Here's two very simple, very fundamental economic principles:
1.) Incentives matter.
2.) Supply and demand matters.
You would think that the President of the United States would understand both of these principles. However, he still says things like this:
"And the evidence shows that unemployment insurance doesn’t stop people from trying hard to find work."
And this:
"But there’s no solid evidence that a higher minimum wage costs jobs."
Both of these statements are incorrect. There is indeed a large amount of evidence that unemployment insurance and the minimum wage have significant, negative impacts on employment. Indeed, such evidence has been discussed on this blog (here and here)
It's also true that such evidence does not necessarily mean that increasing the minimum wage or extending unemployment insurance are bad ideas. It does mean that these policies have real costs that need to be considered.
My real concern with these statements, however, is not that Mr. Obama is misrepresenting the literature on these issues (even though he is). Instead, my real concern is that these statements both are highly illogical from an economic point of view.
One need not look at large amounts of evidence to know that, all else equal, unemployment insurance leads to less employment. All one needs to know to understand this is that incentives are real. If Barack Obama is saying that unemployment insurance has absolutely no effect on employment, he is essentially saying that incentives don't exist.
The same is true of the minimum wage. Wages are determined by supply and demand. Putting a binding minimum on a wage or price, all else equal leads to less demand for that good or service. In the context of wages, that means lower employment. Barack Obama's statement on this is not merely incorrect. It is illogical.
If the literature indeed showed what Barack Obama said it showed (which it does not), the correct way to phrase it would be that these policies do not have large enough effects to make a significant difference in lieu of other factors.
This is not meant as a criticism of Barack Obama, but the fact that our president is saying things like this is a bit disconcerting.
Sunday, December 8, 2013
Thursday, December 5, 2013
Popularity of Single Payer
In my recent post criticizing the single payer model of health care, I left out an important component of the affirmative argument for single payer: the popularity of such systems where in place. There are two questions to ask here:
1.) Are single payer systems actually popular where in place?
2.) Does this mean that single payer is a successful model?
To the first question, the answer is complicated. I was able to find some data from the Commonwealth Fund that does shed some light. They asked people in various if they thought their respective health care systems needed minor changes, fundamental changes, or total rebuilding.
In Canada, which sports the model of single payer that advocates in the USA often want to emulate, the results indicate that only 10% of Canadians are willing to say they want to completely rebuild their system. Only 38%, however, said only minor changes are needed. That leaves a majority (51%) of Canadians saying that their system needs "fundamental change". That isn't terrible, but it is hardly the picture of a popular health care system.
It only looks popular in comparison to the USA. Here, 27% say complete rebuilding is necessary, 42% say fundamental changes are needed, and 29% say only minor changes are needed. Canada's numbers look a good deal better when put into this context.
However, a study that I linked to in my last post on single payer provides data regarding a different but closely related question: how people feel about the care they personally receive. Here, the numbers are quite different. 51% of Americans aged 18-64 report being very satisfied with the health care services they receive. For Canadians, only 42% of those aged 18-64 report being very satisfied with their health care services. For people over 65, the results are closer but even here the USA comes out on top.
In other words, Canadians like their system more than Americans like their system, but Canadians are less positive about the care that they personally receive than are Americans about the care that they receive.
This moves to the second question I posed above. The popularity of a given system is, in my view, shaped more by perception than reality.
I've been to countries with single payer health care, and there is a sort of "health care nationalism". Criticism of the NHS or Canadian Medicare are seen as unpatriotic. The medias in these countries lavish praise upon these systems constantly. By contrast, within America, criticism of the system is universal. Indeed, defenders of the USA status quo in health care are often seen as contrarians.
The people in countries with single payer generally know that these systems have great flaws which is why, at least in Canada, they aren't keen on the service they personally receive. Despite this, they still tend to believe that their system is pretty good. Another reason for this is that most people never encounter any other health care systems other than their own. So, most people really don't know what other health care models are actually like.
Another simple reality is that in systems of single payer, care is free at the point of delivery. Care still costs money, but most of it is paid through taxes. From the point of view of many people in these systems, I would imagine, the care simply seems "free". There is so little direct connection between the costs of health care and benefits of health care that people in these systems only see the benefits. They still bare the costs through taxation, but the connection is often not made. People are more willing to look past the flaws of a system that they think is "free" than a system that they do see the costs for.
This also explains the popularity of Medicare (USA Medicare). People see the benefits, but they don't see the costs. The costs are there, but they are harder to see for the average American.
Single payer health care systems only seem more popular than other models because of perception among the public and how far removed users of the systems are from the costs of the systems. The argument for single payer from popular opinion can be added to the long list of bad arguments for single payer.
1.) Are single payer systems actually popular where in place?
2.) Does this mean that single payer is a successful model?
To the first question, the answer is complicated. I was able to find some data from the Commonwealth Fund that does shed some light. They asked people in various if they thought their respective health care systems needed minor changes, fundamental changes, or total rebuilding.
In Canada, which sports the model of single payer that advocates in the USA often want to emulate, the results indicate that only 10% of Canadians are willing to say they want to completely rebuild their system. Only 38%, however, said only minor changes are needed. That leaves a majority (51%) of Canadians saying that their system needs "fundamental change". That isn't terrible, but it is hardly the picture of a popular health care system.
It only looks popular in comparison to the USA. Here, 27% say complete rebuilding is necessary, 42% say fundamental changes are needed, and 29% say only minor changes are needed. Canada's numbers look a good deal better when put into this context.
However, a study that I linked to in my last post on single payer provides data regarding a different but closely related question: how people feel about the care they personally receive. Here, the numbers are quite different. 51% of Americans aged 18-64 report being very satisfied with the health care services they receive. For Canadians, only 42% of those aged 18-64 report being very satisfied with their health care services. For people over 65, the results are closer but even here the USA comes out on top.
In other words, Canadians like their system more than Americans like their system, but Canadians are less positive about the care that they personally receive than are Americans about the care that they receive.
This moves to the second question I posed above. The popularity of a given system is, in my view, shaped more by perception than reality.
I've been to countries with single payer health care, and there is a sort of "health care nationalism". Criticism of the NHS or Canadian Medicare are seen as unpatriotic. The medias in these countries lavish praise upon these systems constantly. By contrast, within America, criticism of the system is universal. Indeed, defenders of the USA status quo in health care are often seen as contrarians.
The people in countries with single payer generally know that these systems have great flaws which is why, at least in Canada, they aren't keen on the service they personally receive. Despite this, they still tend to believe that their system is pretty good. Another reason for this is that most people never encounter any other health care systems other than their own. So, most people really don't know what other health care models are actually like.
Another simple reality is that in systems of single payer, care is free at the point of delivery. Care still costs money, but most of it is paid through taxes. From the point of view of many people in these systems, I would imagine, the care simply seems "free". There is so little direct connection between the costs of health care and benefits of health care that people in these systems only see the benefits. They still bare the costs through taxation, but the connection is often not made. People are more willing to look past the flaws of a system that they think is "free" than a system that they do see the costs for.
This also explains the popularity of Medicare (USA Medicare). People see the benefits, but they don't see the costs. The costs are there, but they are harder to see for the average American.
Single payer health care systems only seem more popular than other models because of perception among the public and how far removed users of the systems are from the costs of the systems. The argument for single payer from popular opinion can be added to the long list of bad arguments for single payer.
Tuesday, December 3, 2013
A Few Points on the Minimum Wage
The NYtimes has a couple of articles advocating a hike in the minimum wage (here and here), as do many other news outlets. Scott Winship offers an excellent piece that takes a look at the actual facts in the minimum wage debate. Here's a few thoughts:
1.) First, in my post about the economics of the 1950s and 1960s, I made a point about the minimum wage being around $22 today had it kept up with productivity since the 1960s. This is technically true, but it is an entirely useless piece of data. In fact, to compare the relative minimum wage over time, we should look at the "real" minimum wage that is simply adjusted for changes in cost of living. Winship points out that the historical peak in the minimum wage (1968) would only be $8.32 today using a "chained" price index. That means that, contrary to what I said previously, President Obama's proposal would indeed raise the minimum wage above its historical peak. Even if we use a different measure of inflation, the minimum wage was still under $10 in real terms in 1968.
2.) Only 3% of the workforce is paid the minimum wage today compared to 8% in 1979. Likewise, this 3% has benefited from a greatly expanded EITC. This 3% has also benefited from cheaper goods (Wal Mart). The point is that low wage workers today are probably better off than the low wage workers of 30 or 40 years ago.
3.) The standard economic argument against the minimum wage is that it increases low skill unemployment and raises prices. The standard response to this argument is that the literature finds this effect to be very small if even existent. That is to say, advocates of the minimum wage frequently argue that the costs of the minimum wage are very limited. The fact that only 3% of the work force is paid minimum wage also suggests that the benefits of the minimum wage are quite limited. After all, at most, only 3% of the workforce are paid more because of the minimum wage. When doing a cost/benefit analysis of the minimum wage, we need to weigh the benefits of 3% of the population getting slightly higher wages compared to slightly higher prices for all and a small group that will not find employment because of the minimum wage.
4.) Winship does a good job of summarizing the empirical literature. However, given simple economic logic, even economists that are strong supporters of a higher minimum wage will usually admit the obvious truth that there is at least some cost in terms of employment that comes with a higher minimum wage. The only people who deny even a small impact on employment are advocates and non economists who are typically not very familiar with the empirical literature or economics in general.
5.) Despite claims to the contrary, the empirical literature suggests, with very little ambiguity, that there is at least some negative effect on employment stemming from a higher minimum wage (look here). The size of the effect is, however, much less clear.
6.) For whatever it's worth, Scott also points out that 70% of the workforce today reside in states that have higher minimum wages than the national $7.25. That means that, effectively, the minimum wage is higher than $7.25 for about 70% of the workforce. This was true of virtually nobody prior to 1980.
7.) It's often pointed out that the minimum wage disemployment effects should be low because, unlike manufacturing jobs, minimum wages jobs are usually in the service sector and cannot be outsourced. This line of thought seems to ignore the fact that, also unlike manufacturing, jobs in the service sector can be easily eliminated in favor of "self service". Gas stations, for example, no longer hire people to fill up tanks. Instead, they just have people fill up their own tanks. It's not unthinkable that the minimum wage had at least something to do with this shift. Service sector employment is not necessarily less sensitive to minimum wage hikes. More on this here.
8.) It is often argued that raising the minimum wage would reduce public spending on anti poverty programs by increasing the wages of low income workers to high enough levels to reduce their eligibility for such programs. Of course, this argument entirely ignores the disemployment effects of the minimum wage. If raising the minimum wage decreases employment, that means more people in need of more public assistance. As stated above, the literature is pretty clear about the fact that there are at least some negative employment effects stemming from the minimum wage. The effect on public finances depends on the size of this effect. All things considered, it seems quite unlikely that a higher minimum wage will actually reduce anti poverty spending.
9.) A significant portion of those earning minimum wage (37%) are teenagers living with their parents (look here). That's not exactly the portrait of minimum wage workers that the media often presents.
10.) It's fairly clear that raising the minimum wage increases prices at least somewhat (look here for some evidence on this). However, just like the employment effects, the size of this effect is much less clear.
When all is taken into consideration, my view is that the costs of raising the minimum wage far outweigh the benefits which is why I oppose such an increase. However, other views are welcome as always. Given the ambiguity in the literature, diverging views can exist even among those very knowledgable about the issue.
1.) First, in my post about the economics of the 1950s and 1960s, I made a point about the minimum wage being around $22 today had it kept up with productivity since the 1960s. This is technically true, but it is an entirely useless piece of data. In fact, to compare the relative minimum wage over time, we should look at the "real" minimum wage that is simply adjusted for changes in cost of living. Winship points out that the historical peak in the minimum wage (1968) would only be $8.32 today using a "chained" price index. That means that, contrary to what I said previously, President Obama's proposal would indeed raise the minimum wage above its historical peak. Even if we use a different measure of inflation, the minimum wage was still under $10 in real terms in 1968.
2.) Only 3% of the workforce is paid the minimum wage today compared to 8% in 1979. Likewise, this 3% has benefited from a greatly expanded EITC. This 3% has also benefited from cheaper goods (Wal Mart). The point is that low wage workers today are probably better off than the low wage workers of 30 or 40 years ago.
3.) The standard economic argument against the minimum wage is that it increases low skill unemployment and raises prices. The standard response to this argument is that the literature finds this effect to be very small if even existent. That is to say, advocates of the minimum wage frequently argue that the costs of the minimum wage are very limited. The fact that only 3% of the work force is paid minimum wage also suggests that the benefits of the minimum wage are quite limited. After all, at most, only 3% of the workforce are paid more because of the minimum wage. When doing a cost/benefit analysis of the minimum wage, we need to weigh the benefits of 3% of the population getting slightly higher wages compared to slightly higher prices for all and a small group that will not find employment because of the minimum wage.
4.) Winship does a good job of summarizing the empirical literature. However, given simple economic logic, even economists that are strong supporters of a higher minimum wage will usually admit the obvious truth that there is at least some cost in terms of employment that comes with a higher minimum wage. The only people who deny even a small impact on employment are advocates and non economists who are typically not very familiar with the empirical literature or economics in general.
5.) Despite claims to the contrary, the empirical literature suggests, with very little ambiguity, that there is at least some negative effect on employment stemming from a higher minimum wage (look here). The size of the effect is, however, much less clear.
6.) For whatever it's worth, Scott also points out that 70% of the workforce today reside in states that have higher minimum wages than the national $7.25. That means that, effectively, the minimum wage is higher than $7.25 for about 70% of the workforce. This was true of virtually nobody prior to 1980.
7.) It's often pointed out that the minimum wage disemployment effects should be low because, unlike manufacturing jobs, minimum wages jobs are usually in the service sector and cannot be outsourced. This line of thought seems to ignore the fact that, also unlike manufacturing, jobs in the service sector can be easily eliminated in favor of "self service". Gas stations, for example, no longer hire people to fill up tanks. Instead, they just have people fill up their own tanks. It's not unthinkable that the minimum wage had at least something to do with this shift. Service sector employment is not necessarily less sensitive to minimum wage hikes. More on this here.
8.) It is often argued that raising the minimum wage would reduce public spending on anti poverty programs by increasing the wages of low income workers to high enough levels to reduce their eligibility for such programs. Of course, this argument entirely ignores the disemployment effects of the minimum wage. If raising the minimum wage decreases employment, that means more people in need of more public assistance. As stated above, the literature is pretty clear about the fact that there are at least some negative employment effects stemming from the minimum wage. The effect on public finances depends on the size of this effect. All things considered, it seems quite unlikely that a higher minimum wage will actually reduce anti poverty spending.
9.) A significant portion of those earning minimum wage (37%) are teenagers living with their parents (look here). That's not exactly the portrait of minimum wage workers that the media often presents.
10.) It's fairly clear that raising the minimum wage increases prices at least somewhat (look here for some evidence on this). However, just like the employment effects, the size of this effect is much less clear.
When all is taken into consideration, my view is that the costs of raising the minimum wage far outweigh the benefits which is why I oppose such an increase. However, other views are welcome as always. Given the ambiguity in the literature, diverging views can exist even among those very knowledgable about the issue.
Saturday, November 30, 2013
Greg Mankiw On Pope Francis
I was going to comment on Pope Francis's recent comments on economics, but Greg Mankiw did a much better job expressing the same reaction I had:
"First, throughout history, free-market capitalism has been a great driver of economic growth, and as my colleague Ben Friedman has written, economic growth has been a great driver of a more moral society.
Second, "trickle-down" is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose. It is equivalent to those on the right referring to the "soak-the-rich" theories of the left. It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.
Third, as far as I know, the pope did not address the tax-exempt status of the church. I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down."
"First, throughout history, free-market capitalism has been a great driver of economic growth, and as my colleague Ben Friedman has written, economic growth has been a great driver of a more moral society.
Second, "trickle-down" is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose. It is equivalent to those on the right referring to the "soak-the-rich" theories of the left. It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.
Third, as far as I know, the pope did not address the tax-exempt status of the church. I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down."
I had the exact same reaction that Mankiw had, and, as usual, Mankiw hit the nail on the head.
Wednesday, November 27, 2013
What Do the 1950s and 1960s Teach Us About Economic Policy?
The 1950s and 1960s economy featured a much stronger role for unions, much higher marginal tax rates on wealthy individuals, much stronger regulation, and a much higher minimum wage (in real terms). What happened?
Well, as progressive economists often tell us, unemployment was fairly low, GDP growth was fairly high, and we had much less income inequality. Is this not a total refutation of neoliberalism and supply side economics?
Perhaps, but I don't see it that way (not surprisingly). To give a bit more perspective, since that time period, union membership has fallen from somewhere around 30 to 35% of the workforce to 10 to 15% of the workforce today. Top marginal tax rates ranged from around 70 to 90% in the 50s and 60s compared to tax rates ranging from 28 to 40% over the past few decades. The minimum wage would something like $22 (that's the number I've heard) had it kept up with productivity since 1960. Instead, it is $7.25 today. Another neoliberal policy, free trade, has also been expanded greatly since the mid 20th century.
On the other hand, the Great Society was not until the 1960s and thus the welfare state was a good deal smaller for most of the 1950s and 60s than it is today. Also, while we've seen many deregulatory initiatives in recent decades, we've also seen expanding regulation in many areas. So, the direction of regulatory policy is more debatable.
Still, all things considered, our economic policy has moved in a decidedly neoliberal direction since the mid century. Despite this, as is often mentioned, there is not a noticeable improvement in economic performance during this period, but there is a large increase in income inequality.
The way progressives (and indeed most people who look at this issue) interpret this is that neoliberalism ultimately failed to enhance productivity. I think there are two ways to interpret this:
1.) The progressive narrative that neoliberal reforms simply took place due to a political shift and failed.
2.) Another possible explanation is that neoliberal reforms were in response to a bad economic performance and did improve economic performance relative to how the economy would have performed absent the reforms.
The basic disagreement here stems around what would have happened absent any economic reforms. The progressive narrative implies that, absent the reforms, our economy would have continued performing as strongly as it had in the 1950s and 60s. The competing narrative holds that, absent any reforms, there would have been a much more significant growth slowdown than there was.
Luckily, the neoliberal revolution was not strictly an American phenomenon and indeed happened across the developed (and even developing) world. Perhaps more importantly, some countries were much more aggressive in reforming their economies than others while some did not reform at all. This offers us something close to a natural experiment.
If the progressive narrative is correct, countries with more aggressive reforms should not see any advantage in economic growth over the countries that reformed less aggressively or didn't reform at all. If the competing narrative is correct, the more aggressive reformers should she positive (relative) results.
Scott Sumner wrote a piece in 2010 looking at this very data. He compares the GDP per capita
(and even provides a chart) over time between various countries and here is what he finds:
"
On the other hand, the Great Society was not until the 1960s and thus the welfare state was a good deal smaller for most of the 1950s and 60s than it is today. Also, while we've seen many deregulatory initiatives in recent decades, we've also seen expanding regulation in many areas. So, the direction of regulatory policy is more debatable.
Still, all things considered, our economic policy has moved in a decidedly neoliberal direction since the mid century. Despite this, as is often mentioned, there is not a noticeable improvement in economic performance during this period, but there is a large increase in income inequality.
The way progressives (and indeed most people who look at this issue) interpret this is that neoliberalism ultimately failed to enhance productivity. I think there are two ways to interpret this:
1.) The progressive narrative that neoliberal reforms simply took place due to a political shift and failed.
2.) Another possible explanation is that neoliberal reforms were in response to a bad economic performance and did improve economic performance relative to how the economy would have performed absent the reforms.
The basic disagreement here stems around what would have happened absent any economic reforms. The progressive narrative implies that, absent the reforms, our economy would have continued performing as strongly as it had in the 1950s and 60s. The competing narrative holds that, absent any reforms, there would have been a much more significant growth slowdown than there was.
Luckily, the neoliberal revolution was not strictly an American phenomenon and indeed happened across the developed (and even developing) world. Perhaps more importantly, some countries were much more aggressive in reforming their economies than others while some did not reform at all. This offers us something close to a natural experiment.
If the progressive narrative is correct, countries with more aggressive reforms should not see any advantage in economic growth over the countries that reformed less aggressively or didn't reform at all. If the competing narrative is correct, the more aggressive reformers should she positive (relative) results.
Scott Sumner wrote a piece in 2010 looking at this very data. He compares the GDP per capita
(and even provides a chart) over time between various countries and here is what he finds:
"
| Country | 1980 | 1994 | 2008 |
|---|---|---|---|
| United States | 1.000 | 1.000 | 1.000 |
| Australia | .841 | .770 | .837 |
| Canada | .905 | .818 | .843 |
| Britain | .688 | .705 | .765 |
| France | .780 | .730 | .713 |
| Germany | .803 | .812 | .763 |
| Italy | .756 | .754 | .675 |
| Sweden | .868 | .777 | .794 |
| Switzerland | 1.146 | .987 | .915 |
| Asia | |||
| Hong Kong | .547 | .845 | .948 |
| Japan | .732 | .815 | .736 |
| Singapore | .577 | .899 | 1.064 |
| Latin America | |||
| Argentina | .395 | .300 | .309 |
| Chile | .210 | .251 | .311 |
Note that four countries gained significantly on the United States, two were roughly stable (Australia and Japan) and the rest regressed. The four that gained were Chile, Britain, Hong Kong and Singapore. Of course, many poor countries also gained on the United States, but that's to be expected. As we will see, the relative performance of each of these economies is consistent with the view that neoliberal policies promote economic growth.
Britain: At the time Margaret Thatcher became Prime Minister in 1979, decades of statist policies had turned Britain into the sick man of Europe. The government owned the big manufacturing firms in industries such as autos and steel. The top individual MTRs on income were 83 percent on "earned income" and an eye-popping 98 percent on income from capital. Frequent labor strikes paralyzed transportation and led to garbage piling up in the streets of London. Much of the housing stock was government-owned. Britain had lagged other European economies for decades, growing far more slowly than most economies on the continent. Thatcher's reforms were among the most comprehensive in the world, and by the mid-1980s, Britain was growing faster than the other major European economies. By 2008, it had a higher per capita income than Germany, France, and Italy.
United States: The United States was doing better than Britain in 1980, but not particularly well. We had also been growing much more slowly than Europe and Japan. Unlike Britain, we were still richer than most other developed countries, and so many people viewed this convergence as partly inevitable (the catch-up from World War II) and partly reflective of the superior economic model of the Germans and Japanese. It was widely expected that Japan and Germany would eventually surpass the United States in per capita GDP. Paul Samuelson claimed in 1973 that Soviet GDP might surpass U.S. GDP as soon as 1990.5 Obviously none of this happened, and by the 1990s, the United States was growing faster than most major European economies.
Australia: A traditionally rich country whose commodity export model started to sputter in the 1970s, Australia began free-market reforms in the 1980s (under a left-wing government) and accelerated the reforms after the conservatives took power in 1996. After 1994, Australia's relative decline reversed.
Japan: Japan is just the opposite of Australia. Its free-market export model did very well in the post-war years and didn't hit a wall until about 1990. After that, domestic growth sputtered as Japan's dysfunctional government refused to reform its statist domestic economy.
Hong Kong and Singapore: These two countries top most surveys of "economic freedom" (which include size of government.) Both are in the process of becoming much richer than the United States. Some of that is due to their status as city-states. But even in larger developed economies, the population is mainly urban, and so Hong Kong's and Singapore's success is due to more than just demographics.
Canada: Canada is similar to Australia, except that it was not as statist as Australia in the earlier period, and its reforms occurred in the 1990s, when Canada began shrinking the size of government as a share of GDP, after having, in 1988, adopted free trade with the United States. These reforms were successful, as its decline relative to the United States was reversed, and Canada started catching up after 1994.
France and Germany: Both passed some reforms, but much less than Britain. They suffered a decline relative to both Britain and the United States. Note that the German data for the whole time period include the East, so their relative decline cannot be explained by the 1990 absorption of that less-productive region.
Italy: Italy instituted a few reforms, but has a significantly more statist model than most of Western Europe. Italy fell far behind Britain.
Sweden: Sweden had a bad recession in the early 1990s after having suffered decades of relative decline. It made major cuts in MTRs, privatized, and deregulated during the 1990s, and its relative performance improved after those reforms.
Switzerland: Switzerland has always been regarded as one of the most capitalist countries in Western Europe, but has also been among the least aggressive countries in terms of neoliberal reforms. That pattern would predict high levels of GDP/person, but relative decline vis-Ã -vis the United States And that is exactly what has occurred."
(There is more here)
The data seems to be much more in line with the neoliberal narrative than the progressive narrative. This, of course, begs another important question: if really high MTRs, really high minimum wages, and related policies hurt relative economic growth after 1980, how did the USA economy do so well with top tax rates in excess of 70% and a minimum wage over $20 in relative terms.
In my opinion, there is an often unacknowledged reality regarding economic policy and culture: a given policy could be good in one country at a certain point in time, bad in another country at a different point time, and really bad in yet another country at yet another point in time.
70% top tax rates and $22 minimum wages are the kinds of policies that are bad wherever tried. However, they would be much worse today than in the 1960s. Why?
I think a few forces since then have made these sort of economic policies go from moderately bad in the 1960s to very bad in the 2010s. One force is globalization. This is things like free trade, immigration, and the elimination of capital controls, all of which offer immense economic benefits.
However, they also make it easier for employers to find labor that is not subject to USA minimum wage laws. That could be foreign labor or (illegal) immigrant labor. It could also be machine labor.
The point is that in the 1960s, employers had fewer options when it came to labor that they valued less than the minimum wage. That is not true today.
The same is true of taxes. In the mid 20th century, industry was not particularly mobile. People weren't particularly mobile. It was much harder to make investment or living choices based on tax regime. Still, even in in the 1950s and 1960s, there was significant investment in tax avoidance. This is made clear by the discrepancy between the high tax rates and (not so high) revenue as % of GDP. If high tax rates aren't even able to raise a lot of revenue, one wonders exactly what purpose they are serving.
Another issue is the rising role of startups. Back in the good old days (I'm told), there were a few companies that everyone worked for their entire life. They all joined the union and received a steady, stable paycheck.
Today, there is a heavy reliance on entrepreneurs and startups. New enterprises are much more difficult to startup in an environment of high taxes, high labor costs, and a large regulatory bureaucracy. Large, incumbent firms can absorb these costs more easily. An economy relying on these types of firms also involves less mobility.
An entrepreneur starting a new business is much more likely to take tax regime into account when choosing where to do business than an existing large business that already has a substantial infrastructure. In an economy that relies on the continuation of startups, tax regime matters a good deal more.
On a similar note, in the post industrial economy, people are often switching jobs. People are also competing with the entire globe when it comes to jobs. Strong labor unions were likely an inevitable casuality of economic progress.
The main point is that larger economic forces are pushing economic policy in a certain direction. In the modern world, economies with 70% top tax rates, $22 minimum wages, and powerful unions are simply not competitive economies.
People who supported these economic policies see this as a "race to the bottom". I tend to see it more as a "race to the top". Globalization has forced countries to adopt economic policies that are ultimately better for their people.
The 1950s and 1960s were something of a golden age for the American worker. However, all things considered, its a good thing that we left the economic policies of the mid 20th century in the mid 20th century.
UPDATE: I 'd also like to point out how the parameters of our debate have shifted. Even if President Obama could get his minimum wage and tax proposals through, we would be looking at a $9 minimum wage and a top tax rate around 45%. I'm not a fan of either of those proposals, but we are still looking at a minimum wage and top tax rate well below their level in the 1960s.
Republicans accepted the New Deal long ago and began trying to reform it instead of eliminate it. Democrats have done the same with regards to the (necessary) changes in economic policy that have taken place over the past 30 years.
Saturday, November 23, 2013
The ACA and Market Based Health Care Reform
What exactly is the ACA?
Many on my side of the political spectrum claim that it is a government takeover of the health care system that will ultimately lead to a disasterous socialized medical system. Others on this side claim it is merely a large expansion of the federal government that will lead to all sorts of practical and unintended problems.
On the other side of the political spectrum we see some claim that the ACA is a heroic (but politically feasible) piece of legislation that reduces many of the injustices present in our current health care system. Another group claims it was a pathetic attempt to achieve a progressive goal (universal health care) largely through private entities. The latter typically support single payer health care.
So, who's correct?
In my opinion, it is the latter group on the right who claim that the ACA's flaws lie in the practical problems that will come about with it.
Regardless, there is one thing the ACA clearly is not: market based health care reform. As a supporter of market based health reform, I have found that many ACA supporters think that I should support ACA. Indeed, a liberal friend of mine recently asked me why I oppose a bill that is so market oriented. Well, the reason, as I explained to him, is that the ACA does not move us towards market based health care. It moves us in the opposite direction.
From my point of view (an advocate of consumer based health care), there are a number of strong critiques of the ACA:
1.) The insurance regulations are far too comprehensive. If we are to have a health care system with a greater role for market incentives alongside an individual mandate, that mandate has to only mandate catastrophic coverage. I want to go into more detail about the specific benefit mandates in the future. No health care plan that mandates anything more than catastrophic insurance cannot be considered market oriented.
2.) The subsidies are a more complex issue. They don't actually interfere with the workings of the market in any major way. However, the fact that these subsidies are heavily means tested creates the unintended consequence of high implicit tax rates (IMTR). As income rises for individuals with subsidies, the subsidies are phased out which creates a disincentive to work. I support the general concept of subsidies (or tax credits) to help individuals purchase plans and finance health savings accounts (which have been impacted negatively by ACA).
3.) The Medicaid expansion is problematic as well. On top of being a means tested program that also creates higher IMTRs, Medicaid offers extremely low quality coverage. Indeed, the quality of care offered on Medicaid is simply unacceptable for a nation as wealthy as ours. Expanding the program without any major effort to improve the quality of care offered by Medicaid would actually hurt the very people the policy intends to help. One very smart blogger accurately labeled Medicaid a "humanitarian catastrophe".
4.) The employer mandate exacerbates one of the worst features in our current system: the connection between health insurance and employment. This mandate also has the unintended consequence of increasing the cost of employment which will likely lead to reductions in total employment.
5.) The tax increases are another major element that very few advocates of markets in health care would be comfortable with. This is especially true since a major tax increase is aimed at investment income which is an extremely inefficient form of taxation.
6.) I don't have a problem with IPAB per say. However, I do have a problem with the law's assumption that IPAB will save such a large sum of money. Given the nature of our political system and the limits on IPAB, it is unlikely that IPAB will achieve any major cost savings. This means that the health care law will likely add a significant amount to the national debt. This is especially true after we consider lost revenue from the deadweight loss resulting from the hikes in both IMTRs and MTRs.
Having said all of this, the ACA does do do a few things that will truly lead to a more competitive market. The health exchanges, despite their technical problems, have great potential in this respect. Indeed, if the comprehensive mandates and large amount of regulations included in the ACA get rolled back, the health exchanges could offer a path to true consumer based medicine. This would also likely require a rollback of the Medicaid expansion and elimination of the employer mandate.
All in all, I'm not a supporter of the ACA. However, I am also a political realist. Even a Republican president and congress would not be able to repeal the bill come 2017. However, the optimist in me thinks it is possible that a coalition of pragmatic Democrats who recognize that the law has many shortcomings and pragmatic Republicans who realize repeal is no longer a politically viable option may come together to fix the aforementioned problems and, perhaps, bring us something much closer to a consumer driven health care system than we had even before the ACA.
Thursday, November 21, 2013
Why I Don't Like Single Payer
There are a few competing narratives surrounding the troubled rollout of the ACA. One narrative is that the problems thus far are emblematic of deep and fundamental flaws in any approach to health care reform (or virtually any other societal problem) that involves a large expansion of the state.
A differing narrative that is popular on the progressive left is that attachment to private medicine or multi payer health care financing is the underlying problem and, according to this narrative, a transition to single payer would be much smoother and efficient (example of this narrative here).
My goal here is not to dissect the differing interpretations of the implementation of the ACA. Instead, I'd like to explain why I do not support single payer, largely in response to the recent surge in discussion about transitioning to such a system.
Single payer is often defended on grounds of fairness and efficiency. Single payer, it is argued, is fairer than other health care financing systems because the state is a more egalitarian financing mechanism than the market. It is also argued that single payer is more efficient because it is able to use its large amount of bargaining power to force down prices for providers. Also, single payer health care systems do not need to put resources towards advertising, profits, etc. and can therefore run a health care system at less cost.
The empirical evidence to support such claims about the superiority of single payer is straight forward:
1.) Medicare is a single payer system. The program is popular and has lower administrative costs than private insurance.
2.) Other countries that have single payer have lower health care costs and higher life expectancies than the USA. These systems are also popular.
I'm obviously not convinced by this line of reasoning. The USA is an very large and diverse nation. Health care is a very individualized matter as well with each individual having very different health care wants and needs. Given this, it is hard to imagine the federal government's taking over of the entire financing of this sector going particularly smoothly.
Even if single payer were successful in countries like Sweden, that would hardly imply that a similar system would be successful in the USA. Sweden, for its part, seems to be moving away from a purely public health care model towards a model with a larger and more active private sector.
Then, there is the question of the empirical evidence. It is actually not clear that Medicare has lower administrative costs than private insurance. That result can only be found if you measure as a percentage of total costs. Per beneficiary, Medicare actually has higher administrative costs than private insurance. Regardless, Medicare's administrative costs don't include the many services that they outsource to other agencies (like revenue collection). They also don't include the deadweight loss inherent to the taxation used to finance Medicare.
Low administrative costs don't even necessarily indicate efficiency. It is quite possible that low administrative costs indicate underinvestment in management, fraud detection, and many other crucial services that are considered "administrative".
The large amount of bargaining power that supposedly allows these large public programs to "bargain down" prices typically have the unintended effect of eliminating competition among the sellers. Imagine a market with only one buyer. Whatever products that buyer decides not to purchase would ultimately have to go out of business due to the lack of sales. One buyer ultimately means one seller. There is no competition in this setup which means the traditional mechanism for lowering price (competition) is gone. The seller, eventually, has as much power as the single payer because neither of them has any other options. Instead of paying less for the same services, a single payer financing mechanism would eliminate the competition needed to provide lower costs and higher quality over time.
Advertising and profit are also crucial elements of any functioning market. They are hardly "wasteful costs" as advocates of single payer claim. Advertising gets crucial information to consumers and, perhaps more importantly, forces sellers to essentially figure out how their product benefits consumers (so they can advertise on that basis). Profit, for its part, is important for the signals it sends to producers and the reinvestment made possible by it.
There is a popular view that profit and advertising are somehow wasteful expenses. In fact, any system with true competition, by definition, must have a profit motive present and advertising. They are quite small expenses compared to the benefits (including cost savings) brought about by competition.
There is also the point pertaining to life expectancy. As I have pointed out in a recent post, life expectancy has little to do with the model of health care financing a country chooses. The simple fact of the matter is that health care systems don't have nearly as much effect on public as people like to believe.
When it comes to cost, single payer systems do all have lower costs levels than the extremely dysfunctional USA system. Still, somehow the British socialized medical system found a way to have higher cost growth over the last decade than even the USA. Canada, for its part, has had roughly the same amount of cost growth as the USA over the same period.
Indeed, most of the difference in health spending levels between the USA and other developed nations is a result of our excessive cost growth in the 1980s. There are competing explanations for this reality, but lack of single payer health care is not a particularly feasible one.
If anything, single payer systems should at least be much more equitable than non single payer systems. Even here, though, the evidence is not so clear. Canada, with its single payer system, actually has a steeper health-income gradient than the USA. The UK also has inequities in its (socialized) health care system.
This may seem odd at first, but one must only think of the public school system in the USA. Despite being state owned, public schools in wealthier areas are still far superior to those in less wealthy areas. There's a lot of reasons for this. Wealthier people are more sensitive to both taxes and the quality of the public sector. They are also more politically active and more willing (and able) to contribute to political candidates and are thus more politically powerful. The lesson here is that allowing the government to run industry won't end inequities within that industry. Instead, it will shift resources from economically powerful to politically powerful, and there is a lot of overlap between those two groups.
Of course, there are also the standard problems with single payer. The one size fits all model makes innovation in medicine very difficult. For all its dysfunction, our system is relatively innovative.
There are also the problems with quality that plague virtually all types of public health coverage. There are long waiting times and shortages of medical technology. The UK also has unusually bad cancer survival rates (this is also one of the few areas where we do quite well).
Our USA system is deeply dysfunctional. I'm not even necessarily arguing that our system is superior to Canada's or the UK's. I am arguing that we would be unwise to emulate these models.
Regardless of how they compare to the USA, it should be clear that they are quite dysfunctional. One of the main problems in the health care debate is the refusal by both sides to acknowledge how badly the entire developed world has handled health care.
Instead of trying to decide which health care system is the least dysfunctional, we should be asking why virtually all of the health care systems in the first world are so dysfunctional compared to other sectors in their respective economies.
Perhaps the problem is the idea that health care is "different" from other industries. Health care is different. However, the laws of economics still apply. Incentives still matter. Just like any other market, even the most intelligent central planners are not able to fix prices and allocate resources in an efficient manner. And, also just like any other market, only a decentralized, competitive system is capable of allowing the type of innovation that will ultimately lower costs and improve quality.
A single payer system would move our system in the wrong direction on all of these counts. The problems with our current system largely stem from the perverse incentives inherent to any system with as many distortions as our current system has. Implementing single payer would essentially be doubling down on the very mistakes that has brought our system to the dire state it is in today.
A differing narrative that is popular on the progressive left is that attachment to private medicine or multi payer health care financing is the underlying problem and, according to this narrative, a transition to single payer would be much smoother and efficient (example of this narrative here).
My goal here is not to dissect the differing interpretations of the implementation of the ACA. Instead, I'd like to explain why I do not support single payer, largely in response to the recent surge in discussion about transitioning to such a system.
Single payer is often defended on grounds of fairness and efficiency. Single payer, it is argued, is fairer than other health care financing systems because the state is a more egalitarian financing mechanism than the market. It is also argued that single payer is more efficient because it is able to use its large amount of bargaining power to force down prices for providers. Also, single payer health care systems do not need to put resources towards advertising, profits, etc. and can therefore run a health care system at less cost.
The empirical evidence to support such claims about the superiority of single payer is straight forward:
1.) Medicare is a single payer system. The program is popular and has lower administrative costs than private insurance.
2.) Other countries that have single payer have lower health care costs and higher life expectancies than the USA. These systems are also popular.
I'm obviously not convinced by this line of reasoning. The USA is an very large and diverse nation. Health care is a very individualized matter as well with each individual having very different health care wants and needs. Given this, it is hard to imagine the federal government's taking over of the entire financing of this sector going particularly smoothly.
Even if single payer were successful in countries like Sweden, that would hardly imply that a similar system would be successful in the USA. Sweden, for its part, seems to be moving away from a purely public health care model towards a model with a larger and more active private sector.
Then, there is the question of the empirical evidence. It is actually not clear that Medicare has lower administrative costs than private insurance. That result can only be found if you measure as a percentage of total costs. Per beneficiary, Medicare actually has higher administrative costs than private insurance. Regardless, Medicare's administrative costs don't include the many services that they outsource to other agencies (like revenue collection). They also don't include the deadweight loss inherent to the taxation used to finance Medicare.
Low administrative costs don't even necessarily indicate efficiency. It is quite possible that low administrative costs indicate underinvestment in management, fraud detection, and many other crucial services that are considered "administrative".
The large amount of bargaining power that supposedly allows these large public programs to "bargain down" prices typically have the unintended effect of eliminating competition among the sellers. Imagine a market with only one buyer. Whatever products that buyer decides not to purchase would ultimately have to go out of business due to the lack of sales. One buyer ultimately means one seller. There is no competition in this setup which means the traditional mechanism for lowering price (competition) is gone. The seller, eventually, has as much power as the single payer because neither of them has any other options. Instead of paying less for the same services, a single payer financing mechanism would eliminate the competition needed to provide lower costs and higher quality over time.
Advertising and profit are also crucial elements of any functioning market. They are hardly "wasteful costs" as advocates of single payer claim. Advertising gets crucial information to consumers and, perhaps more importantly, forces sellers to essentially figure out how their product benefits consumers (so they can advertise on that basis). Profit, for its part, is important for the signals it sends to producers and the reinvestment made possible by it.
There is a popular view that profit and advertising are somehow wasteful expenses. In fact, any system with true competition, by definition, must have a profit motive present and advertising. They are quite small expenses compared to the benefits (including cost savings) brought about by competition.
There is also the point pertaining to life expectancy. As I have pointed out in a recent post, life expectancy has little to do with the model of health care financing a country chooses. The simple fact of the matter is that health care systems don't have nearly as much effect on public as people like to believe.
When it comes to cost, single payer systems do all have lower costs levels than the extremely dysfunctional USA system. Still, somehow the British socialized medical system found a way to have higher cost growth over the last decade than even the USA. Canada, for its part, has had roughly the same amount of cost growth as the USA over the same period.
Indeed, most of the difference in health spending levels between the USA and other developed nations is a result of our excessive cost growth in the 1980s. There are competing explanations for this reality, but lack of single payer health care is not a particularly feasible one.
If anything, single payer systems should at least be much more equitable than non single payer systems. Even here, though, the evidence is not so clear. Canada, with its single payer system, actually has a steeper health-income gradient than the USA. The UK also has inequities in its (socialized) health care system.
This may seem odd at first, but one must only think of the public school system in the USA. Despite being state owned, public schools in wealthier areas are still far superior to those in less wealthy areas. There's a lot of reasons for this. Wealthier people are more sensitive to both taxes and the quality of the public sector. They are also more politically active and more willing (and able) to contribute to political candidates and are thus more politically powerful. The lesson here is that allowing the government to run industry won't end inequities within that industry. Instead, it will shift resources from economically powerful to politically powerful, and there is a lot of overlap between those two groups.
Of course, there are also the standard problems with single payer. The one size fits all model makes innovation in medicine very difficult. For all its dysfunction, our system is relatively innovative.
There are also the problems with quality that plague virtually all types of public health coverage. There are long waiting times and shortages of medical technology. The UK also has unusually bad cancer survival rates (this is also one of the few areas where we do quite well).
Our USA system is deeply dysfunctional. I'm not even necessarily arguing that our system is superior to Canada's or the UK's. I am arguing that we would be unwise to emulate these models.
Regardless of how they compare to the USA, it should be clear that they are quite dysfunctional. One of the main problems in the health care debate is the refusal by both sides to acknowledge how badly the entire developed world has handled health care.
Instead of trying to decide which health care system is the least dysfunctional, we should be asking why virtually all of the health care systems in the first world are so dysfunctional compared to other sectors in their respective economies.
Perhaps the problem is the idea that health care is "different" from other industries. Health care is different. However, the laws of economics still apply. Incentives still matter. Just like any other market, even the most intelligent central planners are not able to fix prices and allocate resources in an efficient manner. And, also just like any other market, only a decentralized, competitive system is capable of allowing the type of innovation that will ultimately lower costs and improve quality.
A single payer system would move our system in the wrong direction on all of these counts. The problems with our current system largely stem from the perverse incentives inherent to any system with as many distortions as our current system has. Implementing single payer would essentially be doubling down on the very mistakes that has brought our system to the dire state it is in today.
Wednesday, November 13, 2013
On Market Based Health Care
Here's Uwe Reinhardt on cost sharing in health care:
"[T]he often advanced idea that American patients should have “more skin in the game” through higher cost sharing, inducing them to shop around for cost-effective health care, so far has been about as sensible as blindfolding shoppers entering a department store in the hope that inside they can and will then shop smartly for the merchandise they seek. So far the application of this idea in practice has been as silly as it has been cruel. "
(Thanks to Austin Frakt for the reference)
This reminds me of something Paul Krugman said a while back:
"There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence."
"[T]he often advanced idea that American patients should have “more skin in the game” through higher cost sharing, inducing them to shop around for cost-effective health care, so far has been about as sensible as blindfolding shoppers entering a department store in the hope that inside they can and will then shop smartly for the merchandise they seek. So far the application of this idea in practice has been as silly as it has been cruel. "
(Thanks to Austin Frakt for the reference)
This reminds me of something Paul Krugman said a while back:
"There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence."
I can think of a few real world examples of more or less free market (or consumer based) health care:
1.) In the USA, cosmetic type surgeries like Lasik Eye Surgery (look here). Results seem to be fairly positive.
2.) Abroad, Singapore and, to a lesser extent, Switzerland use significant amounts of cost sharing. These systems aren't exactly "market oriented", but consumers have a lot of "skin in the game" compared to other systems (including our own system). The results (here and here). On the whole, results here seem to be fairly positive as well.
Obviously, just because a certain policy is good in cosmetic surgery or small, wealthy, and healthy countries does not mean it is right for an entire nation like the USA for all types of care. However, the limited evidence in "free market" medicine seems to be pretty favorable. The problem is that it is limited.
Still, it's a far cry from "no examples of success", as Krugman claims.
Granted, there is a lot more evidence from non consumer based health care systems like Canadian single payer, UK socialized medicine, or even USA multi payer because we have a lot more experience with these systems. However, the evidence here seems to be quite negative for all these systems. Indeed, the only way you can paint a remotely positive picture of virtually any health care system in the developed world (excluding Switzerland and Singapore) is by comparing to a more dysfunctional system (typically the USA).
The evidence on free market health care is, admittedly, very limited, but it also is favorable. Compared to the overwhelming evidence of failure in every type of non consumer based health care system, it seems like it may be worth pursuing.
Thursday, November 7, 2013
Universal Health Care and Life Expectancy
It is very hard to come by good measures to compare health care systems. We can compare costs fairly easily, but it is much more difficult to compare the actual quality of health care offered. Instead of acknowledging this reality or trying to find better measures, commentators oftentimes use measures that tell us very little about the actual quality of a nation's health care.
The classic example of this is the oft repeated claim that "other countries with nationalized health care have lower prices and higher life expectancy than the USA". This is an entirely true statement, but the implication is that nationalized health care (or other forms of universal health care) is the cause of lower prices and higher life expectancy.
The relative prices of different health care systems is a point I'll get to in a later post as it is quite complex. However, the claim that these systems increase life expectancy is an example of intellectual laziness. Life expectancy is impacted by many factors that have little to nothing to do with a nation's health care system. This is a point that Avik Roy made in a recent post, drawing on research from Robert Ohsfeldt and John Schneider. After controlling for international differences in car accidents and homicides, they found that the USA actually has the highest life expectancy even among developed nations.
Aaron Carroll also comments with a contrary view. Carroll points out, accurately, that people in the USA still lag in life expectancy after age 65. This metric should be less influenced by premature deaths from homicide and car accidents. However, as Carroll points out, people older than 65 in the USA are on a single payer system: Medicare. Some are also on Medicaid. So, the USA lagging in life expectancy above 65 is not exactly a point in nationalized health care's favor, as this is a group that is on a form of nationalized health care.
I found this old post from Tino Sanandaji comparing Sweden's life expectancy over time with the USA to be quite interesting as well. Here's an excerpt:
"Medicare was introduced 1965 in the US. Public health coverage for the elderly existed by 1950 in Sweden, but full universal coverage dates to 1955 in Sweden (a public health insurance was founded in 1891, and public municipal public health existed for even longer).
In 1950, before Medicare, and before Universal coverage in Sweden the difference was +2.6 at birth and +0.3 at 65. In 2001-2005 the difference between the Sweden and US was +2.7 at birth and +0.3years at 65. Identical!
First, regarding the life expectancy at birth we can note that 50 years of different health policy, labor mark policy, welfare state coverage seems to have had zero effect on total outcome.
Second the pattern of large differences at birth but small differences at 65 existed well before the introduction of Medicare in the U.S, refuting Yglesias and Krugmans automatic attribution of differences in outcomes to the differences to policy.
It suggests a shallow understanding of the world to attribute every national difference to policy. Reality is more complex than that. Health outcomes in Europe and the U.S differ for other reasons, especially having to do with lifestyle, including auto accidents, the murder rate, smoking, diet, and demographic differences."
In 1950, before Medicare, and before Universal coverage in Sweden the difference was +2.6 at birth and +0.3 at 65. In 2001-2005 the difference between the Sweden and US was +2.7 at birth and +0.3years at 65. Identical!
First, regarding the life expectancy at birth we can note that 50 years of different health policy, labor mark policy, welfare state coverage seems to have had zero effect on total outcome.
Second the pattern of large differences at birth but small differences at 65 existed well before the introduction of Medicare in the U.S, refuting Yglesias and Krugmans automatic attribution of differences in outcomes to the differences to policy.
It suggests a shallow understanding of the world to attribute every national difference to policy. Reality is more complex than that. Health outcomes in Europe and the U.S differ for other reasons, especially having to do with lifestyle, including auto accidents, the murder rate, smoking, diet, and demographic differences."
The key takeaway here is that health policy seems to have very little effect on actual measures of public health. This is similar to the point I was trying to make with regards to the Oregon Medicaid study.
I'm not a supporter of a single payer or nationalized health care system in the USA. One of the main reasons is the lack of evidence that such a system would bring about large benefits. Even the most intelligent supporters of single payer are often guilty of falling back on this very weak argument on life expectancy (or a similarly weak argument on infant mortality), and that does not speak well for single payer.
Tuesday, October 29, 2013
Bad Outcomes is Using Bad Logic
Charlie Clarke and his co-blogger, Robert H, are both sure that I'm either committing some sort of statistical fallacy or suffering from some misunderstanding. The thing is that I'm not. Instead, both Robert H and Charlie Clarke are using very faulty logic and misunderstanding my position.
They are both convinced that the only relevant results from the Oregon Medicaid study are the positive results on mental health, self reported health, and financial hardship. In other words, the only relevant results are the ones that reinforced their preexisting beliefs about Medicaid. The results that are less convenient for their worldview (the ones on physical health) should be thrown out.
The justification for this ideologically convenient analysis of the study is that the lack of positive results on physical health supposedly tells us absolutely nothing about the effect that Medicaid has on physical health. Obviously, that is a rather absurd view. In fact, a correct reading of the results on physical health do make claims of Medicaid improving physical health dramatically much weaker.
Typically, people are guilty of overstating their case. Oddly enough, as I read back on this exchange and look at the evidence, it seems that I have been understating my case. The lack of positive results on Medicaid is indeed a rather poor result for Medicaid. This was not a small sample size by any means. The study was not, by any reasonable measure, underpowered. If Medicaid made substantial improvements in health, it should have shown up this study.
As I have said, this does not mean that this experiment disproves significant health improvements stemming from Medicaid. It does not. However, it does significantly weaken the justification for belief in such effects.
The more I read Clarke and H, the more it seems that what they are really saying is "the results don't matter unless positive results show up". In other words, heads they win, tails we can't draw any conclusions from.
If these results did turn up significantly positive, there is only one likely conclusion that we could come to:
1.) Medicaid significantly improves physical health relative to being uninsured.
If they turned up with no statistically significant effects, there are really only two likely conclusions:
1.) Medicaid does not significantly improve physical health relative to being uninsured.
2.) Medicaid does significantly improve physical health relative to being uninsured, but not by enough to have significant results in this study.
Clarke and H seem to have come to the rather absurd conclusion that the results would only have mattered if they came out statistically significant in some direction. That is incorrect. Virtually nobody would have predicted that Medicaid would have significantly reduced physical health. Instead, the critics of Medicaid would predict a lack of major improvement.
I'll also add that I have let Clarke off the hook for ignoring the raw numbers that actually show Medicaid reducing certain measures of health. Of course these numbers are not statistically significant, but they are closer to statistical significance than most of the positive results on physical health. If Clarke is going to claim that these raw numbers suggest improvements in physical health, he needs to also claim that they suggest Medicaid hurts the cardiovascular health of the already sick and increases smoking. (more on that here). Of course, I think it is obviously wrong to suggest that this qualifies as evidence that Medicaid hurts cardiovascular health among the sick or increases smoking, but that is the logical conclusion that Clarke's arguments should lead him to.
By the way, there's been another round of results from the Oregon study that don't find statistically significant changes in employment resulting from Medicaid. I'm waiting for Clarke and H to explain to the NYtimes that they really shouldn't be reporting on these results as they don't really tell us anything about the effects that Medicaid has on employment. I would agree with the NYtimes here. But, if the folks at Bad Outcomes are to be logically consistent, they should be accusing them of committing all kinds of statistical fallacies. Don't hold your breath.
They are both convinced that the only relevant results from the Oregon Medicaid study are the positive results on mental health, self reported health, and financial hardship. In other words, the only relevant results are the ones that reinforced their preexisting beliefs about Medicaid. The results that are less convenient for their worldview (the ones on physical health) should be thrown out.
The justification for this ideologically convenient analysis of the study is that the lack of positive results on physical health supposedly tells us absolutely nothing about the effect that Medicaid has on physical health. Obviously, that is a rather absurd view. In fact, a correct reading of the results on physical health do make claims of Medicaid improving physical health dramatically much weaker.
Typically, people are guilty of overstating their case. Oddly enough, as I read back on this exchange and look at the evidence, it seems that I have been understating my case. The lack of positive results on Medicaid is indeed a rather poor result for Medicaid. This was not a small sample size by any means. The study was not, by any reasonable measure, underpowered. If Medicaid made substantial improvements in health, it should have shown up this study.
As I have said, this does not mean that this experiment disproves significant health improvements stemming from Medicaid. It does not. However, it does significantly weaken the justification for belief in such effects.
The more I read Clarke and H, the more it seems that what they are really saying is "the results don't matter unless positive results show up". In other words, heads they win, tails we can't draw any conclusions from.
If these results did turn up significantly positive, there is only one likely conclusion that we could come to:
1.) Medicaid significantly improves physical health relative to being uninsured.
If they turned up with no statistically significant effects, there are really only two likely conclusions:
1.) Medicaid does not significantly improve physical health relative to being uninsured.
2.) Medicaid does significantly improve physical health relative to being uninsured, but not by enough to have significant results in this study.
Clarke and H seem to have come to the rather absurd conclusion that the results would only have mattered if they came out statistically significant in some direction. That is incorrect. Virtually nobody would have predicted that Medicaid would have significantly reduced physical health. Instead, the critics of Medicaid would predict a lack of major improvement.
I'll also add that I have let Clarke off the hook for ignoring the raw numbers that actually show Medicaid reducing certain measures of health. Of course these numbers are not statistically significant, but they are closer to statistical significance than most of the positive results on physical health. If Clarke is going to claim that these raw numbers suggest improvements in physical health, he needs to also claim that they suggest Medicaid hurts the cardiovascular health of the already sick and increases smoking. (more on that here). Of course, I think it is obviously wrong to suggest that this qualifies as evidence that Medicaid hurts cardiovascular health among the sick or increases smoking, but that is the logical conclusion that Clarke's arguments should lead him to.
By the way, there's been another round of results from the Oregon study that don't find statistically significant changes in employment resulting from Medicaid. I'm waiting for Clarke and H to explain to the NYtimes that they really shouldn't be reporting on these results as they don't really tell us anything about the effects that Medicaid has on employment. I would agree with the NYtimes here. But, if the folks at Bad Outcomes are to be logically consistent, they should be accusing them of committing all kinds of statistical fallacies. Don't hold your breath.
Sunday, October 27, 2013
Yet Again on Oregon Medicaid Study
Charlie Clarke responds again. One excerpt:
"In Anon Ymous's latest response, it seems he feels he's being misunderstood. Yet, he keeps making statements that demonstrate exactly the view I'm arguing against.
"The Oregon study did not find evidence of statistically significant improvements in physical health. That is a pretty significant result."
No, this is exactly what I've criticized. If you run a test that has low power, it is NOT significant if you find no effect. Suppose you have a magic pill that stops you from dying, you give it to 10 undergrads and use 10 as a control group and measure the effect after one year. You find no statistically significant effect. Is that finding significant? NO!!! Even if the pill prevents 100% of all deaths, you'd have to give it to thousands of undergrads to get statistical significance, because undergrads just don't die very often."
"In Anon Ymous's latest response, it seems he feels he's being misunderstood. Yet, he keeps making statements that demonstrate exactly the view I'm arguing against.
"The Oregon study did not find evidence of statistically significant improvements in physical health. That is a pretty significant result."
No, this is exactly what I've criticized. If you run a test that has low power, it is NOT significant if you find no effect. Suppose you have a magic pill that stops you from dying, you give it to 10 undergrads and use 10 as a control group and measure the effect after one year. You find no statistically significant effect. Is that finding significant? NO!!! Even if the pill prevents 100% of all deaths, you'd have to give it to thousands of undergrads to get statistical significance, because undergrads just don't die very often."
I don't think Clarke understands that I am agreeing with his core point, that the Oregon study did not prove Medicaid does not improve physical health. Based on this study, we can't rule out the possibility that Medicaid might improve health. However, we can say, based on this study, that even if Medicaid improves health, it does not improve health dramatically enough to be captured in what was a fairly large study. Indeed, it was done, as Clarke suggests in his hypothetical, on thousands of individuals, and there was still not statistical significance.
It is possible that they would have found statistically significant improvements in physical health if there were more individuals in this study. It is possible they will find statistically significant improvements in physical health when looking at a larger time horizon. However, that is not the study we have. For now, we have a study that has a sample size in the thousands and a time horizon of a few years. In this study, there was not evidence found of statistically significant improvements in health.
Clarke would be well served in this argument to just come out and admit that there wasn't evidence, in this study, of significant improvements in physical health. Instead, Clarke resorts to arguing that the numbers provide just as much support for the view that Medicaid substantially improves physical health as to the view that Medicaid does not substantially improve physical health:
"For high blood pressure, there is a fall from 16.3% of people to 14.97% of people. That's an 8% reduction in incidence of high blood pressure. It's more consistent with a "bold claim" of up to a 16% reduction of high blood pressure than it is a zero percent reduction.
For diabetes, there is a fall from 5.1% to 4.17%. That's an 18% reduction in the incidence of diabetes. That's more consistent with a "bold claim" of up 36% reduction in the incidence of diabetes than no reduction in the incidence of diabetes."
For diabetes, there is a fall from 5.1% to 4.17%. That's an 18% reduction in the incidence of diabetes. That's more consistent with a "bold claim" of up 36% reduction in the incidence of diabetes than no reduction in the incidence of diabetes."
This is a point I responded to a few days ago in a previous post:
"The Oregon Medicaid Study did indeed show no statistically significant improvement in objective measures of physical health. I am a bit surprised that so/ many people have taken issue with this assertion. The common response is that there were positive results, but they just weren't positive enough to be statistically significant. In order to be statistically significant, results have to have less than a 5% chance of being statistical noise. In the Oregon study, the positive results on elevated blood pressure had a 65% chance of being statistical noise, the positive results on elevated blood sugar had a 61% chance of being statistical noise, and the positive results on high cholesterol had a 37% chance of being statistical noise. In other words, not only were the results not statistically significant. They weren't even close.
It's actually worse than that. If we just look at raw numbers and ignore statistical significance, we can also say that Medicaid increases smoking and decreases cardiovascular health of those that were already sick. The raw numbers suggest that. Of course, neither of these results are statistically significant, but they are closer than any of the other measures. There is only a 24% chance that the results showing Medicaid reducing cardiovascular health are statistical noise, and there is only an 18% change that the results showing Medicaid increasing smoking are due to statistical noise. These still are far from statistically significant, but if one is going to argue that the raw numbers that are statistically insignificant are useful in telling us the effect of Medicaid, then they should also be arguing that Medicaid increases smoking and worsens cardiovascular health of the already sick.
I would argue that we shouldn't read too much into any of the statistically insignificant results and instead focus on the statistically significant ones. By the way, that data is from Megan McArdle who had an excellent post on this very topic."
It's actually worse than that. If we just look at raw numbers and ignore statistical significance, we can also say that Medicaid increases smoking and decreases cardiovascular health of those that were already sick. The raw numbers suggest that. Of course, neither of these results are statistically significant, but they are closer than any of the other measures. There is only a 24% chance that the results showing Medicaid reducing cardiovascular health are statistical noise, and there is only an 18% change that the results showing Medicaid increasing smoking are due to statistical noise. These still are far from statistically significant, but if one is going to argue that the raw numbers that are statistically insignificant are useful in telling us the effect of Medicaid, then they should also be arguing that Medicaid increases smoking and worsens cardiovascular health of the already sick.
I would argue that we shouldn't read too much into any of the statistically insignificant results and instead focus on the statistically significant ones. By the way, that data is from Megan McArdle who had an excellent post on this very topic."
The raw numbers would also suggest that Medicaid increases smoking and decreases cardiovascular health for the already sick. Of course, these numbers aren't statistically significant, but they are closer to statistical significance than most of the positive results in the raw numbers.
Using Clarke's logic, we could say that the study provides more evidence that Medicaid increases smoking and reduces cardiovascular health among the sick than evidence that Medicaid improves any of the other measures of objective physical health.
For the sake of clarity, I want to lay out my exact position on this study:
1.) The Oregon study found statistically significant positive results when looking at self reported health, mental health, and financial strain. The Oregon study did not find statistically significant positive results when looking at objective measures of physical health.
2.) This does not rule out the possibility that a larger study over a longer time horizon would have found statistically significant positive results on objective measures of physical health.
3.) It does mean that this sample size of thousands over the given time horizon was not able to find evidence of statistically significant improvements in physical health.
4.) Now, while this does not rule out the possibility that a larger study would have found statistically significant improvements in physical health, it is also true that if there were very substantial improvements in physical health (anywhere near the size of the improvements seen in other areas) resulting from Medicaid, they would have likely been captured in this study.
5.) This study did capture significant improvements in other areas (financial strain, mental health, self reported health). This suggests that, at the very least, Clarke can admit that this study suggests that the improvements in objective physical health are not anywhere near as large as the improvements in the aforementioned areas.
As for the implications for public policy:
1.) This study does suggest that there is much value in having a program that provides health care for the poor. We can gather this from the results on mental health, financial strain, and even self reported health.
2.) However, this study does not tell us that Medicaid does a particularly good job of being this program. It does not tell us that a smaller Medicaid program that takes a very different form could not offer the same benefits without all the costs.
3.) This is why I say that the study, at the very least, slightly boosts the case for reform.
Now, let us go back to what Raj Chetty said:
1.) The Oregon study found statistically significant positive results when looking at self reported health, mental health, and financial strain. The Oregon study did not find statistically significant positive results when looking at objective measures of physical health.
2.) This does not rule out the possibility that a larger study over a longer time horizon would have found statistically significant positive results on objective measures of physical health.
3.) It does mean that this sample size of thousands over the given time horizon was not able to find evidence of statistically significant improvements in physical health.
4.) Now, while this does not rule out the possibility that a larger study would have found statistically significant improvements in physical health, it is also true that if there were very substantial improvements in physical health (anywhere near the size of the improvements seen in other areas) resulting from Medicaid, they would have likely been captured in this study.
5.) This study did capture significant improvements in other areas (financial strain, mental health, self reported health). This suggests that, at the very least, Clarke can admit that this study suggests that the improvements in objective physical health are not anywhere near as large as the improvements in the aforementioned areas.
As for the implications for public policy:
1.) This study does suggest that there is much value in having a program that provides health care for the poor. We can gather this from the results on mental health, financial strain, and even self reported health.
2.) However, this study does not tell us that Medicaid does a particularly good job of being this program. It does not tell us that a smaller Medicaid program that takes a very different form could not offer the same benefits without all the costs.
3.) This is why I say that the study, at the very least, slightly boosts the case for reform.
Now, let us go back to what Raj Chetty said:
"Other economic studies have taken advantage of the constraints inherent in a particular policy to obtain scientific evidence. An excellent recent example concerned health insurance in Oregon. In 2008, the state of Oregon decided to expand its state health insurance program to cover additional low-income individuals, but it had funding to cover only a small fraction of the eligible families. In collaboration with economics researchers, the state designed a lottery procedure by which individuals who received the insurance could be compared with those who did not, creating in effect a first-rate randomized experiment.
The study found that getting insurance coverage increased the use of health care, reduced financial strain and improved well-being — results that now provide invaluable guidance in understanding what we should expect from the Affordable Care Act."
Nothing Chetty says here is actually incorrect, as I said before. However, I would have to say that a vast majority of readers that know little about the actual Oregon study would finish reading this article with the impression that the Oregon study simply told us that Medicaid "reduced financial strain and improved well-being" and was therefore a vindication of Medicaid.
Clarke says that this a fair characterization of the study. I disagree. The study didn't prove that Medicaid did not improve physical health. However, it did look to see if there was any evidence that it did in any significant manner, and they did not find any. That result does matter.
Clarke is wrong to say that we should just leave out that part of the study. It may not prove that Medicaid doesn't improve physical health, but it does tell us that a study that apparently was large enough to allow us to conclude that Medicaid brings about significant improvements in financial strain, mental health, and self reported health was not able to detect any significant improvements in physical health.
That does tell us something about Medicaid. And, it is not unambiguously positive. An economist of Chetty's caliber writing about why economics should be considered a science should have made a stronger effort to convey this point. After all, that's what any good scientist would do.
Subscribe to:
Posts (Atom)