Monthly Archives: December 2013

Two Views of Obamacare

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1. The Washington Post editorial page:

Republicans, many of whom claim to favor market approaches to expanding health-care coverage but oppose excluding patients with preexisting conditions, can’t credibly balk at the natural results of competition organized under those very principles. No one can expect low premiums and near-unlimited service, particularly in a system designed to spread costs around so that the sick and the old can finally obtain decent health coverage from private insurers. That’s not a mistake. It’s economics.

Pointer from Mark Thoma. I wish that he had also linked to John Cochrane’s piece, below.

Of course, I do not think this is very good economics. Spreading costs around is best done through subsidies and taxes, not through mandating that some people buy inappropriate coverage so that others can enjoy subsidized coverage. Also, I am getting really tired of folks referring to government-designed health insurance sold through an exchange as a “market approach.” This approach eliminates what I see as the main benefit of markets, which is the process of innovation and creative destruction.

2. John Cochrane:

Only deregulation can unleash competition. And only disruptive competition, where new businesses drive out old ones, will bring efficiency, lower costs and innovation.

Now that’s economics. As to health insurance, Cochrane writes

Health insurance should be individual, portable across jobs, states and providers; lifelong and guaranteed-renewable, meaning you have the right to continue with no unexpected increase in premiums if you get sick. Insurance should protect wealth against large, unforeseen, necessary expenses, rather than be a wildly inefficient payment plan for routine expenses.

People want to buy this insurance, and companies want to sell it. It would be far cheaper, and would solve the pre-existing conditions problem. We do not have such health insurance only because it was regulated out of existence. Businesses cannot establish or contribute to portable individual policies, or employees would have to pay taxes. So businesses only offer group plans. Knowing they will abandon individual insurance when they get a job, and without cross-state portability, there is little reason for young people to invest in lifelong, portable health insurance. Mandated coverage, pressure against full risk rating, and a dysfunctional cash market did the rest.

Culture and Institutions

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Alberto Alesina and Paula Guiliano write,

We have shown how certain institutions need to “fit” with the dominant culture, such as regulatory policies regarding, for instance, the welfare state, financial regulations, or the functioning of the labor market. On the other hand, certain institutions can determine trust and social capital, as is the case for the presence of free city states in Italy in medieval times.

Therefore, statements like “only institutions matter” or “only culture matters” are unnecessarily single-minded and clearly incorrect

Over the years, I have found a number of articles stressing institutions, while other articles stressed culture. I agree with the authors here that it is more complicated.

Youth, Age, and Entrepreneurship

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Edward Lazear writes,

we found that young societies tend to generate more new businesses than older societies. Young people are more energetic and have many innovative ideas. But starting a successful business requires more than ideas. Business acumen is essential to the entrepreneur. Previous positions of responsibility in companies provide the skills needed to successfully start businesses, and young workers often do not hold those positions in aging societies, where managerial slots are clogged with older workers.

Pointer from Mark Thoma. Another interesting quote from Lazear:

The importance of youth is illustrated by the stark contrast between two neighboring countries, Japan and Korea. Using the GEM survey data, we found that Japan’s rate of entrepreneurship (the proportion of individuals who own a business that they founded in the past 42 months) is just 1.5%. In Korea the rate is a much higher, 8%. The median age in Japan is 43; in Korea it is 34. The U.S., with an entrepreneurship rate of 4.4% and a median age of 36, is in the middle of the pack on both entrepreneurship rates and median age.

Larry Summers on the Great Factor Substitution

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He said,

If there are only two factors, they have to be complements. If there’s more capital, the wage has to rise. Now imagine that…you can take some of the stock of machines and, by designing them appropriately, you can have them do exactly what labor did before…When capital is reallocated to substituting for [replacing] labor, the stock of effective labor rises and the stock of conventional capital falls, and so wage rates fall. Third, the capital share, understood to include the total return to capital of both varieties, rises. That’s just a corollary of output rising and wages falling. This pattern is similar to what we have seen take place. I suspect that this reflects the nature of the technical changes that we have seen: increasingly they take the form of capital that effectively substitutes for [replaces] labor.

Pointer from Tyler Cowen, who I’m surprised did not make a bigger deal about it.

My one quibble/criticism is that this describes a closed economy. In the real world, with China and India developing, factor-price equalization is at least as important as factor substitution. To put this another way, include those countries when you calculate trends in labor’s share of income.

Also, Summers writes,

Where production has taken place in the classic way we teach, productivity growth has continued. There has been progress. Real wages measured in those terms have increased substantially. It’s just that a larger and larger share of our economy is in sectors that are not well thought of as widgets produced by competitive firms. They are sectors where property rights, scarcities, intellectual property, and the like are of fundamental importance.

My take on this is to be wary of talking about “the” real wage. Your real wage is much higher if you abstain from making extravagant use of modern medicine and private colleges. See The Reality of the ‘real wage’.

He concludes by raising the issue that Nick Schulz and I called the New Commanding Heights. Summers writes,

Whether the expansion of those sectors as a share of the economy necessitates a growing share of the public sector in the economy, or whether the share of healthcare and education that takes place in the public sector should decline will be a matter of great public debate. As a country, and not without controversy, we do not seem to be moving toward a smaller public role in healthcare. Nor do other countries in the world. But that will, perhaps, change over time.

Merry Christmas

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From The Guardian (the story has appeared in several outlets).

Turner said a “magic pill” that reverses ageing is several years away, partially due to the cost of the compound, which would be about $50,000 a day for a human.

The compound is called NAD. A more scientific report is here. I predict that if the compound works, I predict it will take less time for somebody to figure out how to make it cheaply than it will take for the FDA to approve it.

Bernanke and History

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the WSJ presents Five takes, three positive and two negative. Michael Bordo writes,

During the Fed’s first 100 years, it has shifted gradually from being a banker-run to an economist-run central bank, culminating in Ben Bernanke’s assumption of the chairmanship in 2006. His appointment promised to bring the academic rigor of modern monetary economics to the chairmanship. Bernanke’s research, advocating greater transparency and better communication to enhance the central bank’s credibility, augured well for continuing low and stable rates of inflation.

Bordo’s take is negative. I have to say that I cannot agree that Bernanke made the Fed an economist-run central bank. During the crisis, it seemed to me to be a banker-run central bank.

Two Findings in Search of Explanations

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1. Yihui Pan, Tracy Yue Wang, and Michael S. Weisbach find that

disinvestments are fairly common in the early years of a CEO’s tenure, and that these disinvestments decrease with tenure. Investments, on the other hand, are relatively low in the early years of a CEO’s tenure and increase over time. As a result, the firm’s assets and employment grow more slowly early in the CEO’s tenure than in later years.

Pointer from Timothy Taylor, who speculates

the analysis makes CEOs sound a bit like coaches of sports teams: they arrive to clean up the mistakes of the past regime, but over time many of them gradually drift into their own set of mistakes.

This analogy would suggest that whatever the incumbent’s excesses (too much investment, too little investment), the new CEO would do the opposite. But instead the pattern seems to be that the incumbent eventually tends to over-invest.

The authors’ preferred explanation is that the CEO wants to over-invest, and only over time does a CEO gain control of the board and carry out the over-investment. When the CEO exits, the new CEO is more subservient and understands the need to pare back.

My proposed explanation may be the least dramatic. My thinking is that major projects go through a long gestation period. A new CEO needs to get comfortable before he/she can approve major new projects, so major new projects get put on hold for a year or two. Meanwhile, existing projects wrap up, so you get a lull. My explanation would predict that you would not see a burst of investment just as a CEO is getting close to exit. Rather, you would see low investment when a CEO starts, then ramping up to a higher level that is maintained until the CEO exits.

2. Alison Jane Rauh writes,

While blacks of the second generation have equal or higher education and earnings levels than the first generation, the return on their unobservable characteristics is converging to that of native blacks…Convergence across generations is mostly driven by low-educated second generation blacks that drop out the labor force in greater numbers than low-educated first generation immigrants do. Similarly, convergence within a generation is mostly driven by low-educated blacks who immigrate when they are young dropping out of the labor force in greater numbers than those who immigrate when they are older. A social interactions model with an assimilation parameter that varies by age of immigration helps explain this phenomenon. When making their labor force participation decision, immigrant men of all races, but not women, generally place more weight on the characteristics of natives the earlier they immigrate.

Pointer from Tyler Cowen. Both he and the author embrace a “peer effect” explanation, in which black immigrants start out trying to achieve, but assimilation leads them to see achievement-orientation as acting white.

An alternative explanation is that first-generation immigrants of all races are more willing to strive and sacrifice than are their children. However, suppose that there are differences in average ability by race, and that even high-ability first-generation immigrants are hampered by lack of cultural background. As immigrants assimilate, differences in outcomes start to reflect differences in ability.

I am not saying that my alternative explanations are necessarily correct. My point is that these are both papers that strike as presenting interesting findings that might have many possible explanations.

Public Choice 101

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From Cathy Reisenwitz.

Earlier this year, Center for American Progress donor Citibank hired lobbyists to literally write 70 out of 85 lines of a bill regulating derivatives trading which passed the House. If this regulation was meant to hurt Citibank’s profitability while defending their customers it’s unlikely to have done so.

There are three main reasons corporations like Citibank write their own legislation. First, lawmakers feel pressure from constituents to regulate industries about which their staffs know nothing; corporate lobbyists and lawyers provide much-needed information. Second, it’s much easier and faster for a company to understand and comply with a regulation it wrote. Third, and most important, companies write regulation that is easier and cheaper to comply for them than for their competitors.

Read the whole thing. Of course, it will change no one’s mind. The way to resist public choice theory is to insist that with sufficient moral authority “we” can regulate in a non-corporatist way. That is a non-falsifiable hypothesis, because the premise of sufficient moral authority is never satisfied.

Another Obamacare Glitch

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Stella Paul reports,

Millions are losing their health insurance policies and being forced onto the ObamaCare exchanges, where most plans only provide local medical coverage. As Americans realize they must pay for all non-emergency medical care when they leave their home county

With your old, “bad” health insurance, you were covered if you took a vacation. With your new, “better” health insurance, you are not.

I wish that the web site had been working well from day one. That way, these glitches would have shown up sooner, and Obamacare would have failed quickly and cleanly. Instead, it will fail slowly, and its supporters will forever be saying, “If only the technical issues had been handled correctly…”

Health Insurance Corporatism

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James A. Morone, of Brown University and Brookings, writes,

The ACA itself has two large programmatic components. One is a classical Republican idea: health insurance marketplaces. The other expands a program from the Democrats’ halcyon days: Medicaid. The red half of the law tries to tap the magic of market capitalism; the blue half grows the kind of Great Society government program much loved by liberals. The compromise –which might point to the future of American health care—puts the red and the blue together in an unanticipated way.

I object to characterizing health exchanges as “the magic of market capitalism.” To me, health insurance marketplaces run by the government are no such thing. As we are seeing, health insurance exchanges turn the insurance companies into government-run utilities.

If you want market-oriented health insurance, then leave health insurance to the market. Do not put it on a government exchange.

Professor Morone may ve correct about where health insurance in this country is headed. However, such a “compromise” will be an unmitigated defeat for market principles. Corporatism is not capitalism.