Pursuit of Truthiness

my gut tells me I know economics

Archive for September 2013

Physicians Per Capita by State Multiyear Panel Data

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I was recently trying to get data on the number of physicians in each state for a paper I’m doing on the politics of health insurance mandates. I found that this data was very easy to find for a single year (lots of popular articles and sites) or a few years (Statistical Abstract of the US and the CDC), but hard to find for every year in a multiyear panel. It turns out that the answer is the Area Resource File from the Department of Health and Human Services, which has data from 1995 to 2011 (except 2009, because that would be too easy).

I hope this post will save someone from spending over an hour Googleing, as I just did.

Who Pays for Obesity?

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Is obesity a true social problem, or just a problem that many individuals face?

Should the government use Bloomberg-style coercive regulations to try to fight obesity, or stick to funding medical and public health research? What if many people really are happier eating whatever they want and drinking Big Gulps than being thin- what right does everyone else have to make their decisions for them?

One reason you might claim that right is to say “I pay for part of their health care, and obesity raises health costs”. Your income taxes do pay for Medicare and Medicaid. But one other reason you might think you pay for the health costs of others is that high-cost people covered by your insurer (like the obese, on average)  raise premiums for everyone else.

Jay Bhattacharya and Kate Bundorf, economists at Stanford’s med school, found that this is not the case in their 2009 paper. They show that obese workers receive lower wages at firms that offer health insurance to their workers, and that the difference in wages is about equal to the difference in health costs. By comparison, when firms don’t offer health insurance, obese workers make the same as everyone else. They interpret this to mean that obese workers pay for their own higher health costs in the form of lower wages.

But as the authors acknowledge, this isn’t necessarily the case. Firms that offer health insurance are pretty different; they offer higher compensation overall, and operate in different industries. It is possible that being obese makes you less productive at these firms, but not at the kind of firms that don’t offer insurance, and this is the reason for the wage differential.

My paper, forthcoming in the November issue of Economics Letters (ungated version here), shows that Bhattacharya and Bundorf got it right. Obese workers really do pay for their higher health costs in the form of lower wages. I take advantage of state laws that require health insurance to cover diabetes. Because diabetes is about four times as prevalent among the obese, these laws raise the cost of insuring obese people relative to others. After these laws are passed, wages go down for obese workers with employer-provided health insurance by roughly the expected cost of diabetes treatment (the wage decrease is relative to non-obese workers and obese workers in states that didn’t pass the law). This means that obese workers are paying for their own higher costs rather than passing them on to you.

Most Americans are insured through their employers. This means that if obese people are passing their health costs on to others (causing an externality), it is through the smaller sectors of individual insurance, charity care, and government insurance. I leave it to you to decide whether the possibility that 10-15% of people pass on weight-related health costs to others means no one should have Big Gulps. Perhaps you can implement an ID system, where you can get the get the food and drink you want as long as you show your employer-based insurance card or step on a scale. Or not.

If despite this blog post, you would like to read more on the subject, check out  Bhattacharya and Sood’s overview in the Journal of Economic Perspectives (JEP is wonderful- totally free and often understandable to non-economists).

Why the Drug War Causes Violence, in 57 words

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Legal Business: My liquor store is robbed. I call the cops.

Illegal Business: I am robbed for my cocaine.
If I call the cops, I am laughed at or arrested.
If I do nothing, they rob me again every week.
I can only save the business through vigilante justice.
Maybe a kid gets caught in the crossfire.

Written by James Bailey

September 20, 2013 at 2:57 pm

Posted in game theory

So long and thanks for the $60 billion, Ronald Coase

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There have been a lot of great appreciations for Coase’s theorems after his recent death at age 102.

But one thing I haven’t seen emphasized is his work on spectrum allocation. Coase suggested auctioning off radio/tv/cellular spectrum instead of giving it to select companies through a licensing process.

This has improved life for consumers (speeding the adoption of cell phones, for instance) at the same time that it raised $60 billion for the government. As John Siegfried noted in Better Living Through Economics, this one suggestion brought in more money than the US government has spent on economic research in its entire 200+ year history.

It is worth keeping all of us around even if most are worthless, just in case one turns out to be the next Coase.

Written by James Bailey

September 4, 2013 at 6:03 pm

How to Persuade Economists about Irrationality

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Bryan Caplan‘s Myth of the Rational Voter is a good explanation of how politics works, but a truly great example of how to convince people about something they fundamentally disagree with.

Economists usually assume that people act in their rational self-interest. Critics often object that this is unrealistic, but their objections usually fail to make any change in economists’ beliefs or practices. While behavioral economics has grown larger and more respected, it remains a small sub-field.

One reason the critics have failed is that modeling people as rationally self-interested actors is easy and is a genuinely good first approximation most of the time. But another big reason the critics have failed is that they are bad at persuasion. Lets contrast their arguments with Caplan’s:

1) Speak the Language

If you want economists to listen to your critiques, you need to put them in the language of economics. At a minimum, this means using terms correctly, understand what economists mean by “rationality”. Caplan takes this a step further by translating his argument into supply and demand framework, showing that the quantity of irrational beliefs will rise when the “price” of holding them goes down. This is reminiscent of one of the most widely cited behavioral economics papers of all time, where Kahneman expressed inconsistent preferences (irrational) as crossing indifference curves (indifference curves being a standard tool).

2) Make one Paradigm a Special Case of the Other

No one wants to be told they are wrong. Even worse is to be told you were badly, stupidly wrong. It is best to leave your intellectual opponents a line of retreat that allows them to accept you argument gracefully.

The Keynesian revolution was probably the most successful paradigm shift in the history of economics. I think one big reason for Keynes’ success that he left a line of retreat. The reason his magnum opus was called the “General Theory” was because he thought that classical economics was true for the special case of full employment, but needed revision in the more general case of recession-level unemployment. Instead of saying his opponents were stupidly wrong, he making the easier sell that his opponents were correct about a special case.

Caplan uses a similar tactic, but one even more generous to the other side. For Caplan, economists are right about rationality in general, and only wrong in the special case when it is cheap to hold irrational beliefs. In the market settings that most economists study, holding irrational beliefs is expensive.  As Ronald Coase said, the employee of a corporation who buys something for $10 and sells it for $8 is not likely to do so for long. But for voters, holding irrational beliefs is cheap, because voting “incorrectly” has an incredibly small chance of actually affecting the election’s outcome.

3) Status is Everything

The key reason critics of economics fail is that their arguments are perceived as an attack on economists. Sometimes they actually say explicitly that the rationality assumption shows how economists are stupid / autistic / lacking in common sense, so people should lower the status of economists and any policy recommendations they make.

This is about the worst thing you can do if you are actually trying to persuade someone. Bryan Caplan found a way to not only avoid this problem, but to turn it into the finest weapon in his own persuasive arsenal. Myth of the Rational Voter is like economist crack.

The core of Caplan’s empirical argument is based on the Survey of Americans and Economists on the Economy. Caplan goes through the survey in great detail, explaining how normal people have very different beliefs from economists on most politically-relevant economic issues. He carefully explains why the economists are right and everyone else is wrong, which makes the economists feel smart. He also shows how the differing answers for economists are not due to the class or ideological biases of economists: economists disagree almost as much (and in some cases actually disagree more) with people who share their own income level and political ideology.

To disagree with Caplan, an economist has to say their conclusions about economic issues are no more valid than those of average voter. Agreeing with Caplan means getting to say that I as an economist know better than everyone else. You can see why Caplan’s argument persuaded a lot of economists that voters are irrational. Speaking their language, he argued that economists need to add a special exception for politics to their general arguments for rationality, and did so in a way that raised the status of the people he was trying to convince.

PS In case this blog post was unpersuasive because it was perceived as raising Bryan Caplan’s status too much, I can try to take him back down a peg. Caplan thinks that he is pretty nerdy because he is the Dungeon Master of an all-economists D&D game. But that is just not on the same scale of nerdiness as “Fermat’s Last Stand“, a musical adventure of mathematicians and philosophers through a D&D world, featuring boss fights against Rene Descartes and Saul Kripke.

PPS Thanks to the Public Choice Outreach Conference for a free copy of The Myth of the Rational Voter.

Written by James Bailey

September 4, 2013 at 10:23 am