Medical Free Markets

This is a very interesting post by Karl Smith:

Lack of jobs is why everyone feels bad, not because they have less or are poorer or the country isn’t producing or consuming as much. And, not to get to meta – in what I hope is an easily readable post – but an economy that makes lots of people feel bad is by definition a bad economy.

Moreover, the feeling that you have now about the economy is not the feeling of lack of value creation. Its not the feeling of socialism.

I wish I had more time to go into this because “what socialism feels like” is an important concept. However, my more conservative readers will may readily get the following example.

Have you ever been pissed off at the fact that your neighborhood school doesn’t teach any of the stuff you want and it feels like your kid is just wasting her valuable time going to all of these pointless classes for no reason. THAT, is what socialism feels like. That is what the lack of value creation feels like.

Its not that you are afraid of losing what you have or that budget constraints are pinching. Its that the stuff which is available to you sucks. It – in extreme cases – is a world where everyone has a job but where no grocery store has fresh milk. It’s a world where everyone gets a pay check but no one can find shoes that fit.

That is what socialism feels like. That is what government getting in the way of the market feels like. In many ways it’s the exact opposite of the way this feels.

Because you know I can’t resist: When you are waiting in your doctor’s office and she is 50mins late and proceeds to be rude to you and not give you “permission” to go buy the drug that you are dying to buy because its finally been “approved.” That’s what socialism feels like.

It is an important insight that much of the current crisis is not caused by excessive government intervention. Now, it could be true that we could get to a bad place with the addition of excessive government oversight, but I think it is fair to accept that we are not there yet.

That being said, I think the argument about seeing medical doctors (and how familiar this experience is in the US) should give us pause when we argue that the current medical system is free market. It isn't. It's also one of our few areas of growth (which Tyler Cowen sees as rent seeking areas absorbing the unemployed) which is also worth thinking about.

I wonder if we are asking the right questions about the long term?

More on Medicare

I had barely finished my last post when Austin Frakt presented the hard numbers:

All told, the cost to the system of raising the Medicare age to 67 would be $11.4 billion in 2014, which is a high price to pay for $5.7 billion in federal savings. It’s exactly a factor of two too high. That’s a massive cost shift. Let’s put it this way, how much would you want to pay for the federal government to save $5.7 billion? I hope your answer is no greater than $5.7 billion. (If not, I’ve got a business proposition for you.) Paying $11.4 billion is a rip off.

It is actually worse than I thought it would be!!

Medical Expenses

From Igor Volsky:

The Center On Budget and Policy Priorities’ (CBPP) Paul N. Van de Water is out with a new report warning lawmakers on the Super Committee against considering proposals that would gradually raise the Medicare eligibility age from 65 to 67 . . .

Van de Water argues that raising the age would actually increase overall system costs and only save the federal government money “by shifting costs to most of the 65- and 66-year-olds who would lose Medicare coverage, to employers that provide health coverage for their retirees, to Medicare beneficiaries, to younger people who buy insurance through the new health insurance exchanges, and to states”

I think that this outcome is obvious from the structure of the problem. It seems obvious to me that single payer systems are able to reduce costs by exerting market power. When I look at procedures, they generally have three costs: out of pocket, insurance reimbursement rates, and medicare rates (in descending order of costs). For a lot of procedures, the costs are thousands of dollars apart.

This is why simply switching to a free market (and going to out of pocket prices) is problematic as a transition (as costs, already the highest in the world, will go up). It also explains why other countries (example: France, Britain, Canada) have decided to go with universal single payer systems: it lower costs (and, if you believe the Incidental Economist, it certainly does not lower quality).

Now it may be that there is a benefit to our current health care system and that other countries may be free riding on our innovations. I am open to this argument. But it is also true that we need to make a decision about what are goals are. If we want to reduce costs (in aggregate) then lowering the medicare eligibility age makes sense (why could it not be 60?).

But if we want to both increase and shift (away from government) the total costs of medical care, that is a lot more concerning. From a societal perspective that seems like an awfully bad deal. It seems unlikely that we are going to increase innovation by all that much by growing the private and medicaid markets by a small fraction. But the costs to those effected by the policy are high.

Why is this a good policy?

More on the vanishing business of writing

Andrew Gelman has a good response to Jonathan Rauch's anti-blogging blog post but I think this section deserves extra comment:

Pace Alex, the average quality of newspapers and (published) novels is far, far better than the average quality of blog posts (and—ugh!—comments). This is because people pay for newspapers and novels. What distinguishes newspapers and novels is how much does not get published in them, because people won't pay for it. Payment is a filter, and a pretty good one. Imperfect, of course. But pointing out the defects of the old model is merely changing the subject if the new model is worse.

You'll notice that he said novels and not short stories. The business model that allowed people to make a living selling short fiction (something people used to do in this country) has been dead for decades, long before the arrival of online content. Rates for freelancers have been flat for almost as long. For the past fifty years it has gotten increasingly difficult to make a living as a writer.

These are worrisome trends -- I suspect it will take a few more decades to realize just how much the loss of the creative middle class has cost us -- but you can't blame this one on the internet.

Never give money to a company that has a Director of Thought Leadership

Felix Salmon adds some sharp commentary to Janet Reitman’s Rolling Stone article on Haiti. He also reminds us of just how flaky the consultants who worm their way into these initiatives can be.

Is there a demographer in the house? -- Texas edition

With the population growth of Texas in the news (see Krugman and Salmon), this seems like a good time to raise a question that's been bothering me for a awhile. If you look at a map of population growth over the past decade, it's hard to miss the impact Katrina had on Louisiana and Mississippi. It's safe to say that some of the growth those states would have experienced was diverted to Texas, but estimating the magnitude of that effect is not nearly so straightforward (and is probably something best left to people who know what they're talking about).

Anybody care to give it a shot?

Options have a cost associated with them

This observation bears repeating:

First, a lack of alternative opportunities can force us to concentrate on developing skills. The kid who spends countless hours practicing football or music becomes much more proficient - and possibly rich - than one who, faced with many opportunities, flits between them and becomes a mere dilettante. A big reason why I got into Oxford - and from there a decent income was a small step - was that, in the days before computer games, I had nothing else to do.

There’s an analogy here with the arts. As Jon Elster points out in Sour Grapes, great art often arises because of constraints. 78 records which limited recordings to three minutes produced lots of great music whereas free jazz and atonality is often unlistenable. Old black and white films with no special effects are often superior to multi-million pound CGI ones. And so on. Excellence often arises from limited choice, and mediocrity from freedom.

I think that this is a very important insight. In sports, we have rules that make the games, themselves, more interesting. A game like Calvinball rapidly becomes uninteresting as one gets older. It is only within a cleanly defined decision space that you can compare degrees of excellence.

I think that this insight has a lot of applications to broader contexts. Removing constraints does not always lead to a uniform improvement in the result. If we took away required classes, I suspect the median student would end up less well educated in epidemiology (is this true for other fields? I'd venture to say that the same would be true in statistics but my exposure beyond that is limited).

I think, as I age, I begin to think that Aristotle (with the ideal of the Golden Mean) was a very clever guy. In particular, it's possible we spend a lot of time comparing two local minima (the two extremes of policy) and ignoring the global maxima (the middle ground between these extremes).

Medicare versus Social Security

I hear this point a lot:

At any politically plausible margin, it makes more sense to take $1 out of Medicare than to take it out of Social Security. Social Security checks can be used to buy health care services.

I think that this analysis neglects one key point. Medical care in the United States (or anywhere, for that matter), is hard to bargain with at the time of a procedure (especially an emergent one). It is hard to discuss prices at the ER door during a myocardial infarct, where minutes matter. Here, the real benefit of medicare is the ability to exert market power to set standardized prices (to avoid the power asymmetry otherwise present in medical bargaining).

It is not ideal, but I have not yet come up with a better idea than collective price setting and my own experiences as an uninsured person in the US were certainly eye-opening in this regard. It was amazing how few doctors would even consider accepting cash for services.

Still more intellectual property silliness

I've got an actual post on this in the works but in the meantime check out these stories.

From the New York Times:

When copyright law was revised in the mid-1970s, musicians, like creators of other works of art, were granted “termination rights,” which allow them to regain control of their work after 35 years, so long as they apply at least two years in advance. Recordings from 1978 are the first to fall under the purview of the law, but in a matter of months, hits from 1979, like “The Long Run” by the Eagles and “Bad Girls” by Donna Summer, will be in the same situation — and then, as the calendar advances, every other master recording once it reaches the 35-year mark.

The provision also permits songwriters to reclaim ownership of qualifying songs. Bob Dylan has already filed to regain some of his compositions, as have other rock, pop and country performers like Tom Petty, Bryan Adams, Loretta Lynn, Kris Kristofferson, Tom Waits and Charlie Daniels, according to records on file at the United States Copyright Office.

“In terms of all those big acts you name, the recording industry has made a gazillion dollars on those masters, more than the artists have,” said Don Henley, a founder both of the Eagles and the Recording Artists Coalition, which seeks to protect performers’ legal rights. “So there’s an issue of parity here, of fairness. This is a bone of contention, and it’s going to get more contentious in the next couple of years.”

With the recording industry already reeling from plummeting sales, termination rights claims could be another serious financial blow. Sales plunged to about $6.3 billion from $14.6 billion over the decade ending in 2009, in large part because of unauthorized downloading of music on the Internet, especially of new releases, which has left record labels disproportionately dependent on sales of older recordings in their catalogs.

“This is a life-threatening change for them, the legal equivalent of Internet technology,” said Kenneth J. Abdo, a lawyer who leads a termination rights working group for the National Academy of Recording Arts and Sciences and has filed claims for some of his clients, who include Kool and the Gang. As a result the four major record companies — Universal, Sony BMG, EMI and Warner — have made it clear that they will not relinquish recordings they consider their property without a fight.

“We believe the termination right doesn’t apply to most sound recordings,” said Steven Marks, general counsel for the Recording Industry Association of America, a lobbying group in Washington that represents the interests of record labels. As the record companies see it, the master recordings belong to them in perpetuity, rather than to the artists who wrote and recorded the songs, because, the labels argue, the records are “works for hire,” compilations created not by independent performers but by musicians who are, in essence, their employees.

Independent copyright experts, however, find that argument unconvincing. Not only have recording artists traditionally paid for the making of their records themselves, with advances from the record companies that are then charged against royalties, they are also exempted from both the obligations and benefits an employee typically expects.

And from Andrew Gelman:

Christian Robert points to this absurd patent of the Monte Carlo method (which, as Christian notes, was actually invented by Stanislaw Ulam and others in the 1940s).

The whole thing is pretty unreadable. I wonder if they first wrote it as a journal article and then it got rejected everywhere, so they decided to submit it as a patent instead.

An interesting observation about the electoral math of Texas

And kudos to the New Republic for giving its interns a chance to do good, high-profile work. From Gabriel Debenedetti:

And Texas, Tucker notes, “is an unusual electoral landscape”—which is to say it’s nearly empty. The Democratic Party in Texas is nearly nonexistent, and puts up only the most pro forma candidates. (“The Democrats are weak in ways that are not even indicated in the low numbers or poor electoral results,” says Jim Henson, director of the Texas Politics Project and a professor of Government at the University of Texas at Austin. “As an organization, the Democrats are just—I can’t even come up with a negative enough word.”) And judging from the low turnouts in the Republican primary elections—the only votes in Texas that really count for anything—even the ruling party in Texas is extremely dispirited. In the 2002, 2006, and 2010 votes in which Perry was elected governor, only around 4 percent of the voting-age population turned out for the Republican primary.

As a result, Perry only needed to convince roughly 2 percent of the voting-age population of the Republican-heavy state that he would be a suitable governor before cruising through the general elections against a pro forma Democratic candidate, or, in 2006, a slate of nominal candidates. In Texas, the “people who vote in primary elections are unusual people,” Tucker stressed to me. “They are more extreme, further to the right.” In other words, Perry was able to repeatedly vault himself to the governorship largely not because he was a persuasive campaigner, but because he catered to the extreme views of a minority of die-hard conservatives.

Wish I had time to discuss this in detail

Check out this interview with Michael Winerip on recent cheating scandals.

When you really want to reach a conclusion

I've heard the argument that unemployment benefits caused higher unemployment before, but I never expected anyone to use Germany's relatively strong numbers to support the case.

Last conference of the year

And so posting on my end is light this week. I'll have new content this weekend, though.

Noah Smith has some smart things to say about libertarians and property rights...

...and you should probably read the whole thing, but I wanted to single out this passage:

That's right: irreducible transaction costs are a fly in the libertarian soup. Completing an economic transaction, however quick and easy, involves some psychological cost; you have to consider whether the transaction is worth it (optimization costs), and you have to suffer the small psychological annoyance that all humans feel each time money leaves their bank account (the same phenomenon contributes to loss aversion and money illusion). Past a certain point, the gains to privatization are outweighed by the sheer weight of transaction cost externalities. (Note that transaction costs also kill the Coase Theorem, another libertarian standby; this is no coincidence.)

This dovetails nicely with this discussion about why the decision-making processes of engineers and scientists are often 'irrational' in the strict economics sense of the word. Like transactions, decision-making algorithms have a cost. In most cases, these costs are fairly small (like the few seconds it takes to decide on a brand of beer) and you can get away with ignoring them, but freshwater economists routinely make arguments for rational behavior that require people to make incredibly complicated calculations almost instantly. What's worse, they continue to make these arguments even when data suggests that people are using other, simpler rules to make their decisions.

Stop by and see what you think

Andrew Gelman has some intriguing news about the possibility of reform in the institutional review board system.