From an email, sent to all employees, from the Office of the Governor of the Commonwealth of Virginia:

Virginia faces its most critical budget shortfall in several decades and we must do all that we can to reduce spending pressures…

If you are enrolled in the state health plan and have "You Plus One" or "You Plus Two or More" coverage, you will receive a packet of information concerning the audit of eligible dependents. I strongly urge you to provide the necessary information to protect your continued coverage by the state health plan.

You will be asked to sign an affidavit attesting that each of your dependents is eligible to be covered by the state health plan (click here for definitions of eligible dependents).

Participation is required. The health benefits program may initiate spot audits that will require additional documentation of dependent eligibility. The benefit to you and other state employees is that this audit will help keep health care costs down by removing ineligible persons from the state health plan.

Lately, I’ve been reading lots of textbooks on economic growth. Here are a few:

Introduction to Modern Economic Growth by Daron Acemoglu: Weighing in at just under 5 pounds and 1000 pages this is the Mas-Colell, Whinston, Green of economic growth. It’s hard not be impressed by Acemoglu’s mastery of the subject and for a handful of top graduate programs this is clearly the book for the next generation. The title, of course, misleads in a revealing way–this book is first and foremost a book about modern economic theories of growth and, in particular, the math behind those theories.  Acemoglu is too good an economist to write a book just about the math–there is good material here especially in areas where Acemoglu has made important contributions such as directed technological change and political economy–but the economic insights can easily be lost in this massive tome.  Acemoglu is a good guide to the math but there is no effort to communicate to a larger audience.  Empirical work is occassionally cited, but rarely discussed in much depth.

The Economics of Growth by Philippe Aghion and Peter Howitt: Also aimed at the graduate market this book is the David Romer of economic growth.  Still more of a guide to models rather than to economic growth per se but key empirical work is presented and one does find the words “motivating evidence.”  Simplified models with a touch of empirical analysis drive the book forward.  Combined with a few empirical papers and a bit more background on the theory and this would make a good graduate text for all but the top programs.  Careful questions will prove useful to professors.

Economic Growth (first edition here) by David Weil.  One of the best textbooks I have ever read on any subject – this is the book to get.  Weil’s book covers more topics with greater wisdom and wit than any of the other books and this is first and foremost a book about economic growth rather than about theories of economic growth.  Weil is good on the basic models and especially on tying theory to empirical work.  Ostensively aimed at the undergraduate market, there is a huge amount here for professional economists and graduate students. After passing their prelims on dynamic programming, this is the book that graduate students should read to discover the real questions that are in need of answers.  I learned the most from this book.

David Leonhardt makes an interesting argument about why employers don't choose employee health insurance carefully.  The argument is interesting because it is wrong but in a subtle way.

The bottom line: The cost of insurance comes mostly out of employees' paychecks. If insurance costs more, employees are generally paid less. If insurance costs less, employees are paid more. The cost of insurance does not have a big effect on employers’ overall compensation costs.

That’s why no one should be surprised that employers don’t make for good consumers of insurance. And it’s why insurers are not operating in a very competitive marketplace.

The premise is correct, employee compensation comes out of wages.  The subtle mistake is to forget that this is only true in equilibrium.  Imagine that a single employer was able to buy for his employees equal quality health insurance at a lower price. Would wages at that firm rise?  No, an employer only has to pay workers what they could earn in another job.  If other firms aren't paying more then this firm need not raise wages even though its costs have fallen.  Thus an employer that reduced health insurance costs while keeping real compensation the same could pocket the savings as profit.  It's only when other firms follow suit–also in an attempt to cut costs and earn excess profits–that wages at all firms rise, eliminating the excess profit everywhere.

The process produces the equilibrium.  You can't have one without the other. 

If you are still uncertain, here's another way of making the same point.  Imagine that an employer provided his workers with better health insurance at the same cost. Employees would then flock to this employer pushing down wages and increasing that firm's profit.

So do employers fail to choose insurance carefully?  Given the costs of health insurance and the profits to be made by cutting costs (holding quality constant), I have my doubts.  Nevertheless, it could still be the case that giving employees more choices about which insurance firms to patronize could improve things on some margins as Leonhardt also argues in a related column today.  

A group of econophysicists recently made a bold prediction, the Shanghai stock exchange would crash between July 10 and August 10, 2009.  A silly prediction?  Maybe not.

Ironman at Political Calculations offers some further thoughts.  Graph from arXivblog.

The defense of the public option coming from the administration, Paul Krugman, Mark Thoma and many others is that a public plan would have lower administrative costs and it would discipline the insurance industry.  As stated, I find the argument weak.  The argument, however, begins to make a certain kind of sense when you consider what else the major health insurance reform proposals would do.    

The major proposals would require insurance companies to take all customers regardless of pre-existing conditions, offer guaranteed renewability and no dropping of coverage for the ill, impose no annual or lifetime caps, and offer coverage of preventative care with no-cost share, among other requirements. Finally, if insurance companies must take all customers regardless of pre-existing conditions it is obvious that sooner or later and probably sooner the government will require that everyone purchase health insurance.

In short, insurance reform will mean that everyone will be required to buy a product that will be tightly regulated and more homogeneous.  Both of these factors will increase the market power of insurance firms.  Since escape via non-purchase will no longer be a potential response to higher prices, mandatory purchase will reduce the elasticity of demand giving firms an incentive to increase prices.  Moreover, in oligopolistic markets, a more homogeneous product can increase the ability of firms to collude.

I believe that health insurance reform will increase the market power of insurance firms and drive up prices.  In this scenario, the public option at least has a raison d'etre, although whether it actually fulfills its purpose is an open question.

It's true that mandatory purchase doesn't necessarily lead to market power, auto insurance is quite competitive.  Nevertheless, given the potential of insurance reform to increase the market power of insurance firms the search for some disciplining device like the public option is reasonable.  Other useful reforms would be to have a single, national regulator of insurance – rather than the 50 we have now, allow an optional federal charter (as we do for banks) or (my preferred approach) move to a competitive federalist system for insurance similar to that for corporate charters.

Hat tip to Ray Lehmann for discussion.

In an interesting article on the history of "photoshopping," the New York Times says that one of the classic photos of Abraham Lincoln is actually the great emancipator's head grafted onto the body of John C. Calhoun!  Calhoun, of course, was the great proponent of slavery calling it not a necessary evil but a "positive good."

The article doesn't say, but surely the compositor was sending a message with his ironic deception.

FYI, this caught my eye because the first article that Tyler and I ever co-authored was on Calhoun's constitutional theory.  No link, but here's the reference: Tabarrok, A., and T. Cowen. 1992. The Public Choice Theory of John C. Calhoun. Journal of Institutional and Theoretical Economics 148 (4):655-74.