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There is a lot of talk about health care in terms of giving consumers of medical services choice in a marketplace. The basic cost-control measure that the Ryan Plan hopes for is that a market in health insurance will lower prices. Well, it likely won’t. The mechanism that will control prices is the willingness of people to make up the difference between Medicare vouchers and the actual costs. But brushing that aside, Paul Krugman takes ultimate offense to the characterization of “patients as consumers“:

Medical care is an area in which crucial decisions — life and death decisions — must be made; yet making those decisions intelligently requires a vast amount of specialized knowledge; and often those decisions must also be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.


The idea that all this can be reduced to money — that doctors are just people selling services to consumers of health care — is, well, sickening. And the prevalence of this kind of language is a sign that something has gone very wrong not just with this discussion, but with our society’s values.

Of course it is very true that life and death situations are made in the field of medicine…probably every day if not at a single hospital, at hospitals as a whole. But the actual truth of the matter is that the bulk of medical spending of the average person does not involve death at all…just nagging, often temporary, quality of life issues. In fact, outpatient care (which includes routine and sick visits to the doctor and same-day hospital visits), drugs and non-durables (which includes things like wheelchairs and other medical supplies), and administration account for ~2/3rds of all medical spending in the US.*

In this aspect of medical care, patients are consumers, and would benefit from price competition in a less-regulated market. Having strep throat doesn’t so much require “specialized knowledge”, as it requires a signed piece of paper so that you can get specialized drugs. Most moderately bad cuts are treated with the highly technical, and extremely specialized skill…applying super-glue.** Same thing with pain management, which in the name of the “War on Drugs”, we severely limit and police. This is why I think that leftist-liberals get it exactly backward when they want to push people into insurance markets, and then use a lot of administrative tricks in order to control costs. What you want to do is push people into a market for these services, perhaps by subsidizing price competition.

Then we can discuss the extent to which the government should intervene as a single payer for the remaining 1/3 of medical spending; which includes inpatient care (plus some emergency outpatient procedures from the previous category), long-term care, and end-of-life services, among a few other things. The point is you can’t just wrap the blanket of “life and death” and “specialized information” around every single medical service, and then claim that markets don’t work.

As an aside, is it really wise to base regulation on perceptions of different groups of people? Seriously?

*The information is a little dated, but it hasn’t changed much if at all:
**I pride myself on the fact that I’ve super-glued many a cut of my own! Also, I have some odd illness that is STILL untreated, and it is naggingly annoying…however it’s hasn’t proven “life or death”. I would have much preferred shopping on price for services (like my CT scan for instance, which was $1,500) to having my insurance company pay tens of thousands of dollars in tests and visits — all which have yielded no results.


I’m not going to argue that we should necessarily have a market citizenship for immigrants, but I think it is a useful starting point for analysis. After all, when we have some scarce resource we want to allocate, absent some public goods nature of the good, markets are the way we normally do it. Does citizenship have some public goods nature? Even if this is the case, markets should be the starting point of analysis and the market failure should be clearly explained so that market-based solutions can be examined.

How would markets allocate citizenship? While citizenship is necessarily produced by the government, it doesn’t need be allocated by mandate or allocating shares democratically, but instead it could be done by auction. Each year the government can choose how many citizens to produce, and then they could auction them off. What would the problems be with doing it this way?

One could argue that low-skilled immigrants hurt low-skilled natives, whereas high-skilled immigrants are likely to invent things and produce externalities in production, which means we should favor the high-skilled over the low skilled. However, a system that allocates citizenship based on auction will naturally favor individuals who will be very productive, because they will have a high-willingness to pay. If the externalities to certain migrants were certain enough, we could also offer a x% discount to individuals with specific degrees or qualifications. That means these migrants would get a matching grant of 20 cents for every dollar they bid in the auction. Starting from a price system and attempting to correct for positive and negative externalities will be much more efficient than the status quo, and compared to setting immigration quotas based on country, education levels, etc. it would require less information from policymakers and be more dynamic.

Another objection is that we want to grant some people immigration for humanitarian reasons, and these people would be priced out of the market. But there are lots of goods we want to give people for humanitarian reasons, but we don’t throw out the price system for these goods. Private charities and individuals could spend money buying citizenship for people. Imagine how many people could have been brought from Haiti to the United States if citizenship could be bought. This allows private groups like NGOs who are actually on the ground in these countries to try and allocate citizenship to those who need it most.

I’m prepared to accept that markets won’t work for immigration or that there are some massive market failures that can’t be overcome. But I would like to see these things identified rather than assumed. I also think this analysis is useful in terms of selecting optimal non-market allocations. After all, if you think we should value high-productivity workers more than a price system, perhaps one combined with subsidies for specific degrees, then you should explain why. Likewise, if you think we should allocate these based on humanitarian reasons more than private charities and a market system would, then you should explain why. What is it about citizenship that suggests we should diverge from the allocations markets would produce?


ADDENDUM: It’s also worth noting how this relates to the DREAM act. People who have lived here for most of their lives, and especially those who are college bound,  will likely have a very high willingness to pay for citizenship. After all, consider this: if you’re an American reading this, what would your willingness to pay for U.S. citizenship be? Given this, I think the DREAM act is a pretty good marginal proxy for a market outcome, since it’s granting citizenship to likely auction winners.

It’s not perfect, of course, as some possible immigrants from across the world would probably outbid some DREAM act beneficiaries, and some charities would probably outbid them for citizenship for Haitians. Nevertheless, it does seem to be as good of a marginal allocation as any centrally planned allocation we could conceivably get.

In the comments on my previous post contrasting minimum wage and prostitution, Sister Y argues that prostitution in fact has an externality. Some individuals find prostitution morally objectionable, and so they suffer mental costs when someone else hires a prostitute. The idea that we have preferences over each others actions, and that this can lead to conflicts between welfare analysis and various notions of liberty, is a longstanding issue in economics that owes much to Amartya Sen. However, I think the prostitution-as-externality argument is fairly easily resolved and doesn’t generate any conflicts between liberty and welfare analysis.

To illustrate, allow me to use characters from HBO’s Hung, which stars Tom Jane as middle-class, suburbanite, male prostitute Ray Drecker.

Say Ray’s friend Lenore wants to purchase Ray’s prostitution services and she values them at $400. But when Lenore does this it bothers Ray’s other friend Tonya. If the negative utility Tonya experiences is worth more than $400, then the market provides a mechanism for Tonya to satisfy her wants: she can pay Ray $401 not to sleep with Lenore.

You might argue that contracts aren’t complete enough to guarantee that Ray won’t sleep with Lenore anyway the moment Tonya turns her back. But what Tonya can buy from Ray for $401 is only an hour of not sleeping with Lenore, because that is what one hour of his time is worth. If she wants to pay Ray to never sleep with Lenore she has to pay the net present value of all of the future services.

For those who morally object when Ray sells himself to anyone, not just Lenore, this is a moot point because there are other clients anyway, so paying to not sleep with Lenore doesn’t accomplish much less prostitution. The point is that because prostitutes offer a flow of services Tonya has to pay Ray not to sleep with all of his potential clients if she wants him to not be a prostitute. Essentially she has to buy the entire flow of services.

This makes contracting much less simple: if you don’t like prostitution then you can hire the prostitute to do something else. In this way the presence of lots of people who object for any reason, moral or otherwise, to prostitution can drive down the quantity of prostitution services by bidding up their price. What this means is that markets are fully capable of internalizing the mental costs borne by those who dislike prostitution.

People will probably object that this is unbelievable, and that even if it happened once in a while, in the real world this would never be enough objectors to affect the quantity of prostitution. I think this is correct. After all, the objectors would have to value preventing prostitution at more than average rate of $300 an hour in order to outbid the existing buyers. But what this tells you is that the marginal utility gained from prostitution by consumers would vastly exceeds the marginal disutility to objectors.

I think objectors know. After all, market based solutions are possible and yet you never hear objectors push for anything but prohibition. This tells me that their willingness to pay is pretty low, and therefore so is their disutility.

While the rest of the world is poring over the works of this years Nobel Prize in Economics winners (um, you are reading Aggregate Demand Management in Search Equilibrium, aren’t you?) I’m still reading one of last year’s winners, Elinor Ostrom. In Governing the Commons, she makes a counterintuitive point about the public goods nature of markets themselves:

A competitive market – the epitome of private institutions – is itself a public good. Once a competitive market is provided, individuals can enter and exit freely whether or not they contribute to the cost of providing and maintaining the market. No market can exist for long without underlying public institutions to support it.

It is an interesting and counterintiutive claim. But what does she mean by this? What, precisely, are the benefits of a pre-existing market that a potential entrant receives?

One benefit is that a new business can observe prices prior to entry, which communicates important information about demand. If you can make a pair of shoes for $20, then knowing what price the market will currently bear is valuable to you, yet you usually won’t need to pay for that information; just see what the competition is charging.

Upstream sunk costs will generally be sunk, so that, for example, a shoe factory does not need to pay the large up front costs of starting a cattle ranch, but can buy leather at marginal cost from existing suppliers.

I do not think she can mean simply the existence of general institutions that facilitate markets, like laws of commerce and a judicial system to enforce it. If this were the case then a market is “a public good” in the sense that any type of cooperation or exchange that benefits from a lack of lawlessness and general rules is a public good. It is more accurate to say that the those institutions are public goods which benefit markets rather than the markets are public goods.

Nor do I think she means laws particular to a market, such as you can’t sell exploding shoes, because for many properly functioning markets, especially very simple ones, no particular laws are needed other than the general laws of commerce.

However, one particular legal area which may be a benefit to new entrants is the existence of standardized contracts which have developed by trial and error over time to be more effective than they would be if one was starting from scratch. However, markets need not currently be functioning for this knowledge to exist.  Functioning markets having existed some time in the past could be sufficient. So it’s not clear that this should be chalked up to the public good nature of markets.

What else am I missing here?

Two excellent examples today of liberals defending markets… not that that is unusual or anything, but both are exceptionally good and I wanted to highlight them, but there’s no other topic under which I could simultaneously blog these two items.

First is Brad DeLong putting a lower limit on the value of markets over command and control:

How much does the use of markets as a decentralized social planning mechanism for economic life matter? How much richer are we because we live in a market economy rather than in a command-and-control bureaucratic economy?

We are fortunate–if that is the word–to be able to answer this question because the twentieth century provided us with a natural experiment in the form of High Stalinist central planning…

In 1989, the Iron Curtain came down, and we could see what a difference it made as we could examine levels of material well-being on both sides of the Curtain. This is as close to a perfect natural experiment as anyone could wish: the Iron Curtain’s location was determined by where Stalin’s and Mao’s and Giap’s armies marched–which is as exogenous to other determinants of economic well-being as anyone could wish.

Here are the results:

Material Well-Being in 1991: Matched Countries on Both Sides of the Iron Curtain

The Iron Curtain

Eschewing markets robs you of between 80% and 90% of your potential economic productivity.

Now you can argue that the difference in human well-being is less than this gap in material wealth. Cuba, after all, has a high life expectancy and a low level of inequality.

Or you can argue that the difference in human well-being is much, much greater than this gap in material wealth…  Put me down on the much, much greater side of the argument.

Brad displays this picture to illustrate where the difference in human well-being comes from that is much, much greater than the material wealth gap.

Next is Paul Krugman, who defends public transportation and illustrates the hypocrasy of almost everyone you know who says that public transportation should pay for itself:

The usual suspects on the comment board are, inevitably, arguing that rail transit should pay for itself. The obvious response is that road transit doesn’t; why should only public transit have to self-finance, when private vehicles generally drive on free roads built and maintained out of taxes?…

Now, Econ 101 says that the first-best answer to these externalities is to make people pay these social costs; if we did, New Jersey Transit could charge much higher fares! But since that isn’t going to happen — at best, we may someday get a modest congestion charge — we’re into second-best territory.

And rail transit takes people off the roads, thereby yielding a large benefit that doesn’t show in NJT’s books.

This certainly doesn’t mean that all or any public transportation passes cost benefit, but it does mean that you don’t need public transportation to actually take in money or beak even in an accounting sense for it to have a positive net present value. Keep this in mind the next time your ranting uncle tells you otherwise: markets are awesome, let’s have one for roads.

Say a machine is invented that allows one individual to transfer years-of-life to another individual. Should people be allowed to buy and sell their years-of-life or should these exchanges be outlawed?

If your answer is yes, picture the cults that would arise with the sole purpose of breeding and brainwashing people so that they give life-years to their now immortal Leader.

If you’re answer is no, then does the morality of kidney exchanges hinge on the evidence that donating a kidney doesn’t lower life expectancy? As far as I know randomized studies on this have never been done, and the selection bias and unobservables here seems potentially insurmountable. If these results were overturned by a  randomized trial, how many kidney exchange supporters switch positions?

I do support kidney exchanges, but I also don’t have good answers to these questions.

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