Public Health & Economic Literacy

My former research assistant is now pursuing a master’s degree in public health at Harvard. She recently blogged about her economics course:

During econ class today, the professor explained in great detail the ways in which the federal government tinkers with agricultural output, like price floors and crop restriction and so forth. A lot of my classmates were genuinely surprised at the extent to which government messes with food production to placate the farm lobby, and that, in turn, surprised me. I thought most people — or most well-educated grad students and medical residents, who make up my class — knew all about concentrated benefits/diffuse costs, and why we probably pay more for milk than we should. At one point, a student from India, astonished, said, “You mean the government actually sets aside these funds every year for this purpose?” Professor: “Of course not. We run deficits.”

Again, these students made it all the way to Harvard without any exposure to such things. Makes me wonder if any research has been done on the economic literacy of the public health profession. (E-mail me mcannon [at] cato [dot] org" href="mailto:mcannon [at] cato [dot] org">here if you’re aware of any.)

Let’s just hope that Adrienne’s econ class is a required course.

Concealed Weapons

The Associated Press reports:

When Susan Kuhnhausen returned home from work one day earlier this month, she encountered an intruder wielding a claw hammer. After a struggle, the 51-year-old nurse fended off her attacker by strangling him with her bare hands. 

I hope she isn’t arrested for possession of dangerous hands.

Furmanology

CHICAGO—The only nice thing about being stuck on an airplane (aside from free soda) is the chance to catch up on one’s reading. On this trip, I (finally) turned to Jason Furman’s article “Our Unhealthy Tax Code” from the premiere issue of Democracy. I address Furman’s objections to health savings accounts in a recent paper. (Refreshingly, we actually agree on one or two things.) But Furman also commits what I think is an important error when discussing tax deductions for health care. 

Congress exempts employer-provided health benefits from income and payroll taxes, which costs the federal government an estimated $200 billion per year in lost tax revenue. Furman describes this as the federal government “spending approximately $200 billion annually in subsidizing employer-provided insurance.” But that is flat incorrect. A tax deduction allows workers to keep more of their own income, provided they engage in a desired behavior — in this case, obtaining employer-sponsored health insurance. It is not government spending because the government cannot spend money that it never possesses. Nor is it a subsidy, because to subsidize means to transfer resources, and again the government never possesses those resources. The tax deduction may have the same effect on government revenues (and the economy) as government spending for the same activity. But that still doesn’t make it spending

Suppose I robbed Peter and gave his money to Paul. Suppose alternatively that Peter gave his money to Paul because I threatened to punch him in the nose unless he did. In the first scenario, I would be spending Peter’s money on Paul. But in the second, Peter would be spending his money on Paul.  I wouldn’t be spending anything. I merely would be threatening to assault Peter unless he did what I said. 

A more precise way of describing such tax deductions would be to say that they create price distortions between favored and non-favored activities. If a health insurance policy and a plasma TV each have a nominal price tag of $5,000, the fact that health insurance is tax-deductible reduces its price relative to the TV. (If the price distortion is greater than my preference for the TV, the tax deduction will induce me to consume the less-valued option, creating economic losses.)

The distinction might seem semantic, but it has important normative implications. Furman despises the tax deduction for employer-sponsored health insurance on equity grounds: The wealthy get larger tax deductions than lower-income workers. (I despise it too, for different reasons.) A government spending program that disproportionately subsidizes upper-income workers would be offensive to more people than a policy that merely lets some workers keep more of their own money. The former description suggests (assumes?) that the money belongs to the state, and that the state has the right to spend it on something else at its discretion. The latter suggests (correctly) that the money belongs to the people who earned it, and for the state to spend that money would require a $200 billion tax increase.

To anticipate a predictable objection, I am aware that the federal government itself prefers the former description, and the term tax expenditures. It is hardly surprising that the federal establishment chooses the description that presumptively increases its claim on society’s resources. That it is a convention makes it no less incorrect.

More Evidence on Coinsurance and ‘Skimping’

PHOENIX—In a recent paper on common criticisms of health savings accounts (HSAs), I discussed the concern that, since HSAs encourage greater price-sensitivity, they will encourage patients to forgo necessary medical care. I found that most of the evidence points to the opposite conclusion: Price-sensitive patients do not seem to “skimp” on necessary care.

The latest issue of Health Affairs includes an article that adds more weight to that conclusion. Dana Goldman and colleagues examined the effect of different levels of cost-sharing on privately insured patients with at least two of the following diagnoses: cancer, kidney disease, rheumatoid arthritis, and multiple sclerosis. The out-of-pocket costs for specialty drugs that treat these diseases can be quite high. For example, median out-of-pocket drug spending for cancer patients was $336 dollars (in 2004), but ran as high as $12,000 for some cancer patients.

What was striking about this study was that greater cost-sharing did not cause those patients to cut back on their drug expenditures. According to the authors:

[C]oinsurance did not significantly affect the level of spending at all once a patient initiated specialty drug use. What is most striking about these results is how inelastic demand is — that is, how insensitive patients are to price — in comparison to traditional pharmaceuticals, for which it is not uncommon to see responses of 30–50 percent when copayments double.

For emphasis, the authors include the following figure, which shows pharmaceutical spending among kidney patients as a function of the coinsurance rate:

Effective Coinsurance Rate For Kidney-Related Products And Spending, 2003–04

The coinsurance rate seems to have little effect, which suggests that when patients need medical care, they don’t cut back when exposed to more of the cost.

Despite these results, the authors argue against greater cost-sharing for specialty drugs, both because the drugs tend not to be used by patients who would not benefit, and to protect those patients from financial hardship. Yet that recommendation does not seem to follow from their findings. First, those drugs may not be subject to overuse at present. However, as the authors recognize, the market for specialty drugs is set to expand dramatically, which increases the potential for moral hazard when cost-sharing is low. Second, if those patients are suffering serious financial hardship, it isn’t apparent from this study: They are still able to obtain the drugs they need.

The authors seem to have a preference for pooling the cost of specialty drugs — which is fine. Personally, I’m agnostic: I think consumers should make that choice according to their own preferences. But this study’s empirical results do not illuminate whether it is better to have individual patients bear those costs, or to have those costs borne by the entire insurance pool — an option that could possibly make coverage unaffordable for other patients, whether now or in the future.

More on the Ideological Neutrality of Behavioral Economics

Below, Mark links to a fascinating-looking paper pointing out that government regulators are human, too, and therefore subject to the same cognitive foibles as the rest of us.

It might seem pretty surprising to Cato-style classical liberals that this sort of application of behavioral research didn’t immediately leap out to researchers. But on reflection, it makes sense that the first bunch of policy implications to be suggested from a new area of research will tend to reflect the ideological preferences of the investigators. This need not imply any kind of willful axe-grinding bias. This kind of unwitting bias, in fact, illustrates a few of the main points of behavioral economics: We don’t have unbounded cognitive capacities, the mind uses lots of quick and dirty rules of thumb, and we can’t count on those speedy cognitive tricks to conform to canonical standards of rationality. Even brilliant economists and sage government regulators simplify the complexity of the real world by passing it through sometimes shoddy ideological filters — even while attempting to draw out the implications of that very phenomenon.

Here are a couple more examples of papers drawing on behavioral research that don’t have an obvious ideological tendency. In a paper under review at Public Choice, “Behavioral Economics and Perverse Effects of the Welfare State” [doc], Bryan Caplan and Scott Beaullier write:

Critics often argue that government poverty programs perversely make the poor worse off by discouraging labor force participation, encouraging out-of-wedlock births, and so on. However, basic microeconomic theory tells us that you cannot make an agent worse off by expanding his choice set. The current paper argues that familiar findings in behavioral economics can be used to resolve this paradox. Insofar as the standard rational actor model is wrong, additional choices can make agents worse off. More importantly, existing empirical evidence suggests that the poor deviate from the rational actor model to an unusually large degree. The paper then considers the policy implications of our alternative perspective.

The policy implications would make Charles Murray smile. And here is a working paper by Daniel Benjamin, Sebastian Brown, and Jesse Shapiro showing that

… higher cognitive ability — especially mathematical ability — is predictive of much lower levels of small-stakes risk aversion and short-run impatience. For example, we calculate that a one-standard-deviation increase in measured mathematical ability is associated with an increase of about 8 percentage points in the probability of behaving in a risk-neutral fashion over small stakes (as against a mean probability of about 10%) and an increase of about 10 percentage points in the probability of behaving patiently over shortrun trade-offs (with a mean of about 28%).

And what are we to make of that? The authors somewhat tepidly suggest that better education might improve poor cognitive ability a bit, though they recognize that differences in ability run deeper than differences in schooling. More intriguingly, their results go to the heart of the currently raging inequality debate. Because the more “cognitively able” are less likely to make errors relative normative standards of risk and expected utility, they’re likely to do better at choosing the elements of an investment portfolio:

Our results also suggest additional reasons why the overall returns to cognitive ability may be underestimated by focusing solely on the labor market returns … we might conjecture that a one-standard-deviation increase in cognitive ability is worth about 0.3% of lifetime wealth due to improved portfolio allocation alone. Since portfolio choice is only one of many important household decisions that are affected by cognitive ability, the total value of cognitive ability’s effect on decision-making could be quite substantial.

If changes in the economy have increased the payoff to the decisions affected by cognitive ability, that might explain some changes in wealth inequality.

Behavioral economics done right is just good science. The real peril is in the transition over the gap from psychology to policy. Big philosophical and ideological assumptions lurk in the gap. It’s very important to make those assumptions explicit, and defend them. Unfortunately, that’s too rarely done

Hopelessly Devoted to HIM?

SMU Biblical studies professor Mark Chancey has just penned a study of Bible teaching in Texas Public Schools (.pdf). The report concludes that “the public school courses currently taught in Texas often fail to meet minimal academic standards for teacher qualifications; curriculum, and academic rigor; promote one faith perspective over all others; and push an ideological agenda that is hostile to religious freedom, science and public education.”

Chancey’s most damning charge: “Most Bible courses are taught as religious and devotional classes that promote one faith perspective over all others.” If true, that, of course. would be unconstitutional. (Nadine Strossen, call your office.)

Here’s a thought: Rather than forcing all Americans to pay for a one-size-fits-few government monopoly that inevitably creates legal and cultural conflict over the curriculum, why not institute a school system that would give both parents and other taxpayers real educational choice? This could easily be done by combining and enlarging the existing personal use and scholarship donation tax credit programs that exist in states like Pennsylvania and Arizona. A short exposition of the idea appears here, and a more comprehensive one is available here.

Cato’s Neal McCluskey will be publishing a study of the endless school wars caused by our state-run education monopolies later this year. Stay tuned.

New at Cato Unbound: Veronique de Rugy on Anti-terrorism Spending

In today’s installment of Cato Unbound, AEI resident scholar (and Cato adjunct scholar) Veronique de Rugy argues that the $271.5 billion devoted by the federal government to homeland security since 9/11 has not been well spent.

“Not only are we over-investing in homeland security,” de Rugy argues, “but most times we spend too much money in the wrong way and on the wrong things.”

The consequence is that we are no safer. “Bad security is often worse than no security at all,” de Rugy writes. “By trying, and failing, to make ourselves more secure, we make ourselves less secure.”