What is the correct reference group?

Canada is still a really suboptimal comparison to the United States in terms of how one might improve health care cost-effectiveness.  Consider:

As I have outlined over my last two OECD health data spending posts, Canada is one of the world’s biggest per capita spenders when it comes to total health spending – the sum of both public and private. Indeed, both public and private health spending have grown in tandem over the last few decades. In US PPP$ in 2010 for the 34 OECD countries, Canada ranks seventh in terms of total health spending per person. Yet, it comes to physicians per capita, it ranks 26^th. We rank 25^th in the number of total hospital beds per capita, 25^th in the number of nurses per capita, 21^st for CT scanners and 20^th for MRI units. While we are in the top ten per capita spenders, we are never in the top ten for any of these five health care resource indicators.
 

While I am not sure I completely accept the idea of Iceland as a great comparator, either, it is pretty clear that the Canadian approach is still pretty expensive relative to the other first world countries. 

What Canada is, instead, is an existence proof for the possibility of a universal care system in a highly diverse population that costs less.  But why don't we consider a country like France as a health care model.  Or, for that matter, at least look at what is working so well in reducing costs in Iceland. 

Back to education for a moment

This comment from Dana Goldstein is directly on point:

I'm often asked what one education reform I think would make the biggest impact on American students' achievement. I don't like this question. The real answer--vastly decrease poverty--isn't going to happen anytime soon
 

 It may not be in the cards, but poverty and the knock-on effects of poverty are hard to ignore in the context of United States education policy.  It simply connects to too many different pieces.  Neighborhood funding models for schools mean poor neighborhoods end up with under-resourced schools.  High rates of incarceration increase issues like single parent families and foster care families.  Lack of trust in social institutions makes short term planning much more rational. 

All of these things end up impacting the overall quality of education.  Any inefficiencies due to a teacher's union preventing teacher recruitment are likely to be a rounding error compared to the main effects that we are estimating here. After all, when there are enough problems with home life (stress, food insufficency, lack of child care, etc . . .) there is only so much that a teacher can do for the 30 students in his/her class. 

She left out the part about encouraging you to get your family to risk their finances by co-signing your loans

But other than that, Helaine Olen pretty much nails it.

Robert Kiyosaki, author of the bestselling Rich, Dad, Poor Dad series of financial advice books, is offering his fans yet another lesson in how the rich are different than you and me: they file for bankruptcy not because of ill health or unemployment related issues, but instead as a strategic business move.

Rich Global LLC, one of the corporate arms Kiyosaki has done business under, filed for bankruptcy protection in August, after it was ordered to pay just under $24 million to the Learning Annex and its chairman Bill Zanker.

Kiyosaki was one of the small-time wealth guru mountebanks who made it to the big-time in the aughts by telling his forever falling behind audience that they could get ahead, they just had not learned how. The shtick behind the Rich Dad books was that Kiyosaki was sharing secret money-making strategies of the wealthy with his wage slave readers. The tips ran the gamut from ridiculous to illegal and downright hurtful and included advocating for insider trading, arguing for the purchase of multiple real estate properties with little or no money down and telling followers they could purchase stocks on margin via unfunded brokerage accounts.

Kiyosaki is among the worst but he's not all that unrepresentative. If you feel up to it, the next time you're in a big bookstore take some time to browse the business section. Here and there, you'll find something interesting and intelligent or at least, helpful, but for the most part you'll encounter three profoundly embarrassing genres:

 1. The you-too-can-be-rich books like Rich Dad, which tend to target the financially vulnerable and deliver, more often than not, ruinous advice;

2. The guru books. These are predominantly buzzword-rich seminar fodder in the Tom Peters mode with the occasional pseudo-profound business fable thrown in (and no, I didn't make up the term 'business fable'). These are less sleazy than the first category (they primarily target people who are already in business rather than the desperate and dunemployed), but the advice is not that much better and their cost to society may be greater. Directly and indirectly, American business wastes a tremendous amount of money and what might otherwise be productive man-hours on these bozos.

3. The be-like-me books, where someone with a completely inapplicable success story tries to convince you that you can somehow get similar results by following his or her lead. These are probably the least harmful of the bunch. They can also provide some of the most amusing examples.

If the word 'slumberland' means anything to you...

Check out the Google home page today (October 15th)

S'more thoughts on the marshmallow game

Continuing the thread of Joseph's recent post on the Marshmallow game...

Everybody reading this has probably run across the persistent (and well-subsidized) narrative that goes something like this: virtually all of the variability we see in wealth can be explained by intelligence, talent and character with luck and inequality of opportunity playing little role in a person's success. In this narrative the labor market is now strongly efficient and the decrease in social mobility is simply the consequence of that current level of efficiency and a very large genetic component associated with those traits needed for success.

There are entirely reasonable parts to this narrative (I don't know of anyone arguing that being smart and hard-working won't won't help you get ahead), but if you try to take that case to the extreme and argue that money, social position and connections don't factor in, you have to start explaining away a large number of counterexamples and potential problems with the narrative.

The new findings in the marshmallow game are one example, showing that deprivation can cause people to be less likely to delay gratification rather than the causality necessarily running the other way.

"Being able to delay gratification—in this case to wait 15 difficult minutes to earn a second marshmallow—not only reflects a child's capacity for self-control, it also reflects their belief about the practicality of waiting," says [researcher Celeste] Kidd. "Delaying gratification is only the rational choice if the child believes a second marshmallow is likely to be delivered after a reasonably short delay."

How about the poor irresponsible spenders who are hopelessly bad with money? According to Sendhil Mullainathan of Harvard that's not the case.

Mullainathan claims that although planning is a central part of poverty, poor people are better at making financial decisions than the rich and middle class. 

“If you go and stop people at a supermarket and ask them for their receipt and say, ‘Hey how much did you just spend,' middle class shoppers have no idea. The poor know what they just spent," he said.

What about on the other side? Are the well off and educated consistently better with their finances? Perhaps not: (via Thoma)

But college-educated people were more likely than those with high school or less education to be above this 40 percent threshold - considered to be a risky amount of debt for most households.

Another, more amusing example, comes from some of the same think tanks and pundits who promote the inequality-reflects-ability narrative. It's the idea that a small increase in the top marginal rate would create a large hardship on those close to the cutoff.

As discussed before, if the cutoff is 250K of taxable income, a family would have to be making in the neighborhood of 300K gross to pay any of the higher tax. To see an increase of three or four thousand in its tax bill, the family would have to be bringing in something like 350K. If someone, even with a family, is making more than a third of a million a year and is so financially shaky that additional expenses of four thousand will cause financial hardship, that person has to be at least one of the following to an extreme degree:

1. Unlucky

2. Undisciplined with limited capacity for delayed gratification

3. Bad with money

So one of the main conservative attacks on increasing the tax rate presupposes that either luck plays a large role in economic outcomes or a significant number of the well-to-do lack the very traits that Charles Murray and company use to explain the success of the upper classes.

As mentioned at the beginning, conservative think tanks and pundits have expended a great deal of money, time and energy promoting the idea that wealth and poverty simply reflect relative contributions to society, that the rich deserve to be rich and the poor deserve to be poor. Perhaps those proponents are right, but you have to wonder what would happen if they trusted the marketplace of ideas enough to let this idea stand or fall on its own merits.

The Marshmallow Game

Even have one of those paradigm changing moments?  When things that you beleived are completely altered by new evidence.  Mark Thoma links to a new version of the Marshmallow game. Consider, especially, this piece:

But as she observed the children week after week, she began to question the task as a marker of innate ability alone. "If you are used to getting things taken away from you, not waiting is the rational choice. Then it occurred to me that the marshmallow task might be correlated with something else that the child already knows—like having a stable environment."
 

This is a massive finding for two reasons.  One, it gets at the issue of trust and how important it is t be able to trust your fellows in order for society to function.  In a low trust environment, there is a serious risk of perverse incentives (and it is easy to forget this).  This may be especially true of issues like employment contracts -- if you can't trust employers to keep their part of the implicit social contract then it is hard to defer gratification. 

Two, all of this talk of impulse control leading to poverty is deeply misguided.  Framing it as impulse control makes it seem like a feature of the person and not the environment.  But it appears that it is also deeply related to how much you trust the systems in place.  So perhaps the issue is growing up in unstable environments or in how much we can depend on people to be reliable. 

That makes the whole issue seem both a lot clearer and a lot more complex.

The Antonym Game

I thought of this* a while back as a possible classroom game but as I was working on another post it came to mind again, this time for its metaphorical possibilities.

The object of the game is to get from a word to to its antonym through a chain of roughly synonymous pairs in the fewest number of steps. For example, small and large.

Small can mean fine

Fine can mean excellent

Excellent can mean great

Great can mean large

Admittedly, some of these pairs stretch the relationship a bit but you get the general idea. (I'm tempted to segue into a discussion of Janus words here, but that's off the main topic and really ought to wait for another post). I'm not sure how well it would actually work as a word game but at least it makes a useful metaphor when discussing contrarian journalism.

The objective of contrarian journalism is analogous, describing something with an antonym of the word you'd normally associate with the thing. Like the game, this linking of antonyms is normally done through a series of steps that seem that seem more or less reasonable when viewed individually even though, taken together, they lead to an absurd conclusion.

More importantly, this kind of journalism is, at heart, also a game, a demonstration of cleverness, no more intended to produce meaningful insights than a game of Scrabble is intended to produce elegant verse. This isn't to say that counter-intuitive conclusions are bad. If a line of reasoning leads to somewhere surprising, somewhere conventional wisdom would never point to, that can be a very good thing (assuming you didn't reach that conclusion via a stupid mistake in your reasoning -- counter-intuitive often means wrong).

But if you start out with a counter-intuitive position and set out to find a just-good-enough argument to prop it up, then the whole exercise is no more productive than misusing the transitive property to claim that small means large.

*I'm pretty sure someone else thought of it first.

Higher Education

Matt Yglesias:

Summers mentioned that for all the valid complaints that one hears about the state of American college education, there's a clear demand for it on the international stage so we must be doing something right. Many more foreign students come here to study than we send abroad, notwithstanding the generally higher cost structure of the American higher education sector.
 

 I actually think that this can be one of the weaknesses of market signals.  Reputation persists even after fundementals have changed.  The classic example of this, in my view, is the American Car Industry.  If one were to go to Detroit in 1968 and talk about how bad decisions might eventually catch up with them, they would look silly.  But when these decisions actually did catch up with them the damage was very hard to reverse. 

Another example was deforestation on Easter island.  Over the short term, each tree that was harvested was an economically sound decision.  It had an immediate and positive payoff.  But when all of the trees were gone, things definitely were not improved.

So just because an industry looks strong (now) doesn't mean that there are not rising challenges in the future. 

Nate Silver interview on Fresh Air

Promoting his new book The Signal and the Noise. The part I caught was excellent and I've got the rest downloaded for tomorrow.

 You can catch it here.

Jon Stewart does not believe that 8 million > 4 billion

and he's also kinda picky about decimal places.

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Better yet, it was a satirical math twofer.

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Health Insurance markets are tricky

The problem with trying to harness market forces to provide less expensive health care for older adults is the lack of an open price system.  Matthew Yglesias critiques David Brook's alternative to the current proposal of using a panel of experts to try and set costs:

Brooks says Obama's plan to do this with price controls is doomed for political economy reasons. A politically powerful coalition of elderly people and health care providers will block it. That's certainly plausible. But what's the alternative?

Brooks says the alternative is to insert an additional layer of rent-seekers into the dynamic by contracting Medicare services out to private health insurance companies.
 

This approach always assumes two things: 1) that there is a functional market that can set prices independent of the insurance system.  How many elderly patients pay out of pocket for major medical services in the United States and then brag about the transparent pricing?  2) that there are real efficiencies to be gained by a private firm that could not be availed by the government.  Notice that the insurers are not the providers, we already have private hospitals.  So the efficiency would have to come from somewhere else.  For example, that the firm could simply billing procedures to reduce administrative overhead.  But medical billing tends to be complicated and needing to interface with a lot of different systems/reporting structures reduces efficiency.  Or they could set prices more saccurately, but then they are just another panel of experts that is not accountable to the electorate. 

We have the same issues with defense contractors.  It is very hard to set market prices for items that can only be sold to the United States government (think nuclear weapons or aircraft carriers). So we rely on expert judgement (on the part of the government) as to what costs should be for these items.  Would we really expect to see costs drop if we inserted another layer of "bargainers" who acted on behalf of the government to set prices and then got to have a percentage of expenditures?  How could such incentives ever work out? 

 

Innovation

Noah Smith has a dynamite post on a recent economics paper.  It puts forth the idea that "cuddly" countries (i.e. Sweden) are parasitizing off of "cut-throat" countries (i.e. the United States).  The problem is the modeling assumptions.  In one especially problematic passage of the Daron Acemoglu and James Robinson paper is:

We assume that workers can simultaneously work as entrepreneurs (so that there is no occupational choice). This implies that each individual receives wage income in addition to income from entrepreneurship[.]
 

This basically, all by itself, destroys the link between their model and real world experience.  How many people do you know are able to do these two things at the same time?  How can the time spent in your garage inventing Apple computers not reduce your ability to work at a demanding corporate job?  How many people can draw a full wage and benefits while working for themselves on a small start-up?  Can we really believe that there is no financial sacrifice at all? 

Then I think about things like Health Insurance.  When reading about a small retail businesses (see this comment thread), one thing that was clear was how useful it is to have a spouse with a good job (i.e. one that gives out health insurance).  How can the need to construct these elaborate safety net plans possible improve the success rate of small business? 

Another assumption that seems implausible:

Also, the authors assume that entrepreneurs do not put up any of their own wealth as startup capital for their ventures, and they assume no heterogeneity between worker/entrepreneurs. This means that it is just as easy - and no more risky - for a poor person to start a successful company as for a rich person to do so.

I am reminded of the founder of Jimmy Johns who started a business with a $25,000 loan from his father (in 1982 dollars).  It's an inspirational story, but what about people who did not have parents with that level of capital to just give to their children?  Would he have been as successful if he stopped by a bank and asked for a loan?


Instead I want to think about whether you see the reverse in terms of entrepreneurship.  Look at Sweden versus the United States -- why do they have more entrepreneurs? 

Which brings us to the final problem -- innovation being measured by patents.  Are we really excited to see Apple and Google spending more on patents than research?  After all, patents prevent emulation of good ideas and slow innovation.  In theory the patent process is intended to reward innovators, but are we positive its real effect isn't to enrich lawyers? 

More indispensable journalism from Marketplace

Marketplace Money devoted an excellent episode to poverty this week. You should check the whole thing out if you can, but if you're pressed for time make sure to listen to this interview with Harvard economist Sendhil Mullainathan.

Cutthroat capitalism and the 52/20 club

Lane Kenworthy has a long but pithy post questioning the claim that "cutthroat" capitalism spurs innovation. The whole thing is worth reading but this passage in particular got me thinking:

The really interesting question posed by Acemoglu, Robinson, and Verdier is whether innovation would slow in the United States if we strengthened our safety net and/or reduced the relative financial payoff to entrepreneurial success. I’m skeptical, for three reasons.

The first flows from America’s past experience. According to Acemoglu et al’s logic, incentives for innovation in the U.S. were weakest in the 1960s and 1970s. In 1960 the top 1%’s share of pretax income had been falling steadily for several decades and had nearly reached its low point. Government spending, meanwhile, had been rising steadily and was close to its peak level. Yet there was plenty of innovation in the 1960s and 1970s, including notable advances in computers, medical technology, and others.

I think we can take this even further. The entire quarter century following the WWII was marked exceptional innovation and growth and yet there were a number of factors (taxes, unions, large government payrolls, etc.) that reduced pay-outs for economic winners and risks for losers. Many of these factors involved programs for veterans (a huge group at the time). Of these, the most relevant might be one known, disapprovingly, as the 52/20 Club.

 Another provision was known as the 52–20 clause. This enabled all former servicemen to receive $20 once a week for 52 weeks a year while they were looking for work. Less than 20 percent of the money set aside for the 52–20 Club was distributed. Rather, most returning servicemen quickly found jobs or pursued higher education.

You don't hear much about the 52/20 clause these days. I first came across it in a film called the Admiral Was a Lady about a group of airmen living on their pooled unemployment checks (if you're interested in the period you might check it out but be warned: despite the cast, it's not a very good movie).

There was some grumbling at the time at the time (the term "gravy train" was thrown around), but on the whole, Americans in the years after the war (with the Depression still fresh in the collective memory) seemed to be inclined to believe that those who needed a hand should get one. This attitude did not seem to have hurt us in terms of growth or innovation.

There's one more notable implication of the history of the 52/20 Club. We've heard claims recently that unemployment insurance causes people to stay unemployed, but the history of this program suggests that this effect disappears when people can actually find work.

Health Insurance Question

Austin Frakt on John Goodman's proposals in Priceless: 

Anyway, the main rule John doesn’t like is community rating. He explains the problems with community rating, leading to a seeming take-down of risk adjustment. One problem with risk adjustment is that no methods predict costs all that well. Of course, some of health care, probably most of it, is unpredictable, the very part John thinks we should insure against.

John’s proposed solution to risk adjustment is that, upon switching plans, an individual’s “original health plan would pay the extra premium being charged by the new health plan, reflecting the deterioration in health condition.” There are two things about this I do not understand. First, how would this extra premium be calculated in a way that is different from risk adjustment payments? If we knew a better way, we’d have better risk adjustment now.*

Second, this idea seems no different than risk adjustment by another name. Think about it from the new plan’s point of view. Would the plan manager act any differently if the payment is called a “change of health status offset” and paid by the original insurer or a “risk adjustment payment” and paid via a market administrator of some sort (funded, for example, by assessments on low-risk bearing plans)? A dollar is a dollar. The same limitations of risk adjustment apply, don’t they?*
 

I see two issues here, both brought up in the comments.   The first is that there is a huge issue with information here.  Sorting out what the "lump sum payment" would be from the first plan to the second plan is a daunting task.

The other is the assumption that market players are immortal.  What happens if a company invests in high risk assets with their reserves?  Or if a company goes bankrupt?  How does the consumer get to be reimbursed for the increase in premium now that the original company has no assets? 

This is unlike a regular insurance company, because if a regular insurance company has to stop covering thousands of customers for fire, they do not incur instant liabilities.  Nor does the underlying risk of fire make it harder and harder to insure a house over time (or at least this doesn't change as briskly as health between 20 and 50).

The closest analogy is pension funds, but notice the huge problems we are having with defined benefit pension plans.  Notice how much discussion there is about breaking pension plan contracts due to bankruptcy; airline pilots seem to be the latest example.

Now consider the amount of personal risk such a system would create.  At 18 you buy insurance and then hope that it lasts until you are 65 (if we keep medicare) or perhaps 80 or 90 if we don't.  Even the 18 to 65 perod is 47 years.  How many top companies of 47 years ago are healthy today? 

So what is the solution to this risk and information problem?  Well, with pensions we have government backing.  That helps.  But at what point does regulating the market and creating an interaction system between insurers reduce efficiency to the point where competition isn't going to improve gains?  And recall, the real way to make money in this market is to be able to forecast risk (over 47 years) better than your competitors.  But if you underestimate risk and mis-price your plans, you can't reduce services or customers will leave and bankrupt you instantly.

Isn't this just begging for an endless cycle of bailouts?