Month: November 2005

Why doesn’t the health care market work so well?

I see a few candidate hypotheses:

1. Adverse selection in insurance markets.  In this view, outside of the corporate employment context, mostly the unhealthy — the "lemons" — show up to buy health insurance.

2. Poor information about the cost and benefit of different medical procedures and providers.  I am puzzled why we don’t have better institutions for evaluating providers and spreading this information to consumers.  Part of the problem is legal, part of the problem is measurement (doctors could dump near-hopeless patients to get better ratings), and part of the problem is that many people don’t want to know how good (read: bad) their doctor is.

3. Time consistency.  Ex ante, we are most worried about catastrophic health risk.  Ex post, most of the overinvestment in health care comes for victims of catastrophic health risk.  No set of institutions can square these dual perspectives satisfactorily.

4. Showing that you care.  This is Robin Hanson’s hypothesis.  You spend money senselessly on health care, mostly to show your wife you love her and the kids.

Believers in national health insurance tend to emphasize number one, which might be alleviated by forced mass pooling.  In contrast, I am skeptical that adverse selection is the significant problem. 

It is less clear that national health insurance could improve performance on number two.  People would remain underinformed.  Government might have less incentive to rip them off, but the implication would be that government provision is "lazier" in general.  Not a comforting thought.

National health insurance does address numbers three and four, albeit in backhanded fashion.  Ex ante, people feel protected and the program is popular.  Ex post, such systems spend less money on the last six months of life than does the U.S. system.  The relevant denial of treatment is often invisible rather than a stern hand pulling the plug.   

The bottom line: Defenders of NHI place great stock on #1.  If #1 were significant, we could, at least in principle, use national health care to both lower costs and improve treatment. 

If #3 and #4 are the major problems, national health insurance provides benefits by restricting overinvestments in health care.  This is consistent with Europeans living longer and spending less on health care.  The U.S. maybe could replicate these benefits if a) we push out private insurance companies, b) we ration or abandon expensive procedures which don’t extend lives very much, and c) we adopt healthier lifestyles.

I am skeptical of #1, and I am not ready to bet on a), b), or c), much less all three at once.

China fact of the day — life insurance for bird flu

Some Chinese insurance companies are taking a big chance on the possible spread of avian influenza among humans as an opportunity to expand their business. Beijing Minsheng Life Insurance on November 7th was first to launch a policy that would pay the insured if they are infected by the H5N1 virus. Four days later, Shenzhen based Hua-an Property Insurance followed. The Hua’an policy costs 100 yuan for each 200,000 yuan of compensation. It is valid for a year for anyone aged 3 to 70. Analysts say the odds are that the two insurers will make money given what they consider is the low probability of a serious pandemic.

SimonWorld comments.  In my view, the business model captures pure profit.  If avian flu kills many humans, the company would in any case go bankrupt.  In the meantime it rakes in cash from "positive selection," which is the opposite of adverse selection.  Often the people who buy insurance are the super-safe ninnies, afraid they might not do something they were supposed to.  On the other hand, if you are still a chicken culler in China, you are probaby somewhat reckless, or too poor to buy life insurance.

Tabarrok’s Offer

Pascal’s Wager came up at the great debate the other night and Bryan Caplan was kind enough to refer to my paper as the definitive refutation.  Coincidentally, a reader in search of counsel on matters economic and theological writes to the Financial Times’s Dear Economist who replies by trying to take the vig out of my scam ministry!

The economist Alex Tabarrok points out that if there is even a tiny
chance that Pascal is right, a tiny chance of a tiny chance of a second
of infinite bliss is still infinitely valuable.

Now, if you give
me all your money, I’ll intercede with God on your behalf and increase
your chance of going to heaven. Of course, there is only a tiny chance
that my intercession will help, but a tiny chance of infinite bliss is,
again, infinitely valuable.

Please send your cheque via the FT, and quickly please – I’ve already given Professor Tabarrok all my cash.

How to get bigger tips

Scrawling a patriotic message on a restaurant tab is a great way to boost tips — at least in northern Utah.  Communications professors John S. Seiter of Utah State University and and Robert H. Gass of California State University at Fullerton instructed two waitresses to serve up four different types of bills to 100 diners at two local restaurants.

The servers wrote "United We Stand," and "God Bless America" or "Have a nice day" on the bills.  A control group received no personal note.

Patrons gave a 20 percent tip on tabs that included "United We Stand" but only 15 percent when they got no message at all.  The other two messages garnered slightly more than 15 percent, Seiter and Gass reported in a recent article in the Journal of Applied Social Psychology.

That is Richard Morin from The Washington Post, someday the link will show up here.  You can buy the article here.  Here is my previous post about tipping.

Why are UFO reports declining?

Just as our technology for finding and understanding UFOs improved dramatically, the manifestations of UFOs dwindled away. Despite forty-plus years of alleged alien abductions, not one scrap of physical evidence supports the claim that mysterious visitors are conducting unholy experiments on hapless victims. The technology for sophisticated photograph analysis can be found in every PC in America, and yet, oddly, recent UFO pictures are rare. Cell phones and instant messaging could summon throngs of people to witness a paranormal event, and yet such paranormal events don’t seem to happen very often these days. For an allegedly real phenomenon, UFOs sure do a good job of acting like the imaginary friend of the true believers. How strange, that they should disappear just as we develop the ability to see them clearly. Or perhaps it isn’t so strange.

Here is more.  I doubt if people have fewer delusions, so presumably they have moved into stories which cannot so easily be refuted.  This would include delusions about the future (e.g., extreme forms of transhumanism?), delusions about politics, and delusions about religion.  The demand for verification need not outrace the ever-powerful self-deception; "stamp the weasel" is never an easy game to win.  And sometimes too much stamping is counterproductive.  For all of the associated craziness, UFO delusions have been of a relatively harmless ilk.  They made people skeptical about government, drew viewers to science fiction movies, and the policy implications of belief in aliens (appoint another ambassador?) were consistent with fiscal responsibility.

Oskar Lange wasn’t so stupid

While most scholars of the Interwar Debate on Socialism interpret Lange as having offered an answer to the problem of socialist economic calculation, evidence exists to the contrary. Lange’s thinking on calculation was more complex and less settled than commonly recognized. His 1936 and 1937 articles actually admitted to the impossibility of socialist calculation, but also asserted the impossibility of capitalist calculation. Lange’s thinking evolved further on this subject, due in part to Lerner’s influence, but he never answered the challenge posed by Mises and Hayek.

That is from my student Doug McKenzie, read more here.  Elsewhere on the Mises site you will find this proposal for a Misesian pocket calculator, and an on-line version of Robert LeFevre’s classic libertarian anarchist essay on government.

Why is welfare losing political popularity?

I mean welfare programs in the narrower sense of targeted redistribution to the poor, not transfer programs per se.  Robert Moffitt, editor of the American Economic Review, offers some hypotheses in a recent interview:

…increased labor force participation of middle-class women was part of the cause [of falling popularity]. That transformation really changed the attitude of voters. Once a large percentage of middle-class women were working and putting their children into day care, the public began to question why we shouldn’t expect the same thing from poor women. There was no longer the support for paying women to stay at home with their children, which was the goal of the original legislation in 1935.

Another turn against welfare, I think, has to do with the changing composition of the welfare caseload. In the 1960s, the caseload was largely composed of divorced women. One could imagine that members of the middle class, while not looking favorably upon divorce, understood it because many of them were getting divorced too. But by the 1980s, the caseload started to become composed largely of young women who had never been married and were having children out of wedlock. That is a completely different group, and the middle class had a great deal less sympathy toward those women.

A final factor is that I think the attitudes among women receiving welfare changed. If you look at attitudinal studies from the early 1990s, many welfare recipients said that they didn’t like welfare, that they thought other women were gaming the system to stay on welfare, and were not really trying to improve their lives. Welfare recipients had incorporated the social norms of the middle class. And once the legislation led some recipients to move off welfare, it had a snowball effect. They began to exert social pressure on other women to find work. I think that increased stigma within poor populations made it easier to overhaul the welfare system. But it took a major shock; incremental reform would not have done it.

Here is the full interview, which is interesting throughout, from the Richmond Fed’s Region Focus.

Water of Life

While most countries are committed to increasing access
to safe water and thereby reducing child mortality, there is little consensus
on how to actually improve water services. One important proposal under discussion
is whether to privatize water provision. In the 1990s Argentina embarked
on one of the largest privatization campaigns in the world, including the privatization of local water
companies covering approximately 30 percent of the country’s municipalities.
Using the variation in ownership of water provision across time and space generated
by the privatization process, we find that child mortality fell 8 percent in
the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas.  We check the robustness of these estimates using cause-specific mortality.
While privatization is associated with significant reductions in deaths from
infectious and parasitic diseases, it is uncorrelated with deaths from causes
unrelated to water conditions.

That is the abstract to a very important paper, Water for Life: The Impact of the Privatization of Water Services on Child Mortality, by Sebastian Galiani, Paul Gertler and Ernesto Schargrodsky in the February 2005 issue of the JPE.  (free working paper version).

In theory, water services are not an easy thing to privatize well because of natural monopoly problems and because some of the benefits of clean water are externalities.  In practice, however, governments in developing countries do such a poor job at providing water that there are large potential gains to privatization even given such problems.

See also Tyler’s post Will the Middle East run out of water? for more on where water privatization may have benefits.

Hello, I’m Johnny Cash

I’d always thought that Sun Records and Sam Philips himself had created the most crucial, uplifting and powerful records ever made.  Next to Sam’s records, all the rest sounded fruity.  On Sun Records the artists were singing for their lives and sounded like they were coming from the most mysterious place on the planet.  No justice for them.  They were so strong, can send you up a wall.  If you were walking away and looked back at them, you could be turned into stone.  Johnny Cash’s records were no exception, but they weren’t what you expected.  Johnny didn’t have a piercing yell, but ten thousand years of culture fell from him.  He could have been a cave dweller.  He sounds like he’s at the edge of the fire, or in the deep snow, or in a ghostly forest, the coolness of conscious obvious strength, full tilt and vibrant with danger.  "I keep a close watch on this heart of mine."  Indeed.  I must have recited those lines to myself a million times.  Johnny’s voice was so big, it made the world grow small, unusually low pitched – dark and booming, and he had the right band to match him, the rippling rhythm and cadence of click-clack.  Words that were the rule of law and backed by the power of God.

That is from Bob Dylan’s Chronicles, volume I.  And I am picking the film to win Best Picture this year, whether or not it deserves it.

Europe Central

A generation before, the Iron Chancellor had observed: I’ve always found the word Europe on the lips of those statesmen who want something from a foreign power which they would never venture to ask for in their own name.

That is from William Vollman’s Europe Central, which just won the National Book Award for Non-Fiction [correction: Fiction].  The Amazon reviews make it sound daunting, but so far (p.32) it is great fun.  If you’re reading it, add your opinion in the comments.