# Archives: 08/2006

## Boudreaux’s Time Machine

Over at Cafe Hayek, George Mason economics chair and Cato adjunct scholar Don Boudreaux has come up with a wonderful thought experiment to illustrate just how absurdly inaccurate the government’s methods for calculating real wages are. Don looks at the Census Bureau report (from the depths of which the New York Times editorial page draws forth the blackest despair) and finds that real median family income has increased an unimpressive 31 percent in the 37 years from 1967 to 2004. In 1967 it was \$35,379 (in 2004 dollars), and in 2004 it was \$46,326.

Are we really only 31 percent–less the 1 percent a year–better off? Don’s thought experiment asks us to imagine that the incomes and years are swapped, and then see how we feel. Would you rather live in 1967 on \$46,000 a year (the 2004 median), or in 2004 on \$35,000 (the 1967 median).

Let’s take it up a notch. So, it’s 2004 and you make \$35,000 (let’s pretend it’s individual, instead of family income). A gangly professor with crazy hair drives up in a time-traveling Delorean and offers you the 1967 equivalent of \$46,000 (that’s a 31 percent raise!) if you’ll let him drop you off in 1967, where you’ll live for one year. You say, “Right on!” and take a lift to yesterday.

So now you’re in 1967 with about \$8,500 in your pocket, and you’re ready to roll. Have you become wealthier?

The professor materializes again and tells you that he lied. Ha! You’re not staying for a year. You’re staying for the rest of your life. But he guarantees your salary each year will be that year’s inflation-adjusted equivalent of the salary that you have in the “stayed-in-2004” timeline. (In 1973, you’ll get your 2010 wages, etc.) You start to cry (no Prozac!). The professor exclaims, “What’s the problem, kid? You’ll always be wealthier than you would have been. And besides, it’s a simpler time. People bowl together!”
You get the idea. Don has a bunch of great examples of things you can’t get in 1967, only some of which I stole.

How much would you have to be paid each year to agree to live the rest of your life from 1967 on? Maybe I’m weird, since my entire life would be different–and almost certainly worse–if it wasn’t for the Internet. (I almost certainly wouldn’t have most of my friends, my very cool job, and more.) There are so many things I rely upon that you couldn’t buy at any price in 1967 that it’s pretty hard to think of a number that’s high enough to compensate for the loss. Personally, I don’t care that much about improvements in TV picture quality, or even how comfortable, safe, and gadget-laden cars are now. It’s the things that just didn’t exist in 1967 that do it for me.

Here’s another thought experiment: Suppose you get a medical procedure with new technology that saves your life. It didn’t exist last year, but now it does. If you had been sick like this last year, you’d be gone. So, in a year, you went from a condition in which no amount of money would have been able to save you from death, to one in which a mere \$10,000 buys you the ability to see your daughter’s wedding. How much wealthier did you become in the space of that year? Is it more than 31 percent?

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## Fear of Freedom in Health Care

From there, we part. Kling’s other solution relies on a massive increase in the amount of health costs that come out of pocket. The “very poor” would be subsidized, as would the “very sick” (neither term is defined in his book), but everyone else would be paying for their own care. This makes sense in a very specific sort of world – one in which you believe consumers have the capacity to make rational health care decisions – and to a very specific sort of person – one who believes those who make mistakes with their health care should simply pay the costs, be they financial ruin or death.

I am not that sort of person, and I am highly dubious of that world. I see no evidence for the claim that a gas station manager in Bakersfield, California, will be able to second- or third-guess his cardiologist’s recommendation of an angioplasty. Will he have the money to get a second opinion? A fourth? Or will Kling’s system convince him to foolishly underestimate his risk? Economists, after all, have shown time and again that we overestimate the pain of financial loss – that, when it comes to money, we are not nearly so rational as one might hope.

In the simulation of my proposals in the chapter on matching funding to needs, I define poor as below the poverty line and I define very sick as having annual expenses over \$5000 for the non-elderly and over \$20,000 for the elderly.  I think that one can, and should, come up with better definitions, but the terms are not left undefined.

How should consumers make decisions about their health care? Let me define a “good” decision as one that is optimal in terms of expected benefits relative to expected costs. A different decision is a “mistake.”

I propose making more consumers more accountable for more of their own health care spending. Let me describe this as a system where consumers make their own mistakes.

What is the alternative to a system where consumers make their own mistakes? The opponents of consumer choice would have you believe that the alternative is a system where no mistakes are made, and instead we simply see good decisions. But that is not the alternative that we observe. In fact, no one would say that the medical decision-making process is mistake-free in America today.

The realistic alternative to having consumers make their own mistakes is to have mistakes made on their behalf by doctors, insurance companies, and government.

In my health care proposals, I envision doctors, insurance companies, and government still available to offer advice. In fact, I envision a much stronger advisory role in health care coming from a commission that studies costs and benefits of health care proposals.

What I propose is that consumers have the incentive to use information about costs and benefits. Any treatment that is proposed today, under the presumption that a third party will pay for it, would still be available under a system where consumers are allowed to make their own mistakes. It’s just that under the latter system, consumers would take costs into account.

I get the sense that the rhetorical attack on consumer choice in medicine is based primarily on the implicit assumption that the alternative to consumers making their own mistakes is consumers making no mistakes. Once you strip away that rhetorical support, the case for paternalism in medicine seems difficult to make.

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## Next Up: CNN Exposes Terrorism Hype!

Jon Stewart lampoons CNN for its over-the-top “TARGET: USA” coverage.

The media has a significant role in fomenting excessive fear of terrorism and engendering disproportionate responses.

## Consumers for High Taxes

In a story on people without health insurance, NPR interviewed a spokesman for a “consumer advocacy group” who warned that we shouldn’t get rid of the estate tax (so we can spend more tax dollars on health care). Yeah, that’s what consumers think – except for the 68 percent of them who do want to repeal it.

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## When Generous People Stop Kidding Themselves

Over at Tapped, Ezra Klein is wrestling with my interpretation of the new estimates of poverty and health insurance coverage released yesterday by the Census Bureau. I observed that after the 1996 welfare reforms made federal cash assistance less “generous,” poverty went down. In contrast, federal health care spending grew ever more “generous,” and the number of uninsured went up. I humbly submitted that perhaps Congress should stop being so “generous” with health care.

Klein thinks that’s “crazy,” but he misfires on poverty rates:

1. He suggests that economic growth of the late 1990s and the expansion of the Earned Income Tax Credit were responsible for the post-1996 reductions in poverty. (The EITC does not directly affect the poverty rate, but it does affect the decision to earn other income that does.) Certainly each played a part. But prior economic booms did not have as dramatic an effect on the poverty rate even when the EITC was present, and scholars like June O’Neill have estimated that welfare reform had larger effects than did the economy. Moreover, although the EITC encourages some people to work more, it reduces work overall by encouraging others – those in the phase-out range – to work less. That might lift some out of poverty, but it traps them and others on the lower rungs of the economic ladder.
2. He notes that poverty has increased every year from 2000 to 2004. True, but he is being selective in order to avoid the larger point that poverty remains lower now than at any point in the 17 years leading up to welfare reform. (Also, FWIW, poverty dropped slightly in 2005.)
3. He confuses the poverty rate for families (9.9 in 2005) with the overall poverty rate (12.6 percent in 2005).
4. Finally, he notes that the family poverty rate was lower in 2005 than in 1996. Yet he somehow believes this to be evidence that federal cash assistance does not contribute to poverty.

The political Left has had a really hard time dealing with welfare reform. When Congress pared back cash assistance, the Left assumed that bad things would happen (increased poverty, starvation, etc.). Instead, good things happened. But that evidence doesn’t fit in the Left’s model. They just don’t know where to put it.

Klein is as confused about the health care side of the comparison.

1. Klein writes: “I don’t know any health care wonks who think medical cost inflation is a product of government spending…” He should get out more. He should start by hanging out with Maryland’s Mark Duggan and Yale’s Fiona Scott Morton, who estimate that prescription drugs are 13 percent more expensive in the private sector thanks to Medicaid. He should read up on crowd-out of private health insurance, which isn’t likely to make private insurance markets any more robust. Many people think that cost-shifting from Medicaid increases the cost of private coverage. Personally, I’d call that crowd-out of another sort, but the effect is the same. Klein should read about how MIT’s Amy Finkelstein speculates that Medicare led to increased medical expenditures in the private sector as well. All of which affects insurance premiums.
2. Klein dismisses the idea of reforming Medicaid as Congress reformed welfare – by cutting back assistance. But that’s exactly what Congress did when it cut off Medicaid for non-citizen immigrants in 1996. Do I need to tell you what the Left predicted? Do I need to tell you what actually happened? Klein should add to his reading list Harvard’s George Borjas, who found that coverage levels for non-citizen immigrants increased after they were cut from the Medicaid rolls – a result that, Borjas argues, cannot be explained by the robust economy.
3. Finally, Klein writes that yours truly “[doesn’t] want Big Government to start pummeling the medical-industrial complex.” But as I argue elsewhere, so long as the government controls the money, the medical-industrial complex will never get the beating it deserves because producers will always have a disproportionate influence over political decisions that effect their incomes. We will not discipline the medical-industrial complex until we have patients on the side of restraining spending, and that will not happen until patients own the money that’s being spent. Libertarians would love to pummel the medical-industrial complex. It would be (marginally) easier to do so were Klein to get out of the way.

Klein’s post reminds me of the passage Charles Murray used to close his seminal work Losing Ground:

Most of us want to help. It makes us feel bad to think of neglected children and rat-infested slums, and we are happy to pay for the thought that people who are good at taking care of such things are out there. If the numbers of neglected children and the numbers of rats seem to be going up instead of down, it is understandable that we choose to focus on how much we put into the effort instead of what comes out. The tax checks we write buy us, for relatively little money and no effort at all, a quieted conscience. The more we pay, the more certain we can be that we have done our part, and it is essential that we feel that way regardless of what we accomplish…

To this extent, the barrier to radical reform of social policy is not the pain it would cause the intended beneficiaries of the present system, but the pain it would cause the donors. The real contest about the direction of social policy is not between people who want to cut budgets and people who want to help. When reforms finally do occur, they will happen not because stingy people have won, but because generous people have stopped kidding themselves.

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## Come to Washington and Do Well

What’s the best business to be in these days? Steel? Automobiles? Maybe not any more. Maybe these days it’s software, or finance. Maybe. But judging from this lead story in this morning’s Washington Post

The three most prosperous large counties in the United States are in the Washington suburbs, according to census figures released yesterday, which show that the region has the second-highest income and the least poverty of any major metropolitan area in the country.

Rapidly growing Loudoun County has emerged as the wealthiest jurisdiction in the nation, with its households last year having a median income of more than \$98,000. It is followed by Fairfax and Howard counties, with Montgomery County not far behind.

– it would seem that government is the boom industry of the early 21st century. That’s the point Chris Edwards made in a Tax & Budget Bulletin (pdf) three months ago: that compensation of federal employees was almost twice compensation in the private sector. Then three months later, things changed, as things have a way of doing. Chris was forced to admit that the government’s latest figures showed that federal compensation was no longer almost twice private-sector compensation: it was exactly twice as much. “Average compensation for the 1.8 million federal civilian workers in 2005 was \$106,579 – exactly twice the average compensation paid in the U.S. private sector: \$53,289.”

Mamas, don’t let your babies grow up to be cowboys,

Don’t let ‘em make software and sell people trucks,

Make ‘em be bureaucrats and fed’rals and such.