Although this video is somewhat dated (since it makes passing reference to the health care reform proposals of the 2008 presidential candidates), it provocatively illustrates why a nontrivial proportion of the nearly 47 million Americans who lack health insurance may be “voluntarily” uninsured. Indeed, a recently released study by the Employment Policies Institute puts the number of uninsured Americans ages 18-64 who could likely afford health coverage at roughly 18 million people. This video provides some anecdotes as to why this occurs.
Category Archives: Economics
57th Annual Management Conference 2009 on "The Future of Markets" at University of Chicago
57th Annual Management Conference 2009 on “The Future of Markets”, held at the University of Chicago Booth School of Business, May 29, 2009. Of particular interest is the 2 hour, 7 minute long keynote panel webcast featuring the following six University of Chicago faculty panelists:
- Gary Becker, University Professor of Economics and of Sociology and winner of the 1992 Nobel Prize in Economics
- Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics
- Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance
- Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance
- Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics
- Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance
57th Annual Management Conference 2009 on “The Future of Markets” at University of Chicago
I would like to call attention to the 57th Annual Management Conference 2009 on “The Future of Markets”, held at the University of Chicago Booth School of Business, May 29, 2009. Of particular interest is the 2 hour, 7 minute long keynote panel webcast featuring the following six University of Chicago faculty panelists:
- Gary Becker, University Professor of Economics and of Sociology and winner of the 1992 Nobel Prize in Economics
- Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics
- Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance
- Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance
- Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics
- Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance
Click here for an executive summary of the keynote panel. For some context on the panel members, read the “Conference Pre-Reading“. Also, the discussion (roughly 1 hour long) featuring Ted Snyder and Gene Fama (from the same conference) on the question “Is the stock market an “efficient” market? is also very worthwhile (executive summary here). Ironically, even though the keynote panel and Fama webcasts took place nearly two months prior to the publication of the Economist cover article (dated 7/16/2009) entitled “What went wrong with economics (and how the discipline should change to avoid the mistakes of the past)”, these webcasts address many of the issues that were brought up in the Economist article.
My preferred approach for reforming health insurance…
I don’t think that the question of whether the health care system should be reformed is particularly controversial; what is controversial is the manner in which health care reform ought to be structured and implemented. I have always thought that the system could be much better designed, and that if you were going to do design such a system from scratch, you definitely would not want to tie the provision of health insurance to employment. This is the problem with “path dependence”; the institutional arrangements depend critically upon the starting point. I think that it is fairly well known that in the case of the United States, the seminal event in tying the provision of health insurance to employment was the imposition of wage-price controls at the end of World War II. Also, as Whole Foods CEO John Mackey recently pointed out, health care reform is not just health insurance reform. We also need tort reform so that the corrosive influence of the trial bar on the practice of medicine can be mitigated, and liberalization of health insurance markets so that there is a national (rather than the current “balkanized” state-by-state) market for health insurance. While the latter reform would require some changes in insurance regulation, I think it would have the salutory effect of introducing much more competition into the health insurance market.
I personally favor a market-oriented reform along the lines described by Mr. Mackey. This would involve the expansion of Health Savings Accounts (HSA’s) coupled with high deductible insurance coverage. Since we are concerned about controlling costs, it seems obvious that there ought to be more of an emphasis placed upon first party as opposed to third party payment, particularly for low severity, high frequency claims. By exposing consumers more to the financial consequences of their health care consumption decisions, Health Savings Accounts have the potential to “bend the cost curve” by creating incentives for better decision-making by consumers and greater innovation and competition by health care providers. Efficiently priced excess of loss insurance coverage that is layered on top of the HSA’s protects consumers from catastrophic loss, and also further reinforces incentives for competition and innovation in the financing and provision of health care services. To Mr. Mackey’s plan, I would also add assigned risk/joint underwriting association (JUA) mechanisms in order to address the problems of the uninsured and pre-existing conditions. These types of mechanisms are widely and effectively used in property-casualty insurance markets (e.g., auto insurance, workers compensation, etc.) for the purpose of providing coverage to individuals and firms who are otherwise “uninsurable” in the voluntary markets.
As I have already noted, such reforms would also create even more opportunities for innovation in the financing of health care. For example, University of Chicago Professor John Cochrane has proposed a particularly compelling idea about insurers offering long-term health insurance contracts in which future insurability is guaranteed, regardless of the manner in which one’s morbidity risk changes throughout the term of the insurance contract. This is conceptually similar to so-called level term contracts offered in the term life insurance market already, and it seems like an obvious innovation in a free market. However, this kind of innovation is not possible as long as we continue to tie the provision of health insurance to employer groups. Group policies are typically contracted for on a 12 month basis, and level term health insurance contracts are inherently less feasible with groups than for individuals.
Tragedy of the Non-Commons: A Case Study of Water Policy in Austin, TX
UT-Austin economics professor Daniel Hamermesh argues that the water shortage problem in Austin, TX “could readily be solved by pricing the water sufficiently high to ensure that we get through the drought with water to spare” (see Grazing the Non-Commons). I wholeheartedly agree with Professor Hamermesh, and I would like to follow up his comments on the Freakonomics blog with my own.
Since 2007, Austin has been subject to so-called Stage 1 Water Use Restrictions. Under Stage 1, residents are legally entitled to use their automatic sprinkler systems before 10 a.m. and after 7 p.m. two days per week (the actual days of the week depend upon whether one has an even-numbered or odd-numbered residence). Violations of this schedule are Class C misdemeanors, with each instance punishable by a fine of up to $500. Starting August 24, Austin will be under Stage 2 Water Use Restrictions, which limits the use of automatic sprinkler systems to Saturdays (for odd-numbered residential addresses) and Sundays (for at even-numbered residential addresses) before 10 a.m.
The manner in which water use is priced (with a nonlinear pricing schedule that is increasing in the volume of water usage) motivates most consumers to conserve. However, I suspect that the prospect of a $500 fine and Class C misdemeanor citation probably affects the timing of water use more than it affects volume for most consumers. In spite of the (rather compelling) economic incentives to conserve which derive from nonlinear pricing, apparently the City of Austin still finds it necessary to impose these highly restrictive rationing constraints. As Professor Hamermesh noted in his blog posting, the Austin American Statesman went so far on Monday as to publicly shame the top 10 users in June and July 2009 in a front page article. This seems like a market failure to me, and my “inner economist” suggests that a better way to mitigate this externality (rather than impose such draconian water use restrictions) would be to make the pricing schedule sufficiently convex so that even members of the top 10 club would sit up and take notice!
I suspect that like Professor Hamermesh, most Austinites will abide by the timing restrictions on watering. However, it is also very likely that many (if not most) Austinites will set their sprinklers to run longer each session now that watering can only occur once rather than twice per week. The problem with the policy is that it primarily addresses timing incentives, and not the real problem, which is over-consumption. It remains to be seen whether private actions (running sprinkler systems longer per “legal” session) don’t end up making matters even worse than they already are.
What are the odds that the Public Health Option will be passed into law by the end of this year?
Intrade.com maintains an actively traded market for futures contracts which pay 100 points (where 1 point = $.10) in the event that a specific contingent event occurs and 0 points otherwise. Thus, prices represent “risk neutral” event probabilities. I have written previously about how useful prediction markets can be in assessing political events such as election outcomes (e.g., see Prediction markets assessment of the Presidential Election from October 26, 2004 and Preliminary assessment of the accuracy of the Intrade State-by-State contracts from November 5, 2008) and Supreme Court confirmations (e.g., see SC.CONFIRM.ALITO from November 6, 2005), as well as other kinds of contingent events such as the state of the economy (e.g., see What are the prediction markets saying about the economy? from April 10, 2009), etc.
Currently (as of August 19, 2009), the Intrade market gives the Public Health Option a 36% chance of being passed into law by the end of this year (the closing price yesterday, on August 18, was 32 Intrade points). The contract is called US.GOVT.HEALTHPLAN.DEC09, and it has been trading ever since June 12, 2009. The highest price recorded for this contract was 51.5 Intrade points (at the contract’s inception on June 12, 2009), and the lowest price recorded was 14.1 Intrade points (on August 17, 2009, after it appeared that the Obama administration might be willing to compromise on the public option in favor of non-profit health cooperatives). Here’s the complete time series since contract inception on June 12:
For more information concerning the topic of “prediction markets”, I recommend an article entitled “Prediction Markets“ by Justin Wolfers and Eric Zitzewitz that appeared a few years ago in Journal of Economic Perspectives (Vol. 18, No. 2 (Spring 2004), pp. 107-126).
Progressivism vs. Libertarianism and Health Care Reform
Arnold Kling and Tyler Cowen provide some interesting analyses of the progressive worldview from a libertarian perspective. Since the various public versus private sector proposals for health care depend critically upon these underlying worldviews (with progressives preferring more government intervention and libertarians preferring greater reliance upon market forces), I can’t help but wonder a less shrill and more constructive discussion and debate of healthcare reform could occur if the opposing sides had a better understanding of these worldviews. I would be most grateful for any references concerning an analysis of the libertarian worldview from a progressive perspective.
End the Corporate Income Tax!
This is one of Megan McArdle’s ideas for “fixing the world”. She goes on to argue that:
“At 35 percent, America’s levy on corporate income is one of the highest in the developed world. In 2007, about 2.5 million companies prepared lengthy returns at great expense, yet the tax generated only about 15 percent of total federal tax revenue. The tax on corporate profits discourages capital formation, targets shareholders regardless of their wealth, and fuels frantic, and costly, business efforts to dodge it. Among experts who study its effects, support for the tax is at best sort of sheepish.”
The risk management literature actually has much to say about how the corporate tax code discourages capital formation. Specifically, the asymmetric nature of the corporate income tax creates disincentives for firms to bear risk. Tax asymmetries derive from two important features of the corporate income tax; specifically, tax rate progressivity and incomplete tax loss offsets. Thus tax asymmetries incentivize firms underinvest in risky (but potentially profitable) assets, which in turn limits the economy’s prospective growth potential.
Rationing and Rationality
In an article entitled “Rationing and Rationality”, the editorial staff of the National Review Online makes (what I think is) a profound observation concerning the nature of health care rationing:
“The view that medical care should be withheld from people based not merely on the likelihood of success or the cost but on judgments about the quality of their lives is no longer held only by a fringe. Practices that are at best close cousins to euthanasia have become widespread.”
Resources and Books on the Economic Way of Thinking
George Mason University economist Russell Roberts has authored a series of essays entitled “Ten Key Ideas: Opening the Door to the Economic Way of Thinking” that are well worth reading. The 10 key ideas include the following: 1. Incentives Matter, 2. Understanding Costs, 3.How Markets Work, 4. How Prices Emerge, 5. Comparative Advantage, 6. The Division of Labor, 7. The Extended Order of Cooperation, 8. Externalities, 9. How Politicians Behave, and 10. What Politicians Can and Cannot Do.
There are also a number of popular books on the “Economic Way of Thinking” that I can recommend. For starters, there’s Roberts’ own book, entitled “The Price of Everything: A Parable of Possibility and Prosperity” (also consider listening to the hourlong Roberts on the Price of Everything podcast for some background and context for the book). The best selling book entitled “Freakonomics” by Levitt and Dubner is definitely worth considering. “Naked Economics: Undressing the Dismal Science by Charles Wheelan, “The Undercover Economist by Tim Harford, and “Armchair Economist: Economics & Everyday Life” by Steven Landsburg are also good reads!