Economic arguments I have never understood
Have you ever heard the claim that U.S. medical care is in trouble because we subsidize third-party insurance through the tax system? Glenn Hubbard presented this view in the Wall Street Journal this Tuesday. Hubbard writes:
Reform the tax treatment of health-care expenses. The most far-reaching and misguided government policy, established more than 60 years ago, allowed employer-provided health care to be exempt from taxation. Under this policy, medical care purchased through an employer’s insurance plan is tax-free, while direct medical-care purchases by patients must be made with after-tax income. The tax preference for employer health insurance has been instrumental in creating today’s third-party payment system. In this perverse world, true insurance, in the form of coverage for catastrophic health events, is the exception; prepaid health care, in the form of coverage with low deductibles and copayments, is the rule. The tax preference for insurance is the primary reason five out of every six dollars of health-care spending are paid by third parties…
Low copayments and deductibles fuel excessive cost growth and breed wasteful medical practice…consumers have little incentive to limit their use of unnecessary medical-care services, little incentive to shop for the health plan that best suits their needs in a cost effective way, and little incentive to evaluate their care on the basis of value.
But I’m stumped. If the argument is that tax deductibility leads to too much health care, I can see the logic. But then the problem is in the pretzels and beer markets; health care should be doing fine, albeit in bloated form.
Alternatively, it might be argued that buying health insurance involves a negative externality on others. Maybe insurance companies are intrinsically bad monitors, and more insurance corrupts the system as a whole. Grant this premise, but where do we end up?
1. We would have a good argument for taxing insurance purchases. Yet the insurance point is rarely raised with this conclusion in mind. We might have (yikes!) an argument for greater government involvement in health care.
2. If insurance companies are such poor cost monitors, why doesn’t this raise premia accordingly? The poor monitoring of the company would be reflected in policy price and thus would be internalized by the people or institutions who buy the policies. The externality should vanish or at least significantly diminish.
3. Why should insurance subsidies lead to “low copayments and deductibles”? Insurance with high copayments and deductibles is favored by the tax system as well. That being the case, why do we blame the tax system for how insurance is (perhaps) poorly structured?
All these points collapse into a more simple query: how can a simple relative price, whether a distortion or not, corrupt the cost control practices of an entire industry?
And if government provision of health care is ineffective and costly, isn’t there a positive externality from the purchase of private health insurance?
Many of the people who cite this argument about health insurance are smarter and more accomplished than I am. I will grant their greater wisdom and authority. But at the end of the day, I still don’t get it.
Is it just my imagination?
Kevin Garnett recently won the MVP award in the NBA after a stellar and very consistent season. He was awarded the trophy in a ceremony before last night’s playoff game, and then had a subpar performance. I recall this same pattern holding in the past when other players receive the award before games. The example of David Robinson comes to mind; he received the trophy and was promptly outplayed by Hakeem Olajuwon. I suspect the lesson is that approbational incentives always matter at the margin, and an MVP trophy makes it harder to motivate oneself for the single basketball game to follow the trophy award. A lesson for life lies therein. If nothing else, try to isolate your awards, triumphs, and conquests from your subsequent performance.
Addendum: Here is another quantitative method of measuring the marginal product of basketball players, the best I have seen yet. Kevin Garnett comes out as number one.
Economics and Philosophy reading list
Here are Brad DeLong’s picks for such a class. I’ll add Derek Parfit to the list, and maybe Jean-Jacques Rousseau. Rousseau, in his Second Discourse, questioned the identification of wealth with welfare. Instead he saw market society as leading individuals into “approbational traps,” whereby they seek more approval but find themselves on a fruitless treadmill in this regard. Parfit asks whether utilitarianism (or consequentialism more generally) can ever dovetail with common sense intuitive morality. I also would have them read McCloskey on economic rhetoric, to better understand the nature of economic argumentation. Then you could add Thomas Schelling on multiple selves, to illustrate the complexities of individual choice; Parfit chips in on this topic as well. If I taught the class for twenty-five weeks, I would consider using Plato’s Republic, which pretty much contains every argument ever made since.
Hey, I taught that class two years ago…!
If you can’t slow down time, try this…
Control your pain through biofeedback:
People can learn to suppress pain when they are shown the activity of a pain-control region of their brain, a small new study suggests. The new biofeedback technique might also turn out to be useful for treating other conditions.
Biofeedback techniques based on electroencephalogram (EEG) recordings of brainwave patterns, in which electrodes are placed on the scalp, are used with some success to treat epilepsy and attention problems such as ADHD.
…Fumiko Maeda, Christopher deCharms and their colleagues at Stanford University in California have tried showing people real-time feedback from a functional magnetic resonance imaging (fMRI) scanner.
The eight volunteers saw the activity of a pain-control region called the rostral anterior cingulate cortex represented on a screen either as a flame that varied in size, or as a simple scrolling bar graph. This brain region is known to modulate both the intensity and the emotional impact of pain.
During the scans the volunteers had to endure painful heat on the palm of their hand. They were asked to try to increase or decrease the signal from the brain scanner and to periodically rate their pain sensations.
It took just three 13-minute sessions in the scanner for the eight volunteers to learn to vary the brain activity level, and thus to develop some control over their pain sensations, the researchers reported at the Cognitive Neuroscience Society meeting in San Francisco last week.
Interestingly, none of the participants could explain how they managed some control. But it seemed to work, albeit on a small number sample.
Why stop here? Why not carry around an advanced biofeedback monitor and console to control your emotions more generally?
The bottom line: I can’t imagine how welfare economics will look two hundred years from now.
Science is Not War
For fifty years the United States dominated the rest of the world with its scientific advances, Nobel prizes and life-saving drugs. We were the king! We ruled!
But now, Tom Daschle sees “disturbing” signs. “America’s dominant position in the scientific world is being shaken,” he says.
Quake! Hold on!
We are in decline and “it’s frightening,” intones Dr. Armbrecht from the Industrial Research Institute.
“They’re catching up to us,” warns Jennifer Bond.
Run, run for your lives!
Funniest statement is from the aforementioned Jennifer who is a vice-President at something called the Council on Competitiveness, an organization in Washington that seeks “to promote industrial vigor.”
We must not lose our precious bodily fluids.
All of this is from a hysterical and hysterically funny article in the NYTimes, U.S. Is Losing Its Dominance in the Sciences by William Broad. One of the brief nods to sanity in the entire piece is this sentence:
Even analysts worried by the trend concede that an expansion of the world’s brain trust, with new approaches, could invigorate the fight against disease, develop new sources of energy and wrestle with knotty environmental problems.
Of course, the next sentence begins with the word “But…”
Now, the U.S. system has its share of problems. The university system is not a market and as a result price signals don’t allocate labor very well so we have too many English and history majors and not enough natural science and engineering undergraduates. (See Paul Romer for the academic argument and the Invisible Adjunct for the life lesson.)
The basic point, however, is that science is not war. So let us turn away from the mediocrities like Tom Daschle and the New York Times and turn instead to Thomas Jefferson who wrote nearly 200 hundred years ago:
He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation.
Subjective time, or the tourist illusion
When you are driving to a new place, it feels longer to get there than to return. No, you are not crazy, this is a confirmed perceptual bias. When taking the route for the first time, you are engaged in an act of problem solving. Subjective time passes more slowly (this has been validated by various experiments). On the way back, you know the route (you hope). Subjective time then passes more quickly. Jay Ingram puts it this way: “When your mind is focused on something other than the passage of time, you are fooled into thinking that less time has passed.”
Similarly, if you do two identical tasks, and they take the same time, you will judge your first attempt as having taken longer. But if you change the background context, such as by putting the people in a different room, this illusion tends to vanish.
There is also strong evidence that time seems to go faster as you get older. (Do we leave the problem-solving mode as we age?) Say you are forty and you will live to eighty. According to one set of calculations, your life, as subjectively perceived, is already seventy-one percent over. This is the most disturbing scientific fact I have heard in a long time. Your last twenty years will feel like no more than thirteen percent of your life. Another set of equations, harder to confirm, puts the age of seventeen and a half (!) as the midpoint of your subjectively experienced life. Occasionally patients with extreme brain damage will experience time as passing very very rapidly; the internal clock of one man seemed to be set at about four times regular speed.
For more information on these experiments, see Jay Ingram’s The Velocity of Honey.
Many scientists are hard at work trying to overcome aging; others are more pessimistic about how long we can live. But perhaps markets will look to another solution altogether. Why not also slow down subjectively perceived time? Might this be easier than stopping aging itself? Would it be nearly as good? In the meantime, what can you do to make your life feel longer?
OK, so here is the economists’ question: what is your marginal rate of substitution for real time vs. perceived time? Would you rather have one year that felt like two, or two years that felt like one?
My personal preferences tend toward objective time. Put aside family issues and matching what one’s partner or family does. I am curious about how history will run its course, how music will evolve, and which movies will come out. And what about the theory of quantum gravity? For this you need objective time more than subjectively perceived time. It’s worth a great deal to me just to get this information injected into my brain, even if I only receive a short extension of my life.
The cost of dieting
Why are Americans so obese? One factor is surely the decline in the relative price of carbohydrates. In hunter-gatherer society, you couldn’t get pasta or bread at all. But how about today?
“What’s really cheap are foods made with refined flour, added sugar and corn syrup and added fat.” People with limited income, he says, “buy foods that fill them up, and who’s to blame them? They get the most calories for their money.”
Not everyone is willing to pay for a good and tasty diet. Christine Davies speaks:
“I tried both the Atkins and South Beach diets, but pound for pound, protein is a lot more expensive than carbs,” she says. “The South Beach diet recommends fish about three times a week. I’d have to eat canned tuna three times a week to afford it, and I get tired of eating the same foods.
“Plus, you have to cook everything yourself,” she says. “Following it on a day-to-day schedule would be completely impossible because of the complexity of the recipes and the cost of the foods.”
She’ll get little argument from Phil Lempert, one of the nation’s leading experts on food prices and grocery-store shopping. Using exclusive data from AC Nielsen and menus from the best-selling diet books, Lempert calculates that strict adherence to the low-carb, meat lovers’ Atkins diet would cost about $100 a week (presuming you eat all meals at home). The salmon-rich South Beach diet priced out at almost $90 a week. That’s far more than the $35 that Davies spends at the grocery store each week to feed herself.
Many other people live in “food deserts,” where supermarkets with fresh vegetables are a long distance away. Of course all this holds only for North America. The world’s very poor find calories hard to come by, engage in hard physical labor, walk much more, or have better access to home farmed fresh foods. Only in the U.S. are carbohydrates so cheap.
Here is the full story. Here is a related article on the cost of dieting. Here is Bruce Bartlett’s excellent short piece on the economics of obesity, with links to the academic literature.
As for me, if you ignore price and delivery costs, I would gladly eat sashimi for at least half of my meals.
How much is a Picasso worth?
Pablo Picasso’s Boy with a Pipe (the link is broadband with audio and video; here is a lower tech image) is on the auction block at Sotheby’s, this Wednesday evening. Some analysts expect the painting to go for at least $100 million, an all-time record. The Whitney family bought that same picture in 1950 for $30,000.
Are you thinking of bidding? Well, what else could you buy with $100 million?
One new opera house in downtown Toronto
15,625 pounds (or 7,087 kilograms) of gold
One six-album recording contract with Whitney Houston
Four years of ball-playing by New York Yankees star third baseman Alex Rodriguez
One Adam Sandler movie, including production and marketing costs
1.5 million hepatitis-B vaccines for children in sub-Saharan Africa and Southeast Asia
One day of Iraqi occupation by U.S. forces
Here is the full story. By the way, the Museum of Modern Art in New York is thinking of selling $27 million worth of its Picasso holdings, perhaps to buy more Damien Hirst.
“Markets in everything” isn’t always nice
Read this story about the recent behavior of British troops in Iraq. A full investigation remains pending, but the account may well be true.
How much consensus is there in economics?
Some economists believe that we should bicker less among ourselves. Instead we should devote more resources to convincing the public on matters where most economists already agree. I have mixed feelings toward this attitude. Even if more instruction would improve economic performance, I am concerned it would damage our long-run ability to track truth. Plus for me it would make economics less fun. I, for one, would not devote my life to being a missionary for the theory of free trade and comparative advantage.
That all being said, how much do economists in fact agree? Check out this paper. The authors survey 1000 economists from the AEA roster; the data cover both 1990 and 2000. Here is one result:
…there was strong agreement with the propositions that restraints on free trade reduce welfare…and that market-determined exchange rates are effective…There was also strong disagreement with the propositions that increasing globalization threatens national sovereignty in environmental and labor standards…that U.S. trade deficits are a result of nontariff barriers…and that the increasing inequality in the U.S. distribution of income is caused by the pressures of a global economy.
What else do we have?
Macroeconomic propositions usually met with “moderate” to “substantial” consensus, but never “strong” consensus (the paper defines these terms more rigorously). And over the last ten years the consensus on macroeconomics has lessened (this result runs counter to my intuitions; I think there is now fairly broad consensus on something between loose price level targeting to mild inflation. Of course that is just monetary policy, not all of macro.) Economists have moved slightly closer to some supply side ideas but are more skeptical about the macro stimulus properties of fiscal policy.
Pollution taxes are very popular, and economists are starting to buy the Card-Krueger argument that minimum wage hikes don’t much damage employment.
Read the whole piece, it has more content than I have presented.
And will the Internet and distance learning drive down the demand for professors? There we see strong disagreement. I might add that I see future demand as more robust than Alex does and I can’t bring him around to my point of view.
Education and economic development
…I was left wondering if anybody knew what education was really about. I have begun to suspect that economic development causes education to develop even if governments don’t force it as Korea has done.. After all, that’s how education got started. When we were all hunters and gatherers 10,000 years ago, we did not have time for education…Only when our productivity for food production increased did we have time for other things.
…It’s possible that poor countries today will not get out of their poverty traps without political changes. Those political changes may only be possible with broader education. The point is, however, that education is not a constraint on the ability of today’s workforces to achieve substantial productivity improvement around the world. Constraints on productivity improvements are the reason education is not developing faster around the world.
That’s from William Lewis’s interesting The Power of Productivity.
My take: I’ve never drawn many real conclusions from the cross-sectional correlations between education and economic growth. These statistical methods are not ideal for ferreting out causal relationships. Hours of television watched probably correlates with growth as well. That being said, I do see at least one special feature of education. If a family in a developing country decides to invest heavily in the education of the children, it is a very special signal. That family has crossed a particular line and is taking a very definite stance within its community. That family will almost certainly be a positive force for growth. In this regard investing in education is a bit like converting to Mormonism. The decision to become a Mormon, for growth, can be at least as important as Mormon doctrine itself. Mormon families in Latin America typically are committing to a greater work ethic, tight family bonds, no alcoholism, entrepreneurial aspirations, and close connections to their religious peers.
Addendum: This paper argues that IQ outperforms education in traditional growth equations.
The consumer surplus from Google’s Gmail
Google will be offering its Gmail service for free, but right now supply is limited. Not surprisingly, a market in the accounts has arisen, check out this ebay listing. I have heard that some accounts have gone for as much as $150.
If any of you know of good estimates of the consumer surplus from Google (and related search engines) more generally, please let me know. Here are some interesting magnitudes, comparing Google’s possible market value to various countries.
Thanks to Nicholas Kreisle for the pointer.
Addendum: Here is some speculation on where Google is heading in the longer run.
Outsourcing that I am against
The origins of TANSTAAFL
“There Ain’t No Such Thing as a Free Lunch.” I used to think that originated with Robert Heinlein’s The Moon is a Harsh Mistress. Many others credit Milton Friedman. But read the real story. A San Francisco newspaper is the earliest known source. And Professor Alvin Hansen, preceding Friedman, wrote of TINSTAAFL, which is simply TANSTAAFL with better grammar.
What is a taxi medallion worth?
New York City just auctioned off some more medallions. What did they go for? About $300,000. What should one cost? Ask Andrew Chamberlain:
…let’s do the math. Given a medallion cost of $300,000, how much does a cabbie have to make to justify buying one? Assuming he’ll use it for 20 years, and assuming a 5 percent discount rate–the forgone return he could’ve earned on a similar investment–he’d need to earn about … $28,300 a year.
That’s not much. So how much do taxi drivers actually earn? According to the New York Times here and here, most drivers pull in about … $30,000 a year.
Chamberlain also questions whether the medallion system makes sense in the first place. My knee-jerk free market reaction is to say no. That being said, it is easy to imagine that a congestion tax on Manhattan taxis is optimal. How close do current quantity restrictions come to such a tax? Hard to say, but at the very least non-Manhattan driving probably does not require medallions. Should we also allow taxis to raise their prices when it is raining? I have heard that Tokyo residents hailing a taxi will hold up two fingers to pay twice the state fare, three fingers to triple it, and so on.
Addendum: Daniel Akst notes that this calculation assumes a very low shadow price for labor. I’ll predict that the immigrant drivers have discount rates higher than five percent a year, as well. That only intensifies the puzzle. On the other side of the equation, you can sell the medallion after twenty years.