Monthly Archives: March 2015

Sentences I Might Have Written

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from Megan McArdle:

1950s health care isn’t expensive; this same regimen would be a bargain at today’s prices. What’s expensive is things that didn’t exist in 1950. You can say that “health care” has gotten more expensive—or you can say that the declining cost of other things has allowed us to pour a lot more resources into exciting new health products that give us both longer and healthier lives.

In Crisis of Abundance, I wrote,

The American middle class can still afford the wonderful health care that was available in 1975–easily. . .as a thought experiment, a return to 1975 health care standards would completely resolve what is commonly described as America’s health care crisis.

You know, that book was written 10 years ago (it came out in 2006), and at the time I said it would have a shelf life of ten years, meaning that I thought that it would still accurately describe the issues for another decade. In fact, it is looking like it will be valid for another ten years. I would say that the majority of popular books on politics and economics expire much more quickly.

Four forces watch: In addition to the New Commanding Heights, McArdle’s essay also touches on the Demographic Divide.

while the college educated class seems to have found a new equilibrium of stable and happy later marriages, marriage is collapsing among the majority who do not have a college degree, leaving millions of children in unstable family situations where fathers are often absent from the home, and their attention and financial resources are divided between multiple children with multiple women.

Other sentences are reminiscent of The Reality of the Real Wage. There, I recycled a bit from my book.

My guess is that if you could find a health insurance policy today that only covered diagnostic procedures and treatments that were available in 1958, the cost of that policy would not be much higher than it was then. Much of the additional spending goes for MRIs and other advanced medical equipment, as well as for health care professionals with more extensive specialization and training than what was available 50 years ago.

I recommend McArdle’s entire essay. Brink Lindsey adds more statistics, such as

In 2011, 87 percent of kids who had at least one parent with a college degree were living with both their parents. For the children of high school dropouts and high school grads, the corresponding figures were 53 and 47 percent, respectively.

Finally, on this same topic, a reviewer (Francis Fukuyama) of an about-to-be-released Robert Putnam book writes,

One of the most sobering graphs in Our Kids shows that while the proportion of young children from college-educated backgrounds living in single-parent families has declined to well under 10 per cent, the number has risen steadily for the working class and now stands at close to 70 per cent.

Pointer from Tyler Cowen.

Lifted from the Comments

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1. On medical innovation.

The third party payment system seriously distorts the incentives. I worked as both a consultant and then an investment banker in the healthcare sector for 12 years, and this element of the business drove me bonkers. In my experience, the companies that succeeded are the ones who successfully gamed Medicare, Medicaid and other third party payors. True innovation had little to do with their success. The exception were those sectors of the healthcare that were dominated by private payors (e.g., cosmetic surgery, dentistry, etc.).

There are four major stakeholders: patients, providers (clinicians), facilities (hospitals), and payers. They have different objectives, criteria, and decision processes. Getting material innovations imbedded requires concurrence from at least a couple and often three or four of the stakeholders. Coming up with innovations that (1) work, (2) have evidence of the type that the different stakeholders respond to, (3) have an economic model that keeps all stakeholders at least whole if not better off is really hard.

Complicating factors include:
* Key parts are highly local & fragmented (providers and facilities)
* Heavy regulatory overhang (FDA is one of many constraints)
* Low margins in some sectors means higher barriers to change (don’t rock the boat, esp given the high % of stable-ish gov’t payers)
* Little data to measure & compare real functional outcomes (vs. process outcomes like infection or readmission)
* The science is hard. Cancer is a hundred little diseases depending on what processes break, even within a disease site (e.g., breast). ‘Curing’ one doesn’t touch the other 99. (And it’s hard to prove that you ‘cured’ that one)

In a fully open market environment, we might make progress on some of these issues. In the current one? It’ll be slow.

2. On how to study

I think I’ve mentioned this book here before, but a few years ago, I stumbled across ‘How to Study and Teaching How to Study’ by F.M. McMurry (1909). I certainly wish I’d been taught or found this book when I was student. To me, his 8 factors of studying are very useful in having a formula to punch through material that doesn’t come easy…One thing is for sure, McMurry’s opening paragraphs on the various study techniques of his fellow students when he was a boy could have been written yesterday about high school or even college students today.

On the topic of motivation, McMurry says that people will study intensively when they really need to learn something. His example is an Eskimo who needs to learn how to build an igloo in order to have shelter.

Lee and Rubio on Tax Reform

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They write,

by consolidating the corporate tax system into a single layer and lowering the maximum rate to 25% on both corporate and pass-through entities, our plan eliminates double taxation of capital gains and dividends, and establishes parity among large and small businesses. And under our proposal, firms with overseas operations will no longer be taxed twice (once abroad and again at home), but only in the country where income is actually earned.

They would also allow corporations to expense investment, rather than having to use depreciation schedules.

Danny Vinik adds,

They would eliminate just about every tax deduction, with the exception of the deduction for charitable giving and a reformed mortgage interest deduction (although they don’t say how it’s reformed). In return for eliminating the standard deduction, they would create a new $2,000 personal tax credit ($4,000 for joint filers).

Vinik notes that Lee and Rubio’s reforms on net would reduce revenue, thereby enlarging the deficit. Maybe you could offset that by abolishing some government departments and agencies.

Differences in College Completion Rates

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Timothy Taylor writes,

It turns out that if are someone from a family in the top-quarter of the income distribution who enters college, you are extremely likely to complete a bachelor’s degree by age 24; if you are in the bottom of the income distribution, you only have about a 22% chance of having a bachelor’s degree by age 24.

Read the whole thing. As he does so well, Taylor manages to locate an interesting report and extract fascinating material from it.

In terms of the Demographic Divide (one of the Four Forces), I think that the high-income college entrants are likely to have several advantages. First, they are more likely to have inherited high IQ and high conscientiousness. Second, their parents are more likely to have had their children after they were married and to have remained married after they had children. Third, the parents are likely to have better skills for identifying and dealing with their children’s needs. Finally, the parents have more financial resources to support the child. The report seems to emphasize only the last of these.

Labor Policy and Implicit Bias

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Commenting on a book about behavioral considerations in public policy, Jason Collins writes,

The opening substantive chapter by Curtis Hardin and Mahzarin Banaji is on bias – and particularly implicit bias. Implicit biases are unconscious negative (or positive) attitudes towards a person or group. Most people who claim (and believe) they are not biased because they don’t show explicit bias will nevertheless have implicit bias that affects their actions.

I think that thinking in terms of the oppressor-oppressed axis is an example of implicit bias. For example, labor policies, such as the minimum wage, are based on an implicit bias that workers are oppressed. I was reminded of this by a recent Tyler Cowen post.

I am often struck by the conflict between one supposition and one fact. First, employers are supposed to be reaping some big surplus from hiring unskilled labor. Second, when a downturn comes, it is unskilled labor who are laid off.

The three-axes model would explain the supposition as a form of implicit bias.

Should the CBO Use Dynamic Scoring?

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John Cochrane writes,

Greg Mankiw has a nice op-ed on dynamic scoring

The issue: When the congressional budget office “scores” legislation, figuring out how much it will raise or lower tax revenue and spending, it has been using “static” scoring. For example, it assumes that a tax cut has no effect on GDP, even if the whole point of the tax cut is to raise GDP.

My thoughts.

1. I am against dynamic scoring. Dynamic scoring means using an economic model. I think that politicians and the press give too much credence to economic models as it is. Even static scoring requires some modeling, but the modeling has more to do with spreadsheet arithmetic as opposed to claiming to be able to predict economic behavior.

2. To the extent that the CBO has to predict economic behavior, I think it should present several scenarios, as opposed to a point estimate or a range. Cochrane says it well:

It’s a fact, we don’t know the elasticities, multipliers, and mechanisms that well. So stop pretending. Stop producing only a single number, accurate to three decimals. Instead, present a range of scenarios spanning the range of reasonable uncertainty about responses.

Responding to another point from Cochrane, Mankiw writes,

you need to specify how the government is going to satisfy its present-value budget constraint. You might be tempted to ask the model what happens if the government cuts taxes and never does anything else. But you won’t get very far. The model will tell you that the government has to do something else eventually, and it won’t tell you what will happen if the government tries to do something impossible.

What I hear Greg saying is that to properly do dynamic scoring, you would need to include a model of future policy responses. That is a point well taken, but I am not sure that I would restrict those policy responses to be only doing things that are possible. Policy makers are doing impossible (that is, unsustainable) things now. The challenge is to predict the outcome of undertaking unsustainable policies until you cannot do so any more.

Of course, the traditional “static” scoring does not solve the problem of how to predict the outcome of unsustainable policies, either.

How to Become a Better Student

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As a teacher, I believe in triage. At the top, there are students who pick up the material with minimal effort. At the bottom, there are no-hopers who cannot seem to learn. In the middle are students where you think that some effort can make a difference.

In college, taking statistics or economics, I was one of the students who picked it up with minimal effort. On the other hand, as a folk dancer, I am a middle student. I am better than the no-hopers who never go beyond beginners’ sessions. But I am not as good as the dancers who can pick up a new dance right away.

Based on my experience with folk dancing, here is my advice to middle students.

1. YouTube is your friend! I encounter many dances that I wish I knew. Before YouTube, I had to muddle through and make mistakes, or give up altogether. Now I have been able to add some of these dances to my repertoire. Similarly, for statistics and economics, just about any concept you would want to learn has a YouTube video.

2. Give yourself more practice than you get from the teacher. Sometimes, a dance session leader will teach a dance for a couple of weeks, then forget about it for a couple months, then put it on again and expect students to remember it. This will leave me totally frustrated if I have been passive. But I can do something about it by practicing the dance on my own, in order to make up for the inadequate practice at the session. As a teacher, after I finish a unit, I often stop giving practice questions on that topic. When I do this, if students want to remember the concepts, they will have to practice on their own.

3. Identify your weak spots and work on them. You can keep doing a dance wrong week after week. Instead, make a mental note of the parts that give you trouble, then later go to YouTube until you have them ironed out. Similarly, if you got a problem wrong, come back to it and do it correctly several times.

4. When you watch someone doing something, articulate what they are doing. If you trying to learn a dance by following, try to say to yourself the steps that the person is doing. Saying “right, left, cha-cha-cha” helps you learn more thoroughly than if you simply follow along. Similarly, if a teacher is doing an exercise in statistics or economics, try to articulate the steps that the teacher is doing. (“Deciding whether this is a shift in demand or a shift in supply” or “using the binomial distribution” or somesuch.)

5. Make the subject seem really important to you. Think of someone you have had a crush on, and pretend that the way to get them to notice you is to become good at the subject.

Attention St. Louis

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I will be here on March 11.

The Discussion Club meets at the Racquet Club Ladue. Doors will open at 5:30 and the formal speaker introduction will begin at 6:00 sharp. The presentation plus one or two questions from the audience will finish around 6:45. Afterwards, members are invited to complementary hors d’oeuvres and drinks with the speaker from 7 to 8.

Talking about the four forces.

I don’t use slides, but if I did I would include this comic strip from Frank and Ernest.

Mixing Markets and Politics

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Randall G. Holcombe writes,

As Kolko (1963) describes it, private sector actors are not merely acting within the framework given by government constraints, the “major economic interests” are designing the constraints under which they act, so that they can retain their dominant positions. . .they sought government regulation and oversight to preserve the status quo

I would say that the forgotten history is that the regulatory state began as an attempt to rein in competition. The idea of pro-consumer regulation only emerged in the latter part of the New Deal. From the start of the Progressive era through Roosevelt’s first term, the goal of progressives was to rationalize the economy by managing it. Alan Brinkley describes how regulation in the name of consumer improvement came to replace regulation in order to rationalize production. (Of course, one can question whether regulation actually achieves either goal.)

Later in the essay, Holcombe writes,

By combining Buchanan and Tullock’s (1962) analysis of logrolling for the benefit of those who are able to engage in political exchange with Coase’s (1960) notion of transaction costs, a theory can be developed in which the elite are in a low-transaction-cost group so they can engage in political exchange for their benefit, at the expense of the masses who are in the high-transaction-cost group. This happens in politics but not in markets because government is able to force people to pay for their programs regardless of whether they want to participate, whereas in markets even those with substantial economic power can obtain resources from the masses only if they voluntarily agree to participate in transactions.

In other words, there is a reason that in politics insiders are insiders and outsiders are outsiders. Housing policy reflects the real estate lobby because the transaction costs of assembling real estate agents, home builders, and mortgage lenders into a pressure group are low. The transaction costs of assembling ordinary taxpayers into a pressure group are high. (Although if 1 percent of taxpayers pay half the taxes, those transaction cost might not be quite so high. Something to watch, perhaps.)

Thus, contrary to conventional wisdom, exit is better than voice at giving power to the little guy.

The New Demographics

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Nicholas Eberstadt writes,

Europe’s most rapidly growing family type is the one-person household: the home not only child-free, but partner- and relative-free as well. In Western Europe, nearly one home in three (32%) is already a one-person unit, while in autonomy-prizing Denmark the number exceeds 45%. The rise of the one-person home coincides with population aging. But it is not primarily driven by the graying of European society, at least thus far: Over twice as many Danes under 65 are living alone as those over 65.

Pointer from Tyler Cowen. The entire essay is recommended.

My impression of the United States is that we have two marital cultures. One culture, more prevalent among the affluent, is traditional marriage, delayed and with fewer children, with reasonably low divorce rates. The other culture, more prevalent among the less-than-affluent, is child-bearing outside of marriage, with a low proportion of long-lasting marriages.

Eberstadt’s global tour makes it difficult to claim that a single factor, such as affluence or local culture or the welfare state, is causing the decline in traditional marriage.

One thought I have is that the traditional family is highly congruent with an agricultural society. Perhaps we are seeing a sort of delayed response to industrialization and urbanization.