Obama’s CEA on Reforming Health Care

The CEA’s Contradictions on Obamacare

By David R Henderson. Excerpt:

"What was strange about Duggan’s discussion of adverse selection and moral hazard is that he ignored his own discussion later in the chapter. On adverse selection, for example, he laid out how asymmetric information leads to adverse selection, writing:

Insurers cannot perfectly determine whether a potential purchaser is a large or small health risk. (p. 186.)

But then later, in discussing the House and Senate bills, he writes:

These regulations would correct insurance market failures by preventing health insurers from responding to adverse selection by raising rates and denying coverages . . . . (p. 202)

Huh? Just 16 pages after laying out that the adverse selection problem occurs because insurers can’t adjust rates to risk, he says that these regulations, which he seems to think are good, will prevent insurers from adjusting rates to risk.

On moral hazard, Duggan writes:

A second problem with health insurance is moral hazard: the tendency for some people to use more health care because they are insulated from its price. When individuals purchase insurance, they no longer pay the full cost of their medical care. As a result, insurance may induce some people to consume health care on which they place much less value than the actual cost of this care or discourage patients and their doctors from choosing the most efficient treatment. (p. 187)

But in a section titled, “Declining Coverage among Non-Elderly Adults,” Duggan writes:

The generosity of private health insurance coverage has also been declining in recent years. For example, from 2006 to 2009, the fraction of covered workers enrolled in an employer-sponsored plan with a deductible of $1,000 or greater for single coverage more than doubled, from 10 to 22 percent. The increase in deductibles was also striking among covered workers with family coverage. For example, during this same three-year period, the fraction of enrollees in preferred provider organizations with a deductible of $2,000 or more increased from 8 to 17 percent. Similar increases in cost-sharing were apparent for visits with primary care physicians. The fraction of covered workers with a copayment of $25 or more for an office visit with a primary care physician increased from 12 to 31 percent from 2004 to 2009. (p. 192)

If the goal is to have people pay more attention to cost when buying health care, a goal that the vast majority of health economists, whatever their political stripe would share, this is good news. Yet Duggan seems to lament it.

Along the way, though, Duggan does give little nuggets that suggest that health insurance markets work better than he originally claimed. For instance:

Forty-four states now permit insurance companies to deny coverage, charge inflated premiums, or refuse to cover whole categories of illnesses because of preexisting medical conditions. (p. 188)

“Inflated” in the above quote simply means high and, given the risk, it makes sense to charge high rates. Here again Duggan undercuts his own “adverse selection” critique of insurance markets.

What do the data tell us about insurance companies rescinding coverage and refusing to pay claims if individuals fail to list any medical conditions? Here’s what Duggan writes:

A House committee investigation found that three large insurers rescinded nearly 20,000 policies over a five-year period, saving these companies $300 million that would otherwise have been paid out as claims (Waxman and Barton 2009). (p. 188)

Now, 20,000 sounds like a large number but remember that these are three large insurers who could easily, among them, have one million policy holders. 20,000 over five years is 4,000 a year. So taking the one-million assumption, which I think is too low, one would conclude that 4/10 of a percent of insured people every year lost their insurance in this way.

DRH note in 2026: I probably way underestimated the number of policy holders that the three large insurers insured. I bet that it was at least 10 million. So 4,000 people per year having their policies rescinded would constitute 1/25 of one percent. Should a huge intervention in the health market be justified on the basis of a problem for 1/25 of 1 percent of insured people.

Another nugget is his number on uncompensated care, which he estimates at $56 billion in 2008. Given that approximately 255 million had insurance at any given time that year, this amounts to $220 per insured person. That’s large, but it’s not huge. The Samaritan’s Dilemma, it appears, is smaller than many have thought."

Regulated Markets Are Slow to Handle Change

From Alex Tabarrok. 

"Gowrisankaran, Langer and Reguant have an excellent paper, Energy Transitions in Regulated Markets (WP), in the latest AER.

The basic idea is that regulation designed to prevent utilities from building useless power plants can induce them to keep obsolete power plants. Some background. We regulated electric utilities under the theory that they were natural monopolies and therefore we would do better by pushing their prices down. What’s a reasonable price? Hard to say, so regulated utilities were allowed to recoup their operating costs plus a fair return on their “rate base”—their capital stock. Makes sense, but once profits depended on the size of the capital stock, utilities had an incentive to build too much—the classic Averch–Johnson effect. Regulators responded with “prudence” requirements and the rule that capital must be “used and useful.” In a stable world, that rule is a check, albeit an imperfect check, on so-called gold-plating.

But now consider what happens in a time of technological change, such as a rapid decrease in the cost of generating electricity with natural gas (driven by fracking and improvements in combined-cycle natural-gas (CCNG) technology). In a free market, large decreases in costs would cause firms to abandon coal and move to natural gas—some would do this to make profits, others to avoid losses. In short, the market forces sunk investments to be abandoned when not profitable.

But there is another possibility under regulation. Tell the regulator that your plants are still viable. Well, telling is cheap talk so you keep burning coal to prove that the plant remains useful. If you can keep your base operating that’s better than abandoning it and to signal how valuable your coal plant still is, it may even be worth while to burn coal when the cost exceeds the price of electricity! The authors have some nice data on exactly this point.

Figure 3 takes a little work to understand, but the pattern is clear. Each point represents a state. In panel A, the vertical axis shows how much less likely a coal plant is to run when the cost of coal exceeds the price of electricity. Obviously, a strongly negative coefficient is the economically sensible response: when burning coal is more expensive than buying electricity, the plant should burn less.

The red points represent restructured states and the green points regulated states. In restructured states coal burning falls when prices fall, just as expected. Coal burning in regulated states responds much less. (I.e., the red points generally lie below the green points.) Indeed, the six states with the largest reductions in coal operation are all restructured states.

One objection to this analysis might be that utilities in general are just slow to respond to prices, so on the horizontal axis the authors plot how well utilities respond to a higher price of gas. Note that these coefficients are all negative and there is no obvious difference between regulated and restructured states. In both types of states, utilities respond well to the price of gas, but only in restructured states do utilities respond strongly to the price of coal. (Why coal and not gas? Because the used-and-useful standard binds on capital whose usefulness is in doubt—which, once gas got cheap, meant coal. In other words, the utilities have to defend coal to the regulators, not gas.)

Panel B on the right shows a slightly different way of presenting the same data. The vertical axis is again how much less likely a coal plant is to run when its cost exceeds the electricity price. The horizontal axis is the fraction of generation owned by electric utilities. Regulated states tend to be vertically integrated, while restructured states opened electricity generation to competition, so utility ownership and regulatory status are closely correlated. Regulated states generally have utility ownership above 60%, while all the restructured states but one are below 30%. The best-fit line slopes upward: in other words, the more generation a state’s utilities own, the less coal dispatch responds to price. A different perspective on the same story.

That is the direct empirical evidence. The authors then construct a more ambitious structural model. In theory, regulation could produce either too much or too little investment in the new technology; their estimates imply too much. Much, too much. Not only do regulated utilities retain too much coal, they also build too much gas capacity. In short, they accumulate both too much old capital and too much new capital. Averch–Johnson on steroids.

The bottom line is that regulation under dynamic conditions is much more difficult than under static conditions. My view is that it may not even be worth the candle"

Abstract

Natural gas has replaced coal as the dominant fuel for US electricity generation. However, utilities in regulated US states have retired coal more slowly than others. We build a structural model of rate-of-return regulation during an energy transition where utilities face trade-offs between lowering costs and maintaining and using legacy capacity. A regulated utility facing carbon taxes lowers short-run coal generation 48 percent as much as a cost minimizer would. Thirty years after a sudden energy transition, a cost minimizer has retired 71 percent more coal capacity than the regulated utility. Alternative regulations may jeopardize affordability and reliability goals during energy transitions.

 

Counties that build data centers are seeing new housing, higher home values, lower unemployment and more job growth

Tweet from Sara Eisen. 

 

 

Everything At the Grocery Store is On Sale Relative to 1980

By Jeremy Horpedahl.

"Back in May 2024, I wrote about grocery prices in 2024 compared to 1980. Relative to average wage increases, almost everything was more affordable — the one exception was bacon.

Grocery prices have continued to climb since 2024, but so have wages. What does the comparison look like now? Well, I have good news for bacon lovers:

Figure 1

  

The chart shows the change in relative affordability, as measured by how many minutes of work at the average wage it would take to purchase the item (using consistent product sizes and weights). As I wrote in that 2024 post, these are not items that I cherry picked. These are all 24 grocery items where BLS has price data in both 1980 and 2026 (out of about 150 items total). Perhaps there is some survivorship or selection bias as to which items are available in both years, but looking at the list this seems like a pretty reasonable shopping cart for a typical consumer (well, maybe there aren’t buying all the meats every week, but probably every month). The prices are updated through July 2026, with the CPI data just released this morning.

While I have used average wages here, that isn’t a trick. We don’t have a median wage for 2026 yet, but using a measure of median earnings you can see that average wages and median weekly earnings increased at exactly the same rate since 1980.

But consumers probably aren’t thinking about prices relative to 1980. Their time horizon is likely shorter. What if we made the same comparison to 2026 using the 2019 prices, which is right before the pandemic and within most shopper’s recent memory:

Figure 2 

 

Relative to 2019, things do look quite as rosy. Some items are “on sale” in terms of affordability, but a lot of items aren’t, especially a lot of proteins. And no doubt many consumers will focus on the items that are less affordable, rather than those that are more affordable (and even for these items, the nominal price is higher, so consumers might still be frustrated).

It is important to note that this basket of 24 items isn’t a perfect representation of all the items consumers purchase. Compared to the CPI “food at home” index, average wages have actually increased more since the beginning of 2019. But consumers are right to feel that beef and few other items are much less affordable than 2019, even if over the long run they are more affordable."

Figure 3

  

The unspoken truth about wildfires

By Matt Ridley. Excerpts:

"wildfires are getting less frequent worldwide, not more, as the globe warms. The acreage burned has decreased steadily since 2000, according to NASA’s satellites, and is thought to have almost halved in a century. The great fires of 1871 in Wisconsin and Michigan burned more than a million hectares long before anybody drove a car"

"this year is an unusually quiet year for wildfire: so quiet it is breaking records for lack of fires by this date, even in Europe. If you don’t believe me, check the figures produced by the Global Wildfire Information System: as of last week, the world had seen 106 million hectares burn this year, the lowest at this date since these records began in 2012. In Europe, just 3.6 million hectares have burned—less than half the average for this date."

"It has been known for many decades that in fire-prone habitats, the longer you go without a fire, the worse the fires will be. So preventing the build-up of tinder by controlled burns is the most important factor."

Here in Britain the government has consistently and relentlessly demanded less ‘cool’ burning—low-intensity, controlled fires—in winter on heather moorland, Britain’s most fire-prone habitat. Such fires have been used by farmers and gamekeepers for generations to create a mosaic of short and long heather. This encourages fresh young heather shoots for sheep and grouse to feed on and makes open areas for rare birds such as golden plover and curlew to nest in. If done in winter it can burn off the rank heather plants while leaving the moss underneath barely touched, as demonstrated by a famous video in which a gamekeeper places a Mars bar in the moss, lights a fierce fire over it, then picks up the unscorched, unmelted chocolate bar, unwraps it and eats it.

Natural England argues that regular cool burning harms the habitat; researchers at York University and elsewhere argue the opposite: that it encourages the growth of sphagnum moss and other species by letting light in. But both sides agree that regular cool burns can dramatically reduce the risk of much more damaging wildfires, which burn down through the moss layer and into the peat. Cutting heather instead is less effective but better than nothing. Yet Natural England has banned heather burning on deep peat altogether and is pushing hard to limit it further everywhere—or at least tie it up in complicated licensing rules. As a result, the fuel load on heather moorland has been increasing; in places the heather is now waist-deep. The National Fire Chiefs Council warned last year that such restrictions on heather management would increase ‘the danger to firefighters and the public’."

"The authorities know their policies increase the fire risks. Here is what the Cairngorm National Park says in its Integrated Wildfire Management Plan about plans to increase shrubs and other vegetation by reducing deer and stopping burning: ‘These habitats will take many years to develop and during the intervening period fuel loads will increase, as will the corresponding need for fire risk mitigation.’ So they knew the risk was increasing. But little was done. John Kirk, a board member of the Cairngorms National Park Authority, told the Strathspey Herald: ‘Everyone is furious… the entire Abernethy forest has no firebreaks.’"

Data Centers Are Not the Problem. Bad Policy Is.

By Scott Lincicome of Cato. 

"there are actually many different types"

"data centers have been around for decades, and there are thousands already operating in the United States. They’re basically any “purpose-built building that runs large numbers of computers reliably, securely and around the clock,”"

"Several regional and national studies have found little merit to the common claim that data centers have already caused large, localized increases in Americans’ electricity bills. In fact, a brand new, peer-reviewed study found that data centers actually caused average U.S. retail electricity rates to “fall modestly” between 2015 and 2024, because the centers’ high, steady power demand helped spread a grid’s fixed costs over more usage. This finding is counterintuitive but consistent with research from 2025 that high-demand areas—including ones like North Dakota and Virginia that saw an explosion of data centers—“saw lower prices overall,” while prices rose in places like California where demand had declined"

"arguably the most viral water claim—that a single Google data center in Chile consumed more than 1,000 times the water supply of a town there—was later acknowledged by its author to be “off by a magnitude of 1,000.” They added that all U.S. data centers combined use less than 0.5 percent of the United States’ freshwater, and that “Google’s thirstiest facility, in Iowa, uses approximately what some golf courses do.”"

"U.S. data centers consumed about 17.5 billion gallons of water in 2023, according to Lawrence Berkeley National Laboratory. That sounds like a lot until you compare it with total public water supply: it’s about 0.3 percent. Beef production, cotton farming, and golf courses each quietly consume far more"

"a lot of “data center water usage” stats in various studies include non-potable water, indirect usage from nearby power plants, and water actually recirculated instead of consumed (thus causing little change to local supplies). Doing this can inflate water usage stats"

"Masley estimates that the water all American data centers will directly consume onsite in 2030 will be the equivalent of just 8 percent of U.S. golf industry usage and just 1 percent of the water used for American corn production. It’s also dwarfed by industrial usage for things like steel plants."

"The 100 billion gallons used in 2023 amount to a drop in the bucket (pun!) compared to what we use each year for golf courses (550 billion gallons) and lawns (3 trillion gallons)."

"data centers aren’t major sources of water pollution in host communities, mainly because most of their usage (e.g., for cooling) is in closed systems."

"Masley has since run the same exercise on land use and waste heat, reaching similarly benign conclusions. Air pollution too. The Taxpayers Protection Alliance, meanwhile, has debunked recent online claims that data centers generate intolerable ambient noise." (AI researcher Andy Masley has done yeoman’s work eon “data center water usage)

The source of the real problems. And how to fix them.

"None of this means data centers are perfect, and it’d be intellectually lazy to claim the pushback is entirely manufactured (though some of it surely is). Where real problems exist, however, the cause is almost always a policy choice rather than an immutable feature of data centers or AI. And that means the issues can be fixed with policy, too.

The most obvious place to start is by nixing all the subsidies that certain states and localities toss at data center projects—and their billionaire owners. Virginia’s data center sales and use tax exemption, for example, cost more than $1 billion in 2024 and is projected to cost almost double that in 2025, with benefits accruing to Google, Amazon, and other bajillion-dollar companies. Indiana’s subsidies are almost as big. Given demand for AI and every other internet-based service in the United States, these data centers will be built without all the subsidies. So, much like sports stadiums and corporate relocation incentives, the handouts are less about real economic development and more about companies playing states and localities against each other to get the sweetest deal for themselves—at taxpayers’ expense. Kill ’em all. The industry doesn’t need the help, and every subsidy dollar is one that not only diminishes data centers’ tax revenue benefits but also fuels a legitimate grievance by the pro-moratorium crowd—maybe their only legitimate grievance.

The next obvious solution is to liberalize the supply side of the electricity market, where the only serious economic risk likely exists. As Pielke notes, various studies confirm that local power prices wouldn’t rise if supply could meet new demand, yet—

The constraint is our national inability to build—hampered by permitting queues and interconnection backlogs that mean that new transmission takes six to 10 years to build—while new demand emerges much faster. A moratorium seeks to freeze demand to match a sclerotic supply side. A better response speeds the creation of supply to meet demand. That means permitting reform, faster interconnection, advanced transmission, and water system investment, including new supply. Blocking construction treats the symptom rather than the disease.

Other things, such as tariffs on transformers, electrical steel, solar panels, and other essential equipment, add to these burdens. Fix them, and some of the demand-side pressure from data centers will be released.

For the rest, Cato’s Travis Fisher and Huddleston have an even better idea: Let data center developers contract directly with private generators or build their own power, through “consumer-regulated electricity” (CRE) reforms:

[CREs] allow for privately financed, off-grid electric utilities to serve new customers under voluntary contracts. These utilities would be physically “islanded” from the regulated grid and would not be subject to economic regulation at the state or federal level. Because they would not interconnect with incumbent systems, CRE utilities would impose no costs, reliability risks, or stranded-asset exposure on existing customers.

Letting these giant, cash-rich companies pay their own way makes abundant (pun!) sense, yet utility regulations and related factors make that impossible in most places. And that, not data center demand, is the problem. Fortunately, as Fisher writes, there are some positive developments in this regard: A few states have already begun experimenting with CRE, and the White House’s voluntary Ratepayer Protection Pledge, signed by most hyperscalers, gestures at similar principles. But much more needs to be done—and fast.

Other data center issues, such as noise, pollution, and land use, have a simpler solution: localities enforcing the relevant laws they already have on the books and making local decisions about whether to permit data centers in their communities. NIMBYism drives a lot of the opposition to data center projects, and I think almost all of it is wrong. The bright side, however, is that it’s an exercise of local control, not a statewide or federal moratorium that blocks an entire industry. In the former case, a data center can move to more welcoming U.S. areas that will enjoy the direct benefits—and occasional headaches—that rapid development offers, while negotiating site-specific terms and mitigation directly with developers, the way Loudoun County did. America’s great Laboratories of Democracy can do their thing.

As Huddleston notes, on the other hand, turning a local land-use dispute into a federal ban would throw out the baby with the bathwater, generating economic harms that go far beyond a few NIMBY-captured communities." 

 

 

Revenue over reason: A case for home distilling

By Ben Semark of CEI. 

"Want to distill spirits at home? Congress says you can’t. This ban from the Reconstruction era was not instated for health or public safety reasons. Rather, the prohibition arose from the inability to accurately tax home-produced alcohol. This reasoning does not justify such a restrictive practice. Distilling is a historically significant process with deep ties to the culture of this nation. Depriving Americans of this liberty in their own home undercuts a storied American tradition.

Creating home-brewed spirits was not a niche or commercial practice in early America; it was an everyday routine. Alcoholic beverages were a staple of the early American diet and were often much safer than local water sources. Wives were often responsible for the process and used various crops distilled into safe beverages to quench the thirst of their households. Stills were treated as ordinary kitchen appliances, like a butter churn or wood oven. In the late 18^th century, 25 percent of households in Augusta County, Virginia owned and operated home stills.

Distilling was not just a household chore; it was also a primary source of income for many farmers. Common crops, such as barley, corn, apples, and peaches, were all vulnerable to spoilage even across short distances. Where travel was especially difficult, distilling these crops provided a more resilient product and a steady source of income for many.

After the Revolutionary War, Alexander Hamilton proposed an excise tax on distilled spirits to tackle the extreme debt the country had accumulated. Excise taxes operate by taxing the manufacture of a targeted good rather than the income generated from sales. Many farmers reacted in outrage, sparking the famed Whiskey Rebellion, during which George Washington led a militia of 13,000 troops to quell the unrest.

The rebellion represented the first violent domestic challenge under the new American Constitution. Hamilton’s enforcement of the tax required every still, no matter how small, to be registered with the federal government. The upheaval underscored the importance of distilling culture in early America. Citizens felt betrayed by their newly formed government, not only due to the tax, but also government intrusion into routine household activities.

Distillation remained common in the home despite the tax, and Jefferson later repealed it, much to the delight of many Americans. Soon after the distilling culture exploded. The early 19^th century came with many advancements in distilling, making the practice accessible to non-farmers. An author at the time noted “we find men of science, men of capital, lawyers, doctors and merchants abandoning other pursuits to learn the art of extracting spirit from grain.” Distilling was no longer merely a household chore or a farmer’s practice; it had become a hobby.

The Civil War marked the second excise tax on spirits. Lincoln had to finance the war, and since stills were so common, spirits were the obvious choice for a tax. Once the war was won by the North, the tax extended to the southern states. The agriculturally dependent South hated the tax, often flouting federal collection officers. In fact, during the early days of the policy, nearly seven out of every eight distilled spirits went untaxed.

This led to a federal clampdown on spirits. In 1868, in order to “secure the revenue” of the spirit excise tax, Congress passed sweeping reforms on enforcement. Distillers were instructed by statute to turn over the keys to their distilleries, allowing inspectors to enter the premises at all times. If they were denied entry at any point, congress authorized them to use any force necessary to gain access.

Because of the obvious hurdles involved in enforcing this surveillance, home distilleries were banned outright. Taxing home distilled spirits would be nearly impossible. In order to further dissuade home distilling, Congress attached harsh penalties to the activity. From that point onward, operating a still in or near a home resulted in a felony, up to five years in federal prison, and, in some cases, forfeiture of their property. Home distilling, once the task of the homemaker and the fun of the hobbyist, was now strictly illegal.

The Treasury was not passive in its enforcement either. The 1880 annual report of Internal Revenue declared “the day of the illicit distiller” over with 4,061 illicit distilleries seized and 7,339 people arrested on account of the new enforcement techniques. Distillers were pushed into the forest under moonlight to avoid internal revenue officers, earning them the now infamous name “moonshiners.”

Around this time social perception of distilling was soured by its close association with violent criminal activity. Moonshiners would clash with enforcement officers, often leading to shootouts. The alignment of some moonshiners with the Ku Klux Klan damaged their reputation as well. Once the 18^th Amendment and Volstead Act were passed, illicit distilling, including home distilling, had firmly cemented itself as a stigmatized practice.

However, the Prohibition would not stand for long. Due to enforcement problems, the propagation of organized crime, and the loss of revenue from the excise tax, the 21^st Amendment repealed the 18^th Amendment, decriminalizing the production and sale of alcohol. However, this liberty remained limited to heavily regulated commercial breweries, wineries, and distilleries. The government was seeking an easily taxable commodity to pull itself out of the Great Depression.

1978 marked the first meaningful restoration of home production of alcoholic beverages. With extensive advocacy efforts from the hobbyist brewing lobby, H.R. 1337 was signed into law. It amended the tax code exempting home-brewed beer and wine from taxation and legalizing their production for personal use. Notably, home distilling was neither decriminalized nor exempted from the tax.

Legalizing home distilling is the next logical step. The prohibition was a step too far, and ever since the regulation of alcohol has been trending downward. For such a common practice during the founding, it is shocking that home distilling carries such steep penalties. The federal government picked this fight, not frontier farmers. The ability to produce spirits in your home for personal consumption should not be infringed. It is what George Washington, with his own home distillery, would have wanted."