Health Policy Proposals

From a RAND paper.

The first five options would decrease costs and risks of inventing new products or
obtaining regulatory approval for products that would advance our two policy goals.

1. enabling more creativity in funding basic science
2. offering prizes for inventions
3. buying out patents
4. establishing a public interest investment fund
5. expediting FDA review.

The last five options would increase the market rewards for inventing products
that would advance our two policy goals. These options are
1. reforming Medicare payment policies
2. reforming Medicare coverage policies
3. coordinating FDA approval and CMS coverage processes
4. increasing demand for products that decrease spending
5. producing more and more-timely technology assessments.

Pointer from Timothy Taylor, who comments

I confess that as I look over their list of policy recommendations, I’m not sure they suffice to overcome the incentives currently built into the U.S. healthcare system.

The Book on SecStag

Timothy Taylor writes,

Coen Teulings and Richard Baldwin, who have edited a useful e-book of 13 short essays with a variety of perspectives on Secular Stagnation: Facts, Causes and Cures. In the overview, they write: “Secular stagnation, we have learned, is an economist’s Rorschach Test. It means different things to different people.”

Read his whole post.

The interesting secular trends include low real interest rates, low productivity growth, and declining labor force participation among prime-age workers.

From a conventional AS-AD perspective, low real interest rates are a demand-side phenomenon. The other two are supply-side phenomena. I wish the secstag folks would get together and sort this out.

I think that the most important secular trends are:

1. The New Commanding Heights. That is, the shift in the economy toward a lower share of goods consumption and a higher share of consumption of education and health care services. The New Commanding Heights are sectors in which productivity is difficult to measure and government interference is rampant.

2. The Great Factor-price Equalization. That is, the ability of workers with a given level of skills in China and India to compete with workers of equivalent skills in the U.S. This benefits the median worker in China and India as well as high-skilled workers in all countries, but it threatens the median worker in the U.S.

3. Vickies and Thetes. Or what Charles Murray calls Belmont and Fishtwon. In the U.S., there is extreme cultural sorting going on. People with high intelligence and conscientiousness are moving in one direction, and people who are low in those traits are moving in the other direction.

I think that (1) explains the low productivity growth. It could be partly a measurement problem and partly a problem of government putting sand in the gears.

I think that (2) and (3) explain the labor force participation problem.

What about low real interest rates? This one has puzzled me for a decade. Is it possible that (1) is the explanation? That is, the New Commanding Heights are not nearly as capital-intensive as the old commanding heights of steel, electric power, and transportation. Also, investment may be deterred because of the way government affects these sectors.

Good Sentences from Timothy Taylor

He writes,

I fear that most people have reacted to Dodd-Frank as a sort of Rorschach test where the word “financial regulation” are flashed in front of your eyes. If you look at those words and react by saying “we need more financial regulation,” then you are a Dodd-Frank fan. If you look at those words and shudder, you are a Dodd-Frank opponent. odd-Frank allowed a bunch of pro-regulation Congressmen to take a bow by passing it, and a bunch of anti-regulation Congressment to take a bow by opposing it. But for those of who try to live our lives as radical moderates, the issue isn’t to be generically in favor of regulation or generically against it, but to try to look at actual regulations and whether they are well-conceived. In that task, the Dodd-Frank legislation mostly used fairly generic language of good intentions, ducked hard decisions, and handed off the hot potato of how financial regulation should actually be written to others.

He points to the fact that many of the rules called for by Dodd-Frank had yet to be written four years after the law passed. He also notes,

A completed rule doesn’t mean that business has yet figured out how to actually comply with the rule. For example, there is a completed rule which requires that banking organizations with over $50 billion in assets write a “living will,” which is a set of plans that would specify how their business would be contracted and then shut down, without a need for government assistance, if that situation arose in a future financial crisis. The 11 banks wrote up their living wills, and the Federal Reserve and the Federal Deposit Insurance Corporation rejected the plans as inadequate. They wrote up second set of living wills, and a few days ago, the Federal Reserve and FDIC again rejected the plans as inadequate.

I have said many times that if the big banks are not going to be contracted and shut down now, then it is not going to happen during a crisis.

The Incentive to Invest

Timothy Taylor writes,

The very slow rebound in investment isn’t obvious to explain.

Read the whole thing. He walks through such explanations as uncertainty, difficulty obtaining financing, low aggregate demand (what Keynesians used to call the Accelerator Effect), and investment that has become less capital-intensive. On the latter, he writes,

it’s often a form of investment that involves reorganizing their firm around new information and communications technology–whether in terms of design, business operation, or far-flung global production networks. As a result, this form of investment doesn’t involve enough demand to push the economy to full employment.

All of these explanations are from a conventional AS-AD perspective. From a PSST perspective, I would look for bottlenecks, particularly in the service sector, where growth is most likely to occur. In the Setting National Economic Priorities Project, the following are considered possible bottlenecks:

–labor-market distortions, including high implicit marginal tax rates embedded in means-tested benefit programs
–the research/FDA approval/patent regime in medicine, given the state of the art in genetics and biochemistry
–the FCC spectrum regime, given the state of the art in spectrum utilization possibilities
–occupational licensing
–regulation of medical practice
–regulation/accreditation barriers to education innovation

The WSJ adds another layer to the mystery.

corporations used almost $600 billion in cash to buy back their own shares in 2013 and the uptrend continues into 2014. While that’s a positive trend for household wealth, it raises questions about companies’ commitment to move ahead with capital spending projects.

Remember the Tobin’s q theory of investment? It says that when stock prices are high relative to the value of existing capital, firms will invest more. Instead, we are seeing firms buy back stock to try to raise q.

This deserves more thought and analysis.

A Peevish Thought on Obamacare

Timothy Taylor writes,

Setting up a health insurance system that offers the right incentives to patients and providers for cost-effectiveness and innovation is a fundamentally difficult task, and those practical challenges don’t disappear just by invoking talismanic phrases like “universal coverage” or “single-payer.”

The worst thing about Obamacare is not the web site glitches or the employer mandates or even the high marginal tax rates. The worst thing is that the Obama folks regard catastrophic health insurance (what I call “real insurance”) as bad and they view “insurance” that covers every little expense as good. I think it’s the other way around.

Even if you think that people will skimp on checkups if they have catastrophic coverage, then the right policy is to subsidize checkups, not insulate them from the cost of all medical services.

I like to say that as individuals, we want unlimited access to medical services without having to pay for them. Comprehensive health insurance does offer that. However, collectively, that does not work. If medical services aren’t rationed by individuals making choices, they have to be rationed by bureaucrats.

That brings us to the Independent Payment Advisory Board, or what Sarah Palin called the death panels. The IPAB is the only economically meaningful mechanism for reducing spending under Obamacare. Fifteen bureaucrats in Washington will tell doctors and patients what to do and what not to do.

If Obamacare remains in place, then I predict that in ten years IPAB will be the most powerful agency in Washington. More powerful than the Fed, the NSA, or the IRS. In fact, the health care reformers on the left want it that way. Former Senator Tom Daschle explicitly said that we need something like the Fed to run health care.

Have a nice day.

Timothy Taylor makes a prediction

He writes,

ultimately, I expect that the growth in services trade will reduce pressures for protectionism. Instead of talking about hypothetical trade in hypothetical completed goods–like cars and computers–it will become clear that portions of the value-added are often being created in different places. Pushing for trade protectionism in the name of specific products made in other countries like cars or steel or televisions is one thing, but I’m not sure any similar protectionist movement will form to prevent, say, insurance record-keeping or checking diagnostic X-rays from happening in another country. In addition, countries will need to be wary of placing tariffs or other restrictions on imports, because many imports will be part of a global production chain, and domestic produces will be quick to point out how inhibiting their access to those global connections will injure the domestic economy.

He cites a paper by Prakash Loungani and Saurabh Mishra and points out that trade in services has been growing three times faster than trade in goods. I would make the additional prediction that the Great Factor-Price Equalization will continue.

Doubts on Solar

Timothy Taylor finds a study by Charles R. Frank, Jr. that tries to assess the cost of solar’s lack of reliability. Taylor quotes Frank:

we estimate that it would take 7.30 MW of solar capacity, costing roughly four times as much per MW to produce the same electrical output with the same degree of reliability as a baseload gas combined cycle plant. It requires an investment of approximately $29 million in utility-scale solar capacity to produce the same output with the same reliability as a $1 million investment in gas combined cycle.

Taking Gains as Leisure

The BLS’ Shawn Sprague writes,

workers in the U.S. business sector worked virtually the same number of hours in 2013 as they had in 1998—approximately 194 billion labor hours.1 What this means is that there was ultimately no growth at all in the number of hours worked over this 15-year period, despite the fact that the U.S population gained over 40 million people during that time, and despite the fact that there were thousands of new businesses established during that time.

And given this lack of growth in labor hours, it is perhaps even more striking that American businesses still managed to produce 42 percent—or $3.5 trillion—more output in 2013 than they had in 1998, even after adjusting for inflation.

Pointer from Timothy Taylor.

Some comments:

1. The gains in real well-being can be vastly under-estimated or over-estimated, depending on how well one adjusts for inflation and other factors, like un-measured consumers’ surplus and the greater variety of goods and services to choose from. My own view is that the gains are somewhat under-estimated.

2. There has been a large increase in leisure. How much of this is a welfare gain, though? My hypothesis is that many more people would work if government policy did not create so many disincentives to supply and demand labor. Just look at Social Security, with its huge payroll-tax disincentive for young people to work and its large subsidy to older people to consume leisure. If my hypothesis is right, then reducing these disincentives would lead to a lot more market work and a slower growth rate in leisure.

3. What accounts for the increase in leisure since 1998? The biggest factor is probably demographics, as many Baby Boomers have gone from prime working years to retirement years. Next, I point to factor-price equalization and to an increase in the wedge between compensation and take-home pay represented by health insurance costs. For the most recent five years, give some weight to Casey Mulligan’s narrative. A lot of economists would point to aggregate demand, but I no longer respect that concept.

Timothy Taylor on Economics and Morality

He writes,

After all, many academic subjects study unsavory aspects of human behavior. Political science, history, psychology, sociology, and literature are often concerned with aggression, obsessiveness, selfishness, and cruelty, not to mention lust, sloth, greed, envy, pride, wrath, and gluttony. But no one seems to fear that students in these other disciplines are on the fast track to becoming sociopaths. Why is economics supposed to be so uniquely corrupting?

I think that economics is singled out for opprobrium because of the way that it challenges the intention heuristic. The intention heuristic says that if the intentions of an act are selfless and well-meaning, then the act is good. If the intentions are self-interested, then it is not good.

The intention heuristic is what generates the veneration of non-profits. One can readily suppose that the intentions of a non-profit are better than those of a for-profit institution. Accordingly, it seems morally superior to work at a non-profit. However, once one drops the intention heuristic, the case for non-profits becomes much weaker.

I think that the ability to think beyond the intention heuristic is very important in social and political philosophy. However, there are many people who are heavily invested in the intention heuristic, and it is my hypothesis that such people are anxious to discredit economics.

Occupational Licensing and Anti-trust

Aaron Edlin and Rebecca Haw write,

Some recent additions to the list of professions requiring licensing include locksmiths, beekeepers, auctioneers, interior designers, fortune tellers, tour guides, and shampooers.

They argue that when licensing boards are made up of professionals who are currently licensed, they should be subject to antitrust laws.

Pointer from Timothy Taylor.

What to do about occupational licensing?

I think that the best idea would be to eliminate it. Instead of occupational licensing, have occupational certification. A consumer would still be free to accept services from an individual who is not certified.

Assuming that elimination of licensing is not going to fly, then I think that Congress should require states to accept licenses from other states except in cases where a fundamental difference in professional requirements exists across states. If being a dental assistant in Alabama is pretty much the same job as in Wyoming, then someone who is licensed in one state should be entitled to practice in the other. To deny the licenses from another state is a violation of the Commerce clause, which is intended to prevent states from setting up barriers to trade with one another.