Stealth entitlement reform

Rep. Ryan's budget proposal called for changes in the fundamental nature of both Medicare and Medicaid.  Since that time, the Republicans have been getting an earful from a lot of writers in the media, and from voters, about the proposed Medicare changes.  Must less has been written about Medicaid, even though it appears that we are approaching a "perfect storm" situation that may make conversion of Medicaid from an entitlement to a block grant program a much easier fight.

Medicaid is a slow-motion budget disaster for the states.  Almost all states have reached the political limits on their tax rates, and Medicaid expenses are growing faster than their economies and revenues.  As a result, Medicaid spending has begun to crowd out spending on state programs with a longer history: depending on the state, all of roads, K-12 education, and higher education have taken larger percentage hits than Medicaid.  The recession accelerated the problem, but did not cause it; the train wreck has been relatively clear in the numbers since at least the mid-1990s.

Two recent developments are in the process of locking the states into this disaster mode.  First, the federal Affordable Care Act blocked states from tightening their eligibility standards.  From the perspective of the Democrats at a national level, this is a feature and not a bug: much of the expansion of insurance coverage provided by the ACA is due to increased Medicaid eligibility, some of which is threatened if states tighten things up.  Second, the Medicaid statute puts a floor under the coverage (that is, which things must be covered), and includes language that puts an implicit floor under provider reimbursements.  Beneficiaries and providers are currently attempting to sue over state violations of that reimbursement floor; the NYTimes published a piece last Saturday that summarizes the current status.

The floor on spending, the rate of growth of that floor, and the practical limits on states' ability to raise revenue puts the states in a very difficult position.  Extended into the not-to-distant future, the numbers suggest states could be in a position where they are literally having to choose whether to continue with Medicaid or to completely drop their support of, for example, higher education.  It seems possible that at least some will choose to withdraw from Medicaid instead of dropping those other programs, despite the consequences.

It appears that it may be possible to put together a coalition of interests that could pass a Medicaid reform package.  Converting the program to a block grant program would, in particular, allow a number of parties to claim victory.  In particular:

• Congressional Republicans could claim a victory on entitlement reform
• Senate Democrats from conservative states could claim -- assuming that required state maintenance of effort spending is less than current spending, which seems likely -- to have relieved some of the pressure on state budgets
• States would be freer to explore alternative approaches for delivering health care to the poor
• The Obama administration could claim delivery of "bipartisan" legislation

Interestingly, the Obama administration filed a friend-of-the-court brief in the Supreme Court case arguing that individuals are not allowed to sue over reimbursement rates, and that the decision is solely in the hands of the federal executive.  A possible implication of the brief is that the administration will not be enforcing the statutory requirements.  Such a decision would have important ramifications.  There are already parts of the United States where low reimbursement rates have made it difficult for clients to find providers who will accept new Medicaid patients.  Health insurance -- and Medicaid typically functions as insurance with the state in the role of insurer -- that is not accepted by providers is little better than no insurance at all.  At least to me, that suggests that the administration is willing to forgo the role of Medicaid in the ACA.

Arizona's "business death penalty" law

This past week, the US Supreme Court upheld in a 5-3 decision (Justice Kagan recused herself) Arizona's law allowing the state to impose a "death penalty" on businesses who hire illegal aliens (or undocumented workers or whichever label you would prefer).  The law allows the state to revoke a firm's business license after a second offense of knowingly hiring illegal aliens.  Now that the state can proceed with enforcement, one has to wonder if they will in fact do so, or if they simply hope the threat is sufficient to achieve their goals.

If we assume that the business also employs legal workers, then such a revocation is bound to cost the state of Arizona some money.  The legal workers will be eligible for unemployment insurance benefits since, to use the magic phrase, they have become unemployed through no fault of their own.  Some may be eligible for Medicaid and other benefits paid for by the state.  Arizona has a terrible state general fund budget mess right now, with little prospect that things will get much better in the near future.  Will the fact that revoking a business license will cost the state in that fashion act to deter the state from actually exercising its authority?

There will be pressure for the state to exercise its authority in an uneven fashion.  Shutting down a car wash is a relatively minor inconvenience for consumers: there are many car washes and most are small independent operations so the effects are small.  Shutting down an Albertson's or Safeway, on the other hand has much larger effects and a much greater impact on consumers.  The state may well be more reluctant to impose the death penalty on a Safeway than on an independent car wash.  Would an implicit policy that rendered large firms immune from the death penalty threat be discriminatory?  Enough so that the state winds up in court again?

Illegal workers are concentrated at the low end of the employment spectrum.  This suggests that businesses might tend to avoid having any workers at that level if they can avoid it.  The new law would seem to encourage a business to, for example, hire a janitorial firm and not its own janitorial staff.  Large businesses have done that sort of outsourcing for a long time; smaller firms may now find the practice more attractive as a means of risk avoidance.  And a very small business, that has been paying part-time cleaners off the books, faces a difficult choice: risk losing the license to operate versus the costs of bringing those workers into the official employment system.

The law also mandates the use of the E-Verify system operated by the federal Department of Homeland Security.  According to the E-Verify web site, "more than 238,000 employers" are enrolled in the system.  Arizona alone has an estimated 150,000 employers who will now have to participate.  Anyone who has dealt with a software system that experiences unanticipated rapid growth knows that the growth all by itself is likely to uncover a variety of problems.  If even a handful of other states enact similar laws, Arizona may find that it has to deal with unexpected difficulties in implementation as E-Verify fails in unexpected ways.

I suspect that very few firms will have their licenses revoked.  Not because they will stop hiring illegal workers, but because the consequences to the state of trying to enforce the law create problems that Arizona's state government won't want to face.

A Colorado policy task I'm glad I don't have

There are policy-oriented tasks that one looks forward to undertaking, and some that one wants nothing to do with.  Federal redistricting in Colorado appears to me to be one of those thankless jobs that no one in their right mind undertakes unless they think that somehow they can gain a partisan advantage.  This session, the General Assembly is split, with the Republicans holding the House and the Democrats holding the Senate and the Governor’s office.  Back in December, before the session started, legislative leadership charged a committee of five Republicans and five Democrats with drawing up new districts.

The committee held hearings around the state.  A couple of weeks ago, they released two different sets of candidate maps, one set drawn up by the Democrats and one set by the Republicans.  Neither set bore any real resemblance to the other, and it appears now that the committee will quietly expire without submitting a redistricting bill.  Expectations are that next week the Democrats will introduce a redistricting bill in the Senate, the Republicans will introduce a different bill in the House, no compromise will happen, and the whole issue will be tossed into the lap of the Denver district court.  The same court drew the district boundaries back in 2001, as well.

The problem for the court, and the reason I wouldn’t want to have to draw the new lines, is that like its budget, Colorado’s legislators and voters have over-constrained the problem.  There are statutes and court orders that specify factors that can be considered, and factors that must not be considered, in drawing the lines.  Three of these seem to be to be particularly troublesome: (1) in effect, there must be an “Eastern Plains” district; (2) similarly, there must be a “Western Slope” district; and (3) the city of Denver must be included in a single district, unless its population has grown too large.

The Eastern Plains and Western Slope requirements are attempts to preserve a voice for Colorado’s rural areas.  Distinct voices are presumably required because of the substantial differences in the two areas.  Why Denver must fit within a single district – and other cities are not granted the same privilege or shackle – is somewhat less clear.  Given that Denver has long been a solidly liberal Democrat stronghold, and is the largest city in the state, one suspects that the purpose was to avoid creating two safely liberal districts, each dominated by half of Denver.

Population patterns have steadily changed the distribution of people in the state.  In particular, the lion’s share of Colorado’s population growth has occurred in the Front Range counties lying between the Rockies and the rural Plains counties to the east.  The following table shows how the growth between 2000 and 2010 was distributed.[1]  Only one of the 12 counties with the largest growth – Mesa County, on the Western Slope – is outside of the Front Range.  Overall, 86 percent of the total growth occurred in the 11 Front Range counties.

 

The target population per Congressional district is now 718,457.  The portion of Colorado outside of the Front Range totals 911,187: enough for one district, but certainly not two.  Those 900 thousand also include the San Luis Valley counties in the south and the mountain resort counties in the center of the state.  The Western Slope and the Eastern Plains, then, must be tacked on to one or more of the Front Range districts (or a portion of the Front Range tacked on to the rural areas, depending on your perspective).

It is increasingly difficult to meet the statutory obligations and not upset some people.  Pueblo, solidly Democratic, resents being attached to the Western Slope and the San Luis Valley – Pueblo and Mesa counties offset one another, and the remaining, mostly conservative, rural areas determine the outcome.  Many Eastern Plains counties are actually losing population; paired with growing Larimer and Weld counties, that rural voice is already on the verge of disappearing.  In order to retain his seat, Congressman Gardner from Yuma will need to convince the voters of Fort Collins and Greeley that he can represent their urban interests if and when those conflict with the interests of his much smaller rural constituency. 

Colorado can be rightfully proud of its rural heritage.  On the other hand, according to census Bureau population figures, Colorado is the 14^th least rural state in the country, slightly more rural overall than New York and Maryland, but less rural than Delaware and Ohio.  Assuming that decades-long trends continue, perhaps as early as 2020, and almost certainly by 2030, the only way to preserve an actual rural representation in Colorado’s Congressional delegation will be to combine almost everything outside of the Front Range into a single rural district.

And that’s why I’m glad that I’m not the one stuck with the job of drawing the new district lines for Colorado.  The current constraints represent an outdated historical perspective: Denver as the dominant population presence, and meaningful rural populations in both the East and the West.  El Paso County has passed Denver in population, Arapahoe County will very likely pass Denver in the next census, and the combination of Larimer and Weld Counties may also pass Denver by 2020 as well.  The rural areas of the state are shrinking in size relative to the Front Range, more so in the East than in the West.  I happen to think redistricting ought to reflect the future direction of the state, not its past.  

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[1] Some might argue against including Weld County as part of the Front Range.  Weld’s population is dominated by Greeley, and I don’t want to split the Fort Collins / Loveland / Greeley area, where boundaries are going to grow increasingly blurred.  Boulder, Jefferson and Broomfield Counties are lumped together because Broomfield County was created from parts of four counties after the 2000 census, and the bulk of its population was drawn from areas that were originally in either Boulder or Jefferson.

 

An observation on US nuclear power

A week ago, the New York Times reported the results of a new poll that showed public acceptance for new nuclear power plant construction in the US had declined to 43% from 57% two years earlier.  Yesterday, sources reported that a mass of fuel and cladding appears to have melted through the Fukushima unit #2 reactor vessel.  As the severity of the incident at Fukushima increases, it will undoubtedly affect public opinion in the US.  Obtaining approval for new reactor construction, and extending the licenses of existing aging reactors, will no doubt be much more difficult than before.

I have long maintained that the United States is too large and too geographically diverse to adopt a single energy policy.  Regional differences require regional approaches to the problems.  This is at least one of the reasons that nuclear power in the US is very much an "Eastern" thing.  If the Great Plains is regarded as the separator between East and West -- and there are good reasons for using that separator -- then only eight of the 104 operating reactors are in the West, and seven of those are clustered in the southern half of California and southwest Arizona.  The difference shows up clearly in this map from the NRC:

The most commonly cited figure for the share of "US" electricity generated from nuclear sources is 20%.  However, in (very) round numbers, approximately 25% of Eastern electricity is nuclear while only 6% of Western electricity is.  There are individual anomolies -- about 25% of generated power in Arizona is nuclear in the West, and Kentucky has no reactors in the East -- but the overall picture is clear.  If no new nukes are built, and existing licenses are allowed to expire, the East faces the situation of losing the generators of about one-quarter of its current power usage over the next twenty years.  In the West, the amount is less than one-fifteenth.

The West can almost certainly make up the losses from renewable sources.  There will be difficulties, of course, particularly in maintaining the balance between base load and peaking power, and accounting for seasonal variations.  The West is relatively rich (compared to its population base) in renewable resources.  Plans have been made, even though final commitments have not, for transmission facilities such as the High Plains Express that would make it possible to deliver power from Great Plains wind farms in Montana and Wyoming to urban centers as far away as Phoenix.  The East faces, at least in my opinion, a much more difficult challenge in replacing its nuclear sources.

How the East tackles that problem could well be the source of regional frictions.  If they adopt stringent conservation standards, and attempt to impose those in the West as well (and at a national level the non-western states certainly have the votes to do so), the West would likely see itself as being punished for Eastern choices.  If the East adopts a strategy of exploiting Western renewable resources, very large transmission systems will have to be built.  The West would likely see itself being punished again if the costs of those systems were levied against both East and West.

New tech for separating oil from sand

Researchers at Penn State University have published a paper describing a new approach for separating heavy oil from sands and clays using ionic liquids.  The method is reported to use very little water or energy, and to cleanly separate the oil, the sand, and the solvent so that the sand goes back to its source, the oil goes on to the refinery, and the solvent can be reused.  A picture is worth a thousand words:

Assume for the moment that the tech can be scaled up to industrial sizes.  Is it a good thing?

As a tool for cleaning up the environment by separating out oil from contaminated sediments of various sorts, it would seem to be a very good thing.  There are any number of places that are simply impractical to clean, or finish cleaning, today.  Waste storage near the Canadian oil sands comes to mind as an immediate example.  Oily waste water in holding ponds and the resulting contaminated sediments could actually be cleaned.  As could areas contaminated by oil spills from tankers, pipelines, and wells.

Canadian and Venezuelan firms that extract oil from oil sands would no doubt regard it as a good thing.  Given that little water or energy is required for the separation process, their costs for extracting petroleum would be significantly reduced.  It would also make the operation more environmentally friendly, at least in the sense of local damage.  Lack of available water is also a limiting factor in production of oil from oil sands in areas such as Utah.  The new technology might enable production from those sources.

On the other hand, if you believe that global warming is an issue that must be addressed, then it is clear that any tech that enables increased production of petroleum is a bad thing.  Production from oil sands using ionic liquids may be much cleaner than the current technologies.  But if it enables production of another million barrels of petroleum per day, that's another million barrels per day that will be converted to carbon dioxide and released into the atmosphere, contributing to the global problem.

I feel reasonably confident predicting that, in the long run, people are going to extract every drop of global petroleum that they can.  And burn it.  Given that as an assumption, cleaner production can only be regarded as a good thing.  Here's hoping the ionic liquids approach is as clean as it looks, and scales.

A Mainstream Economist Recognizes the Finite World

On the day after Christmas, the NY Times published a Paul Krugman column titled "The Finite World."  From that column (all emphasis mine):

Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months....

What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story.... 

So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

 Is Dr. Krugman's prediction that there won't be a collapse, that we'll just gradually adapt our lifestyle, a reasonable one?  Almost 40 years ago, The Limits to Growth made predictions about possible outcomes based on a finite set of resources.  The following chart illustrates the standard run of the world model used in Limits (from The Limits to Growth: The 30-Year Update, used without permission).  The standard run shown in Limits has stood up remarkably well over the nearly 40 years that have passed since it was originally published [1].  The standard run prediction is that there will be a collapse in industrial output, that it should begin in another few years, and that by 2035 or so the global per-capita output will have fallen by more than half.

These two very different views are not necessarily inconsistent.  The Limits view is global, while Dr. Krugman's is specific to the US.  The effects of a collapse are unlikely to be distributed equally around the world.  For example, the US is a very large exporter of food (measured in calories), while almost all countries in Africa are net calorie importers.  Decreased US food production may result in changes in diet, but is unlikely to cause famine in the US (the Krugman prediction).  The corresponding decrease in US exports could, though, leave Africa unable to acquire enough calories to feed its population with widespread famine as the result (the Limits prediction).  This situation would be particularly true if an export-land model effect holds for food as well as other natural resources.  Such an effect would result in US net exports of calories declining at a rate much faster than the decline in production.

Dr. Krugman's prediction also conflicts with the global predictions given in works such as Michael Klare's Resource Wars [2].  In Klare's view, the world will see actual "hot" wars fought over access to resources: oil, water, minerals, etc.  US involvement in such wars seems to me to be unlikely for multiple reasons.  The US still has a robust allocation of natural resources, particularly if we were inclined to manage them better.  The US is relatively isolated from much of the rest of the world: other than Canada, Mexico, and parts of the Caribbean, US involvement has to be across oceans.  And finally, I expect the US people to recognize that the large amounts of resources that are needed to support such long-distance conflict might impact civilian availability to a greater degree than making the effort towards self-sufficiency.  Again, Krugman and Klare's predictions are not necessarily inconsistent on a regional rather than global basis.

I expect all of the predictions mentioned above to be "right" to some degree.  I expect hot wars over natural resources.  And I expect a fairly rapid decline in global food and industrial production.  But I expect the US to stay out of foreign entanglements, and that the decline in production of critical goods and services in the US to be modest, successfully handled by Krugman's "adapting... our lifestyles" approach.  At least for sections of the US; it seems entirely possible to me that areas of the US that have high populations and smaller allocations of natural resources will have problems.  But more on that another day.


[1]  Graham Turner, A Comparison of the Limits to Growth With Thirty Years of Reality, CSIRO, June 2008.

[2]  Michael T. Klare, Resource Wars: The New Landscape of Global Conflict, 2001.

State budget crises consequences

From time to time I leave comments at The Oil Drum based on my experience as a member of the Colorado legislature's budget staff. Recently, Jeffrey Brown (westexas at TOD) asked me to write a piece about the likely outcomes of the current state budget crises. For various reasons, it ended up being posted as a guest piece at Gail Tverberg's Our Finite World blog, and reposted at the Energy Bulletin (Post Carbon Institute). Just to be complete, I'm reposting it here.