Megan McArdle on the final health-care vote and why she opposes reform

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Megan McArdle
Staff Writer, The Atlantic
Sunday, March 21, 2010; 2:00 PM

The Atlantic's Megan McArdle took your questions about the vote on the bill to reform the health-care system and why she opposes the overhaul.

At 1 p.m. ET, E.J. Dionne discussed why he supported the bill and what's next for the reform process.

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Washington, D.C.: In the long term, isn't this a smart move for Democrats? The polls may not be totally on their side now, but Medicare and Medicaid have become quite popular. Why wouldn't the same happen with the health insurance bill?

Megan McArdle: Contrary to memes circulating among the Democrats, Medicare was popular when it was enacted--according to Gallup, and some other pollsters, Medicare always enjoyed a plurality of support. By contrast, the current gap between favorables and unfavorables is about -10%--meaning that more people are against passage than for it. Perhaps it will get more popular over time. But the public has not, to my knowledge, ever rewarded a political party for defying its will.

If the question is, will this bill be hard to repeal, I think the answer is yes. The parts that are unpopular are also the parts needed to make it work, like the individual mandate. Indeed, the big danger is that those parts will be repealed, and the resulting program will spiral completely out of control, bringing on some form of fiscal crisis.

But that won't help the Democrats. By the time it's popular, it will be too late to take credit. When was the last time you heard someone say, "I'm voting for the Democratic candidate because Lyndon Johnson passed Medicare?"

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Jefferson City, Missouri: What do you think about the practice of "rescission"?

Megan McArdle: The practice of recission is common among all insurers; you cannot decide to go without homeowner's insurance, and then buy coverage only when the house is on fire. If they think you lied on your application, they will either charge you for the back premiums, or refuse to pay part or all of the claim.

The problem with recission is not that it exists; it's that the practice can be abused by insurers who would rather not pay legitimate claims. Unfortunately, it's hard to say what results from an underlying condition, and what doesn't--maybe your diabetes caused your heart attack, but maybe you would have had a heart attack anyway. So insurers are tempted to stretch the definitions of underlying conditions when they're faced with a big claim. It's not clear how often this actually happens--health care rallies always involve theatrical stories, but the stories often tend to be much less clear-cut upon investigation. And educated consumers can probably win on appeal . . . eventually. But there's a big risk to the most vulnerable.

It's not clear to me that the right answer is to ban the practice, because the problem with banning it is that you risk something like the classic "insurance death spiral". If health insurers can't get rid of you for fraud on your application, the temptation is obviously simply to wait until you get sick, and then lie to your insurer. Over time, that causes insurance prices to skyrocket, because the only people who want to buy the stuff are the ones who are actually sick. So something like automatic binding arbitration, or regulatory review, might work better. But politically, banning it is clearly the vote-getter.

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Kalamazoo, Michigan: One of the most alarming statistics arising from the HCR debate was medicare's astronomical cost of about 700% above the CBO estimate to date. Can you maybe hit on some of the major causes contributing to that and why or why not this bill is differen't?

Thanks,

SC_Analyst

Megan McArdle: There was no CBO when Medicare was passed; in fact, the CBO was instituted precisely because previous politicians had made such patently unrealistic projections for their programs. My fiance had a very good article about this a few months ago: http://reason.com/archives/2009/12/10/legislative-reality-vs-politic

So do I think that this bill is going to have a 7X difference between projection and reality? No. The CBO is much better than that.

That is not, however, to say that I don't think this will be a budget buster--and Doug Elmendorf, the current head of the CBO, has made it pretty clear that he's worried too. That's why he has caveated his work so strongly, pointing out that the planned cuts are going to be politically tricky, and may not be medically feasible--i.e., that there is a limit to how little you can demand providers charge, before they simply decide not to take Medicare or Medicaid patients any more. We're already seeing this quite a lot with Medicaid; states set the reimbursements so low that doctors actually lose money on every visit. In some states, pharmacies are also starting to refuse Medicaid business. If that happens, the government will ultimately have to cave and raise reimbursements--as it already has to physicians with a series of temporary "doc fixes" to reverse Medicare's automatic payment cuts.

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H. Protagonist, Los Angeles, CA: Megan,

Now that it appears that our legislators have figured out how to successfully game the CBO scoring process such that its scores are effectively irrelevant, what are those of us interested in getting an nonpartisan estimate of the probable cost of future legislation to do? Can the rules be changed such that the CBO provides a range of estimates, or performs a sensitivity analysis on bits of policy that are contentious or unlikely to be implemented?

Megan McArdle: The CBO process is the way it is for good reason. You really don't want the agency shooting down plans it doesn't like by deciding they're politically unfeasible--even if that's true. There's too much potential to game the process.

The problem is, of course, that Democrats have now learned how to game the CBO process by enacting unpopular tax increases that take place almost at the end of the 10-year forecast window (plenty of time to repeal them!) or providing some version of David Stockman's infamous "magic asterisk"--unnamed savings to be identified later.

The CBO process will still be useful for smaller bills, where cost is an actual consideration. But for large scale bills, both parties are going to simply enact a bunch of completely politically infeasible changes, and then claim they've balanced the budget. This is very dangerous.

The way we counter this is the way the Republicans have--by getting letters from the CBO analyzing what would happen if the imaginary changes are never allowed to take effect. The Democrats were very good at this, and the GOP is getting better. Paul Ryan recently got the CBO to do an analysis pointing out that if the excise tax and the Medicare payment cuts don't take effect, this bill will substantially increase the deficit.

Unfortunately, while they've proven adept at getting the letters, they've proven much less effective at getting anyone in the media to write about them.

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Washington, D.C.: You've written a lot about the danger of inhibiting innovation in the health care sector. I understand the criticism if the move is to a single-payer system, but is there anything in this specific legislation under consideration that makes you emphasize the danger posed to innovation?

Megan McArdle: Well, for starters, we're slashing reimbursements to providers, which means that the potential profit from innovation is lower, and of course, there's less cash flow available to fund it. But to me the biggest worry is that this bill ends up costing a lot more than is currently projected--the problem that Massachusetts is now facing. Other countries facing that dilemma have all responded the same way: price controls.

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Appleton, WI: Megan, since you support some form of income redistribution, and seem to support some form of health income supplementation, what is it that this bill gets the most wrong? Or is it simply its irresponsible long-term budget? This seems like an entitlement you support, if there were more first-dollar consumer discretion and funding. Do you really feel in all honesty that this bill will do more long-term harm to medicine than it will do short-term good, with the rate at which technology advances? I just don't see how the poor currently overeconomizing on health care is a positive curb on the system. Please help me agree with you that the bill isn't worth it over any time span.

Megan McArdle: One of the hardest problems that economists deal with is how to weight the interests of future people. The problem is, there are so damn many of them (we hope!). Because the number of people who will be alive in the future is so much larger than the number who are alive now, straight utilitarian calculus can easily lead you to say that people alive now should give up 90% of their income to do anything that increases the income of future people by a penny a year.

The natural answer is to discount the utility of people in the future--in much the way that you discount your own future utility, so that someone has to pay you (interest) in order to get you to defer consumption.

Unfortunately, because the future is very long, even a low discount rate ultimately means that you put basically no weight on people who are alive beyond about 50-100 years from now.

This is a big dilemma for environmental economics, and I think it is also a dilemma here. I am fairly skeptical of the claims that this bill will save thousands, or tens of thousands, of lives a year. (see here: http://www.theatlantic.com/magazine/archive/2010/03/myth-diagnosis/7905/) But even if you think this is true, placing any value at all on the lives of people in the future means that if you save those lives by causing even a small reduction in the rate of innovation (through price controls or regulation), you will end up killing far, far more people than you save. Compound interest is a killer.

I hope that's not too abstract and boring. It's a really tough, really interesting problem, and at some level, it's simply a value judgement about how to weigh the lives of current and future people.

But I'll note that both sides do this very inconsistently: the left wants a high weight on current lives and a low weight for future lives in analyzing health care, but wants to reverse this for the environment; the right takes the opposite stance. Or, in many cases, they simply deny that there is any possible tradeoff between current and future welfare. I find those denials pretty unconvincing--which is one of the reasons I'm for a carbon tax, and against this legislation. There's also the fiscal problem, which I've addressed in other questions.

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Galt's Gulch, CO: Are you sorry that you voted for Obama now?

Megan McArdle: Counterfactuals are hard. It's not clear to me that McCain wouldn't have ended up doing a health care bill that was, at least, almost as bad--and I would have opposed his actions on many other fronts. Aside from health care and the GM bailouts, I don't have many quarrels with Obama so far.

Of course, those are big quarrels--the kind that make for broken marriages and icy thanksgiving dinners.

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Princeton, NJ: As regards innovation:

The MRI was developed in Nottingham England

Statins (Lipitor, Crestor, etc.) were developed by two Japanese academics.

Most artificial joints were developed in France.

The treatment that Rudy Guilini said saved his life was developed in Denmark.

We have no monopoly on innovation.

Megan McArdle: I don't believe I said we did. I'm worried that innovation will slow, not stop--but at this point, the US is by far the most lucrative market for many kinds of innovation. Being the doctrinaire free-marketer that I am, I think that supply curves slope upwards--that when you keep the price of things artificially low, you get shortages. And the incentive of the government is usually to keep prices of the things it pays for artificially low. (Important exception: defense)

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Hiram, Ohio: Hi Megan. In your earlier response on rescission you suggested that there was a danger then of people only signing up for insurance after they needed it, creating a death spiral. That might be true in isolation, but doesn't this bill require everyone to carry insurance all the time? I'm confused.

Megan McArdle: And indeed, that's why we are pairing an individual mandate with a ban on exclusions for pre-existing conditions. If you have guaranteed issue with community rating (i.e. you can't charge people extra for being extra sick), then you get the death spiral. You can have a market that allows exclusions, or a market with an individual mandate--but if you try to enact one without the other, you get a huge disaster.

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Los Angeles, CA: Why so much liberal consternation about guns at town halls and violent threats and spitting and racial epithets and so on?

Can't they see the hypocrisy of this, given that they hung Bush in effigy and compared him to Hitler?

Megan McArdle: Yes, liberals are hypocrites, most of whom got mad when the right demanded that they denounce the crazies at left wing protests. Yes, the right has done a marginally better job of actually denouncing their crazies.

But in the end, what really matters is that the crazies are doing pretty evil and awful things that need to be denounced. The fact that liberals get to make a little bit of political hay out of this is a distant second, in terms of relative importance.

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Los Angeles: Since it is forgone that if Health Insurance Reform fails this time, it will be many years before another attempt can be made, it must follow that in being opposed to reform now, you are willing to let the 45 million uninsured and the other 20 million underinsured continue in their plight. And that you are willing to let the economic drain on our economy by ever rising health care costs go unchecked. What possible practical or moral reason could you have for not doing something now?

Megan McArdle: You're begging the question. Economist Bryan Caplan describes a marvelous syllogism that animates a lot of political discourse:

1) Something must be done
2) This is something
3) Therefore, this must be done

This is the syllogism that got us into the Iraq war--and look how well that turned out!

There are worse things than the current status quo, and I think that this bill is one of them.

Moreover, in America, at least, there's huge lock-in to entitlements. No one in their right mind would enact Social Security or Medicare in their present forms, but they have so far proven totally impervious to meaningful reform. Doing a mediocre-to-terrible program now pretty much means that we foreclose the possibility of doing a decent reform. Any future health care bills will build on this basic structure. We will now never get away from it, if history is any guide; we'll just keep adding ill-fitting "fixes" that don't work very well.

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Personal choice: If given the option, would you give up your health insurance for a cash payment from your employer for the amount they spend for your health insurance?

Megan McArdle: In my state (DC), yes I would. Part of the problem, though, is that the existence of a heavily subsidized employer market means that the individual market is secondary and weird--so it is not necessarily a good guide to what a more free insurance market would actually look like.

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Los Angeles, CA: With the 3.8% increase in taxes on capital gains + the administration's proposed increase from 15% to 20%, it sounds like cap gains will go from 15% to 23.8%. How much impact will a 8.8/15=58.9% tax increase have on investment and on people creating startups?

Megan McArdle: It's pretty distressing that they've chosen to fund so much of this through capital income--the new 4% surcharge on royalties, rents, interest and dividends. There's a reason that even countries like Sweden tend to go light on their capital taxes; capital is mobile, and it's easy to chase away. It's also easy to prevent capital from being formed in the first place, encouraging people to consume now rather than save for the future.

Progressives like capital taxes because the rich tend to have more capital income. But it would be better to fund it through a higher tax on ordinary income. Unfortunately, that hits the professional classes hard, and they are a critical democratic constituency--particularly, in this case, those in the American Medical Association.

I can't make any particular prediction about the magnitude of the distortion, at least not without doing more research than I have time for right now. But obviously, this lowers the return investment, which means that on net, you'll probably get less of it. That means less capital available for entrepreneurs, or other investments.

Oh, and it's not entirely progressive. Renters will be glad to know that as soon as it takes effect, that 4% tax increase is probably going to show up as an increase in your annual rent, above and beyond whatever increase they were already planning.

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Greensboro, NC: "Yes, the right has done a marginally better job of actually denouncing their crazies. "

When, exactly, has any major figure on the right denounced that activities we have seen at the Tea Party rallies? Who has denounced the carrying of loaded firearms to protests, or the vile incidents yesterday when African American congressmen were called racial epithets, and another congressman was spat upon? Who has denounced the numerous signs that call for actual armed revolt or the racist signs that picture Obama as a witch doctor? I have seen or nothing from any person of note on the right except for Drum or Kathleen Parker, and they have been denounced as apostates.

washingtonpost.com: GOP denounces slurs

Megan McArdle: The right was pretty fast to denounce any actual violence or racist catcalls--much faster than the left was, in my experience, to denounce Bush=Hitler signs.

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Chicago, IL: Megan,

Don't we have a problem in that the fines for not buying the mandated insurance are less than the insurance itself costs. Thus, the healthier opt out for a given amount of time thus increasing the cost to insure the rest?

Megan McArdle: Yes, this is a big problem. Rationally, many people should refuse to buy insurance.

Will they? On the margin, undoubtedly some will. But I don't know how many. At a first guess, I'd expect to see the number of refuseniks to increase over time, as it becomes common knowledge that this is the financially rational move. But that's just a guess, and it doesn't take into account that if the number of those who "opt out" grows too fast, the government might increase the penalty.

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Lafayette, IN: Given that the bill looks likely to pass, do you foresee any sort of widespread civil disobedience on the part of the young/healthy refusing to buy insurance they neither want nor need?

Megan McArdle: I doubt it will be framed as civil disobedience. I assume it will be phrased as, "I can't afford it, and I'd rather pay the tax"

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Boston, MA: What do private health insurers contribute to the health care process?

Megan McArdle: They provide countervailing power to the health care providers; in markets where insurers aren't powerful enough, providers tend to have higher reimbursements. They also provide price discovery. If the private health insurance market didn't exist, Medicare would have to invent it, because it's the private health insurance market (including the non-profits), that figure out what things are worth buying in a competitive market place. It's certainly not a perfectly functioning market, but monopsonies (markets with a single buyer) tend to be less efficient than even sub-optimal markets with many players.

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Metuchen, NJ: Now that the tea party people are calling Democrats "n-gger" and "f-ggot" and making death threats against them and the president, are you still willing to defend them?

Or are epithets just free speech, and threats of political assassination a sign that the free market for guns and ammo is alive and well?

washingtonpost.com: GOP denounces slurs

Megan McArdle: Obviously, I'm not going to defend anyone who shouted anything like that. But that's not the entire movement; it's some appalling people within a movement. Given how rare the incidents are, there is no way to fairly characterize them as representative.

So no, I am no more willing to denounce the entire movement based on a few bad apples than I would be willing to denounce the entire anti-war movement based on the fact that ANSWER organized many of its rallies.

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St Louis, Missouri: Can you expand on slashed reimbursements to providers? Are you referring to Medicaid payments? Also what do you think will be the effect of this legislation on healthcare workers?

Megan McArdle: In order to pay for this bill, they have changed the formula that Medicare uses to reimburse providers (except physicians). The net effect is going to be to lower payments quite a bit, over what they would be otherwise. Furthermore, about half of the expansion comes from Medicaid, which is notoriously cheap in its reimbursements--so cheap that in many places, it's nearly impossible to find a provider who will take it.

There are two countervailing effects on healthcare workers. On the one hand, you're expanding demand for their services, and lower-paid workers in powerful unions will be able to exert more pressure on things like Medicaid reimbursements. On the other hand, if you cut payments to hospitals, they're going to have to employ fewer people. Which effect will prevail? I'd guess on net it's a slight plus for low-wage health care workers, a huge plus for the SEIU (which unionizes many of those workers, and could really use some more members to plug a hole in its pension fund), and bad for the more skilled workers, particularly physicians.

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College Station, TX: Your answer on taxes touches on this, but I'll ask anyway... what do you think of Greg Mankiw's point that CBO has to score assuming no changes to the path of GDP growth, but the changes in the bill could have impacts on GDP?

Greg Mankiw's Blog: A Warning about CBO Scoring

Megan McArdle: I think it's true: the taxes in this bill are going to be a drag on GDP. But how big a drag? Big enough to even be detectable? I don't know the answer to that.

Over time, of course, even very small effects can compound into something very large. But about the shorter term, I'm not sure I know whether this is going to be a big enough problem to show up in our national statistics. It well might be. But it also might not.

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Reston, VA: Assuming health care reform passes, how do you think the deficit commission will deal with it? Will they ignore it as too recently passed to touch, or will they propose decreasing the tax exemption for health insurance and capping benefits, or something else entirely?

Megan McArdle: I think they will have to deal with it; you're talking about something that by CBO projections will clock in at around $200 billion a year over the next decade. That's a huge chunk of the federal budget; for reference, that's bigger than any normal year line item except Social Security, Medicare, Medicaid, Defense and interest on the national debt.

I don't know how they'll propose to deal with it, and I'm not sure it really matters, because I don't know anyone who thinks that this commission will ultimately be listened too. Commissions work when they provide political cover for something on which there's already bipartisan agreement: think base closings, or raising Social Security taxes. But there are real and deep divisions on how to deal with our fiscal problems that will not be resolved by outsourcing the initial policy proposals.

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Bowie, MD: Can you think of any part of the economy, anywhere in the world, where more money is wasted than in the current US health care? It seems to me that this is the exception to the rule that the private sector generally does things more efficiently than the government.

Megan McArdle: Defense spending, for starters. American health care is more lavish both in treatments, and in how well appointed the facilities are. In some sense it's "wasted", but whenever anyone, private or public, attempts to curtail the waste, the public backlash derails the cost controls. Think about the recent mammogram guidelines, or the failure of managed care in teh 1990s; both were undone when voters deluged their politicians with demands to undo the cost controls. So far, politicians have always complied with those demands.

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Kensington, MD: When an antitrust-exemption-protected middleman-skimming-operation industry (i.e., one that produces no real good or service) raises premiums yearly by roughly TEN TIMES the rate of inflation, on a product with inelastic demand (i.e., health care is not some elective luxury), something is clearly spinning out of control. I fully understand disagreements on HOW to fix it. But how can -anyone- seriously put forth the notion that no overhaul is needed?

Megan McArdle: Who is saying that no changes are needed? Refusing to support this gargantuan new Rube Goldberg legislative apparatus is not the same thing as saying I don't want change. As far as I know, no one is saying that.

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Anonymous: It's not that people don't want reform but how can we afford this. The just released CBO scoring for the Senate bill and reconciliation package comes in at $940 billion over ten years. A reminder: the benefits (i.e. spending) don't begin until 2014. The taxation (revenue collection) begins immediately. A true number? The CBO says the cost over the first 4 years would be $17 billion. The last 6 would equal $923 billion. So isn't this a better representation of true cost?

$923/6-10 = $1,538 trillion or over 1.5 trillion dollars if the spending is factored evenly over the 10 years like it will be the following 10 years.

And that doesn't include the $200 billion yearly "doc fix" which was deliberately taken out of the bill to make it seem like less spending. Add that to their claimed "net" and see what it gets you. It's certainly not $794 over 10 years or any deficit reduction.

This bill will bankrupt the country in 20 years

Megan McArdle: The power of compound interest means that if the legislation stays on track, the CBO thinks that the cuts in the growth rate of reimbursements will actually keep the bill deficit neutral after 2020. The problem, of course, is that these sorts of gimmicks always sound terrific in theory--just slow the growth rate a little! Unfortunately, when they bite too deep, Congress generally has to undo them, which is why we annually "fix" the alternative minimum tax and doctor reimbursements.

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Rochester, NY: Earlier this week, Newt Gingrich wrote that health care reform would be like civil rights in that it will be bad for Democrats politically. He wrote specifically that the political price of civil rights legislation outweighed the benefits.

Do you agree with this?

Megan McArdle: No, but then I'm not a Democrat running for re-election in 1966.

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Cincinnati, OH: Between the epithets and the spitting, the Tea Party seems to be pretty irrational. What do you think are the motivations behind their protests? What in the bill do they object to?

Megan McArdle: The giant new entitlement funded by mechanisms of dubious political sustainability.

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Wichita, Kan.: One of the problems with our current system is so much money is wasted on people who are too elderly to ever recover. What free market solutions are there to this problem -- the overuse of medicine on the elderly.

Megan McArdle: Realistically, I don't think there is any way that we are ever going to make the kinds of choices that we might about when it is no longer worth treating the elderly. On the margin, I hope we will stop doing heroic interventions with no benefit, which are all too common. But these are not quite as ubiquitous as often suggested; even palliative care can be quite expensive, and if you've only got one month left to live, a four month extension of your life is nearly priceless. When the private sector tries to rein them in, legislators overrule those decisions; ditto, the public sector. It's just too emotional to say, "some peoples' lives aren't worth extending."

We're probably much better off focusing on areas where we realistically could control costs. If we made patients responsible for a substantial portion of their out-of-pocket costs, we'd see much less unnecessary testing and treatment. It's not a silver bullet, but it would help--and would also improve the lives of patients who don't undergo unnecessary biopsies, back surgery, and so on.

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Re: CBO: Should we just scrap the CBO altogether? I would be more comfortable with a FREE MARKET way of scoring bills. Is there any way to do this?

Megan McArdle: You could use prediction markets. But they'd only work if you enlisted a lot of people with reasonable knowledge levels. InTrade is often problematic because there are two few people trading to make an informed market price.

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Megan McArdle: That's all the time I've been allocated, folks. Thanks so much for all the great questions, and if there was a question I didn't answer, you can always ask it in my comments section at meganmcardle.theatlantic.com

Farewell, internet!

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