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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.
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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: http://nihcm.org/pdf/EV_JensenMendonca_FINAL.pdf.
**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.
Krugman has a recent post where he cites a SF Fed study regarding the unemployment rate among recent college graduates:
Mark Thoma leads us to new research from the San Francisco Fed showing that recent college graduates have experienced a large rise in unemployment and sharp fall in full-time employment, coupled with a decline in wages. Why is this significant?
The answer is that it’s one more nail in the coffin of the notion that employment is depressed because we have the wrong kind of workers, or maybe workers in the wrong place.
And asks:
The right question to ask, with regard to all such arguments, is, where are the scarcities? If we have the wrong kind of workers, then the right kind of workers must be in high demand, and either be in short supply or have rapidly rising wages. So where are these people?
Now, not to diminish the fact that what most people refer to as “The Recession” was, in fact, the result of a demand deficiency (or more aptly, a large increase in the demand for money not accommodated by the Fed), I’d like to point to some anecdotal evidence that in reality there is a problem a skill mismatch and “recalculation” that is proving difficult to tract. To the extent that this is the problem, rather than a problem, I’m not quite sure. From David Andolfatto:
For the 15 million Americans who can’t find jobs, the labor market is like an awful game of musical chairs. There are many more players than there are available seats.
Yet at Extend Health, a Medicare health insurance exchange firm in Salt Lake City, Utah, the problem is just the opposite—a growing number of chairs to fill and not enough people with the skills to fit the jobs.
“It seems like an oxymoron in this environment that you can somehow be challenged to find great workers,” CEO Bryce Williams admits, almost sheepishly.
Extend Health’s call center workers help retirees navigate the process of signing up for commercial Medicare Advantage and drug coverage plans.
For this fall’s Medicare Enrollment season, the firm will need close to a thousand workers. The ideal candidate is over 40, with a background of financial services in order to qualify for insurance licensing.
“They need to be able to pass the state of Utah exam, which is not easy,” Williams explains. “They need to have a background in comparing the financial metrics of trying to help someone compare and analyze and give great advice.”
Andolfatto has a link to another story along the same lines regarding manufacturing workers (a field which has become highly specialized). There is also the two facts that college degrees are large fixed investments in skills that may be reduced in demand. This is something that I’m largely familiar with, as I was in school for a prized IT career before the tech bubble burst. As I know Mark Thoma has noted (though I can’t find the link), we have a disproportionately high amount of graduates in business and finance, which is probably still true, and a low proportion of graduates in applied sciences. This of course leads into the next issue: the squeezing of efficiency out of a smaller workforce. How does that relate to the degree profile of our college graduates? Because it is comparatively easy to squeeze extra efficiency out of people who work “in business”. Much easier than, say, squeezing extra efficiency out of an existing construction or manufacturing worker. So if more people are specialized in business or finance, areas that took a major hit, and also an area where substitution is comparatively easy, then there is likely a skills mismatch between there.
So yes, I believe that there is more than trivial problem of skills mismatch, which I think was nearly the whole story up until late 2008, when the large fall in expected NGDP caused various financial obligations to be much harder to service (that tends to pin people down, and reduce employment options). That is a demand story. However, as we slog out of this recession, real job growth may remain low even as we return to previous trend NGDP. We should be at least prepared to discuss the supply side when that happens.
P.S. If anyone was wondering, I’m starting to feel better, though I haven’t gotten a diagnosis as to what is wrong with me, still. Been keeping busy with confusing insurance statements, school, and work. I think I’m at the point where I can end my hiatus from blogging, and write a few things. Glad to be back =].
P.P.S. For a long time I’ve been trying to find oddball diagnoses that fit my symptoms. Doctors hate that, by the way…but I do it anyway. In any case, I’ve been stuck on Whipple’s Disease for a while. Symptoms fit like a glove.
Since I can remember I’ve loved reminding my audiences that economics is not morality play. It wasn’t until Paul Krugman started blogging that I realized that I must have picked it up from one of his early writings.
That virtue can sometimes be vice is one of the most fun lessons of economics. There is a perverse delight in explaining how foreign aid may impoverish the Third World but sweatshops would make it grow rich.
I can understand why many of my fellow economists were so eager to transport this insight to the political realm. Politics they argued was a fight between interest groups – a battle over the fiscal commons. There weren’t good guys and bad guys. There were just naturally self-interested people.
Tyler Cowen pays homage to this legacy in a recent NYT piece
James M. Buchanan, a Nobel laureate in economics — and my former colleague and now professor emeritus at George Mason University — argued that deficit spending would evolve into a permanent disconnect between spending and revenue, precisely because it brings short-term gains. We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society. As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic.
Curiously Tyler refers to a rational actor model as a moral critique but then again he certainly knew Buchanan better than I.
Still, to borrow a phrase from another of my favorite economists, the only problem with this analysis is that it is at odds with the facts.
If we want to build a model of what the government spends money on we would be best to start this way: ask people what social obligations do they believe “society” has. Look around for the cheapest – though not necessarily most efficient – programs that could credibly – though not necessarily effectively– address those obligations. Sum the cost of those programs. That will be government spending.
Contrary to Jonah Goldberg and others who see Canada and the United States as examples of two clashing ideologies, they are actually examples of two different ethnic distributions. The United States is not Canada because there is ethnic strife between Southern Blacks and Southern Whites. That strife reduces the sense of moral obligation on the part of the white majority and so reduces government spending.
I want to be very clear that I don’t say this to paint those against social spending as racists. From where I sit I am betting that most of the intellectuals lined up against expanding the welfare state are naively unaware that their support rests upon racial strife. Otherwise they would realize that as America integrates they are doomed. They are fighting as if they believe they have a chance of winning. Given the strong secular trend in racial harmony, they do not.
I point this out also to show why the major Republican strategy for limiting government was doomed from the start and why I am also not particularly worried about Americas fiscal future per se.
In the 1980s some conservatives believed that they might not be able to cut government but they could cut taxes and thereby starve the beast. Rising deficits would force the hand of future governments. Spending would have to be cut in order to bring the budget into balance.
Much of the current handwringing about fiscal irresponsibility is a sense of alarm not only on the right, but throughout much of the political center, that these spending cuts are not actually materializing.
But, by what theory of government did you ever believe they would? Governments don’t look at how much money they have and then decide what they want to buy. They decide what they want to buy and then they look for ways to fund those purchases.
Divorcing the two – through sustained deficits – was only going to lead to ever increasing levels of debt. This is what we got. At no point was the beast ever starved. The peace dividend lowered government spending growth somewhat, but that was undone by the war on terror. Otherwise spending hummed along, as it always will, with the government buying things the public thinks it ought to buy.
Yet, if this is causing upset stomachs among many of my fellow bloggers it calms mine. Its quite clear how this will end. Racial strife will continue to abate. The public will coalesce around the welfare state and taxes will be raised to meet the cost.
The fundamentals do not predict rising debt forevermore. The fundamentals predict a VAT.
This is not to say I am unconcerned about our economic future. Health care costs will continue to eat up more and more of our economy unless something is done. However, trying to convince people that health care is not a social obligation a fool’s errand. The best you could do is convince them we have no obligation to the other. As the other integrates this will likewise prove impossible.
No, people will ultimately believe that health care for all is a social obligation and therefore government will pay for it. There is no more analysis to be done on that part of the question.
The only part left is looking around for the cheapest program. This is where our attention should be focused. Can we lower the cost of those obligations? Can we make medicine more efficient?
If we can there will be economic room for other things. If we can’t, well just hang in there until the artificial intelligence revolution.
Paul Krugman makes the case for a higher inflation target
But what really stands out, if you assume that discretionary fiscal policy won’t be there when you need it, is that this makes the case for a higher inflation target. Olivier Blanchard, at the IMF, made just that case a year ago(pdf). If we’d come into this crisis with 4 or 5 percent inflation, not 2, there would have been more scope for conventional monetary policy to act before hitting the zero lower bound.
Paul Krugman makes the case for a higher inflation target. This sounds a lot like the argument I have been making for a while, and it should. Paul and I largely agree on how the economy works.
We disagree on whether government spending can be targeted in effective fine grained ways, but that’s the point. Disagreement over the effectiveness of market versus public allocation of resources should not alter your view on the relationship between monetary policy and recessions.
Modeled Behavior 