An Alternative View of Healthcare

Judge Richard Posner, co-blogger of economist Gary Becker, posted an interesting piece on the American healthcare system recently:

Posner’s perspective is shaped by his conservative ’Chicago School’ background, but unlike the noise emanating from the soundbite punditocracy and presidential campaigns, his post has a refreshing honesty that comes from the ability to openly speculate. He brings up some alternative viewpoints that are worthy of exploration and too often ignored in popular coverage of healthcare issues. Among Posner’s objections, he argues that rising healthcare costs should not be assumed, without deeper investigation, to be a sign of trouble; that longevity is not necessarily the proper measure of health care quality; and that the proper focus for any policy debate is on opportunity costs, i.e., assessing the next best use of available resources.

On the first objection, he writes:

It is true that health costs are rising faster than the inflation rate. But rising costs, even of “essential” products and services, such as food, health care, and national defense, do not necessarily demonstrate the existence of a problem. Costs may be rising because quality is rising, which is true of health care (new and better therapies and diagnostic tools), or because demand is rising (and average cost is not flat or declining), which is also true; as people live longer, their demand for health care rises because more health care is required to keep people alive and healthy the older they are.

On the second:

It is also true that Americans spend much more on health care on average than the people in other wealthy countries do, without greater longevity to show for these expenditures. But health care does much more than extend life; it alleviates pain, discomfort, disfigurement, limited mobility, visual and hearing impairments, and mental suffering, and it is not clear that foreign health systems, which also involve considerable costs in queuing, do these things as well.

He concludes with his argument about opportunity costs, which in our view is one of the most valuable (and also most underappreciated and underutilized) concepts that the field of economics has contributed to social science and to public policy debates:

The question should be not whether the percentage of spending that goes to health is increasing but whether there are better things to spend some of the $2 trillion on than health care. Notice that liberals’ concern with the increasing percentage of expenditures on health parallels conservatives’ concern with the increasing percentage of GDP that is spent on government services. In both cases the proper concern is not the percentage of overall spending that goes for a particular class of services but whether there are better uses for some of the money being spent for those services. [emphasis added]

American Prospect: Beware Rubinomics

As we predicted might happen in the upcoming election cycle, longstanding tensions within the Democratic party over economic policy are simmering over into outright dissension and public debate. Evidence for this assertion can be found in The American Prospect’s current cover story, ‘Friendly Takeover’, which bemoans the Democratic party’s longstanding infatuation with Wall Street economist and former Treasury Secretary Robert Rubin. While it’s a rather mild hatchet job on the man himself, it’s something of an all out assault on certain policy principles that he’s helped the party articulate and embrace since at least 1992. In addition to warning that Rubinomics will not inspire political support among voters because it “will do next to nothing for the average American”, author Robert Kuttner launches a pointed shot across the bow of the party’s Wall Street supporters and leaders:

A blind spot in the usual story of the Democratic party’s capture by “interest groups” is the failure to notice Wall Street as an interest group…[Democratic politicians] are said to show political courage by resisting “politically correct” politics and entrenched interest groups. But taking on the most powerful Democratic Party interest group of them all — Wall Street — is viewed as a sign of recklessness, unsoundness, demagoguery, and political suicide. A mark of Wall Street’s ubiquitous power in defining the limits of the politically thinkable is that its power is hardly noticed. The personification of this power is Robert Rubin.

While the economic framework that Kuttner brings to bear is worthy of further discussion and debate, we’re linking to the story for its political implications. We agree with Kuttner that the Democrats are fielding a formidable group of presidential candidates going into 2008, and note that InTrade market participants currently place a 57% probability on a Democratic presidency. It will be interesting to watch how the party’s internal debate over competing economic platforms develops, and to assess what effect this has on their odds for success in 2008.

Blame Shakespeare

Our thoughts on the IMF earlier today raise an interesting line of inquiry—-if financial capital accumulates at a persistently higher rate than human capital in the future, then the primary bottlenecks affecting the global economy are likely to shift–for example, from credit or financial capital to labor or human capital. And while it’s easy enough to conceptualize a financial institution like the IMF as a last-resort provider of financial capital, it’s more difficult to imagine an analogous institution supporting the market for human talent in a similar way.

Education is one such institution, though it is decidedly more local and heterogenous than the IMF, and education clearly requires longer ‘production periods’ than financing agreements do. And it has occurred to us that, from the standpoint of efficiency,  primary school curriculae are outdated and in need of a makeover. Though English Lit teachers and others may damn me for saying so, primary instruction in economics and finance would do far more to advance material standards of living than reading Shakespeare. After all, people cannot enjoy fine literature, much less produce it, if they lack water, food, and shelter (see Maslow’s Hierarchy, for example). Perhaps some solace is available in the realization that productive economic activity makes it possible for cultural luminaries to produce important works of art, and for their passionate admirers to make a living teaching about them.

Taking a cursory glance at trends in charter schools, it looks like the human capital development ‘market’ agrees with us, as we’ve seen more news of ’econ and finance’ school charters than of new schools dedicated to classical literature. I certainly don’t mean to imply that literature is unimportant to the development of human capital, but traditional educational priorities do seem a bit out of step with the real world. While learning Shakespeare can be wonderful for personal refinement and professional specialization, it’s clearly more important to know how to calculate the present value of a mortgage, or other debt obligations, or future income; how to efficiently identify tradeoffs and biases in decision making; how to think in terms of assets, liabilities, and cash flows; how to turn a promising idea into a productive business; how political conditions affect economic activity; how to think strategically over multiple time horizons; and so on. In short–and I realize this statement bumps hard into prevailing cultural sensibilities–the expected social benefits of having more people understand the workings of a global financial economy far exceed the more marginal benefits that reading Shakespeare provides.

IMF Models Its Own Uncertain Future

A new study by IMF researchers supports speculation that we offered back in January:

Is this merely a cyclical downswing, driven in part by global liquidity and economic activity? Or is this a dinosaur institution being forced to contemplate its fate? We tend to think it’s the latter…

From the IMF study:

…two approaches to modeling the use of IMF resources in order to gauge whether the recent decline in credit outstanding is a temporary or a permanent phenomenon…yield the same conclusion: the use of IMF resources is likely to decline sharply. Specifically, credit outstanding is projected to decline from an average of SDR 50 billion over 2000-05 to SDR 8 billion over 2006-10.

That’s an 84% drop between two five year periods, equating roughly to a 30% annual rate of decline. And where we offered caveats and hedges to our assessment, the IMF researchers are much more pessimistic:

Alternative scenarios assuming a weaker economic performance or a less benign global environment do not alter these results.

We’ll stick with our more intuitive hedged argument for the time being, that if central banks overshoot significantly in the future, the IMF might see its balance sheet expand as it is invited to help clean up the wreckage. The probability of chronic overshoot appears to be very low, however.

The full paper is available here: