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July 28, 2009

Economist's View - 4 new articles

Update to "A Breakthrough in the Fight against Hunger"

The post "A Breakthrough in the Fight against Hunger" summarizes Jeff Sachs' favorable view of the G-8's $20bn initiative on smallholder agriculture (e.g. to provide assistance buying seed and fertilizer), and also gives Murat Iyigun's view of the type of developmental assistance advocated by many economists. Since Iyigun mentions Bill Easterly explicitly, and since Easterly and Sachs have an ongoing debate on this (and many other) issues, I promised an update if Bill Easterly responded. I just received this email:

Sachs mentions the lessons of history, but doesn't acknowledge the nearly universal agreement that past efforts at African Green Revolutions (with the same list of interventions that Sachs lists) have failed (see the documentation in my recent JEL article -- ungated version here). That doesn't mean giving up, but it does mean learning from history, trying to figure out why it failed in the past and correcting it -- why does Sachs find this idea so threatening?

On Iyigun's blog, I'm so happy to finally find somebody who gets it, that you shouldn't invade countries based on economists' crappy econometrics, that I have nothing else to add. I have had a lot more difficulty convincing people of this than I expected.


Adverse Selection

With health care reform in the news, there's been quite a bit of talk about adverse selection and the degree to which it is actually a problem in health care and health insurance markets. Some people have even gone so far as to question whether significant adverse selection effects exist at all outside of textbooks since when they look at the marketplace, they have a hard time finding it.

But the thing is, if you go looking for it in the marketplace, you aren't likely to find it. Unless the problem has been largely overcome either the government intervention or the through private sector institutions constructed to fix the problem (generally intermediaries who can solve the information problem that generates the market failure), the market will fail to exist at all. So you will either observe a fairly well-functioning market that has overcome the problem, or you won't see a market at all.

So if you want evidence of adverse selection, you should look for the institutions designed to overcome the problem - e.g. used car dealers with the expertise needed to overcome the one-sided information problem on car quality, and then issue quality guarantees (or develop a reputation for quality) acting as intermediaries, that sort of thing - and those types of intermediaries are easy to find. Evidence of the institutions needed to overcome adverse selection - and evidence that the problem exists - aren't hard to find. Furthermore, very often government intervention isn't needed, the market can solve this on its own.

And the market will solve it on its own in the case of health care, but we may not like the solution the market comes up with. First, it violates our sense of equity since the solution will be to prevent people likely to have high health costs from getting insurance (or the price of insurance will be so high that they are effectively excluded). But we will still have to provide for them, we can't just abandon them to suffer when help can be provided. It's one thing if someone cannot sell their car due to market failure, it's quite another if they cannot get the medicine or care they need to maintain their health. So the private sector solution may not be morally acceptable. Second, because we have to provide for the sick in any case, the resources that are devoted to excluding people are wasted resources, all that happens is that the problem is shunted off to a generally more expensive option.

So it's not that the private sector cannot solve this problem at all, that's not why we need government to intervene, it's that the solution the market imposes violates our moral sensibilities and wastes resources that could be used more productively.

[On the run today and writing this sitting in my car in a parking lot. Mobility is getting better.]

Update: Thinking about this a bit more, I don't think I want to stand behind the claim that finding evidence of adverse selection is unlikely, for example the consequences of missing markets may be evident in the data (technically the search is then outside of the marketplace, but I still don't want to push this). And I also overstated the extent to which the private sector can solve the adverse selection problem, there are problems that I think the private sector cannot resolve, problems that require government involvement (e.g. mandates). But I do want to comment on this from Megan McArdle:

Of course, it's also true that the population of the uninsured is correlated with something that's also correlated with good health: being young. But then, this sort of undercuts the adverse selection argument, and also the moral imperative of giving them health insurance. If you could reasonably afford health insurance by dropping down to a lower-priced cell phone plan and cutting back on your bar tab, you are not a national emergency.

But this is, in fact, a good example of market failure and why government intervention is sometimes needed. So long as people know that they can get care for life threatening illnesses, broken bones, that sort of thing, and even for less threatening ailments, they have no incentive to cut back on these other expenditures. They get roughly the same care whether they drop their cell plan and the bar tab or not, so why bother? That's why the government has to mandate coverage, so they are forced to pay their share. Sure, we can say it's a moral issue, that they shouldn't do this, but if they do it anyway then it's all of us, not the people choosing to forgo insurance, who end up picking up the tab. If we are willing to say "let them suffer for their choices, even die for them" then sure, there's no market failure here, they will know that and get insurance (maybe - it's rational to do so, but will they behave rationally?). But I am going to help if I can when health is significantly threatened (even if just to save them from themselves in some cases) - I think most people would - and that leaves the market failure door wide open (I'm not addressing the presumption that people without insurance have cell phones and bar tabs rather than necessities they can cut out in order to afford insurance - that's not, of course, always true).


Paul Krugman: An Incoherent Truth

Paul Krugman rubs Blue Dog noses in the pile of incoherence they left in the House:

An Incoherent Truth, by Paul Krugman, Commentary, NY Times: Right now the fate of health care reform seems to rest in the hands of relatively conservative Democrats — mainly members of the Blue Dog Coalition, created in 1995. And you might be tempted to say that President Obama needs to give those Democrats what they want. But he can't — because the Blue Dogs aren't making sense. ...

Reform, if it happens, will rest on four main pillars: regulation, mandates, subsidies and competition. ... The subsidy portion of health reform would cost around a trillion dollars over the next decade..., this expense would be offset with a combination of cost savings elsewhere and additional taxes, so that there would be no overall effect on the federal deficit.

So what are the objections of the Blue Dogs? Well, they talk a lot about fiscal responsibility, which basically boils down to worrying about the cost of those subsidies. And it's tempting to stop right there, and cry foul. After all, where were those concerns about fiscal responsibility back in 2001, when most conservative Democrats voted enthusiastically for that year's big Bush tax cut — a tax cut that added $1.35 trillion to the deficit?

But it's actually much worse than that — because even as they complain about the plan's cost, the Blue Dogs are making demands that would greatly increase that cost.

There has been a lot of publicity about Blue Dog opposition to the public option, and rightly so: a plan without a public option ... would cost taxpayers more...

But Blue Dogs have also been complaining about the employer mandate, which is even more at odds with their supposed concern about spending. The Congressional Budget Office has already weighed in on this issue: without an employer mandate, health care reform would be undermined as many companies dropped their existing insurance plans, forcing workers to seek federal aid — and causing the cost of subsidies to balloon. It makes no sense at all to complain about the cost of subsidies and at the same time oppose an employer mandate.

So what do the Blue Dogs want?

Maybe they're just being complete hypocrites. It's worth remembering the history of one of the Blue Dog Coalition's founders: former Representative Billy Tauzin of Louisiana. Mr. Tauzin switched to the Republicans soon after the group's creation; eight years later he pushed through the 2003 Medicare Modernization Act, a deeply irresponsible bill that included huge giveaways to drug and insurance companies. And then he left Congress to become, yes, the lavishly paid president of PhRMA, the pharmaceutical industry lobby.

One interpretation, then, is that the Blue Dogs are basically following in Mr. Tauzin's footsteps: if their position is incoherent, it's because they're nothing but corporate tools, defending special interests. And as the Center for Responsive Politics pointed out in a recent report, drug and insurance companies have lately been pouring money into Blue Dog coffers.

But I guess I'm not quite that cynical. After all, today's Blue Dogs are politicians who didn't ... switch parties even when the G.O.P. seemed to hold all the cards and pundits were declaring the Republican majority permanent. So these are Democrats who, despite their relative conservatism, have shown some commitment to their party and its values.

Now, however, they face their moment of truth. For they can't extract major concessions on the shape of health care reform without dooming the whole project: knock away any of the four main pillars of reform, and the whole thing will collapse — and probably take the Obama presidency down with it.

Is that what the Blue Dogs really want to see happen? We'll soon find out.


links for 2009-07-27

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