Category: Economics
The case for health care spending
In a previous post I wondered whether additional spending on health care in fact brought greater health. Whether we do controlled experiments, or look at cross-national data, a convincing effect is often hard to find.
Brendan Kennelly of Lehigh referred me to this OECD paper, which examines cross-national data to find a positive health effect from health care spending. The result is much stronger for women than for men.
I asked Robin Hanson what he thought of the piece, here is his response:
When a coefficient is truly zero, about 5% of the studies estimating that
coefficient should show a significant difference at the 5% level. And if
people search for specifications that will give this result because they
believe the coefficient is not zero, you might expect 10-20% (or more) of
the reported results will show a significant non-zero coefficient. So
given the current state of econometric practice, the most you could
reasonably hope for when a coefficient is really zero is for about 90% of
the studies to fail to find a significant effect of the desired sign. This
is the current state of the evidence on the aggregate effects of medicine
on health.
My take: The whole debate still makes may head spin. I wonder how much of health care expenditure is geared toward alleviating anxiety (“we did all we could…”) rather than improving health per se. We may be mismeasuring the relevant output. If we could measure the total costs of illness, what percentage of the total would come in the form of anxiety? Furthermore, health care is not a single thing. The marginal return from some forms of health care (bypass operations?) is certainly high, in other cases the return much lower or perhaps negative. So perhaps the debate should shift away from aggregates, and toward trying to identify which health care expenditures we can do without, or do not need to subsidize at current margins.
The wonders of money
…lifting children out of poverty can diminish some psychiatric symptoms…A study published in last week’s issue of The Journal of the American Medical Association looked at children before and after their families rose above the poverty level. Rates of deviant and aggressive behaviors, the study noted, declined as incomes rose.
“This comes closer to pointing to a causal relationship than we can usually get,” said Dr. E. Jane Costello, a psychiatric epidemiologist at Duke who was the lead author.
The study tracked 1420 children, many of whom lived on an Indian reservation. A local casino opening lifted many out of poverty, and also improved their mental health:
…the rate of psychiatric symptoms among the children who had risen from poverty was dropping. As time went on, the children were less inclined to stubbornness, temper tantrums, stealing, bullying and vandalism – all symptoms of conduct and oppositional defiant disorders.
After four years, the rate of such behaviors had dropped to the same levels found among children whose families had never been poor. Children whose families broke the poverty threshold had a 40 percent decrease in behavioral symptoms. But the payments had no effect on children whose families had been unable to rise from poverty or on the children whose families had not been poor to begin with.
Even I, author of a book called In Praise of Commercial Culture (see to the right), am surprised by this result. Supposedly the wealthier parents were now able to spend more time with their children, thus improving their mental health. I wonder whether the key factor instead might have been improved behavior on the part of the parents.
Here is the abstract, plus you can buy a copy of the original research for $12.
Addendum: David Levy, citing Adam Smith, wonders if it isn’t the growth rate of income that makes people better off, rather than the level.
Disagreement With Alex Over A Market in Bad Gene Insurance
The Human Genome Project and its offspring, testing for genetic anomalies, have the prospect in the short-term at least of reducing human welfare. Alex is right that we are largely behind a veil of ignorance with respect to our genetic predispositions to diseases that have not yet presented themselves. Genetic testing removes that veil. No insurance market against genetic disease could survive the asymmetry of information between the insured and the insurer. I have written about this in The Human Genome Project and the Economics of Insurance: How Increased Knowledge May Decrease Human Welfare, and What Not To Do About It, 7 Annual Review of Law and Ethics 219 (1999).
It is not just prescription drugs
You may have spent $100 for your textbook, or made your class cough up this money. That same text might have been sold overseas for half of the price or less. Today’s New York Times offers the full account.
And yes, arbitrage has begun:
At one prestigious university, a sophomore imported 30 biology books from England this fall and sold them outside his classroom for less than the campus-bookstore price, netting a $1,200 profit. Next semester, if all goes well, he plans to expand the operation.
How about this:
The differences are often significant: “Lehninger Principles of Biochemistry, Third Edition,” for example, lists for $146.15 on the American Amazon site, but can be had for $63.48, plus $8.05 shipping, from the British one. And “Linear System Theory and Design, Third Edition” is $110 in the United States, but $41.76, or $49.81 with shipping, in Britain.
Many college bookstores, meanwhile, have taken matters into their own hands, arranging their own overseas purchases.
And it is now a business. BookCentral.com will get you the text from overseas at the lower price, of course you pay them a commission.
The legal status of these reimportations remains an open question. Some publishers are placing stickers on their books, forbidding reimportation, but the Times article suggests that such reimportation is not obviously against the law.
Time for Genetic Insurance
The Genetic Information Nondiscrimination Act that cleared the Senate Tuesday on a 95-0 vote would bar employers from using people’s genetic information or family histories in hiring, firing or assigning workers. Insurance companies could not use genetic records to deny medical coverage or set premiums. (from ABC News)
I understand the desire to pass such a bill but if genetic “discrimination” is made illegal then as genetic testing becomes common we risk serious problems of adverse selection. People who test postive for a genetic disease will buy more life and health insurance threatening the financial stability of insurance companies.
Genetic insurance is a better way of handling the problems brought on by genetic testing. Genetic insurance would pay out depending on the results of a genetic test. If you turn out to have a gene implying a higher risk of heart disease, for example, then the test would pay you enough to cover your now higher health and life insurance premiums and perhaps also something to cover the possibility that you will have a shorter working life.
I think of genetic insurance as a “free-market” idea but it also has Rawlsian undertones. We are all behind the veil of ignorance as far as (some) of our genes are concerned. Buying insurance before a genetic test lifts the veil goes some way to compensating those who, through no fault of their own, were unfortunate to get a bad draw from nature’s lottery.
Addendum: I originally discussed genetic insurance in Tabarrok, A. 1994. Genetic Testing: An Economic and Contractarian Analysis. Journal of Health Economics 13:75-91. A shorter version is in Entrepreneurial Economics.
How much is height worth?
Judge’s study, which controlled for gender, weight and age, found that mere inches cost thousands of dollars. Each inch in height amounted to about $789 more a year in pay, the study found. So someone who is 7 inches taller – say 6 feet versus 5 feet 5 inches – would be expected to earn $5,525 more annually, he said.
Read here for the full story. The commentary of Randall Parker argues that international competition, most of all with the Chinese, will force Americans to embrace genetic engineering for superior intelligence.
Our stalled energy bill
Remember all that hubbub about the new energy bill, following the Great Blackout? What ever happened? Lynne Kiesling offers a useful update on where things are at.
Here is part of her overview:
There’s a lot of stuff in those measures that is economically unsound and may even increase net energy use, such as increased ethanol use. But my political science friends tell me that as long as Denny Hastert is speaker of the House and the Iowa caucuses have the power they do in the Presidential election, corn farmers will be able to sock it to us, good and hard…ethanol’s nose gets in the tent through a renewable fuels mandate, not through the federal fuel oxygenate requirement. Ethanol a renewable fuel? Stop for a second to think about how ethanol is made: till soil, fertilize, plant corn, harvest, process it using lots of fossil fuel energy and creating air, water and soil emissions in the process, transport it in trucks, trains and barges to its consumption location. So there are a few parts in the production process that require fossil fuel use, and consequently result in emissions.
In other words, special interests and political rent-seeking are preventing us from adopting a sounder energy policy. Will things ever change? Stay tuned to Lynne’s blog for periodic updates.
More on Canadian medicine
Median waiting time for radiation treatment for breast cancer in province of Ontario: 8 weeks
Median waiting time for angioplasty in the province of British Columbia: 12 weeks
Median waiting time for radiation treatment for prostate cancer in province of Quebec: 12 weeks
Median waiting time for cataract removal in the province of Ontario: 20 weeks.
Median waiting time for cataract removal in the province of Saskatchewan: 52 weeks.
Median waiting time for a tonsillectomy in the province of Saskatchewan: 80 weeks.
For the full story, replete with additional statistics, and also some graphs, click here.
Parapundit now offers an update on the sorry state of Canadian medicine.
Wining about Taxes
Jennifer Rosen totals up the taxes on a bottle of wine. This summary is direct from Walter in Denver.
1. Federal import license, $500, 3 to 5 month wait.
2. Register an office for each state in which the wine is sold, $100 to $350 per state.
3. Find a distributor for each state or even each county. These distributors will add their own markup to the price of your wine. State governments will not allow you to act as your own distributor.
4. Create and print a new English language label for the wine. The label will have to meet the federal requirements for warning labels and such.
5. After shipping, wait ten days for the wine to clear customs.
In Rosen’s hypothetical case the bottle of wine that sells in its home country for $4.50 winds in U.S. stores at $15.50 per bottle.
Tax protestors often note that half of the average American’s paycheck goes to taxes. When you count the cost of regulation, government’s cost is actually much higher.
Cream Skimming
Glen Whitman at Agoraphilia has some comments on my debate with Tyler on vouchers. He notes that the public school system separates students according to ability with honors classes, AP classes, magnet schools and so forth. Yet, few people call this “cream skimming.” I think Glen’s point blows the peer-effects argument against school choice out of the water.
More generally, the argument in the peer-effects literature is that we shouldn’t let smart kids escape the public school system because their presence gives dumb kids a positive externality. I detest this argument. Children are not pawns to be moved about to satisfy the desires of some grand master. A decent school system treats children as ends in themselves. (In preparation, one might add, for life in a society that treats every individual as an end in themself.)
Is health care good for you?
Robin Hanson frequently tries to convince me that more health care, at the margin, doesn’t make us any healthier. A well-known Rand study found that 30 percent increases in health care consumption did not make people healthier. Nor does the international cross-sectional evidence drive the point home. Once you adjust for income, greater health care spending does not appear to make people healthier.
Robin now sends me this study, which shows that greater Medicare spending doesn’t make people any healthier. Areas with high Medicare spending don’t produce extra health, and yes, this result does adjust for the relevant variables. This, of course, would make Medicare reform a good deal easier, you cut cut spending without fearing catastrophe.
Why, then, do we spend so much on health care? Robin claims we do it to “show that we care” for our relatives. I’ve suggested we
do it simply to avoid the feeling of regret, should one of our loved ones die, and we then feel we “didn’t do enough.”
By the way, here is one of Robin’s essays, “Buy Health, Not Health Care,” he suggests that your doctor should lose a lot of money when you die.
My take: I never manage to win this debate with Robin. I don’t have much evidence to cite in favor of health care spending (email me if you know some). But I am suspicious when I hear the claim that health care does not matter at the margin. Which margin? The last unit you bought? The next unit you might buy? And how big a unit? No one wants to give up penicillin. And exactly which margin are these studies measuring?
On one hand, the economist in me would be happier if I had some evidence that all the extra American health care spending was bringing a concrete return. On the other hand, I hate going to the doctor, in fact I never go. If I could tell my wife that this was rational, well, that would be better than making the economist in me happy.
I’m moving to Switzerland!
Not only are taxes low in Switzerland, but according to Alvin Rabushka beginning in 2004 (not 1994 – earlier version had a typo) the Schaffhausen Canton will introduce an income tax with declining marginal tax rates. Beginning at 8% the marginal tax rate will peak at 11.5% and then decline so that the very highest income earners will face a marginal income tax (from the Canton) of just 6%. I like this not only because my income is relatively high but also because declining marginal tax rates are a property of optimal tax systems (see here for an introduction to optimal tax theory).
Is Austrian Business Cycle Theory Back?
Two new papers on ABC have been written recently by mainstream economists. The Great Depression as a credit boom gone wrong is by Barry Eichengreen and Kris Mitchener under the auspices of the Bank for International Settlements and The Austrian Theory of Business Cycles: Old Lessons for Modern Economic Policy? is by Stefan E. Oppers under the auspices of the IMF. Both links are courtesy of Bruce Bartlett’s Talking Points.
Behavioral economics
Michael, at www.2blowhards.com offers a useful post on behavioral economics, replete with useful links. For instance, this interview with Gary Becker offers Becker’s criticisms of this movement, scroll toward the end, if you don’t read the whole thing. You also can read about how Becker came upon the economics of crime and punishment while looking for a parking spot: “I started thinking about my chances of getting caught…”
More Bickering
Two quick notes on Tyler’s comment on my recent post on vouchers.
First, whether the school or the parent is sent the check is irrelevant (this is a basic theorem in economics). My point, however, was that parents cannot add-on to the voucher amount – i.e. the Chilean system has extensive price controls. Another way of saying this is that in the Chilean system parents never spend any of their own money on the private (subsidized) schools. I think a good voucher system requires that on at least some margins parents spend their own hard-earned dollars on their children’s education.
Second, Tyler thinks that the most convincing evidence is that Chileans did not improve on an international scale. Actually this is the least convincing evidence and it illustrates my point about the power of HU’s tests. The private schools in Chile increased by about 20 percentage points over the relevant time frame. Suppose that private schools were better than public schools by 10 percent then the aggregate gain at the national level would only be 2 percent. Small exogenous decreases in the quality of the public schools could easily swamp this gain.