The Justices Need Economics 101

by Jonathan Cohn | March 28, 2012

The conservative justices' questioning about the health care law on Tuesday may or may not have betrayed a political bias. But it most certainly betrayed an ignorance of health economics.

Henry Aaron, the Brookings economist who has been filing daily dispatches from the hearings, wrote about some of them:

Several of the justices, notably Scalia and Alito, responded to the externalities argument by saying that every economic transaction creates similar externalities. "If I don't buy a Volt, I raise the price of Volts," said Scalia. Alito said much the same thing. So did Paul Clement's brief for the plaintiffs.
This response was and is bad economics. It is true that every commodity is produced along what economists call a "cost curve"—raising output may lower average or marginal unit costs by spreading overhead or achieving economies of scale, but it may also raise costs by forcing up the cost of inputs or incurring diseconomies of scale. None of this occasions concerns about fairness or free-loading or, to use the economist's term, "externalities." But the cost shifting that occurs when uninsured patients fail to pay their bills does; it causes one group—the insured—to have to pay part of the cost of services others use.
Perhaps the most glaring instance of the failure to appreciate what an externality really is came from Justice Alito who at one point challenged the solicitor general by positing that the cost of all of the care currently used by those who are uninsured is less than would be the cost of the insurance they would be forced to carry. That being the case, Alito asked, how can one say that the uninsured are shifting costs to the insured? This query is painfully detached from an understanding of what an externality really is, how insurance works, or what the impact of insurance would be on service use. ...
Another intellectual cleavage line between those sympathetic to the mandate and those skeptical about it or simply opposed was implicit. Opponents of the mandate seemed clearly to be thinking about relatively brief time periods—a year, or something like that. People may or may not be "active" in the health insurance or the health care market, over such a period. Hence, there are those who can freely choose to be outside the market as opposed to those who freely choose to be in the market. These are seen as distinct groups, and forcing one of them to do something that they don't normally do or want to do infringes their freedom. If one is going to do that one should have a damn good reason, as well as some principle on the basis of which one can be sure that Congress won't be empowered to do a whole lot more that would infringe their freedom.
Advocates of the mandate, on the other hand, see the relevant time period as some very much longer period, perhaps the individual lifetime. Thus, there is no real distinction between the health 20-year-old who chooses to go without insurance and uses no health care and the feeble, disease-ridden 80-year old who quite literally could not live without them. These two people are simply time-lapse images of the same human being. In discrete time, it is the pooling achieved through mandatory insurance that makes the multiple stages of the life-cycle fuse into a single sharply-imaged entity. I believe that the lawyers defending the ACA failed to create a sufficiently vivid story to elicit the life-cycle framing that is, in my view, necessary and sufficient to sustain the mandate. Whether the internal debates among the justices will do so is quite uncertain.

Maybe it's too much to expect lawyers to master economics (although it would appear, based on Aaron's writing, that economists can do a pretty good job of mastering the law). But, as noted yesterday, that's one reason for the courts to leave policy analysis to the legislature.

Source URL: http://www.newrepublic.com//blog/jonathan-cohn/102101/the-justices-need-economics-101