Fannie-Mae Healthcare?

This article examines the logic behind instituting a public plan, and some of the drawbacks to doing so.

Even Obama Agrees

WASHINGTON (CNN) – President Barack Obama said Tuesday that there is a "legitimate concern" about the ability of private insurers to compete with a public plan "if the public plan is simply eating (from) the taxpayer trough."

If that's the case, it'd be tough for private insurers to compete, Obama said. If, on the other hand, the "public plan must collect premiums and provide (good) services" like private insurers, then private insurers should have no problem competing with a public option.

Obama said he was hopeful that an efficiently-run public plan could help push private insurers to make similar cost-cutting moves.

The president made his remarks during a news conference at the White House.

Health Care Reform

I know it has been a while since I posted something here, but I wanted to give my take on the current health care reform as well as to link to a couple of good articles.

First, I thought this article and this article are very informative and contain some good points about health care reform and the public option in particular.

Here is my take: there must be some way that health care services are rationed. We live in a world of finite resources, so not everybody can get every treatment that they want or even need. In most markets, rationing takes place through pricing. If you cannot afford a particular good or service, you will not receive it. In the public school system, rationing takes place through local Board of Education decisions that dictate school budgets. There are pros and cons to both ways. The pricing mechanism is generally a very efficient rationing system, but it can be inequitable to the extent that somebody with very limited resources will have very limited access to these goods. The public committee rationing method can in principle be more equitable (though this is no guarantee), but tends to be inefficient, and leaves individuals powerless to alter their circumstances so as to obtain more of the particular good or service in question.

Personally, I believe that is very important that medical decisions be left in the hands of doctors and patients. Liberals will argue that such a worry is a red herring, and that their plans will not change this. Yet, as advocates of a single-payer system (including certain Democrats in Congress who secretly hope the "public plan" will turn into this) will readily admit, under a single-payer system some government body would be responsible for determining "global budgets" for hospitals, as well as what types of equipment they can purchase.

Translation: a government body would determine the total budget for a hospital, even if the hospital could effectively be using more resources, or if the hospital believed-- in disagreement with the authorities-- that a particular capital equipment purchase was justified. This is a very important feature of the health care system: the ability to dissent. Dissent is what gives rise to innovation, and enforced conformity squelches that. Therefore, while it may be true that the government might not (at least initially) tell doctors exactly what procedures they can do, it will determine the total budget that doctors have to work with, as well as the equipment available to them. That seems mighty limiting to me.

In addition, any public plan that relies on taxpayer dollars is thoroughly anticompetitive. For starters, even though Democrats like to portray such a public plan as an "option," it is hardly an option if your tax dollars are being spent on the plan regardless of whether or not you sign up. Secondly, if the public plan is the only plan that has access to taxpayer dollars, then it is competing on a very unfair playing field, which would likely lead to private insurers being pushed out of the market. Note that this would NOT occur because the public plan was so superior that everybody would flock to it. This would occur because EVERYBODY would have to pay the taxes to sustain the public plan, but those who chose not to join would also be paying the full premiums for their private health insurance? Who would like to do both? Nobody.

The question that arises, then, is what sort of system would I like?

I don't favor a complete laissez-faire pricing rationing system. Everybody should have access to at least basic medical care, independent of financial means. However, above and beyond this, individuals should be able to choose more expensive doctors or treatments if they can muster up the financial means to do so. We are far from having a competitive medical marketplace-- with third-party payers, asymmetric information, and a mind-boggling array of subsidies and mandates-- and I believe that moving more in that direction would significantly improve our medical system.

What might a competitive marketplace for health care look like? For starters, medical histories should be a private matter, and should not need to be disclosed in order for somebody to obtain insurance. Secondly, insurance companies should not be able to turn down any applicants for any insurance plans they offer. Thirdly, doctors and hospitals should have complete autonomy regarding what procedures they administer and how much they charge. Like it or not, medical care is an industry, and hospitals are a form of business. Just because an enterprise operates with money does not make it some lowly money-grubbing entity. Services are rendered, and mutually beneficial transactions take place. Just as every other business decides the prices of its services, so should medical institutions. Of course, just because they can do that does not mean they will get customers.

But wait. This is where a common criticism comes up: when somebody is sick (or especially if they are experiencing a medical emergency) they are not going to go shopping around for the hospital with the best price-quality combination. Similarly, when a doctor recommends a treatment, the patient cannot reasonably expect to do some sort of internal cost-benefit analysis to determine if the procedure is more cost-effective than other treatments. I AGREE.

Of course, the same could be said for people seeking out financial analysts or any other expert who knows more than they do. There is nothing inherent about price competition that says that patients would have to seek price information on every single procedure. I have an alternative. Let patients join (or become "members" of) a health network (namely, a doctor, connected to a hospital, and possibly other out-patient providers) to whom they would pay monthly premiums (or "membership fees"). The health network would then be responsible for providing medical services to you, with you making minimal additional payments. This way the true experts are in charge of what procedures to give you, and they compete in order to attract your membership. As with insurance companies, they would not be able to turn people away because of checkered medical histories.

Of course, there would be many details to work out. The role of insurance companies would be changed (and probably reduced) in such a system, probably relegated primarily to being a financial backstop in case you develop cancer or some other incredibly expensive-to-treat condition. Regulations would probably have to be put in place to ensure that the health networks would not unethically hoard your money (though competitive pressures would likely alleviate almost all of this). Etc.

As Competitive as a Rigged Game

If a public plan becomes part of any new health care bill, do not be deceived by those who call it a source of "competition" for private plans. It would be about as much competition as an athlete faces when his opponent is secretly doping up behind closed doors. To read more, go here.

Our Civic Duty

No, it is not patriotic to pay higher taxes, but it is even less patriotic to force a small minority of people to pay for all the goodies that you vote for. In short, everyone should pay taxes. Ari Fleischer makes the case here.

Well, At Least Coach K is Keeping Busy

Obama's Anti-Republican Defense Plan

In case you haven't heard, the White House will now have its own "kitchen garden." The catch? There will also be a beehive. What better way to scare off Republicans from going to the White House than to put guard bees there. I'm not sure if it would work, but it just might if I were an elected official...

Stem-Cell Reversal

President Obama has now reversed Bush's restriction on federal funding for stem cell research that would result in the destruction of embryos. Obama is entitled to do that. However, he went a step further by claiming that this was a sign that his Administration would not "politicize science." Translation: if you believe that there are moral boundaries for scientific inquiry, then you are basing your decisions on ideology instead of science. Interestingly enough, everybody, including President Obama, believes in moral boundaries for research. Somehow I doubt that Obama is in favor of certain forms of animal testing, for instance. Here is an excerpt from a piece from the Wall Street Journal today:

"The claim about taking politics out of science is in the deepest sense antidemocratic. The question of whether to destroy human embryos for research purposes is not fundamentally a scientific question; it is a moral and civic question about the proper uses, ambitions and limits of science. It is a question about how we will treat members of the human family at the very dawn of life; about our willingness to seek alternative paths to medical progress that respect human dignity."

Obama's New Deficit Claims

President Obama now claims that he wants to cut the deficit in half by 2013. By his calculations, since Bush handed him a $1.3 trillion deficit, Obama's goal is to bring that down to $533 billion. ...oh yeah, except there is one problem: The 2008 deficit was $1.3 trillion only because of the one-time $700 billion TARP bill. Without that, the deficits under Bush never even approached $1.3 trillion, and in fact, never even hit $533 billion. It is a good bit of political maneuvering if Obama can pull off this bait and switch.

Krugman's True Expertise

Paul Krugman, up until about a decade ago, was a brilliant international trade economist. His work deserves the awards that it has garnered, though arguably his Nobel Prize should have been a joint prize between him and any of a group of about four other prominent economists. However, Paul Krugman is not and never has been an expert in macroeconomics, despite his constant ranting on the subject-- but don't take it from me, I'm just a graduate student. Take it from Robert Barro:

In an interview with Robert Barro...

Do you read Paul Krugman's blog?

Just when he writes nasty individual comments that people forward.

Oh, well he wrote a series of posts saying he thought the World War II spending evidence was not good, for a variety of reasons, but I guess...

He said elsewhere that it was good and that it was what got us out of the depression. He just says whatever is convenient for his political argument. He doesn't behave like an economist. And the guy has never done any work in Keynesian macroeconomics, which I actually did. He has never even done any work on that. His work is in trade stuff. He did excellent work, but it has nothing to do with what he's writing about.

Bailout Re-Do

From the AP: "Treasury Secretary Timothy Geithner met with the administration's top officials and advisers in recent days, trying to finish a plan to overhaul the $700 billion bailout program that is already half gone. Geithner previously said the administration is weighing the possibility of using a government-run "bad bank" to buy up toxic assets that are weighing on the books of financial institutions, but some officials now say that option is gone because of potential costs."

Wasn't this supposed be the original design of TARP? I originally supported the bailout precisely because I thought the government was going to conduct a reverse auction to buy bad debt from the banks. For reasons unknown to me, Hank Paulsen decided that that was not feasible. Geithner appears to have come to the same conclusion, although he only has $350 billion to work with, rather than the full $700 billion. I can only wonder what decision he would have made if he were in charge of the bailout from the beginning...

Equilibrium Macroeconomics and its Skeptics

Recently several economists-- few of whom seem to actually publish technical papers in reputable journals anymore-- led by Paul Krugman have seen fit to attack those who use equilibrium models to study macroeconomics. The thinking seems to go like this: "Equilibrium macroeconomics came mostly out of the University of Chicago and the University of Minnesota, both of which, and the University of Chicago in particular, were bastions of free market economic thought. Since those who oppose the bailout bill on free market grounds are 'clearly' idiots, and since several economists at Chicago in particular oppose the bailout, it must be that equilibrium macroeconomics is a failed endeavor."

Unfortunately, if Krugman had bothered to ever learn modern macroeconomics rather than spending time writing partisan op-eds, he might have learned how broad equilibrium macroeconomics really is. The first question is this: what exactly is equilibrium macroeconomics?

To answer that, I will first start by saying what it is not. Equilibrium macroeconomics is not free market economics, it does not automatically assume that markets are complete and that information is complete and symmetric, and it does not always conclude that market outcomes are Pareto optimal (basically, efficient) and that government intervention is always ill-advised. Twenty-five years ago there was indeed a correlation between belief in the free market and adherence to equilibrium macroeconomic methods, but as the methods have been more adopted, the specific assumptions used in any given model have become much more varied.

Equilibrium macroeconomics essentially rests on two pillars:

1) Agents-- firms, consumers, workers, etc.-- optimize their behavior (basically, they make decisions that they think will bring about whatever outcome they prefer most) given their knowledge of the actions taken by others and their information about the economic environment in general.

2) Aggregate variables-- interest rates, wages, the unemployment rate, etc.-- are the result of the decisions of the agents in the economy, disciplined by some notion of an equilibrium. Often times, the equilibrium condition is market-clearing. In some instances, the equilibrium condition is Nash equilibrium.

Modern macroeconomics has many fathers, perhaps most notably Robert Lucas, Tom Sargent, and Ed Prescott. The first seminal equilibrium macroeconomic model to study the business cycle was the Real Business Cycle model by Kydland and Prescott from the 1980's. That model DID assume that financial markets and information were complete. By implication, this means that people can perfectly insure themselves against economic risk and that the economy is Pareto efficient (ie there is no way the government can make everybody better off). Clearly, at least the result about perfect risk insurance is far from true.

However, it is NOT those particular assumptions of the model-- or the two controversial (or maybe just dead wrong) implications-- that have made the model an enduring baseline macroeconomic model. It is instead the fact that their model was the first to incorporate (1) and (2) to study the causes of business cycles, and that their model explained a sizable proportion of economic fluctuations. Since then, even if Krugman has not noticed, equilibrium macroeconomic has progressed far beyond that model. Here are some examples:

In the 1990's Rao Aiyagari developed a foundational incomplete markets equilibrium macroeconomic model where people face idiosyncratic risk. The result? People cannot insure themselves completely and the economy is not Pareto efficient. Same methodology (ie using (1) and (2)), different specific assumptions, different outcome.

Since then, Per Krusell and Anthony Smith have extended the model by adding aggregate risk. In addition, whereas Aiyagari assumed that financial markets were exogenously incomplete, there has been substantial work in the dynamic contracting literature within macroeconomics that gives rise to endogenously incomplete markets. What are some of the assumptions of these models? Private (incomplete) information and imperfect enforcement.

The equilibrium macroeconomic literature has been extended in many other ways as well. Several macroeconomists have done and continue to do work in developing better heterogeneous agent, incomplete markets models to explain the evolving wealth distribution and the extent to which people can and cannot insure themselves against risk. In addition, there is substantial work being done on incorporating search frictions-- namely, the fact that workers, firms, investors, etc. must actively search for economic opportunities, rather than automatically encountering them-- into equilibrium models. Christoper Pissarides and Dale Mortensen, among others, have developed a benchmark equilibrium model that generates unemployment dynamics far more realistic (and interesting) than the standard classical, full-employment models.

I could go on...

My main point is that equilibrium macroeconomics has become more or less the norm in the field these days, and I cannot think of any successful job market candidates in macroeconomics that work outside the equilibrium framework, broadly defined. The benefit to this framework is not the specific assumptions that individual economists put into their preferred models, but rather:

1) Equilibrium macroeconomic models do not divorce aggregate behavior from the individual actions which must necessarily generate it.

2) They are internally consistent and enforce discipline on the part of the economic modeler.

On the Anniversary of Roe vs. Wade

Supporters of Roe vs. Wade claim that abortion is purely a private medical decision. Tell that to the child whose life you are about to end-- whose story you are about to cut short. People with stories such as this:

Is Increased Inequality Bad?

...not unless you and your spouse are only high school graduates, argue Jonathan Heathcoate, Kjetil Storesletten, and Giovanni Violante in this working paper.

An Experiment

I haven't decided which look to go with yet...