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Mo’ Mandates, Mo’ Problems

December 15, 2010

Nick asks in the comments:

Why do you think the penalties in this mandate were so toothless to begin with? Do you think it would have been substantially more difficult to get this component of the healthcare package through congress if the included penalties were more severe?

I think that’s an interesting question.  My instinct is:

1. The Obama Administration is heavily influenced by behavioral economists such as Larry Summers and Cass Sunstein, who both hold prominent roles in the cabinet.  They believe the nudging effect of the mandate is really what is at issue, not the deterrence.

2.  It is a Pigouvian tax.  The point is not to get people to buy insurance if they don’t want it.  It is to force people to internalize the externalities they impose on the country when they go around without health insurance.  The penalty allows the government to capture some of these costs while forcing people to indirectly take them into account in their cost-benefit analysis.  Perhaps some people value insurance coverage at $9000 a year for their family, and $11,000 a year isn’t worth it.  The penalty might push them over the edge.  Or not.  Unlike most crimes, the efficient level of coverage might not be zero, as it might be best for some folks not to purchase health insurance.  It’s unlike that my decision not to buy insurance for $11,000 actually costs society $11,000; it may be something like $2000.  This policy might encourage a socially optimal result.  Of course it’s really hard to set taxes like this precisely because we have little information about people’s internal preferences.

3.  It was done for political reasons.  The Obama administration knew it had to produce a budget-neutral bill and this provides extra funding.  Or it was a compromise to satisfy the Hillary Clinton/Tom Daschle camps, and Obama really could care less philosophically about mandates or no.  Or, like Nick suggests, they wanted the mandates higher but Congress couldn’t stomach it.  I doubt this last scenario because of Obama’s opposition to the idea during his campaign, and I believe, his philosophy that doing so would amount to punishing people for being unable to afford insurance.  Shit happens to people’s budgets and it would be unfair for the government to efficiently deter folks just because money gets stretched thin and insurance has to go.

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One Comment leave one →
  1. Matthew Scott Rozen permalink
    December 15, 2010 3:20 pm

    Lol, ok, I guess you made my point in my comment on the last post for me in point 2 in way fewer words.

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