Bryan Caplan  

The World Needs the Accidental Theorist Back

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The Krugman we've got is sold on the House health bill.  But the Krugman we had, the thoughtful economist who wrote The Accidental Theorist, would have responded differently.  Krugman Past, unlike Krugman Present, would have pointed out that when the unemployment rate is 9.7%, it's a bad idea to legislate an 8% payroll increase on businesses that fail to offer health insurance.   Employers are reluctant to hire workers at today's wages; how are they going to feel once the marginal worker gets 8% pricier?

It's not just Krugman who should be against such legislation at a time like this; so should any sensible Keynesian.  If you're a dogmatic believer in market-clearing, you might say, "No problem, wages will fall to prevent a rise in unemployment."  But if you accept the reality of wage rigidity, you know that's pie-in-the-sky.  In the short-run, employers will mostly respond to higher labor costs by letting workers go.  And even in the long-run, employers usually cut real wages by keeping nominal raises below the inflation rate.  In an economy with very low inflation forecasts for years to come, this stealth adjustment process will take years.


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COMMENTS (25 to date)
Matt C writes:

In an economy with very low inflation forecasts for years to come

Am I right that you trust these forecasts for basically efficient-market reasons?

If we see a significant rise in inflation in the next 5 years, would you reconsider your faith in the EMH?

Damien writes:

"In the short-run, employers will mostly respond to higher labor costs by letting workers go."

Do you mean to suggest that evil capitalists will lay off good workers to make more profits? We certainly cannot let this happen. I suggest that Congress pass a law forbidding businesses with a positive bottom line to lay off workers. Don't laugh, it's already illegal in France. Businesses cannot lay off workers unless they can show that it was necessary to save the company.

"And even in the long-run, employers usually cut real wages by keeping nominal raises below the inflation rate."

The plan is to bolster unions via the EFCA. They can in turn make sure that evil capitalists do not exploit their workers. If they get enough support from the government, they might even make wages rise faster than inflation (for those who are lucky enought to have a job anyway). They already do this in Europe, too, so it must be a very good idea!

And, finally, they'll have to deal with the unemployed. Unemployed because greedy capitalists are shipping jobs overseas, that is. Damn globalization! Generous unemployment benefits should take care of this problem and make people realize how generous government officials are. If we want to get rid of all perverse incentives, we might even ask unions to pay unemployment benefits to their members (using public money of course). They would even receive some funding as a reward for this great public service that they do. Once again, this is what they do in Europe, and it has worked so well for them!

I mean, if the US wants to be more like Europe, why not go the whole way? Maybe close down all stores on Sundays too (the Baptists will support this, we just have to find some bootleggers). Ban GM crops? 50% marginal tax rate on income over $40,000? The sky is the limit!

gnat writes:

The reality is that firms that cannot afford to offer health care coverage impose costs on society. Their private costs do not reflect the social costs of the resources they consume.

Troy Camplin writes:

I just ordered Krugman's book on the economy as a self-organizing system. I'm guessing that's the old Krugman, because I cannot imagine how one can understand that the economy is self-organizing critical and recommend almost anything he does. If you know the economy is self-organizing critical, you understand that most interventions in the economy are unpredictable. Some will throw the system into rigidity, others will throw it into chaos, others will throw it into another kind of system, others will have little to no effect, and others will throw the system into wild boom-bust fluctuations. Note that three of these are definitely bad, and the other two may be good, bad, or neutral. Anyone who says they know what will happen is lying either to themselves or to everyone else. Krugman, having written on the subject, should know better. How is it, then, that he apparently does not?

Floccina writes:

@gnat The employees could buy insurance on their own why is this the firm's private costs? Further the employer could provide insurance and pay the employees less and break even. Bryan is talking about a delta effect you are accessing blame for long term situation. Not to mention that the laws almost always exempt small firms. If it good for large firms it should be good for small firms too.

RD writes:

gnat,

That is not "the reality," that is an unwarranted assertion. Perhaps you are confusing the argument that health care can be a positive externality -- that's not the same thing even if true and empirically relevant. How are these firms' social costs higher than private costs?

David J. Balan writes:

The Krug clearly believes in the importance of stimulus when the economy is in the condition that it is now in. In fact, he never stops talking about it. But he also thinks that major health reform is really really important. So I imagine that he is willing to accept a certain amount of anti-stimulus in exchange for health reform, preferably offsetting the contractionary effect by increasing direct fiscal stimulus, but probably even without that. No big inconsistency there, just a regular plain vanilla tradeoff.

BTW, I don't know if he positively favors that 8% payroll tax provision of the plan, or if he regards it as bad but is willing to accept it because he mostly likes the rest of the plan.

gnat writes:

Bryan said: "Employers are reluctant to hire workers at today's wages; how are they going to feel once the marginal worker gets 8% pricier?"

Healthcare is a basic necessity, a cost to the employee that either must be paid out of wages (in which case the employer requirement can be either a wash or net gain: if it lowers heathcare costs per employee) or society is paying the healthcare cost. If a employee is not covered and has very expensive chronic health issues he/she picks up his/her Medicaid card and we all pay for it. When businesses drop healthcare coverage it ususally is in order to compete with other firms that do not provide it.

I have not read the proposed legislation but my understaning was small firms would have to pay something per employee into a fund even if they were exempted.

mark writes:

An ode to Paul Krugman (well, not really an ode, in a formal sense):

There once was an economics professor
Who dreamed of being made tax assessor
He blogged every hour
In his mad quest for power.
The Grey Lady pays for this dreck? God bless her.

Troy Camplin writes:

Sadly, at this point, a limerick is about right.

Colin K writes:

@Gnat: "The reality is that firms that cannot afford to offer health care coverage impose costs on society. Their private costs do not reflect the social costs of the resources they consume."

Let's say an employer offers to pay $12/hr based on a 40-hour week with no benefits, and the employee has the option to buy his own insurance for $320/month. Now let's say the employer offers to pay $10/hr with insurance. Either way the employer spends $1920/mo for that employee, and either way the employee and society are equally-well off. An employer who offers to pay a 27-year-old a wage of $100k with no benefits is not imposing a cost on society, is he?

Mandating insurance-coverage-or-penalty will simply reduce the wages companies are able to offer. As an employer, an employee who costs me $1920/mo is either profitable or not. Whether I am making out one check to Joe Smith or or one to Joe and one to Blue Cross makes no difference to my decisions.

In the end, the difference will be made up by employers (a) laying people off, (b) foregoing hiring, and (c) not giving out raises they otherwise would have. The fun part is that increased unemployment and wage stagnation will be blamed on "the market" failing the working class.

Jayson Virissimo writes:

"Healthcare is a basic necessity"-gnat

Food is a basic necessity. Are you going to argue that we should have mandated food insurance?

Marcus writes:

"The reality is that firms that cannot afford to offer health care coverage impose costs on society. Their private costs do not reflect the social costs of the resources they consume." -- gnat

If this were a true statement then it would also be true that society would be wealthier if the company didn't exist at all.

Can you name any companies that that would be true for?

gnat writes:

Colin:
Add two factoids: (1) Hospital emergency rooms must serve those without healthcare, and public Medicare and Medicaid plans also are available. This causes a race to the bottom for firms to drop healthcare. (2)individuals are "time inconsistent" in that their life cycle preferences (e.g., healthcare, savings for retirement). The group insurance we have today developed as prepaid plans recognizing that once an individual had a chronic illness the expenses would be unaffordable. Individuals have the choice of taking an HSA or opting out of a group plan entirely.


Jayson:
Healthcare insurance developed as prepaid plans because because illnessses were expensive and could not be paid out of wages. BTW, we do have food insurance, its call Food Stamps.

Marcus writes:

"BTW, we do have food insurance, its call Food Stamps." -- gnat

Not to speak for Jayson but I don't believe that's what he means. Food stamps is akin to Medicare.

Food insurance as I understand he's referring to it would be akin to employer provided health insurance. You go to the grocery store and pull out your food insurance card to pay for your groceries.

What kind of effect would that have on the food industry?

Marcus writes:

"If a employee is not covered and has very expensive chronic health issues he/she picks up his/her Medicaid card and we all pay for it." -- gnat

The employee would have been ill even if the employer didn't exist and Medicaid would still have picked up the tab. As such, this cannot be considered a cost imposed upon society by the employer.

Marcus writes:

To continue with my thought above...

If the employee was injured or became ill as a result of working for the employer and Medicaid picked up the bill, then that would be an externality the employer is imposing on society.

But that is a different issue than what you are arguing.

Aaron writes:

"when the unemployment rate is 9.7%, it's a bad idea to legislate an 8% payroll increase on businesses that fail to offer health insurance."

It's a good thing that Krugman Past/Present/Future can realize that the payroll increase doesn't occur until 2013.

The unemployment rate is 9.7% Today in 2009, not 2013.

asg writes:

The title of this post is a bit of a misnomer; in Krugman's original "Accidental Theorist" essay (from which the title of the collection was taken), William Greider, writer for The Nation, not Krugman himself, is the accidental theorist. Krugman meant the term as a criticism of Greider's allegedly fact-driven, theory-free approach, which just adopted a bunch of hidden, erroneous economic premises.

gnat writes:

Marcus: "The employee would have been ill even if the employer didn't exist and Medicaid would still have picked up the tab. As such, this cannot be considered a cost imposed upon society by the employer."

The problem is private insurance companies have incentives to cherry-pick leaving the public to cover the poor and chronically sick, and the availability of a public plan provides an incentive for firms to offload employee healthcare onto public plans. That is a private cost imposed on the society.

dan writes:

So, stimulus now, anti-stimulus in 2013 with the benefit of health care savings in 2013... that sounds like a good thing.

Colin K writes:

Gnat: "Hospital emergency rooms must serve those without healthcare, and public Medicare and Medicaid plans also are available. This causes a race to the bottom for firms to drop healthcare."

You've elided my point. From an employer's perspective, costs are costs are costs. Mandating employers to pay for healthcare is no different than legislating a 10-20% pay raise. All you are going to do is move people from the ranks of the uninsured to the unemployed.

It's all just a money issue. Where I live (Mass.), the % of people covered was far better than the national average long before the universal insurance mandate went into effect. State laws had very little to do with it. Mass. is one of the richest states in the country and as an employer if you don't offer insurance you don't hire many good employees, even relatively low on the totem pole.

Marcus writes:

"The problem is private insurance companies have incentives to cherry-pick leaving the public to cover the poor and chronically sick, and the availability of a public plan provides an incentive for firms to offload employee healthcare onto public plans. That is a private cost imposed on the society." -- gnat

A couple of thoughts.

1) It is a private cost imposed by the government upon society.

2) Even if we accept your argument at face value it still doesn't argue for mandatory employer provided health insurance. If you require people buy health insurance and mandate that insurance companies cannot not turn anyone down, employer provided health insurance becomes obsolete.

We got rid of the 'company store' for a reason. Let's not bring it back under the guise of progressivism.

gnat writes:

Marcus writes"
"1) It is a private cost imposed by the government upon society."

Your are correct that it is not a Pipovian neoclassical externality. Rather, it reflects a societal cost in the sense of the between private costs and societal values. See Karl Willian Knapp and the institutional school.

"2)If you require people to buy health insurance and mandate that insurance companies cannot not turn anyone down, employer provided health insurance becomes obsolete."

Part of the problem is the healthcare insurance market evolved as annual prepaid expense plans by doctor and hospital associations to ensure payment of increasingly expensive care. Many of the current problems could be avoided if health insurance markets operated like life insurance where the future is uncertain and individuals buy insurance at an early age when they are healthy.

Calendar writes:

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