Monthly Archives: March 2017

The Health Care Spending Shell Game

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A commenter writes,

if you can’t decide who is going to pay for the chronically ill, then the number one game in town is the selection game. It is way more important to make sure that “the other guy” pays for the chronically ill. You even end up in situations where you don’t want to be too good at treating the chronically ill, lest all the chronically ill select your plan which is still a net negative.

I think the libertarian reluctance to admit these are going to be socialized costs has led to a patchwork of payers with more interest in playing the selection game then playing the cost control game. It’s also the case that their opponents in the cost control game, providers, have a lot more leverage over a divided foe then a unified foe (either single payer or strong government regulations on cost/utilization).

I think it is fair to point out that our health insurance market as it has emerged gives health insurance companies stronger incentives to hide from costs than to reduce costs.

Another point is that the politics of health care make it more attractive for politicians to help many people who are relatively healthy to handle routine low-cost illnesses, obtain birth control, etc., than it is to try to target support for the people who really need it. Hence, you get the shell game of Obamacare, where you try to give healthy people the sort of benefits that seem to help them, but stick them with premiums that include the cost of subsidizing the people with chronic illnesses.

Politically, what you want are policies with lots of beneficiaries. But the requirement of compassionate health care policy is a policy with few beneficiaries. (For a determined libertarian, this means placing very high expectations on charity.)

Hence, we play shell games. One of them we call “employer-provided” health insurance, as if employers simply give it away. In fact, if an employee is worth $40,000 a year to the company and health insurance costs $10,000, that means that the rest of the paycheck has to be worth no more than $30,000 a year. The cost of health insurance is borne by workers. That means that the workers with illnesses that require expensive treatment are subsidized by workers who are generally healthy.

Another shell game is Medicare. Old people undergo a lot of expensive medical treatments. This cost is borne partly by taxes on the young. It is increasingly being deferred to taxes on people in the future. This Ponzi scheme faces a day of reckoning, which is likely to come within a decade. That is, if you believe the CBO analysis of Medicare, and I thought that fact-based people were supposed to believe in the CBO.

Relative to a policy of honestly taxing the healthy to pay for the sick, these shell games are inefficient. They cost more in terms of lost economic output. The labor market is distorted by “employer-provided” health insurance, leading to less employment and output. The health insurance market is distorted by Obamacare, and in fact that market is in trouble. Subsidized health insurance under Obamacare is sort of working. Mandated health insurance on the exchanges is imploding.

Scientist Affiliation and Motivation to Find Truth

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Dan Kahan writes,

Well, “we all know” that conservatives hold university scientists in contempt for their effemenate [sic], elitist ways & that liberals regard industry scientists as shills. But here’s what GSS says about partisanship & industry vs. university scientists . . . .

He may be fair to liberals, but I do not think that his characterization of conservatives would pass an ideological Turing test.

If I may attempt to speak for those of us on the right, my views would be:

1. When it comes to public relations, industry scientists have an incentive to twist the truth. However, when business decisions are affected by scientific analysis, the incentive leans much more toward aiming for truth.

2. In academics, the incentive is to increase one’s prestige. Aiming for truth is not always the best strategy. In fact, based on my own bitter experience, in economics the best strategy is to surf the latest fads. In my day, it was rational expectations, and I was not on board (pun intended). More recently, we have had behavioral economics, natural experiments, and such. There are probably some current fads that I could willingly join, but not at this stage of my life.

3. In the particular area that most interests Kahan, which is climate change, I trust neither the incentives in industry nor in academics. Obviously, if you work for the coal industry, your incentive is to find low estimates for the environmental impact of carbon dioxide emissions. But if you work in academia and you happen to find low estimates for the environmental impact of carbon dioxide emissions, good luck to you if you hope to win prestige.

What is the Meaning of Credibility?

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A recent survey of leading economists, called the IGM forum, asked two questions about CBO forecasts.

Question A: Forecasting the effects of complex legislative actions is hard, so even competent, non-ideological and non-partisan projections could differ substantially from outcomes.

Question B: Adjusting for legal restrictions on what the CBO can assume about future legislation and events, the CBO has historically issued credible forecasts of the effects of both Democratic and Republican legislative proposals.

The answers were overwhelmingly affirmative for both. I have been following the IGM forum for years, and you rarely see such a strong consensus.

What does the term “credible” mean?

Does the affirmative answer to question B mean that the forecasts are accurate enough that policy makers should take them seriously? John Whitehead seems to think so. Pointer from Mark Thoma.

Or does the affirmative answer to question A mean that the forecasts are not accurate enough to reliably guide policy? Russ Roberts and I would tend to think so.

Anyone, including Russ or me, who criticizes economic methods faces the following argument.

1. Policy has to be based on some model and some forecast.

2. A formal model or a statistical forecast is more rigorous than intuition/opinion.

3. Therefore, the best approach is to use formal models and statistical forecasts.

I think that the problem comes in the way that one interprets point (1). Consider two possibilities:

1a. Policy has to be based on a “model” and a “forecast” which rule out any empirical analysis of how policy is formulated and implemented. Also, the “model” and the “forecast” can ignore the possible evolutionary responses of decentralized activity, including possible emergent market solutions to the problem that the policy is intended to solve, as well as innovations responding to the policy that mitigate its effects or that produce unintended adverse consequences.

1b. Policy has to be based on a “model” and a “forecast” which do take into account empirical public policy and dynamic market responses to the original problem and to the proposed solution.

If we interpret point 1 as “1b,” then I accept the logic that a model is better than no model and a forecast is better than no forecast.

If we interpret point 1 as “1a”, then the argument is a swindle. Models that ignore empirical public policy and dynamic market responses are not necessarily better than intuition/opinion, and they should not be regarded as credible.

Taking into account these requirements for credibility, CBO forecasts are not credible. Using them may very well do more harm than good.

Household Production, Continued

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The insightful Handle writes,

free YouTube videos combined with cheap and quick home delivery of tools and parts have made my own home, computer, and auto repairs much more worth my time than trying to arrange for an experienced professional.

I get it that having a YouTube video that tells me how to fix my toilet can lower the time it takes me to do it myself. But the Internet also makes it easier for me to find a cheap handyman. Overall, I think that my propensity to spend time fixing things myself has gone down rather than up over the past decade. Not that it was very high to begin with.

Another commenter writes,

I think Prof. Kling misunderstood Prof. Cowen’s point. Less household production as share of GDP is not necessarily a bad thing and the best number may very well be 0%.

However, household production is generally not included in the GDP figures, even though it arguably should be. If actual GDP, including household production, used to be 37% higher than measured GDP, but now is only 20% higher than measured GDP, then the growth in actual GDP over the period has been even lower than the pretty dismal numbers we are observing.

Hence, this statistic supports Prof. Cowen’s hobby horse of the Great Stagnation, regardless of how one feels the ideal percentage of GDP household production ought to be. I think he is right on this point.

In a follow-up, the commenter writes,

My neighbor and I live in identical houses and we are equally messy. Initially, we both clean our own houses and nothing is added to measured GDP.

Then we decide to pay each other $100/week to clean each other’s house. Suddenly, measured GDP is $10k/year higher than it used to be. But economically nothing has changed. This suggests that we ought to include our cleaning labors in GDP regardless of whether we clean our own houses or each other’s.

I think this is misleading. I prefer to look at it this way:

1. Suppose you are willing to pay me $100 for 5 hours of cleaning services. Then that puts a value on my time of $20 an hour.

2. Now, suppose that I decide to spend 5 hours cleaning my own house. You want to say that I have produced $100 of output.

3. I would say instead that the 5 hours I spend cleaning my own house is a waste of time!

Maybe if you assume that the most valuable work I can do is cleaning houses, then you are sort of right. But if I am a surgeon, then you are pretty much wrong. And I claim that as an economy gets more efficient at using specialization, you become less and less right and more and more wrong.

In terms of comparing well-being now with well-being 50 years ago, suppose that most of the reduction in housework is due to the prevalence of permanent-press clothes rather than having to iron them. Suppose that our entire (market-based) GDP consists of shirt production. It would be really nice if the GDP calculation subtracted the need for ironing from the cost of today’s shirts. But it could only show up as a quality adjustment that I suspect is too sophisticated to be captured in the statistics.

Suppose that actual shirt production remains the same as it was 50 years ago. Then measured GDP might be the same, also (it could be a little higher, if the statisticians pick up some of the quality adjustment). But the alternative concept, of GDP + household production, has gone down from 50 years ago, because we have stopped ironing. To me, that makes GDP + household production a stupid concept. It has things exactly backwards.

If you are going to add anything household-related in GDP, it ought to be leisure, not housework. If you show me that leisure + GDP is not growing very much, then I would count that as an argument for a Great Stagnation. But I am not the least bit persuaded by a measure of GDP + housework.

The Cato Institute on the Future of the Free Society

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They write,

We have reached out to leading thinkers and challenged them to answer the following questions: What are the most pressing challenges that free societies face in the coming years? What is the most important reason for optimism about the free society? What is the most important but still unappreciated idea that lies just ahead? What’s the most important thing that you have learned about free societies that you wish you knew all along?

By “leading thinkers,” they mean only Tyler Cowen. Evidently not me. But here is how I would answer.

I would start with the last question. I think that the most unappreciated idea is that ideas are underappreciated. As I have said before, the social sciences disciplines that study human society are too materialistic. They try to base their explanations and interpretations on material conditions. In economics, it is the rare Joel Mokyr or Deirdre McCloskey who will recognize the significance of the mental-cultural world. Recall also my essay on cultural intelligence.

The most pressing challenges that free societies face are the David Brin challenge and Fear Of Others’ Liberty.

The David Brin challenge is that we live in a world where surveillance is increasingly feasible and arguably necessary. The challenge is to avoid a dystopia of asymmetric power, in which the state has surveillance capability but the ordinary citizen does not. Brin’s distinctive recommendation is to increase the surveillance power of the citizen, rather than make what he predicts will be a futile attempt to reduce the surveillance power of the state.

FOOL makes it possible for politicians to sell the public on policies that take away freedom. People are afraid of what will happen if other people have economic liberty, such as the liberty to decide on a mutually acceptable wage or the liberty to decide what they want in terms of health insurance or the liberty to purchase products from other countries. etc.

Historically, sometimes we overcome FOOL (as in the American founding), and sometimes FOOL overcomes us (as in American slavery and Jim Crow laws). The present day strikes me as a time when FOOL is ascending, both on the right and on the left. Roughly from 1960 through 2000, on the left there was a trend toward increased support for freedom of expression and market economies. That trend has reversed. Today, we have the leading edge of the left openly advocating for suppression of others’ speech and for socialism. To me, this means that the mental-cultural sky is darkening. That bodes ill for the future, especially for when the left returns to power. Which is bound to occur, probably sooner than most people currently expect.

A reason for optimism? In 2017??? Twenty years ago, I was optimistic that the Internet would empower individuals relative to big corporations, government, and the education establishment. I guess that the most optimistic thing I could say is that maybe it will still turn out that I was right then and that I am wrong now.

Household Services: I have a different take

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Timothy Taylor reports,

The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP.

Tyler Cowen implies that this is a bad thing.

I think of it this way.

“Household production” is inefficient. In the limit, if you produced everything you consume and consume nothing that you do not produce, then you will be at subsistence level–if you are lucky. Our standard of living depends entirely on specialization and trade.

If a surgeon mows her own lawn, it means either one of two things.

a) she likes to mow lawns, so this represents consumption; or

b) this is a market failure, and she would much rather get paid for doing another surgery and use that money to pay for lawn mowing and other things, but for some reason she cannot.

What the Commerce Department is doing is imputing a value to the time that people waste doing housework. All that tells us is the value is lost by not enabling those people to engage in specialization and trade instead of doing housework. It is a measure of market failure.

And of course this imputed (i.e., artificially made-up) value has gone down relative to GDP, because people (women, mostly) are spending less time on housework and more time engaged in specialization and trade. This means that there is less market failure nowadays than there was back then. We should be happy that the number is going down, and we should hope that it heads toward zero.

Health Insurance: Where are the Goal Posts?

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David Cutler writes,

Eighty-four percent of medical spending is for the 50 percent of people with at least one chronic disease; half of spending is for the 16 percent with three or more chronic conditions. People with chronic diseases know they will have them forever; those without have a low chance of contracting one in any year. Nearly half of people who are in the top 10 percent of spending in one year are in the top 10 percent the next year.

The central question for health policy is who should pay for the predictably expensive.

With these statements, David Cutler has not just pushed the goal posts on health care policy a few yards in one direction. He has moved them to the other side of the field.

Everyone is talking about how many households have insurance and acting as if the main challenge is to get healthy people to buy insurance. If Cutler is right, then health care policy boils down to:

1. Finding a fair way to share financial the burden of chronic illnesses. (Obviously, “fair” involves value judgments.)

2. Putting resources into public health measures and efforts to induce people to comply with behavioral advice that would help to prevent chronic illness.

If Cutler is right, then it seems to me that Obamacare and its relatives are beside the point. And I believe that he is right.

See also Benjamin Domenech, who writes,

By providing catastrophic care for all, President Trump could ensure that everyone has an ultimate backstop against medical bankruptcy, while freeing the states to experiment with options for reform. It would also enable the private sector to offer new insurance products to supplement the basic catastrophic care coverage.

That strikes me as much closer to the correct policy than either Obamacare or Repeal-ish. It certainly aims more squarely at the goal posts as placed by Cutler.

Sociologists and Humility

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Neil Irwin writes,

If the White House Council of Social Advisers did exist, one of its great challenges would be to convert some of these findings into actual policy proposals that might help. Part of the ascendance of economics in the policy-making sphere comes from the fact that economists tend to spend more time looking at specific legislative or regulatory steps that could try to improve conditions.

And trying to solve social problems is a more complex undertaking than working to improve economic outcomes. It’s relatively clear how a change in tax policy or an adjustment to interest rates can make the economy grow faster or slower; it’s less obvious what, if anything, government can do to change forces that are driven by the human psyche.

He is referring to sociological research that shows, for example, that the decline in blue-collar jobs has an effect on men’s sense of identity. In the article, the sociologists come across as jealous of economists, because policy makers respect economists.

I do not think that economic advice is necessarily better than advice based on sociology. I disagree with Irwin that economic issues are more clear-cut.

I do believe that economists have less humility than the sociologists. I would actually score that as a point for sociology.

On the other hand, sociology is blinded by ideology. Sociologists only want to interpret the world through the lens of power and privilege. That is their hammer, and everything looks to them like a nail.

Economists as individuals may be no less ideological. But the profession as a whole has much more ideological diversity than does sociology. That may not last. I believe that the trend is for conservative economists to fall in status, and if this keeps up, academic economics will look like sociology in another decade or two. In the meantime, I hope that economists somehow develop the humility of sociologists, but I fear that may not happen.

Health Care Vs. Rationality

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A commenter wonders,

I’ve never been told by my doctor “This medicine will cost you 47.50. It will only help 25% of the time. After 10 days your ailment may cure itself.”

Why is this not mandated?

A reader asks (referring to the prices for medical services),

How are people supposed to make decisions/ration their savings (if they have any) when no one can give you a straight answer about how much things cost?

In the United States, about 90 percent of health care spending is paid by third parties. The remaining 10 percent is called out-of-pocket. We have one of the lowest rates of out-of-pocket spending the world, even lower than that in Canada and other countries with more socialized systems.

Much of what seems economically irrational about health care comes from this use of third-party payments. Doctors do not themselves make hard-headed probability calculations, much less give patients the information to make such calculations. Prices are hidden from patients. We waste a lot of money on medical procedures that have high costs and low benefits.

It is natural for economists, like me, to suggest that the way to make the system more rational is to reduce the extent of third-party payments. In my book, Crisis of Abundance, I offered suggestions for reducing third-party payments from 90 percent to 50 percent. I do not think you can reduce them much below that. A large share of health care spending is on a small fraction of the population where the cost of treatment is high, and some combination of government/charity and health insurance is inevitable in those cases. Also, there are people who are so poor that somebody else has to pay for even basic health care for them.

Why do we have a system with such a high proportion of third-party payments? I do not think it is because some evil demon foisted it upon us. I think it is because people like it.

Fifty years ago, doctors liked it, because it encouraged demand. In those days, there were not so many expensive treatments out there, and insurance companies could operate by approving pretty much anything the doctor ordered and paying whatever were the “usual and customary” rates. More recently, as health care costs have started to take a larger and larger share of worker compensation, insurance companies are starting to negotiate harder, and friction is growing between doctors and insurance companies. Still, most doctors would rather take insurance than give up on it altogether. As frustrating as it can be, it is still less trouble than dealing directly with patients on money matters.

I also think that there is a status issue involved. If the doctor does not have to talk about price with the patient, then the doctor is in the position of offering “the gift” of health care. That gives a doctor higher status than that of somebody who is selling you something.

Another point is that when we need health care we are vulnerable, and there is resentment involved in having to pay when you are vulnerable. We feel the same way about charging interest to people who are desperate for money. 2000 years ago, if the only lending had been to growing corporations, then nobody would have complained a bit about the practice of charging interest. Instead, usury was declared a sin because borrowers tended to be people in desperate straits. Even today, the sense of outrage at making vulnerable people pay interest can be seen in the stigma attached to payday lending. Similarly, if you break your arm, having to pay thousands of dollars in hospital bills feels cruel.

Let me repeat Josh Barro’s point that health care is 1/6th of our economy but nobody wants to spend 1/6th of their income on it. When health care spending was lower as a share of GDP, we had the luxury of setting up a system dominated by third-party payments, without the insurance companies or the government imposing difficult restrictions on what procedures could be approved or what doctors could receive in compensation. But health care spending has gotten to be too large a fraction of GDP to be handled that way. The system is bound to change, and the change is bound to feel uncomfortable to many people.