Why The Debt Ceiling Matters

A number of commenters (at least one here and several elsewhere) have asked why we need a debt ceiling. If the Congress wants to spend less, why don’t they just go ahead and spend less?

The answer is that different spending programs command different majorities. Snip and Snap vote to fund rabbit hospitals; Snap and Snurr vote to fund trapeze subsidies; Snurr and Snip vote to fund lava lamp research. Plausibly, they’d all prefer to eliminate all these programs. Even if Snap thinks rabbit hospitals and trapeze subsidies are both great bargains, he might not be so happy about getting two for the price of three.

Individual shoppers (at least the perfectly rational individual shoppers we meet in our economics textbooks) have no reason to constrain their own behavior. If you buy the Oreos, it’s because you wanted the Oreos, so why try to stop yourself? But legislators — even perfectly rational ones — are not like individual shoppers. They shop with other people’s money and — more importantly for this issue — other people shop with theirs.

So it can make perfect sense for legislators to constrain themselves by agreeing in advance that they won’t spend more than $X in a given year. A debt ceiling is not exactly the same thing as a spending ceiling, but in practice it can be pretty close.

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106 Responses to “Why The Debt Ceiling Matters”


  1. 1 1 Ted Levy

    It I read you correctly, Steven, you are making an argument as to why a debt ceiling may be an effective tool in restraining government spending, or government deficits. That may have had some theoretic appeal a century ago, when the debt ceiling was first put into effect (it seems the country managed well enough for 150+ years without one). But now, looking back, we see almost 100 increases in the debt ceiling in about as many years. We see a debt ceiling has never NOT been raised when approached. I’m sure the late James Buchanan would not view that as a coincidence akin to flipping 100 coins and always getting heads.

    I respectfully suggest that a ceiling that always moves farther away whenever approached is actually a mirage, not a real barrier to anything.

    So it seems your argument makes sense only in the counterfactual situation where a debt ceiling actually ceilings debt.

  2. 2 2 Ted Levy

    Sorry…”150+” should be “almost 150″

  3. 3 3 Will A

    @ Prof. Landsberg #0

    It seems like a better title for your post would be:
    Why a Different Type of Debt Ceiling Could Matter

    We could set a debt limit of $3,000,000,000 and then when we have gone into debt that amount, we don’t commit ourselves to anymore debt unless we vote to go into more debt.

    This is not the debt limit we have though. The debt limit we have means that we can decide to default on payments already agreed to.

  4. 4 4 Daniel

    Except this limit could result in indefinitely higher interest rates for government debt and push the world economy into another crisis. Why don’t we have this conversation after we’ve cleared the worst recession sice the great depression. Why would we make decisions like this on the basis of higher deficits that’re mainly due to a depressed economy?

  5. 5 5 Will A

    @ Daniel #4

    Higher deficits are mainly due to the government spending more than it takes in.

    In your opinion if congress had cut defense by 200,000,000,000 and shifted 100,000,000,000 to infrastructure and 100,000,000,000 to the safety net what would have been the effect?

  6. 6 6 Daniel

    Also, your premise on collectively making bad decisions is mostly based on spending that would fit into the category of pork barrel when we should be paying attention to the true driver’s of debt, Medicare and increases in the cost of healthcare. I’m singling out Medicare because it perpetually receives vast majorities of support so doesn’t meet your premise of the reasons for government spending. Instead of constantly complaining about there being too much spending why don’t we pull our heads together and think of ways we can slow the growth of Medicare and healthcare spending. I think the left has been ready and willing to have this conversation for a while now but everything we propose is either not good enough by tea party standards because it doesn’t inflict enough pain on the middle class and the poor, like negotiating with pharmaceuticals, or it offends people, like saying no to low probability treatments. Meanwhile the tea party has proposed things that would make healthcare more expensive overall while making it trivially cheaper for the government, like privatizing Medicare, or raising the Eligibility age for Medicare (getting the cheapest people off the roles), and would be extremely painful for those who slip through the cracks.

    The reason I’m particularly disappointed in you Steve is that you’re a really good economist and math geek who believes in limited government but you never constructively propose policies that would lower spending and would be politically viable. Help us out here Steve. I’d like to see the right offer proposals that are given more than a half second of thought and are well calculated and not scribbled on a piece of paper.

  7. 7 7 Daniel

    @Will A #5. I don’t know that answer. I think I’d prefer the infrastructure and safety net spending but it’s impossible to evaluate how much the US contributes to world safety with our spending, although I think there a significant amount of free rider effects going on here so I’d rather other industrialized nations contribute a higher fraction of their GDP and us contribute a lower fraction of our GDP.

  8. 8 8 neil wilson

    One way to avoid the debt ceiling is to significantly raise taxes and Odestroy the economy.

    Nobody answered my question before.

    What significant spending can be cut that has a chance of passing the House? (I realize it wouldn’t make it through the Senate and would be vetoed by Obama but what spending cuts could get 218 votes in the House?)

    The Ryan budget doesn’t cut spending too much in the initial years. To avoid raising the debt limit too often or too much we would need to cut spending in 2013 and 2014.

    Put up or shut up.

  9. 9 9 Mike H

    @Daniel #4 echoed my first thoughts. The debt ceiling law as it stands doesn’t make sense. Congress passes a spending bill, with no corresponding revenue bill. Without further action by congress, the president eventually has to either
    * disobey congress, and not spend
    * disobey congress, and impose extra tax, or
    * disobey congress, and borrow in excess.

    A more sensible debt limit law would mean that spending bills that were projected to exceed the debt limit would be automatically void. Then, if congress wants to spend, they must also raise the debt limit when they commit to the spending (or tax reduction).

    My second thought was that the debt limit doesn’t restrain spending, it restrains debt. If you want to restrain spending, you need a “spending limit” bill.

    Is the debt limit indexed? Against what?

  10. 10 10 Mike H

    Hmm, it seems I have misattributed my first thoughts to Daniel #4 instead of Will A #3.

  11. 11 11 Neil

    A great argument! For a spending limit. Here, legislators, is how much you should spend–you figure out how to spend it. For a debt limit–not so much.

  12. 12 12 Brandon Berg

    I think the left has been ready and willing to have this conversation for a while now but everything we propose is either not good enough by tea party standards because it doesn’t inflict enough pain on the middle class and the poor, like negotiating with pharmaceuticals….

    The grown-ups are talking, Daniel. If you don’t understand the arguments against reducing the profitability of drug development, you’re not qualified to have an opinion on this topic.

  13. 13 13 Daniel

    @brandon, right now we’re financing drug innovation for the entire world. Sound fair? Again there’s significant free rider effects going on. And right now the drug industry is not set up in a way that promotes innovation but rather in a way that promotes creating slightly improved drugs that you can patent and sell without improving healthcare. And to use demeaning language “the grown ups are talking” without offering your own proposal is a waste of time. Offer your proposed solution and stop insulting other people’s intelligence.

  14. 14 14 Mike H

    @Daniel – if we were “financing drug innovation for the entire world”, the Malaria parasite would be an endangered species by now. Nonetheless, I agree with you that the current model is broken.

    On the news recently, I heard that scientists in Australia have found that massive doses of Vitamin B + Folate may be effective againt certain types of migraine. I don’t think this discovery would excite Big Pharma, however – after all, there’s little chance to profit from it.

    The model “make drugs expensive so that drug companies have an incentive to discover new drugs” produces an incentive to discover new drugs. It does not produce an incentive to discover ways to keep people healthy.

    Note that the Vitamin B + Folate research is being performed by a government-funded institution in Australia, not by a Pharma-funded institution in the USA.

  15. 15 15 Daniel

    @Mike H. thanks for your backup. By financing drug innovation, I just meant that the US spends a lot on drug R&D and the rest of the world can use our drugs without spending money on R&D. I think tying Medicare payments on drugs to their marginal improvement over other drugs would do a world of good in bringing back innovation to the drug industry, especially if this payment model got transferred over to private companies.

  16. 16 16 Bob Murphy

    Great post Steve. I thought this point was obvious, but I’m glad you made it because apparently all of your commenters think you’re wrong.

  17. 17 17 Mike H

    “the US spends a lot on drug R&D and the rest of the world can use our drugs without spending money on R&D”

    the same is true of most R&D – there are big positive externalities. There is therefore a Pigovian argument for government subsidies for R&D.

  18. 18 18 Harold

    So, in principle, will a democratic system like the USA always spend more than everybody would like, or is that just a possible outcome? I can see there is an upward pressure on spending, but is there a downward one?

    @16 – This reminds me of Gandhi when asked whay he thought of Western civilisation – “I think it would be a very good idea” he apparently said. It seems that some commenters think a debt ceiling would be a good idea, but we don’t in fact have one.

  19. 19 19 Jonathan Kariv

    @ Harold #18 I think there might be a downward pressure (disclaimer that it’s early and I could be missing something, someone correct me if I am).

    Imagine 3 projects X, Y and Z which each cost $100.
    Imagine 3 voters A, B and C (who vote on there join spending.
    A likes X, B likes Y and C likes Z.

    What this means (in this contrived example) is
    A is willing to spend 150 to get X, 90 to get Y and 90 to get Z.
    B is willing to spend 150 to get Y, 90 to get X and 90 to get Z.
    C is willing to spend 150 to get Z, 90 to get X and 90 to get Y.

    If they vote on weather to spend the 100 on X then A says yes but B and C say no. Hence X doesn’t happen. Similiarly Y and Z dont happen. If they communicate with each other they would probably agree to fund X, Y and Z.

    Now if you swop 150 and 90 for each voter (so each voter likes 2 of them) and change 100 to 140 and we have the situation Steve is talking about (if I’ve understood it right).

    Possibly the more interesting question is which of these situations happens more often (or maybe what is happening with particularly large projects).

  20. 20 20 Kirk

    Daniel,

    “I think the left has been ready and willing to have this conversation for a while now but everything we propose is either not good enough by tea party standards because it doesn’t inflict enough pain on the middle class and the poor”

    “And to use demeaning language “the grown ups are talking” without offering your own proposal is a waste of time. Offer your proposed solution and stop insulting other people’s intelligence”

    Pot, this is kettle calling, do you read?

  21. 21 21 Kirk

    My New Years pledge is to repeatedly point out that anyone blaming this crap on the Reps or Dems is THE problem. Both groups f**k us repeatedly for their own benefit and laugh as half of America blames the other group. The only sensible vote is a vote for a third party – it really doesn’t matter which one. As soon as the big 2 parties have to negotiate with a third party to get a majority (this can happen with less than 5% third party in a chamber) things will start to change.

    This applies especially when it occurs on an economics blog comment section…

  22. 22 22 Ken B

    @Bob Murphy 16: There exists a counter-example.

  23. 23 23 Andy B

    If legislators really wanted to constrain themselves, the debt ceiling, as currently constructed, is a poor way to do that. But it could be vastly improved. If it were modified to be set as a percentage of potential nominal GDP (to adjust for inflation and the business cycle) and based on debt outstanding held by the public, then it would be much more meaningful. If you got close to that ceiling, then that would be a strong indication for a policy response rather than the farce we have now based on continuous arbitrary notional step increases.

  24. 24 24 Daniel

    Kirk,
    I don’t see in my remarks where I insulted anyone? Third parties needs to believe in something in order to be relevant. What solutions to today’s problems do you believe in? Also how do we know both parties are the problem? Certainly there’s corruption on both sides but why wouldn’t that be true of third parties as well?

  25. 25 25 Daniel

    Kirk,

    Also if third parties are the solution, can you offer any evidence from other countries that do have substantial third, fourth, and fifth parties that they increases the efficiency of the government?

  26. 26 26 Harold

    @25 – having a strong third (and more) parties generally constrains what governments can do. The UK coalition has probably restrained the more extreme wing of the majority party at the moment. I don’t know if this is more efficient, but perhaps less is more?

  27. 27 27 Daniel

    Harold,

    I take your point. I also think that the current construction of the U.S. government creates restraints for the Majority party (filibuster), though I’m not really sure if this is always optimal. For example, if there comes a time when we need the government to be unconstrained because paralysis prevents needed changes then this would be sub-optimal.

  28. 28 28 Will A

    @ Kirk #21

    Great point about voting for any third party and it doesn’t matter which one. It makes particular sense to do this in a very bad economy to send a message to polticians.

    @ Kirk #25
    The National Socialist German Workers’ Party started out very small in the 1920′s, but many would argue that the party lead to Germany becoming very efficient.

  29. 29 29 David Wallin

    @24 Daniel, you said: “I don’t see in my remarks where I insulted anyone[?].”
    So, when in @6 you said “I think the left has been ready and willing to have this conversation for a while now but everything we propose is either not good enough by tea party standards because it doesn’t inflict enough pain on the middle class and the poor . . .”
    Do I really need to explain how clearly insulting you were? I understand this is the dogma of the left: fiscal conservatives hate the poor (with an ill-defined middle class added in recent years), but usually they hide the notion in specific issues rather than spreading the lie so generally.

  30. 30 30 Ken B

    @David Wallin 29: Yup. And you left out this pearl:
    “I’m particularly disappointed in you Steve … I’d like to see the right offer proposals that are given more than a half second of thought”

  31. 31 31 Kirk

    I’d swear I posted a response. Stupid internet! They’ll both show up for sure now.

    Anyway, Thanks to Ken and David for pointing out the obvious.

    At Will A. – the any part was somewhat facetious. I have my preferences but that was not my point.

    I also should point out that I didn’t suggest a STRONG third party, I suggested a RELEVANT third party. A strong third party would be just as bad as the current two.

    I also don’t suggest this to improve the efficiency of government, rather, I hope it decreases their efficiency in screwing us to the benefit of themselves and their cronies.

    I won’t discuss which party I think is worse or better (of the big two) that would be like arguing the relative merits of nuclear Armageddon versus the zombie apocalypse. Pointing out what’s wrong with the “other” party is the modern equivalent of pointing to the speck in the other guy’s eye while ignoring the log in your own.

    Congratulations Daniel, you are doing exactly what your party expects from you.

  32. 32 32 Ken B

    As for 3rd parties … In Canada, fed up with the supposed small government Progressive Conservative party I supported a fourth party. They eventaully grew to swallow the PCs. In the meantime, the supposedly big government Liberal party tacked towards serious cuts and fiscal sanity in the 90s. Were all these connected? Parties need to see there are voters to be had if they respond, and I think that happened in Canada. (In the 90s we had effectively a 5 party system. )

  33. 33 33 Manfred

    My humble suggestion to the readers in the blog café is for y’all to read John Cochrane’s blog entry on the debt ceiling discussion. It was for me the most instructive one (he did this in the context of this trillion dollar coin thing, but he discusses the debt ceiling issue first). Go and read it, I think you will like it.

  34. 34 34 Ken B

    @Jonathan Kariv: You are right about the combinatorics but missing the incventive I think. In you example a bill passing X and Y would gain a winning coalition. (So would a coalition with all three, but a pair is easier and more likey to form. In this case then Z is like left out in the cold). The point is that we all all have spending ideas that would benefit us greatly, at a small cost to many others, and so have an incentive to form coalitions to spend. The obverse is we all have tax exemption ideas we’d like that would benefit us greatly, so we form coalitions to get them. The incentive always drives from small groups with a lot to gain versus large groups with little to lose.

  35. 35 35 Dave

    Debt ceiling? pffft….more like a debt target

  36. 36 36 Will A

    @ Kirk #31

    I would say what you might consider doing as part of your resolution is to also get people to flood media (local, NPR, National) with complaints about not airing all viewpoints.

    If the Green and Libertarian Parties were given a seat at Meet the Press, NPR, presidential debates, etc. you might find some movement toward 3rd parties and/or toward policies on which the majority of American’s agree.

    Instead we have, “Today on NPR’s Morning Edition we let Democrats and Republican dictate terms of public discourse. Democrats say 39.6%. Republicans say 36%. Which should it be? Join us for a 15 minute discussion”

  37. 37 37 Dave

    Manfred – do you have a link?

  38. 38 38 Ken B

    The Cochrane link http://johnhcochrane.blogspot.com/2013/01/two-cents-on-trillion-dollar-coin-and.html#more

    I hesitate to provide it; KS has noted that Cochrane once made an error, so that everything he says must be forever wrong.

  39. 39 39 David R. Henderson

    @Ken B,
    Who’s KS?

  40. 40 40 iceman

    A little off-topic, but so is most of this post:

    6 – outside of Medicare / Medicaid (and govt mandates on private providers), how can there be a “healthcare spending problem”? Could there be an “Xbox 360 spending problem”?

    14 – so not imposing price controls = “making something more expensive?” Quite the semantic gymnastics.

    39 – you probably don’t want to go there

  41. 41 41 Daniel

    Points taken about insulting the right and the tea party. I do not mean to offend anyone, and if I did so, I apologize. My general frustrations are that I haven’t been able to pin down any specific policy proposals from the right that would reduce long term spending by a substantial amount. Can anyone send me to some links that would further my education on specific policy proposals that would reduce the deficit in the long-term. The one’s I know so far are to increase the medicare eligibility age (kicking the cheapest people out of the risk pool), and to privatize Medicare (which I’ve seen lot’s of research on why this would increase overall spending on health care). If you have links to why these things would actually work can you send them to me?

  42. 42 42 Daniel

    @ Iceman in response to 40. We spend vastly more as a percent of GDP than any other 1st world country (including those with similar levels of GDP) and we have about equal healthcare outcomes. We’re also the most privatized of the group. Is this just a coincidence? I agree that we might have some unique qualities which lead to this, but could none of it be correlated with us being the most privatized? Because of the laws of indifference curves, if I could spend less on something and get the same amount of that good (expressed here as healthcare outcomes) I would prefer to spend less then spend more.

  43. 43 43 Mark Draughn

    Congress controls spending, Congress controls revenue, and Congress controls the debt ceiling. But

    debt = spending – revenue

    So they’ve got an equation with three variables and they’re trying to control all three. They’re over-controlling the system. It’s bad engineering and I say to hell with it!

  44. 44 44 Manfred

    Ken B: thanks for providing the link. I should have done it, was lazy, and thus, unabashedly free rode on fellow commenters.

    David Henderson: [off topic, but since you are here] great review of Blinder’s book in the WSJ Saturday. Really enjoyed it. Especially the Lehman Bros detail you mention, which I had not read anywhere (not that I am expert or well read on this). But I do have a comment: you call Blinder’s book “the best account so far” or something, but then you go on to severely criticize it. Did you really mean it that it is the best account written since sliced bread? [BTW, similar questions arose at the WSJ comments site of the article.]

  45. 45 45 iceman

    Daniel 42 — back to my analogy, I may think a new Xbox provides similar benefits to my old Nintendo, so as an individual consumer I might choose not to buy it (or an insurance plan that covers it). But I probably wouldn’t say someone who wants the Xbox has a “video game spending problem”. However “we” may have a problem if the govt decides everyone should be able to have an Xbox. My point is if there is no spending discipline in Medicare, that is the problem. BTW the logic of a voucher-type system (which is what I think you’re calling “privatized”) is that it gives people more control and responsibility over their health care spending. I’m sure there’s lots of research to digest but it does seem more logical than saying that will increase costs.

  46. 46 46 Daniel

    iceman 42. Now we get to the heart of the matter finally. Choice in risk pooling doesn’t always lead to better outcomes. If I know that I’m more healthy on average shouldn’t I be more likely to pick plans which provide less coverage because they are made better off by switching. In insurance this leads to death spirals because the costs of premiums spiral upward as the average cost of providing rises and more people decide that they should exit the pool. So while most might be made better off by being in a collective pool, the few who are not force everyone out of the pool.

    http://en.wikipedia.org/wiki/Death_spiral_(insurance)

    You also have to take into account that private companies might have higher administrative costs (they have an incentive to provide as little benefits as possible to the pool so as to collect a higher profit on premiums).

  47. 47 47 Daniel

    Iceman 42. Also the other problem I see with your Xbox and Nintendo example is that there it is relatively easy to judge the quality of the two items. You can read reviews, play demos, talk to your friends about it. The problem with health insurance is that I can never know ahead of time which level of insurance will be better for me, since I don’t know if I’ll get sick. While over long periods of time people’s health costs may tend towards the mean, many people will make decisions that seem good for their current health status. Remember that one of the requirements of a perfectly competitive market is that information is shared equally by the buyers and the sellers. I can’t think of many other markets where information is more asymmetric than in a health insurance market and more broadly in the health care industry in general.

  48. 48 48 Mike H

    @iceman #40, in response to me #14 so not imposing price controls = “making something more expensive?” Quite the semantic gymnastics.

    I’m afraid I must cede the gymnast’s crown. The conversation went :

    @Daniel #6 “…everything we propose is either not good enough by tea party standards…like negotiating with pharmaceuticals…

    @BB #12 “…If you don’t understand the arguments against reducing the profitability of drug development…

    In writing #14, I took it that BB understood that granting power to government bodies to negotiate prices for pharmaceuticals naturally increases buyer power (Porter’s 5 forces model, from Pharma’s perspective), lowers profitablility.

    I chose to critique, in #14, the model “make drugs expensive so that drug companies have an incentive to discover new drugs“, pointing out that this produces the wrong kind of health outcome incentives. We want healthy people, not (necessarily) new drugs.

    So, @iceman, I really don’t know where you got the “price controls” term (or idea) from. Certainly not from #14 nor the subthread to which it belonged. Hence, I cannot accept the title of semantic gymnast, at least not in this thread. You may take it if someone is willing to nominate your implication that “not allowing negotiation with Big Pharma = not imposing price controls

  49. 49 49 Ken B

    @David R Henderson: KS is an intermittent commenter here. He made a great fuss once about an error Cochrane had made, likened it to a physicist claiming F=mv, and claimed that an error so egregious justified ignoring everything he wrote.

    KS and I have a history on this blog so caveat emptor.

  50. 50 50 Ken B

    @Mark Draughn: I think if we’re talking engineering analogies, the debt is ceiling is a constraint, not a control variable. Steve’s point is that the contraint is valuable; Cochrane’s is that the constraint is effective.

  51. 51 51 Ken B

    @Mike H: Depends on what counts as negotiating. “Nice pharma you got there, be a shame if anything happened to it.”

  52. 52 52 Ken B

    Daniel: “I can’t think of many other markets where information is more asymmetric than in a health insurance market”

    This is a good point, but I think I can name a few. Hiring a prostitute, buying cocaine on the street. In earlier times, hiring an abortionist. In each case the legal prohibition is what makes it hard to get information. A good reason to end the legal prohibitions I submit. It’s not a problem with abortionists these days is it?

  53. 53 53 Harold

    The health insurance market is by its very nature asymmetric. The individuals must know more about their health than the company, unless we have some pretty draconian laws requiring medicals and disclosure. The information is also of necessity incomplete.

    42: “We’re also the most privatized of the group. Is this just a coincidence?”
    I used to think correlation implied causation, but then I went on a statistics course. Now I know better. My partner suggested that the statistics course had helped, but I am not so sure.

  54. 54 54 Daniel

    Harold

    Very funny. I know that correlation is not causation, but I can’t think of another variable, besides having different population demographics/behavior that would account for the 7% difference in health spending as % of GDP between us and Europe/Japan. Does anyone have a link for the effect our demographics/behavior has on health spending as apposed to Europe/Japan? I guess the question is do you think the difference in population demographics between us and Europe/Japan is enough to justify this 7% difference? If not, what else would account for the difference?

  55. 55 55 Kirk
  56. 56 56 neil wilson

    I have lived in England, Canada and Japan.

    I have relatives in each country.

    All I can say is there is not a single person I met in any of those countries who would trade their healthcare for ours.

    The most conservative politician in England would never publicly come out against NIH because they would lose the next election.

    My personal experience is deals mostly with the birth of my kids. England had better prenatal care and FAR better post natal care than we could dream of in the US.

    I would love to cut our spending by 7% and have the same quality care of Canada, England or Japan.

  57. 57 57 iceman

    Daniel – Since I don’t want to completely hijack this post into health care, I’ll just say I think you raise some interesting points / questions that pertain to a coverage problem or a distributional problem, but not (to my way of thinking) a “spending problem” more broadly than the fiscal excesses of Medicare and Medicaid. Again, I’m simply not sure what it means to say that people (facing their individual budget constraints) can create a spending problem with regard to Xbox’s, or anything else. I guess maybe this does tie in with Landsburg’s post after all: “If you buy the Oreos, it’s because you wanted the Oreos…but legislators…shop with other people’s money.”

  58. 58 58 Ken B

    @neil wilson: You might want to talk to my aunt. OH WAIT, you can’t. She needed diagnostic tests and had to wait until her condition worsened.
    The Canadian system works very well for some things, and very poorly for others. Alas the others probably matter more. If you get seriously sick you get better *medicine* in the USA. If you want to go to the doctor for a sprain it’s cheaper in Canada.

  59. 59 59 iceman

    Mike H – didn’t mean to strike a nerve, but “make drugs more expensive” struck me as contrived. Setting aside the (long term) effect on health outcomes of “allowing” pharma companies to be more profitable, I guess the difference for me is the idea that the government doesn’t really “negotiate”, especially when it represents somewhere around 50% of the market; it sets the price. Frankly to me it seems disingenuous to say we want to provide things for people (which can be a fine thing) but we don’t want to pay the “true” price (including opportunity costs of R&D etc.). That’s just shifting or hiding costs, not reducing them. Aka charity on the cheap.
    (BTW I recognize a bit of circularity in identifying the “market” price when you have a 50% buyer; but the fact that people think there are such huge savings to be had seems to support the price-setting view.)

  60. 60 60 Daniel

    Kirk,

    The link you sent me to seems to give reasons why medicare would be less efficient than if it was left to private means. However, this doesn’t explain the difference between why we spend much more than other countries but have on average the same outcomes and are more privatized? Why have other countries been able to successfully impose constraints while we have not? It’s also noteworthy that medicare and private spending per capita have grown at approximately the same rate. How does the article you linked me to account for both these things in it’s analysis.

    http://content.healthaffairs.org/content/22/2/230/F1.expansion.html

  61. 61 61 Daniel

    Iceman 57 – My argument for why this is relevant for this blog post, is that increases in Medicare spending due to an aging population is the main driver of our budget problems over the next 40 years. There are solutions in game theory which rebut you thinking that under free market conditions the optimal amount of spending for each individual given their budget constraint will be obtained.

    Let’s say that 80% of the population prefers to be covered by insurance, but only if 100% of the population is covered. In a free market, 20% of the population will choose not to be covered. Now let’s say that 60% of the population prefers to be covered if 80% of the population is covered. In a free market, now only 60% will get covered. Now let’s say that 40% of the population prefers to be covered, if only 60% of the population is covered. . .Do I need to explain further why this would lead to 0% of people being covered given these conditions (death spirals)? Do we agree that in a free market set up with these conditions 80% of the population is made worse off by not forcing everyone to buy insurance? Who’s made better off by the free market set up in this situation (the 20% of people who originally preferred not to be on insurance). So we would have a spending problem in this situation. We would be spending less than the social optimum in a purely free market. This is the reason we do not have a purely free market set up in health care.

    Now you might say that, well that’s redistributing from the 20% who prefer not to be on insurance to the 80% who do prefer to be on insurance. Well yes that is true, but only partially. Over an entire lifetime the 20% who preferred not to be in the 100% covered will at some point be made better off by being covered. In fact as they age and their health care becomes more expensive, virtually all of them will prefer to be covered (not many seniors would gladly give up medicare to pay for their own health costs out of pocket).

    So now that I’ve established that a purely free market does not always lead to the optimal amount of spending for society, the question is which alternative provides for healthcare at the lowest cost given outcomes remaining constant. My reasoning is that having all these requirements and advantages to companies that remit compensation in the form of healthcare as a way of making sure that the socially optimal level of people will buy insurance, is a more costly way of providing insurance, than if insurance is handled directly by the government. The evidence, which you can fairly argue with is that other countries that spend far less overall per capita as a percent of GDP have about equal outcomes. Hence my reasoning for saying that people being on medicare as opposed to letting people have vouchers to buy their own insurance might increase rather than decrease health spending. My argument is that it is at least possible that neither the free market set up (which leads us to spending less than the social optimum) nor the current set up (which I believe leads us to spending more than the social optimum) is the best solution. Thoughts?

  62. 62 62 Mike H

    @KenB #51 LOL!

    @iceman #59 I guess the difference for me is the idea that the government doesn’t really “negotiate”, especially when it represents somewhere around 50% of the market; it sets the price.

    Well, I suppose neither of us know what actually happens in the negotiating room, but having lived in a country with real price controls on various items (Malaysia), the concept of “using market power to negotiate a better price” seems much less like “setting the price” to me than it it seems to seem to you.

    Frankly to me it seems disingenuous to say we want to provide things for people (which can be a fine thing) but we don’t want to pay the “true” price (including opportunity costs of R&D etc.).

    I’m not sure whether this (we don’t want to pay the “true” price) is, in fact, what people are saying, nor that it’s necessarily implied by statements like “allow the administrators of the program to negotiate prices”. A thought : part of what gives other developed countries better bang-for-buck than the US enjoys is the fact that we don’t pay the “true” price of healthcare – after all, government-funded universal healthcare greatly reduces a swathe of administrative and other costs relating to the private health insurance industry. There are also artificial discounts enjoyed by encouraging people to live healthy lifestyles and reduce their need for healthcare.

  63. 63 63 Kirk

    Daniel,

    I think the article succinctly pointed out why government involvement created inefficiencies which lead to increased healthcare costs. It’s impossible to compare our outcomes with other countries outcomes because they all have different programs which create different inefficiencies.

    Plus there are 300 million of us in fifty states which is an inefficiency in and of itself.

    I’m also not suggesting a completely free market healthcare system – that makes no sense at all. I would like a more free market health INSURANCE system.

    My very first reform to healthcare would be to ensure that access to emergency care is available, but not free – though if you can’t pay we’ll wait until you can (if ever.)

  64. 64 64 Daniel

    Kirk,

    I reread the article to make sure I wasn’t missing something. If private companies were more efficient at controlling costs, wouldn’t we see not as large of an increase in private spending as opposed to public spending. This is not the case, as the increases in both have been largely equal as my link earlier indicated. My question is how have other countries been able to properly calibrate cost containment mechanisms? Also, all the problems in controlling costs for Medicare, why should these not apply to private insurers as well? The article doesn’t even get into the cost containment problems with private insurers. Than at the end they praise Ryan’s proposal while bashing obamacare even though they’re essentially the same thing for different populations.

  65. 65 65 Harold

    Daniel – you clearly distinguish between correlation and causation, I was just getting my joke in. I also cannot think of a correlating factor that would lead to such high helathcare costs in the USA.
    I think that the USA is so expensive because of the way it is set up, not because of other correlating factors. The USA system is not a free market one. One of the big problems is universal cover and what you do with those who are uninsured for whatever reason. It seems the USA has a choice. You could go in the direction of socialised healthcare, where everybody is covered. Or you could go towards a proper free market model, but that will seem very cruel when folk start dying in the streets. Or you can stick with the weird hybrid you have and keep on paying through the nose. I keep repeating this, but I found it so surprising, the USA Govt. healthcare spending per capita is higher than most (or possibly all) other developed countries total healthcare spending. Then there is all the private insurance on top. I can’t believe that is value for money.

  66. 66 66 Kirk

    300 million – fifty states

    Different healthcare regime

    apples, oranges

  67. 67 67 Harold

    Kirk -I think you are pointing out that it is possible that there could be other contributing factors that make costs so much higher in the USA. I agree it is possible, I just think it very unlikely that any would explain account for the difference. If we compare Europe with USA we have 350 million and 20-30 countries, not so different from 300 milion and 50 states.

  68. 68 68 Harold

    I put an italic thingy in my earlier post, and now everthing is coming out italic. What happens if I put in a . Lets see.

  69. 69 69 Ken B

    I just tried an italic close.

  70. 70 70 Ken B

    Harold, you have slanted the debate. Now I can no longer doubt that this blog leans right.

  71. 71 71 Daniel

    Kirk,

    “My very first reform to healthcare would be to ensure that access to emergency care is available, but not free – though if you can’t pay we’ll wait until you can (if ever.)”

    How is this different than how emergency health is handled now? The problem is in implementing this, it is difficult to determine when people are able to pay? Do we make them pay as soon as they have the available funds to remit payment. Do we automatically doc their pay to pay for the medical bills. Do we wait until they have enough money to pay for their basic needs (housing and food), and than doc their pay? What if they’re unconscious at the time emergency services are rendered, and so have no choice in their treatment? What do we with-hold if they do not make payment? All these questions must have an exact legal answer if we are to implement your plan correctly.

  72. 72 72 iceman

    Daniel – “So we would have a spending problem in this situation. We would be spending less than the social optimum”

    I think it’s safe to say when people talk about “bending the cost curve” the concern is that we’re spending too *much*, not too little.
    I maintain only the govt can “overspend” by printing & borrowing, usually from trying to achieve distributional goals.
    In the case of single payor healthcare it seems the ultimate response is to limit the scope of services available to everyone. That darned innovation is too expensive. Of course it’s also the source of improved basic care over time.
    Personally I don’t find that to be a very inspiring or, frankly, honest approach to addressing our moral obligation to provide the involuntarily uninsured with essential basic care.
    We agree Medicare is the gorilla in the fiscal solvency debate, and that providing coverage through corporations is not ideal, though perhaps for different reasons (e.g. non-portability causes much of the pre-existing conditions issue).

    BTW on “death spirals” – I can’t tell whether single payor advocates think insurers are unable to risk discriminate at all (e.g. so the voluntarily uninsured are depriving others of a “public good”), or they can discriminate so effectively that their own pools unwind one by one. Personally I think it’s possible they can segment people into reasonably defined risk pools (priced accordingly), within limits. To me this would also undermine the claim that some people are being deprived of something. Similarly on asymmetric information – another important theoretical consideration, but in reality I suspect with a few simple tests insurers could likely know as much or more about my health as I do. And it seems many who fret about a “lemons problem” here also freak out about the specter of genetic testing (even examining family history?). Makes me wonder where exactly we acquire a right to withhold such information when entering into what frankly is a very intimate contractual relationship – literally asking someone to take on the financial risks related to most every aspect of our lifestyles etc.

  73. 73 73 iceman

    Mike H – I think an entity that can, for example, assess special taxes on medical device companies is exercising “buyer power” of a nature with which Porter wasn’t really dealing (how’s my grammar?)

    What should we conclude if, say, private purchasers representing around half the market (many of whom have presumably achieved pretty decent economies of scale) are paying X for something and the govt seeks to “negotiate” a lower price? What if, in the case of pharma, part of this “negotiating leverage” involves threatening to pass laws allowing reimportation from countries that openly flout our intellectual property laws and quite literally impose price controls?

    On “lower administrative costs” – it seems clear that systems which can, say, render coverage decisions (read: deny care) with no legal recourse will enjoy some savings…but is that “real”, and what we really want?
    And “encourage” healthier lifestyles – like by banning large sodas or smoking in bars? I don’t even want to imagine what else they do in Malaysia, but does it ever feel like when we find ourselves at the point of controlling behavior we deem too expensively unhealthy, a basic respect for liberty rights requires us to consider the alternative that our moral obligation simply doesn’t require us to underwrite such behavior?

  74. 74 74 Daniel

    iceman, Your point was asking how can we have a spending problem outside of interference from the government? My point was that without any influence from the government it would be possible, and because of the research around death spirals, I say almost positive that we would have a spending problem in a societal sense. We would be spending too little. My point was that this is a primary reason that we don’t have a free market system for insurance, In your example of xboxes and nintendo’s it was not possible to spend too little as it was not possible to spend too much.

    In regards to insurance segmentation, I guess the closest we would have to an example of markets segmenting people on their own would be the individual buyer market. These markets are extremely expensive and offer little benefit for the average buyer. I guess genetic testing and family history could work to properly segment the market and I guess my disagreement with this has more to do with a value judgement than economics. Do we want the unlucky to have to pay for their bad luck? For example, couple x has a child with a disease from birth, that would be too costly for them to ever possibly pay for the treatment. Do we ask society to pay for this unlucky disease or do we ask the parents to go bankrupt? If person y gets laid off from a job and thus loses their ability to pay for insurance, and before they can find another job gets cancer, do we want them to have to bare all the financial responsibility?

    Things I would be morally okay with discriminating for, are those that choose personal activities that are more dangerous. I’d be all for insurance companies being allowed to charge more for those that ride in car rather than take public transportation, ski recreationally, or own a gun. All kidding aside for value reasons, I don’t think allowing insurance companies the ability to discriminate is the best way to go.

  75. 75 75 Daniel

    Iceman,

    Another point about allowing insurance companies to discriminate based on genetics and family history, and I really don’t mean this next question as an insult, I’m just curious.

    Giving preference to those with less costly genetic code, how is this different than Social Darwinism?

  76. 76 76 Henri Hein

    I am late to the party again, and I see I missed a good discussion. Darn! In case anyone is still listening:

    Daniel @42: “We spend vastly more as a percent of GDP than any other 1st world country (including those with similar levels of GDP) and we have about equal healthcare outcomes”

    This is false. It only seems true because we have about the same *health* outcomes — ie, life expectancy. Digging into actual healthcare outcomes, it turns out that the US has about the same outcome for communicable diseases, and *much* better outcomes for non-communicable diseases, as other countries. Any one. If you are going to get cancer, the US is hands down the best country to be in.

    Incidentally, non-communicable diseases are more expensive to treat.

  77. 77 77 Henri Hein

    @Neil #56:

    I have lived in two countries in Europe (Denmark, where I am from, and Ireland), and the US. I can tell you that any day of the week, I much prefer the US system, flawed as it is. This preference is so strong that whenever I hear talk about socializing the US healthcare system, my knees start knocking in fear.

  78. 78 78 Harold

    Henri Hein: “ Digging into actual healthcare outcomes, it turns out that the US has about the same outcome for communicable diseases, and *much* better outcomes for non-communicable diseases, as other countries. If you are going to get cancer, the US is hands down the best country to be in.”

    This can’t really go unchallenged. There is some data that suggests USA does better in some cancers – particularly prostate. This could be because USA screens much more heavily, and so many early stage prostate cancers are diagnosed and the patient survives many years. In Europe, the patient also survives many years, but several of them are un-diagnosed. America does do well in cancer care – better than Europe overall, but not statistically better than the best in Europe, which falsifies the claim that USA is “hands down” the best country to be in if you get cancer.

    But it makes no sense to cherry pick one area of health. There is no evidence to support the claim the USA has “the best healthcare in the world” (not that Henri made that claim, but others do). However, I think there is very good evidence that America spends by far the most in the world. I include a link to one article, but there are many others. Please support your claims.
    http://www.urban.org/uploadedpdf/411947_ushealthcare_quality.pdf

  79. 79 79 neil wilson

    The people in this country who are happiest with their healthcare are the people on the SINGLE PAYER HEALTH CARE SYSTEM called Medicare.

    Canada is able to spend less on its health care because they sit next to the US and can send their excess patients down here. As an American, it ticks me off that I am spending more on healthcare to support Canadians.

    We spend more on drugs in this country than we have to because we are supporting cheap drugs in the other rich countries.

    How can we produce a drug in this country, ship it to Canada, and then ship the drugs back to the US and they magically get cheaper. It doesn’t work with software, why should it work with drugs.

    In any event, when we spend twice as much on healthcare as another country and get, at best, slightly better care, how is that a good thing? I thought people reading this blog actually care about getting what you paid for. I thought you cared about doing what is best and not helping people who don’t contribute.

  80. 80 80 iceman

    74-75: I assumed you were referring to *over*spending (like the 99.9% of people who talk about HS inflation, bending the curve, rising premiums etc.)
    But you also agree Medicare is the biggest budgetary issue we face?

    I’m less interested in cherry-picking cross-country stats than fleshing out starting premises:

    - When you say “insurers shouldn’t discriminate” or “80 people want insurance but only if 20 other (healthier) people are in the pool too”, I hear “we want to pretend things don’t cost what they cost” and “we want to sluff a moral obligation onto private enterprise”. [BTW I always found this an interesting phrase from Arrow’s seminal paper: “Hypothetically, insurance requires for its full social benefit a maximum possible discrimination of risks. Those in groups of higher incidences of illness should pay higher premiums.”]
    - I think we can and would help the poor and unlucky, with or without insurance, via charity and/or a public safety net.
    - I don’t think this requires forcing 300mm Americans into the same pool. I think that’s bad for innovation (i.e. future basic care) and simply wrong if it prevents some people from buying other coverage they would’ve preferred and were willing to pay for.
    - Any approach requires us to make difficult decisions about what is to be considered “basic, essential” care.
    - Politicians don’t like making difficult decisions. Broadening the pool lessens this problem and masks the underlying distribution.
    - There are always theories available to dress down these realities. E.g. ‘death spirals’ are an interesting thought exercise but taken literally it strikes me as a bit silly. To say that not experiencing a low-probability event during a certain period of time automatically qualifies you for a different risk pool seems to me to misunderstand the nature of insurance. And your comment about “social Darwinism” confirms that at least in this instance “we” want the information to be asymmetric (at least those who fear they’d pay more).
    - We agree that corporate provision creates a portability problem. My understanding is that arose from govt interference in the labor market. And at least theoretically, purchasing coverage for a child before it is born (perhaps well before any of your children are born), is how insurance is supposed to work. I’m not entirely sure why it couldn’t or doesn’t work that way.

  81. 81 81 Daniel

    Iceman,

    “- We agree that corporate provision creates a portability problem. My understanding is that arose from govt interference in the labor market. And at least theoretically, purchasing coverage for a child before it is born (perhaps well before any of your children are born), is how insurance is supposed to work. I’m not entirely sure why it couldn’t or doesn’t work that way.”

    So should kids who’s parents aren’t able to provide insurance throughout their childhood be forced to pay more when they enter the workforce? Your version of how health insurance should work seems like it would work only if people always have the ability to pay for insurance, and they for some reason just choose not to. How can we increase the portability of health insurance for those that have no income at the time?

    “Hypothetically, insurance requires for its full social benefit a maximum possible discrimination of risks. Those in groups of higher incidences of illness should pay higher premiums.””

    You’ll have to tell me what variables we should allow companies to discriminate based upon? Should we allow insurance companies to discriminate based on income? Those who have less income tend to be sicker, so if we’re going to “perfectly discriminate” shouldn’t we take this into account? In theory, we could perfectly discriminate so that an individual pays only their own inherent health risk and thus the overhead of the company consumes any risk benefit for the consumer to enter the pool?

  82. 82 82 Daniel

    Iceman,

    Also you keep speaking about how a completely private insurance system will necessarily lead to more innovation compared to our current or a single payer system. I agree that it will lead to innovative ways to profit but not necessarily to improve health outcomes. There are circumstances where these two things work together but also circumstances where they conflict. I think that in general the less competitive an industry is, the less likely it is to innovate through private means. What would a perfectly competitive market for health care even look like? In your answer be sure to address having infinite buyers and sellers, zero entry and exit barriers, perfect information, zero transaction costs, and homogenous goods. Then after you’ve finished that thought experiment, tell me if you think it would be possible or even preferable to the current or alternatively a single payer system.

  83. 83 83 John K

    of course, what you meant to argue for was the passage of a budget (which can set the caps for spending) and not for the presence of a debt ceiling. It seems quite silly to me to contend that deficit mistakes are in one direction only. Even if you personally don’t believe it, there is no consensus on the matter, right? I would have preferred to see smaller surpluses as we approached 2000, and I would have preferred to see larger deficits over the period b/w 2008 and 2010 at the very least. In other words, I would have preferred a debt floor for those particular years to a debt ceiling. Active buying back of debt by the Treasury after the 90s surpluses? Get real!

  84. 84 84 Daniel

    John K,

    Let’s see what happens with the experiment in Japan. If they bust out of their deflationary cycle after years of low inflation, we’ll have essentially solved the only remaining question with liquidity trap recessions.

  85. 85 85 iceman

    How do we get rid of the stupid italics? Harold help. Eventually just abandon the post I guess. But first one more go:

    Daniel – “the less competitive an industry is, the less likely it is to innovate through private means”
    Is there a less competitive model than single payor?
    Also I still don’t understand if you think we’re underspending or Medicare is a big budgetary problem.

    I haven’t argued that HC fits the perfectly competitive model (few things do…should they all be socialized?), or for a “completely private system”. Straw men begone. Rather you seemed to suggest that the other end of the spectrum, single payor, is the way to go (without defending every possible assumption involved with that claim).

    The quote from Arrow (not mine) pretty clearly refers to differentiating based on level of health risk. Of course hospitals routinely discriminate based on income, in a ‘good’ way – it’s called charity care and even the for-profits’ bad debt expense is typically 10-15%.

    It just seems like an uncontroversial fact that people who want but cannot afford a certain “basic, essential” level of care need help. In those cases it has little to do with the normal norms of private enterprise, and as I said I believe “we can and would help the poor and unlucky, with or without insurance, via charity and/or a public safety net.” I sincerely wonder why it seems we go to such lengths (e.g. ‘transforming’ the system for everyone) to avoid calling that what it is? Are we that afraid we won’t honor a moral obligation if we identify it as such and acknowledge the true costs openly?

    PS – it’s not clear that those with less income tend to be sicker – if merely younger they may be healthier.
    - On corporate provision my point was there are simpler ways to address the portability issue, like leveling the tax deductibility. I thought at a minimum we might agree on that.
    But it’s also not clear people currently pay more when they’re employed. Do you mean more than zero (where able) for things when they reach working age, as with housing and food?
    - Overhead is part of the cost of operating any viable organization. There may well be excess, but I suspect much of this is due to regulatory mandates which “we” presumably wanted.
    Again the govt can avoid the costs of some (legitimate and necessary) business functions, e.g. by not bothering with underwriting risk and not providing any process for settling disputes. But this is really just shifting costs into other forms.

  86. 86 86 Ken B

    “How do we get rid of the stupid italics?”

    Eugenics. Slow but steady.

  87. 87 87 iceman

    84 – I think 20 years was a little closer to the “long run” than Keynes had in mind.

  88. 88 88 Daniel

    iceman,

    “Also I still don’t understand if you think we’re underspending or Medicare is a big budgetary problem.”

    I don’t think that we’re underspending, I believe we’re overspending but I believe in a completely unregulated health market we would be spending less than the social optimum. I think that Medicare is a budgetary problem because we have an aging population and our tax rates are still written for when we had a growing young population (possibly an argument for increasing legal immigration for the young).

    “I haven’t argued that HC fits the perfectly competitive model (few things do…should they all be socialized?), or for a “completely private system”. Straw men begone. Rather you seemed to suggest that the other end of the spectrum, single payor, is the way to go (without defending every possible assumption involved with that claim).”

    I know that most markets don’t meet these requirements, but I think that health care fails all of the assumptions spectacularly. If you’d like a more detailed response that goes point by point through each of the assumptions I can provide that, but I think you can do the exercise on your own and come to the same conclusion. My general argument is that the closer markets are to perfect competition, the less regulation they’ll need, and the farther away markets are from perfect competition, the more regulation they’ll need. A good government should reflect the social desires of those they represent, provide public goods, and account for the costs of externalities. I think uncompetitive markets will not meet the social optimum, and that governments can make adjustments towards the social optimum.

    “It just seems like an uncontroversial fact that people who want but cannot afford a certain “basic, essential” level of care need help. In those cases it has little to do with the normal norms of private enterprise, and as I said I believe “we can and would help the poor and unlucky, with or without insurance, via charity and/or a public safety net.” I sincerely wonder why it seems we go to such lengths (e.g. ‘transforming’ the system for everyone) to avoid calling that what it is? Are we that afraid we won’t honor a moral obligation if we identify it as such and acknowledge the true costs openly?”

    The reason Medicare and Medicaid were set up, was because we didn’t provide these things normally through charity and a public safety net. IF you believe that we will somehow all meet the requirements of helping those in bad luck via charity, why are so many families forced into bankruptcy to pay the medical bills for their loved ones?

    “PS – it’s not clear that those with less income tend to be sicker – if merely younger they may be healthier.”

    Low income populations consistently have higher rates of cancer and infection. Would you like me to provide a source for this?

    “Again the govt can avoid the costs of some (legitimate and necessary) business functions, e.g. by not bothering with underwriting risk and not providing any process for settling disputes. But this is really just shifting costs into other forms.”

    I agree that the government needs to have some requirements for when and how people are able to get care. I also think that it isn’t much different to let the government choose these things then to let insurance companies choose these things, except that private companies are motivated by profit, while governments are motivated by budget constraints. I also think that mixing profit motivations with deciding whether or not someone should receive a treatment may lead to negative externalities. My argument is that in a single payer system, if anyone wants more than what the government is willing to pay for they can pay for it out of pocket or buy supplementary insurance

  89. 89 89 iceman

    Good discussion of first principles. (BTW I might be with you on immigration.) Frankly I think Medicare is a budgetary problem because politicians are inherently incapable of setting those parameters responsibly (at best “it takes a crisis”). The incentive to use this as another redistributive tool is too great. I don’t see how (arbitrarily) expanding the govt pool wouldn’t make that worse. You say:

    “in a single payer system, if anyone wants more than what the government is willing to pay for they can pay for it”

    1) but the first question is why include those who can purchase their own coverage? Seems like another solution that’s bigger than the problem. Isn’t it more transparent to just have a public plan for those who need it? [Note Soc Sec forced everyone to participate to increase *political* support for the program, i.e. everyone had a (contrived) “vested interest”.] Even where we think markets need regulating, shouldn’t we try to harness as much of the virtue of competition as we can? I note the ACA rates better on this score than single payor – to me that’s not regulating it’s usurping.
    2) it’s simply not that neat & tidy – as you note people’s preferences are not homogenous, so the cost of the subsidization is that at the margin you preclude many from purchasing coverage for things they want.

    “A good government should reflect the social desires of those they represent, provide public goods, and account for the costs of externalities”
    “Social desires” makes me nervous. I define “public goods” as things people can’t do, not just choose not to do. I think we often stretch the meaning of “externalities”. Many of our actions affect others, but in most cases people have the right to their preferences and don’t incur some “positive right” to take different actions just because that might benefit others. You can argue that people impose HC costs on others, but to me a self-imposed moral obligation is quite different from something like pollution.

    “I think that health care fails all of the assumptions spectacularly”
    I might be more easily persuaded if we didn’t have restrictions on interstate competition, all manner of mandates, collusive supply (licensing) restrictions as Arrow noted etc.
    I know the big thing about HC is supposed to be complexity and uncertainty, but I also see markets deal with lots of things and devise clever solutions like advisors & agents.
    (And Arrow was writing long before the Internet came along.)

    “I also think that it isn’t much different to let the government choose these things than to let insurance companies choose these things”
    It seems categorically different to me. Insurers don’t “choose” for everyone, consumers choose what they want coverage for (to the extent they’re allowed to) and then insurers enforce the limits of those contracts. (“Rescission” is a different matter.) Of course they try to do so cost-effectively within that context, but when people talk about “profit motive” as a wasteful or harmful thing here I still wonder why that same reasoning wouldn’t apply to just about anything else.

    On the bankruptcy thing, to be honest (at the risk of sounding callous when discussing any of these things) this has always seemed like a bit of a red herring to me. What exactly is the social cost? The personal cost is proportionate to the amount of assets one has, and only comes into play where one apparently did not have sufficient assets / income to obtain (or else chose not to obtain) catastrophic coverage.

  90. 90 90 bigjeff5

    Daniel – “those who have less income tend to be sicker”

    So I saw this statement and it hit me that that’s a really heavy prior to be following without supplying any support, so I did a little research (very little, it’s a hot topic with lots of compiled information available).

    Turns out it is, for the most part, true according to more than a few studies listed in the wikipedia article on economic inequality*.

    Funny thing though, the differences within populations hold regardless of the level of economic inequality. Also, populations with the lowest inequality among members of that group had the lowest death rates of all groups, and populations with the highest inequality among members had the highest death rates of all groups. By that I mean the 4th quintile (least equality) had 100 more deaths per 100,000 members per year for all income groups than the 1st quintile (most equality). It scaled nicely between them for quintile 2 and 3. Within each quintile, the story was identical: upper class had by far the lowest death rate, upper middle had the next lowest, lower class had barely higher death rate than upper middle, and lower middle class had by far the worst rates. A plausible explanation for the odd breakdown is that lower class has access to more free care than any other group, and so death rate goes down, but lower middle both can’t afford care and cannot get handouts.

    Other studies mentioned in the article confirm this somewhat odd relationship regardless of country or healthcare system (i.e. the UK had the exact same profile, just different numbers).

    This suggests to me that, while the statement “those who have less income tend to be sicker” is technically true, it is a red herring. The real prior we should be working from is “social groups with less equality tend to be sicker”.

    So what’s the best way to get low inequality? And are there limits where the pursuit of equality actually reduces average health? For these questions I have no idea.

    * http://en.wikipedia.org/wiki/Economic_inequality#Population_health

  91. 91 91 Daniel

    Iceman,

    “On the bankruptcy thing, to be honest (at the risk of sounding callous when discussing any of these things) this has always seemed like a bit of a red herring to me. What exactly is the social cost? The personal cost is proportionate to the amount of assets one has, and only comes into play where one apparently did not have sufficient assets / income to obtain (or else chose not to obtain) catastrophic coverage.”

    I guess I see not having the ability to purchase catastrophic insurance, and being one of the unlucky enough to get cancer or another costly disease as not a reason we should let people lose their home. I guess we may never come to an agreement on this matter. I think that people don’t always plan appropriately, not because they don’t want to be protected in the case of catastrophes but because humans tend not to be very good at planning ahead in general, or don’t have the means to plan ahead (when you’re worried about keeping a roof over your kids head, you sometimes don’t think about the risks associated with losing your job and not being able to pay for insurance out of pocket from savings).

    “I know the big thing about HC is supposed to be complexity and uncertainty, but I also see markets deal with lots of things and devise clever solutions like advisors & agents.
    (And Arrow was writing long before the Internet came along.)”

    How many people who took out subprime mortgages do you think had advisers and agents? I still think you’re not properly taking into account the affect information asymmetry in insurance company discrimination. You may be right that the reason we create social insurance programs, that include those that don’t need to buy it is to give them a vested interest in keeping it going, but I’m not sure this is always a bad thing. If the Pareto optimal level of health care can not be obtained through entirely private means, I’m also not sure that stake holders will provide for the Pareto Optimal level of health care without thinking they have a stake in the matter. It’s also very costly to determine, which population are currently in need of help with regards to financing their health care.

    “Of course they try to do so cost-effectively within that context, but when people talk about “profit motive” as a wasteful or harmful thing here I still wonder why that same reasoning wouldn’t apply to just about anything else.”

    I think this applies to goods relative to close they are to perfect competition. For example, oligarchical industries are heavily influenced by planned and perceived obsolescence. Is it okay to regulate these markets to protect against this profit motivating behavior, or is it not okay? More perfectly competitive markets don’t suffer from this problem.

  92. 92 92 Daniel

    bigjeff5,

    Thanks for clarifying my statement. I guess my question is then, should this be something we allow insurance companies to discriminate based upon, which was the original intent of my statement? If we’re going to start allowing the market to discriminate based on factors, we need to know what is off limits and what is okay to discriminate based upon. So let’s say we discriminate based on income quartile. Wouldn’t we be making insurance virtually impossible for those with the lowest income to obtain? Iceman thinks that it shouldn’t be too hard for the market to segment into groups, whereas I think that it would be extremely hard for the market to segment if we begin to set rules by which they can discriminate.

  93. 93 93 Harold

    Don’t know about the italics. I just put an i in less than and greater than brackets, followed by an italic close. Don’t know why it has not understood the close.

    Interesting point about incentives and markets has come up recently. UK has lower survival rate for some cancers in part because people do not go to the docs early enough because they don’t want to waste the doctors time. This is the reverse of the predicition of simple economic theory, which I have seen in these comments somewhere, that if you make healthcare “free” people will over-use medical services.

  94. 94 94 Man in the Middle

    One of the principles taught by Dave Ramsey for getting our own finances in balance is to cut up the credit cards and pay cash, because it hurts more to see cash going away than to swipe a card.

    If Congress wants this country to be free and prosperous, Ramsey would say it needs to do the same — stop deficit spending and start living within its means. Even Lord Keynes didn’t believe in a government ALWAYS spending more than it takes in.

    Short of a balanced budget amendment (which I would support), regularly hitting a ceiling on borrowing is about the only thing still preventing whichever party is currently in power from setting fire to our grandchildrens’ future, especially now that our Senate no longer even pretends to pass an annual budget.

  95. 95 95 Daniel

    Man in the Middle,

    If you’re going to use individual debt in justification for lowering the deficit, let’s talk about what financial advisers would tell an individual. The safe zone for debt for individuals is less than 300% of income. What percent of GDP do we own in public debt? More seriously, there are many differences between government debt and individual debt. Governments can sell debt in a currency they can print themselves, they can perpetually refinance at lower rates, and they have no guaranteed expectation of imminent death (Bond holders don’t seem to think that the US government is going out of business anytime soon). Sorry, but things that apply to individuals don’t necessarily scale to governments. There are reasons to reduce the deficit over the long term, but not in a depressed economy.

  96. 96 96 iceman

    91 – Actually I think personal bankruptcy is designed to help people keep their homes (a budget is set which gives preference to mortgages and other secured debts).

    But I think we have identified a basic difference: to the extent we use govt to perform charitable functions, should we try to target policies to those actually in need and/or otherwise “deserving”, in order to retain some level of incentives for responsible behavior on the part of those who could choose to take reasonable precautions? (Note this can be entirely consistent with a desire to help people in the best way over time.) Or do we simply presume (for practical or other reasons) that the exceptions are the rule and more generally people are hardwired to be incapable of XYZ? To some this seems dangerously self-fulfilling, and gives rise to the terms “cycle of dependency” and “nanny state”. In this case, I wonder if you think it’s right or prudent or “fair” to make any attempt to differentiate between the involuntarily and voluntarily uninsured in terms of what is provided or promised? (Again, as an example I’m wondering out loud here how we categorize someone who has a meaningful amount of resources at risk of bankruptcy, but does not use a portion of those resources to obtain catastrophic coverage. Perhaps in different times or circumstances some people have even made their initial housing decisions so as to preserve resources for such contingencies?) Of course nobody wants to be bothered with thinking about insurance, so perhaps an economist would expect that if we tell people they don’t have to worry too much about it, they won’t (whether or not they are capable). On the other hand, it seems to me that familiarity with even one example of negative consequences can cause people to seriously rethink whether such planning is worth a little effort after all. I guess I have a hard time simply assigning helplessness to most people.

    PS Some (like the Austrians) think the textbook model of perfect competition is not necessarily the real-world gold standard from which all deviations are prima facie evidence of a need for regulation. It could be that the *process* of discovery and experimentation is what is most important for creating wealth and raising living standards. Once again I think at a minimum our ability to improve on things without unintended consequences is best considered with a sufficient degree of humility.

  97. 97 97 Daniel

    Iceman,

    The other basic difference is that I think that you think that an unregulated health insurance market could properly allocate into groups and I still have profound reservations on this account. For example, before Medicare, 50% of seniors did not have health insurance, and 35% lived in poverty. Could this high a percentage of seniors just be irresponsible? I think this must have had a lot to do with adverse selection problems, and some to do with not knowing what the costs of health would be 40 years in the past. Can you point me to some work by Austrian schools that used actual data? So far I haven’t found any? Also unlike you I’m not convinced that creative discovery doesn’t occur in government. I just think it’s easy to blame all problems on the government because we see how badly it went in Russia and China and Cuba when the government controlled industry and we assume that any intervention must be bad. Until I find data that supports the Austrian postion I’m inclined to believe that some level of balance, between letting free markets work on their own in competitive circumstances and having some level of intervention n markets which are less competitive is the best way to go.

    As to your point about nanny state, I’m not entirely sure what you mean? What benefit other than food stamps and healthcare can someone receive after 5 years of their maximum on TANF? I agree that this creates an incentive to remain at the bottom and keep your health insurance. Wouldn’t a single payer system remove some of this incentive to remain below a certain level of income, since you’ll remain insured no matter what?

  98. 98 98 Daniel

    Iceman,

    I just did a little bit of research and it seems to me that the more generous welfare states are more likely to provide for more economic mobility, supporting my last statement that more intelligently designed welfare systems create higher economic mobility.

    http://en.wikipedia.org/wiki/Economic_mobility#Worldwide

  99. 99 99 iceman

    The beat goes on…

    We seem to be lumping together “discrimination” based on income and health risk, and as a result I’m a bit confused at this point as to whether you’re calling it a case of failure when a market doesn’t serve people who cannot pay? Taking your stats at face value, to me 35% of seniors below the poverty line means a lot of people simply need help (buying health care and everything else). I’m certainly not attributing that to irresponsibility. I did suggest that insurers could differentiate based on *health risks* (where we allow them to), certainly to a greater extent than implied by the claim that the voluntarily uninsured deprive others of a “public good”. (As I mentioned I also think this stretches the notion of public good to assert “positive” rights on the actions of others).

    I agree it’s not all or nothing on regulation, it’s a spectrum. By “nannying” I guess I refer generally to designing policies more broadly than required to directly address a perceived need, e.g. lumping together the needy, irresponsible and responsible. This can create a self-fulfilling dynamic, and sometimes involves a view that we simply know what’s best for others (aided by new cognitive theories or conceptions of externalities). This can go beyond providing benefits to “shaping” behavior in lots of different ways. BTW I’m not an expert on Austrian economics but I do think there’s more to competition than the theoretical PC model. For govt I think the starting point is that the incentives are very different, and most regulation is intended not to promote “creative destruction” but to alleviate distributional concerns over its effects (where these are serious enough to warrant sacrificing some LT growth).

    Your point about “more intelligently designed welfare systems” I think ties in with the discussions in the post on “stress test”, and I think there are some plausible points to be made there. I would just say this is different from simply “more generous” which is what can create “an incentive to remain at the bottom”.

  100. 100 100 Daniel

    Iceman,
    If there’s a better falsifiable model than PC, I think that needs to be stated clearly so that we can test it. If there’s a better understanding about the qualifications that make markets work, I’d like to hear them. From what I know about Austrian economics they make assumptions without falsifying any hypothesis or using any data but I’ll keep searching for an Austrian study which does this.

    I’m not saying it’s a market failure when people can’t obtain insurance, although when lot’s of sick and poor people have to worry about how they’re going to pay for medical bills I would say this is a socially undesirable outcome. I do think it’s a market failure when there’s asymmetric information between buyers and sellers. For example, I could be in perfect health but really enjoy skiing, running across three lane highways, playing tackle football with no pads, etc. If I do so and we’re only looking at *health risks*, I can enter a risk pool that costs on average less than my true risk value.

    And like I said, I think single payer would be a system with less of the perverse incentives to remain at the bottom, since insurance is not conditional on remaining at a low level of income. Obviously we shouldn’t provide most classes of goods this way, I just think health care insurance is unique, and that might have something to do with that it involves whether people live or die (yes I know we provide emergency care in any case, but I’m more worried about people choosing not to go to the doctors because they fear financial consequences and end up at the emergency room a year later with stage 4 cancer). Perhaps this part does tie into Steve’s discussion about “Stress Tests”.

  101. 101 101 iceman

    - Perfectly efficient and benevolent govt is a pretty easily falsified model as well
    - Unlike “market failure”, “socially undesirable outcome” is not by definition a call for govt action
    - If an insurer could use GPS technology to do a better job of tracking the “covert” health risks you describe, and adjust your rates accordingly, would you object?
    What if they asked you if you ski, you say no, you then go skiing and break your leg and they deny coverage?
    The point is again I think much information is asymmetric because we want it so.
    - Since insurers have dealt with adverse selection and moral hazard problems for centuries, “complication” is better than “failure”.
    I suppose in a sense govt can avoid adverse selection by not “discriminating” and putting everyone in the same pool (even coercively); but this arguably makes moral hazard worse.
    - We means test all kinds of programs with sliding scales etc. so I think we’re overplaying the “remain at the bottom” problem (at least if we think “intelligently designed welfare systems” is not a complete oxymoron). But I think you do touch on the fact that the “uniqueness” of health care may be primarily that we just think the stakes are higher. Of course this is partly because it’s simply the visible end result of many other health / lifestyle decisions people make (and which we choose to underwrite). The “live and die” hyperbole is also why we have such difficulty designing public policies that set sustainable parameters.

  102. 102 102 Daniel

    Iceman,
    I think you confuse what a falsifiable model is. Also, at what point did I imply that government is perfectly efficient or benevolent?

    Okay, so who gets to decide on which information we allow companies to use and which information we don’t allow them to use? Where is the line drawn? Do we let the insurers decide? This will lead to them wanting to re-evaluate your health risks every year, you can refer to the wiki on death spirals for more information on that. If we agree that we can’t let the companies decide, than who makes that decision?

    In what way does putting everyone in the same pool make moral hazard worse? explain please.

    The fact that Medicaid coverage is discrete makes it much more difficult to provide benefits based on a sliding scale. Obamacare tries to implement some form of sliding after the Medicaid threshold but I still think it’s too discrete to make the curve smooth.

    Define sustainable parameters? I think there’s great difficulty in defining the value of a life. I guess that difficulty may make it hard to determine where the marginally beneficial amount of spending lies, for governments and equally for individuals making decisions. Is my life worth the total amount of all wages from birth to death or more? This is a difficult question to answer.

  103. 103 103 iceman

    - You seemed to imply that any deviation from the PC model is a potential justification for govt intervention, but we agree that few real markets literally fit that description i.e. we’ve already “falsified” it. You further allow that most goods shouldn’t be provided by govt but rather argue there is something “unique” about HC, so the whole thing seems like a non-starter. I’m suggesting the benefits of competition may run deeper and even the “imperfections” need to be weighed against the real world shortcomings of govt intervention (e.g. public choice theory). We agree it’s a spectrum, my point was you seem to be demanding different standards of ‘empirical rigor’ at the two ends.

    - I think ‘we’ can decide politically that we don’t want companies to use certain information based on distributional or ethical concerns, but in that case we should be open about it and not claim as justification a contrived “market failure” due to the resulting ‘asymmetry’. Otherwise I guess by definition insurers would decide for themselves which of the remaining “allowable” sources of information are useful for risk categorization and which aren’t. Again the death spiral scenario seems similarly contrived, e.g. why couldn’t markets create options analogous to “term” life insurance that cannot be rescinded annually?

    - Moral hazard involves a change in behavior after you issue a policy, so it seems to stand to reason that a) insuring people who did not previously have insurance (which may nevertheless be an appropriate policy goal), and b) forcing others into a pool that includes coverages they may not have been looking to purchase previously (not as clearly appropriate a goal), will affect more such changes in behavior. On further thought, single payor actually seems neutral with respect to the adverse selection issue (which involves pre-existing characteristics rather than behavioral changes) by simply putting everybody in.

    - At a minimum your description of Medicaid does not make it sound particularly “intelligently designed”.

    - To me “sustainable” means defining an appropriate set of “basic, essential” services to be covered as public assistance. (Innovations can still become part of the “basic care” basket over time.) Certainly this involves decisions that are very difficult, but still necessary. Introducing rhetoric about “the value of a life” seems mainly to make this a much more difficult political problem.

  104. 104 104 Daniel

    Iceman,
    It’s been a really nice discussion with you. By a falsifiable model I just meant testing hypothesis, which it seems Austrians while interesting are lacking since I haven’t been able to find a really good paper that’s tested their models. I think Milton Friedman was confused by them as well. I don’t think you could set up a formal statistical test to see whether or not governments are perfectly efficient or benevolent but there’s so many obvious examples why they’re not that even if you could your conclusion would probably be met with, “so what?” I do acknowledge that there are costs to having the government run the any market, but I think the costs of leaving it to the private sector are much larger than the costs to single payer in this case.

    I think we have decided politically where the line is and it happens to be not allowing companies to discriminate based on pre-existing conditions or other health risks. There’s no other way to keep companies open in the market in this case then to force everyone into the pool. I think comparing to term life insurance is a poor example since it involves a known one time payment, and information is much more symmetric.

    I think moral hazard is a problem for health insurance in general. Why is this a government insurance problem? Generally I think moral hazard arguments on the part of the user are over-rated, and looking across countries shows that it tends not to add much as a percent of GDP to healthcare costs. By neutral, do you mean that there is no adverse selection problem in single payer since there’s no selection?

    When did I imply Medicaid was an intelligently designed system? I was saying that single payer would be an improvement over this mixed public/private system that we have in terms of incentives to move up.

    What’s your definition of “Basic, essential”? I define “Basic, essential” to be giving people cheap access to preventive care via their primary care physician, emergency care, care in the case of cancer or other chronic conditions especially at earlier stages so it won’t be extra costly later, and access to prescription drugs because they’re Loy’s of times cheaper than the alternative. I think at least considering the “value of life” is important, and I wasn’t tryng to inject emotion into the debate. QALY’s are used all the time by health economists to determine whether a procedure is worth the risks associated with them. How else do you suppose we divy out our limited health resources? Imagine there are 2 people in critical condition and only enough resources to try an expensive procedure on one of them (person x and y). There’s a 90% chance that you can save person x and that they’ll live another 40 years if successful. There’s a 10% chance that you can save person y and they’ll live another 2 years? Should the decision of who to try the procedure on be based on who has insurance, the value of their expected remaining lives given the procedure, or some other valuation? A completely market based system would give the procedure to the person who has the insurance to pay for the procedure, and completely ignore the associated much higher benefit received by person x.

  105. 105 105 iceman

    I’ve enjoyed it too. I don’t know nearly enough to offer a definition of what should be considered “basic, essential” services, but the concept exists. Yours sounds like a fairly reasonable (but obviously vague) starting point.

    I think we have similar goals but differ over the “necessary and proper” means. I also think language and transparency are important, e.g. when we’re talking about “discriminating” based on pre-existing conditions, in all honesty we’re simply past the point of having a meaningful conversation about “insurance”. But political decisions are often based on expediency. Broadening the pool is redistributive, and we may couch it in terms of “public goods”, but at the end of the day it seems the answer to “why force people into a pool who do not need to be forced into that pool?” are either “for their own good” or “for the benefit of others”, and neither feels good in a system that is supposed to uphold a basic respect for liberty. We can be open about our public moral obligation, or get into controlling behavior and restricting choice.

    So on your ‘x-y’ example, 1) there’s no “completely market based system”, again there are people who need help and people who don’t; and 2) I think people who pay for medical services (including through actuarially sound insurance) allocate the resources to that particular market that they consume. For ‘x’ we need to decide how many more resources our moral obligation guides us to direct there (the situation you describe certainly sounds compelling — perhaps subject to some tricky “value of life” calculation?). But denying ‘y’ care they want and have paid for (or would have paid for had they been allowed to) is too Hobbesian for me under almost any circumstance.

    Yes I think adverse selection is not “solved” by merely selecting everyone; the “adverse” are on the public rolls either way. In terms of moral hazard, “discriminatory” premiums provide about the only real source of incentives we have for people to assume more responsibility for their own health (once again alternatives tend to get into things like mandatory checkups). Last if not least, I fear the impact on the future of improved “basic care” from anything that threatens the innovation that other systems are free-riding on. Those costs could be very large over time.

  106. 106 106 Daniel

    Just one clarifications. “Adverse” selection refers to the “Adverse” being more likely to be selected. In single payer, they’re no more or less likely to be selected.

    Actually the x-y example happens all the time. Should we allocate the replacement heart to the 21 year old who just got out of college but doesn’t have insurance because they haven’t found a job yet, or the middle class 79 year old millionaire who would pay any price for the heart? The 21 year old is subject to a budget constraint but we know that heart is a lot more valuable to them than to the 79 year old. The 79 year old retired millionaire who’s money is worthless to them would pay any amount for just 2 more years of life. Under what calculation should we give the 79 year old the heart?

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