The Media Recognize Utah Health Care Reforms

Rich mentioned that IHC is another example of a health care provider that is doing a good job of managing costs. I have actually seen a few comments about IHC and Utah's health care system in the national press. Here are a few examples:

This article in the New Yorker, which has been cited repeatedly by President Obama, talks about why McAllen, Texas has the highest health care costs in the country. The conclusion is that doctors there have caught an entreprenuerial spirit that leads them to choose a manner of care that maximizes their profit. The system of incentives in this country makes it possible, so he takes the position that things will inevitably get worse. But, he also mentions a few places, such as Salt Lake, that use what he calls an accountable care model where doctors, insurers, and hospitals work together as a community to focus on quality of care rather than on volume.

This one from the Washington post makes the case for why national policy makers should look to some of Utah's reforms as an example.

Another from the Heritage foundation describes Utah's reforms in a little more detail, and states that other states should learn from how Utah has been able to improve access and implement new technology with minimal regulation.

Too Much of a Good Thing

Two quick points as it is rather late. First of all, I finished the bar exam today. It was about twice as long as it needed to be. I mean seriously, 250 multiple choice questions and 7 essays? An exam with 3 essays and 100 multiple choice would be just as good at weeding out the totally incompetent.

Next item: Obesity. Is it as big of a deal as we have been told? Here is an interview with the author of The Obesity Myth. The gist of the discussion is that the obesity panic is largely an illusion. First of all, people that weigh just a little more than arbitrary weight considered obese are not unhealthy. Also, since the average American is just below the line, if everyone gained a few pounds the percentage of people who are obese goes up significantly. Here is a quick numerical example.

Suppose we have fourteen people whose weight is distributed as follows: 1 person at 120 pounds, 2 at 140 lbs, 4 at 160 lbs, 4 at 180 lbs, 2 at 200 lbs, and 1 at 220 lbs. Now suppose we make say that anyone who weighs 185 lbs or more is obese. 3 out of 14, or about 21% of our group are obese. Now suppose that over Thanksgiving everyone gains 5 or six lbs. Suddenly 4 more people are over the limit and now 7 out of 14, or 50% of the population is obese. In one day the number of obese people in our group went up by 133%.

So you can see that the statistics you hear about obesity can be misleading. If the average weight of Americans goes up by ten lbs it is more informative to learn about the health consequences of putting on ten lbs than to tremble in fear that the portion of people who are obese has gone up by some frightful percent.

Can Markets Cure Health Care? Part 2

Yesterday I wrote about whether the health care market is plagued by two problems that make it impervious to the invisible hand. The main point was that the problems Krugman discussed are not limited to the health care industry , and that there is no reason to believe that the government is better at dealing with agency problems than the market. But Krugman also made another claim: that there is no successful example of free market care.

The difficulty with this claim is that there is no major industrialized country besides the United States that doesn't have universal government health care. So to say that there is no successful example of free market health care is to say that the health care market in the US doesn't work. But the government pays for about half of all health care expenditures in the US, and subsidizes most other health insurance by making employer provided health insurance tax free. So Krugman's statement may be true, but it is misleading. It would be more honest to simply say that there is no example of a major economy with a free market for health care.

So why is this? Why doesn't anyone try a free market? Is it because of the problems described by Krugman? I highly doubt it. People don't want government health care because the free market is inefficient. They want government health care because we don't like to see poor people go without care. There are two major principles that help us evaluate a social policy. The first is efficiency. The second is distribution. A free market will never resolve distributional concerns. A free market will result in inequality.

I have written before about the difference between insurance and subsidy. Advocates of health care reform tend to argue that we need more insurance when what they really want are subsidies. They argue that the free market is inefficient, when the real problem is that the free market results in inequality. Unfortunately, many reforms meant to address inefficiency result in increased inequality and those that reduce inequality tend to increase inefficiency.

Whenever you engage in a discussion about health care you should ask yourself, are we talking about inefficiency or inequality? If it is not clear, if there is no discussion about the trade offs between these two objectives, you can be pretty sure that whatever you are hearing (or saying) is not really getting to the heart of the issue.

Can Markets Cure Health Care? Part 1

Paul Krugman just wrote a blog post entitled "Why Markets Can't Cure Health Care?" He says that a free market doesn't make sense for two main reasons.

Claim #1: People can't predict when they are going to need care, therefore they need insurance. We can't trust insurance companies to make good health care decisions because they make their money by denying claims.

Response: The first thing we need to realize is that there are all kinds of health care. Some of it is discretionary, some of it is fairly predictable, some of it is easily paid for out of pocket, sometimes the costs are spread out over time, and sometimes the costs are immediate and catastrophic. Health insurance is not necessary, nor is it very useful for those kinds of care that are discretionary, predictable, or not that costly. But the current system of government subsidies and tax breaks promotes the use of health insurance for many of these things. When the government subsidizes insurance, the inefficiencies that come along with it should not be blamed on a failure of the free market.

And what about the problem that insurance companies make more money by denying claims? It is true that for some kinds of medical risks, people ought to buy insurance. When they do so, the incentives of people and insurance company are different. People don't have to pay for care so they want more than they need, insurance companies have to pay for care so they want to restrict how much is given. Instead of having one party (the person receiving care) comparing the costs and benefits of getting the care, you have one party with the costs and another with the benefits. There is bound to be some friction. That is why an insurance contract exists.

Suppose I need a house. Since I don't know how to build houses, I hire a contractor and authorize him to buy materials. I want the best materials for my house, but the contractor can save costs by getting cheaper ones. Do we complain that the construction industry is hopelessly flawed because contractors can save costs by getting cheap materials? No, we write a contract that specifies what materials to use. If I want good ones, I put that in the contract and pay more for it. So it is with insurance contracts. If you don't want to be denied the kind of care you want, get an insurance contract that covers that kind of care.

Granted, health insurance contracts are complicated and you can't specify whether you want coverage for every imaginable kind of care. So in some instances people are going to try to push the line by getting their insurance ot pay for care that isn't cost effective and sometimes insurance companies are going to try to deny care that is. Insurance companies insure costs to decide which claims to deny, and the court system is available to those who think an insurance company has violated a contract.

The problem of contracts that are hard to specify is not unique to the insurance industry. It is a major challenge of many industries. It is inevitable anytime you have an agent making a decision for a principle. In health insurance you have an insurance agent deciding whether to pay for care, but what about cases where lawyers make legal decisions for clients, or when CEO's make business decisions for shareholders. Are those contracts hard to specify? You bet they are. But does this mean that legal costs and CEO salaries should be set by the government? There are some that think so, but in reality the free market is usually better than the government at dealing with contracts that are hard to specify.

Is that true in this case? Couldn't we just save money by having the government pay for everyone's insurance so we don't have to pay insurance agents to decide whether to deny us care? Guess what? If the government pays for care then you better believe that government is going to employ agents to decide when to deny you care. If they didn't, health care costs would explode. In a free market, numerous companies try different strategies to balance the coverage they promise and the amount spent on administrative costs with their reputations and premiums. Those companies that find the right balance succeed. This is why the free market is so great. No single person or commission has to be smart enough to find that balance by themselves. If government is in control, congress or some executive panel is charged with that task. It's not that government is necessarily corrupt or incompetent. It's just that such decisions are too complicated to put much faith in any given organization. The free market allows us to try every possible balance at once, even when it comes to insurance contracts.

Claim #2) Health care is too complicated, so people can't comparison shop.

Health care isn't like a car where you can look at a few numbers like HP and MPG, go to the lot to take a test drive, and then make an educated decision. We need people to help us make health care decisions. But is it any more difficult to compate doctors than it is to compare lawyers, airline pilots, accountants, professors, or real estate agents? The market doesn't have to have perfect information in order for doctors to feel competitive pressure. Competition doesn't require individuals to always make the right decisions in order to be effective. It depends on providers feeling pressure to offer a good deal.

There must be some method of comparison in order for a market to work, but I dispute the idea that no information on doctors is possible. People can judge doctors based on treatment statistics (from advertising efforts or third party data providers), people skills, the appearance of the offices, and most importantly, on cost. Granted, in an emergency this is not always possible, but in a free market people could decide where to get emergency care in advance.

Even when there are inefficiencies in the free market, we can't compare a market to an ideal system where everyone always gets optimal care at an affordable cost. We have to compare how the free market compares to realistic alternatives. Tomorrow I will discuss Krugman's assertion that there are "no examples of successful health care based on the principles of the free market."

What Causes Unemployment?

Unemployment is one of the most upsetting things about an economic downturn. It is one thing to cut down on luxuries and quite another to find yourself without a job. So what is it exactly that causes unemployment? At first the answer might seem obvious. Unemployment is the result of companies firing people, isn't it? But the answer is not so simple. Even when the economy is doing really well, a lot of people lose their jobs. But in a dynamic economy those people get hired by new firms relatively quickly. So, why isn't that happening now?

Unemployment occurs when the marginal cost employers are willing to incur to hire new labor is lower than the wage that employers are willing to accept. If Acme, Inc. is willing to hire new employees at $6/hr and the most desparate unemployed laborer won't work for less than $8/hr, no new jobs will be created. There are several factors that affect the wages that employers offer and the wages that labor will accept.

Reduced demand for goods. This is the obvious one. If consumers and investors don't want to spend as much on consumption and capital, then employers can't charge as much or their volume will decrease. Thus, they can't afford to spend as much on labor and the wage they are willing to pay goes down.

Minimum Wage. A minimum wage prevents firms from offering employees low wages, and prevents workers from accepting them. Thus, if a firm can only afford to pay $6/hr and the minimum wage is $7/hr, the firm will not hire anyone and people willing to work for $6/hr will be unemployed.

Unions. The effect of unions is similar to that of a minimum wage. A union is a monopoly on labor. A monopoly will reduce supply in order to raise the price that it can charge. A union does this by preventing people from working unless the company pays them the monopoly wage (which may include benefits and job security).

Opportunity Cost. Most workers have a range of wages that they think they can achieve with some degree of likelihood. If they agree to work at one wage they may have to give up higher paying opportunities. Imagine a society with 100 workers, and a number of different employers that occaisionally fire employees or take on new employees. On average, all firms together are willing to hire 25 people at a wage of $50/hr, 35 people at $20/hr and as many people as are willing to work at $10/hr. Now imagine that demand dries up and suddenly the economy can only support 15 people at $50/hr. You were working for $50/hr and your company downsizes and you lose your job along with 10 other people. You know that a new $50/hr job comes up once every month and you have a 10% chance of getting the job each time one comes up. Lets say that a new $20/hr job comes up once each month as well and you have a 50% chance of getting that job, and you can get a $10/hr job any time you want. What would you do?

If you hold out for the $50/hr job you will probably find one within about 6 months, and by the end of the year you will have made about $50,000. If you opt for the $20/hr job you will find a job in about a month and by the end of the year you have made about $35,000. If you take the $10/hr job you will start immediately and earn $20,000 on the year. Looks like taking a job now is not such a great choice for any of the ten people that are laid off. So even though there are jobs available at lower wages, you could have 25 people continuously competing for 15 high paying jobs.

Unemployment benefits. If you offer people unemployment benefits, the cost of waiting 6 months to find a new job goes down. Thus, you will end up with more people with even fewer qualifications holding out for a limited number of well paying jobs. Unemployment benefits don't just make people more lazy. They make it worthwhile for more people to compete for jobs that only a few people can get.

Mobility restrictions. If it is difficult for workers and/or business to relocate, it is possible that newly created jobs will appear in a different geographic location from unemployed workers.

There are a number of other causes of unemployment, but these few that I have mentioned raise some interesting points. First, some degree of unemployment is unavoidable. Even if it is best for the economy as a whole to have full employment, it is often best for individuals to compete for jobs that they are not likely to get immediately. Second, attempts to improve labor conditions by allowing union negotiation, instituting a minimum wage, and providing unemployment benefits inevitably lead to some degree of unemployment. These measures cause more unemployment during times when wages are falling, especially if people think the downturn is temporary and it is worth it to hold out until more high paying jobs are created.

Note: requiring businesses to pay medical benefits, and increasing the cost of these benefits is another way of increasing the marginal cost of labor. This exacerbates unemployment and lowers the volume of goods that businesses can produce at low cost. This is one reason many people are opposed to enacting health care reform during a recession.

The Cost of Insurance Mandates

Here is a great blog post explaining how the kind of insurance mandates in the health reform bill (such as minimum coverage requirements and restrictions on the factors that can affect premiums) will raise the health insurance costs of individuals. Consider this quote from the blog:

"[C]learly these mandates will increase premiums, and...the neighborhood is quite expensive: +4-5% higher premiums for another 10 benefit mandates, +20-27% for community rating, and New Jersey’s guaranteed issue is associated with 94% higher premiums compared to a similar State without guaranteed issue."

The numbers are derived from a study comparing different state programs. The bottom line is that even if the health care reform were done in a way so that it was deficit neutral in terms of the federal budget, it could end up doubling health insurance costs for a lot of people. That might cause a pretty significant political backlash.

America's Affordable Health Choices Act

Here is a link to a document outlining the proposed health care reform bill.

Some of the main points.

• People will have access to a public health insurance plan that competes with private plans
• Private health insurance will not be allowed to vary premiums based on health conditions.
• Minimum coverage standards will be set for health insurance plans.
• Government will subsidize health insurance on a sliding scale for people up to 400% poverty level.
• Medicaid will be expanded to include more people and have higher reimbursement rates.
• People who don't have health insurance will pay a penalty of a 2.5% tax.
• Large employers will be required to provide health insurance.
• Some funds will be provided for prevention and community based measures.
• Taxes will be raised on the rich to pay for the increased coverage. (this is not discussed in the article I linked to, but it is the means of funding proposed by congressional leaders. Obama said he won't sign a bill that increases the deficit.)

Political Principles

I spent some time this evening watching campaign videos on youtube from last year's election. Listening to various candidates spout a list of qualifications for office is about the most boring thing imaginable. But a few candidates focused on specific issues and principles . It made me start to think more about my own political principles. What things would guide me in making decisions if I were an elected official. Here are a few things I thought of:

Limited Government. Elected officials should understand that government is not the solution to every problem, and they need to have a test for determining when government action is appropriate. I believe in two important principles that both justify and limit government. First, government should protect private liberty and property. Responsible individuals interacting in a free market can resolve the vast majority of problems. Second, I belive that the government should assume direct responsibility for things that can only be enjoyed collectively such as national security. We are a long way from this ideal, but marginal changes to reduce the scope of government can still be made.

Transparency. It is critical for government representatives to communicate what they are doing to their constituency. Effective communication requires a great deal of effort, it doesn't just happen by itself. Those in government have a responsibility to inform the people they represent of the underlying facts, and explain the reasoning behind their decisions.

Information. Understanding a problem begins with knowing what questions to ask and asking them. Decisions based on incomplete or irrelevant data can often do more harm than good.

Innovation. Creative solutions to difficult problems should not be limited to technology and business. Government also needs intelligent people that can respond to new challenges with an open mind and a willingness to think outside the box.

What kinds of political principles are important to you?

Utah Common Ground Initiative

Mercedes and I spent the evening discussing the issue of gay marriage. It started when we found some videos online from a debate about the Common Ground Initiative, a series of laws designed to extend more rights to gay couples. Here is the president of the Sutherland Institute arguing that they should not extend the rights, and this is the argument by Equality Utah in support of the intitiative. Both Mercedes and I thought that Equality Utah representative made a better speech, but we did not come to a full agreement about the policy proposals. The Common Ground Initiative includes four main parts:

1) Extend health care benefits for state employees to the partners of same sex couples.

2) Make it illegal to discriminate on the basis of sexual orientation in housing and employment.

3) Allow same sex partners to sue for wrongful death and make life insurance claims.

4) Promote Adult Joint Support Declarations (I don't know exactly what they mean by this, but it is on their website as one of the four main points)

The initiative is partially a response to a statement by lds church officials that "The church does not object to rights (for same sex couples)...regarding hospitalization and medical care, fair housing and employment rights, or probate rights, so long as these do not infringe on the integrity of the family or the constitutional rights of churches and their adherents to administer and practice their religion free from government interference."

So where do I stand? Although I agree that many basic rights should be extended to gay couples, I do not support some important parts of the initiative. Most importantly, I don't think same sex partners should automatically be entitled to enjoy their partner's health insurance benefits. My reasoning for this is that I think the main reason to extend health benefits in this way is to allow one spouse to stay home and care for children. If we expected both husband and wife to work, then they could each get their own health insurance.

Despite a lot of changes in the way people view sexuality, I believe that procreation is still the fundamental principle underlying marriage. Granted, there are many heterosexual married couples that don't intend to have kids and never will. But as a social institution, marriage is inseperable from reproduction. Thus, it seems legitimate for the state to lower the economic barriers that make it difficult in modern society for a family to raise kids.

I don't think that procreation is a fundamental part of the commitment between same sex partners in general. Sure, there are many such couples that are raising kids. But reproduction isn't the centerpiece of the rather new tradition of same sex commitment as I understand it. Thus, I don't think there should be a presumption that committed same sex partners should have one bread winner and one homemaker. So, if there are same sex couples that actually do have children I think they should be eligible for the benefits. If not, they should be responsible for getting health insurance (and other employment benefits) as individuals.

Inequality

One of the more interesting topics floating around the blogosphere these days is the question of how to interpret the fact that income inequality has been growing steadily in America for about the last 30 years. Growing income inequality is considered the greatest threat to this country by many progressives, such as Nobel Prize winning economist Paul Krugman. The first post on his blog with the New York times lays out the issue as he sees it:

"Since the late 1970s the America I knew has unraveled. We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent...Because of movement conservative political dominance, taxes on the rich have fallen, and the holes in the safety net have gotten bigger, even as inequality has soared...the important thing is to realize that the story of modern America is, in large part, the story of the fall and rise of inequality."

A few days ago, an article by Will Wilkinson was published by a libertarian think tank, The Cato Institute, offering another perspective on inequality. The main pionts are that first, we should be more concerned with inequality in happiness than with consumption, and the improvements over the past several decades have made life for the poor and middle class better in many ways that aren't represented in income statistics. For example, he argues that the prices on basic consumer goods have fallen (in large part thanks to wal-mart) and the quality of low cost goods has improved to a greater extent than the goods only affordable by the rich.

The second point of the article is that income statistics taken on a national level do not take into account the impact of immigration. If a poor family moves to the US and their income doubles, things have greatly improved for them. However, because their new income level is still below average for Americans, income inequality statistics would indicate that Americans on average just got a little bit poorer. Prior to coming to the US, they didn't count. Once they arrived, their presence brought down the average.

One of the underlying reasons why many people find income inequality to be problematic is that a dollar in the hands of a rich man is not worth as much as a dollar in the hands of a poor man. So by taxing the rich and giving to the poor we can do more good than harm. But since the rich invest more of their money, taxing them may reduce economic growth much more than taxing the poor and middle class. In the long run, this could hurt the poor more than than they stand to benefit from the immediate redistirbution of wealth.

My personal tendency is to think more along the lines of Wilkinson than Krugman. I am enamoured with progress and I have a natural aversion to policies that will impede growth. If we could raise the welfare of the poorest Americans without causing economic stagnation I would not hesitate to do it. Also, I think that the enormous changes in income distribution over the course of the past generation ought to make us stop and think about whether society is headed in the right direction. But I do not think that we should grant government the responsibility of ensuring that no one gets too far ahead of the rest of us.

Education Reform

Education is similar to health care in that many feel it is a fundamental right, and in that people often complain that the United States is falling behind other countries. In reality, American kids score pretty well in comparison to other countries. Check out the Trends in International Mathematics and Science Study (TIMSS), which indicates that children in the US score better than all but a few Asian and European countries. Five Asian countries (Taiwan, Japan, Hong Kong, Singapore and Korea) top the charts. Many of the bottom dwellers are middle eastern countries (including Yemen, Qatar, Palestine, and Saudi Arabia). Russia, England, and the Czech Republic stood out as some of the top European countries. It would probably be going too far off on a tangent to try and hypothesize as to why 4th graders from Kazakhstan blow their counterparts from Norway out of the water when it comes to math skills.

In any case, the US is not doing too badly. But could we do better. Most studies indicate that improving the education system is not easy. For example, a recent overview of school voucher programs across the country shows that introducing a little competition into a public school system doesn't seem to make a significant difference. (Paper available for free temporarily at this link).

On the other hand, an evaluation of charter schools in New York City reveals that most of them do have a positive impact. The biggest factor in explaining (or at least correlating with) the success of charter schools in New York? A longer school year. Having a longer school year seems to be more important than small class sizes or any other factor considered. The typical school year in the US is 180 days. The typical charter school in NYC has 193 days. (For comparison, I think Japanese students go to school more than 240 days per year.) On the other hand, some rural schools in Colorado only have 160 days per year and I haven't seen evidence yet whether that is significantly hurting students.

In any case, why not increase the number of school days to 200 or more? Why do we have a three month summer vacation in the first place? Read this interesting article for a little history on the subject. Basically, it is hot in the summer and in the 19th century there wasn't very good air conditioning so having school was not so effective. As far as I know, however, air conditioning technology has improved considerably over the past 150 years or so. If a longer school year is the best known way to improve schools, can't we pony up the money?

Another of my favorite ideas for school reform is increased use of online and computer technology, and games in particular. Perhaps we could increase the number of school days by having required online summer courses so we wouldn't have to spend so much more on increased teacher's salaries.

So, vouchers are a favorite idea of mine but there isn't much evidence that they work. Increasing the number of days works, but people don't like it and it is expensive. Computer and internet technology are just beginning to be explored (I am not sure why, maybe the unions are afraid that teachers will be replaced by computers). What are some other potential reforms?

Utah: Land of Controversy

With the possible exception of Alaska, I can't think of any other state that has been subject to so much controversy over land use as there has been in Utah. Consider:

In 1996, President Clinton created the Grand Staircase-Escalante National Monument, which put 1.9 million acres of land in Southern Utah off limits to development. This put an end to projects such the Andalex Coal mine, and outraged many residents. It also generated a lot of support for Clinton among environmentalists.

In 2003, a deal to swap 108,119 acres of state land for 139,979 acres of federal land collapsed under allegations that the deal would have amounted to a $100 million windfall for the state. The federal lands in question would have been opened to development and used to support the state's school trust. The state lands would have been consolidated federal acregage in the area of the San Rafael Swell.

Last year, Tim Dechristopher, an undergrad econ student at the U, made fraudulant bids and won the rights to lease $1.7 million dollars worth of oil and gas rights. He now faces two felony charges, depsite the fact that the Dept. of the Interior later rescinded many of the leases up for bid for many of the same reasons that motivated the students act of civil disobedience.

Utah has some of the most beautiful and unique land in the world. Clearly it is worth preserving. But how do you measure the value of an undisturbed habitat as compared to a potential tourist attraction or a coal mine. In some ways this calculus is even more difficult than the prospect of putting a price on human life for the purpose of rationing health care. But without any attempt at doing a cost benefit analysis of environmental measures, the results can be expensive and wasteful. Consider the fact that over $100 million dollars has been spent on a failing program to save the desert tortise. This does not include the development and use restrictions that have also burdened areas that fall within the habitat of this burrowing reptile.

Many people feel that an undisturbed environment is valuable to them even if they never see it. This is called "passive use value." Theoretically you could ask people how much they would pay to protect a given acre of land and then add up the total for all Americans. Or, perhaps we can infer that people don't value the land much because few are willing go out and pay for the right to protect it (with Tim Dechristopher being a potential exception...of course, even he didn't put up his own money).

Should the government attempt to put a price on the environment?

Rationing

I am a little curious what people mean when they say that we need to reduce "waste" in the health care sector. Do they mean administrative costs? Excess Profits? Costly procedures? I think that the main source of waste is that a lot of time spent, and procedures done, in hospitals don't do that much good. If market forces are allowed to operate, this problem would be greatly diminished by price competition. But if we want a public plan, the only option is rationing.

Since I think there are good arguments for having both public and private involvement in health care, I think that both price competition and rationing need to be used effectively. A lot of people seem to have given up on price competition (largely because they wrongly believe that free market forces have already been tried, and have been unsuccessful). But it seems that the arguments for rationing are starting to gain momentum. Two recent articles in the NY Times address the issue:

The first article outlines a system that may be implemented in Massachusetts, whereby health providers would be provided a flat annual fee for each person they care for rather than the current fee-for-service system. This would necessitate rationing by health care providers who no longer profit by giving people unnecessary care.

The second article is a general defense of rationing written by bioethicist Peter Singer. The title is simply "Why We Must Ration Health Care." It is worth a read. One interesting note is that the British health authority NICE has set a standard that health care will only be provided if the cost is less than $49,000 per year that the care is likely to extend a patients life. Later in the article he notes that the US Dept. of Transportation will only implement policies that will cost less than $5.8 million per life. If we assume that the average life saved has 40 years left, this comes to about $145,000 per year. Do either of these numbers sound right? Do you object to putting a price on life?

Immigration and Racism

Usually I try to avoid the subject of racism when discussing immigration, but the fact is that it probably plays a major role in determining how many people think. Consider the recent conflict between Rep. Chris Herrod of the Utah Legislature and the Mayor and Police Chief of Salt Lake. Herrod sent this email to the legislature, and got this response from the mayor.

Read the email. The word "Hispanic" is used 32 times by my count as he spouts statistics about the crime rate. The word "alien" is used 13 times. He tries to justify this by saying he is extrapolating numbers for illegals from the numbers for legal Hispanics, but what is the implication? Someone reading the letter could easily come away thinking "My God, we need to do everything we can to keep these Hispanics off the streets and if some of them are here illegally there is no more convenient excuse."

The crime rate for Hispanics is higher than average. It becomes us to learn the reason for the discrepancy. Is it due to poverty, gang associations, difficulty in integration? I am not sure. But what I do know is that "Hispanic" does not equal "illegal" and they should not be used as synonyms.

Update: I do not want to imply that Rep. Herrod is a racist. Maybe he feels threatened by the influx of Hispanics, maybe not. The point is that those who oppose further Hispanic immigration often argue as if they just want to uphold the law, but when they make their arguments they find it hard to hide their underlying motives. In the email, Herrod complains that political correctness is ruining the nation. Perhaps what he means is that it makes it difficult to talk about some issues openly. I agree. But I don't think the solution is to confuse the issue by with the kind of flimsy arguments he makes, first arguing that he is not against Hispanics, only against illegal immigrants, and then backing his position up using data about Hispanics.

Legislative Transparency

Not many people are truly informed about the laws that are passed in our country (either on a state or federal level). One problem is that laws tend to be very long and complicated. Consider this report about House Majority Leader Steny Hoyer (D-Md), who actually laughed at the idea that a congressman would read a new health care bill before voting on it. Why did he laugh? Because the bill will probably be 2,000 pages long, full of technical language, and it probably won't be released to the full House until a few hours before the vote.

There may be nothing we can do about the length of bills given the complexity of governing such a large nation. The problem casts considerable doubt on whether our existing legislative process is adequate to the task. But I recently came across something that gives me a little bit of hope. This youtube video features Senator Bob Bennett explaining why he voted against a bill imposing additional regulations on the tobacco industry. He takes on what many think is probably a good idea and tries to explain in a publicly accessible way why he voted against it.

One of the ideas that I have been toying with for some time is the possibility of making explanations such as Sen. Bennett's an official part of the political system. How would it work? The simplest method I have come up with is to allow (and in time, expect) members of congress to write an official opinion describing why they voted one way or another. These legislative opinions could be joined by other like minded legislators, and would become a formal part of any bill signed into law. Legislative opinions joined by a majority of both houses would be binding in any subsequent judicial proceedings where the meaning or intent of the law is in question.

Even if members of congress can't be expected to know every detail about a 2,000 page bill they should be expected to know why they voted for something. Using voting records alone to judge whether a politician is sufficiently conservative, liberal, or supportive of a particular special interest is a blunt method. Making legislative opinions a part of the process would give voters a deeper, more nuanced look into the workings of government and the positions of our representatives.

Given Our Current Health Care System, What Reforms are Realistic?

I think that the first step is to terminate the tax exemption for employer provided health insurance. This will begin to allow an effective market for private insurance and out-of-pocket payment to develop. I just don't see the advantage of adding employers into the health care mix. It is complicated enough already. It furthers the perception that people aren't responsible for their own care, and makes changing jobs even more difficult, which hinders economic growth. If we want to subsidize care, there are much, much better ways of doing it. Just providing people with a check each year to spend as they see fit would be a better option because it would not interfere with incentives so much.

Second, we must radically overhaul medicare. This will be very difficult but it is going to have to happen eventually. Medicare is the single biggest factor in America's health care mess. We could start by buying private hospitals and requiring that medicare patients use public hospitals if they are available in their region. Then we ration the care that we provide. This would probably be more politically feasible than kicking everyone out of medicare and starting from scratch.

My health care fantasy is probably just a fantasy, but the overall goal of making room for the market is still possible. We don't want a system like Canada's where private health care is basically outlawed, but we do need to be able to ration the care we provide for free (or highly subsidized). Once again, I emphasize that I think most health care should be paid for by consumers directly. High copay insurance plans can reduce the risks of catastrophe for individuals (and by catastrophe, I don't mean an emergency room visit for a broken arm; I mean things like leukemia), and strictly rationed care (whether publicly or privately provided) can ensure basic service for the poor.

Why Does the US Spend More on Health Care than Canada?

In my last post I talked about two factors that cause growth in health care costs, but I didn't directly address the question of why the US spends so much more than other countries without a comparable increase in health outcomes. So here is my explanation: The United States has a system where the government agrees to an almost open ended commitment to pay for, or subsidize, health care that is not effective. Countries with social health systems ration care. That is it. Our commitment is open ended, theirs is not.

What do I mean by an open ended commitment? In the US, medicare and employer provided insurance essentially subsidize as much care as individuals or doctors think they need. Since people make decisions based on economic trade-offs, when they don't face the direct cost of their care they tend to "need" a lot of hospital days and MRI's. In Canada, the federal and provincial governments have a limited pot of money that they spend building hospitals and paying doctors so they ration out this money by paying doctors less and providing less care. Most health care isn't that helpful, and honest doctors will do their best even if you pay them below the market rate so the outcomes aren't really affected.

The difference is not the difference between a free market and socialism. It is the difference between rationed socialism and open ended socialism. Of course there are attempts to limit the amount of money spent on medicare and employee insurance, but rationing these programs is much more difficult than directly rationing care. I admit that government provided health care is a better alternative than government provided health insurance for this reason.

There are also factors such as the fact that the US spends more on medical R&D, and the rest of the world adopts technology that we pay for, but I think that is a minor factor compared to the overall state of incentives.

Technology and Insurance

The plan I outlined and that proposed by Miriam may not be as different as they seem at first blush. I advocated subsidizing the limited kinds of care we want to provide using vouchers, Miriam advocated using government hospitals. In my plan, the subsidy would be limited to certain kinds of care and would not be enough to get the most expensive kinds of care. Under Miriam's plan, the most expensive kinds of care would simply not be available in the public hospital. Miriam's point that people do not like to spend money on health care is one of the main reasons for subsidizing care through either method. The main question in determining which of these plans is superior is whether government or the private sector is better at providing low cost basic care. I tend to put more faith in the private sector. I think the current failings of the private sector are actually caused by government interference. Let me explain.

As I see it, there are two main factors that have driven expansion in health care costs in recent decades: technology and insurance (in future decades, an aging population may become the major driver). These two factors are very closely related.

By itself, technology growth should be expected to increase the cost effectiveness of care. In some cases, technology makes existing procedures cheaper (e.g., computers reducing the amount of human labor required for information processing). In other cases, technology is sufficiently effective that it reduces the amount of care necessary. Finally, technology growth can lead to new procedures becoming effective enough that they are worth doing. For example, without organ transplant technology many expensive procedures would not have even a remote chance of working so they would never be attempted. Only this last effect should lead to an increase in prices. But if greatly improved outcomes leads to higher prices, we should not consider it such a bad thing.

In a well functioning market, practically every technological advance would result in more cost effective health care. So I think it is a mistake to say that technology is the cause of inefficiencies in the system. The problem is ineffective use of technology. Why would people choose to use expensive technology that does not lead to significantly better outcomes? There are two main reasons. First, people may not have good information about the cost effectiveness of medical procedures (or they can't process the information due to cognitive bias). Second, people do not costs into account because they don't pay for medical procedures themselves. I think both factors are significant. People have been getting ineffective health care for millenia based on misinformation.

The second factor brings me to the issue of insurance. Most people don't pay for their own medical care. They are either provided "insurance" by an employer or government. The insurance companies are either directly publicly funded like Medicare, or subsidized by the fact that employer provided insurance is not taxed. They are also subject to a lot of regulation in terms of what they must cover. There is a convincing argument to made that the bulk of the market for medical care is driven by what medicare decides to cover. The government is incapable of determining whether care is appropriate in individual cases, so market incentives are basically thrown out the window and hospitals make their investments in technology based on what will be covered by medicare or employer based insurance programs.

Now let me introduce you to an important medical study that highlights some important things to remember. First, the "gold standard" in health care studies, the RAND Health Insurance Experiment. This study spent millions of dollars following people randomly assigned to different kinds of health insurance plans over the course of about a decade. The results? People that had to pay more for their own care went to the doctor far less often. Also, with a few exceptions, those people who got more care didn't become any healthier. (The excpetions are that the extremely poor benefitted from free care, as did people with hypertension and eyesight issues).

What does this tell us? If someone else is willing to pay for it, we are perfectly happy getting health care that doesn't really help.

Also, consider this study by health economist Amy Finkelstein at MIT. It shows how the introduction of medicare in the 60's impacted the market for medical care. Basically, existing hospitals expanded and a bunch of new hospitals entered the market because they had a guaranteed customer base regardless of health impacts. The new investments ended up increasing the costs of health care for everyone.

Bottom line: government provided health insurance combined with government subsidization and regulation of private insurance are the primary source of our problems. Even a limited voucher program like the one I advocate is risky, in that it could explode into something as harmful as medicare to the overall market.

Health Care Utopia

The conversations on immigration and climate change are far from resolved so I would still love to see your comments, but I want to add a few cents to the current debate about national health care reform. First of all, aside from the fact that medicare will eventually break the budget I don't think we are really in a crisis. There are some challenging problems, but as far as reform goes I would much rather see helpful reform than quick reform. So what do I mean by helpful? Let me start by outlining what I think a health care system would look like in a perfect world.

My health care fantasy is that most health care expenses would be paid for out of pocket. Hospitals could extend credit to people that want to spread out the cost of care over time in order to reduce the impact of an emergency on their budget. The government would buy bad debt from hospitals and use the power to directly divert wages (as with income tax and social security) to increase the rate of repayment.

Health Insurance would be primarily used to cover catastrophic events. A typical health insurance policy might cover any expenses over $10,000 per year. Health insurance would be private and portable. Employers would not have any special incentive to provide insurance. Basic health insurance would be mandatory. Insurers would be able to take into account pre-existing conditions.

Due to the difficulty of obtaining consumer information, the government would gather and report (in a way accessible to the average citizen) information about the results of treatments aggregated by condition, hospital, and doctor.

Because there are positive externalities associated with certain kinds of care, and because we don't like to see people suffer, the government would directly subsidize some kinds of care in the form of vouchers, similar to the food stamp system. Vouchers would be available to everyone, regardless of income.

People with severe conditions requiring regular, large health care expenditures could apply for special government assistance that would provide them with the most cost-effective proven treatment for their condition.

There would be a regulated market for organs. All people would be organ donors by default unless they conscientiously object.

Medical records would be standardized, electronic, and portable. They would be kept by private companies. People would choose which company to manage their records based on the reputation of the various firms for privacy and security. Vouchers would fund their choice.

Nurse-specialists would be allowed to perform many procedures that now require doctors.

Did I miss anything?

The Complexity of the Global Warming Debate

I would like to address a number of interesting comments made on the last post about climate change.

First, roc of the desert proposes that we should clean up our act as individuals before trying to enforce our views on other people. In general I am a big believer that people should maintain responsibility for their behavior and let others make their own choices. However, I think we should remember the tragedy of the commons problem. Imagine a common field where villagers can bring their flocks to graze. Each person has an incentive to graze as much as possible, but if everyone does so the field will be destroyed. If one person restrains their own behavior, chances are someone else will still ruin the field. Thus, each person figures they may as well get what they can while the opportunity exists. However, if each individual were allowed to vote on a proposal that would bind everyone to a more responsible plan it would be in everyone's best interest to do so.

This is a collective action problem. There are cases where it is in each persons interest to act responsibly if they can guarantee that everyone else will do the same; but with no guarantee, it is in each person's interest to seek the immediate gain even if it leads to a worse outcome on the whole. Since the impact of any one individual on the climate is quite small, I think that eventually there will have to be binding social arrangements to make the necessary changes.

Another point was it is difficult to predict the impact of emissions or emission restrictions. I agree. However, I don't think that the relationship is so chaotic that even with the best tools available we are completely impotent to improve our knowledge. A lot of interesting science has been done on the subject, and the rapid explosion in available computing power is on the verge of making such complex calculations feasible. But just to give a sense of the complexity, here is an article about how two of the fastest supercomputers in the world have been utilized to try and predict weather patterns one day in advance. Of course, climate and weather are two different things, but the point is that it is a huge, but not necessarily forever intractable problem.

Finally, I would like to say a few words about Noelle's comment that the debate on climate change involves more than just concerns about our own economic welfare. How should we value future generations, animals, or the Earth itself? There has been quite a bit of debate in the context of climate change over how to value future generations. A famous British commission made a major report (called the Stern Review) about their estimation of the effects of climate change and how we ought to respond. Many American economists objected that the recommendations were based on the (highly controversial?) idea that harm to future generations should be valued about the same as if it were present. Should they be?

Given all of the challenges in trying to estimate and place a value on the potential harm caused by greenhouse gas emissions, it almost seems foolish to declare one course of action to be the best and try to achieve a social consensus. This is especially true when the potential costs and benefits of action (or inaction) are so huge. Maybe this decision making task is beyond our abilities as a society. In the meantime we have to make some decisions, and despite our uncertainty (or preferrably, taking our uncertainty into account in our models) I still believe that the decisions should be made by attempting to weigh the consequences of our actions and choose the course that we expect to result in the best possible outcome using all of the knowledge at our disposal. Unfortunately, this procedure will involve weighing things and comparing values that we are not often called upon to compare (such as 50,000 jobs versus .001 degrees Celsius or 1% economic growth now versus the city of New Orleans 100 years from now). Adopting uncompromising principles such as "protect the environment at all costs" will only make the process more difficult.

Climate Trade-Offs

One of the President's primary policy goals is to reduce the amount of carbon that the nation emits in order to control the advancement of global warming. One way of doing this is to set a limit on the amount of carbon that different producers are allowed to produce, and then let them trade amongst themselves so that the most efficient producers have the highest allowances. Another policy that has been already adopted is to increase the fuel efficiency requirements for cars and trucks.

The basic argument for these policies goes something like this: Many human activities create carbon dioxide and other "greenhouse gases". These byproducts increase global temperatures. Increasing temperatures can potentially cause terrible consequences. Therefore, we need to limit the activities that create these gases. Many supporters of these programs also claim that new "green" restrictions will create new jobs as people are forced to adopt new technology.

My predisposition is to support efforts to limit greenhouse gas emissions. I believe in taxing externalities. If people engage in behavior that negatively affects others that have no recourse, they should have to pay for that behavior even if the activity is beneficial overall. This is one of the basic justifications behind allowing people to sue others that injure them. My problem with the public debate as I usually find it is that aside from a few economists, not many people are willing to discuss the relationship between the magnitude of the potential harm and the magnitude of the tax.

The fact is that in order to limit greenhouse gases, we are going to have to tax some of the most basic economic activities: driving and producing electricity. These things will become more expensive. This will slow the economic growth of the country. Believing that new green jobs will compensate for this loss is delusional. It is like arguing that a rule requiring all cars to have square wheels will help the economy because of all the effort that people will put into figuring out how to overcome this self-imposed obstacle.

America stands to gain if our technology is sold to other countries that impose restrictions on themselves. But placing restrictions on our own greenhouse gas emissions will hurt our economy. Things will be more expensive. Jobs will be lost. Don't let anyone tell you otherwise.

With this in mind, we should realize that we face a trade-off. In order to avoid potential problems in the future we have to make economic sacrifices immediately. So the obvious question that a lot of people miss is, if we sacrifice $1 of present value by limiting our economic activity now, how much future harm will we avoid? If the answer is that for every dollar we sacrifice we will likely save ourselves $1,000 within the next generation then the limitations look like a great idea. If the answer is that sacrificing a dollar now will save us $0.45 in 200 years then the plan seems pretty ridiculous.

Trying to calculate the consequences of climate change is very difficult. However, in the case of Obama's CAFE standards, the evidence does not look good that we are getting a very good deal. As explained by the economist and former Bush administration advisor Kieth Hennessey the National Highway Traffic Safety Administration estimated the difference in effects on the climate between the previous standards and Obama's stricter rules. Their estimate was that under the previous policy global temperatures would rise by 1.942 degrees celsius by the year 2060. The Obama rules will result in an increase of 1.941 degrees. For this reduction in global warming we can expect to sacrifice 50,000 jobs over the next five years.

Granted that 50,000 jobs is a drop in the bucket compared to the hundreds of thousands that are being lost every month during the current recession. Still, it is not meaningless. One one-thousandth of a degree over 50 years just might be.

The bottom line: it is possible to accept that human greenhouse gas emissions are having a significant impact on global warming, and that global warming has the potential to cause very sever problems, and still be skeptical that limiting greenhouse gases under current conditions is cost effective. It is simply unwise to try and reduce every risk we face to zero.

The Greatest Union on Earth

In a comment on my last post, Micheala brought up the point that if we really care about the welfare of people in other countries, one of the best things we can do is to allow them to move to where they can earn the most money. I found this quote in the article I linked to last time about the economic impact of illegal immigration:

"For a twenty-five-year-old Mexican male with nine years of education (slightly above the national average), migrating to the United States would increase his wage from $2.30 to $8.50 an hour, adjusted for cost of living differences in the two countries."

That is a pretty significant increase, and the difference is far greater for countries that have even lower wages than Mexico. Here is an article about an economist name Lant Pritchett (a Mormon better known for writing the infamous Larry Summers memo) who advocates creating a massive guest worker program.

http://www.nytimes.com/2007/06/10/magazine/10global-t.html

The basic idea is that developmental economists should care more about people than countries, and that the best thing to do for people in third world countries is to let them work in rich countries.

But shouldn't American laws be designed to improve the welfare of Americans? So what if allowing free immigration would be a huge boon to the third world. What about us? What if that 25 yr old Mexican male with 9 yrs of education takes a job that would otherwise be held by an American? The United States is like a giant factory, and the citizens form a massive labor union. Sure, allowing the management to hire non union (immigrant) labor might allow them to reduce their costs and be more productive, but some of us will surely lose our jobs and those who remain will be paid significantly less. As citizens of the Union, isn't it our right to protect ourselves in order to ensure a decent living wage?

One of the reasons that it is so easy for me to advocate for greater labor mobility is that I don't see myself as in competition with immigrants. As a consumer I want cheaper goods. As an entrepreneur I want cheap labor. Immigration provides those things. But the fact is that many Americans do benefit from limits on immigration. Do I have an obligation to seek first to benefit my fellow American unskilled laborers before I venture to open our borders to competition from the outside?

My understanding of the economy and my sense of my personal self interest motivate me to advocate for more open borders. Concern for the inhabitants of the world leads me in the same direction. But the knowledge that the benefits of doing so will come at the cost of making life harder for many American workers tempers my zeal a little bit. It is at least arguable that our laws should be designed solely to benefit citizens, and not all citizens have the comfort of knowing that their ability to work will not be threatened by competition from a 25 yr old Mexican with 9 yrs of education.

Utah's New Immigration Law

On July 1st, Utah's new immigration law became effective. A description of the bill, along with some potential legal challenges associated with it can be found at

http://www.sltrib.com/news/ci_12660285

The essential purpose and effect of this law is to make it more difficult to be an illegal alien in the state of Utah. The sponsor of the bill, Rep. Mike Noel of Kanab, has made it clear that the bill is not about racism or xenophobia. It is simply an attempt to promote respect for the law.

This law and the stated motivation highlight an important aspect of the controversy surrounding immigration in the US. Those who are afraid of the economic and social consequences of increased immigration from countries such as Mexico have made a conscious decision to try to shift the focus of the debate from the economic and social impact of immigration to the question of support for the law. Illegal immigrants are breaking the law, therefore they are hurting America.

This argument is severly flawed. The problem is that there is good reason to believe that illegal immigrants are even better for the economy than legal ones. Surprised? Read this article:

http://www.cfr.org/content/publications/attachments/ImmigrationCSR26.pdf

The basic logic is that legal immigration is not as responsive to changes in the labor market. Visas and greencards are given out either based on the principle of uniting families or based on a bueracratic attempt to match the needs of the economy. But the fact is that immigrants are more responsive to the labor market than the government. Thus, illegal immigrants come to the US during times of economic growth, they come to areas where the growth is the fastest, and they work in fields where labor is in demand. Of course illegal immigrants also enjoy some public welfare benefits, but the economic burdens they place on society are far less than the economic benefits that we derive from having a flexible labor market.

I am open to debate about the overall economic and social consequences of immigration, but I am afraid that many Americans are focused on the wrong issues. Consider this quote from an article written by Tom DeWeese, one staunch opponent of illegal immigrants:

"Here are a few guidelines to help organize locally and face the coming onslaught of charges of racism. DON'T express anger at what is happening to your community. DON'T express annoyance because illegals refuse to assimilate into your community or abide by your customs. DON'T make the issue economic and safety issues. Overcrowded housing and commercial vehicle zoning violations or that specific individuals are illegal aliens....Instead, make the issues about the abrogation of law. Focus your efforts against the individuals, businesses and politicians who create this problem and cheat honest business owners and workers by allowing illegal hiring practices under the table. In short, make the issue about enforcement of the law, cost and corruption."

The full text of the article can be found at

http://www.newswithviews.com/DeWeese/tom106.htm

In essence, don't talk about any of the real issues. Proponents of immigration are going to call us racist if we talk about economic and social consequences, so let us avoid talking about our real concerns and focus the debate on something that everyone agrees on like support for the rule of law. In addition to deflecting cries of racism, if we avoid talking about the critical issues underlining the debate there is no possibility that our arguments can be undermined by real data or economic logic.

This annoys me to no end. Before we talk about how to enforce the law we should talk about what the law should be. If illegal immigrants are benefitting society more than legal immigrants, this is an indication that the law making them illegal is severely flawed. No, I am not advocating lax enforcement. I don't even want to talk about enforcement. I want to discuss the underlying costs and benefits of different kinds of immigration, and modify the law so that legal immigration is not so unresponsive to labor market conditions. The question of how strictly we ought to enforce a counterproductive law is an interesting one in an academic setting, but under the current circumstances it is a smoke screen to avoid discussing the things that matter.