Funding for the UC has dropped consistently over the last 25 years, during the rule of both Democratic and Republican governors, and with a variety of administrators at the helm of the UC. Students in California are finally awakening to the fact that it is not the political leadership of the state or the administrative leadership of the UC that should be the subject of their ire. California’s state governance is so fundamentally (and uniquely) screwy that we’re all set up to fail.

….

The time has come for reform. In November, there should be at least one initiative on the ballot that would replace the 2/3rds requirement for passing a budget with a simple majority.

A prior article demonstrated that belief in the effectiveness of financial literacy education lacks empirical support. This article argues that the belief is implausible.

…. The gulf between the literacy levels of most Americans and that required to assess the plethora of credit, insurance, and investment products sold today—and new products as they are invented tomorrow—cannot realistically be bridged.

…. For some consumers, financial education appears to increase confidence without improving ability, potentially leading to worse decisions. When consumers find themselves in dire financial straits, the regulation through education model blames them for their plight, shaming them and deflecting calls for effective market regulation. Consumers are not required to serve as their own doctors and lawyers and for reasons of efficient division of labor alone they should not be required to serve as their own financial experts. Opportunity costs should not be overlooked; a single-minded focus on financial education inhibits pursuit of other policy tools for improving the financial welfare of Americans.

More broadly, it’s been a common theme of policymaking for some time that consumer welfare problems can be overcome by better-informed, more self-reliant consumers.  Certainly, when information asymmetry is the main problem in a market, it’s satisfying to discover you can correct it with a judicious minimum of regulation.  But often, the real problem is power asymmetry, and that ultimately needs a heavier hand.

In this case, even supposing consumers can be effectively taught to navigate a morass of complex alternatives, lenders and other financial actors will always have the resources to bring that complexity to the next level - plus the wherewithal to research and exploit normal human cognitive biases.  The article lists the cognitive biases associated with financial decisions in some detail: overwhelming information and choices, high financial and emotional stakes, discomforting thoughts, uncertainty about the future, opaque attributes and incommensurate tradeoffs, and the tendency to passivity.

Also, financial education’s tendency to cast debt delinquency as a moral failing is a bit unsettling when you think about it, considering that credit card companies make much of their profits through interest and late fees.  How many people try to pay back crippling debt when they ought to be declaring bankruptcy, because they think they’ll be a bad person otherwise?  I wonder.

Instead of financial education - which, if this article is correct, is like preparing someone to run a minefield by giving them a chemistry lesson - why not require that financial products be comprehensible and hazard-free?

Insurance costs too much

You can require everyone to buy insurance, but if it’s not affordable, it won’t work.

Health insurance is simply too expensive for many, and while the plan creates state-based insurance exchanges and provides exemptions and cost-sharing subsidies for financial hardship, many argue that this is not enough. If there is no affordable health care option, the penalty for not buying insurance ($750 for an individuals) serves as a harsh punishment imposed on poor people who may want to buy health insurance but simply cannot afford it.

Many ideas have been floated for creating lower-cost options, such as the public option or expansion of Medicare to those under 65, but they don’t show up in this bill. I hope that this bill opens a broader dialogue about strategies to create affordable options for low-income Americans who will be required to buy insurance. If this bill is ultimately implemented, I have no doubt that these issues will quickly bubble to the surface.

Individual mandate & guaranteed issue

You cannot have an individual mandate without guaranteed issue. Today, countless Americans are uninsured because they cannot get coverage due to pre-existing conditions. We can only require them to buy insurance if insurance companies are required to take on customers regardless of prior health status. H.R.3590 does impose guaranteed issue on insurers, and requires nearly all Americans to buy insurance if they don’t receive it through their employer or from a government program.

The problem of healthy young people

The plan outlined in H.R.3590 imposes a $750/year fine on individuals who don’t get insurance (or .5% of income for those above $150,000/year). For some people, the $750 penalty is too low – so low, in fact, that it basically serves as an “opt-out fee.” Many healthy young people will opt out of buying insurance altogether. $750 is far cheaper than an insurance plan, and with the assurance of guaranteed issue if they ever do become ill or injured, there is simply no incentive for those who use few health care services to purchase their own insurance.

Consider a healthy 25-year old who recognizes that $750 is a lot cheaper than the $6,000+ she would spend on insurance. Add the fact that she can buy-in later if she breaks a leg while snow-boarding, and you almost guarantee that she won’t buy insurance. The entire concept of health insurance is based on pooling risk, and this gets tossed out the window when less-risky clients can opt out. The result is increased premiums for those who do buy coverage, which ultimately perpetuates this cycle.

Now I am not arguing against guaranteed issue. Denying coverage to insurance-seekers due to pre-existing conditions has unfairly excluded people from the risk-pool, and those are often the people who need insurance most. A major reason for this problem is actually the fact that insurance is linked to employment, which means that people can lose insurance simply because they lose their job. These people often find that they cannot get covered elsewhere. Given the vast opportunities to lose coverage in the U.S., it is critical that all Americans be able to buy insurance if they want to.

Restructuring penalties for individuals

As I discussed above, for poor people, both the cost of insurance and the penalties are too high. But for others, the penalties are too low. Opt-out fees will have to be restructured to better match consumer incentives and social justice values. The baseline fee should be much lower than $750, but should increase based on income, at a higher rate than the current bill provides. For example, the fee could be $200 for an individual, or 1% of income (whichever is higher), which would kick in at $20,000. An even more progressive structure would increase the percentage of income as income rises. For instance, those with incomes over $30,000 could pay 1.5% of income, and those over $50,000 could pay 2% of income, those with incomes over $75,000 could pay 3% of income, and those with incomes over $100,000 could pay 4% of income. I don’t know what the exact price would be, but I’m sure that White House economic analysts could find it. There must be penalties to ensure compliance, the penalties need to match the incentives of the consumer in order to be effective, and the whole purchasing and penalty structure needs to allow for real options for America’s poor.

Given that federal health care programs are the biggest driver of long-term projected deficits, something has to be done:

Also see the Congressional Budget Office’s 2009 - 2019 Budget Outlook Summary.

Rep. Ryan’s alternative budget proposal to President Obama’s budget release last week accomplishes this by privatizing social security and creating a voucher plan for Medicare, shifting the burden of paying for Medicare from government to individuals.  For shizzil folks, the CBO examined the proposal, and OMB Director Peter Orzag called it a “serious proposal.”

Agree or disagree with the seriousness of the plan, but one thing is for certain: Rep. Paul Ryan has cojones–(Read the Washington Post interview with Rep. Ryan).