Assorted links
1. The influence of Milton Friedman on U.K. economic policy.
2. Felix Salmon on the top living artists. Here is a related Times (UK) poll.
The public health insurance plan
Here is comment from Ezra Klein, who distinguishes different versions of the public plan idea and also links to further reading. Matt Yglesias comments in favor of the idea. Here is a Paul Krugman column. Arnold Kling is skeptical. Those are good introductions to the debate. On the economics, Ezra writes:
Rather, the theory here is simple: If you can't replace them, convert
them. If the public plan works, then private insurance will work better
as well. In this telling, the simple existence of the public plan
forces a more honest insurance market: Private insurers need to offer
premiums closer to their marginal cost, and they have to cut
administrative costs, and they have to work on their reputation for
cruelty and capriciousness. The existence of another option changes the
market. Individuals will have access to private insurers, but they'll
no longer be stuck with them.
I believe Ezra is assuming no direct cash subsidy to the public plan, lower marginal and average costs for the public plan, and some mix of market power and X-inefficiency in the private insurance companies. The existence of the public plan then "contests the market," which eventually lowers MC in the private plan and leads to lower prices and better service.
My question is what the equilibrium looks like. Say the public plan has a cost advantage (both MC and AC), as plan proponents suggest. If public and private plans are to coexist, the public plan must be attracting the higher-cost customers, namely the higher medical risks. (I am also assuming that the political equilibrium does not allow the public plan to reject these customers outright.) There is then market segmentation and it is not obvious that there are significant positive competitive pressures on private insurance companies.
Oddly, I believe in some models the public insurer constrains the private companies more tightly when the public insurer does not have an apparent cost advantage. Even here, the properties of the monopolistically competitive equilibrium would be very tricky.
You might wonder why the public plan does not attract all the low-risk customers and take over the whole market. I would say that either a) it does, or b) it is tailored toward the high-risk customers. Since public plan advocates sincerely and correctly claim the policy is not just a back door to single-payer, we are left with b).
Another question: is the "cruelty and capriciousness" of the private plans — cited by Ezra — driven by profit maximization? Presumably it is and again assume the government plan will not do the same. Why then would public sector competition force a private firm to throw out a profit-maximizing strategy? In fact "cruelty and capriciousness" would be a comparative advantage of the private companies and maybe it would be milked more strongly in a more competitive environment.
Another possibility is that the public company has a bigger cost advantage on AC than MC. For instance maybe it has a "head start" on the fixed costs, because everyone has heard of it, but its cost advantage for additional service dwindles at some point. The successive accretion of high-risk customers then threatens to put the public plan under (especially if there are lots of previously uninsured and they are high risks) and the public plan requires a subsidy simply to break even. I consider this equilibrium to be not totally unlikely.
Obviously I am missing some equilibria, but in many cases the public plan is mainly providing insurance to high-risk customers. There's nothing wrong with that (and indeed it is a major policy goal), but the resulting equilibrium needn't much improve the performance of private health insurance. I file this argument under "not yet established."
Why it’s worth defending rational expectations theory
RSuleiman, a commentator over at Ezra Klein, writes:
Having just finished reading the paper, it seems very much of a piece
with Professor Cowen's other post-crash writings, and yes, it does seem
to be designed as a defense of the rational markets hypothesis.
He is referring to my piece on the crash. Suleiman's is a common response but it is neglecting why rational expectations (RE) models are so powerful and also, at least among economists, so popular. Economists try to fit various phenomena into RE models to show that the mechanisms underlying those phenomena are general and not relying on some very specific set of assumptions about expectations. The goal is not to convince everyone that expectations, or markets, are indeed rational. They're not, at least not always.
The goal of an RE model is to establish the universality (or lack thereof) of a specified problem.
There are people who misuse rational expectations techniques, but don't let those mistakes mislead you. Krugman and Stiglitz also have used RE a lot as a modeling device, although they are (properly) willing to abandon it as a descriptive assumption in many cases. A market failure argument with RE is often more powerful than a market failure argument without RE.
A Simple Theory of the Financial Crisis, link
A working link to my paper on the financial crisis, discussed below, seems to be here.
Markets in everything
Hamas now has a matchmaking service:
"The applicants, who pay a fee of $10-$70, are divided into
categories according to their eligibility. Women under 25 are easiest
to marry off; more challenging are women over 30 and divorcees.
"But
in a nod to Gaza's grinding poverty triumphing over its conservative
culture, there is a special file for women with jobs. Bringing home a
salary in Gaza can trump any other category, matchmakers say.
"In
the women's application, they describe their ideal man. Most ask for a
devout Muslim with a job and his own apartment, a top find in crowded
Gaza.
"Women also must describe their appearance and answer a
killer question: 'Do you consider yourself pretty according to Gaza
standards?'"
I thank TheBrowser.com for the pointer.
Eric Weinstein’s tweet
A Simple Theory of the Financial Crisis or, Why Fischer Black Still Matters
The key question about the current financial crisis is how so many
investors could have mispriced risk in the same way and at the same
time. This article looks at the work of Fischer Black for insight into
this problem. In particular, Black considered why the “law of large
numbers” does not always apply to expectations in a market setting.
Black’s hypothesis that a financial crisis can arise from extreme bad
luck is more plausible than is usually realized. In this view, such
factors as the real estate market are of secondary importance for
understanding the economic crisis, and the financial side of the crisis
may have roots in the real economy as a whole.
That's the abstract from an article by me, Financial Analysts Journal, Vol. 65, No. 3, 2009. I don't yet know of an on-line copy.
State-run health insurance plans
This article in The New York Times offers some detail on the government-run insurance plans at the state level. I learned:
1. Three dozen state governments currently run such plans and they do not in general drive private insurance companies out of business. In California, the largest such plan, two-thirds of all eligible people choose the privately-run health insurance plans.
2. The state-run plans are usually administered by a major private insurance company, which has authority to negotiate payment rates with doctors and hospitals. In this regard the forthcoming Obama proposal might be quite different.
3. These plans are not especially effective at controlling costs.
4. The North Carolina plan now requires a significant bailout.
5. Some people (this is now my esoteric reading) view the state-run plan as a way of forcing private insurance companies to bargain down reimbursements much further than they have done. It's a monopsonistic social means of opting for lower expenditures and lower returns for the medical sector.
What should university presidents and provosts know about economics that they don’t?
I'm giving a talk to such a group tomorrow and I am curious to hear what you think I should be telling them. This isn't a talk about public policy per se, it's a talk about the economics of universities.
In addition to what I say, I will refer them to the answers you all give.
Lunch with Felix Salmon, and then Gretchen Rubin
Or was it dinner? He let me order and we ate at the excellent Sichuan Gourmet, on 39th between 5th and 6th. Felix asked me who were the three greatest living contemporary artists. Although we had never discussed this question before (and we had barely met before), we agreed immediately on picks #1 and #2 and required only a short while before settling the more difficult question of who should be #3.
Can you guess our picks? I'll leave it to Felix to decide if and when to offer up our answers, whether on his blog or in the comments section here.
I also had an excellent lunch with Gretchen Rubin, covering the strengths and weaknesses of Judith Harris's The Nurture Assumption, people who have a "relentless" writing style, and what sells books and what doesn't.
I have never once met a person whose blog I like and then been disappointed. Never.
Theories of multiple equilibria
On Sunday, a procession of more than 500 blondes paraded through the
capital Riga wearing pink and white. Many were escorted by lap dogs
wearing the same cheerful hues. Their goal: to use their beauty to
shine a little light into the dark mood caused by the global downturn
Though it was far from being a protest march, some women used the
opportunity to counter stereotypes. "I am beautiful, but I'm not dumb,"
Ilone Zigure told the news agency AFP. The student added that she hopes that those of her countrymen who are
depressed about the economic crisis will find her "positive energy"
contagious.
Here is the story (with photo gallery). I thank Ryan Sager's Neuroworld for the pointer. Here is a good general update on the country.
Fearless Critic
The subtitle is Washington DC Area Restaurant Guide and the author is Robin Goldstein. I am a Contributing Editor and yes he did listen to my most valuable pieces of advice. Described as "brutally honest," this is much, much better than Zagat's and the like. It is the best book of its kind.
Elsewhere on the new book front, there is Keith Stanovich's What Intelligence Tests Miss (I hope to review it) and Robert Wright's The Evolution of God; there is some chance I will be doing a BloggingHeads with Wright on this book.
The forecasters and the forecasts
Hugo Lindren has just written a very interesting portrait of some of the major forecasters and their economic forecasts. In New York I was asked a number of times about my own forecast. I offer it with trepidation but here goes:
1. The next year will see significant recovery in terms of published economic magnitudes.
2. "Dormant inflation" will spring to life, at some point quite rapidly, and the Fed will choose to tighten. Five to six percent inflation for a while would be OK but we will be faced with the prospect of more than that and the Fed will choke it off and prevent it.
3. We will see a "double dip" recession, with the second dip more closely resembling the 1979-1982 experience than did the first dip. It's not just that the Fed may make an error in the timing of tightening; there may truly be no good path from here to there.
4. There will be yet a third dip to the recession, resulting from our current fiscal choices. At some point borrowing costs will rise and taxes will go up. There's a chance of a financial crisis for our government, especially if Chinese growth does not hold up.
5. Ten years from now, the United States will have settled into a lower long-term average growth rate, in part for policy-driven reasons and in part for demographic reasons.
6. There is still some chance that our current situation leads directly into a much bigger downturn. This will depend on international factors, not on the internal dynamic within the U.S.
I do not put any of this forward with great confidence.
Addendum: Arnold Kling comments.
Assorted links
1. Michael Pollan or Michel Foucault? — a new blog.
2. The swine flu rate of hospitalization: about 2 percent. The crisis isn't over.
3. Via Arnold Kling, an excellent economics blog by Matthew Rognlie, a twenty-year-old. Here is Matt's vita, hire him. His blog is much better than what most professors could do plus he has an 800 trifecta on his SATs.
4. Videos of the world's top scholars.
5. Peak car?
6. From Julian Sanchez, a proposal for Hansonian journalism.
Why U.S. health care policy is especially egalitarian
The "poorest" people are not those with low incomes but rather those with low human capital endowments. That includes the elderly because, even if they are very talented, on average they will die sooner. A typical 23-year-old lower-middle-class immigrant has a higher real endowment than does Warren Buffett.
Through Medicare, the U.S. government subsidizes the health care of the elderly. Given the embedded incentives in the system, the subsidy is especially large for people in the last year of life or so, namely the very poorest.
Western European welfare states may be more efficient, because they do more to expand routine health care access for the relatively young and this may have a higher rate of return. But those same systems are in critical regards less egalitarian. Bravo to them.
Many people do not look at the contrast this way. They wish to think they believe in egalitarianism, they wish to be skeptical of the United States, they wish to condemn the U.S. for its inequality, and they wish to raise the relative status of people who are not very successful under capitalism. When you put all those wishes together, those people will be deeply allergic to my argument.
A few of these people also confuse "high social status" with "well off." Since old, high-bank-account white males have lots of social status and power, these onlookers cannot bring themselves to regard those males as holding very poor overall endowments. They substitute in assessments of social status for assessments of absolute endowments (another sign of the claim that "politics is not about policy" but rather it is about whom we should admire and condemn).
I am amazed (but not surprised) by how frequently people think of egalitarianism in terms of social markers of status rather than actual forward-looking endowments.
It is common for more egalitarian policies to be less efficient.
From the comments: "Let us say you are a twenty three year old immigrant living in New York. Would you want to trade places with Warren Buffett?
My answer is this- you couldn't pay me enough to make the trade."