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August 20, 2009

Economist's View - 5 new articles

Recession 101

I am driving through the Nevada desert today. Just outside of Fernley, Nevada there is a billboard that says:

Recession 101 Chill (Hysteria causes recessions)
That was it as far as I remember. Just lettering on a white background. I wonder who thought that sign would be worth the cost?


"The Rationing Canard"

Free Exchange responds to a WSJ editorial by Martin Feldstein charging that "rationing health care is central to President Barack Obama's health plan":

The rationing canard, Free Exchange: Many, many people have already weighed in on whether or not the health care plan making its way through Congress will involve "rationing", and it was inevitable, I suppose, that Martin Feldstein would eventually decide that it's his turn. Here he is:
...The Obama strategy is to reduce health costs by rationing the services that we and future generations of patients will receive.
The White House Council of Economic Advisers issued a report in June explaining the Obama administration's goal of reducing projected health spending by 30% over the next two decades. That reduction would be achieved by eliminating "high cost, low-value treatments," by "implementing a set of performance measures that all providers would adopt," and by "directly targeting individual providers . . . (and other) high-end outliers."
The president has emphasized the importance of limiting services to "health care that works." To identify such care, he provided more than $1 billion in the fiscal stimulus package to jump-start Comparative Effectiveness Research (CER)... Comparative effectiveness could become the vehicle for deciding whether each method of treatment provides enough of an improvement in health care to justify its cost. ...
...The deployment of scare quotes would seem to suggest that Mr Feldstein has a problem with the government limiting high cost, low-value treatments, even though they're costly and not very valuable. In his third paragraph he says that Comparative Effectiveness Research—that is, research to determine whether treatments are effective or not—could lead to a cost-control mechanism which could become the vehicle for deciding whether a treatment's effectiveness justifies its cost. And then he says something about a system that in no way resembles the one America would have if the current reform package passed. Left unaddressed is whether it counts as rationing if you're still allowed to pay for additional services out of pocket.
It's fair for Mr Feldstein to recommend certain changes in the tax code, as he then proceeds to do, as a useful policy step. But why the long and dishonest preamble?
The bigger problem with the argument by rationing is that it seems to ignore how resources are allocated in a perfectly free market—by willingness or ability to pay. Mr Feldstein writes:
But unlike reductions in care achieved by government rationing, individuals with different preferences about health and about risk could buy the care that best suits their preferences. While we all want better health, the different choices that people make about such things as smoking, weight and exercise show that there are substantial differences in the priority that different people attach to health.
Certainly, preferences regarding the level of health insurance to carry vary, as do preferences for overall healthiness, as revealed by choices about things like smoking and diet. But to what extent are lifesaving treatments had or not had on the basis of preference? What about costly but effective therapies for chronic conditions?
The nub of the matter is this—government can afford to provide basic coverage to everyone, but it can't afford to provide every treatment everyone may want to everyone who wants it. It must therefore decide how to limit its expenses, and it can leave open the option of using a private practitioner to those who are denied care based on a cost-benefit analysis. Or government can provide coverage to no one, and those who cannot afford a treatment—effective or not—will go without. Those people will be just as fine as they'd be with treatment in some cases, they'll suffer in others, and occasionally they'll die because they couldn't afford coverage.
That's the nub of it, really. Faced with the prospect of a plan that provides effective treatments to everyone but forces people who want relatively ineffective treatments to pay for them on the private market, Mr Feldstein says he'd prefer a system where people who are unable to afford effective treatments don't get them, calling concern for those unable to pay for treatments "misplaced egalitarianism".
It's all well and good to let the market allocate televisions. Many people live happy lives without televisions, and lack of a television hasn't ever killed anyone. Attempting to provide a basic level of access to television to every American would be misplaced egalitarianism. I would have thought Mr Feldstein could understand the ways in which the market for televisions is different from that for health insurance.

I've discussed rationing via price and other mechanisms previously, (e.g. here), so let me instead try to characterize the political debate on this topic with an overly simplified example. We can, very roughly, break down medical costs as:

total medical costs = (cost per person)*(number of people covered)

The cost per person can be broken into two components:

cost per person = (number of procedures per person)*(cost per procedure)

The number of procedures per person is intended as a rough proxy for the level of care each person receives (i.e. the quality of care, and it includes all aspects of a particular procedure, including prescription drugs). Putting these together gives:

total medical costs = (cost per procedure)*(procedures per person)*(number of people covered)

The Republican attacks are, essentially:

Democrats intend or will be forced to reduce costs by reducing the number of people covered (perhaps focusing on the elderly) and by reducing procedures per person (i.e. a lower level of care on average). Dramatic tax increases may be needed as well.

The Democrat's response runs along the following lines:

That's a fabrication. There's no intent to reduce the number of people covered or to reduce the level/quality of care. In fact, the number of people covered must rise to achieve universal coverage, and procedures per person, i.e. the level of care, will only fall to the extent that procedures with little or no benefit are eliminated. The number of procedures (i.e. the quality of care) will, if anything, go up.

To achieve the goal of universal coverage while controlling costs, it is necessary that costs per person fall. However, this will not be achieved through rationing care. Instead, costs per person will be reduced by lowering the cost per procedure (through lower administrative costs, increased competition, lower drug costs, etc.) and by eliminating unnecessary procedures. Additional revenue may also be used to broaden coverage. Cross-country studies indicate that the reduction in costs per person needed to provide universal coverage without reducing the level of care is achievable.

The goal of Democrats is to lower costs without sacrificing the quality of care (which will allow coverage to be expanded). Whether that's achievable or not is a legitimate point to debate, I think the experience in other countries suggests there's quite a bit of excess in the system that can be removed without affecting the quality of care people receive, but accusing Democrats of intending to cut the quality of care or to ration care within particular segments of the population (or overall) mischaracterizes what they are trying to achieve.


"Honesty, Dishonesty and Competence"

Since Richard Posner has decided to continue his attack on economists as public intellectuals, this time directed at Brad DeLong (see here plus the update at the end if you are unfamiliar with how this started), let me note Menzie Chinn's response to Posner's initial critique (the full version of Menzie's post explains the points below in more detail):

Honesty, Dishonesty and Competence: Comments on Posner's Critique, by Menzie Chinn: Richard Posner has a critique of public intellectuals who work in the public sphere (with special reference to Christina Romer), either in government service, or in journalistic fora. Mark Thoma and Brad Delong have already made clear the (many) points at which Mr. Posner has gone astray. Parenthetically, I'll add that I wonder about the analytical abilities of anybody who lumps Phillip Glass (!) and Elliott Carter together into the highbrow music category (see page 18 in his tome Public Intellectuals: A Study of Decline (1991)). More substantively, I have a few of additional observations...
First, I agree with Mark Thoma that Mr. Posner apparently has little understanding of macroeconomics...
Second, I would not pass a student out of intermediate macro who ... is confusing a financial investment with physical investment in a NIPA sense. ...
Third, before he pontificates on what economists who work in the government should or should not be doing, I think Mr. Posner should read Martin Feldstein's discussion of how the CEA works... CEA members ... do not "leave behind their academic scruples" when they move from academia to government service. ..
Fourth, I think any blog post (let alone paper) should be internally consistent. ... [Posner's isn't.]
Fifth, ...As someone who had to "fact-check" numbers going into White House policy documents and speeches on occasion, I can say that the numbers are verifiable... But the more substantive question is whether the math is so nonsensical. As I showed quite clearly in this post, the number Dr. Romer obtained was easily calculated and plausible.
Sixth, my impression is that former CEA staffers and members that have become bloggers are pretty careful with the numbers and analytics -- certainly more so than Mr. Posner. These include Jeff Frankel, Paul Krugman (notwithstanding Mr. Posner's barbs), Andy Samwick, Diane Lim Rogers, and Nouriel Roubini. (see this post for former gov't/Fed economists who became bloggers.)


"Social Mobility"

The U.S. does not have as much social mobility as Horatio Alger would have you believe. Equal opportunity is an important social goal, at least it is to me, and to the extent that this indicates unequal opportunity, it is of concern. Why is social mobility within the U.S. lower than in many other countries?:

Social mobility, by Daniel Little?: We often think of the United States as a place with a lot of social mobility. What exactly does this mean? And is it true? Ironically, the answer appears to be a fairly decisive "no." In fact, here's a graph from a 2005 New York Times series on income mobility that shows that the United States ranks second to last among Great Britain, US, France, Canada, and Denmark when it comes to the rate of income improvement over four generations for poor families. And here are two very interesting recent studies that come to similar conclusions -- a report on social mobility by the Center for American Progress and a 2007 academic study by researchers at Kent State, Wisconsin and Syracuse. Here is how Professor Kathryn Wilson, associate professor of economics at Kent State University, summarizes the main finding of the latter study: "People like to think of America as the land of opportunities. The irony is that our country actually has less social mobility and more inequality than most developed countries" (link). Basically social mobility refers to the likelihood that a child will grow up into adulthood and attain a higher level of economic and social wellbeing than his/her family of origin. Is there a correlation between the socioeconomic status (SES) of an adult and his/her family of origin? Do poor people tend to have poor parents? And do poor parents tend to have children who end up as poor adults later in life? Does low SES in the parents' circumstances at a certain time in life -- say, the age of 30 -- serve to predict the SES of the child at the same age? The fact of social mobility is closely tied to facts about social inequality and facts about social class. In a highly egalitarian society there would be little need for social mobility. And in a society with a fairly persistent class structure there is also relatively little social mobility -- because there is some set of mechanisms that limit entry and exit into the various classes. In the simplest terms, a social class is a sub-population within a society in which parents and their adult children tend to share similar occupations and economic circumstances of life. It is possible for a society to have substantial inequalities but also a substantial degree of social mobility. But there are good sociological reasons to suspect that this is a fairly unstable situation; groups with a significant degree of wealth and power are also likely to be in a position to arrange social institutions in such a way that privilege is transmitted across generations. (Here are several earlier postings on class; post, post, post.) A crucial question to pose as we think about class and social mobility, is the issue of the social mechanisms through which children are launched into careers and economic positions in society. A pure meritocracy is a society in which specific social mechanisms distinguish between high-achieving and low-achieving individuals, assigning high-achieving individuals to desirable positions in society. A pure plutocracy is a society in which holders of wealth provide advantages to their children, ensuring that their adult children become the wealth-holders of the next generation. A caste system assigns children and young adults to occupations based on their ascriptive status. In each case there are fairly visible social mechanisms through which children from specific social environments are tracked into specific groups of roles in society. The sociological question is how these mechanisms work; in other words, we want to know about the "microfoundations" of the system of economic and social placement across generations.
In a society in which there is substantial equality of opportunity across all social groups, we would expect there to be little or no correlation between the SES of the parent and the child. We might have a very simple theory of the factors that determine an adult's SES in a society with extensive equality of opportunity: the sum total of the individual's talents, personality traits, and motivation strongly influence success in the pursuit of a career. (Chance also plays a role.) If talent is randomly distributed across the population, rich and poor; if all children are exposed to similar opportunities for the development of their talents; and if all walks of life are open to talent without regard to social status -- then we should find a zero correlation between parents' SES and adult child's SES. So, in this simple model, evidence of correlation with SES of parent and child would also be evidence of failures of equality of opportunity. However, the situation is more complicated. Success in career is probably influenced by factors other than talent: for example, personal values, practical interests, personality qualities like perseverence, and cultural values. And these qualities are plainly influenced by the child's family and neighborhood environment. So if there is such a thing as a "culture of poverty" or a "culture of entrepreneurism", then the social fact of the child's immersion in this culture will be part of the explanation of the child's performance in adulthood -- whatever opportunities were available to the child. (French sociologist Didier Lapeyronnie makes a point along these lines about the segregation of immigrant communities that exists in French society today; post, post.) So this is a fact about family background that is causally relevant to eventual SES and independent of the opportunity structure of the society. But another relevant fact is the sharply differentiated opportunities that exist for children and young adults from various social groups in many societies, including the United States. How is schooling provided to children across all income groups? What kind and quality of healthcare is available across income and race? To what extent are job opportunities made available to all individuals without regard to status, race, or income? How are urban people treated relative to suburban or rural people when it comes to the availability of important social opportunities? It is plain that there are substantial differences across many societies when it comes to questions like these. Education is certainly one of the chief mechanisms of social mobility in any society; it involves providing the child and young adult with the tools necessary to translate personal qualities and talents into productive activity. So inequalities in access to education constitute a central barrier to social mobility. (See this earlier post for a discussion of some efforts to assess the impact of higher education on social mobility for disadvantaged people.) And it seems all too clear that children have very unequal educational opportunities throughout the United States, from pre-school to university. These inequalities correlate with socially significant facts like family income, place of residence, and race; and they correlate in turn with the career paths and eventual SES of the young people who are placed in one or another of these educational settings. Race is a particularly prevalent form of structural inequalities of opportunity in the US; multiple studies have shown how slowly patterns of racial segregation are changing in the cities of the United States (post). And along with segregation comes limitation on opportunities associated with health, education, and employment. So the findings mentioned above, documenting the relatively limited degree of social mobility that currently exists in the United States by international standards, are understandable when we consider the entrenched structures that exist in our country determining the opportunities available to children and young adults. Race, poverty, and geography conspire to create recurring patterns of low SES across generations of families in the United States. (See an earlier post on Douglas Massey's analysis of the mechanisms of race and inequality in the US.) And limited social mobility is the predictable result.


links for 2009-08-20

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