Thursday, October 29, 2009

Growth looks like this: 3.5%


REUTERS:

WASHINGTON - The U.S. economy grew in the third quarter for the first time in a year, beating market expectations, as consumer spending and new home-building rebounded, signaling the end of the worst recession in 70 years.

The Commerce Department, in its first estimate of third-quarter gross domestic product on Thursday, said the economy grew at a 3.5 percent annual rate, the fastest pace since the third quarter of 2007, after contracting 0.7 percent in the April-June period.

The growth pace in GDP, which measures total goods and services output within U.S. borders, was above market expectations for a 3.3 percent rate. The economy last grew in the second quarter of 2008.

"Better than expected GDP is confirming that the Great Recession has ended," said Kevin Flanagan, fixed-income strategist for Global Wealth Management at Morgan Stanley in Purchase, New York.

"The question going forward is, is this more of a statistical recovery or are we going to get some meaningful momentum on a sustained basis."

More analysis here.

Thursday, October 15, 2009

2009 Nobel Prize

Professor Ben Powell supplies his thoughts on both the 2009 Nobel Prize and a grad discussion board about the topic as well as some further reading material. Enjoy!

Sorry I'm a bit slow on this but I was out of the country until last night and am only now reading the commentary on this year's nobel prize winners Lin Ostrom and Oliver Williamson. I was shocked and thrilled to see this year's announcement. Williamson was not a surprise at all but I would have expected him to share the prize with Alchien or Demsetz. Instead by awarding it with Elinor the committee has highlighted a commonality in that both of them illustrating how to generate institutions to improve economic outcomes. In Williamson's case, it's the reason for the firm. In Elinor's it's the spontaneous generation of rules governing the commons and the reason why many top down solutions don't work. In both cases these should be conceived of as institutions embedded in the market or more broadly, civil society.

The reason I'm writing to the grad students specifically (and cc'ing the faculty) is because of the very troubling grad student blog (and very popular) I read this morning (warning, comments in it are vulgar and sexist):

The crux of their complaints seem to be that Elinor shouldn't have one because:
1) They never read her in their grad education
2) She hasn't published in many "top" economics journals
3) She's trained in political science and therefore not capable of doing economics.

This is a VERY sad state of affairs. They instead should feel ashamed of the lack of breadth of their own reading and their narrow focus outside of the broader tradition of political economy. Elinor asks some of the biggest "big think" type questions about institutions that should have a major impact in one's thinking on economic development especially but many other things as well. Her main publications have been books rather than econ journals and she's influenced some of the other big thinkers in economics (for instance 2002 Nobel winner Vernon Smith). Her work doesn't collapse neatly into a max subject to type framework or other training these grad students have got. Instead of seeing this as a limitation of their models they see it as a limitation of what is interesting. This is very shallow thinking and blinds them to important questions. I'm glad I work in a place that does have some appreciation for a more broad tradition of political economy.

I encourage you all to get some knowledge of Ostrom (and Williamson but if you've done any IO you'll be familiar with him anyway, or perhaps should be regardless of field since he is the world's most cited economist). Here are a few excellent blog posts or op-ed's by accomplished economists who will give you a general sense of her work. If you want to read her own writing her most influential book is "Governing the Commons" but that is rather high cost. There was just a nice symposium in the Journal of Economic Behavior and Organization that summarizes the bloomington school and includes a contribution from her:
June 2005 57(2), "Polycentric Political Economy: Essays in honor of Elinor and Vincent Ostrom" that would be a lower cost intro.

At a minimum check out some of the following:

David Henderson's WSJ op-ed:

Vernon Smith's Forbes column:

Paul Romer's Blog:

Alex Tabborak's blog:

Peter Boettke's Blog:

And Peter Klein on Williamson

Congrats to Ostrom and Williamson and happy reading to all of you.

At 9.3

U.S. 9.8% MA 9.3%. Make of it what you will.

Friday, October 9, 2009

A morning Email

Before I had my first cup of coffee today, an interesting E-mail chain had formed. Starting with the following quote, curtosy of Professor Jonathan Haughton, a lively debate was set off. Professor David Tuerck, Professor Ben Powell, Alfonso Sancez-Penalver and I, both of BHI, weigh in on the subject of universal health care.

Just this weekend I came across this quote from Hayek (chapter 9 in The Road to Serfdom):
“Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance — where, in short, we deal with genuinely insurable risks — the case for the state’s helping to organize a comprehensive system of social insurance is very strong.”

Is this not a case for universal health coverage of some sort (and for some conditions)?

Jonathan Haughton
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Yes, it is. And I would say, sadly so. Of course, Hayek is talking about a state run insurance system as opposed to the single-pay system to which we are headed. Nevertheless, he did himself no good by succumbing to this one urge to recommend a statist solution.

David G. Tuerck
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Agreed. You can find further, misguided, quotes from him in the Constitution of Liberty. I think these off the cuff concessions are inconsistent with the body of his work on knowledge and competition as a discovery procedure.

Ben Powell
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Perhaps. I see a somewhat different problem, which I am a bit surprised that he didn't address: some sickness really is not the fault of the individual - alzheimer's, Type 1 diabetes, and the like. But what about illness that results from personal choices - lung cancer (from smoking), Type 2 diabetes (from obesity), for instance. A key problem from an insurance perspective would be how to distinguish between these. In other worlds, how to insure against serious problems that are not one's fault without creating too much of an incentive to go easy on prevention.

Of course we already have universal health insurance (thanks to Ronald Reagan!), in that emergency rooms may not deny care to those who need it. That's appropriate, but one can't help thinking that it is a hugely inefficient way to provide such coverage - it is financed in haphazard fashion (mainly as cross-subsidies from our tax-favored health premia).

Jonathan
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I keep thinking that, aside from the best solution, which would be complete government withdrawal from health care, the government should just take care of people who are sick through no fault of their own and who can't pay for their very expensive health care. This is the "high risk pool" of uninsurable people with chronic, unpreventable problems. It should ignore everyone else. People who go to emergency rooms could be chased down and made to pay for their care, and if they can't or won't pay, the hospitals could pass that cost along to the rest of us. In a rational market, young people could contract for health insurance now at rates that reflect the cost of their health care as they get older. By the way, I suspect that emergency room care is pretty efficient. I've gone to the emergency room at least three times to get a quick prescription for bronchitis and gladly paid the premium rather than wait for my doctor to see me. 'We could expand the availability of health clinics, too.

People who don't pay for insurance until they are middle age and then come down with some predictable middle-age disease have nothing to complain about. They rolled the dice and now they're out of luck. The key is health insurance available to the young, who are usually healthy, that they are guaranteed to keep even when they get older and sicker. I would rather let private charity take care of people in the high risk pool than give the government the job of caring for them, but that much government involvement I could take.

David
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Having read all these messages you are almost selecting what the government should cover instead of whether the government ought to cover. Going down that path opens a lot of questions that are not easy to answer. You mentioned before lung cancer from cigarette smoking. It is true that more patients of lung cancer are cigarette smokers but there has not been a definite scientific proof that smoking cigarettes causes lung cancer. What happens with patients of lung cancer that don't smoke? Even if it were to be proofed that smoking somehow caused lung cancer, what if the patient smoked in his 20s but had lung cancer in his 30s, what if he had it in his 40s, 50s or 60s? Continuing with cancer, what is considered to be the individual's fault? As we know cancer patients' descendents are at a higher risk of getting cancer. Is this the fault of the individual? Should the individual pay for the sins of the parents?

Having individually tailored insurance is not effective, either privately or publicly. The high risk patients may not be able to afford the insurance so the low risk patients are the ones who pay for the others' risks. Unless there is some risk poolin, insurance is not affordable by a lot of people. If you want the government to cover these high risk uninsurable patients, this funding is done via taxes. Why shouldn't it be done with a general private insurance plan? In the private plans they take into account whether you present a higher and lower risk at the time they issue the plan, so at least it is somewhat tailored. Private, for profit, companies have a higher incentive to look into a plead for free insurance from the people that claim to not afford the insurance they need.

The real question is, however, should we have universal insurance? The problem of answering yes to this question is that there are people who cannot afford it. How do they get it then? This may lead to government intervention, which is inefficient since government administration is not as efficient as private. The problem with answering no to that question is that some people cannot have their sicknesses treated. There are nonprofit health practices, but I'm not sure if they would cover open heart surgery.

Not a topic to be easily solved.

Alfonso Sanchez-Penalver
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I agree there has to be risk pooling; otherwise why bother with insurance. But if one forces everyone to buy insurance, this represents a very regressive tax. A solution would be to provide everyone in the country with (say) a $4,000 health insurance voucher, and people could pay more for fancier coverage; but this provides an incentive for insurance companies to spend a lot of money figuring out ways to not insure high-risk individuals - surely a directly unproductive activity. Increasingly, I get pulled toward some sort of "basic medicare for everyone" solution with fairly high copayments, with scope for individuals to buy additional coverage (private hospital rooms, lower deductibles, etc.).

David may be right that emergency room service may not be as inefficient as all that; but if we were to encourage more "doc in a box" outfits, a lot of the relatively routine stuff could be handled more cheaply. More generally, I think we need to address restrictive practices in medical education and practice (excess certification; requiring a bachelor's degree before strating medical school; limited use of nurse practitioners and nurses for routine stuff).

On a related, but different issue; if a generic drug is available for, say, $20, and the brand drug costs, say, $50, why do insurance companies not limit reimbursements to ($20 - deductible)?

Jonathan
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The core problem here is that health insurance as it currently exists is no longer insurance, but prepaid health care. Insurance is a contract voluntarily arrived at according to terms voluntarily agreed upon in which the person insured is promised benefits, given a specified, adverse turn of events. Moral hazard makes it uneconomical for such contracts to cover events over which the insured has control. That's why my car insurance doesn't cover oil changes, tire rotations and minor accidents. Also, to be economical, insurance must cover events that occur with increasing probability over the lifetime of the insured, provided the insured buys into the insurance when he is young. In this respect, health insurance is exactly like life insurance.

So what's wrong with the status quo? For one thing, mandated benefits mean that I am insured against the cost of taking my Nexium, this for a condition that I could alleviate by the simple expedient of eating fewer spicy foods - the equivalent of insuring my car against damage due to not changing my oil. The second problem is the push to insure people against "pre-existing conditions." It is one thing if a patient is 22 and poor and has a pre-existing chronic problem like ALS. It's another thing if the patient comes down with diabetes at age 50, when he is wealthy but hasn't bothered to buy insurance. In my judgment, both patients should have to turn to charity for help. Presumably, a charity will take more pity on the first patient than on the second. But it doesn't matter since contributions to charity are voluntary. On the other hand, since I'm only 99% conservative, I'd be willing to go along with using taxpayer dollars to help the first patient, as long as I didn't have to help the second.

Anything wrong here?

David
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You bring a good point. Here's my question, what should happen to the 50 year old who is poor, not wealthy, and comes down with diabetes? I believe in your mind you have a clear path where people are born poor and end up wealthy, but this is not necessarily the case. Even when it is, you are saying that in you 1% liberal mind, the government who is primarily financed by those wealthy 50 year olds to cover the 20 year old case... why? Well... because the 50 year old can afford to pay himself!!! Why should he have to when he is paying more taxes than the 20 year old??? That would be making him pay twice for insurance. That one percent mind of yours is very liberal!!!

Alfonso
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My question on this, is in relation to what should insurance actually cover, regardless if its by the state or a private company. If I found out tomorrow that I was going to have a child, would I take out an insurance policy to pay for his or her first car in 16 years? Or would I start a small savings account, and put cash aside here and there. I know today that in 50 years time I will inevitably have medical issues. Should the insurance plan that I have cover there medical costs that I know will occur? Should I just expect insurance to cover actual random events (car crash injury, ect?) or above a certain expected level?

Mickey Head

Thursday, October 8, 2009

Look to history for the bright upside

Nathan Fisk in today's Christian Science Monitor: Why the US will survive this recession.
Then, as in 2008, America's most prominent financial institutions collapsed or nearly failed under the weight of speculative promises. Yes, the devastation is remarkably similar, but so is the cure.

From the Panic of 1837 to the Great Depression of the 1930s to the difficulties of 1969 and '70 when the cost of living jumped 15 percent, American ingenuity has consistently beat back economic calamity.

In 1837, it was the individuals who cast their vision forward who succeeded. Tough times spur recovery.

The time is ripe for American genius to surge. We must shed the idea that our government can buy us out of a depression or somehow use a new tariff or tax to encourage growth.

Rather, we must turn to our ingenuity and the audacious independence unique to our nation – and change the course of America.


Friday, October 2, 2009

A heavy social safety net

This will strain the entire concept of social security. Reuters: Half of babies born in rich world will live to 100
[Researchers] said huge increases in life expectancy -- of more than 30 years -- had been seen in most developed countries over the 20th century.

And death rates in nations with the longest life-expectancy, such as Japan, Sweden and Spain, suggest that, even if health conditions do not improve, three-quarters of babies will live to celebrate their 75th birthdays.

"But should life expectancy continue to improve at the same rate, most babies born in rich nations since 2000 can expect to live to 100 years," they wrote.

The researchers, who pooled and analysed data from several international studies, said they wanted to explore "a common view" that a big rise in the proportion of older people would come as a result of helping an increasing number of frail and ill people survive longer -- with huge personal and societal costs.

But they found that even though many people who live to age 85 have chronic diseases such as diabetes and arthritis, they have only become frail and disabled at a later stage, essentially postponing frail old age instead of extending it.

"This apparent contradiction is at least partly accounted for by early diagnosis, improved treatment, and amelioration of prevalent diseases so that they are less disabling," they wrote.

"People younger than 85 years are living longer and, on the whole, are able to manage their daily activities for longer."

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