scream it from the rooftops

Interpreting the results of the Oregon Medicaid experiment

There is a new and probably very important paper by Amy Finkelstein, Nathaniel Hendren, and Erzo F.P. Luttmer:

We develop and implement a set of frameworks for valuing Medicaid and apply them to welfare analysis of the Oregon Health Insurance Experiment, a Medicaid expansion that occurred via random assignment. Our baseline estimates of the welfare benefit to recipients from Medicaid per dollar of government spending range from about $0.2 to $0.4, depending on the framework, with a relatively robust lower bound of about $0.15. At least two-fifths – and as much as four-fifths – of the value of Medicaid comes from a transfer component, as opposed to its ability to move resources across states of the world. In addition, we estimate that Medicaid generates a substantial transfer to non-recipients of about $0.6 per dollar of government spending.

An implication of this is that the poor would be better off getting direct cash transfers: “Our welfare estimates suggest that if (counterfactually) Medicaid recipients had to pay the government’s cost of their Medicaid, they would not be willing to do so.”

And perhaps this sentence could use the “rooftops treatment”:

It is a striking finding that Medicaid transfers to non-recipients are large relative to the benefits to recipients; depending on which welfare approach is used, transfers to non-recipients are between one-and-a-half and three times the size of benefits to recipients.

Or this:

Across a variety of alternative specifications, we consistently find that Medicaid’s value to recipients is lower than the government’s costs of the program, and usually substantially below. This stands in contrast to the current approach used by the Congressional Budget Office to value Medicaid at its cost. It is, however, not inconsistent with the few other attempts we know of to formally estimate a value for Medicaid; these are based on using choices to reveal ex-ante willingness to pay, and tend to find estimates (albeit for different populations) in the range of 0.3 to 0.5.

Might the program in fact be a bad idea?

Questions that are rarely asked

From Arnold Kling (and the graph is from Karl Smith):

I challenge any supporter of the sticky-wage story (Bryan? Scott?) to write a 500-word essay explaining how this graph does not contradict their view. If employment fluctuations consisted of movements along an aggregate labor demand schedule, then employment should be at an all-time high right now.

My view is “sticky nominal wages for some, negative AD shock, ongoing stagnation and thus low job creation, and the progress we have is in some sectors immense but typically labor-saving rather than job-creating, all topped off with a liquidity shock-induced revelation that two percent of the previous work force was ZMP.”  (Try screaming that from the rooftops.)  I read the above graph as consistent with that mixed and moderate view.  As Arnold notes, it’s harder to square with an AD-only view.  If I wanted to push back a bit on Arnold’s take, and save some room for AD stories, I would cite the “Apple Fact of the Day,” and also note that stock prices have not responded nearly as well as have measured corporate profits.  Still, we economists are not taking this graph seriously enough.

Addendum: Arnold Kling responds to responses.

How uncertainty reduces investment

Brad DeLong writes (do read his entire post on my post, it is too long to excerpt; also read the comments on his post):

In this environment, an increase in uncertainty–a mean-preserving spreading-out of ex ante investment project return distributions–causes a greater share of investment projects to fail to make the 1/β guaranteed gross-rate-of-return hurdle. So production of investment goods falls…

…and production of consumption goods rises, as labor is redirected.

There is no employment-reducing fall that I can see in aggregate supply in response to an increase in uncertainty. Yes, there is a structural readjustment as investment-goods industries shed labor and consumption-goods industries gain labor. But this is no more a fall in aggregate supply that leaves an extra 5% of the labor force with nothing productive to do than there was a fall in aggregate supply earlier, when perceived uncertainty fell and labor moved into investment-goods production–remember, back when financial engineering guaranteed by S&P and Moody's offered a way to create more of the AAA assets that the representative worker wanted to hold. There is a fall in aggregate supply in the sense that the value added by investment projects falls–but that fall shouldn't have implications for employment.

I think Brad is assuming I've fallen into the "Paul Krugman is right and Austrian Business Cycle theory is wrong" trap, but it's a different story.  I have in mind a model of costly-to-reverse investment where many entrepreneurs decide to wait.  It's also the case that producing consumption goods can be risky, even non-durable consumption goods: look at the decline in the number of luxury food items in a Whole Foods over the last few years.  Brad may not be convinced, but there's no logical problem in the story.

Here is one of the empirical pieces on how uncertainty reduces investment and yes RW this is also a negative supply shock, as it makes extant resources less productive, at least for the time being.  Here are more papers in the area.  Here is one recent relevant model or see the papers of Robert Pindyck.  Again, I don't wish to push "uncertainty" as the only story, it's rather the simplest means of seeing that it's not all just about weak aggregate demand.

Scott Sumner likes to scream from the rooftops about how Bernanke has forgotten his previous work on monetary economics.  I like to note that there is more than one — indeed more than two — Ben Bernankes.  He wrote his MIT dissertation on uncertainty and irreversible investment.  One of the Ben Bernankes I follow is in part a real business cycle theorist.

Brad also writes:

…the cost of borrowing for the government has fallen–the market value troday of future cash tax flow earmarked for debt repayment has gone way, way up–therefore we should dedicate more future cash flow to debt repayment by borrowing more. There is no "but even." Expansionary fiscal policy is a good idea.

I'll blog more on that soon, in a separate post.  For the time being I'll repeat my point that the monetary authority moves last anyway, so it's ultimately a matter of monetary rather than fiscal policy, whether we like that fact or not.

Buried scary ledes

The [ECB] bank reversed itself on buying bonds amid signs that the debt crisis was spreading to the banking system.

“The situation was already starting to get worse on Thursday afternoon and throughout Friday of the week before last,” Mr. Trichet said. “A number of markets were no longer functioning correctly. It looked somewhat like the situation in mid-September 2008 after the Lehman Brothers’ bankruptcy.”

I suppose…I am glad they have not screamed that from the rooftops.  The full story is here.

Update: The scary lede has been removed altogether from any NYT story.

What should we do instead of the Obama health reform bill?

A lot of people think you have no right to criticize a bill unless you propose a better bill.  I don't agree (if the aforementioned bill is bad on net), but in any case I will give this a try.  These are not my first best reforms or even my second best reforms.  They're my "attempt to work with some of the same moving pieces which are currently on the table" set of reforms.  I would trade away the Obama bill for these in a heart beat.  Keep in mind people, with a "no insurance" penalty of only $750, the current bill isn't going to work (and that's ignoring the massive implicit marginal tax rates on many individuals and families, or the "crowding out" of current low-reimbursement-rate Medicaid patients), so we do need to look for alternatives.

Here goes:

1. Construct a path for federalizing Medicaid and put it on a sounder financial footing; call that the "second stimulus" while you're at it.  It's better and more incentive-compatible than bailing out state governments directly and the program never should have been done at the state level in the first place.

2. Take some of the money spent on subsidizing the mandate and put it in Medicaid, to produce a greater net increase in Medicaid than the current bill will do, while still saving money on net.  Do you people like the idea of a public plan?  We already have one! 

2b. Make any "Medicare to Medicaid" $$ trade-offs you can, while recognizing this may end up being zero for political reasons.

3. Boost subsidies to medical R&D by more than the Obama plan will do.  Establish lucrative prizes for major breakthroughs and if need be consider patent auctions to liberate beneficial ideas from P > MC.

4. Make an all-out attempt to limit deaths by hospital infection and the simple failure of doctors to wash their hands and perform other medically obvious procedures.

5. Make an all-out attempt, working with state and local governments (recall, since the Feds are picking up the Medicaid tab they have temporary leverage here), to ease the spread of low-cost, walk-in health care clinics, run on a WalMart sort of basis.  Stepping into the realm of the less feasible, weaken medical licensing and greatly expand the roles of nurses, paramedics, and pharmacists.

6. Make an all-out attempt, comparable to the moon landing effort if need be, to introduce price transparency for medical services.  This can be done.

7. Preserve current HSAs.  The Obama plan will tank them, yet HSAs, while sometimes overrated, do boost spending discipline.  They also keep open some path of getting to the Singapore system in the future.

8. Invest more in pandemic preparation.  By now it should be obvious how critical this is.  It's fine to say "Obama is already working on this issue" but the fiscal constraint apparently binds and at the margin this should get more attention than jerry rigging all the subsidies and mandates and the like.

9. Establish the principle that future extensions of coverage, as done through government, will be for catastrophic care only.

10. Enforce current laws against fraudulent rescission.  If these cases are so clear cut and so obviously in the wrong, let's act on it.  We can strengthen the legal penalties if need be.

11. Realize that you cannot tack "universal coverage" (which by the way it isn't) onto the current sprawling mess of a system, so look for all other means of saving lives in other, more cost-effective ways.  If you wish, as a kind of default position, opt for universal coverage if the elderly agree to give up Medicare, moving us to a version of the Swiss system and a truly unified method of coverage.  But don't bet on that ever happening.

Separate issues:

12. If you can tax health insurance benefits and cut a Pareto-improving deal overall, fine, but I am considering this to be too politically utopian and it's not clear what the rest of that deal looks like.  The original tax break makes no economic sense but you don't want to end up with a big tax increase and a lot more people on the public books with little in return.

13. If the current bill were voted down, you can imagine some version of the above happening, although not necessarily all at once in one big bill.

14. Commission a study of how much the Obama plan is spending per QALY saved.  I agree that more health insurance saves lives, but a) the study should adjust appropriately for the superior demographics of those who hold or buy insurance, and b) the study should adjust for the income that would be lost through mandates and the safety that income would purchase.  I worry greatly that we have never, ever seen this number presented and that if we did it would not be pretty.  In any case, do the study, scream the number from the rooftops, and reread points 1-11.  Enact.

That's my recipe.  It's better than what we are doing now.  You don't have to adhere to any extreme form of economistic or free market ideology to buy it.  It might even be politically easier than the current path, as it "sounds less socialistic."

What does the Dale and Krueger education paper really say?

It was reported in the media as showing that, controlling for all the right variables, going to an elite college or university as an undergraduate doesn't really matter for your future prospects or income.  But Robin Hanson, with money on the line, investigated further.  After reading the relevant pieces closely, he reports [what follows is Robin, not me, but with the multiple indentations I haven't indented everything again]:

"In fact his original 1998 working-paper abstract said:

We find that students who attended colleges with higher average SAT scores do not earn more than other students who were accepted and rejected by comparable schools but attended a college with a lower average SAT score.  However the Barron's rating of school selectivity and the tuition charged by the school are significantly related to the students' subsequent earnings. 

Half Sigma screams from the rooftops:

Based on the straightforward regression results in column 1, men who attend the most competitive colleges [according to Barron's 1982 ratings] earn 23 percent more than men who attend very competitive colleges, other variables in the equation being equal.

23 percent is quite a bit of money, it’s almost like getting two college degrees instead of one!  They also discovered that there was a benefit to attending a more expensive school. The more expensive tuition resulted in a lifetime internal rate of return of 20% for men and 25% for women."

Sherry Glied’s new health care paper

It is one of the best health care papers in recent times, it is here, I cannot find an ungated version.  Glied reminds us that only about 1/3 of American health care spending comes from private insurance.  Moving to international comparisons, the more general point is that:

…there is no persistent and regular relationship between the structure of system financing and the rate of growth in per capita health expenditures in a health system…the efficiency of operation of the health care system itself appears to depend much more on how providers are paid and how the delivery of care is organized than on the method used to raise the funds.

In other words, as I’ve stressed before, the health care cost problem comes from immediate suppliers, namely doctors and hospitals, and not from health insurance companies.

The best parts of the paper concern equity.  It is GPs which help the poor, not additional spending on technology or surgery; see p.18 for other comparisons along these lines.  Furthermore, and this you should scream from the rooftops, consider this:

…patterns of health service utilization in developed countries suggest that the marginal dollar of health care spending — money used to purchase high tech equipment or specialist services — is less progressively spent than the average dollar.

In other words, egalitarians should not allocate marginal government spending to health care.  And there is evidence that the more a government spends on health care, the less it spends helping people in money ways.  That is, there is crowding out. 

Finally, Glied offers a summary comparison:

Putting $1 of tax funds into the public health insurance system
effectively channels between $0.23 and $0.26 toward the lowest income
quintile people, and about $0.50 to the bottom two income quintiles.
Finally, a review of the literature across the OECD suggests that the
progressivity of financing of the health insurance system has limited
implications for overall income inequality, particularly over time.

Highly recommended.

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