Monthly Archives: July 2009

The Meds In Spain Vary Mainly By The Plain

In June I proposed to municipalize medicine:

Consider letting government take full control of the industry, but at a municipal level. …  Some municipalities will find ways to cut overuse, and others will fail, but failures can then emulate successes. …

We could require municipalities to give universal coverage, and require national standards so businesses could avoid dealing with differing local regulations.  But we should otherwise give municipalities wide discretion on cost control measures. They could receive federal funds, but depending only on demographics, and usable for other purposes; the key is for local folks to pay for local practice variation.  Municipalities should be empowered to charge new residents higher prices, just as insurance companies now charge for pre-existing conditions.  (Perhaps the districts folks leave should pay districts they go to.) … My libertarian friends prefer this proposal to the [US] status quo.

It turns out that Spain does this, at least at the region level: Continue reading "The Meds In Spain Vary Mainly By The Plain" »

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Government Insurance Advantage?

Comments on Tuesday’s post itemizing medical market failures suggest that many think private insurance fails via excess administrative costs, and via excess costs of enforcing contact details.  Private insurers, many think, charge too much and try too hard to renege on their promises.  Let me explain why this sounds odd to an economist.

In a typical industry, producers use tech to convert inputs into outputs, and price those outputs to induce consumers to buy them.  Markets typically fail by inducing consumers to buy the wrong product mix, and inducing producers to make the wrong product mix.  In such cases we consider regulating prices and/or product mixes to mitigate this failure.  In principle, a market could also fail if private producers only had inferior tech available to them, while the government had superior tech only usable via direct government production.  In such an apparently odd hypothetical case one might prefer direct government production.

Strangely enough, this possibility seems to be the reason many want government provided medical insurance.  Let me elaborate.  There are usually many trade-offs to make between costs and various product features and methods of production.

In medical insurance, the cost to estimate customer risk is reduced if all customers must buy your product.  That and other administrative costs are also reduced when the insurance is renegotiated less often, and when one insures a large group at once instead of one at a time.  The cost of enforcing contract details, such as what treatments are covered in what situations, is higher when the contract is complex, excluding many particular things while including many others.  Contract enforcement is also harder when the agents who are supposed to comply with the contract have strong contrary financial incentives.

Many think that government provided insurance would be cheaper and more dependable.  But the question is: would this be because the government would choose a different product mix, using the same insurance-making technology available to the private sector, or is this because the government is assumed to have some superior tech for making insurance?

If government insurance is better because it is infrequently renewed, is required to all or offered to large groups, has simple coverage definitions, or is implemented by agents with weak financial incentives, then we must wonder: why couldn’t private insurers make those same production choices?  If they could have done so, but didn’t expect consumers to want such a product, then there would have to be some market failure that induces a bad product mix.   If they could not have done so, then we have to postulate some extra insurance technology only available to government insurers.  But what could that extra tech be?

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On The Origin Of Pigeons

“Pigeons indeed,” huffed Charles Darwin, his brow furrowed as he read to the end of a letter and laid it down on his desk.

The letter contained feedback from his publisher John Murray on a draft of what would become On the Origin of Species by Means of Natural Selection. Murray had farmed out copies of the manuscript to a couple of his trusted advisers. One of them, a rural vicar and literary editor by the name of Whitwell Elwin, had not liked it all. “At every page, I was tantalized by the absence of the proofs,” Elwin had written to Murray on 3 May 1859. In contrast to the Journal of Researches (later known as Voyage of the Beagle), which Elwin had found “one of the most charming books”, Darwin had written this new work in a “much harder & drier style”.

Although opposed to the publication of what he saw as “a wild and foolish piece of imagination”, Elwin hadn’t advised Murray to reject the manuscript outright. Instead, he had sought the advice of the geologist Charles Lyell. It was Lyell who said that the book should focus on Darwin’s observations of pigeons “accompanied with a brief statement of his general principles” on natural selection. …

It is worth taking a moment to reflect on what might have been On the Origin of Pigeons. Such a volume would, Elwin had suggested, “be reviewed in every journal in the kingdom & would soon be on every table”. He was probably right. Breeding ‘fancy’ pigeons was an extraordinarily popular pastime in Victorian Britain, with enthusiasts spanning the entire social spectrum, from the poorest weavers in London’s Spitalfields to Queen Victoria herself.  But how effective would On the Origin of Pigeons have been as a vehicle for Darwin’s ideas on evolution by natural selection?

That is from Nature.  One of my best papers started out in my PhD Thesis as a general model of rational paternalism.  For publication the editor insisted that it appear as a model of paternalism in drug bans only, even though the math applied just as well to most other paternalism.

I think the general rule is that little people should only have little ideas; big ideas are reserved for big people.  That makes little sense for an academia designed to achieve intellectual progress, but more sense for an academia designed to let people affiliate with credentialed impressiveness.

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Medical Market Failures

Academic economists often publish analyses of the consequences of possible policies; in fact, I’d say it is the bread and butter of what economists do.   Such analyses usually rate policies using economist’s standard evaluation criteria: economic efficiency.  When a policy of more government intervention is ranked higher that a policy of less government intervention, that is usually because of an identified “market failure”, i.e., a reason why a low regulation “market” situation would not achieve high economic efficiency.

Some economists also act as pundits, arguing for or against current policy proposals to wider audiences.   Such arguments often draw on a wide variety of kinds of reasoning.  But since these people are economists, and not just pundits, I want to hold them to a higher standard: they should offer market failure arguments for their conclusions, and clearly distinguish these arguments from other reasons.  If a big part of the reason people listen to econo-pundits is that they are economists, having been certified by the economics community as having economic expertise, it would be nice to see signs that they continue to apply their economics expertise to their punditry topics, rather than just using their pulpit to preach policies they like for other reasons.

Continue reading "Medical Market Failures" »

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Reform Rate Signals

Current new coverage of Obama’s medical reform seems to focus on the issue of pace; everyone seems to agree that a fast process is a good for Obama, while a slow process is good for his Republican (and other) opponents.   I see two key reasons for this:

  1. Insiders can see that there will be a lot that the public can object to, once they get time to find out what is in this reform.  A fast process is trying to “pull a fast one” on the public.
  2. The more that insiders dislike about what they see, they less eager they are to speed the process.  So a fast process signals a good program to approve, while a slow process signals that it isn’t so good.

Obviously Obama and allies are pushing the second interpretation, while Republicans are pushing the first.  No doubt both factors are relevant.

From a public policy point of view, this signaling equilibrium is lamentable; it would be better if we could take the time to think carefully about big policy changes.  Perhaps that would mean we made fewer changes, because we’d see more details we don’t like.  But that would probably be worth it.

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Efficient Markets Confusion

Matt Yglesias and Brad DeLong are both fond of this Economist quote:

The [Efficient Capital Markets] hypothesis has two parts, [Thaler] says: the “no-free-lunch part and the price-is-right part, and if anything the first part has been strengthened as we have learned that some investment strategies are riskier than they look and it really is difficult to beat the market.” The idea that the market price is the right price, however, has been badly dented.

These two parts are not, however, easily separated. That same article explained:

The efficient-markets hypothesis” (EMH). … Eugene Fama, of the University of Chicago, defined its essence: that the price of a financial asset reflects all available information that is relevant to its value.  … If the EMH held, then … deviations from equilibrium values could not last for long. If the price of a share, say, was too low, well-informed investors would buy it and make a killing. If it looked too dear, they could sell or short it and make money that way. It also followed that bubbles could not form—or, at any rate, could not last: some wise investor would spot them and pop them. And trying to beat the market was a fool’s errand for almost everyone. If the information was out there, it was already in the price.

EMH claims that current market prices are the best available estimates of asset values; it does not claim that these two sets of numbers are exactly equal.  After the fact you will of course be able to look back and see that price estimates were once in error, either too high or too low relative to the right answer.  But the EMH is only wrong if you could reasonably have known to say the direction of the error at the time, using info “available” then.   And if you could have known then that the price was too high or low, you could have bought or sold based on your info, and gained the “free lunch” of superior investment returns.  Continue reading "Efficient Markets Confusion" »

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Media Scale Econ

On Friday I endorsed low-discretion subsidies of political investigative journalism, like the old postal subsidy.  This seems a good idea in general, but seems especially relevant given recent reduced demand for traditional journalists.

Now one might argue that even if traditional media is shrinking, total journalism effort is no less than before; journalism is just moving away from traditional professionals and toward amateurs like bloggers.  And I might even grant this point.  Traditionalists might respond that experienced professionals are more efficient investigators than amateurs, and while this is probably true, I don’t think it is an especially strong argument.

A much stronger argument, I think, centers on scale economies in media reputation.  Reader demand for small independent bloggers not doubt depends in part on their reputation for reliability, but the rate at which an individual blogger’s claims actually get checked is probably rather low.  Furthermore, an independent whistle-blower who claimed that a blogger was in error might itself have a questionable reliability.  These factors weaken the incentive for an independent blogger to avoid saying things that won’t check out.  Also if this blogger happened across something really big, where making a sloppy claim might bring him or her a huge bump in attention, that blogger might reasonably be tempted to lower his or her usual standards. Continue reading "Media Scale Econ" »

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Fem Firm Finance

In a Post OpEd, Katty Kay and Claire Shipman try to persuade firms to hire more female exces, because many studies show that female led firms are hugely profitable compared to male led firms.  Kay and Shipman, however, never mention that anyone who believed this result should expect to make big profits just by buying female firms and selling male firms.

If many stock speculators believed Kay and Shipman, firm stock prices would jump upon hiring more female execs, making most CEOS quite eager to hire more women execs.  There would be a boom in female execs and Kay and Shipman would not have bothered to write their oped.  Since that didn’t happen, I’ve gotta believe most speculators don’t believe those studies, and so I shouldn’t believe them either.  If you think otherwise, go speculate.  That OpEd:

The sexy new discussion in policy circles around the world, thanks to the recession, is whether a significant shift of power from men to women is underway — or whether it should be.  Accounting giant Ernst & Young pulled out charts and graphs at a recent power lunch in Washington with female lawmakers to argue a provocative bottom line: Companies with more women in senior management roles make more money. … Continue reading "Fem Firm Finance" »

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Explain This Correlation

At SciFoo Camp last weekend, famed quantum gravitist Lee Smolin mentioned that he’d noticed a correlation between these beliefs:

  1. Many worlds for quantum mechanics,
  2. Anthropic arguments in physics, and
  3. Conscious computer-based AIs could be built.

This correlation seems intuitively right, but puzzling.  Any explanation for why it exists other than the obvious, that some people tend to be right about everything?

Added: Lee and most who came to the particular SciFoo session where he made this observation disagree with these beliefs, yet were creative sharp physicists, hackers, sociologists, etc.

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Subsidize Investigative Journalism

At Cato Unbound, Paul Starr calls for an investigative journalism subsidy:

Many regional papers in the United States have cut back or shut down their Washington bureaus, reducing coverage of their region’s representatives in Congress and the implications of federal policy for their area. The analogous process has also happened within the states; in the past five years, according to surveys by the American Journalism Review, the number of reporters covering state government has dropped by one-third … Will non-commercial patrons step in to rectify this imbalance and finance more public-service journalism? Perhaps, but I see no reason to assume so. …

Public policy in the United States didn’t always put the public press at a relative disadvantage. Beginning in the 1790s, when most papers were partisan, Congress subsidized their development through postal policy. The postal rates for sending newspapers through the mail were set below cost, and editors could exchange copies with one another at no charge. Congress also refrained from taxing newspapers, a legacy of colonial opposition to Britain’s Stamp Act. …

While partisan journalism has a legitimate place, we also need sources of reported news that can be widely trusted.  … Government subsidies that are viewpoint-neutral and that do not give officials any discretion may be a less constraining method of supporting journalism than leaving it to dependence on patrons. Today, any such subsidies should be not only viewpoint-neutral, but also platform-neutral. We need the modern equivalent of the postal subsidies of the early American republic, except that there ought to be no bias in favor of publications that appear in print.

At a modest cost, investigative journalists add enormous value to the health of our political system, and media firms capture only a small fraction of that value.  This sets a strong presumption of a market failure, and hence a strong argument for neutral subsidies.   I completely agree: let’s raise low-official-discretion subsidies of political investigative journalism.  There is clearly a tradeoff between how narrowly targeted is any subsidy, and how much discretion that produces.  But many available options seem better than the status quo.

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