Monthly Archives: May 2017

Losing health insurance that you do not want

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Tyler Cowen writes,

many of the poor do not value health insurance nearly as much as many planners feel they ought to, in large part because they are already getting some health care.

He quotes from the abstract of a paper by Amy Finkelstein, Nathaniel Hendren, and Mark Shepard. They conclude that most low-income people would not choose to pay for health insurance if they had to. My thoughts:

1. I would be careful about concluding that people do not value health insurance based on their preferences when their incomes are low. Perhaps if you raised their incomes a lot, they would value health insurance more highly.

2. Almost 15 years ago, I wrote an essay called Health Insurance Do-nots. I recommend it as relevant to the current discussion.

3. While people with low incomes get above-board subsidies for health insurance, many people with high incomes get subsidies, also. Government workers, for example. Or people who get employer-provided health insurance, which is subsidized through the tax system.

4. If my wife and I could be assured of paying the same price for medical services that our insurance company pays, we would be much better off self-insuring than getting our Obamacare insurance. If you cumulate over 5 years, we would have to incur well over $100,000 in medical procedures in order to make back our premiums/deductibles under Obamacare. And note that we separately pay for our own long-term care insurance, which addresses the biggest health-related financial risk that we face.

Measuring Output of the GDP Factory

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Martin Feldstein writes,

More generally, as Triplett and Bosworth (2004) note, the official data imply that productivity in the health industry, as measured by the ratio of output to the number of employee hours involved in production, declined year after year between 1987 and 2001. They conclude (p. 265) that such a decline in true productivity is unlikely, but that officially measured productivity declines because “the traditional price index procedures for handling product and service improvements do not work for most medical improvements.” More recent data show that health sector productivity has continued to decline since 2001.

When you think of a factory producing, say, slate shingles, measurement of output is pretty straightforward. That makes measurement of productivity pretty straightforward.

Now introduce a second good, iron nails. These are produced in a different factory, but the idea of aggregation is to treat the economy as if it were a single GDP factory producing shingles plus nails. Of course, if you measure output as shingles plus nails, you will get strange results. If the economy produces 1 less shingle and 101 more nails, the total goes up by 100. But you do not know if the value of what was produced went up at all.

To obtain a more reasonable measure of total output, the statisticians take a weighted average of nail production and shingle production, where the weights are based on relative prices. If one shingle sells for $1.01 and one nail costs $.01, then producing 1 less shingle and 101 more nails results in no change to total output.

But using relative prices this does not completely solve the problem. Relative prices can change. Then you have to decide whether to base the weights on last year’s prices, this year’s prices, or some combination of the two.

But choosing a relative-price base year does not completely solve the problem, either. Relative prices can change because of quality change. Suppose that this year the shingle maker produces shingles that are more durable than the shingles produced last year, but charges the same price. Because quality has gone up, the relative price has gone down. Will the statisticians capture this?

Think of what you are trying to accomplish with these sorts of measurements. You might start by asking for any particular product how many hours a low-skilled worker would have to work in order to obtain that product. Brad DeLong once calculated that five hundred years ago it would take someone about three days in order to obtain the equivalent of one bag of flour. For today’s low-skilled workers in the U.S., this would take only a matter of minutes.

But then, how do you take a weighted average over many products? What do you do about quality change? How do you value new products?

Next, you have to note that people with more skills have higher wages, which reduces the number of hours that they must work to obtain the same goods. As the skill mix of the population changes, how do we want that to affect our measure of the productivity of the GDP factory?

In my view, the attempt to treat the economy as a GDP factory is bound to be very far from precise. It always amazes me when economists take seriously a concept like “the change in the trend rate of productivity.” The level of productivity is a very imprecise measure, for the reasons sketched above. When you measure the growth rate of productivity, you necessarily boost the noise to signal ratio. Then, when you measure the change in the rate of productivity growth rate of productivity, you once again boost that noise to signal ratio, to the point where you are pretty close to talking nonsense.

Neoliberalism vs. Boboism

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Tyler Cowen recently linked to some interpretations of the 2016 election that differ from mine.

My most pronounced views are:

1. Be careful not to over-interpret the election. It was very close. Had the ball bounced differently, we would be reading few essays about the populist revolt and many essays about the political strengths of Mrs. Clinton and the Democrats. I believe that the election of President Obama was assigned excess significance by pundits, and I believe that the election of President Trump is being assigned excess significance squared.

2. I believe that the best interpretation of the populist revolt is that it reflects anti-Bobo sentiment. Bobo, of course, is David Brooks’ shorthand for bourgeois bohemian. It describes those of us who are well educated, well off financially, socially liberal in outlook, bourgeois in important respects, and bohemian in superficial respects. In his book published in 2000, Brooks painted a mostly favorable portrait of the Bobos.

However, it turns out that many Bobos became increasingly smug about their cosmopolitan social morality, to the point of not being able to hide their contempt for those who do not adopt the Bobo ethos. They became moral narcissists, meaning that

What you believe, or claim to believe or say you believe—not what you do or how you act or what the results of your actions may be—defines you as a person and makes you “good.”

One of Tyler’s links goes to Andrew Sullivan.

Modern neoliberalism has, for its part, created a global capitalist machine that is seemingly beyond anyone’s control, fast destroying the planet’s climate, wiping out vast tracts of life on Earth while consigning millions of Americans to economic stagnation and cultural despair.

I have grown wary of the term “neoliberalism.” It gets used as an undefined all-purpose boo-word. Want to explain the financial crisis? Blame neoliberalism. Want a simple theory to explain the phenomena cataloged in Coming Apart and Our Kids? Blame neoliberalism. Upset that Donald Trump won the election? Blame neoliberalism.

The term also comes up in the other essay to which Tyler links, by Henry Farrell.

They also provide, potentially a diagnosis of what has gone wrong since the 1980s. Embedded liberalism is dead, and neo-liberalism has triumphed in its place.

If neoliberalism is the ill-defined boo-word, then social democracy is the ill-defined yay-word, which Farrell employs enthusiastically. He all but insists that social democracy is what Trump voters really need, and they just need to learn what is good for them.

Again, I read the election differently. The way I see it, in 2016 there were some voters in key states who decided that they would be better represented by an anti-Bobo in the White House.

Advertisement for Three Languages of Politics

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Do you think it will get anyone interested in ordering it?

I tend to doubt it, but I am pretty pessimistic about the book’s prospects in general. I’m proud of the book, but the most avid audience for political books won’t like it and the people who would most like it (other than you folks, of course) are not the most avid about politics.

Tyler Cowen and Russ Roberts

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Self-recommending. As usual, Russ does not just throw softballs at the guest, so you get more interesting at-bats. For example,

[Russ]: I don’t sense the distinction between a less dynamic, more stable economy and a complacent one. So, tease that out a little bit for us.

[Tyler]: In a lot of the late 19th century it’s not even clear according to the numbers that our rate of productivity growth was always so high. Yet American society was not complacent. We had a frontier mentality, an immigrant mentality; we were very likely to move across state lines; we were willing to accept a lot of risk. And that in turn helped us later on, get the rate of productivity growth up higher. But I see today it’s a culture where younger people are more willing to keep on living with their parents, less interested in buying a car, more likely to aspire to being on Disability as a kind of future, and less interested in, you know, protests and social change than, say, they were in the 1960s or in the 1970s. Those to me are all signs of complacency.

And by the way, today the new edition of my Three Languages of Politics is available.

What I’m Reading

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Two books that attack conventional economic modeling, especially in light of the financial crisis. I have a preview copy of Economics for Independent Thinkers, by Daniel Nevins. I have a review copy of The End of Theory, by Richard Bookstaber. I am likely to recommend the former. The latter is certain to make it onto my list of “best books of the year.”

It is interesting that both authors have backgrounds in applied option pricing. So do I. Is it a coincidence that we all ended up taking heterodox positions? If you toss in Fischer Black and Nassim Taleb, you start to wonder if there isn’t something in the option pricing water.

A reader points to Diane Coyle’s negative review of Bookstaber. She writes,

his complaints about economics are both wearily familiar territory and decreasingly true; economics is and has been changing a lot. In finance specifically, think of Andrew Lo’s new book, Adaptive Markets.

I disagree with her on all counts. One indication that Coyle has missed the point is that she thinks that Bookstaber’s critique applies only to macro/finance. I can readily apply it to the way economists model the demand for health insurance, the demand for home ownership, and principal-agent contracts, among other microeconomic phenomena.

I am drafting a review essay, which reads in part,

If I could reduce it to a bumper sticker, it would read, “Stare more at the world and less at your model.”

…All of the major fields in economics are inclined to follow strict technical procedures at the expense of realism. In the 1500s, if mapmakers had been similarly inward-looking and rigid, they would have continued to draw maps of the globe that ignored the lands discovered by Columbus and subsequent explorers, insisting that “The state of cartography is good.”

Turning to a relatively minor passage that resonated with me, here is Bookstaber’s description of the role of collateral in repurchase agreements and derivative bets on p. 159:

Let’s say your bookie demands that you put up $20,000 of collateral for a marker on a $15,000 bet. You give him your gold Rolex watch, worth $20,000. He comes back to you a week later and tells you that you need to put up another $3,000. Why? “People, they aren’t so much interested in these Rolexes anymore. It’s marked down to $17,000.” …You say, “Wait, I see prices for watches just like it, anywhere from $20,000 to $24,000.” He says, “Hey, do you owe them money or do you owe me money? You’ve got the marker, and I’ve got the watch, and I say that today it’s worth $15,000.”

By appraising collateral, notably mortgage securities, at low values, investment banks like Goldman Sachs caused runs on other firms. Gary Gorton termed it the “run on repo.”

[note: the following paragraph is my own. Although I cannot confirm that Bookstaber would endorse it, to me it seems likely that he would.]

But it was not just repo. The run on AIG was to demand collateral for credit default swaps. Think of a credit default swap as flood insurance and think of collateral as used because you don’t entirely trust that the insurance company will have the wherewithal to pay off. You have a house near a river, and when you get flood insurance you have the insurance company give you some Treasury bills as collateral, until the insurance policy expires. Then, a big rain comes, and the river starts to rise. Your house is still dry, but you are more worried, so you ask for more Treasury bills as collateral. That is what Goldman Sachs and the other investment banks did to AIG during the crisis. As it turned out, most of the houses never got flooded (that is, most of the bonds that AIG insured did not default), but the demands to put up more safe securities as collateral became impossible to meet, especially because similar demands were being made all over Wall Street for firms engaged in derivatives and repurchase agreements.

The quoted passage does not in any way capture the book’s larger, more ambitious theme. I was struck by it because it fit my understanding of what happened, which policy makers at the time seemed to me to miss. Had they been cognizant of the real problem, they would have applied a remedy closer to the one that I was proposing at the time. I called this the “stern sheriff” model, and it would have meant telling Goldman and other firms to stop making their outlandish collateral calls.

College women and the future of economics

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Catherine Rampell writes,

The shrinking of the middle is largely due to a recent rise in the share of women (who also represent a majority of college students) who identify as either liberal or far left. The share of female respondents, but not male respondents, who describe their political views this way was at an all-time high (41.1 percent for women, 28.9 percent for men).

Pointer from Tyler Cowen. Note that this survey is of incoming freshmen and freshwomen.

My hypothesis is that these left-leaning women (and men) use small-community intuition in arriving at their political beliefs. They want the relationship between government and citizen to be one of parent and child. They want to see communal sharing, as if we lived in luck village rather than effort village.

When I went to college, I was on the far left. Those views began to change, in part because taking an economics course shifted my paradigm from small-community intuition to thinking about a complex society in more systemic terms. I am not sure that today’s young leftists will undergo a similar transition.

1. In the systemizer-empathizer dimension, women are more likely than men to lean toward empathizer. Empathizers probably will be less likely to take an economics course, less likely to enjoy an economics course, and less likely to be affected by an economics course.

2. I think that economics courses are going to tilt left and toward empathizers. I have an essay forthcoming in which I suggest that in a few decades economics may turn into a left-wing ideological monoculture comparable to sociology today.

A poem to celebrate decentralized order

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Russ Roberts wrote and produced this 6-1/2 minute video. Once again, his creativity, risk-taking, and use of media are a triumph.

I believe that the challenge that economists face in promoting pro-market views is overcoming small-community intuition. If your mental model of society is that it is a family or a small community, then your intuition will not supply any benefits for markets. I think that in order to appreciate markets, you have to understand three things.

1. If a society were limited to a small, self-contained unit, such as a family or a village, it would necessarily have a primitive economy.

2. The coordination problems in a large-scale society cannot be solved the way that coordination problems can be solved in small-scale society. In small-scale society, direct observation of other people and intuition will get you a long way. That is not true in large-scale society.

3. Prices, competition, and creative destruction are an elegant solution to the economic coordination problem in large-scale society.

The poem emphasizes point (3). That is in some ways the most difficult point to explain. But I think you need to walk people through all three points, and even then they may still not be convinced.

Jonathan Haidt’s six-step program

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for viewpoint diversity on campus. The steps include

Look inside the mind. Learn a little bit of psychology to see the tricks the mind plays on us, making us all prone to be self-righteous, overconfident, and quick to demonize “the other side.”

Understand the moral matrix. Learn how each team or tribe builds a comprehensive worldview that can explain everything, while making it harder for its members to think for themselves.

Venture beyond your moral matrix. Step outside your own moral matrix by exploring the mindsets, perspectives, and principles of progressives, conservatives, and libertarians.

Pointer from Tyler Cowen.

I think that my book, The Three Languages of Politics, does a good job with these three steps. For the remaining steps, Haidt’s other resources are needed. My book will be out in two days, and it is available now for pre-order.

Firm, Soft, Militant, Moderate

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Suppose that your beliefs can be firm or soft, and that your tone can be militant or moderate. This yields a matrix:

Firm Soft
Militant True Believer Tribal
Moderate Principled Weathervane

The True Believer expresses anger and contempt for those who disagree.

Tribal means that you care most about group status. An example would be an economist who is a deficit hawk when one party is in power but a deficit dove when the other party is in power. Or an economist who uses a high estimate of labor demand elasticity when arguing for more immigration and a low estimate of labor demand elasticity when arguing for a higher minimum wage (or an economist who does the opposite).

Principled means that you care more about your beliefs than about tribal loyalty. However, you are willing to tolerate and even respect people who disagree.

Weathervane means that you want to just “go along to get along,” to please people and further your ambitions.

1. David Brooks, in Bobos in Paradise (2000), seems to me to have suggested that people with firm beliefs tend to have to be militant in tone in order to be successful as public intellectuals. That is, the public does not respond to the category I call Principled as well as it does to the category I call True Believer. People may even mistakenly treat a militant tone as a signal of firm beliefs.

2. I think that in the media, the biggest growth over the past twenty years has been in the Tribal category. The other categories are losing out. Both the strong pro-Trump camp and the strong anti-Trump camp strike me as Tribal.

3. I am disturbed by the increasing use of violence and speech suppression by the True Believers on the left.

4. You can argue that the Weathervane category is what holds the country together. Politicians who can change with the mood of the country and compromise make democracy more comfortable than politicians who stick to their guns. Many people look at Macron in France as a sort of Weathervane savior.

My bottom line is that I like the Principled category the most and the Tribal and True Believer categories the least. I lament that the media culture rewards and amplifies militants over moderates.