When You Don’t Need To Worry About Facts

By James Kwak

Masquerading behind an invocation to “wisdom” in the title, David Brooks today finds his false equivalence (see here for another example) by comparing the the two parties’ approaches to Medicare: the Democrats, he says, favor “top-down centralized planning” while the Republicans favor the “decentralized discovery process of the market.”

David Brooks swallowing Republican talking points whole is not worthy of note, so I’ll just point out one: he calls the Ryan Plan a “premium support plan,” despite the categorial denial by Henry Aaron, the creator of the premium support idea.* But it’s marginally more interesting to point out Brooks’s finely-honed rhetorical dishonesty.

The first example is characterizing this difference as a “basic philosophical choice” between centralized planning and the market, when it’s really the difference between having a government health insurance system and not having one. Brooks echoes the Republican characterization of the Independent Payment Advisory Board (Paul Ryan’s “fifteen-panel board“) as a centralized planning bureaucracy and expresses skepticism that it can work. But IPAB is supposed to do the same thing that every private insurance company is trying to do: figure out how to provide incentives that will improve care at lower cost. All large companies have centralized planning; that’s how they get things done. One problem with Medicare is that its centralized planning committee is called Congress, and hence Medicare payment rates are highly politicized. The alternative to IPAB is running Medicare poorly. Criticizing government experts as central planning is just a more reasonable-sounding way of saying that government programs shouldn’t have planning at all, which is transparently crazy.

The other alternative, Brooks would say, is not having Medicare at all. But the Obama administration didn’t choose IPAB because they wanted Soviet-style centralized planning; they chose it because it was the only pragmatic, responsible choice. Based on everything we know about Obama’s economic and domestic policy teams, it’s much more likely that, if they had a clean slate to draw on, they would have preferred managed competition — the exchanges, regulation, and subsidies that the ACA creates for the under-65 individual market — for the entire population. They stuck with Medicare because (a) it’s politically popular and (b) it’s already the lowest-cost part of our health care system. Dismantling Medicare would be like pouring gasoline on a fire: it would only exacerbate the problem of health care cost inflation, since Medicare pays lower reimbursement rates than the private sector.

The real choice is whether or not to have a government health insurance plan for the elderly. And in evaluating that choice, Brooks invents a whole new category of rhetorical subterfuge.

“The fact is, there is no dispositive empirical proof about which method is best — the centralized technocratic one or the decentralized market-based one. Politicians wave studies, but they’re really just reflecting their overall worldviews. Democrats have much greater faith in centralized expertise. Republicans (at least the most honest among them) believe that the world is too complicated, knowledge is too imperfect. They have much greater faith in the decentralized discovery process of the market.”

Why is this brilliant? Most ordinary pundits (those without space on the Times op-ed page) use the more common device of citing studies on both sides to show that there is support for both sides. But this is rookie league stuff. Brooks shows how it’s really done: just dismiss the entire attempt at empirical support with a wave of the hand, which lets you get back to “philosophy.” It’s much easier to know nothing than to know something.

But for this question, we don’t even need to go to the academic studies. We already have a health care system where people “select from a menu of insurance plans. Their consumer choices would drive a continual, bottom-up process of innovation. Providers could use local knowledge to meet specific circumstances.” It’s called the individual market, there are tens of millions of people in it, and it’s a complete failure. It leaves tens of millions of people uninsured, and to those who are insured, it delivers mediocre care at high costs. The only way you can ignore this fact is by pretending that facts don’t matter.

Then there’s this gem: “if 15 Washington-based experts really can save a system as vast as Medicare through a process of top-down control, then this will be the only realm of human endeavor where that sort of engineering actually works.” Um, David, there’s this country to north of us. It’s called Canada. They have a national health insurance system that covers everybody. And that system . . . Whom am I kidding? When you don’t have respect for facts, a few more aren’t going to change your mind.**

I’m not expecting the Times to fire David Brooks anytime soon, but after his enormous, embarrassing gaffe with the Ryan Plan, can’t his editor at least get him to stop writing about Medicare?

* The difference is who bears the overall risk of health care cost inflation. In a premium support system, you have a market mechanism to promote competition, but you keep beneficiaries whole by making sure that the subsidies, in the aggregate, continue to pay the same proportion of health care costs. In a voucher system, like Ryan’s, you decouple the value of the subsidies from the cost of health care, shifting risk from the government to the individual.

** For those of you weirdos who do like facts, Krugman has charts on costs and quality. In the latter, Canada doesn’t do so well (although still better than the U.S.) — but check out the U.K., where not only health insurance but health care delivery is public?

Generated by BlogIt

BlogIt - Auto Blogging Software for YOU!

When Price Does Not Clear the Market

And other non-Neoclassical tales

Finance and Development has a profile of one of my teachers, Nobel Laureate George Akerlof, written by Prakash Loungani. Akerlof's views are critical to recall in these times when some individuals think supply and demand are sufficient to answer all policy issues. Akerlof's research highlighted the role of information asymmetries that prevent prices for setting quantity demanded equal to quantity supplied. From the article

While unemployment is the topic that has motivated him the most, it is his 1970 article showing how markets might break down in the presence of asymmetric (or unequal) information that won him the Nobel Prize. Indeed, if you play a game of word association with an economics PhD and say “Akerlof,” chances are the response will be “lemons.” This is because the example Akerlof gave was of used car markets, where sellers have better knowledge of whether their car is a good one or a “lemon.” The buyers’ best guess is that the car is of average quality, so they will only be willing to pay the price of a car of average quality. This means, however, that owners of good cars will not place their cars in the used car market. But that in turn lowers the average quality of cars on the market, causing buyers to revise downward their expectations of quality. Now even owners of moderately good cars are unable to sell, and so the market spirals toward collapse.

Akerlof says that the problem dates back to one that has confronted horse traders over the ages: “If he wants to sell that horse, do I really want to buy it?” But problems of asymmetric information are present in most markets, particularly in financial markets. “This [recent financial] crisis gave us glaring examples,” says Akerlof. “Ordinary people thought they were buying homes, not the complex derivatives that they later realized they had ended up buying.”

Akerlof says he chose the example of used cars to make his paper “more palatable” to U.S. readers. But his interest in the subject had been triggered when, during his stay in India in 1967–68, he noticed people’s difficulty obtaining credit. He kept this example in the paper, along with sections on how the “lemons principle” could also explain why the elderly had trouble obtaining insurance and why minorities had difficulty obtaining employment. All this proved too exotic for much of the academic market of the time; the paper was turned down by three leading journals before it was finally published in the Quarterly Journal of Economics.

Today, the questions Akerlof tackled in the “lemons” paper are a staple of the academic diet. And Akerlof himself continues to push the frontiers on the study of such questions, most recently in Identity Economics, coauthored with Rachel Kranton, then at the University of Maryland. Akerlof’s son, Robby, carries on the tradition. A graduate of Yale—where Shiller was one of his professors—and Harvard, he is studying questions such as why corruption and the tolerance of it vary across corporations; what managers can do to increase the legitimacy of their authority (paying efficiency wages turns out to be one option); what accounts for an oppositional culture where minorities disparage the majority and are disparaged in turn; and what fuels protracted feuds between two parties.

The insight that informational asymmetries abound in today's economy leads me to suspect that merely removing impediments to the activities of firms will not lead to Pareto optimal solutions [edited 8:41am]. Free markets are not necessarily competitive markets, even if one rules out externalities, and market imperfections (oligopoly, monopolistic competition). And yet, some people are proposing competition as the solution to health care and financial markets, both arguably pervaded by information asymmetries.

Aklerof and Romer analyzed deregulation's impact (and subsequent "looting") in the runup to the S&L crisis, as I discussed in this post. It is a story that has great relevance for the most recent crisis, as Jeff Frieden and I document in our forthcoming book, Lost Decades (Norton, September).

Generated by BlogIt

BlogIt - Auto Blogging Software for YOU!