Wednesday, April 30, 2008

McCain's Health Care Plan

A return to health care. Here are several unfavorable reviews of McCain's health care plans.

First, economist Tyler Cowen:

Trade aside, so far I've yet to see many actual policy proposals from the McCain camp. Mostly I've seen attempts to signal that they won't do anything too offensive to the party's right wing. Very few of these trial balloons seem to be ideas that McCain had expressed much previous loyalty to. I don't even think we should be analyzing these statements as policy proposals. We should be wondering why the Republican Party has given up on the idea of policy proposals.

Second, Jon Cohn:
Instead, McCain is offering people like Edwards what he calls a "Guaranteed Access Plan." But unlike all those awful big-government entitlements the Democrats are promising--you know, the ones that (supposedly) make you wait in long lines and cut off access to high-technology treatments--McCain says his plan will let the states handle the problem by working hand-in-hand with private insurers to offer insurance for people with pre-existing conditions.

It will be the best of both worlds, McCain promises: Affordable, available insurance, but through private carriers and without the heavy hand of Washington.

It all sounds very lovely--unless you know something about health care policy, in which case it sounds absolutely preposterous.
Third, Ezra Klein:

Give McCain this: His philosophy is clear. McCain believes that Americans use too much health care, and he has created a plan that will make care less affordable so millions of Americans will use less. He even has a euphemistic description for this approach: "The key to real reform," he says, "is to restore control over our health-care system to the patients themselves … These accounts put the family in charge of what they pay for."

That's undoubtedly true. Parents weighing an emergency room visit they can't afford no doubt realize that they are in charge of what they are paying for. They are certainly more "price sensitive." They are certainly not acting with the wanton disregard of an insured family who seeks care for their feverish child without a second thought. The question, of course, is whether this sort of cost sensitivity is desirable.

More slamming of the gas tax holiday

Republican, Democratic, conservative, and liberal economists all agree gas tax holiday is stupid:
A gas tax holiday proposed by U.S. presidential hopefuls John McCain and Hillary Clinton is viewed as a bad idea by many economists and has drawn unexpected support for Clinton rival Barack Obama, who also is opposed.

"Score one for Obama," wrote Greg Mankiw, a former chairman of President George W. Bush's Council of Economic Advisers. "In light of the side effects associated with driving ... gasoline taxes should be higher than they are, not lower."

Update -- to point out how really absurd this discussion is, even if you assume that the entire that consumers receive the entire benefit of the tax cut, the savings will be trivial. For gas sipping vehicles like mine -- maybe $12, for gas guzzlers maybe twice that.

More from Newsweek

I could highlight a long debate among economists on suspending the gas tax, but there is no debate. Not one respectable economist—and not one environmentalist or foreign policy expert—supports the idea, unless they are official members of the Clinton or McCain campaigns (and even some of them privately oppose it). To relieve suffering at the pump, send another rebate check or provide tax credits or something else, but not this.

Why is this gas pander so bad? Let me count the ways:

* It's a direct transfer of money from motorists to oil companies, which are getting ready this week to again report record obscene profits. If the federal excise tax were lifted, oil companies would simply raise prices and pocket most of the difference. Clinton's proposal to recover the money with a windfall profits tax on oil companies sounds nice but won't happen. That tax was easily blocked by the Senate in December and would likely be blocked again.

* It offers taxpayers only peanuts. The Congressional Budget Office says the average savings to motorists this summer would be a total of $30. Did I miss something, or was that measly number somehow not included in Clinton's explanation of her support?

* It sends more hard-earned money to the Middle East, which is terrible for our national security. Remember, 15 of the 19 terrorists on 9/11 came from Saudi Arabia. How did they get the terrorist training? The madrassa indoctrination? Oil money.

* It worsens global warming by encouraging gasoline consumption. When you flee your house in 2020 because of flooding, remember which politicians pandered.

* It makes it more likely you'll have a car accident or will waste even more time in traffic. The proceeds from the gas tax go for highway construction and upgrades. Because the tax (24.4 cents a gallon on diesel fuel) was last raised 15 years ago, our infrastructure is a mess, with potholes and dangerous crossings practically everywhere. Thousands of repair projects will be further delayed.

* It will cost 300,000 construction jobs, according to the Department of Transportation. Makes it kind of ironic when Clinton starts her rallies saying she wants "jobs, jobs, jobs."

* It will cost the U.S. Treasury at least $8.5 billion and probably much more, according to state highway officials. For McCain that's no money at all—merely one month in Iraq. For Clinton it's money she's already spent. She has said in the past that any proceeds from a windfall profits tax would go for renewable energy. The $8.5 billion figure assumes the tax would be reapplied after Labor Day. Fat chance. The one-year costs are probably closer to $30 billion.

* It won't happen anyway because Congress isn't usually quite that stupid, and if it is, President Bush would veto the bill.

So why are McCain and Clinton doing this? Because when they learned that Obama had supported a similar suspension of the Illinois gas tax in Springfield, Ill., before realizing it was a bad idea, they saw an opening. It was like Hillary's whiskey shot in the bar, only sleazier. Try to show that the guy just doesn't get it.

Of course, McCain and Clinton do get it. They get that people are hurting and want some relief, even if this form of it makes no sense. They get that voters have been conned into believing that both candidates are responsible public servants because they're not as bad as some others, so they can trade on that reputation. They get that smacking Obama is more important than anything else on the planet right now, and that for Obama to respond by calling them panderers will take Obama about as far as it took Paul Tsongas in 1992 when he leveled the same charge at Bill Clinton.

In sum, McCain and Clinton get that the media will let them get away with this. You can't forgive them on this one, Lord, for they know exactly what they do.

Monday, April 28, 2008

ECON 365: Capital Gains Taxes

Sigh. Here's John McCain last week on "This Week"
Senator Obama says that he doesn’t want to raise taxes on anybody over — making over $200,000 a year, yet he wants to nearly double the capital gains tax. Nearly double it, which 100 million Americans have investments in — mutual funds, 401(k)s — policemen, firemen, nurses. He wants to increase their taxes.
There are two fundamental facts to be aware of when evaluating this statement. First, when you take your money out of your 401(k) (or you put your money into a Roth 401(k), you are taxed at your regular INCOME TAX rate (not the capital gains tax rate). So 401(k) investments are irrelevant to capital gains tax discussions.

Second, here's a chart of who pays the capital gains tax:

You'll notice that this tax is paid almost exclusively by people with high incomes. Heck, doubling the tax on people in the 90-95 percentile would cost these individuals (making over $110,000 per year) $500.

On another topic, you may hear that capital gains taxes pay for themselves (Charlie Gibson threw this little tidbit out at the recent Democratic debate). This is misleading at best. Here's the CBO:

The Response to Capital Gains Tax Rates

Because taxes are paid on realized rather than accrued capital gains, taxpayers have a great deal of control over when they pay their capital gains taxes. By choosing to hold on to an asset, a taxpayer defers the tax. The incentive to do that--even when it might otherwise be financially desirable to sell an asset--is known as the lock-in effect. As a consequence of that incentive, the level of the tax rate can substantially influence when asset holders realize their gains, as can be seen particularly clearly when tax rates change (see Figure 2). For instance, the Tax Reform Act of 1986 boosted capital gains tax rates effective at the beginning of 1987. Anticipating that increase, investors realized a huge amount of gains in 1986. Then, in 1987, realizations fell by almost as much, returning to a level comparable to that before the tax increase.

Figure 2.
The Ratio of Realized Gains to GDP and the Top Gains Tax Rate, 1952 to 2000

Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of the Treasury.

The sensitivity of realizations to gains tax rates raises the possibility that a cut in the rate could so increase realizations that revenue from capital gains taxes might rise as a consequence. Rising gains receipts in response to a rate cut are most likely to occur in the short run. Postponing or advancing realizations by a year is relatively easy compared with doing so over much longer periods. In addition, a stock of accumulated gains may be realized shortly after the rate is cut, but once that accumulation is "unlocked," the stock of accrued gains is smaller and realizations cannot continue at as fast a rate as they did initially. Thus, even though the responsiveness of realizations to a tax cut may not be enough to produce additional receipts over a long period, it may do so over a few years. The potentially large difference between the long- and short-term sensitivity of realizations to tax rates can mislead observers into assuming a greater permanent responsiveness than actually exists.

Because of the other influences on realizations, the relationship between them and tax rates can be hard to detect and easy to confuse with other phenomena. For example, a number of observers have attributed the rapid rise in realizations in the late 1990s to the 1997 cut in capital gains tax rates. But the 45 percent increase in realizations in 1996--before the cut--exceeded the 40 percent and 25 percent increases in 1997 and 1998 that followed it. Careful studies have failed to agree on how responsive gains realizations are to changes in tax rates, with estimates of that responsiveness varying widely.

ECON 365: What if economic growth had been distributed more eqaully?

What happens if you assume that the economy would have grown at the same rate over the past 25 years, but the gains had been distributed more evenly across the income distribution? Here's Lane Kenworthy:

Income inequality in the U.S. has increased sharply in the past generation. Those who worry about this development do so partly on grounds of fairness and partly because inequality may have adverse effects on politics, health, and crime. Sometimes overlooked is a more immediate cost: slow income growth for a large chunk of the population.

The following chart shows average inflation-adjusted incomes in 1979 and 2005 for various groups of households: the bottom 20%, the lower-middle 20%, the middle 20%, the upper-middle 20%, the next 10%, the next 9%, and the top 1%. The incomes include government transfers and subtract taxes. The data, from the Congressional Budget Office (here), are the best available for this purpose.

The average income among all households rose at a rate of 1.5% per year over these two and a half decades. But as the chart makes plain, much of that increase went to households at the top of the distribution, especially those at the very top. Households in the bottom three quintiles experienced very slow income growth — 0.2% per year for the poorest quintile, 0.6% for the next, and 0.7% for the middle.

What would 2005 incomes have looked like if income growth had been proportionate rather than heavily skewed in favor of the top — in other words, if all incomes had increased at a pace of 1.5% per year? The dashed line in the next chart shows the answer. To make it easier to see the effect, I include only the bottom 80% of households here. All of them would have been a good bit better off.

It’s often said that progressives focus too much on the distribution of income and don’t pay enough attention to absolute income levels. In fact, its impact on absolute incomes is one of the chief reasons to be concerned about rising inequality.

Just so the numbers are little more clear. A household in the second quintile was (eyeballing the graph) making approximately $26,000 in 1979. In 2005, second quintile households were making a little over $30,000, but if incomes had grown by 1.5% (annually) throughout the distribution second quintile households would be making over $38,000 in 2005.

Sunday, April 27, 2008

Frank: Demand for high quality education (partially) responsible for housing crisis

Robert Frank in the WaPo:

But while Congress clearly should not rescue borrowers who lied about their incomes or tried to get rich by flipping condos, such borrowers were at most a minor factor in this crisis. Primary responsibility rests squarely on regulators who permitted the liberal credit terms that created the housing bubble.

Hints of how things began to go awry appeared in ... a 2003 book in which Elizabeth Warren and Amelia Warren Tyagi posed this intriguing question: Why could families easily meet their financial obligations in the 1950s and 1960s, when only one parent worked outside the home, yet have great difficulty today, when two-income families are the norm? The answer, they suggest, is that the second incomes fueled a bidding war for housing in better neighborhoods.

It's easy to see why. .... Because the labor market has grown more competitive,... [i]t is no surprise that two-income families would choose to spend much of their extra income on better education. And because the best schools are in the most expensive neighborhoods, the imperative was clear: ... you must purchase the most expensive house you can afford.

But what works for any individual family does not work for society as a whole. ... When we all bid for houses in better school districts, we merely bid up the prices of those houses.

It seems somehow counterproductive to spend lots of money bidding up the price of housing near good schools. Wouldn't it be better to divert some of those resources to increasing the supply of good schools? Yes, this requires the belief that increasing money to schools would lead to improved schools -- which is controversial; however, as I mentioned in class, I think it is possible for money to improve school quality (but increasing money may not improve schools as frequently as it could).

Saturday, April 26, 2008

Clinton Joins McCain in Failing Econ 101 (or at least Econ 365)

I thought Clinton had better economic advisers than this:
Clinton launched an ad calling for a suspension of the gasoline tax.

"Hillary Clinton knows it's time to act, take some of the windfall profits of big oil to pay to suspend the gas tax this summer, investigate the oil giants for price gouging and collusion," the ad said.
Obama appears to have better advisers (or at least he's listening too them on this issue):
Obama spoke out against halting a tax on gasoline during the summer months, a move supported by Clinton and presumptive Republican nominee John McCain, saying it may not bring down prices and would deplete a fund used for building highways.

"The only way we're going to lower gas prices over the long term is if we start using less oil," Obama said in Anderson.
Just so it's clear, a gas tax holiday won't lead to lower gas prices:

But economists and energy analysts say it would have little impact on mitigating the rise in gasoline prices. In fact, it could lead to the opposite result.

The federal gasoline tax represents a flat fee of 18.4 cents a gallon nationwide. With gasoline currently averaging $3.39 a gallon, the tax represents a mere 5 percent of today’s pump price. While that’s not trivial, consider that gasoline prices have more than doubled since 2004.

The problem is that lowering gasoline prices at the pump would encourage more consumption. So in the long run, it would push prices up.

The timing of the proposal matters. Senator McCain called on Congress to suspend the gas tax from Memorial Day until Labor Day. That’s typically the period of highest gasoline use in the country as Americans drive to their holiday destinations.

“You don’t want to stimulate consumption,” said Lawrence Goldstein, an economist at the Energy Policy Research Foundation. “The signal you want to send is the opposite one. Politicians should say that conservation is where people’s mindset ought to be.”

To be more fair, if, in fact, the supply of gas is less than perfectly inelastic, then consumers will see some decrease in prices. Furthermore, if the demand for gas is significantly less elastic than the supply, then consumers will observe changes in gas prices (indeed if demand (not supply) is perfectly inelastic than consumers will receive the full benefit of the cuts). However, the "energy experts" argue that supply of gas in the US during the summer months is close to perfectly inelastic (refineries are operating at capacity, so higher prices don't lead to more supply). Indeed, this inelasticity is why gas prices rise significantly every summer as demand for gas increases. This is why the tax holiday is unlikely to lead to increases in consumer welfare.

Energy Subsidy Facts

The Energy Information Administration has a new report out about energy subsidies:

This report responds to a request from Senator Lamar Alexander of Tennessee that the EIA update its 1999 to 2000 work on Federal energy subsidies, including any additions or deletions of Federal subsidies based on Administration or Congressional action since 2000, and providing an estimate of the size of each current subsidy. Subsidies directed to electricity production are estimated on the basis of generation by fuel.

Sprawl and Carbon Emissions

There's a new report out about development patterns and carbon emissions, Growing Cooler argues:
Meeting the growing demand for conveniently located homes in walkable neighborhoods could significantly reduce the growth in the number of miles Americans drive, shrinking the nation’s carbon footprint while giving people more housing choices, according to a team of leading urban planning researchers.

In a comprehensive review of dozens of studies, published by the Urban Land Institute, the researchers conclude that urban development is both a key contributor to climate change and an essential factor in combating it.

Here's Brad Plummer on the same topic:

A 2003 World Bank study comparing various cities in the United States illustrated the dramatic difference a bit of sprawl can make. Boston, for instance, isn't the most compact city around, but if its population was as spread out as, say, Atlanta's, then Bostonians would be driving about 9 percent more, kicking up a lot more carbon into the air. If Boston had Atlanta's inferior rail system, driving would increase another 5 percent. In fact, if you could somehow wave a magic wand and move the entire population of Boston to a city with all of Atlanta's sprawl-like characteristics, total driving would increase 25 percent.

Now, some amount of sprawl might always be inevitable, since many people don't enjoy living in crowded urban areas and may well want low-density subdivisions and industrial parks and freeways. That's fine. But that doesn't mean it's impossible for urban planners to constrain sprawl. Compare Vancouver and Seattle. Similar cities in similar areas with similar sorts of people. Yet the former has promoted downtown development and limited freeway expansion and, as a result, has considerably less sprawl. As that World Bank study suggests, that can really have a dramatic effect on emissions.

These patterns also seem to adjust pretty quickly to carbon prices. NPR recently reported that, as gas prices climbs, the pace of sprawl in northern Virginia has taken a breather, as people are deciding they don't want to live so far away from urban centers; home prices in the outer suburbs and exurbs have been falling rapidly as a result. (Some people seem to be thinking that maybe it's not cheaper to buy a lower-priced house way out in the suburbs if you end up spending so much extra time and money on transportation costs.) Obviously there are things city governments can do to accelerate this trend—increasing the availability of affordable housing closer to the center, for starters. I'm not sure how much, exactly, all this would contribute to a larger emissions-reduction strategy, but it seems pretty meaningful.

Garbage Island

Here's a promo clip from CNN on the documentary on Garbage Island we were watching in the first class yesterday:

You can watch the whole show here.

More info available here at

Mortgage Follow-up -- Liar's Loans

A nice article on the breakdown in honesty norms that added fuel to the mortgage crisis:

Here's the narrative we've heard about the mortgage meltdown: miscalculation and unfounded optimism, clueless investors, cash-strapped home buyers clobbered by rate resets.

But there's one piece of the mortgage-meltdown tale that virtually every article or television program dances around without ever quite confronting. It's the simplest aspect of the crisis to understand and also the most troubling, because it's not about complicated financial dealings and can't be fixed with bailouts. It's about an astounding breakdown of social norms.

Congestion Pricing

In one of the classes yesterday, we discussed imposing a congestion tax. Here's one author's unfavorable view of the equity implications of a congestion pricing plan in LA:

Right. It takes unconventional and courageous thinking to come up with a plan that clears a highway lane for the well-off, while the middle class and working poor are left to inhale each other's $5-a-gallon exhaust fumes... making the daily lives of the hundreds of thousands of moderate-income commuters ... even more intolerable...

The worst thing about this ill-considered decision to allocate freedom of movement according to income is that it represents local public policy made for the worst of all possible reasons -- simply because there's federal money available to do it. ...

Friday, April 25, 2008

Food Crisis

MIT's Esther Duflo has a nice summary of  what's happening in food markets:

Several reasons explain the upward trend in prices, including the demand for biofuels (which consume a significant part of the corn produced worldwide), and the growth and enrichment of the world population (particularly the increased demand for meat in China – paradoxically, it takes more grain to produce a calorie in meat form than it does to produce a calorie in grain form).

Several short-term factors also help to explain the recent price peak. Because the main consumers of rice are also producers, the volume of rice traded is low compared to the volume of rice produced (only seven percent of produced rice is traded). Restrictions by big producers (such as India) can thus have large impacts on the world price of rice, since they affect a large proportion of the volume of rice traded. It keeps the prices in India relatively insulated from what is happening on the world market, however. Wheat harvests have been poor in several major producing countries, rice is suffering from a mysterious parasite in Vietnam, and following accusation of corruption and mismanagement in the last few years, there have been sharp declines in grain stocks maintained by governments to stabilise prices (they are at their lowest levels since 1984). As a result, prices are not only high in general, but also more volatile (another drop in rice prices is expected after the harvests in Indonesia and India); even the financial crisis plays a role: in the current meltdown, commodities offer an interesting betting opportunity.

Winners and losers

Robert Zoellick (President of the World Bank), Jacques Diouf (the chairman of the UN Food and Agriculture Organization), and many others, have now rung the alarm bells. Zoellick even waved a loaf of bread at the annual meetings of the IMF and the World Bank to drive the point home. According the analysis of the World Bank Living Standard Surveys (which Abhijit Banerjee and I have exploited in our article “The Economic Lives of the Poor”1 ), food accounts for between 50% and 77% of the budget for a family that lives on less than a dollar a day per capita (the world poverty line), depending on the country. This leaves these families very sensitive to food prices, and it is no surprise that the recent increase can make a serious dent in their budget.

Yet, two or three years ago, rich countries’ farm subsidies, and even food aid, were strongly criticised: by keeping prices artificially low, the argument went, they prevented African farmers from selling their products at a good price, keeping them in poverty.

These two arguments may seem contradictory at first. Unfortunately, they are not. An increase in food prices benefits net producers (those who produce more than they consume), to the detriment of net consumers. This is true at both the national and individual levels. Thus, at the national level, the rise in grain prices will improve the trade balance of exporting countries and worsen that of importing countries, including those of Sub-Saharan Africa. At the individual level, the poor who are most affected are in urban areas, but even in rural areas, a number of the poorest people are in fact net consumers of grain as well. A 1989 study of Thailand by Angus Deaton2 showed that, on average, rural households benefited from an increase in the price of rice, but with large variations from one household to another. Those households who benefited most were neither too poor nor too rich.

So when grain prices rise, some of the poor gain, and some lose – in the short-term. In part, the uproar over food prices reflects a fundamental political economy reality: when some gain and some lose, the voice of those who lose is always louder. This is particularly true of an increase in food prices, which hurt primarily the urban poor. In the medium-term, however, an increase in price volatility is damaging for everyone. Poor families in developing countries are already facing enormous risks (they are often self-employed, they are subject to the uncertainties of weather, and their health is fragile), and there is very little insurance against such risks, apart from their own savings or informal solidarity. Furthermore, these risks are more serious for households struggling to provide the bare minimum. A setback might mean sacrificing the children’s education, or not being able to save a little girl from a diarrhea attack (on this, see a beautiful paper by Elaina Rose, which showed that during drought, the relative survival probability of girls dramatically declines).3 A passing difficulty can leave a permanent scar.

Tuesday, April 22, 2008

ECON 260: Topics Thread

If you are interested in talking about your paper or another topic in class on Wednesday or Friday, post a brief discussion of the topic below.

Sunday, April 20, 2008

ECON 365: More Inequality

Greg Mankiw writes an article on growing income inequality for the NYTimes which Mark Thoma excerpts and provides a nice set of responses.

Here's Mankiw:
Maybe educational levels are like Willie Wonka’s chocolate bars. A few of them come with golden tickets that give you opportunities almost beyond imagination. But even if you aren’t lucky enough to get a golden ticket, you can still enjoy the chocolate, which by itself is well worth the price.

Saturday, April 19, 2008

Different Views of Regulation

Dani Rodrick nicely summarizes different views about government regulation:

The sub-prime mortgage crisis has demonstrated once again how hard it is to tame finance, an industry that is both the lifeline of modern economies and their gravest threat. While this is not news to emerging markets, which have experienced many financial crises in the last quarter-century, a half-century of financial stability lulled advanced economies into complacency.

That stability reflected a simple quid pro quo: regulation in exchange for freedom to operate. Governments brought commercial banks under prudential regulation in exchange for public provision of deposit insurance and lender-of-last-resort functions. Equity markets were subjected to disclosure and transparency requirements.

But financial deregulation in the 1980s ushered us into uncharted territory. Deregulation promised to spawn financial innovations that would enhance access to credit, enable greater portfolio diversification, and allocate risk to those most able to bear it. Supervision and regulation would stand in the way, liberalizers argued, and governments could not possibly keep up with the changes.

What a difference today's crisis has made. We now realize even the most sophisticated market players were clueless about the new financial instruments that emerged, and no one now doubts that the financial industry needs an overhaul.

But what, exactly, needs to be done? Economists who focus on such issues tend to fall into three groups.

First are the libertarians, for whom anything that comes between two consenting adults is akin to a crime. If you are selling a piece of paper that I want to buy, it is my responsibility to know what I am buying and be aware of any possible adverse consequences. If my purchase harms me, I have nobody to blame but myself. I cannot plead for a government bailout.

Non-libertarians recognize the fatal flaw in this argument: Financial blow-ups entail what economists call a "systemic risk" - everyone pays a price. As the rescue of Bear Stearns shows, the government may need to bail out private institutions to prevent a panic that would lead to worse consequences elsewhere. Thus, many financial institutions, especially the largest, operate with an implicit government guarantee. This justifies government regulation of lending and investment practices.

For this reason, economists in both the second and third groups - call them finance enthusiasts and finance skeptics - are more interventionist. But the extent of intervention they condone differs, reflecting their different views concerning how dysfunctional the prevailing approach to supervision and prudential regulation is.

Finance enthusiasts tend to view every crisis as a learning opportunity. While prudential regulation and supervision can never be perfect, extending such oversight to hedge funds and other unregulated institutions can still moderate the downsides. If things get too complicated for regulators, the job can always be turned over to the private sector, by relying on rating agencies and financial firms' own risk models. The gains from financial innovation are too large for more heavy-handed intervention.

Finance skeptics disagree. They are less convinced that recent financial innovation has created large gains (except for the finance industry itself), and they doubt that prudential regulation can ever be sufficiently effective. True prudence requires that regulators avail themselves of a broader set of policy instruments, including quantitative ceilings, transaction taxes, restrictions on securitization, prohibitions, or other direct inhibitions on financial transactions - all of which are anathema to most financial market participants.

To grasp the rationale for a more broad-based approach to financial regulation, consider three other regulated industries: drugs, tobacco, and firearms. In each, we attempt to balance personal benefits and individuals' freedom to do as they please against the risks generated for society and themselves.

One strategy is to target the behavior that causes the problems and to rely on self-policing. In essence, this is the approach advocated by finance enthusiasts: Set the behavioral parameters and let financial intermediaries operate freely otherwise.

But our regulations go considerably further in all three areas. We restrict access to most drugs, impose heavy taxes and marketing constraints on tobacco, and control gun circulation and ownership. There is a simple prudential principle at work here: Because our ability to monitor and regulate behavior is necessarily imperfect, we need to rely on a broader set of interventions.

In effect, finance enthusiasts are like America's gun advocates who argue that "guns don't kill people; people kill people." The implication is clear: Punish only people who use guns to commit crimes, but do not penalize others by restricting their access to guns. But, because we cannot be certain that the threat of punishment deters all crime, or that all criminals are caught, our ability to induce gun owners to behave responsibly is limited.

As a result, most advanced societies impose direct controls on gun ownership. Likewise, finance skeptics believe that our ability to prevent excessive risk-taking in financial markets is equally limited.

Whether one agrees with the enthusiasts or the skeptics depends on one's views about the net benefits of financial innovation. Returning to the example of drugs, the question is whether one believes that financial innovation is like aspirin, which generates huge benefits at low risk, or methamphetamine, which stimulates euphoria, followed by a dangerous crash.

Thursday, April 17, 2008

Money does make you happy

According to Justin Wolfers and Betsy Stevenson:

Arguably the most important finding from the emerging economics of happiness has been the Easterlin Paradox.

What is this paradox? It is the juxtaposition of three observations:

1) Within a society, rich people tend to be much happier than poor people.
2) But, rich societies tend not to be happier than poor societies (or not by much).
3) As countries get richer, they do not get happier.

Easterlin offered an appealing resolution to his paradox, arguing that only relative income matters to happiness. Other explanations suggest a “hedonic treadmill,” in which we must keep consuming more just to stay at the same level of happiness.

Either way, the policy implications of the Paradox are huge, as they suggest that economic growth may not raise well-being by much.

Given the stakes in this debate, Betsey Stevenson and I thought it worth reassessing the evidence.

We have re-analyzed all of the relevant post-war data, and also analyzed the particularly interesting new data from the Gallup World Poll.

Last Thursday we presented our research at the latest Brookings Panel on Economic Activity, and we have arrived at a rather surprising conclusion:

There is no Easterlin Paradox.

The facts about income and happiness turn out to be much simpler than first realized:

1) Rich people are happier than poor people.
2) Richer countries are happier than poorer countries.
3) As countries get richer, they tend to get happier.

Moreover, each of these facts seems to suggest a roughly similar relationship between income and happiness.

What explains these new findings? The key turns out to be an accumulation of data over recent decades. Thirty years ago it was difficult to make convincing international comparisons because there were few datasets comparing rich and poor countries. Instead, researchers were forced to make comparisons based on a handful of moderately-rich and very-rich countries. These data just didn’t lend themselves to strong conclusions.

Moreover, repeated happiness surveys around the world have allowed us to observe the evolution of G.D.P. and happiness through time — both over a longer period, and for more countries. On balance, G.D.P. and happiness have tended to move together.

There is a second issue here that has led to mistaken inferences: a tendency to confuse absence of evidence for a proposition as evidence of its absence. Thus, when early researchers could not isolate a statistically reliable association between G.D.P. and happiness, they inferred that this meant the two were unrelated, and a paradox was born.

Our complete analysis is available here. An excellent summary is available in today’s New York Times, here, with a very cool graphic, and readers’ comments. Other commentary is available in the F.T. (here and here), and Time Magazine.

Wednesday, April 16, 2008


I hope to have more to say about the sad state of the supposedly elite medie in the near future. In the meantime this says alot:
NEW YORK In perhaps the most embarrassing performance by the media in a major presidential debate in years, ABC News hosts Charles Gibson and George Stephanopolous focused mainly on trivial issues as Hillary Clinton and Barack Obama faced off in Philadelphia.

Wars in Iraq and Afghanistan, the health care and mortgage crises, the overall state of the economy and dozens of other pressing issues had to wait for their few moments in the sun as Obama was pressed to explain his recent "bitter" gaffe and relationship with Rev. Wright (seemingly a dead issue) and not wearing a flag pin while Clinton had to answer again for her Bosnia trip exaggerations.

Then it was back to Obama to defend his slim association with a former '60s radical -- a question that came out of rightwing talk radio and Sean Hannity on TV, but delivered by former Bill Clinton aide Stephanopolous. This approach led to a claim that Clinton's husband pardoned two other '60s radicals. And so on.

More time was spent on all of this than segments on getting out of Iraq and keeping people from losing their homes and other key issues. Gibson only got excited when he complained about anyone daring to raise taxes on his capital gains.

Yet neither candidate had the courage to ask the moderators to turn to those far more important issues. But some in the crowd did -- booing Gibson as he exited.

ECON 365: Inequality Links

Here are some basic links on inequality:

Berkley professor Emmanuel Saez has written many of the most detailed descriptions of these issue. Links to his papers (and the tables I used in class) are available here.

Here's something I posted earlier on how much the gov't spends promoting economic mobility.

Here's an overview of the issue I wrote awhile back -- in particular, here's a document I wrote that explains the basic elements of inequality, mobility, and income growth.

Here are some of my opinion pieces on this topic. One and another.

ECON 260: A backlog of links

Here are several interesting environmental economics items from the past week:

The Environmental Economics blog explains who actually pays a tax (aka tax incidence): Part 1, Part 2. Here, the ideas in these post get applied to McCain's plan to "help" people by eliminating the gas tax for the summer -- the conclusion prices paid at the pump won't fall, oil companies will capture the entire benefit of the tax reduction.

The PEW Center Climate Change's "Climate Change 101: Cap and Trade" document.

Some economists' view of the implications of happiness research on benefit cost analyses.

Reliance on voluntary carbon emissions (the Bush admin strategy) has some flaws (the idea is that if consumers prefer green companies, companies that go green can capture profits -- the evidence from Wall Street suggest that people don't believe this is likely to happen:

Porter and van der Linde (1995) and Reinhardt (1999) argue that environmentally responsible investments can improve corporate financial performance. They propose that pollution-reducing investments create “green goodwill,” which differentiates the firm’s products and increases its market share. Such investments may also reduce production costs and the risk of future environmental liabilities, as well as give the firm a competitive advantage if subsequent regulatory actions force industry rivals to follow. In addition, Heinkel, Kraus and Zechner (2001) suggest that if investors refuse to hold the stock of polluting firms, the cost of capital may rise to the point where it is optimal for some firms to undertake environmentally responsible investments.

In joint work with Karen Fisher-Vanden, I examined the positive net present value assumption underlying the U.S. policy for climate change (Fisher-Vanden and Thorburn, 2008). Specifically, we studied the stock market’s reaction when companies joined Climate Leaders, a voluntary government-industry partnership in which firms commit to a long-term reduction of their greenhouse gas emissions. Importantly, when the firms announced to the public that they were joining Climate Leaders their stock prices dropped significantly. Controlling for general market movements, the average abnormal stock return was -0.9% over a three-day window and -1.5% over a five-day window around the announcements. For the 46 sample firms that joined Climate Leaders, the total loss in market value was $16 billion. The stock price decline was smaller for firms in carbon-intensive industries, where regulatory action is more likely (and thus partially anticipated in the stock price), and greater for high-growth firms, suggesting that the green investments crowd out growth-related capital expenditures.

The relationship between US energy policy and food riots.

Thursday, April 10, 2008

ECON 260: Comment Thread for 4/11

This link contains several other links to the debate among economists over whether or not we should curb carbon emissions using a carbon tax or a cap-and-trade scheme.

What do you think is the best way to regulate carbon emissions? A carbon tax? Cap and trade (with which features)? Or should we stick with command and control regulations?

Wednesday, April 09, 2008

ECON 365: Health Care Solutions

Here are several links to discussions of health care reform discussions. When evaluating health care proposals you should keep two questions in mind -- how does this plan help improve cost effectiveness by increasing quality, lowering costs, or (preferably) both, and how does this plan expand health insurance coverage (and hopefully expand access to health care)?

First, the KFF's overview of the presidential candidates plans.

Here's one health policy expert's examination of:

the Obama plan

the McCain plan

On the Democratic side there has been lots of debate about mandates.

Here's an extended discussion:

Here’s Paul Krugman:

Why have a mandate? The whole point of a universal health insurance system is that everyone pays in, even if they’re currently healthy, and in return everyone has insurance coverage if and when they need it.

And it’s not just a matter of principle. As a practical matter, letting people opt out if they don’t feel like buying insurance would make insurance substantially more expensive for everyone else.

Here’s why: under the Obama plan, as it now stands, healthy people could choose not to buy insurance — then sign up for it if they developed health problems later. Insurance companies couldn’t turn them away, because Mr. Obama’s plan, like those of his rivals, requires that insurers offer the same policy to everyone.

As a result, people who did the right thing and bought insurance when they were healthy would end up subsidizing those who didn’t sign up for insurance until or unless they needed medical care.
Here’s another more specific article on the “importance” of mandates.

On the other side, here’s David Cutler (my original advisor at Harvard and author of the Obama plan) with comments from Richard Escrow (note there are several very informative links at the start of this post before the interview I copied below; bold = questions from Escrow)

“I’d like to start with a general comment,” Cutler began. “Two possible reasons why people don’t have health coverage are usually given. One is that the uninsured are gaming the system. The other is that they can’t afford it and don’t know where to get it. Most of the literature suggests that the explanation is mostly the latter. That means the single biggest thing we can do to help the uninsured is to make coverage affordable and accessible.”

“That’s why all the Democratic plans focus on removing excessive profits where they exist, improving information technology, and so forth,” Cutler continued. “All the plans do those things, although I think the Obama plan does the most.”

“The mandate argument is: You must buy something – but I’m not going to tell you what it is, how much it will cost, or where you’re going to get it.”

“It comes down to this,” said Cutler. “You’ll never get someone to buy something if it’s not affordable and not accessible. People just don’t do it.”

That’s an area where the Edwards campaign has taken the lead. They suggest automatic enrollment whenever an American intersects with the health care system or government services.

“You can enroll them,” Cutler replied, “and then forcibly collect the premiums. That’s one way to solve the problem. But it’s not necessary to do that.”

“A better approach is to do everything possible to make it affordable and available. When it is, almost everyone will have it.”

There are a couple of concerns about that approach. One is the problem of “adverse selection.” Sicker people – or people with a greater likelihood of becoming sick – will enroll. That will drive plan costs up, making it prohibitively expensive.

“Let’s look at the level of coverage you can get without a mandate. Our estimates, based on studies in the literature, is that we can get 98% or 99% coverage without a mandate for adults. There may be some small pockets of people who choose not to buy it.”

What about those people?

“If there are free riders, Obama is open to mandates. But what he is saying is ‘Look, mandates seem like a panacea, but that’s not where the hard work needs to be done.’ Auto insurance is a mandate, too, and not everyone has that. You’ve got to prove to the public that you’re willing to do the hard work.’”

Would mandates be considered at that point?

“He hasn’t ruled anything out. It’s a matter of priorities. The fact is, the policy differences on the mandate issue aren’t that large at all. Sen. Obama believes they’re an option down the road, if other approaches don’t work.”

And yet Sen. Clinton made another speech about mandates and universal coverage yesterday. And the Clinton had ( Clinton Campaign Manager) Patti Solis Doyle and (Policy Director) Neera Tanden talk about health care differences with reporters this morning.**

And Paul Krugman weighed in on the pro-mandate side of the debate, too.

“I know the arguments,” said Cutler, “but look at the evidence. What really matters is: Can they afford the coverage?”

Part of the debate involves political communications: Is the mandate issue a winner for Democrats in the general election, or a liability?

“I don’t get involved in the politics of it.”

What about the concern – which I and others share – that insurance premiums are an inherently regressive form of ‘taxation.’ The state of Massachusetts has had to waive the mandate for 20% of the uninsured as a result. All the campaigns have been forced to create fairly complex subsidy structures in an attempt to offset that regressivity, but paying for some portion of health insurance out of general tax revenues – either for a public system or some type of voucher – would be less regressive. What about taxation as a funding mechanism?

“That doesn’t seem to be on the table now for any of the candidates.”

Then the devil is in the details, isn’t it? What would premiums costs? Who would get a subsidy, and for how much? Nobody is debating these issues with any specificity, and yet that’s where – arguably – the real debate should take place.

“That’s why we’re suggesting that we lower costs first. Otherwise, you’re saying you want to force people to buy something, but we don’t know how much it will cost or what you’ll get in return.”

There’s been talk that a consensus is forming among policy analysts that 10% of income is the right number for total out-of-pocket health costs, including premiums, copays, and deductibles. But that’s a very high number for lots of people.

“Well, healthcare is 16% of the GDP now. Some of that cost is being borne through taxes already. So it depends what you want to count.”

But 10% for whom? $4,000 for a family of four with income of $40,000 is a devastating figure. Whereas there are probably very few people in the top 2% of income who spend 10% on healthcare.

“That’s where the subsidy debate comes in, and is another reason to address the cost issue first.”
Here’s an example involving MA mandates and Medicare Part D subsides:

Can you really mandate people to buy health insurance?

That's not so much a policy question as a practical question and it is what Hillary Clinton seems to be saying is the big difference between her health care reform plan and the health reform plan of Barack Obama. That's why a news story this week out of Massachusetts caught my eye.

It seems that the Mass Department of Revenue is in the process of drafting new regulations to up the penalty for people who do not buy health insurance. If they are approved, the maximum penalty for those who do not buy health insurance would jump from $219 per year to a maximum of $912 in 2008. The penalty is estimated to be half the per person cost of the lowest priced health plan available.

Penalties would vary by age and the time a person was without health insurance. A 26 year-old would have a penalty of $672 per year and those over 26 would pay $912. So, a family of two adults over 26 would pay about $1,800 in penalties if they didn't buy health insurance (a reader has correctly pointed out children are not covered by the mandate).

The state health plan administrator- The Connector--has said that about 290,000 of the states 400,000, that were believed to be uninsured when the program was launched, have purchased coverage. But most of these people are those that get either all or most of their premiums paid by the state. Among those who get no subsidy, relatively few have chosen to buy insurance likely because they cannot afford the thousands of dollars in premiums for the minimum policy with a $2,000 deductible.

At a practical level, we are talking about middle class families being required to buy a health insurance policy costing $6,000 to $9,000 a year (with a $2,000 deductible) or having to pay a $1,800+ penalty.

The Connector has already exempted thousands of residents from the mandate because there was no way they could buy the coverage.

It is notable that the senior Medicare Part D drug benefit is voluntary but the vast majority of seniors have purchased it. Why? Because the government pays 75% of the costs and it is affordable. The Part D experience shows that if insurance coverage is affordable people will buy it.

The Massachusetts experience tells us if it is not affordable, people will not--or maybe more appropriately cannot--buy health insurance.

It's one thing to mandate health insurance coverage, but as we are learning in Massachusetts, the real challenge is making it affordable.

On the issue of health insurance mandates, Barack Obama, and the Republican candidates, are right.
Additional reading

ECON 365: High cost of inputs

A big part of the high costs of US health care is that we pay doctors more:

But many health care economists say both sides are wrong. These economists, some of whom are also doctors, say the partisan fight over insurers and drug makers is a distraction from a bigger problem: the relatively high salaries paid to American doctors, and even more importantly, the way they are compensated.

“I always find it ironic that when I go to doctor groups and such, they always talk about the cost of prescription drugs,” said Dana Goldman, director of health economics at the RAND Corporation, a nonprofit research institute in Santa Monica, Calif.

Prescription drugs cost, on average, 30 percent to 50 percent more in the United States than in Europe. But the difference in doctors’ salaries is far larger, Dr. Goldman said.

Doctors in the United States earn two to three times as much as they do in other industrialized countries. Surveys by medical-practice management groups show that American doctors make an average of $200,000 to $300,000 a year. Primary care doctors and pediatricians make less, between $125,000 and $200,000, but in specialties like radiology, physicians can take home $400,000 or more.

In Europe, however, doctors made $60,000 to $120,000 in 2002, according to a survey sponsored by the British government in 2004.

Given the years of training that doctors require and the stress and importance of their jobs, few would disagree that they should be well paid. In addition, with a year of medical school now about $30,000, many doctors leave school deeply in debt. And many doctors would argue that cutting salaries would only persuade talented, college graduates to pursue better-paying professions.

Still, the lower salaries are a significant part of the reason that European countries spend less on health care than the United States does — a fact liberals avoid mentioning when they preach the advantages of a European-style single-payer system.

ECON 365: Lack of Transperacy

Markets work when they are transparent and competitive. Information about prices and quality are fundamental to market functioning. If patients (or even insurance companies) know essentially nothing about prices (because the real price is obscured in a complicated insurance transaction) or quality, then how can they be expected to make choices that discipline the market to provide the right outcome -- good health at low cost? They can't. The suppliers run the system and they run it to their own advantage.

ECON 365: Administrative Costs

An excellent summary from a nice article in health affairs (that actually describes several other reasons for high costs in the US than I've outlined):
. By international standards, the U.S. approach to financing health care is extremely complex. Research suggests that a sizable fraction of higher U.S. health spending, not explainable by higher GDP per capita, can be traced to the higher administrative overhead required by such a complex system.16 To quote economist Henry Aaron on this point: "Like many other observers, I look at the U.S. health care system and see an administrative monstrosity, a truly bizarre mélange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public system with mind-boggling administered prices and other rules expressing distinctions that can only be regarded as weird."17

Aaron’s comment was part of his response to a recent paper by Steffie Woolhandler, Terry Campbell, and David Himmelstein, who find that administrative costs for insurers, employers, and the providers of health care in the U.S. health system (not even including the time costs patients bear in choosing health insurance and claiming reimbursement) were "at least" $294.3 billion in 1999, or about 24 percent of total U.S. health spending.18

Aaron’s remarks may leave the impression that public insurance programs are the chief culprits in this "administrative monstrosity." However, as Commonwealth Fund president Karen Davis observed in her recent testimony before Congress, administrative expenses for private insurance in the United States are two-and-one-half times as high as those for public programs.19

ECON 365: Lack of Prevention

Americans are notoriously unhealthy, and our health care system provided few incentives to do better. In particular, our health care system does a woeful job of managing people with chronic problems.

In terms of improving the efficiency of the health care system, there are two parts to prevention. First, we need to make sure that healthy people don't end up sick. In particular, we want to encourage people to do what they can to avoid developing chronic problems. Second, once people develop chronic problems, we to manage them effectively so that we avoid costly "extreme" events.

As noted in class, 1% of patients comprise 35% of health care expenditures, and 70% of medical care costs come from people with chronic diseases. Doctor shows and conversations tend to focus on acute care (traumas, cancers, communicable diseases, maternity care, etc.), but the bulk of health dollars are in fact spent on people with chronic condistions like diabetes, congestive heart failure, coronary artery disease, asthma, and depression.

Many health problems (both acute and chronic) are preventable, but the health care system does little to encourage people to "be smart" because not everyone gets paid if people remain healthy. The two players in the system who would make money if people stayed healthy are individuals themselves and insurance companies (and perhaps employers who ultimately pay for insurance premiums). Individuals obviously need some help because we're not getting it done on our own in spite of the fact that most people are aware of their unhealthy habits. Insurance companies don't invest heavily in prevention because they know that the benefits of prevention today come in the form of better health tomorrow, but they know that it is very likely that when tomorrow comes you'll be covered by a different insurer.

Health care providers, sadly, have no financial incentive encourage prevention and efficiently manage chronic problems because they get paid more for doing more complicated stuff. One might argue that doctors should still do the right thing because if they make their patients healthier they should attract more patients, but patients don't know if they are receiving good care or not. As such, this mechanism for market correction doesn't function.

Furthermore, lack of communication and coordination among one's various doctors (in part due to lack of electronic medical records, in part due to the lack of incentives for effective coordination) impedes effective management of people with chronic problems (particularly those with several).

Many argue that improving prevention efforts would reduce health care costs substantially, but there is debate over whether or not the net savings would actually be very significant. Here's a nice summary of the prevention debate:

The theory goes like this: By practicing preventive medicine, doctors can keep many people from getting sick in the first place. Those who do end up with a chronic illness will be closely tracked so that fewer of them develop complications. These steps will result in less illness, which in turn will require less health care. With the savings, the country can then lower its medical bills or provide health insurance for the 40-odd million people who lack it — or maybe even both.

As Hillary Clinton recently told The Atlantic, it’s possible to “save money and improve quality and cover everybody.”

The would-be reformers have hit on something important here. The current health care system doesn’t pay hospitals, doctors and nurses to keep people healthy; it pays for tests, surgeries and drugs. So Americans often get expensive invasive care of dubious medical benefit while missing out on sensible basic care. Millions of other people go without any care for chronic illnesses like heart disease and diabetes. If Medicare and private insurers paid for more preventive care, Americans would be healthier than they are today and live longer.

But the current presidential candidates go one step further. They don’t merely argue that preventive care delivers good bang for the buck. They argue that it delivers good bang for no bucks whatsoever. And this is where the candidates are overreaching.

No one really knows whether preventive medicine will save money in the long run, let alone free up the billions of dollars a year needed to help pay for universal health insurance. In fact, studies have shown that preventive care — be it cancer screening, smoking cessation or plain old checkups — usually ends up costing money. It makes people healthier, but it’s not free.

“It’s a nice thing to think, and it seems like it should be true, but I don’t know of any evidence that preventive care actually saves money,” said Jonathan Gruber, an M.I.T. economist who helped design the universal-coverage plan in Massachusetts.

This is a tough idea to swallow because better health really does seem as if it should lead to lower medical bills. Indeed, if it were somehow possible to wave a wand and turn people into thin nonsmokers who remembered to take their statins, this country’s health care expenses would fall.

But any effort to promote health has its own costs. Doctors and nurses need to spend time with patients to persuade them to change their behavior. (Ever tried to get someone to stop smoking or drinking?) For a new program to work, it has to reach people who are not being helped by whatever exists now — and who thus will be among the most difficult and expensive patients to treat. The program would also have to treat a whole lot of people who never would have gotten sick.

ECON 365: Overtreatment II

Overtreatment is one reason why US health care is so expensive (and thus why many people lack insurance coverage). We pay alot for doctors visits, tests, and treatments that do little to improve health outcomes. As noted below, some estimate suggest that 1 out of 3 dollars spent on health care was not necessary.

Below is a handy map from the Dartmouth Atlas Project discussed in class (and the previous overtreatment post) it shows the average spending by Medicare in the last two years of life for chronically ill patients. Variation in spending isn't bad by itself, but the fact that higher spending is not associated with better outcomes is problematic.

Ezra Klein explains more:

More specifically, the UCLA medical center spends $93,000 per patient over the last two years of life. The Mayo Clinic, by contrast, spends $53,000. Patients at UCLA had twice as many doctor visits and spent 50 percent more time in the hospital. But the outcomes were no better. The Mayo Clinic, in fact, is considered to have better care than UCLA. The difference is that they don't overtreat, and rather than being in Los Angeles, which has a high density of health service supply, they're in Minnesota, and aren't affected by a glut of specialists and imaging systems.

The difference, in other words, is the incentives for overtreatment. Prescribing, and paying for, unnecessary, unhelpful, possibly even dangerous, care. And what the Dartmouth Atlas Project has proven is that in health care, supply creates demand. When there are more hospital beds and surgical facilities, doctors and hospitals make sure they get used. They contract out with emergency rooms or they inculcate a culture of intensive treatment or they're simply swayed by the ability to offer this care, and so patients are happily sent to get ever more care, which they tend to appreciate because the mythology of medical treatment is that everything that's done gets you one step closer to "better." That of curse, isn't true. In fact, excess treatment does quite the opposite. It costs us money and, in some cases, harms or kills us, through medical errors or hospital infections or adverse drug interactions.

When folks talk about health care spending, they often talk about rationing. But that's not really what's at issue here. You're not "rationing" care if you only pay for high value treatment. You're helping people get the care they need, and helping them stay away from unnecessary treatments that could harm them. It's the difference between buying everything in the store because you don't know what's necessary and walking in with a shopping list. The latter isn't a cruel constraint. It just makes sense.

Ultimately, there are several contributing factors to overtreatment.

Patient Moral Hazard -- insured patients don't pay the full marginal cost for utilizing
the health care system, as such, they consume too much care. Section 15.2 of the textbook explains the details of this process.

Doctor Moral Hazard -- because patients don't know what they ultimately need and because doctors get paid for tests run and procedures performed (and they get doubly paid if they own the testing equipment like the MRI or perform the additional procedure themselves), doctors have an incentive to perform and bill for extra tests and procedures (these incentives might be furthered by their fears of malpractice suits).

Drug and Device Manufacturer Marketing -- these two types of moral hazard are enhanced by the efforts of drug and device manufacturers. Direct advertising to patients prompts many doctors visits and some unnecessary utilization of expensive drugs. Marketing to doctors and using doctors as "consultants" encourages doctors to prescribe expensive drugs and devices that may not be needed.

Tuesday, April 08, 2008

ECON 365: Health Care -- Overview of Problems

As discussed in class our health care system has two fundamental problems:

(1) It is not very cost effective. We spend alot (approx $6000 per capita) and costs are rising fast (health insurance premiums have risen approx 80% since 2000; health care spending as a percent of GDP rose from 7% in 1970 to 16% in 2005 and is expected to rise to 21% by 2020). This is substantially higher (about double) than what other industrialized countries spend, but Americans' have mediocre health outcomes relative to other countries (so it is hard to argue that our high spending is associated with substantially higher quality).

While it is hard to measure the overall health of an entire population, America ranks very low on a number of common measures. E.g., healthy life expectancy at age 60 is 18 years for women and 15 years for men in the US, but 19 and 16 in Canada and 20 and 17 in France; infant mortality in the US 7 infant deaths per 1000 live births, but only 5.2 per 1000 in Canada and 4.1 per 1000 in France; and the US has 115 deaths per 100,000 people below age 75 that were potentially preventable with timely and appropriate health care, in Canada there are only 92 per 100,000 and in France only 75 per 100,000. Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2006.

(2) A significant (and growing share) of our population lack access to adequate health care. Approximately 45 million Americans lack health insurance (in contrast to the universal coverage in many other industrial nationas). Furthermore, 25 percent of Americans don't visit a doctor when they have a medical problem because they can't afford it (in contrast to only 4 percent of Canadians, 12 percent of Germans, or 2 percent of Britons).

The link below contains several other Health Care factoids:

Health care by the numbers.

Monday, April 07, 2008

ECON 365: Overtreatment

David Leonhardt describes "Overtreatment" his number 1 economics book of 2007:

In 1967, Jack Wennberg, a young medical researcher at Johns Hopkins, moved his family to a farmhouse in northern Vermont.

Dr. Wennberg had been chosen to run a new center based at the University of Vermont that would examine medical care in the state. With a colleague, he traveled around Vermont, visiting its 16 hospitals and collecting data on how often they did various procedures.

The results turned out to be quite odd. Vermont has one of the most homogenous populations in the country — overwhelmingly white (especially in 1967), with relatively similar levels of poverty and education statewide. Yet medical practice across the state varied enormously, for all kinds of care. In Middlebury, for instance, only 7 percent of children had their tonsils removed. In Morrisville, 70 percent did.

Dr. Wennberg and some colleagues then did a survey, interviewing 4,000 people around the state, to see whether different patterns of illness could explain the variations in medical care. They couldn’t. The children of Morrisville weren’t suffering from an epidemic of tonsillitis. Instead, they happened to live in a place where a small group of doctors — just five of them — had decided to be aggressive about removing tonsils.

But here was the stunner: Vermonters who lived in towns with more aggressive care weren’t healthier. They were just getting more health care.

Dr. Wennberg would eventually move to Dartmouth and, over the last 30 years, has done versions of his Vermont study for the entire country. Again and again, he has come up with the same broad result. And that result holds the key to health care reform — how to spend less on health care while not making the population any less healthy.

Dr. Wennberg’s story forms the backbone of “Overtreated,” by Shannon Brownlee, which is my choice for the economics book of the year. ...

But I’m going with Ms. Brownlee’s book because it’s the best description I have yet read of a huge economic problem that we know how to solve — but is so often misunderstood.

As you’ve doubtless heard, this country spends far more money per person on medical care than other countries and still seems to get worse results. We devote 16 percent of our gross domestic product to health care, while Canada and France, where people live longer, spend about 10 percent.


Fortunately — if that’s the right word — there is an obvious candidate for cost-cutting: all that care that brings no health benefit. It’s not hard to find examples. Scientific studies have shown that many treatments, including spinal fusion, routine episiotomies and neonatal intensive care, are overdone. These procedures often help specific subsets of patients. But for a lot of people, and “Overtreated” is full of stories, the treatments are a modern-day version of bloodletting.

“We spend between one fifth and one third of our health care dollars,” writes Ms. Brownlee, a senior fellow at the New America Foundation and former writer for U.S. News & World Report, “on care that does nothing to improve our health.”

Worst of all, overtreatment often causes harm, because even the safest procedures bring some risk. One study found that a group of Medicare patients admitted to high-spending hospitals were 2 to 6 percent more likely to die than a group admitted to more conservative hospitals.

Why is this happening, then?

Above all, it’s the natural outgrowth of our fee-for-service health care system. It turns doctors into pieceworkers, as Ms. Brownlee puts it, “paid for how much they do, not how well they care for their patients.” Doctors and hospitals typically depend on the volume of work for their income, and they are the gatekeepers who decide when work needs to be done. They also worry about being sued if they do too little. So they err on the side of overtreatment.

Patients play a role, too. We’re entranced by the wonders of modern medicine and fooled by our byzantine health insurance system into thinking that we’re not really paying for all those unnecessary spinal fusions.

The typical book about current affairs is better at describing problems than solutions. But there is a nice surprise at the end of “Overtreated.” (If you find yourself wishing the book had fewer anecdotes, I’d suggest you skip to the end rather than putting it down.) In plain English, Ms. Brownlee lays out an agenda for reform that is usually confined to academic journals.

It includes some steps that should be widely popular, like giving doctors incentives to explain the risks and benefits of procedures more clearly than they do now. Research has shown that patients frequently decide against marginal care when they know the true risks and benefits. Malpractice laws would also need to be changed so doctors were not sued by patients who later changed their minds.

Other solutions would be more difficult — because medical evidence is often murky, because hospitals and insurers would fight to keep their revenues and because most Americans think it’s the other guy who’s getting unnecessary treatment. These are the reasons that presidential candidates don’t focus on wasteful treatment.

But models for reform are out there. Hospitals that don’t use the fee-for-service model, like those run by the Veterans Health Administration, are already getting better results for less money. They closely track their performance — that is, the health of their patients — and motivate employees to improve it.

As I’ve written before, there is nothing wrong with devoting a large chunk of our economy to medical care. Since the 1950s, doctors have made incredible progress against diseases that were once inevitably fatal. That progress is probably the finest human achievement of the last half century.

If we weren’t wasting so much money on overtreatment, it would be a lot easier to repeat the achievement over the next half century.

ECON 365: Wait Times

Someone brought up wait times in class last week, I couldn't recall the specific facts. They are alluded to in the post below, but here's a more direct statement:

But don't people in other countries sometimes find it hard to get medical treatment? Yes, sometimes - but so do Americans. No, Virginia, many Americans can't count on ready access to high-quality medical care.

The journal Health Affairs recently published the results of a survey of the medical experience of "sicker adults" in six countries, including Canada, Britain, Germany and the United States. The responses don't support claims about superior service from the U.S. system. It's true that Americans generally have shorter waits for elective surgery than Canadians or Britons, although German waits are even shorter. But Americans do worse by some important measures: we find it harder than citizens of other advanced countries to see a doctor when we need one, and our system is more, not less, rife with medical errors.

Above all, Americans are far more likely than others to forgo treatment because they can't afford it. Forty percent of the Americans surveyed failed to fill a prescription because of cost. A third were deterred by cost from seeing a doctor when sick or from getting recommended tests or follow-up.

Saturday, April 05, 2008

ECON 260: Comment Thread for 4/7

Use the comments below to post any questions you wish to pose (in advance) to our guest speaker for Monday.

ECON 365: Health Care Problems

From Ezra Klein:
Indeed, we have brand new data. The Commonwealth Fund just released a broad survey collecting health care attitudes and experiences from patients in Australia, Canada, Germany, the Netherlands, New Zealand, the United Kingdom, and the United States. Here are summaries of some of the findings:
  • 1. We spend the most. We spend more than any other country in the world. In 2005, our per capita -- so, per person -- spending was $6,697. The next highest in the study was Canada, at $3,326. And remember -- that's "mean" spending, so it's the amount we spend divided by our population. But unlike in Canada, about 16 percent of our population doesn't have insurance, and so often can't use the system. These facts should set the stage for all numbers that come after: Every time you see a data point in which were dead last, or not leading the pack, remember that we spend twice as much as any of our competitors.
  • 2. We don't pay doctors according to the quality of their care. One of the first questions is "percent of primary care practices with financial incentives for quality" -- in other words, how many doctors are paid, in part, according to the quality of the care they deliver. In the United Kingdom, the number is 95 percent. In Australia, it's 72 percent. The U.S. scores lower than anyone else, at 30 percent. Similarly, electronic medical records -- which both increase the quality of care and lower its cost -- have 89 percent penetration in the U.K., 79 percent in Australia, 98 percent in the Netherlands, and 28 percent in America. On both these metrics, we perform miserably.
  • 3. Our wait times are low because many of us aren't getting care at all. It's true, Americans do have short waits for non-elective surgeries. Only 4 percent of us wait more than six months. That's more than in Germany and the Netherlands, but considerably less than the Canadians (14 percent) or the Britons (15 percent). But our high performance on the waiting times only account for individuals who get the care they need. Our advantage dissipates when you see the next question, which asks how many patients skip care due to cost. And here, America is far worse than anywhere else.

    In just the past year, a full 25 percent of us didn't visit the doctor when sick because we couldn't afford it. Twenty-three percent skipped a test, treatment, or follow-up recommended by a doctor. Another 23 percent didn't fill a prescription. No other country is even close to this sort of income-based rationing. In Canada, only 4 percent skipped a doctor's visit, and only 5 percent skipped care. In the U.K., those numbers are 2 percent and 3 percent. Few of our countrymen are waiting for the care they need, that much is true. But that doesn't mean they're getting it quickly. Rather, about a quarter of us aren't getting it at all.

    Indeed, 19 percent of Americans were unable, or had serious problems, paying medical bills in the last year. Comparatively, no other country was even in the double digits. This is part of why we perform well on the waiting-times metric. In other countries, the disadvantaged wait longer for their care, and so show up in the data tracking wait times. In our country, they disappear from that measure, because they never get the care at all. You don't wait for what you're not receiving. So their wait times show up as "zero," when they should really be something akin to infinite. And would you prefer to wait four months for your surgery, or never get it at all?

  • 4. Most of us don't have a regular physician. One might expect, given what we pay, that our care would at least be more central and convenient. But it's not so. Of everyone surveyed, Americans were the least likely to report a doctor or general practitioner they routinely saw. As a result. Americans are the most likely to say their doctor doesn't know important information about their medical history, which has obvious implications for care quality, medical errors, etc.
  • 5. Our care isn't particularly convenient. Nor is medical service more convenient for Americans to access. On such questions as whether your doctor has early morning hours, evening availability, or weekend slots, we're not trailing the pack, but we're not in the lead, either. On evening hours, for instance, we lag behind Australia, Canada, Germany, and New Zealand. On same day appointments, Only 30 percent of Americans report that they can access a doctor on the very day they need one, as opposed to 41 percent of Britons and 55 percent of Germans. And a full 67 percent of Americans -- more than in any other country -- say it's difficult to get care on nights, weekends, or holidays with resorting to the emergency room, where care is costlier and, if your injury is not grievous, less efficient.
  • 6. Our doctors don't listen to us. But maybe the amount we're paying comes in customer service -- maybe our doctors spend more time with us, are more reassuring, are more attentive to our cases. After all, we basically like the care we get. Our overall self-evaluation of the treatment we receive is solidly in the middle of the pack, with 70 percent expressing satisfaction -- which means we're less satisfied than the Canadians, Australians, and New Zealanders, but 5 percent above the Britons, and well above the Germans or Dutch. But when you ask for specifics, we do a bit worse.
  • Americans are the least likely to report that their doctors explain things in ways they understand (though the spread on this question is rather small) or say doctors spend enough time with them (56 percent of us say they do, as compared to 70 percent of Germans). We're the most likely to report that test results or medical records were unavailable during our scheduled appointments and, along with the Germans, the most likely to say that our doctors ordered tests that we'd already had done. On the bright side, 78 percent of us say our regular doctor was "informed and up-to-date" about follow-up care after a hospital visit.

  • 7. We have high rates of chronic conditions. Aside from the surprisingly unhealthy Australians, Americans have the highest rate of chronic disease. And this isn't only a comparative problem; our high rates of chronic disease are a massive cost-driver, attributable, according to the research of Ken Thorpe, for about 2/3rds the rise in health spending over the past few decades.
  • 8. … But we're not treating them properly. So given the high prevalence of such diseases, and the pressures they exert on our system, you'd hope our system had evolved so as to treat these diseases more effectively.

    Not so. One of the big issues with chronic disease is coordination of care. Illnesses like diabetes and kidney failure have so many manifestations, and require so much maintenance, that it's critical for care providers to have a full picture of what treatments are being received, what the patient's medical history is, what therapies they will and will not follow, etc. And for that reason, it's critical for the patients to have a single medical home – a regular care center where their case is understood, tracked, and treated. Sadly, we're tied with the Canadians for the lowest percentage reporting a single "medical home."

    Worse,we're far and away the likeliest to report spending more than $500 out-of-pocket on prescription drugs annually. That's a problem, as higher out-of-pocket costs mean more of us going without prescriptions, which means less maintenance of conditions and, thus, more cost when our chronic illnesses balloon into catastrophic health events. Indeed, 42 percent of Americans with chronic conditions -- the exact same percentage who report paying more than $500 for drugs -- report skipping care, drug doses, or doctor's appointments due to cost. That's cheaper for them in the short-term, as they can spend some of the money on food or rent. It's more expensive for us, however, as we pick up the huge bill when they end up in the hospital in full cardiac arrest.

  • 9. We're frequent victims of medical, medication, and lab errors. Along with Australians, Americans are the most likely to report a medical, medication, or lab error, with 20 percent saying they've experienced one of the above over the past year. For those of us with chronic diseases, the rates are even higher. There are many reasons for this, ranging from our low adoption rate of electronic medical records to our splintered care system. But the effects are bad for our health and, needless to say, bad for our insurance rates. Conservatives make a huge deal out of medical malpractice claims, but studies show that our high rate of lawsuits is due to our high rate of medical error. The crisis isn't just in the courtrooms, it's on the operating tables.
  • 10. Most of us are dissatisfied with our current system. In health polling, happiness with the system is generally measured through a three-answer question: Does your system merely need minor changes, as it works pretty well? Does it need fundamental changes? Or does it need to be rebuilt? Of all the countries surveyed -- including the supposedly dystopic U.K. and Canada -- Americans are the least likely to report relative satisfaction, and the most likely to call for a fundamental rebuilding. Only 16 percent of us are happy. In Canada and the U.K., that number is 26 percent. In the Netherlands, it's 42 percent. Meanwhile, 34 percent of Americas want to completely rebuild. Only 12 percent of Canadians say the same, and only 15 percent of U.K. residents want a new system. So paying more than twice as much as anyone else, we have the lowest satisfaction with our health care system. Lower than the countries with waiting lines. Lower than Germany, and Australia, and New Zealand.

    And perhaps this shouldn't be a surprise. Is it any wonder that Americans who have to forgo care are less satisfied than Canadians who simply have to wait for elective surgeries? That our shorter doctor visits, more impersonal caregivers, higher rates of medical errors, and inability to find primary care after 6 P.M. have left us frustrated? And that our sky-high costs have, finally, left us aching for change?

There is no other area of American life where we collectively accept such a bad deal. We spend the more than any other nation on our military, but our military is unquestionably the mightiest in the world. We spend the most on our universities, but our universities are the best on the planet. But we spend the most on our health care -- twice as much as anyone else -- and our health system is mediocre-to-poor, with 47 million of us lacking the insurance necessary to easily access it. It's not surprising that Americans want change.

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