Month: October 2004

Health Insurance and Health Costs

Tyler asks Why is private health insurance such a disaster? in particular he wants to know, Why does private health insurance perform so badly in holding down costs?

There are actually two issues. Tyler mostly questions the traditional arguments that insurance increases costs. I won’t deal with all of his arguments (today!) but consider the following:

The tax-free nature of employer-supplied insurance benefits encourages wantonness. (TC: Why? You can subsidize the purchase of apples, that doesn’t mean apples will be produced inefficiently or at “excess cost” for that level of apple output.)

True, but the phrase “for that level of output” contains a whole bag of tricks because subsidies will change the output level both in quantity and quality terms. Assume that there are two drugs, a cheap one at $10 and an expensive one at $20. You think the expensive drug is worth $5 more than the cheap one. With no subsidy you buy the cheap drug. With a 75% subsidy the cheap drug is $2.50 and the expensive one is $5 and the difference is now only $2.50 – you now buy the expensive drug. Thus there is no necessary production inefficiency but costs double.

So it is true that 3rd party payment will increase total costs. I think some of the other arguments that Tyler questions are also correct but these arguments do have another problem – one Tyler does not mention. To the extent that third party payment is not increasing, the increase in demand will cause a one-time increase in the level of prices/expenditures. What we see in the United States and worldwide, however, is a sustained increase in relative prices and expenditures and for that you need some factor that is also sustained – that factor is technological advancement. In real terms technological advancement lowers prices but when you combine that with an elastic demand for medical care nominal prices and expenditures increase. (When Christian Barnard performed the first open-heart surgery in 1967 he reduced the real cost of treating heart disease but increased expenditures on open-heart surgery).

In other words, health insurance companies don’t hold down costs because their customers don’t want them to. In this sense, I don’t think private health insurance is a disaster. The problem, if there is one, is in ourselves.

The Ig Nobel Prize in Economics

This year’s Ig Nobel prize in economics goes to the Vatican for outsourcing prayer.

A prize to Tyler, probably more Ig than Nobel, for flagging more than one future winner in Marginal Revolution including the aforementioned prize in economics and the prize in psychology for research on gorilla vision.

If you don’t yet know about the gorilla vision research, I encourage you view this Java video of a basketball game and try to count the total number of times that the people wearing white pass the basketball. Do not count the passes made by the people wearing black. When you’re done read Tyler’s post. As this award indicates some Ig Nobels are given for important research.

More Lost Nukes

Concerning yesterday’s post on missing nuclear weapons Gerald Hanner wrote to say:

I once flew with one of the people involved in that lost nuke in South Carolina. It was being carried by a B-47, and they were on their way to a forward-deployed base in England to pull alert. For takeoff the weapon (no one in the business calls them “bombs”) is not pinned into the release mechanism so that it could be released if there was an aircraft emergency after takeoff. Since the “pit” was not installed in the weapon there was no chance of a nuclear detonation. In any case, after a safe takeoff the copilot went back to the bomb bay to place a safety pin in the release mechanism; the pin would not go into the slot it was designed for. After calling back to their departure base to discuss the problem, someone on the ground suggested jiggling the release mechanism a bit to properly align the parts. The copilot did. The next transmission from the aircraft was, “Shit! We dropped it!” The weapon released and went right through the closed bomb bay door; those were heavy dudes back then. You’ve read the rest of the story.

Dave Walker of Lockjaw’s Lair wrote to report on a still-missing nuclear weapon in North Carolina.

It was just after midnight on January 24, 1961. A B52G Stratofortress (one of the greatest airplanes ever to cast a shadow on this fine Earth, IMHO) suffered structural failure in its right wing near Faro, NC. The plane carried two MK39 hydrogen bombs.

The two weapons were jettisoned from the plane. One parachuted safely to the ground, receiving minimal damage. The other plummetted to Earth, partially breaking up on impact. Part of the weapon, however, was never found. The lost portion was the uranium-containing part, as well. Crews dug to a depth of 50 feet in the boggy field, but could never retrieve the warhead. To this day, the lost weapon continues to lie in this field.

Radioactivity tests have come up negative, and the Air Force has purchased an easement on the property to prevent anyone digging. If you’d like to read further on the case of the lost warhead, check out this link.

Truth is Stranger than Fiction Department

In 1958 a nuclear bomb 100 times more powerful than that dropped on Hiroshima was accidentally lost over the coast of Georgia. Amazing! But it doesn’t stop there. At first, there was an intense search but the search petered out when several weeks later another bomb was accidentally dropped near Florence SC – fortunately the latter weapon, although nuclear, was not primed. The bomb’s conventional components, however, detonated on impact creating a huge crater and injuring several farmers. The weapon lost over the Georgia coast may have been found recently by a private radiation expert who measured radiation levels 3,000 times above normal near where the bomb was said to have gone down.

The economics of open-source software

What will the world of software look like once the open-source transition is complete?

Some programmers worry that the transition to open source will abolish or devalue their jobs. The standard nightmare is what I call the “Open Source Doomsday” scenario. This starts with the market value of software going to zero because of all the free source code out there. Use value alone doesn’t attract enough consumers to support software development. The commercial software industry collapses. Programmers starve or leave the field. Doomsday arrives when the open-source culture itself (dependent on the spare time of all these pros) collapses, leaving nobody around who can program competently. All die. Oh, the embarrassment!

We have already observed a number of sufficient reasons this won’t happen, starting with the fact that most developers’ salaries don’t depend on software sale value in the first place. But the very best one, worth emphasizing here, is this: when did you last see a software development group that didn’t have way more than enough work waiting for it? In a swiftly changing world, in a rapidly complexifying and information-centered economy, there will always be plenty of work and a healthy demand for people who can make computers do thingsā€“no matter how much time and how many secrets they give away.

Here is the full essay, if nothing else it is provocative. It is also beyond my sphere of expertise, but anyone interested in the private provision of public goods should check out this piece.

Thanks to Steven Pearson for the pointer.