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HHS. The IRS. Benghazi. Spying on reporters. Scandals abound, which just might be good for the administration in the long run.

I confess, when I woke up this morning, I half expected to find that Obama had confessed to being one of our lizard overlords, or made an offhand mention of the time he'd had the CIA price out a drone attack on Mitt Romney's headquarters.  Between Benghazi, the discovery that Kathleen Sebelius has been leaning on insurers to finance their Obamacare PR, uncovery of a freelance political inquisition by the IRS, and last night's revelation that the Department of Justice had been trolling through the phone records of AP reporters, this has been the most scandalicious week in living memory.  I mean, sure, none of it rises to the level of Watergate.  But while the gravity may pale in comparison, the volume is breathtaking.  So breathtaking that it's tempting to think that the administration is doing this deliberately.

In finance, there's an art known as "Big Bath Accounting" which is used to manage earnings expectations.  Here's how it works:  if you know you're going to have a bad quarter, you look around for anything else that might go wrong in the future, and you decide to "recognize" that bad news now.  Inventory looking a little stale?  Write it down, man!  Customers getting a little slow to pay?  Now would be a good time to write off their accounts as bad debt.  Is there some uncertainty in the projections about depletable assets like oil stores?  For heaven's sake, why not use the low end of the projections rather than the medium or high end? And we should really book some sort of charge to account for the risk that the Yellowstone supervolcano will explode, killing hundreds of thousands and covering the entire western half of the United States in volcanic ash, and in the process severely dampening demand for our premium line of Wyoming-themed memorabilia.

Corporations call this "cleaning up the balance sheet".  Accounting professors call it things I can't print because this is a family blog.  

The theory is that there is only so much bad news people can take in all at once, so you might as well cram all the bad stuff into one action-packed earnings call.  As a bonus, later, when it turns out that the Yellowstone supervolcano is actually just producing extra-spectacular geysers at the moment, causing your premium line of Wyoming-themed memorabilia to soar to new sales records, you can "reverse the charge" and enjoy a nice bump in your earnings per share.  

The Philadelphia abortionist is guilty of three counts of first degree murder. Why didn't we stop him sooner?

After weeks of brutal testimony, a heartbreaking and horrifying parade of the inhumanities of which human beings are capable, Dr. Kermit Gosnell of Philadelphia has been found guilty of three out of four counts of first degree murder.  The jury has ruled that he did indeed induce the birth of viable infants, and then snip their spinal cords with scissors to ensure that they would not live.  Like most of you, I would rather I'd never read the grisly accounting of his misdeeds . . . because these terrible things had not happened.

I staunchly oppose the death penalty, so I hope that Gosnell gets life when he is sentenced next week.  But I cannot help but notice that if he did get death, he would be killed under higher standards of sanitation and medical care than he himself observed.  And treated with more dignity and kindness than the viable newborns he butchered and discarded.  How did we come to enforce higher standards on state sponsored murder than on abortion clinics?

Having read the grand jury report, I have to say this to my fellow pro-choicers: we helped create that situation.  Not intentionally or knowingly, and not because being pro-choice means you want to kill babies.  But we focused so hard on access that we failed our equal responsibility to think about safety--and the danger of rogue abortionists who were terminating viable infants. (The murder charges involved infants who were born alive, but Gosnell was also convicted of over 20 illegal late term abortions, which aren't morally much different from killing them in the open air.)  

I was rather astonished to find, when I went to their website today, that NARAL Pro-Choice America thinks that Pennsylvania abortion providers are excessively burdened by health and safety regulations.  The grand jury report on the Gosnell case indicates that the exact opposite is true:

Detroit's Emergency Manager has released a new plan for the city. It's not looking good.

Detroit's population has fallen by 60% since its peak.  15% of its land parcels are vacant, and over 70,000 buildings stand empty.  As the city's finances plunged deep, deep into the red, the state appointed an emergency manager, who just released his preliminary plan for the city.  The plan suggests, though it does not quite say, that things are pretty hopeless.  

Consider what has happened to income taxes over the last decade:

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The city's gambling tax now takes in more than its property tax.  I've been to Detroit's casinos, and they're fine, but they're not going to form the basis for a revitalized urban economy.  

A look at statistical significance, and what Oregon can really tell us

Last week, I asked Jim Manzi for his thoughts on the Oregon health care experiment.  Manzi is a very smart guy who has founded a very successful company that helps other companies do experiments.  He is also the author of the terrific Uncontrolled, a book about using randomized controlled trials to improve business, policy, and life in general.  Jim was kind enough to send me his very long, very smart, very wonkish thoughts, which you'll see below.  If you have any interest in Oregon, or just want to be smarter about issues in evaluating social science, you should read this all the way through.

Some Observations on the Oregon Health Experiment

As a vocal proponent of using randomized experiments to inform policy debates, I have followed the discussion surrounding the recent Oregon Experiment with great interest. I think the only thing I’ve previously written for publication on the topic of health care finance was a review of the RAND Health Insurance Experiment. This is the only other randomized experiment of which I am aware that tested the impacts of varying levels of generosity of health care coverage on physical health. The RAND experiment concluded that (1) lower levels of coverage “reduced the use of nearly all health services,” but that (2) this reduction in services “had no adverse effect on participants’ health.” As a casual observer of the topic, that struck me as a fairly important result.

The Oregon Experiment has replicated the first part the first part of the RAND result: Providing free health care coverage increased the use of health care services. However, a debate has arisen between Austin Frakt, Kevin Drum, Avik Roy, Megan and others around the second part: Did this increase in use of health care services lead to measurable improvements in physical health?

Was it a legitimate reaction to an explosion of tax-exempt electioneering?

Kevin Drum outlines what I take to be the emerging case for the defense of the IRS agents who applied special scrutiny to tax-exemption applications from Tea Party groups:

Roughly speaking, what seems to have happened is that three years ago the IRS was facing an explosion of newly formed 501(c)4 groups claiming tax exempt status, something that’s legal only for groups that are primarily engaged in promoting education or social welfare, not electioneering. So some folks in the Cincinnati office tried to come up with a quick filter to flag groups that deserved extra scrutiny. But what should that flag be? Well, three years ago the explosion happened to be among tea party groups, so they began searching their database “for applications with ‘Tea Party,’ ‘Patriots,’ or ‘9/12’ in the organization’s name as well as other ‘political sounding’ names.” This was dumb, and when senior leaders found out about it, they put a quick stop to it ...

The problem is that the explosion of 501(c)4 groups is a genuine problem: they really have grown like kudzu, lots of them really are used primarily as electioneering vehicles, and the IRS has been either unwilling or unable to regulate them properly. So the fact that some of the folks responsible for processing these applications were looking for a way to flag potentially dubious groups is sort of understandable.

However, if I were accused of this thing, and this was my defense, I’d be looking forward to a guilty verdict from any semicompetent jury.  

Tea Partiers were targeted for review of their tax-exempt status during the 2012 election.

Conservative groups have been complaining for a few years that they're being harassed by the IRS, forced to endure an inordinate amount of scrutiny. I've been ignoring those complaints, because it just seemed so unlikely. Sure, that sort of thing used to go on: Kennedy ordered the IRS to investigate both right- and left-wing groups he didn't like, and Richard Nixon was audited three times between 1961 and 1968. But those were the bad old days.  No modern administration, or modern agency would do that.  

Well, I take it back. The IRS admits that, in fact, it did single out conservative groups for scrutiny:

The Internal Revenue Service is apologizing for inappropriately flagging conservative political groups for additional reviews during the 2012 election to see if they were violating their tax-exempt status.

Lois Lerner, who heads the IRS unit that oversees tax-exempt groups, said organizations that included the words "tea party" or "patriot" in their applications for tax-exempt status were singled out for additional reviews.

Is it their fault that the law wasn't more market friendly?

The past few months have been hard on Obamacare, and its supporters.  Max Baucus, one of the primary authors of the plan, suggested that it was going to be a trainwreck unless the administration got its act together on implementation.  Cost-saving improvements like Electronic Health Records turn out not to save costs. Insurers are wary about entering the exchanges, making it likely, says Reuters, that "some markets will have little or no competition next year."  A major study of a Medicaid expansion which was supposed to bolster the case for Obamacare by showing how much it improved health ended up showing no such thing.

Josh Barro, among others, has suggested that this is partly the fault of Republicans, for not being real partners in the health care debate.  Josh writes:  

Liberals are tired of being lectured by conservatives about what’s wrong with their approach to health policy because conservatives haven’t been a productive partner in seeking a fix. And they’re right to note that conservatives’ preferred alternative to Medicaid expansion (leaving tens of millions of people uninsured) would be worse for quality of life.

But the lesson of the Oregon Health Study is nonetheless that there’s cost-effectiveness information out there that Medicaid and other health insurers aren’t exploiting. And even though conservatives have generally done a terrible job of explaining why, conservative ideas about increasing consumer direction in health care could help to exploit that information and make health care more cost-effective -- without repealing Obamacare or stopping the Medicaid expansion.

Should students get the same loan rates as banks at the discount window?

Senator Elizabeth Warren (D-MA) has just introduced a new bill, the Bank on Students Loan Fairness Act, to offer student loans at the same rates that the Federal Reserve charges big banks through its discount window lending program.  At the moment, that rate is about 0.75%.  The rates on federally guaranteed student loans, meanwhile, is set to double to 6.8% this summer.

"Some may say we can't afford this proposal," said Senator Warren as she introduced the bill.  "I would remind them that the Federal Government currently makes 36 cents in profit for every dollar it lends to students . . . meanwhile, the banks pay interest that is one-ninth of the amount that students will be asked to pay.  That's just wrong.  It doesn't reflect our values."

"Now some explain that the banks get exceptionally low interest rates because the economy is still shaky and banks need access to cheap credit to continue the recovery." She sighed loudly.  "But our students are just as important to the economic recovery as our banks, and the debt they carry poses a serious risk to that recovery."

It's probably true that some say banks need low interest rates to keep the economy growing.  But no one except possibly a lunatic has told Elizabeth Warren that banks are getting 0.75% at the discount window as a thank you for all the hard work they're doing helping the economy.  Discount window loans are cheap for three reasons: the borrowers have assets and income that are easy to seize, the loans are quite short term, and the banks are required to put up collateral.  

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How the IRS Wrecked Your Pension

Don't blame the fund managers, blame the tax code.

This week, I had a piece in the magazine arguing that retirement is trouble.  That's a golden oldie for those of you who've been reading a while; my favorite evergreen topic is haranguing my readers to save 15-20% of their income, or fer goshsakes at least 10%, towards retirement.  (I mean it guys.  You need to save more.)

But this piece had an interesting peg: Republic Services, Inc. is in the middle of an epic battle with the Teamsters International over the pension plans that cover their workers.  Up until recently, Republic teamsters have been covered by the rather notorious Central States pension fund, whose own director told Congress it would be broke in a decade or so unless something drastic was done.  Republic wanted to terminate its obligations and put workers in a 401(k) (or at least a more solvent Teamster pension plan).  The International Brotherhood of Teamsters was not a fan of this plan.  

Central States is in particularly bad shape, but it's far from alone.  A whole lot of the big union pension plans are in trouble.  This is usually cited as an example of The Trouble With Unions, or alternatively, The Scandalous Underregulation of the Private Sector.  As I dug into the details though, I found out something that surprised me: this wasn't just a story about union mismanagement.  And it wasn't a story about deregulation, either.  Oh, to be sure, the funds could have managed things better (more about that in a little while).  But the reason that they're in such deep trouble now is neither bad management, nor inadequate regulation.  In fact, the opposite is true: managers wanted to do a better job, and the government actively stopped them.  Meet the true culprit behind the crisis in union pension plans: the friendly folks at the IRS.  

Back in the day, long before the stock market boom began, the IRS decided that pension funds were a problem, taxwise.  As I understand it, this problem was mostly in small professional practices like doctors and lawyers offices.  The doctors and lawyers would employ one or two other people, most of them transient single women who could be expected to leave to get married long before their pension vested.  So you'd set up a "pension plan" in which, realistically, you were going to be the beneficiary.  Then you'd stuff it full of money, far more than you needed to pay out your pension.  It was a pretty nice tax shelter.

Everyone favors greater transparency in markets. But surprisingly, sometimes it can backfire.

"Transparency" is one of those policy prescriptions that pretty much everyone can agree with, like "Be nice to people" and "Never run with scissors".  Even libertarians generally smile when the government steps in to force businesses to provide more information, though to be sure, when the business is a fast food restaurant, and the information is how much fat we'll pack on if we eat the 10-piece McNuggets we're craving, that smile may take on a certain strained, false quality.  

Still, transparency!  As all-around marvelous as motherhood and apple pie; pretty much everyone is theoretically in favor.  But at least in one market, Mark Kleiman reports, transparency may have had the unexpected result of killing a product that everyone liked:

It appears that one local grower developed a strain sold under the “Purple Urkle” label. It was widely held, by producers and consumers alike, to be truly righteous weed, and it flew off the shelves.

Then the fashion for chemical testing came in. Purple Urkle tested at a mere 7% THC – perhaps twice the THC content of what was called “marijuana” when I was in college, but well below the 12-18% that current products claim (more accurately in some cases than in others). Result: even the consumers who had already experienced and enjoyed Purple Urkle, and had been asking for it by name, wouldn’t touch it. They were so used to the idea that quality is defined by THC content that they didn’t want to smoke what they now “knew” to be weak weed. So the brand more or less died.

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Get Ready for the War on Data

If you can't win the political battle, change the facts on the ground

A colleague points out something interesting about Mark Sanford's comeback victory in South Carolina's first district: it's part of a broader trend towards uncompetitive congressional districts.  Some pundits have despaired at the thought that a guy who left the governor's office (and his wife) to sneak off to meet a girlfriend in a foreign country could nonetheless be returned to elected office--Ross Douthat of the New York Times tweeted "I'm a John Profumo guy living in a Mark Sanford world."  But for voters, in the end the only thing that mattered in yesterday's special elections was the (R) after Sanford's name.  

And that's not limited to South Carolina.  Michael Barone recently noted that .  Political preferences are hardening; folks in a given district are consistently voting the party, not the candidate.  This suggests that for the foreseeable future, all the political action will lie in the presidency, and the Senate.  The next big movement in the House will probably be the 2020 census.  

But the implications don't stop there.  If the Census is the key to political control, then you can expect parties to put more energy into gaming the census.  Arguably, you're already seeing this: Republicans are now making their second attempt to defund the American Community Survey, which uses sampling to generate data between censuses.  The American Community Survey is not used for districting, but it is used for all manner of other policy purposes.  

As the political fault lines harden in Congress, the battlegrounds are moving back to more hidden levers of policymaking.  There are the courts, of course: we're now in the third decade of a mostly undeclared war to gain control of the Supreme Court and do some unelected legislating.  Data gathering and research funding are coming under fierce scrutiny.  And on the national security front, secrecy and executive orders seem to be the order of the day for whoever is in the White House.  

How We Die

Has Medical Innovation Slowed Down?

The good news is that health care costs aren't rocketing away like they used to. The bad news is that drug discovery has slowed down too.

While working on some of my recent posts about the Oregon study, I came across this report from the CDC on changing causes of death over time.  If you spend any time thinking about the history of health innovation in America, it's pretty fascinating.

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The first thing you notice is that how we die hasn't changed all that much since the Great Depression: the leading causes of death today are cancer and heart disease, just as they were in 1935.  But in other ways, everything has changed.  

For decades, pneumonia was known to doctors as the "old man's friend" because it was viewed as a better way to die than cancer or heart disease, and among the elderly, it had a mortality rate approaching 100%.  Babies, too, were apt to succumb.  Thanks to antibiotics, this category has largely been vanquished.  Kidney disease, formerly a major cause of death, has basically dropped out of the chart thanks to the invention of dialysis. Stroke fatalities have notably decreased, because we've gotten pretty good at controlling hypertension.  Accident deaths are down too, for which you can thank both safer jobs and better trauma care.  Cancer and heart attacks are expanding only because we've all got to die of something eventually; if you look at the annual mortality statistics, you'll see we're better at treating those, too.  

More on that bombshell study out of Oregon

It's time for another post on last week's study out of Oregon, which showed--much to the surprise of practically everybody--that putting people into Medicaid didn't seem to significantly improve their physical health.  

I know it's a lovely spring day and you're looking longingly at the happy hour specials, or that riding lawnmower you'd like to test drive one more time.  But stay with me, because this debate is literally the most important thing to happen to health care policy since . . . well, for a long time, anyway.  If the Oregon results hold, they will radically change the way that we think about health care policy: what it's for, what it can do, and how it should be constructed.  

And contrary to what you might have heard, this is not some weird, outlying result that doesn't mean anything.  There are other studies which have found surprisingly small effects of giving people insurance.  I commend to you Levy and Meltzer's very thorough literature review from 2008, in which they point out just how mixed the data are:  

How does health insurance affect health? After reviewing the evidence on this question, we reach three conclusions. First, many of the studies claiming to show a causal effect of health insurance on health do not do so convincingly because the observed correlation between insurance and good health may be driven by other, unobservable fac- tors. Second, convincing evidence demonstrates that health insur- ance can improve health measures of some population subgroups, some of which, although not all, are the same subgroups that would be the likely targets of coverage expansion policies. Third, for pol- icy purposes we need to know whether the results of these studies generalize. Solid answers to the multitude of important questions about how specific health insurance policy options may affect health seem likely to be forthcoming only with investment of substantial resources in social experiments.  

"Count all the Votes" became the rallying cry after the courts told Democrats they couldn't just count some of the votes

Last week I wrote that "count all the votes" emerged comparatively late in the game of the Bush v. Gore saga.  A number of people have pushed back, here and elsewhere, have pushed back.  Gore, they say, offered to do a hand recount of all 67 Florida counties on November 15th; if Bush would support it, and withdraw his lawsuits, Gore said he would withdraw his lawsuits too.  Bush turned him down.  This is supposed to prove that Democrats always had a committment to counting all the votes.  

Well, not so fast.  For starters, when Bush turned him down, Gore didn't go and start asking for recounts in all 67 Florida counties.  His committment to "counting all the votes" was conditional on Bush withdrawing all of his lawsuits.  It was a second-best alternative to just counting some of the votes, one which he offered when it looked like he might be losing.  When it was turned down, he went on with his partial recount strategy.  

And because of this, the voices raised in favor of counting all the votes were somewhat muted.  A Nexis search for the phrase "Count all the votes" in major newspapers turns up just 26 uses in the week after the Florida election--before Gore had made his offer.  In the first 17 days of the recount, it occurs just 57 times.  Then, on November 24th, the Supreme Court accepted cert for the Florida recount, with a hearing to be held on December 1st.  

Observers knew that this meant the Florida Supreme Court ruling allowing partial recounts was likely going to be overturned (if they weren't likely to overturn, they would have just dodged the case on a technicality).  Suddenly, folks get very interested in counting all the votes: there are almost 100 mentions between November 24th and November 30th, with most of those seeming to come in the few days before the hearing.  Then things quite down for the three days until the court decides: just 25 mentions.  

Tax the Internet!

Why is Amazon Supporting an Internet Sales Tax?

Shifting business models mean that sales tax is no longer a competitive advantage

It looks like the Marketplace Fairness Act--the official name for a proposal to allow states to collect sales tax on internet sales made to their residents--will pass the Senate sometime today.  It will have a tougher time in the House, where Republicans still aren't keen on supporting anything that smacks of higher taxes.  Still, it's remarkable, at least because it shows that under the right circumstances, you can get at least some members of the GOP to support a tax increase.

I wrote about this plan a couple of weeks ago, noting that the biggest issue with the bill is the disproportionate burden it will put on small businesses.  Amazon can afford to pay a small army to hassle with states who claim that Amazon isn't paying enough tax.  Mom's Cupcake Bakery and Cable Store cannot.  

The really interesting story of this whole case is Amazon's shift from a staunch foe of taxing the internet, to one of its biggest boosters.  A few years back, Amazon was waging a scorched-earth campaign against states that attempted to collect sales taxes from internet businesses.  For example, when various states passed laws claiming that affiliate links represented a physical nexus in those states that would allow them to collect taxes, Amazon said they were closing down associates who were residents of those states.  

Both the states and Amazon clearly believed that freedom from sales tax constituted a major competitive advantage for Amazon.  Yet a few years later, they're all sunshine and smiles when it comes to taxing the internet.  In fact, they're lobbying for it.  Why the shift?  

About the Author

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Megan McArdle

Megan McArdle is a special correspondent for Newsweek and The Daily Beast covering business, economics, and public policy. A former senior editor at The Atlantic and writer for The Economist, Megan has a diverse work history including three small startups and a disaster recovery firm at Ground Zero.

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