Arnold Kling  

MIT Economists in the New York Times

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Karma... Hummel vs. Bernanke...

1. Twenty years ago, Peter Diamond wrote,


suppose individuals could be grouped independent of their health needs and work status. What if government simply assigned people to groups, ranging in size from 10,000 to 100,000, based solely on where they live? Everyone would automatically receive basic coverage and could, if they desired, purchase additional insurance. High-risk individuals wouldn't be excluded or charged enormous rates. Cross-subsidization of premiums can equalize insurance payments between urban ghettoes, where health is relatively poor, and more affluent neighborhoods in the same city or region.

Government-created groups as a way to manage risk aren't novel. Consider the market for residential mortgages. Any mortgage poses a risk of default. But a large bundle of mortgages poses a more predictable risk, with little threat of default. The Federal National Mortgage Association (Fannie Mae) groups individual mortgages together into securities that are sold to private investors.

I assume that Diamond would stand by the first paragraph. The second one, maybe not so much. Although in Diamond's health insurance scheme, I wonder why you wouldn't just go to a system where government assigns people to insurance programs randomly, without regard to geography. Thanks to Mark Thoma for the pointer.

2. More recently, this article quotes Robert Solow.


"One point I always make to my graduate students is, avoid sound bites. Never sound more certain than you are."

To explain the case for humility in economics, Mr. Solow said, look no further than the stimulus bill: "It has run its course over the past year and a half, but it is not an isolated event. One thousand other things were happening that had an effect on employment and real G.D.P.," a measure of a nation's total output adjusted for changes in prices. "You want to trace the effect of one of a very large number of significant causal effects, and that's a very hard thing to do."

I find that the economists I am most drawn to are those with the greatest willingness to express self-doubt. The arrogant bullies, on either side of the ideological debate, leave me cold.


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COMMENTS (14 to date)
Daniel Kuehn writes:

Do you think a blogger would be an arrogant bully if that blogger disparages a perspective that is different from his by accusing them of thinking "they're smarter and better educated" than everyone else, or that this perspective is "absolutely committed to expert control over the economy"? That seems like kind of a bullying approach to me, particularly if there are comments like that littered over the course of several posts.

Then again, a lot of this is in the eye of the beholder.

David N writes:

The reason for the geographic pools is that it costs more to provide equivalent medical services in high cost-of-living areas. I think a better idea would be to have one big national pool with a geographic cost of living adjustment applied to premiums, but maybe it would be a wash.

kebko writes:

I must point out that the Slow quote is a sunlight with a tone of certainty.

JohnW writes:

Later on in that NYT article, the journalist writes:

"Nor is it fair to say that economists have done little to help in the latest crisis. A depression seemed possible two years ago, and thanks to the ideas of economists, that didn’t happen. "

Aiyah! Where did that come from?

Jehu writes:

Why SHOULDN'T high risk individuals be charged high rates? If we as a society think we should subsidize the health care of high risk individuals, we should call it what it is---welfare from a central government---and not expect private companies to obfuscate it for us. And what about high risk individuals who are ALSO high earners? Is there any good reason we should subsidize people who have a few bad cards but otherwise have a decent hand? To me it seems that the only groups that are allowed to bear the full insurance cost of their own nature & behavioral choices are young unmarried males (who pay much higher auto insurance rates).

David N writes:

Jehu,

We could also call it mutual aid. You never know when you might move from low-risk to high-risk status. That's why the responsible thing to do is carry insurance.

Jehu writes:

David,

There are lots of mutual aid societies, some churches, some groups like Masons, Oddfellows, or Elks. The sort of thing you're talking about can be handled through either organizations like that or honest welfare. Or, if you're particularly worried about what amounts to 'insurance status' insurance (i.e., hedging against a future increase in the cost to insure you), you can always negotiate a longer term insurance contract. It's a really bad idea though to conceal a wealth transfer from healthy people (who tend to be poorer and younger and just starting their families) to sicker people (who tend to be wealthier and older) even if you believe in bizarre semi-governmental wealth transfers in general.

David N writes:

Jehu,

I didn't propose any such wealth transfer nor its concealment. The original concept of insurance is a mutual organization. If I am fortunate enough not to have a claim, my premiums go towards other people's claims. That's how insurance works and I don't have a problem with it.

Jehu writes:

David,
Such mutual aid societies that formed the original insurance operated in an environment where the actual risk of all the parties involved was about the same (e.g., how many barges will be lost going down the river carrying our crops to market). If your risk was significantly different from your fellow mutual-aiders, they'd have ...words...for you (for instance, if your boat maintenance or handling was shoddy). They didn't have a problem smearing unpredictable risk across the entire pool, and I don't either. It's when some groups have systemically higher risk and want to smear it across a larger pool that doesn't have such risks in general itself that I have a problem (given that such smearing generally requires governmental interference to persist, otherwise adverse selection will take care of the problem).

For instance, say I'm grossly overweight and as a result have Type II diabetes, and accordingly cost more to insure. Should everyone else be required to pay higher rates so that I don't have to pay a rate commensurate with my actual risks? What if I'm also a 95th percentile earner? You're equivocating two very different types of risk here.

Dan Weber writes:

One idea I've had (and seen others express) for insurance is that there should be exactly 1 variable a health insurance company uses to determine your rate: your age.

Insurance companies could also offer a lock-in: if you join us when you are 20, your rates will only go up by (say) 1% a year, until you die.

Randomly-determined pools take care of adverse selection. If they are only of moderate size, they also force people to face the realities of their health-care expenses. Sure, providing invasive prostate surgery for a positive PSA tests sounds like a good idea, but is it worth everyone paying an extra $800 per year? Especially if it doesn't improve outcomes at all?

Jehu writes:

Dan,
Why should someone who is overweight, with type 2 diabetes and 25 pay the same rate that someone with exceptionally good fitness and health who is also 25? We allow people to benefit from their natural endowments and how they've developed them in most other contexts (almost nobody is going to say that women can't discriminate in terms of who they want to date in favor of the latter man against the former), why are so many people allergic to allowing this in the health sphere? Insurance is classically intended to handle unpredictable risks---allowing me to hedge the risk, of, say, getting hit by a truck with an uninsured judgment proof driver and incurring say 100k in medical expenses. In my view, adverse selection represents freedom in most cases---it's not a bad thing. If you want to use a group of people to subsidize others in your pool (i.e., you're not offering them a good deal), why SHOULD they want to participate?

David N writes:

Jehu,

It sounds like what your saying is you think a lot of people are responsible for their own poor health. I'm not going to argue with that. We both have a normative position: you say the obese and the smokers should pay more, I say it shouldn't matter, assigning blame is a slippery slope. You say the rich should pay more...how is that not a wealth transfer? I say when I purchase something with cash it's nobody's business what I can afford.

We have different values. That doesn't change the fact that a less finely-grained set of risk pools is not the same as "welfare from a central government."

Dan Weber writes:

Jehu, that may be the best thing to do from the free-market perspective.

But, the difficulties that ObamaCare is facing notwithstanding, the current system is facing pressure, and the public really wants something that takes away the chances of them finding themselves mysteriously denied care. And despite our host's affection for them, I don't think health care vouchers will go over well at all with them.

The perfect is the enemy of the good.

Jehu writes:

David,
My position is that nobody should subsidize anyone else, unless we as a people decide who and how much explicitly. And, should we so decide, we should do it through explicit welfare payments to the affected individuals who belong to the classes we think ought to get a subsidy to offset their higher risk. Let insurance companies be insurance companies and charge based on their assessed risk. Dan, this speaks to your point also---if you could be charged your by your actual actuarial risk, you wouldn't see people being denied coverage, it'd just cost them more sometimes. Insofar as we believe that somebody shouldn't have to pay more for insurance despite an objectively higher risk (e.g., they develop type I diabetes), we should just go ahead and do a direct transfer payment towards them according to what we decide through a normal political process. Personally, I don't cotton to the idea of such subsidies---believing that when/if they're needed they ought to be handled through private charitable organizations, but if we must have them, have them above the board and transparent. Presently the groups being subsidized are receiving way too little attention on that basis. If your group is receiving monies from another group, it SHOULD lower your social status. Therein lies one of the only checks on moral hazard.

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