Category: Economics
Is Medicare progressive in its impact?
Maybe not.
If just one assumption about Medicare’s distributional effects would seem to be safe, it would be that the system results in substantial progressive redistribution, or transfers from people who on a lifetime basis are high-earners to those who are low-earners. After all, everyone gets the same insurance coverage upon retirement, but during your working years you pay a flat rate tax, with the result that high-earners pay more.
Think again. Here are some reasons why wealthier people use Medicare more:
1. Wealthier people demand more health care and greater treatment intensity.
2. Wealthier people tend to live longer.
3. Wealthier people don’t mind Medicare copayments as much.
4. Wealthier people are more likely to live in or near major cities, where access to care is greater.
A variety of studies offer mixed results, but in general do not support the view that Medicare is progressive in its effects. Note, however, that these studies do not consider the distributional impacts of the recent Bush drug prescription bill.
The above is taken from Daniel Shaviro’s Who Should Pay for Medicare?, an excellent public policy study. You’ll be hearing more about this book soon.
My observations: The correct notion of progressivity would account for the value of benefits received, not just dollars spent. Of course this is harder to measure. In the meantime, the result suggests that partial privatization of Medicare, as would allow the wealthy to opt out, would not create an (additional) fiscal crisis for the rest of the system. That being said, if the wealthy are gaining on net, don’t be surprised if privatization doesn’t get off the ground. Furthermore the medical benefits of privatization will be correspondingly limited. The main benefit of privatization would be to stop Congress from spending the money in the mythical “lockbox.”
Kidney swaps II
The Wall Street Journal reports (subs. required) that the kidney swap idea I wrote about earlier is beginning to be implemented. Here are they key points:
Last year, 43% of kidneys transplanted in the U.S. came from living donors, up from 28% a decade ago.
But a biological barrier often blocks a transplant from a relative. In about a third of all would-be pairs, blood types are incompatible. In others, the sick person has antibodies that can initiate a rejection of the donated organ. It’s heartbreaking “to have the treasure of the live donor and then have that not go forward because of a biological obstacle,” says Massachusetts General Hospital transplant surgeon Francis DelMonico.
Occasionally, transplant centers spot a way out: One New England father with blood type A couldn’t donate a kidney to his daughter with blood type B. So he gave a kidney to a teenager with blood type A, and the teenager’s sister gave a kidney for the man’s daughter.
Such swaps, however, typically occur only when happenstance alerts surgeons to the possibility. Economist Alvin Roth and co-authors have devised an algorithm, however, that computes all the possible swaps and which is incentive-compatible.
…when Dr. Saidman gave the economists details on 45 pairs in which the would-be donor was unable to give a kidney to the intended recipient. Even though each of the 45 had a donor willing to spare a kidney, all were stuck waiting for the right person to die. With swaps involving two kidneys, the economists found, eight transplants were possible. If swaps involving three kidneys were possible, then 11 transplants were possible.
Addendum: Alert readers will note that kidney swaps are quite similar to organ clubs an idea for saving lives that has been implemented by Lifesharers.
Trade as a substitute for migration: Outsourcing update
New Border Patrol uniforms, ordered in the wake of the agency’s transfer last year to the Department of Homeland Security, arrived this month and some agents are not very happy: The new uniforms were “Made in Mexico.”
How many of the people who made those uniforms would have otherwise migrated? Has the Border Patrol found at least one (partial) solution that works? Here is the full story.
Why do Asian central banks buy so many dollars?
Why exactly are the Japanese and Chinese foreign banks buying so many U.S. dollar-denominated securities? And if such purchases are so important in keeping our economy afloat, ought we not try to figure out whether they are likely to stop?
Foreign central banks are on a spending spree. As recently as 2001, central banks bought just $10.7 billion in Treasury securities on a net basis. But their net purchases have risen dramatically: to $43.1 billion in 2002 and $128.5 billion in 2003.
With each passing quarter, foreigners have become more significant consumers of U.S. government debt. In 2002, non-Americans accounted for about half of net purchases of Treasury securities. But in the first quarter of 2004 they accounted for 150 percent! That is–the rest of the world bought a net $679.8 billion in Treasury securities while U.S. brokers and dealers sold a net $202.7 billion.
I can think of a few theories:
1. They think dollars are a good investment. Well, at one level this must be true tautologically. But why do those two central banks have such a special attachment to this investment vehicle?
2. They think they will receive geopolitical favors in return. I view this as a relatively optimistic scenario. It suggests, among other things, that the game can continue for a long time. Mutual gains from trade have a strong attraction. It also would mean that American “imperialism” has a lower economic cost than is usually believed. It leads countries to want to buy our Treasury securities as a favor to us. On the darker side, it means that our fiscal irresponsibility has a higher cost than is usually believed. It forces us to play numerous games on the international stage.
3. China and Japan want to keep the value of the yuan and yen low, as part of a mercantilist export-promotion strategy. I take this to be the standard wisdom. I”m certainly not dismissing it, but I do have a few questions. Aren’t there easier ways to subsidize exports? Why are exporters the dominant interest group here? Isn’t a country wealthier when its currency is stronger in real terms?
4. They are building up an endowment, for the same mix of self-evident and obscure reasons that universities do. It is a symbol of status, stability, and commitment to the long haul. It helps them be taken seriously as countries.
5. They have a stake in American prosperity. They’re willing to hold an inferior portfolio if it keeps the U.S. — obviously a major market — fat, healthy and addicted to imports.
6. They are incredibly risk-averse. What safer investment could you find?
7. They are just plain, flat-out stupid. I call this the uh-oh scenario. They won’t stay stupid forever.
I suspect there is truth in all seven hypotheses.
This Slate article offers some useful background and the above quotation. And here is some (numerically overstated) good news:
The day may come when the Chinese government stops being the lender of last resort to America, but if it does stop, there are a billion or so Chinese citizens ready to take up the cause. Given the legal right to do so, they would yank deposits out of the Chinese banking system and invest in U.S. securities.
Addendum: If I look at my own portfolio, I am doing much the same thing. I believe that most assets are overpriced and I don’t know where else to put my money.
Shorter patent lives mean shorter lives
People talk about the high price of pharmaceuticals as if high prices lasted forever. In fact, within a year of the expiration of a pharmaceutical’s patents, prices will typically fall by more than 50 percent as generic producers enter the market. Patents nominally last for 20 years but the effective patent life is much lower because patents are typically granted years before a product has cleared FDA review. The effective patent life of the average new pharmaceutical in the 1990s averaged just 12 years (see here for some references). Competition from competing but non-infringing pharmaceuticals makes the de facto patent life even shorter.
Thus, my response to the seniors and others clamoring for lower pharmaceutical prices is to be more patient. Does this sound harsh? Consider this, the people who are demanding price controls are not simply asking for lower drug prices they are asking for lower prices on the newest drugs. Lower prices for drugs introduced 15 years ago are already here. Remember, those drugs were recently considered the very best modern medicine has to offer, so it’s not like I am expecting those who can’t afford the newer medicines to go back to using leeches.
Price controls or other such plans such as reimportation may bring cheaper pharmaceuticals for a short period but we will then have a much smaller supply of new drugs forever. Only the shortsighted would buy that prescription.
Payola II
Following my earlier post, an astute reader pointed me to an excellent analysis of payola:
[Payola] helped new musicians gain airplay. Payola combatted conformism and racism in the music business… Chuck Berry’s “Maybellene,” his first hit and still one of his most popular songs, was given initial airplay because of payola. Leonard Chess of Chess Records went to well-known disk jockey Alan Freed with a large catalog of material. Chess offered Freed partial songwriting credits on any song of his choice, provided that he would play and promote the song. Freed now had a stronger incentive to pick the best song and to promote it. After listening to hundreds of recordings, Freed picked “Maybellene.” Berry became a star, and the Freed estate continues to receive royalties…
The discussion, of course, is from Tyler’s book In Praise of Commercial Culture. (Yup, he’s the astute reader also!). See the book for more, including how racism factored into the payola “scandals.”
Markets in everything: marital odds
The betting odds that Jennifer Lopez will divorce Marc Anthony before the end of the year: 3 to 1
The odds that Demi Moore and Ashton Kutcher will marry before the end of the year: 1 to 2
The odds that Justin Timberlake and Cameron Diaz will marry before the end of the year: 5 to 1
Prince Charles and Camilla Parker Bowles? 8 to 1
The odds that David and Victoria Beckham will divorce have gone from 50 to 1 to 2 to 1 to 8 to 1 within the year.
Here is the full story (NYT, registration required). Here is one market site.
Addended Query: Would it help your marriage to have the odds publicly posted?
Government spending: Brad asks me to tell my readers certain truths
Read him, he is correct that counting the number of agency spending cuts does not measure overall fiscal responsibility. My original post, titled “Has Bush Cut Back Government Bureaucracy?,” noted that he is 0-15 in this regard. That relates to my title, conclusion, and what I put in bold face print. I didn’t mean to endorse the data [I wrote “This is a highly imperfect proxy…”] for all other purposes, including for overall measures of fiscal responsibility across Presidents. And I am happy to report that, in my opinion, Clinton had better economic policies than most American Presidents, fiscal policy included.
This issue has come up a few times lately, so I will restate our general policy. There is writing, and there is linking. A link does not itself constitute a specifically inferable opinion on what is being linked to.
While we are on the topic, Brad has another excellent post about government spending under Reagan.
Why is Payola Illegal?
Actually, payola isn’t illegal if it goes to the station, rather than to the DJ, and if it is disclosed. But if radio stations don’t want their DJs profiting from payola they can easily write this into their contracts. Since contract law can handle the DJ issue it seems doubtful that the real intent of the Federal Communications Act was simply to help radio stations from being abused by their employees. Apparently, the requirement of disclosure was a big enough deterrent to prevent the real issue, payola to the stations, although some stations occasionally do play songs “as presented by Arista Records.”
The issue is further complicated by the role of Billboard magazine and other radio charts. Getting on the chart may generate momentum thus
Canadian pop rocker Avril Lavigne’s new song “Don’t Tell Me” aired no fewer than 109 times on Nashville radio station WQZQ-FM.
The heaviest rotation came between midnight and 6 a.m., an on-air no man’s land visited largely by insomniacs, truckers and graveyard shift workers. One Sunday morning, the 3-minute, 24-second song aired 18 times, sometimes as little as 11 minutes apart.
But what many chart watchers may not know is that the predawn saturation in Nashville — and elsewhere — occurred largely because Arista Records paid the station to play the song as an advertisement….The practice is legal as long as the station makes an on-air disclosure of the label’s sponsorship — typically with an introduction such as “And now, Avril Lavigne’s ‘Don’t Tell Me,’ presented by Arista Records.”
Using advertising to bias the charts in this way seems like a relatively new phenomena so I don’t think it explains the animus towards payola. Correcting this problem, say by counting only top-hour plays, doesn’t seem so difficult either.
Should we worry about Mexican remittances?
Our trade deficit has reached a record high, and Mexicans are sending billions of dollars home to their poorer relatives. Is this a problem?
Most importantly, poverty in Mexico declines. Many recipients earn no more than a dollar or two a day. As for America, sending the funds does not damage the U.S. economy. For purposes of comparison, let’s say that Mexicans came to this country, worked to earn money, and then burned the dollar bills. Would this “trade deficit” hurt us? No. Wiring funds to Mexico has similar effects. If the dollars don’t come back, it is as if they have been burned. We have earned seigniorage by trading paper for goods. If the dollars do come back, someone is investing in the U.S. or buying exports.
The level of remittances does mean that we should be less worried about the trade deficit. Think of the remittance as redistributing wealth within Mexico, but without costing the United States real resources.
To some extent our trade deficit may reflect an inadequately low rate of saving. But wiring money abroad is not the central cause of low savings. First, migrant workers often contribute to our capital stock. Second, sending the money to Mexico is probably a substitute for spending it (most senders of remittances are themselves relatively poor, and thus have lower savings rates). So when these people “burn” their money by sending it abroad, they are lowering the real quantity of American resources devoted to consumption. Let’s not confuse sending money with sending real resources.
Read Econopundit for a more negative spin. Randall Parker inclines negatively on remittances as well. I often agree with Randall, but on this issue I am ready to send away…
New economics blog
It is called CornerSolution.com, and it is written by graduate students from my own GMU. Alex and I have even taught a few of these people, maybe you can guess which ones…
Weak arguments against privatization
Italy is planning to privatize many of its historic museums and buildings:
A portmanteau law affecting all aspects of the Italian artistic, built and environmental heritage was enacted last month. It is the product of three political tendencies. The first dates back to the late 1990s, when a Socialist government wanted to allow the private sector to become involved in a part of Italian life that for 50 years had been dominated by the State, in order to bring greater efficiency and better services to it. The second is the partial devolution of power to regional and local government as result of the electoral reforms of the 1990s, and the third proceeds from a 2001 Finance Act of the current, right wing government that aimed to raise money by the sale of public assets, including historic buildings and State-owned land.
This is a difficult policy issue, as national heritage can be a genuine public good. But the major argument being used against these privatizations is hardly convincing:
The proposal to sell State-owned buildings has been contentious, largely because the State does not know in detail what it owns [emphasis added], and the architectural protection lobbies are afraid that masterpieces may be sold to unsuitable owners.
Here is the full story.
Does marriage raise male income?
It has long been common wisdom that men who marry will work harder, save more, and accumulate more wealth. This has been called the “marriage premium.” However recent research suggests that this picture is incomplete.
Married men do earn more, but often their wives proceed to take lower-paying jobs. Aggregate family income is much less likely to go up:
[Audrey] Light analyzed data collected from 12,686 men and women born between 1957 and 1964 and interviewed more or less annually between 1979 and 2000. By tracking changes in their marital status and living arrangements and matching those to changes in earnings, she was able to examine the effect of marriage and cohabitation on the overall financial status of a household, and not merely on men’s earnings.
When she did that and factored in family size, Light found that the bump up in men’s pay due to the marriage premium was easily matched by increased family spending and a drop in their wives’ earnings. The more modest financial advantage of cohabitation also disappeared. “Single men have the same total family income [per family member], regardless of whether they are single, cohabiting or married,” she wrote, adding that “marriage and cohabitation confer sizable — and identical — financial benefits on women while men break even upon entering either type of union.”
Here is a short home page for the researcher. Here is the original research.
Gas prices and the demand for new cars
Yesterday, I test drove a Toyota Prius, the high-tech gas-electric vehicle that gets up to 60 mpg. After the test drive, the salesperson told me that demand was so high there was a 6 month wait.
The future of Europe?
Every time I go to Europe I wonder what kind of future the place has:
1. The average American consumes 77 percent more than the average citizen of EU-15, read here.
2. Germany has recently failed in its attempt to reform the country’s antiquated store closing laws. German shops, with some exceptions, cannot stay open later than eight at night or on Sundays or major holidays. The German public strongly opposes these laws, but the small shop lobby dominates.
3. A recent survey in France suggests that 70 percent of French schoolchildren aspire to become bureaucrats rather than captains of industry. (See the IHT, June 9, “Divided We Graumble,” by Roger Cohen, p.2.)
4. The beauty of European cities typically stems from 1920 or earlier, when much of Europe was economically freer than the United States. How would U.S./Europe comparisons feel to us if all of Europe had been built after the second World War? How many people would then think that the “European way of life” is superior.
5. Guido Tabellini (FT, June 3) tells us that Europeans consume more leisure because they find it harder to get good jobs, not because of a cultural preference for the finer things in life.
6. The major European economies face serious demographic problems and have a hard time pushing much above a one percent growth rate. Americans call it a recession when our rate of growth falls to a mere two percent.
Hey, wait a minute:
American investment in the European Union is at an all-time high. So how bad can things be?
This is what makes economics an interesting science. My best guess is that it is easier than ever before to free-ride on the productivity and ingenuity of your neighbors. This is a great benefit of globalization, but it also makes it too easy for economies to postpone needed reforms.
That being said, here are further grounds for hope.