Category: Economics

Can we spend another $52 trillion without raising middle class taxes?

The question seems like a joke, right?  Yet because so much of our elite media class wants Elizabeth Warren to win, they are contorting themselves into every possible direction to make this one sound coherent.  It is not a question of whether total nominal expenditures on health care go up or down, but rather of thinking through incidence and opportunity cost and where the real burdens of the plan will fall.  Those are the core themes of my Bloomberg column, here is one excerpt:

Another part of the plan is to pay lower prices — 70% lower — for branded prescription drugs. That is supposed to save about $1.7 trillion, but again focus on which opportunities are lost. Lower drug prices will mean fewer new drugs are developed. There is good evidence that pharmaceuticals are among the most cost-effective ways of saving human lives, so the resulting higher mortality and illness might be especially severe.

And the close:

Warren’s proposals, when all is said and done, are best viewed not as a way of paying for her program but as a series of admissions about just how expensive it would be. Whether or not you call those taxes, they are very real burdens — and many of them will end up falling on the middle class.

By the way, here is a good NYT summary of Warren’s financing plan.  Here is a good Maxim Jacobs tweet:

It’s really hard to pick out which part of her plan is most insane?: – Lowering brand drug pricing by 70%? – CMS paying specialists less money – Taxing unrealized capital gains – Claim hiring more IRS agents will raise $2.3 trillion – “Not one penny in middle-class tax increases”

Here is more from Peter Suderman.

The Global Kidney Exchange Programme

In my WSJ review of Al Roth’s excellent book Who Gets What—and Why I wrote about Roth’s proposal to extend the idea of kidney swaps globally:

It’s often the case that a living donor is willing to give a kidney to a loved one, but the loved one can’t accept it because of immunity mismatch. But if a pair of such mismatched donors could be found (call them A and A´ and B and B´), then perhaps a match could be found by a crisscross pairing: Donor A could give to recipient B´ and donor B could give to recipient A´, thus solving the mismatch problem and saving lives.

…Today such multi-way exchanges are becoming common….Mr. Roth, however, wants to go further….why not open U.S. transplants to the world? Imagine that A and A´ are Nigerian while B and B´ are American. Nigeria has virtually no transplant surgery or dialysis available, so in Nigeria patient A’ will die for certain. But if we offered a free transplant to him, and received a kidney for an American patient in return, two lives would be saved.

The plan sounds noble but expensive. Yet remember, Mr. Roth says, “removing an American patient from dialysis saves Medicare a quarter of a million dollars. That’s more than enough to finance two kidney transplants.” So offering a free transplant to the Nigerian patient can save money and lives.

It’s hard to think of a better example of gains from trade (or a better PR coup for the U.S. on the world stage).

Recently, Rees et al., (including Roth) announced the first such global kidney exchange:

We report the 1‐year experience of an initial Filipino pair, whose recipient was transplanted in the United states with an American donor’s kidney at no cost to him. The Filipino donor donated to an American in the United States through a kidney exchange chain. Follow‐up care and medications in the Philippines were supported by funds from the United States. We show that the logistical obstacles in this approach, although considerable, are surmountable.

Naturally, some people aren’t happy because of “ethical” objections. Minerva, Savulescu and Peter Singer write in defense of the program:

Lurking behind all the arguments against the GKE is the assumption that people who are poor are incapable of autonomous choices. So, if they appear to choose to act in ways that benefit not only themselves, but people in HICs, they must have been coerced, exploited, or commodified.

…Poverty does not necessarily make a person unable to choose to donate a kidney to a loved one, nor does it make someone incapable of weighing the pros and cons of an option like that offered by the GKE. Poverty does narrow down the options available to people, and often forces them to settle for an option that is not as good as a wealthy person would choose. That, however, is irrelevant to the ethics of the GKE if that programme provides a better option to patients in LMICs who need a kidney than any other option currently available to them.

…It would be tragic if such misguided objections were to prevent the GKE from realising its potential to reduce suffering and save the lives of rich and poor patients alike.

Hat tip: Frank McCormick.

The Prescription Escalator

Ask anyone and they will tell you that their prescription costs are rising. But generic drug prices are falling (also here) and generics are 80-90 percent of all prescriptions. Moreover, although branded drugs are expensive total out-of-pocket costs for the population as a whole are flat or even decreasing as Michael Mandel points out:

[A] May 2019 research report from the Agency for Healthcare Research and Quality reported that average out-of-pocket spending for prescribed medications, among persons who obtained at least one prescribed medication, declined from $327 in 2009 to $238 by 2016, a decrease of 27 percent. Data from the Bureau of Labor Statistics Consumer Expenditure Survey shows that average household spending on prescription drugs fell by 11% between 2013 and 2018.

Moreover, OECD data shows that average out- of-pocket spending on prescribed medicines in the United States ($143 per capita in 2017) is actually lower than countries such as Canada ($144), Korea ($156), Norway ($178), and Switzerland ($215).

So are people simply mistaken about what they are experiencing? Not quite. Mandel uses the metaphor of the prescription escalator to explain the apparent paradox:

It turns out that an escalator is the appropriate model for prescription drug costs for individuals. As people get older, they unwillingly ride the prescription escalator, with their average spending on prescription drugs rising by about 5-6% per year. This figure assumes no change in the underlying price of drugs. Rather, people fill more prescriptions as they age.

In other words, every individual experiences an increase in prescription costs as they age even though for the population as a whole prescription prices are flat or falling–a form of Simpson’s paradox. The driver of higher costs is usage not price. People aged 65-74 have on average 25 (!) prescriptions to fill, more than two and half times as many as people aged 25-34 (about 9 per year).

Understanding the prescription escalator is important because regulating drug prices–aside from being a bad idea–won’t solve the perceived problem.

…even if drug reform efforts were successful and there were no more increases in drug costs, every individual would still face a 5.6% increase each year in drug spending as they got older. That would total 30% after five years, and 70% after ten years, across the board.These are enormous increases.

Indeed, the prescription escalator is a sign of success. If drugs weren’t successful we wouldn’t buy more of them when we were older and sicker and costs wouldn’t rise.

Opioids and labor market participation

The onset of the opioid crisis coincided with the beginning of nearly 15 years of declining labor force participation in the US. Furthermore, the areas most affected by the crisis have generally experienced the worst deteriorations in labor market conditions. Despite these time series and cross-sectional correlations, there is little agreement on the causal effect of opioids on labor market outcomes. I provide new evidence on this question by leveraging a natural experiment which sharply decreased the supply of hydrocodone, one of the most commonly prescribed opioids in the US. I identify the causal impact of this decrease by exploiting pre-existing variation in the extent to which different types of opioids were prescribed across geographies to compare areas more and less exposed to the treatment over time. I find that areas with larger reductions in opioid prescribing experienced relative improvements in employment-to-population ratios, driven primarily by an increase in labor force participation. The regression estimates indicate that a 10 percent decrease in hydrocodone prescriptions increased the employment-to-population ratio by about 0.7 percent. These findings suggest that policies which reduce opioid misuse may also have positive spillovers on the labor market.

That is from a job market paper by David Beheshti at the University of Texas at Austin.

Learning is Caring: An Agrarian Origin of American Individualism

I am looking forward to reading this one, from Itzchak Tzachi Raz, who is on the job market from Harvard this year:

This study examines the historical origins of American individualism. I test the hypothesis that local heterogeneity of the physical environment limited the ability of farmers on the American frontier to learn from their successful neighbors, turning them into self-reliant and individualistic people. Consistent with this hypothesis, I find that current residents of counties with higher agrarian heterogeneity are more culturally individualistic, less religious, and have weaker family ties. They are also more likely to support economically progressive policies, to have positive attitudes toward immigrants, and to identify with the Democratic Party. Similarly, counties with higher environmental heterogeneity had higher taxes and a higher provision of public institutions during the 19th century. This pattern is consistent with the substitutability of formal and informal institutions as means to solve collective action problems, and with the association between “communal” values and conservative policies. These findings also suggest that, while understudied, social learning is an important determinant of individualism.

Here is the home page, the paper is not yet available.  Here is his actual job market paper, on adverse possession.  I do hope the author lets me know once this paper is ready, I am very much looking forward to reading it.

Public employee pension and municipal insolvency

This paper studies how governments manage public employee pensions and how this affects insolvency risk. I propose a quantitative model of governments that choose their savings and risk exposure by borrowing/saving in defaultable bonds, borrowing in non-defaultable pension benefits, and saving in a pension fund that earns a risk premium. In insolvency, the government can receive transfers from households who may differ from the government in their preferences for public services and private consumption. I match the model to a panel of CA cities and a hand-collected record of fiscal emergencies. The model predicts that governments are highly vulnerable to another stock market bust. A hypothetical shock to pension funds in 2015 produces twice as many fiscal emergencies as the original 2008-10 shock. In the quantified model, the government undersaves and take excess risk relative to what households would choose. Savings requirements that limit spending to essential services plus 0.3% of cash-on-hand produce large welfare gains for households. Requiring the pension fund to invest more in safe assets decreases household welfare because the lower average return discourages the government from saving.

That is from the job market paper by Sean Myers of Stanford University.

Economists and non-economists on elasticity

From a recent paper by Joanna Venator and Jason Fletcher:

In this paper, we estimate the impacts of abortion clinic closures on access to clinics in terms of distance and congestion, abortion rates, and birth rates. Legislation regulating abortion providers enacted in Wisconsin in 2011-2013 ultimately led to the closure of two of five abortion clinics in Wisconsin, increasing the average distance to the nearest clinic to 55 miles and distance to some counties to over 100 miles. We use a difference-in-differences design to estimate the effect of change in distance to the nearest clinic on birth and abortion rates, using within-county variation across time in distance to identify the effect. We find that a hundred-mile increase in distance to the nearest clinic is associated with 25 percent fewer abortions and 4 percent more births. We see no significant effect of increased congestion at remaining clinics on abortion rates. We find significant racial disparities in who is most affected by abortion clinic closures, with increases in distance increasing birth rates significantly more for Black, Asian, and Hispanic women. Our results suggest that even small numbers of clinic closures can result in significant restrictions to abortion access of similar magnitude to those seen in Texas when a greater number of clinics closed their doors.

There are (at least) two possible responses to such results, and that is without even getting into one’s underlying view of the ethics of abortion.  One is to say that a great deprivation has occurred because many fewer women end up having abortions.  Another response is to infer that the marginal value of the abortions could not have been so high to begin with, if the number drops off so readily.

The same issue comes up with Obamacare.  If the price of health insurance goes up, quite a large number of people decide to go without coverage.  Is the size of that number a measure of the human tragedy resulting from the price increase?  Or is it a measure of how little those people actually value health insurance?  Or somehow both?

I have yet to meet a person who can think through these issues rationally and absorb what is interesting and valid in each of those two perspectives.

Release Bad News on a Friday

Politicians have long known to release bad news on a Friday and it appears that pharmaceutical firms may do likewise.

Safety alerts are announcements made by health regulators warning patients and doctors about new drug-related side effects. However, not all safety alerts are equally effective. We provide evidence that the day of the week on which the safety alerts are announced explains differences in safety alert impact. Specifically, we show that safety alerts announced on Fridays are less broadly diffused: they are shared 34% less on social media, mentioned in 23% to 66% fewer news articles, and are 12% to 51% less likely to receive any news coverage at all. As a consequence of this, we propose Friday alerts are less effective in reducing drug-related side effects. We find that moving a Friday alert to any other weekday would reduce all drug-related side effects by 9% to 12%, serious drug-related complications by 6% to 15%, and drug-related deaths by 22% to 36%. This problem is particularly important because Friday was the most frequent weekday for safety alert announcements from 1999 to 2016. We show that this greater prevalence of Friday alerts might not be random: firms that lobbied the U.S. Food and Drug Administration in the past are 49% to 56% more likely to have safety alerts announced on Fridays.

From The Friday Effect in Management Science by Diestre, Barber and Santalo.

Hat tip: Kevin Lewis.

The impact of the Affordable Care Act

The Impact of the Affordable Care Act: Evidence from California’s Hospital Sector
(with Mark Duggan and Atul Gupta) R&R, AEJ: Economic Policy

The Affordable Care Act (ACA) authorized the largest expansion of public health insurance in the U.S. since the mid-1960s. We exploit ACA-induced changes in the discontinuity in coverage at age 65 using a regression discontinuity based design to examine effects of the expansion on health insurance coverage, hospital use, and patient health. We then link these changes to effects on hospital finances. We show that a substantial share of the federally-funded Medicaid expansion substituted for existing locally-funded safety net programs. Despite this offset, the expansion produced a substantial increase in hospital revenue and profitability, with larger gains for government hospitals. On the benefits side, we do not detect significant improvements in patient health, although the expansion led to substantially greater hospital and emergency room use, and a reallocation of care from public to private and better-quality hospitals.

That is the job market paper by Emilie Jackson of Stanford.

Declining marriage incentives and male withdrawal from the labor force

Why have so many young men withdrawn from the U.S. labor force since 1965? This paper presents a model in which men invest time in employment to enhance their value as marriage partners. When the marriage market return on this investment declines, young men’s employment declines as well, in preparation for a less favorable marriage market. Taking this prediction to data, I show that fewer young men sought employment after 2 interventions that reduced the value of gender-role-specialization within marriage: i) the adoption of unilateral divorce legislation, and ii) demand-driven improvements in women’s employment opportunities. I then show, using a structural estimation, that half of the employment effect of a labor market shock to men’s wages is determined by endogenous adjustment of the marriage market to the shock. These findings establish the changing marriage market as an important driver of decline in young men’s labor market involvement.

That is from the job market paper of Ariel J. Binder, job market candidate from the University of Michigan.

Loren Fryxell of Northwestern is a creative thinker

Here is his home page, here is one abstract:

A Theory of Criminal Justice

Abstract: I propose a general framework with which to analyze the optimal response to crime. Each criminal act, detected with some probability, generates a random piece of evidence and a consequent probability of guilt for each citizen. I consider a utilitarian planner with no artificial moral constraints. In particular, I assume no upper bound on punishment—such a bound can only rise endogenously from the utilitarian objective. I consider three types of “pure” responses—deterrence, rehabilitation, and incapacitation—along with general sentences combining any of the three. If citizens are expected utility maximizers, a repugnant conclusion is reached—it is optimal to punish only with the realization of the most incriminating evidence. Allowing for more general behavior yields a weaker but more satisfactory result—optimal punishment is always decreasing in the quality of evidence. (Rehabilitation, incapacitation, and general sentence results coming soon.)

Here is his job market paper:

A Theory of Experienced Utility and Utilitarianism

Abstract: I present a theory of measurement of preference intensity and use this measure as a foundation for utilitarianism. To do this, I suppose each alternative is experienced over time. An individual has preferences over such experiences. I present axioms under which preferences are represented by an experienced utility function equal to the integral of instantaneous preference intensity over time and unique up to a positive scalar. I propose an ethical postulate under which social preferences are utilitarian in experienced utilities.

Job candidates with ideas can be difficult to come by, so I wanted to highlight his work…

Who benefits from Uber surge pricing?

In the last decade, new technologies have led to a boom in dynamic pricing. I analyze the most salient example, surge pricing in ride hailing. Using data from Uber in Houston, I build an empirical model of spatial equilibrium to measure the welfare effects of surge pricing. My model is composed of demand, supply, and a matching technology, and it allows for temporal and spatial heterogeneity, as well as randomness in supply and demand. I find that, relative to a counterfactual with uniform pricing, surge pricing increases total welfare by 3.66% of gross revenue. Only riders benefit: rider surplus increases by 6.52% of gross revenue, whereas driver surplus and Uber’s short-run profits decrease by 1.63% and 1.18% of gross revenue, respectively.

That is from a new job market paper by Juan Camilo Castillo of Stanford University.  At the link his other papers are interesting too.

How can California be left in the dark?

That is the title of my latest Bloomberg column, the inspiration for which came from an Alex T. tweet.  Here is one passage:

Economists themselves have been of no great help. My Twitter feed includes plenty of the world’s greatest (or at least best-known) economists. They love to debate Elizabeth Warren’s plan for a wealth tax, an idea that probably isn’t going to happen (just ask Mitch McConnell or, for that matter, any moderate Democratic senator). When it comes to designing a better incentive model for California power utilities — a concrete problem for which economics is remarkably well-suited — there has been close to complete silence.

Economists are just reflecting a more general failing in American political debate. The old saying that all politics is local has been turned on its head: All issues are now national in scope and partisan in nature. People are less interested in the day-to-day mechanics of actual governance, including at the state and local level. The comeuppance for those ideological obsessions is now upon us.

I wonder how much worse things will have to get before they become better.

My favorite job market paper so far this year

It is from MIT, by Jonathon Hazell and Bledi Taska of Burning Glass, here is the paper, here is Hazell’s home page, here is the abstract:

If wages are more rigid downward than upward, then unemployment is volatile during recessions. In benchmark models, the wage for new hires is particularly important for unemployment fluctuations, but there is limited evidence of downward rigidity on this margin. We introduce a dataset that tracks the wage for new hires at the job level—that is, across successive vacancies posted by the same job title and establishment. We show that the wage for new hires is more rigid downward than upward, in two steps. First, the nominal wage rarely changes at the job level. When wages do change, they fall infrequently, suggesting a constraint from beneath. Second, when unemployment rises, wages do not fall for new hires—though wages rise strongly as unemployment falls. We show that prior work, which studies the average wage for new hires, cannot detect downward rigidity due to changing job composition. Finally, we match a standard labor search model to our estimates, and uncover state dependent asymmetry in unemployment dynamics. After contractions, unemployment responds symmetrically to labor demand shocks; after persistent expansions, unemployment is as much as twice as sensitive to negative than positive shocks.

It is a true puzzle why the wage should be sticky for employment relations which do not yet exist!  (It is easier to see you might not cut wages for workers who had prior expectations and who will stick around and might wreck things due to being disgruntled.)

Do note this:

However the average wage for new hires, the object of previous studies, is not more rigid downward than upward—in contrast to our job- and establishment-level results on downward rigidity…

But note that in section 6.2 the paper shows that firms do not lower the average quality of job during a recession so as to lower the average wage offer — yet a further puzzle.  Section 6.3 considers whether quality of job reallocation across establishments might offset wage rigidity.

This paper raises many important questions, and it is the most significant progress on understanding wage rigidity I have seen since the questionnaire work of Alan Blinder and also Truman Bewley.

Recommended, both the paper and the job candidate!

Addendum: Note this earlier post of Alex’s, on workers moving to new jobs since the end of the recession.