A Case to Watch

From the Washington Post:

A majority of the U.S. International Trade Commission recommended on Monday that President Barack Obama impose additional duties for three years on imports of low-cost Chinese tires the panel says are harming U.S. industry.

In a case seen as a test of how the Obama administration will cope with Chinese trade issues, four members of the six-member commission recommended that Obama impose additional duties of 55 percent in the first year, 45 percent in the second year, and 35 percent in the third year on imports of passenger vehicle and light truck tires from China.

"In our opinion, these tariff levels would remedy the market disruption that we have found to exist," the four said in a statement. The complaint was brought by the United Steelworkers union, which said a surge of Chinese tire imports have cost thousands of U.S. jobs.

Two other members of the commission disagreed, saying Obama should take no "trade-restricting" action because this would do more harm than good....

Trade experts are watching to see whether Obama, who criticized China for what he called unfair labor practices during his campaign and won strong labor support in his bid for the White House, will be tougher on China than predecessor George W. Bush. Bush routinely rejected petitions for restricting Chinese imports.

President Obama's views about international trade are still something of a mystery. As a senator and presidential candidate he seemed like a protectionist, but once elected he hired a bunch of free traders as economic advisers.

Larry Summers once said of Barack Obama, "When I’ve heard him talk about economic issues—with the exception of NAFTA, where I just hope he doesn’t believe what he says—he seems intelligent and serious. I wouldn’t say I’m bowled over by the brilliance of anything I’ve heard, but everything has a kind of thoughtfulness to it that’s sort of impressive." That is, even the president's chief economic adviser was discomfited by his campaign rhetoric concerning international trade.

This Chinese tire case may be one indication of the president's true feelings about trade. So let's wait and see what happens.

Happy Independence Day!

High-speed Trains to Nowhere

Harvard economist Ed Glaeser on transportation policy.

CBO and I agree

In my recent Times article on the possibility of a public option, I wrote

An important question about any public provider of health insurance is whether it would have access to taxpayer funds. If not, the public plan would have to stand on its own financially, as private plans do, covering all expenses with premiums from those who signed up for it.

But if such a plan were desirable and feasible, nothing would stop someone from setting it up right now. In essence, a public plan without taxpayer support would be yet another nonprofit company offering health insurance. The fundamental viability of the enterprise does not depend on whether the employees are called “nonprofit administrators” or “civil servants.”

The CBO is thinking along similar lines. In its most recent letter on heath reform plans, it says

The new draft also includes provisions regarding a “public plan,” but those provisions did not have a substantial effect on the cost or enrollment projections, largely because the public plan would pay providers of health care at rates comparable to privately
negotiated rates—and thus was not projected to have premiums lower than those charged by private insurance plans in the exchanges.

Unemployment Update

Source of graph. Click here for my discussion of it.

Old Speeches, New Policies

For academics, it always a delight when some old, obscure thing we've written suddenly gets noticed. So I was pleased when econoblogger Mark Thoma decided to draw attention yesterday to a speech I gave six years ago (pdf version) to the National Association of Business Economists. I had not looked at that speech in years, but looking back at it today, I think that it holds up pretty well. So, please, feel free to follow the link and read the whole thing.

The part of the speech that Mark highlights on his blog is the defense of running budget deficits during a recession. I am a bit puzzled about why Mark picked up that piece, however. Mark seems to be suggesting that my speech can somehow be construed as a defense of Obama fiscal policy. Yet I don't think that aspect of current economic policy is controversial. As I wrote in the NY Times in March of this year, "Few economists would blame either the Bush administration or the Obama administration for running budget deficits during an economic downturn."

The controversial parts of current fiscal policy are, first, the relative reliance on spending hikes versus tax cuts as short-run stimulus and, second, the long-term picture. On the short-run issue, I explained my preferences here. On the long-run issue, the apparent willingness of the congressional leadership to give away most of the allowances under a cap-and-trade system for carbon is the most recent symptom suggesting either a lack of concern about the long-term fiscal imbalance or a willingness to allow distortionary taxes to rise significantly in the future to close the fiscal gap.

Protectionism: A New Twist

More Competition, More Attentive Parents

Intriguing new research from UCSD economists Garey and Valerie Ramey (via Dan Hamermesh) shows that parents respond to the incentives:

After three decades of decline, the amount of time spent by parents on childcare in the U.S. began to rise dramatically in the mid-1990s. Moreover, the rise in childcare time was particularly pronounced among college-educated parents. Why would highly educated parents increase the amount of time they allocate to childcare at the same time that their own market returns have skyrocketed? After finding no empirical support for standard explanations, such as selection or income effects, we offer a new explanation. We argue that increased competition for college admissions may be an important source of these trends. The number of college-bound students has surged in recent years, coincident with the rise in time spent on childcare. The resulting "cohort crowding" has led parents to compete more aggressively for college slots by spending increasing amounts of time on college preparation.

Cooley on the Beleaguered Middle-class

The NYU economist looks at the data: Read both Part I and Part II.

This makes my day

Milton Friedman has long been one of my role models. So I was delighted to read that, according to BYU econ prof Richard Evans, at least in one small way, I have managed to emulate him.

Split Opinion

...about the proposed health reforms:

A new Rasmussen Reports national telephone survey finds that 50% of U.S. voters at least somewhat favor the Democrats’ health care reform plan, while 45% are at least somewhat opposed.

While the overall numbers favor the plan, those with strong opinions tilt the other way. Twenty-four percent (24%) strongly favor the plan, but 34% are strongly opposed....

Among all voters, just 12% think their health care coverage will get better if the plan is passed while 37% expect it will worsen. Thirty-seven percent (37%) expect their coverage to stay about the same if the plan proposed by the president and congressional Democrats becomes law.

A Missed Opportunity

From Donald Marron:

On Friday, the House of Representatives passed its climate change bill by a slim margin. The bill’s key feature is a cap-and-trade system for greenhouse gases. That system would set national emission limits and would require affected emitters to own permits (called allowances) to cover their emissions.

The number one thing you should know about this bill is that the allowances are worth big money: almost $1 trillion over the next decade, according to the Congressional Budget Office, and more in subsequent decades.

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.

As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster....

Economists have spent decades demonstrating the potential benefits of using environmental taxes to help finance the government (and make no mistake, a cap-and-trade system is a tax; the Congressional Budget Office, much to its credit, even scores it that way). But that economic logic works only when a substantial fraction of the revenues are used to improve fiscal policy — e.g., reducing deficits or reducing distortions from the tax system. The House bill does neither.

Donald is right. The Pigou Club is not happy.

Interview with Kevin Murphy

Click here.

The Arbiter of Ignorance

In a brief blog post on healthcare, Paul Krugman says that George Will and I are "either remarkably ignorant or simply disingenuous." I cannot speak for George, but I can attest that I am completely ingenuous. So I suppose I must be remarkably ignorant.

There is a lot of that going around lately. In an earlier post on the state of macroeconomics, Paul says, "Brad DeLong and I have been sort of tag-teaming the Great Ignorance which seems to have overtaken much of the economics profession."

What is going through Paul's head as he writes these posts? I suspect three things:

1. On the issue of macroeconomics, I think I understand Paul's point of view. He accepts the 1970-vintage Keynesian economics he first learned from, say, Jim Tobin when Paul was an undergraduate at Yale. Like Tobin and Bob Solow, one of his teachers at MIT, Paul thinks a lot of modern macroeconomics was an unfortunate turn in the wrong direction. In this old paper (published version), I tell the story of modern macro and describe how many old Keynesians were more likely to denigrate modern macroeconomics than to engage it intellectually. Paul is following in that tradition.

2. On the issue of health care, I also think I understand Paul's point of view. He would like a single-payer system, and he views a public option as a Trojan horse to achieve that goal. In my column, I wrote, "for those who see single-payer as the ideal, a public option that uses taxpayer funds to tilt the playing field may be an attractive second best. If the subsidies are big enough, over time more and more consumers will be induced to switch." Paul was one of the people I had in mind (see this old post of his).

In his latest post, Paul writes, "the standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough."

In my view, these comments are just off point. The Obama administration says it wants a public insurance plan that will compete on a level playing field with private plans (that is, without taxpayer subsidies). Is there any cogent economic analysis that suggests that such a policy addresses problems of adverse selection and moral hazard? None that I know. If it has to stand on its own financially, the public plan has no special advantage in addressing these issues.

In any event, it is not like the only alternatives available to us are a government-run health insurance plan or unregulated laissez faire. The most intriguing proposal in the current policy debate is the Wyden-Bennett bill (see this David Brooks column or this letter from CBO on the proposed legislation). That seems to be the best hope for truly bipartisan healthcare reform. At this point, given the legislative strategy of Congressional leadership, the hope is slim at best.

3. On the issue of tone, I again think I understand Paul's point of view. He likely believes that civility is overrated. He seems to think that in the blogosphere, and perhaps in the public debate more generally, you score points simply by insulting your intellectual adversaries. Sadly, I am afraid he may be right.

Harvard's Troubles

As seen by the Times (UK).

My Take on the Public Option

Click here to read my article in tomorrow's NY Times.

A Dose of Ennui

I have a soft spot for novels about adolescent ennui. Not that I was a particularly disaffected teenager. Quite the contrary. But I am sometimes a disaffected adult, so I still easily relate to this genre of fiction. Last year, I reread Catcher in the Rye and enjoyed it more than I did when I first read it in high school.

All this is a prelude to a recommendation. My wife (who reads about twenty times as much fiction as I do) recently suggested that I read a short novel called Someday This Pain Will Be Useful to You by Peter Cameron. And she was right: It is indeed very good, so I am passing along the suggestion.

Was Keynes really a savvy investor?

An excerpt from Scott Sumner's thought-provoking blog:

I got to thinking about this issue last night while reading The Lords of Finance (which by the way is a fine book so far, despite one little point I will nit pick.) See what you make of this:

“In early 1920, he [Keynes] set up a syndicate, with his brother, some of the Bloomsbury circle, and a financier friend from the City of London. By the end of April 1920, they had made a further $80,000. Then suddenly, in the space of 4 weeks, a spasm of optimism about Germany briefly drove the declining currencies back up, wiping out their entire capital. Keynes found himself on the verge of bankruptcy and had to be bailed out by his tolerant father. Nevertheless, propped up by his indulgent family and by a loan from the coolly acute financier Sir Ernest Cassel, he persevered in his speculation”

Translation, without help from his rich daddy and rich friends, this cocky, arrogant, smart-aleck would have fallen on his face, ended up digging ditches somewhere and we would never have heard of him. But he did have a rich daddy, who bailed him
out....

Don’t anyone write in and tell me that Keynes made lots of other good investments, because if you’ve got a rich backstop, none of that matters.

Here’s what I’d do if Bill Gates was willing to lend me $3.57 billion dollars for a day: I’d go to Vegas and put $5 million on numbers 1 through 34 on the roulette wheel. The odds are roughly 90% I’d win. If I did so, I’d win $180 million on a bet of $170 million. I repay the $3.57 billion and pocket my $10 million dollars and be rich for the rest of my life, clipping coupons. If numbers 35, 36, 0, or 00 came up I’d bet again, this time $100 million on each number 1 through 34. If I won, I’d receive $3.6 billion, repay Gates, and have $30 million dollars to spend for the rest of my life. The odds are nearly 99% that I’d win one of these two bets. Of course if both failed, I’d be in big trouble. But that’s not very likely is it?

What’s the point? If you have a rich backstop it’s relatively easy to come up with investment strategies that will usually (not always) make you look like a genius. From now on I will never believe anyone who tells me that Keynes was a great investor.

Does this matter? It shouldn’t, but unfortunately it does. If his investment reputation was like Fisher’s (calling stocks fairly priced in 1929) nobody would take seriously his Chapter 12 in the General Theory where he tries to shoot down the efficient market hypothesis.

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Update from Greg: Because of the formatting, some readers mistakenly thought I wrote part of what appears above. To be clear: It is all taken from Scott's blog. Sorry for the confusion.

The Ugly Cap-and-Trade Bill

Analysis from economists Alan Viard and Ted Gayer.

The Public Option

Pro and Con.

Posner on Financial Reform

Judge Posner is not impressed.

Cutler on Healthcare Costs

My Harvard colleague David Cutler has been a healthcare adviser to President Obama. Click here to read how he and coauthor Melinda Beeuwkes Buntin believe healthcare costs can be contained.

Physicians' Incomes and Healthcare Costs

Source of the graph.

For obvious reasons, I have been thinking a lot about healthcare recently. One important question is, why does the United States spend so much more on healthcare than other nations do?

There are surely myriad reasons for the international differences, but part of the answer can be gleaned from this passage by Uwe Reinhardt, Gerard Anderson, and Peter Hussey (via an old post of Ezra Klein):

Although the United States now has relatively fewer physicians per 1,000 population than the OECD median, its total national spending on physicians as a percentage of GDP is double the OECD median (2.9 percent in 1999, compared with an OECD median of 1.3 percent). U.S. physician spending peaked in 1991–1992 at 3.0 percent after steadily rising from 1.7 percent in 1980. Since 1992 spending has more or less hovered around 3 percent. OECD median spending has been mostly flat over the entire period, hovering between 1.1 and 1.4 percent of total spending. As a dollar amount, U.S. per capita spending for physician services was the highest in the OECD in 1999: $988, compared with an OECD median of $342. Physician services accounted for 22.7 percent of total U.S. health spending in 1999, compared with 15.2 percent in the median OECD country.

Physicians’ incomes are much higher in the United States than they are in other OECD countries. In 1996, the most recent year for which data are available for multiple countries, the average U.S. physician income was $199,000. The comparable OECD median physician income was $70,324. The ratio of the average income of U.S. physicians to average employee compensation for the United States as a whole was about 5.5. Germany’s was the next highest, at only 3.4; Canada, 3.2; Australia, 2.2; Switzerland, 2.1; France, 1.9; Sweden, 1.5; and the United Kingdom, 1.4.

One can think of several reasons why physician compensation in the United States is relatively more generous than elsewhere. First, physicians in most other nations face a powerful single buyer (monopsony) for health services. As the McKinsey Global Institute and Mark Pauly have shown, market power (or regulation) translates into relatively lower prices for health services, including the services of physicians. Second, U.S. physicians must make a larger financial investment in their education than their counter parts in many other countries do; they must recover the debt they incur as part of the educational process. Third, the incomes of highly skilled health care workers—notably physicians—are determined partly with reference to the incomes that equally able and skilled professionals can earn elsewhere in the economy. Because the U.S. distribution of earned income for all occupations is wider than it is in most other OECD countries, the relatively high incomes offered skil led professionals in the United States may well have served to pull up the incomes of American physicians relative to the incomes of their peers abroad.

Based on this reading, and in particular on the three hypotheses outlined in their last paragraph, here are some questions for class discussion:

On the issue of monopsony power: Explain how a large government healthcare plan (a "single payer" being the extreme case) could potentially reduce the wages of healthcare workers and thereby national healthcare costs. What are the similarities and differences between this solution to high healthcare costs and a targeted income tax surcharge levied only on healthcare providers (the revenue from which is rebated to all taxpayers)? Are the policies you considered above efficient, using the economist's standard definition of efficiency? Are they equitable, as judged by your own notion of fairness? In your opinion, does your analysis argues for or against a government-run healthcare plan?

On the issue of doctor training: Suppose that in country A physicians get free training through a taxpayer-financed educational system, while in country B physicians finance their own education and then, once trained, are paid higher fees. If country A classifies these training expenses as education rather than healthcare spending, which country would report higher healthcare costs? Is that difference in healthcare costs real or an artifact of labeling? In which country would doctors, once trained, have more incentive to work long hours? In which country would there be more doctors? Which country's system, in your judgment, is more efficient and equitable?

On the issue of inequality: Do you think that the provision of medical services uses more or less human capital than does the typical job in the economy? What does your answer imply about the relative price of healthcare looking across countries with varying degrees of economic inequality? In the United States, the wage gap between skilled and unskilled workers has increased substantially over the past several decades. Other things equal, what does this fact imply about the trend in the relative price of healthcare? If public policy were to try to prevent this change in the price of healthcare without addressing the underlying trend in wage inequality, what effects would the policy have?

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Addendum: These broad issues apply not just to doctors but to other skilled healthcare workers as well. If you look here, you will find that dentists, nurses, and physiotherapists are also paid more in the United States than in other nations. By contrast, relatively unskilled workers such as chambermaids and bus drivers do not get much advantage working in the United States.

Financial Crisis Timeline

If you have trouble keeping straight all the events of the past couple years, these timelines from the NY Fed will help you out.

Jury Duty

I had jury duty yesterday. I spent most of the day sitting around a courtroom to find out whether I would end up on a jury to hear a medical malpractice case. From the brief description of the case given by the judge, it appears that a woman had died of thyroid cancer and her family was suing her general practitioner for not ordering more tests or referring her to a specialist when she reported early symptoms of the problem.

I did not have any obvious disqualifications, such as knowing some of the parties, lawyers, or witnesses involved in the case. So I was called up and sat in the jury box, but that lasted for only about five minutes. Then, apparently, one of the sets of lawyers used a peremptory challenge to kick me. The only information they had about me at the time was based on a brief questionnaire, which did not say much more than my name, address, and occupation.

I wonder: Why does being a professor of economics at Harvard make one an undesirable juror in such a case? And does this say anything about the judicial system or the need for medical malpractice reform? I am not at all sure about the answers, but the experience did raise some intriguing questions.

Top Level Institutions in Economics

A new ranking from REPEC.

This ranking aggregates various parts of a university, such as Harvard's Economics Department, Harvard's Kennedy School of Government, and Harvard's Business School, into a single entity. Click here for a more complete explanation.

Can better prevention save healthcare costs?

In the debate over healthcare reform, another claim one often hears is that better prevention will save us money. I have noted previously how "schlocky" this argument is. Over the weekend, a doctor writing in the Wall Street Journal puts the point as follows:

Prevention of a disease, we all assume, should save us money, right? An ounce of prevention . . . ? Alas, If only such aphorisms were true we’d hand out apples each day and our problems would be over.

It is true that if the prevention strategies we are talking about are behavioral things—eat better, lose weight, exercise more, smoke less, wear a seat belt—then they cost very little and they do save money by keeping people healthy.

But if your preventive strategy is medical, if it involves us, if it consists of screening, finding medical conditions early, shaking the bushes for high cholesterols, or abnormal EKGs, markers for prostate cancer such as PSA, then more often than not you don’t save anything and you might generate more medical costs. Prevention is a good thing to do, but why equate it with saving money when it won’t?

Think about this: discovering high cholesterol in a person who is feeling well, is really just discovering a risk factor and not a disease; it predicts that you have a greater chance of having a heart attack than someone with a normal cholesterol. Now you can reduce the probability of a heart attack by swallowing a statin, and it will make good sense for you personally, especially if you have other risk factors (male sex, smoking etc).. But if you are treating a population, keep in mind that you may have to treat several hundred people to prevent one heart attack. Using a statin costs about $150,000 for every year of life it saves in men, and even more in women (since their heart-attack risk is lower)—I don’t see the savings there.

As a daily consumer of a statin, I appreciate the extra lifespan, even at the cost. So I am not opposed to prevention--only to the claim that it will yield substantial budgetary savings.

Update: A reader points out that this doctor's brief mention about the budgetary effects of reduced smoking is likely inaccurate. The Congressional Research Service has concluded,

"Governments save on the costs of old-age medical care, social security, and nursing home care due to the earlier death of smokers...Smoking has apparently brought financial gain to both the federal and state governments, especially when tobacco taxes are taken into account. In general,smokers do not appear to currently impose net financial costs on the rest of society."

See also Viscusi. This fact strengthens the doctor's point: Even prevention via reduced smoking is not a money-saver.

To avoid misunderstanding among many of the young impressionable readers out there, let me emphasize that this fact does not mean that smoking is desirable. (As a personal lifestyle choice, smoking seems pretty dopey to me.) But it does mean that there are not negative externalities to smoking working through its effects on governmental budgets.