Pursuit of Truthiness

my gut tells me I know economics

Medicare’s Midlife Crisis

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I just finished the 2002 book of the same name, by Sue Blevins.
Overall I found the book too polemic- it seems like the author doesn’t like Medicare and so wrote down all the arguments she could think of against it, even if some were weak or contradictory. But while I didn’t buy the book’s main arguments, I found a lot of interesting facts within, especially about the history of health insurance. I post them here:

Medicare is funded with public money, but claims are processed by private insurers: “Today, Blue Cross and Blue Shield plans process approximately 90 percent of Medicare Part A claims and about 57 percent of all Part B claims.” (p10)

There was a major government program aimed at covering seniors before the introduction of Medicare in 1965: “On September 13, 1960, President Dwight Eisenhower signed into law the ‘Medical Assistance for the Aged’ program, commonly known as the Kerr-Mills law. The program extended coverage to 10 million seniors whether or not they were receiving Social Security benefits and another 2.4 million on Old Age Assistance. All told, 77 percent of seniors were eligible for government assistance under the Kerr-Mills program.” (p20)

Many European countries set up national health insurance systems before 1914, starting with Germany’s Sickness Insurance Act in 1883. But World War I stopped the campaign to set up such a system in the US: “Compulsory health insurance became negatively linked with ‘made in Germany’ and ‘Bolshevism.'” (p27)

“The first hospital insurance program was created in the United States at Baylor University Hospital in Dallas in 1929…. initially it only covered Dallas schoolteachers” (p29)

The American Medical Association fought for years to shut down physicians’ group practices, until the Supreme Court ruled in 1943 they were violating the Sherman antitrust act. Given the explosion in occupation licensing in recent decades (which the current Court isn’t a fan of either), I think the courts’ unanimous opinion on this case, written by Justice Owen Roberts, should be known more broadly: “Professions exist because people believe they will be better served by licensing specially prepared experts to minister to their needs. The licensed monopolies which professions enjoy constitute in themselves severe restraints upon competition. But they are restraints which depend upon capacity and training, not privilege. Neither do they justify concerted criminal action to prevent the people from developing new methods of serving their needs. The people give the privilege of professional monopoly and the people may take it away.” (p33)

The idea of Medicare hospital insurance started as the King-Anderson bill in Congress, and was strongly backed by then-President Kennedy. Doctors and Republicans didn’t like the bill, and promoted alternatives of their own to try to kill it- the AMA proposed “Eldercare”, Republicans proposed “Bettercare”. Chairman Mills of the Ways and Means committee decides to take a new approach to legislative compromise- instead of splitting the difference between the three plans, just pass all of them- a “three-layered cake”. The Democratic proposal becomes Medicare Part A (hospital insurance), the Republican proposal becomes Medicare Part B (physician insurance), the AMA proposal becomes Medicaid. (p46)

Nowadays we are used to worrying the Medicare is going to bankrupt the federal government, and that much of Medicare’s spending is wasteful. But I didn’t realize that even supporters of Medicare had these worries as far back as 1968. President Johnson, who signed the law, said in 1968 that “Between 1965 and 1975, the cost of living will increase by more than 20 percent. But the cost of health care will increase by nearly 140 percent…. part of these increases will be expanded and improved health services. But a large part of the increase will be unnecessary- a rise which can be prevented.” (p59)

In the year 2000, 18% of medical spending by Medicare beneficiaries was out-of-pocket, a higher rate than that paid by the average American (and many Americans have no insurance at all, so pay everything out of pocket). In some ways Medicare really isn’t good insurance. It doesn’t do the one thing insurance really should, and which private plans are now legally required to do by the ACA- put a cap on how much you could possibly end up spending on medical care. (p72)

Romneycare vs Obamacare

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Back in the 2012 election, Mitt Romney was in the unenviable position of trying to attack the Affordable Care Act without implicating his own reform in Massachusetts. At the time, like most people, I assumed this attempt to differentiate the two was pure cynical politics. Johnathan Gruber worked on both bills and famously said “Its the same damn law”.

But recently, and actually thanks to the same Johnathan Gruber, I’ve realized there is one very important difference. First, there are some quantitative differences. Some of the ACA’s penalties are much larger, which may lead to more substantial disemployment effects. Also, Massachusetts had a much higher rate of employer-based insurance than the rest of the country to start with, so they had a smaller gap to close with government subsidies (making their reform the cheaper one).

The biggest difference though, and the one I hadn’t thought about until I saw Gruber talk at the American Economic Association meetings, is that Massachusetts had a guaranteed issue law for years before Romneycare. Guaranteed issue means that insurers must cover anyone, regardless of pre-existing conditions or expected costs.

By itself, guaranteed issue ruins health insurance markets. It allows people to go without insurance and pay no premiums until they get sick, then sign up and get huge benefits, then drop insurance again once they are recovered. For guaranteed issue to work, it needs an individual mandate to prevent people from gaming the system; for the individual mandate to work we need subsidies, so that poor people can actually get the insurance they are required to. This trio of reforms- guaranteed issue, the individual mandate, and subsidies- is what Gruber calls the 3-legged stool. Massachusetts only had one leg, and this means individual premiums were sky-high until Romneycare brought the other two legs.

Almost no other states, though, had their own guaranteed issue laws before the ACA- their individual health insurance markets were not nearly as broken as Massachusetts’ was.

Consider 3 policy packages:

1. No Reform

2. Guaranteed issue, individual mandate, subsidized exchanges

3. Guaranteed issue only

Before 2006, most states were at 1, but Mass was at 3. 3 is clearly inferior to both 1 and 2; the choice between 1 and 2 is a tougher one. Romneycare moved Mass from 3 to 2, clearly an improvement that fixed a totally broken individual market. Obamacare moved the rest of the country from 1 to 2, which is much more of a mixed bag. So for once, I think I overestimated the cynicism of a politician; the two laws in effect really were different.

Written by James Bailey

January 20, 2015 at 5:58 pm

Give me a lever long enough and a place to stand, and I will move the world

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G.K. Chesterton was a mad genius, a bullet-biting Archimedes. From his What’s Wrong with the World, in response to doctors wanting poor childrens’ hair cut short to prevent lice:

Now the whole parable and purpose of these last pages, and indeed of all these pages, is this: to assert that we must instantly begin all over again, and begin at the other end. I begin with a little girl’s hair. That I know is a good thing at any rate. Whatever else is evil, the pride of a good mother in the beauty of her daughter is good. It is one of those adamantine tendernesses which are the touchstones of every age and race. If other things are against it, other things must go down. If landlords and laws and sciences are against it, landlords and laws and sciences must go down. With the red hair of one she-urchin in the gutter I will set fire to all modern civilization. Because a girl should have long hair, she should have clean hair; because she should have clean hair, she should not have an unclean home: because she should not have an unclean home, she should have a free and leisured mother; because she should have a free mother, she should not have an usurious landlord; because there should not be an usurious landlord, there should be a redistribution of property; because there should be a redistribution of property, there shall be a revolution. That little urchin with the gold-red hair, whom I have just watched toddling past my house, she shall not be lopped and lamed and altered; her hair shall not be cut short like a convict’s; no, all the kingdoms of the earth shall be hacked about and mutilated to suit her. She is the human and sacred image; all around her the social fabric shall sway and split and fall; the pillars of society shall be shaken, and the roofs of ages come rushing down, and not one hair of her head shall be harmed.

Written by James Bailey

January 20, 2015 at 3:38 pm

Escape from Capital

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The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the authors assault upon them is to be successful,a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds. -John Maynard Keynes

The first economic model of growth came from David Ricardo. He thought that capital accumulation was they key to growth, capitalists were heroes, and landlords were villains who would eat into the profits capitalists needed to finance economic growth.

Marx made people think of capitalists as villains, but he was even more obsessed than other economists with the importance of capital for long-run economic growth; he just thought it was too important to be owned by capitalists alone. Capital was the name of his magnum opus and his constant focus.

In the 20th century, economists have discussed many other factors that determine economic growth: institutions, culture, entrepreneurship, human capital, technology. But the old obsession with physical capital has remained.

Joseph Schumpeter introduced the idea of creative destruction, the importance of innovation and entrepreneurs. But at the end of the day, he thought that communism would win out over capitalism because it would accumulate more capital and communist countries would out-grow capitalists. He loved the freedom of capitalism, but thought that communist countries forcing investment in physical capital would prosper more.

Robert Solow created a new model of economic growth, and his empirical tests of the model showed that the vast majority of differences in economic growth across countries could not be explained by differences in physical capital. Instead, we should focus on the Solow residual- the other things like technology that influence the productivity of labor. But Paul Samuelson, friend and colleague of Solow and arguably the greatest economist of the 20th century, still couldn’t shake the old focus on physical capital- his bestselling textbook kept predicting that forced capital accumulation would lead communist countries to surpass capitalist right up until the breakup of the Soviet Union.

New work continues to show the importance for growth of factors other than physical capital- Paul Romer on innovation, Acemoglu and Robinson and Douglas North on institutions, McCloskey on culture. Yet somehow, economists cannot escape from a focus on physical capital. Perhaps it is this, not modeling, that is the true Ricardian vice.

Written by James Bailey

December 9, 2014 at 1:31 pm

The Paradox of Trust

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We constantly make judgements, usually subconsciously, about how much to trust others. On average, we seem to be pretty decent at making these assessments- at first. But someone’s trustworthiness is not a fixed quantity. When someone knows that others trust them, they know that people are less likely to look for their possible misbehavior, and more likely to accept their version of events if evidence of misbehavior arises. Some people will take advantage of this trust to commit misdeeds.
The same analysis applies to professions, with the additional mechanism that people with bad intentions may seek out a place in trusted professions in order to commit their misdeeds with a reduced chance of being caught. The very fact that so many people trusted priests not to sexually assault children is what allowed it to happen so often. The very fact that most people trust police not to kill unjustifiably is what allows some to kill unjustifiably.
This seems like a bit of a paradox to me. Is it ever possible for a trusted profession to remain trustworthy for long? How? By trying as hard as possible to select for people of good character? This seems like a hard problem.
The paradox seems like a problem that others must have thought about a lot in many fields- literature, philosophy, and economics at the very least seem like they would be fruitful here. I think a game-theoretic analysis would be interesting, and may have no stable equilibrium. But nothing much comes to mind when I try to think of what others have said about this, besides “who guards the guards?”
What am I missing?

Written by James Bailey

December 5, 2014 at 12:35 am

Taxation is Death

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Disclaimer- I hope this post does not get read widely, because it is a relatively controversial take on a peripheral part of what is mainly an open-and-shut case of police abuse. People of different political persuasions seem to actually be coming together on the main issue in this case- liberals seem furious about it even beyond the race angle, major conservatives are calling it a tragedy, and when was the last time Reason magazine celebrated the US Attorney General for prosecuting someone? But many others are saying those things well, so this was what remained on my mind unsaid.

Many anarcho-capitalists want to end all taxation because “taxation is theft”. I have always had a hard time getting worked up about this- sure, taxation does seem like a type of theft, but the practical benefits of a tax system seem to outweigh this abstract flaw.

Then they note that if you try to resist the theft by not paying, you could get thrown in prison, an even more serious violation of your rights. But in practice this happens so rarely; almost everyone just pays up, and never really even thinks about taxes as coercive measures backed by physical force. It seems like the tax system more or less works, and funds the government’s worthwhile endeavors. Sure, it has flaws, but consequentialists and economists like myself usually focus on flaws like how most taxes distort the incentives to save and invest- flaws that can be fixed without scrapping the idea of taxation.

But sometimes, events make the nature of the system hard to ignore. Government taxes and regulations really are backed by force- and sometimes, given a government staffed by imperfect humans, something as well-intentioned a tax on cigarettes can lead not only to people in jail, but to someone being killed.

The idea that taxation is theft, backed by force doesn’t mean we should eliminate all taxes. But it is one of many things worth keeping in mind when you propose a tax. It is something I should have been thinking of when I last taught microeconomics and enumerated to the class the benefits of Pigouvian taxes- I even used the example of a cigarette tax.

Written by James Bailey

December 4, 2014 at 7:26 pm

Dialogue on Randomization

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Roger Bacon- Consider the diverse benefits of randomization. Piercing through the vagaries of chance and deception, it allows us to discern truly the causes and consequences of action.

 
Trollius Maximus- Yet, there are costs to randomization. A trial requires an exceeding amount of time and treasure, while other methods can be done in short time by a single natural philosopher of modest means. Even if trials were as easy to conduct, they are harder to generalize to far-away lands and eras. To say nothing of the ethics of rewarding one man while spurning another, all according to the flip of a coin.

Bacon: I do not say that randomized studies are the only way. Where traditional methods fail, or when the question is of true import, we will find the costs of randomization to be of little matter.

Trollius: Even the ethical costs? Will you so lightly toss aside the question of the good?

 
Bacon: What could be the flaw of helping one while passing another by, so long as I do no harm to the other? Does not every good deed only help one or a few, while the multitudes remain ignorant of the deed?

 
Trollius: Have you indeed done no harm to those passed over in your trial, or those who bear witness to your study? Have you not convinced them that the world was a more random place than they had thought, that their own actions matter little compared to the all-powerful, uncaring hand of chance?

Bacon: Perhaps I have. Indeed, I stand convinced. I shall demonstrate in a paper using a randomized trial that exposure to randomization undermines people’s conviction that they are the master of their fate, the locus of their control, and I shall show that this new belief causes them great harm.

Trollius: Your paper would roil the world of randomistas.

 
Bacon: Yet I worry that natural philosophers will still turn too readily to randomization, since they gain most of the benefits from doing such studies, while experiencing only a fraction of these costs. Witness how psychologists continue to use deception, while economists and others spam the world with audit studies.

Trollius: Ah, but your work would be so convincing, your brilliance could shatter the randomista movement with a single blow. They would return to running cross-country regressions, and Sophists will carry the day once more.

Bacon: I see. Your trolling has convinced me to stay silent, for the good of the world I must maintain the Noble Lie that randomization is the ideal and the future of natural philosophy.

Trollius: By silence, you mean not writing a paper. Certainly a blog post could do no harm; people would find it funny, rather than a failed attempt at cleverness and a lame imitation of Brad DeLong (who you shouldn’t be trying to imitate anyway).

Bacon: Indeed. To the blogosphere!

Written by James Bailey

November 11, 2014 at 11:15 pm

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