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1000 Word Rebuttal
The tax code, [Bush] said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”
Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums.
Rebuttal:
Posted by Alex Tabarrok on January 25, 2007 at 07:25 AM in Economics, Medicine | Permalink
Comments
BUUURRRRN!
Tou-frickin-che'
Posted by: Aaron at Jan 25, 2007 8:49:53 AM
Alex:
Can you please explain the assumption that the tax code "encourages" employees to select gold-plated health plans? Do employees, in fact, select "overly-expensive" plans? And by who's lights are the plans "overly expensive?" Thanks.
Dan
Posted by: Dan Cole at Jan 25, 2007 9:25:04 AM
I don't think this counts as a burn. Krugman already clarified that he was assuming that the long-run supply curve would be flat (therefore, no externality). In fact, Krugman's clarification is included on THE EXACT SAME blog that Alex is quoting (economist's view).
http://economistsview.typepad.com/economistsview/2007/01/what_pecuniary_.html
I seriously hope Alex had just over looked this post and isn't just looking for a new way to burn Krugman for holding slightly less libertarian views than him.
Posted by: Student at Jan 25, 2007 9:29:04 AM
Wow. Maybe Krugman thinks health insurance supply is extremely elastic? (shrug)
He goes on: "Will all those who think they have 'gold plated' health coverage please raise their hands?" I guess that's me. My health plan covers regular visits to the chiropractor, the kids' regular visits to the pediatrician, visits to the dentist for cleanings. It's not that these are unnecessary. But to the degree that they're utterly routine, predictable costs, this plan isn't insurance. I don't know what to call it. The insurance company calls it "profit".
Posted by: Jason at Jan 25, 2007 9:30:22 AM
I'm glad I wasn't the only one who caught this glaring misrepresentation. Unfortunately Krugman continues down the path towards disingenuous political hack.
Posted by: Taggert J. Brooks at Jan 25, 2007 9:34:00 AM
Dan,
I think the term gold-plated is slightly misleading. My reading of things is that gold-plated doesn't mean necessarily that my insurance covers things like pedicures (aside: you should see how many economists I ran into at the AEA meetings that were getting manicures and pedicures) but rather that they regress to offering first-dollar coverage, low-premiums, low copays and the like.
I also think it is misleading to suggest that the tax code encourages employEES to select these types of plans - I do not think that employees have these options. The right way to frame it is that the tax code encourages employERS to offer these types of plans. At the last three places I've worked, it seems that I had a choice between two plans that only marginally differed, but that I think Bush would consider gold-plated.
Why does the tax code encourage employers to offer these sorts of plans? Two reasons I suggest. The obvious one is the asymmetry in the tax code - which makes a $1 of employer-provided insurance coverage worth more than $1 increase in income. That in and of itself should not be sufficient to cause the "problem" of gold-plated coverage. Second is that most of the costs of the employer provided system are hidden to the employee - and I do not mean insulation here. I have never seen a W-2 or paystub where it shows me the dollar contribution to the total premium that my company is making.
-Mike
Posted by: Mike at Jan 25, 2007 9:38:06 AM
I just can't get past the fact that a government official is deciding that some plans are "overly expensive". Especially when state and federal governments mandate minimum requirements for plans including generous mental health benefits, chiropractors, etc., and the requirement to practice defensive medicine that the courts effectively impose. Do the tax incentives make a bigger difference than government mandates?
Posted by: DK at Jan 25, 2007 9:39:13 AM
Dan,
The standard account of a subsidy is that it encourages over-consumption - over-consumption in the sense that the marginal units consumed are valued at less than their cost.
Do note that the issue addressed in the post is not "overly expensive" but Krguman's statement that "No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums." That statement is doubly false in that a) economic analysis does show that subsidizing Peter can raise Paul's premiums and b) Krugman is surely aware of this analysis!
Best
Alex
Posted by: Alex Tabarrok at Jan 25, 2007 9:49:53 AM
Krugman clarifies: "Aha - I was wondering if anyone would raise that. I was taking it as true to a pretty good approximation that the long-run supply curve for medical services is horizontal. Unless you think that there's permanently limited supply of medical education, or something, why should we think otherwise?"
Hmm. I thought the usual assumption was that supply curves slope up somewhat. I'm probably just confused.
Krugman is saying that in the long run, there's no scarcity of doctors, nurses, hospital rooms, etc. That's counterintuitive to me. I thought potential doctors were rare.
Posted by: Jason at Jan 25, 2007 10:15:40 AM
Jason,
"Wow. Maybe Krugman thinks health insurance supply is extremely elastic?"
Yes, he does. And he said so in an e-mail that is posted on Mark Thoma's blog.
http://economistsview.typepad.com/economistsview/2007/01/what_pecuniary_.html
Posted by: Student at Jan 25, 2007 10:17:02 AM
I was thinking a bit more about this. If Krugman belies the long-run supply of health care is perfectly elastic, then isn't he therefore predicting a pretty steep decline (or at least leveling off) of health care costs in the medium term, given the steep recent rise in health care costs we've seen recently?
After all, if the long-run supply curve is perfectly elastic, then prices shouldn't rise over the long run...
Posted by: Keith at Jan 25, 2007 10:28:18 AM
Yep, Krugman's really wrong on this one. You can't talk about the problems of rising health care costs one day and then say you believe that the long-run supply curve of health care is elastic. At least not if you want to be credible.
Posted by: Keith at Jan 25, 2007 10:37:46 AM
I think 'gold plated' here simply means expensive as in more than $15,000 a year. But how do you know how expensive your plan is unless your employer shares with you his cost as well as yours or if you're buying it yourself?
Anyway, here's a point for Krugman.... If insurance companies have two products...gold plated and standard why wouldn't the subsidy for 'gold plated' simply serve to push up the price of gold plated plans? If the gov't subsidizes Paul's shopping at Nordstrom I'm not sure why that would cause Wal-Mart's prices to go up....they may in fact go down!
Posted by: Boonton at Jan 25, 2007 10:40:49 AM
I would have said "gold-plated" means Congress' plan - maybe even the government labor unions' plans, but on reflection, at least Congress' is "platinum-plated."
Once again the stupid party doesn't do anything, let's compare the working man's policy against Congress'.
I see an opportunity for government cost-cutting.
Posted by: Sandy P at Jan 25, 2007 10:47:56 AM
Boonton says:
If the gov't subsidizes Paul's shopping at Nordstrom I'm not sure why that would cause Wal-Mart's prices to go up....they may in fact go down!
Ah, but don't many of the people who believe in a crisis in health care think that it's much more difficult for consumers to know the difference in price and quality among different health care choices than it is to know the difference between Nordstrom and Wal-Mart?
Sure it's possible that hospitals will somehow charge higher prices to only people with good insurance plans. I think, however, that in reality we actually see the opposite-- insurers seem to use their market power to negotiate lower prices than those charged for people without insurance, by using the threat of diverting the patients' business elsewhere.
There are more complicated arguments that overconsumption of expensive experimental medicine will lead to greater research and in the long run benefit. I'm not sure why we necessarily want to subsidize the wealthy in doing that, though.
I'm always a little surprised when people seem to argue that subsidies cause higher prices and overconsumption in one area, say Medicare prescription drug benefits, and deny it that it's even possible in another, such as health insurance or college tuition costs. I can understand arguments that the long term supply curve is flat and all, though that would seem to argue against a long term crisis.
Posted by: John Thacker at Jan 25, 2007 11:09:54 AM
I do not agre with your chart. Your representtion is that the ENTIRE demand curve is mved outward by the subsidy. That seems misleading as the subsidy applies only to certain people. Also, I am not entirely sure what market you are graphing? Are you graphing the marlet for health insurace coverage? Are you graphing the total demand for ALL health insurance?
Posted by: GeorgeNYC at Jan 25, 2007 11:32:15 AM
People who have insurance through their employer pay smaller premiums due to the nature of underwriting a policy that spreads the risk over more people. Also, health insurance premiums paid through an employer, regardless of the cost, are paid prior to any payroll or income taxes. People with private policies can only deduct insurance premiums in extreme circumstances on their taxes at the end of the year.
He views the best route to resolving this discrepancy as subsidizing everyone with a standard deduction from our taxable income.
Is this the advantage that he wants to level between the those who pay for insurance through an employer and those who buy private policies?
Thanks for the clarification.
Posted by: Josh at Jan 25, 2007 11:37:03 AM
I thought hat do to AMA pressures the supplyof doctors is not extremely elastic.
Posted by: mike at Jan 25, 2007 11:41:19 AM
Perhaps Krugman believes that rising health costs are due to an upward shift of the horizontal supply curve rather than a movement along the curve. Keith, would this explain Krugman's reasoning better? I'm pretty new to the economics of health-care and to this particular argument but the curve shift makes sense to me.
Posted by: eriks at Jan 25, 2007 12:28:29 PM
pwned
Posted by: asg at Jan 25, 2007 12:29:14 PM
"Perhaps Krugman believes that rising health costs are due to an upward shift of the horizontal supply curve rather than a movement along the curve. Keith, would this explain Krugman's reasoning better? I'm pretty new to the economics of health-care and to this particular argument but the curve shift makes sense to me."
And these upward shifts (a decrease in health care supply) would be from...? You actually need an event that decreases the overall supply of health care to actually shift the supply curve like that...does Krugman believe that a sudden illness will disproprtionately kill doctors, that computer viruses or electrical failures will destroy medical equipment?
Nope, it looks like Krugman has either predicted a future drop (or at least leveling off) of future health care costs thanks to shifting short-run supply curves along the horizontal long-run supply curve, or he made an erroneous argument in order to defend a flaw in his initial reasoning.
Krugman's only argument left: He really believe health care outsourcing will take off and that we will pass legislation that will allow health insurance companies and organizations to do business across state lines, which will then lower (level off) heal;th care costs. In this model, short-term political pressures are endogenous, so that when health care costs get high enough, politicians then undo restrictions that made the supply curve inelastic.
Posted by: Keith at Jan 25, 2007 12:54:26 PM
I suspect the difference has to do with disagreement over what economic analysis means.In Tabarrok's world, proposing a model and drawing a chart illustrating it is sufficient. Krugman, on the other hand, is more stringent - I'm guessing he would like to see some real data validating the model.
Posted by: alex at Jan 25, 2007 1:01:18 PM
Many problems with Alex's post. First, the graph goes too far in assuming that the supply of medical care is perfectly inelastic (though i think it's also a stretch to assume that it's perfectly elastic over time). It's way over-simplistic to represent either the supply or the demand of 'medical services' as a unitary thing - so from a functional standpoint of representing something about the real world, it's meaningless.
It's also missing the point to depict a tax subsidy to the purchase of group insurance as if its a subsidy to the purchase of medical care per se. Insurance 'subsidizes' the purchase of medical care in two fundamental ways: by annuitizing or amortizing the cost of medical care that the insured population will consume over their lifetimes; and by making it possible for insurers, representing groups of consumers, to negotiate for lower prices. Both of those advantages are subject to very strong economies of scale and scope, with the result that for any given population, group insurance is always more efficient (lower total cost per person) than individual insurance, and is always more efficient for larger groups than for smaller groups. (There are also, in theory, some economies of scale in payment processing and so forth; and managed care advocates would say that insurance can improve the quality of information and care to boot. But I think those are speculative and marginal benefits, so ignoring them for this purpose.) So before we join Alex in laughing off Krugman's argument, let's remember what it is that the President has suggested, that Krugman is rightly critiquing: reducing the tax subsidy for employer-provided group insurance, and using the proceeds to provide a new subsidy to individual insurance. Right off the top, that implies using our tax system to subsidize a less efficient type of health insurance, at the expense of a more efficient type. That's a deadweight loss, one that Alex might want to consider representing somewhere on his tidy little graph.
But i understand Alex is making a theoretical point, not a quantitative one, so let's look at it that way. If we subsidize one person's consumption of a scarce good, we can end up driving up the price of that good for everyone else - fair enough. If nobody had comprehensive insurance - i.e. if everyone had to pay for medical care out of pocket - then we could expect the prices of a lot of medical services to come down. The mechanism by which that would happen would be a reduction in consumption - probably a pretty drastic one. Over time, medical care in general being a high-fixed-cost type of good, the supply curve would most likely shift to the left, which would depress consumption even further, up to the point that some new equilibrium would be achieved. In the meantime, we as a society would have to deal with all of the externalities to a fall-off in the use of medical care that don't make it into Alex's graph: more undiagnosed chronic conditions that spiral into acute health crises, more people courting bankruptcy based on medical bills, more people foregoing even necessary care because they don't have the money, fewer medical providers and fewer choices of treatment (because there won't be sufficient buying power out there to support very many specialists), fewer medical advances (because why invest in a market where demand is drying up) ... all of the things that were characteristic of health care in the US before the dawn of group health care in the 40s - 50s & Medicare/medicaid in the 60s-70s.
Alex seems to be a smart guy, but this is a dumb, cheap-shot post. It's the kind of argument that somebody would make if they dropped Econ 101 halfway through the semester: taking the most rudimentary of economic analysis tools and treating it like it holds the answers to everything.
Posted by: Tom at Jan 25, 2007 1:16:55 PM
A large number of people with plans that do not discourage economically unreasonable defensive medicine tests such as MRIs for simple headaches [an exaggeration, perhaps, but maybe not as much as you might think] can make such tests arguably the "standard of care", which can make treatment of simple headaches more expensive for everyone.
There's no long term / short term issue here, although as for any other product technology can change the supply curve -- either way.
-dk
Posted by: Dick King at Jan 25, 2007 1:38:30 PM
"First, the graph goes too far in assuming that the supply of medical care is perfectly inelastic"
No it doesn't. Perfectly inelastic would be if the curve is vertical. Since the curve is linear, I'd need to know the price and quantity to tell you if that's the elastic or inelastic part of the curve, but even a rudimentary familiarity with Econ 101 would tell you that the curve is not perfectly inelastic.
And Krugman did not make the defensible claim that Econ 101 may not be a complete paradigm for health care economics. Krugman made the indefensible claim that no such analysis of subsidy increasing price existed. In addition, by arguing that he believes the long-run supply curve is horizontal, Krugman himself used Econ 101 tools to defend his argument.
Let me say, I believe, contra Econ 101, that subsidies COULD decrease long-run prices, if we subsidized certain preventive care. I believe that because I believe people get disutility from visiting the doctor, and so don't visit until something's a bigger problem, which causes negative pecuniary externalities. But we do not subsidize preventive care now; we subsidize other types of care.
Posted by: Keith at Jan 25, 2007 1:39:41 PM
Why would someone pay an extra dollar for only 70 cents worth of benefits? If the government gives you back 40 cents for that extra dollar, that's when.
The second problem with the current system is that plans are only marketed to businesses because you only get that tax break if you have an employer who pays for the plan.
The current system screws the self employed and the retired.
More plans marketed to individuals rather than businesses would give people more choices and lower prices.
Posted by: Half Sigma at Jan 25, 2007 1:47:14 PM
Keith, I am aware that something must cause a curve shift. However, I don't think that it has to be "an event"; instead I believe it could be the introduction of new technology (rather than destroying technology) and drugs that could cause the upward shift. From what I've read MRI machines are costly upfront and to maintain and this is a relatively common machine known by most of the population. Most esoteric machinery is surely out there and more will come with similar costs.
Posted by: eriks at Jan 25, 2007 1:47:50 PM
Half Sigma,
Where is the cost lowering mechanism?
Posted by: eriks at Jan 25, 2007 1:49:05 PM
So Paul Krugman is talking about the long term equilibrium and you throw up a diagram that's valid for the short term. Not to say Krugman's right, but you haven't shown he's wrong.
Posted by: Nathan at Jan 25, 2007 1:50:25 PM
"instead I believe it could be the introduction of new technology (rather than destroying technology) and drugs that could cause the upward shift. From what I've read MRI machines are costly upfront and to maintain and this is a relatively common machine known by most of the population."
Well, hedonically, a new technology lowers costs. In other words, a new technology costs more, but it delivers a higher quality of health care that can be hedonically treated as delivering more health care. So that would shift the long run supply curve down. So the per unit health care cost should be lower, otherwise there'd be no point in using the technology.
Now, if fractional consumer payment (and encouragement thereof through tax subsidy) causes consumption of technology even when it's not cost-effective, then we're back to Alex's diagram.
Posted by: Keith at Jan 25, 2007 2:10:03 PM
Andrew Samwick said:
"One could point out that if he was 'wondering whether anyone would raise this point,' then he seems to realize that he was going a bit overboard in claiming that 'no economic analysis I'm aware of says that when Peter chooses a good health plan, he raises Paul’s premiums.'"
That's a generous understatement. Krugman took a running jump overboard. We have the unusal case where long-run supply of a product is perfectly elastic, which is a strange assumption since medical care comes from relatively scarce human talents and capital goods, and has high barriers to entry to boot. Yet any analysis that does not accept this strange assumption of horizontal supply falls under "no economic analysis [Krugman is] aware of."
Sorry, but Krugman's explanation doesn't make his original claim any less preposterous, and it's a rather weak explanation anyway. Alex's post wasn't dumb, and it wasn't a cheap shot. It was just an amazingly easy shot, because Krugman said something so plainly stupid in the first place.
Posted by: Steve Miller at Jan 25, 2007 2:12:35 PM
So will removal of the subsidy actually make medical insurance cheaper?
Another over-simple model, price discrimination, suggests that elimnating the gold plated version will make the standard version more expensive.
As far as what is beng spoken about is insurance rather than services, the supply curve is extremely elastic.
I'm interested to know what won't get bought as a result of this. Either there will be negative health effects or the money that won't get spent was wasted in which case there are problems with the system that aren't to do with the subsidy.
Making health insurance an individual matter will also increase selection effects making insurance more expensive, again a standard textbook example.
If only politicians got as much attention for their pronouncements as does Paul Krugman.
Posted by: Jack at Jan 25, 2007 2:26:59 PM
Who thinks their health plan is gold-plated? I do. I'd buy catastrophic insurance only if it weren't for the fact that my employer is picking up almost all of the cost. I do know what my employer is paying for it, and it's ridiculous. I would be ecstatic to take half of it as extra salary.
Posted by: BillWallace at Jan 25, 2007 2:27:36 PM
It seems like there are 3 problems that may need to be addressed: adverse selection, poverty, and sick people. Adverse selection problem should be amenable to a tax credit equal to some fraction of premium payments. Poverty problem should be amenable to another tax credit that decreases with income for out-of-pocket expenses. And the sick people problem should be amenable to rules that require insurers to take all comers and spell out the criteria they can apply in setting premiums. Could also require carriers to pool really sick people.
This would be a much better system than what we have today with employers making across-the-board decisions for people with varying incomes, tastes, and risk preferences. The government would pay a signicant fraction, but probably well under half, of the costs of treatment and insurance. Individuals would pay the rest.
Posted by: henry evans at Jan 25, 2007 3:00:12 PM
Alex is just trying score points, rather than actually address what Krugman is saying. It hurts your credibility, not his.
Krugman did not say: "No economic theory I am aware of..."
He did say: "No economic analysis I am aware of..."
That is, no economic analysis, that Krugman is aware of, shows the long-run supply curve in this context is other than flat or mostly flat.
Theory versus analysis. Pie in the sky, versus real world. Assumption versus empirical analysis. Guess what, Krugman is more interested in the real world than theory laden with false assumptions when discussing health care. Shouldn't you be?
Posted by: Ragerz at Jan 25, 2007 3:50:09 PM
By the way, Alex. Nice picture. But it isn't a "rebuttal" since it isn't relevant to what Krugman said.
Posted by: Ragerz at Jan 25, 2007 3:51:20 PM
We should also, for the sake of avoiding more ridiculousness from those looking to bash rather than engage with Krugman, modify Krugman's words with a few modifiers that he surely implicitly meant.
He wrote: "No economic analysis I am aware of [demonstrates that supply-curve in this context is other than flat or mostly flat]"
He meant: "No serious and reliable economic analysis I am aware of [demonstrates that supply curve in this context is other than flat or mostly flat]."
So, if Alex or any of your commentators want to produce some serious and reliable economic analysis that demonstrates (not merely assumes) that the supply curve in this context is other than flat or mostly flat, that would be great. Then Paul Krugman could become aware of such analysis.
If you don't do that, then you lose. And Alex loses no matter what, because he cannot demonstrate that Paul Krugman was aware of any solid economic analysis that demonstrates (not merely assumes) that the supply curve if other than flat or mostly flat.
Alex writes:
"Krugman is surely aware of this analysis!"
You say analysis. I say theory. But anyway, since you are so confident that Krugman is aware of this so-called "analysis", don't you think it is best to consider alternative interpretations of what Krugman is saying, before adopting the most absurd interpretation? Or, are you just going to go straight for the interpretation that implies that Krugman is a liar, that he is aware of this so-called "analysis", but intentionally deceives his readers, even when other perfectly reasonable interpretations are available? (Being aware of economic analysis that demonstrates X, but saying you aren't aware of such analysis = lying.)
Would you have others interpret you as a liar when other reasonable interpretations are available?
(Finally, it should be noted that Krugman is under heavy space constraints in writing his column. He doesn't have time to go on about theory versus empirical analysis in his column.)
Posted by: Ragerz at Jan 25, 2007 4:09:27 PM
All the complaints that Krugman is more interested in the real world are incorrect. He is working without the data you appeal to, and was claiming to know of no standard model theoretical basis for something which is completely standard.
Posted by: Sebastian Holsclaw at Jan 25, 2007 4:14:59 PM
Steve Miller writes:
That's a generous understatement. Krugman took a running jump overboard. We have the unusal case where long-run supply of a product is perfectly elastic, which is a strange assumption since medical care comes from relatively scarce human talents and capital goods, and has high barriers to entry to boot. Yet any analysis that does not accept this strange assumption of horizontal supply falls under "no economic analysis [Krugman is] aware of."
Actually, I think that you are fundamentally confused. Krugman isn't looking for analysis that assumes one thing or another. You assume it is sloping. I assume it is flat. But there is no serious and reliable economic analysis out there, that Paul Krugman is aware of, that demonstrates rather than merely assumes that long-run supply curve is other than flat or mostly flat.
Guess what your so-called "analysis" here does. It assumes that the supply curve is not flat. As such, Krugman would rightly not consider your analysis to be "serious and reliable economic analysis" on the question of whether the long-run supply curve if flat (or mostly flat) or not.
You are the one that just took a running jump overboard, by demonstrating your inability to come up with alternative interpretations rather than assuming an economist that is a serious candidate for a Nobel Prize in the future is a total moron.
So yes, Alex took a cheap shot. And so have you.
Posted by: Ragerz at Jan 25, 2007 4:20:02 PM
As someone with a B.A. in economics from X years ago, remembering, well, not so much, I am finding this discussion fascinating. I'd be interested to see A.T. repond to some of the points raised in these comments. Thanks!
Posted by: Pat at Jan 25, 2007 4:29:25 PM
Ragerz,
Alex applies an economic theory, hence Alex perfoms an analysis. It may not be your favorite analysis, but Alex is right in assuming Krugman would be aware of such an elementary analysis. He should have acknowledged that. Then he could claim that he's convinced by analyses that lead him to believe long-run supply for medical care is flat.
Posted by: josh at Jan 25, 2007 4:30:52 PM
Sebastion Holsclaw:
All the complaints that Krugman is more interested in the real world are incorrect. He is working without the data you appeal to, and was claiming to know of no standard model theoretical basis for something which is completely standard.
(1) Krugman didn't say he was working with data. He said, in essence, he is not aware of any economic analysis that uses data demonstrating that the long-run supply curve in this context is other than flat or mostly flat.
(2) Krugman did not say anything about a "standard model theoretical basis." He did not say he was not aware of any economic theory. He said he was not aware of any analysis.
(3) Even if it were true that making a certain possibly false assumption with critical implications for the outcome of of your analysis were "standard," that would not make the assumption any less false (or possibly false).
(4) Please feel free to produce serious and reliable economic analysis that demonstrates that the long-run supply curve in this context is other than flat or mostly flat.
Posted by: Ragerz at Jan 25, 2007 4:31:59 PM
It may not be your favorite analysis, but Alex is right in assuming Krugman would be aware of such an elementary analysis.
Whether it is my favorite analysis or not, it is entirely irrelevant to the real world unless the assumption behind it, that is, a long-run supply curve that is other than flat or mostly flat is correct.
You and Alex are absolutely right that Krugman is aware of this simplistic economic model that you put forth. What Krugman was getting at, is that he is aware of no serious and reliable economic analysis that demonstrates that this simplistic economic model is applicable in this particular context.
By the way, theoretical "analysis" that contains false assumptions and is thus inapplicable to the real world would not meet the "serious and reliable" test.
And no, if you are writing a NY Times column, you don't go into "serious and reliable" or theory versus empirical analysis demonstrating the applicability of a theory to a particular context. Before you all willfully decide to misinterpret Krugman, maybe you should remember the limitations of the medium in which he is communicating, including severe word limitations and an audience of mainly non-economists.
Posted by: Ragerz at Jan 25, 2007 4:41:12 PM
Teh diagram! It musts be treu!
Posted by: aeal.c at Jan 25, 2007 4:48:27 PM
Keith, I'm not sure what unit of health care you're referring to. Perhaps you could explain.
Posted by: eriks at Jan 25, 2007 5:08:00 PM
"Guess what your so-called "analysis" here does. It assumes that the supply curve is not flat."
But supply curves are rarely flat. So assuming that it isn't flat, is an odd assumption. It is especially odd considering that there are huge barriers to entry in becoming a doctor. Furthermore, his other assumptions don't make sense with a flat supply curve.
Posted by: Sebastian Holsclaw at Jan 25, 2007 5:29:29 PM
Sebastian Holsclaw,
There are reasons to think that long-run supply in this context may be flat and that this industry may be partially what Brad DeLong calls a "constant-returns-to-scale industry." Interesting, even if superficial, commentary on that issue can be found here. Whether the long-run supply curve is flat or or not is an empirical question. One thing is for sure. Paul Krugman knows of no serious and reliable economic analysis demonstrating that long-run supply is other than flat or near flat.
When it comes to the real world, proceeding by unreliable assumptions, like the one you are making here, is unacceptable. So, your gut feeling tells you that that constant-returns-to-scale industries just don't exist? My gut feeling says the opposite.
Maybe, just maybe, we should try to resolve this issue with reference to the particulars of the industry in question and with reference to the real world rather than through conflicting "feelings" about what assumptions to make.
If you have any serious and reliable economic analysis to put forth, that discusses the long-run supply curve issue with less feelings about correct assumptions and more factual and industry specific analysis, I am very interested.
In the meantime, don't insult Krugman, who is merely saying that he knows of no dispositive evidence resolving this issue. And perhaps implying that the burden should be on those who want to, in effect, reduce peoples' healthcare to correct for pecuniar externalities. It is up to advocates that want to correct this particular pecuniar externality to prove that it exists before we change the status quo in a way that reduces people's health coverage to correct for it.
So, bring on the industry specific analysis. Your assumptions just aren't good enough.
Posted by: Ragerz at Jan 25, 2007 6:13:18 PM
Ragerz--
what is the shape of the long run supply curve for
medical care? Why do you think it is flat?
Do you have studies to cite?
Do you have reason to believe that not only are there
studies showing a perfectly elastic supply curve,
but that these studies are are so convincing that
this is the conventional wisdom?
Ther reality is that Krugman put his foot in his mouth.
The usual analysis is that a subsidy for some raises
prices for all (with those receiving the price paying less
net of the subsidy.)
Of course that is what people would expect. If Krugman
wanted to say that contrary to the ordinary undestanding of
the situation, a long run horizontal supply curve in health
care means that such a thing wouldn't occur, fine.
But that is a special case.
Semantics about theory and analysis is just as embarassing.
Posted by: Bill Woolsey at Jan 25, 2007 6:20:15 PM
I'm new to all of this, but thinking back to what little I remember from math classes....
If the supply curve is flat, then demand could increase at an infinite rate and the price would never go up. How is that possible? Anyone?
Posted by: ChristianCB at Jan 25, 2007 6:47:36 PM
Bill writes,
what is the shape of the long run supply curve for medical care? Why do you think it is flat?Do you have studies to cite?
You want to change the status quo and enact policies that ensure people have less access to healthcare to correct for pecuniary externalities? Then the burden is on you to prove that the long-run supply curve is other than flat by industry specific analysis.
There are reasons to think that long-run supply might be flat. If we believed that we could respond to increases in demand with more entry into the medical profession, for example. But regardless, the burden is on you, who would deprive people of healthcare to correct for a pecuniary externality, to (1) establish the existence of that externality and (2) to establish the magnitude of that externality and (3) to demonstrate with clear and convincing evidence that the unanticipated negative side effects from correcting that externality more likely than not are outweighed by the positive benefits from correct that externality.
Don't try to shift the burden to me, when you are the one that wants to change the status quo.
"Semantics about theory and analysis is just as embarassing."
First of all, here is the definition of semantic
"Of or relating to meaning, especially meaning in language."
Of course. Having a discussion about meaning and actually distinguishing between two different concepts. How very embarassing!
To think that there was any difference between abstract theory not applied to reality, and reality itself. How very embarassing!
Please don't use words when you apparently are unfamiliar with their definitions. There is nothing wrong with "semantics" when we are talking about how someone should be interpreted. Last time I checked, interpretation (and that is what we are doing here, with what Krugman said) involves meaning, i.e. semantics.
People criticizing "semantics" in a conversation largely, though not entirely, involving interpretation and meaning (here the interpretation and meaning of what Krugman said) are embarassing!
Even worse, those who do not understand the difference between theory and the real world are embarassing. Those who do not understand that theoretic "analysis" is not always applicable to the real world when certain assumptions are incorrect and thus cannot be said to be "serious and reliable analysis" are embarassing.
Maybe you should spend some time alone in some room drawing graphs with unrealistic assumptions. I don't care. Just stay out of discussions about the real world if that is all your going to do.
Posted by: Ragerz at Jan 25, 2007 6:59:26 PM
Christian CB,
You have to distinguish between short-run supply and long-run supply.
In the long-run, increased entry, changes in technology and other dynamic effects can result in a flat long-run supply curve.
Posted by: Ragerz at Jan 25, 2007 7:01:42 PM
Oh yeah, one more question... How long is the long run?
Sorry for the silly questions, not everyone can spend all their limited income on years of education. :)
Posted by: ChristianCB at Jan 25, 2007 7:04:20 PM
Ragerz is doing a great job of making a fool of himself. It's possible to defend the position that under certain circumstances a subsidy doesn't lead to higher prices. But there's no defense for pretending that Krugman believes the standard supply-and-demand tools have no relevance or are an unsuitable form of economic analysis. Krugman is not a denier of economics, and in fact his response used standard economic reasoning to explain his position. He simply said something silly and wrong, and he got called on it. It's not the first time, and it won't be the last.
Posted by: Steve Miller at Jan 25, 2007 7:09:03 PM
I wish there was an edit button. Ragerz, thanks for answering my first question, but it only brings up more questions.
The big one for me is that 'in the long run' every supply curve is flat. Even for something like old growth trees and oil supply. As I can't predict what will happen in the future (tech changes, increased entry, etc.), I can imagine. So anything that is 'in the long-run' is simply a guess at what is going to happen.
That's how I'm seeing it, it obviously can be 100.3% wrong.
Posted by: ChristianCB at Jan 25, 2007 7:09:07 PM
CB Christian,
The supply of computers, in the long-run, might be flat.
Say there was a large increase in demand. This would increase the price of computers. This, in turn would lead to at least two effects. Existing computer makers would have more incentive to increase efficiency (i.e. technological changes) thus increasing supply. New entrants would an incentive to enter the industry. Also increasing supply.
If the increases in supply (shift in the supply curve) matched the increase in demand (shift in the demand curve) in the long-run, you would have a flat long-term supply curve.
Posted by: Ragerz at Jan 25, 2007 7:18:47 PM
Steve Miller,
You are doing a great job avoiding addressing the substance of anything I have said in your last post.
I can understand when someone who is intellectual overpowered is fearful of actually engaging with substance, so resort to ad hominen combined with irrelevant statements not addressing the points made by the target of the ad hominen. I have sympathy for you.
Posted by: Ragerz at Jan 25, 2007 7:21:09 PM
Thanks for answering again! Good stuff. So then, to get back on topic:
Nothing needs to be done to deal with the increasing costs of health care because in the long run the supply curve is flat? Should I not bother myself with issues dealing with flat supply curves, as the curve just moves with demand over time?
And if anything I just wrote is correct, why so much debate about what needs to be done if it will naturally be done?
Thanks again!
Posted by: ChristianCB at Jan 25, 2007 7:27:27 PM
Steve Miller distorts what Krugman said by characterizing it as thus:
But there's no defense for pretending that Krugman believes the standard supply-and-demand tools have no relevance or are an unsuitable form of economic analysis.
Krugman never said this. My previous discussion has already established why this is a poor interpretation of what he said. Amusingly, you avoid actually addressing that discussion.
Add the two adjectives, "serious and reliable" to the phrase "economic analysis" in Krugman's column, and you will see that the simplistic model that Alex drew, probably in less than a minute with some modeling program, does not qualify, standing alone, as "serious and reliable."
Posted by: Ragerz at Jan 25, 2007 7:29:39 PM
I'm not trying to fool you with my little questions Ragerz, I'm just trying to get some basics down. :) No harm from me, as I doubt I could hold my own yet with anyone on this blog. I'm willing to write what I think, and accept that I could be very wrong; in that case, I would hopefully get a pointer into the right direction towards what is right.
From what I'm seeing, from my very basic and simple eyes, is that supply, in the short run, isn't very flat...No matter how much incentives suppliers have to increase the supply, it just can't be done that fast, while on the other hand, the demand can shift wildly when buyers are subsidized. But, over the long run, the supply will catch up as the incentives are still there.
Posted by: ChristianCB at Jan 25, 2007 7:46:46 PM
ChristianCB,
What does the supply curve in healthcare look like?
The first step to answering this question is to break the problem down into logical parts. The real question is what do the various healthcare supply curves (plural) look like.
For example, the supply of a drug for a particular purpose, where a pharmaceutical company enjoys a monopoly on a particular drug for 20 years is quite a bit different than the supply of medical services by doctors, where supply is tightly regulated by the AMA, versus the supply of services by PAs or nurses of different sorts, all of which face different barriers to entry over different time frames.
The long-run supply of a new drug is not going to be flat until patent protection on that drugs run out, because new entry is inhibited. Unless other pharmaceutical companies manage to come through with new drugs that substitute, while not violating the first drugs patent. To what degree will competitors be able to come up with a non-infringing substitute for a particular drug?? And if you look really long-run, the patent does expire and allows for entry...
What should be our time frame, when discussing supply?
The point here is that one needs to do an industry specific analysis. One cannot rely on some silly generic supply curve that doesn't address the specifics of the industry in question. Instead, one's analysis should examine the specifics of the industry in question in detail, backed up by empirical analysis whenever possible.
This is actually tangential to Paul Krugman's main point. All he is really pointing out is that advocates of correcting for the "pecuniary externality" associated with "gold-plated" healthcare plans have not really made their case. And he is implying that the burden should be on them to make that case. Before we deprive Peter of healthcare to help Paul, we should really be sure that Peter's healthcare consumption harms Paul in the long-run.
Krugman's main point, as I see it, is that the "adverse selection death spiral" needs to be addressed. However, that is not the point where Alex and others seem to be willfully misinterpreting him.
Posted by: Ragerz at Jan 25, 2007 7:48:43 PM
"There are reasons to think that long-run supply in this context may be flat and that this industry may be partially what Brad DeLong calls a "constant-returns-to-scale industry.""
If that's the case, then there is no problem over the long run with rising health care costs. Any health care costs increases we've seen will be undone as the short-run supply curves shifts along the horizontal price path defined by the long-run supply curve.
Now, if Krugman is prepared to state that he believes health care costs will now fall, then he can credibly argue that he really believes that long run supply curves. But Krugman has given every indication that he believes health care costs will rise and will continue to rise. This is at odds with any belief that the LRS curve for health care is horizontal.
Krugman made a dumb statement. He tried to cover for it with a statement that relies on a conjecture (horizontal long run supply curves) that he himself clearly does not even believe. He's done on this.
Posted by: Keith at Jan 25, 2007 7:49:15 PM
Christian CB writes:
"I'm not trying to fool you with my little questions Ragerz."
I have not thought otherwise. The questions seem sincere enough.
"in the short run, isn't very flat"
No disagreement here or anywhere else about that. But we are really talking about a context where the short-run supply is not relevant. If it really is proper to charcterize certain employees as getting "gold-plated" healthcare plans, that is a long-term, not a short-term phenomenon.
Posted by: Ragerz at Jan 25, 2007 7:54:04 PM
Keith writes:
If that's the case, then there is no problem over the long run with rising health care costs. Any health care costs increases we've seen will be undone as the short-run supply curves shifts along the horizontal price path defined by the long-run supply curve.
This is a good point, if you never move away from your model and into the real world.
What this fails to take into consideration is the creation of new markets via innovation within the medical field. The long-run supply curve for existing treatments, after patent protection runs out, could be flat, but then overall prices are rising as innovators are awarded patents for new innovations that create new markets.
Let us say that you curtail Peter's "gold-plated healthcare" plan by denying access to existing treatment where the long-run supply curve is flat. You don't help Paul, for the reasons discussed.
Let us say that instead you curtail Peter's "gold-plated healthcare" by denying him access to innovations. The intermediate supply curve here is not flat (the very long-run might be), but does this help Paul? Not if by depriving Peter of these things drug companies and other innovators do not have the funds to invent these innovative new drugs and treatments in the first place.
Basically, your mistake, Keith, is by characterizing healthcare markets in a unitary manner. When an industry specific analysis calls for looking at the multiple markets and supply curves that constitute healthcare. You can have rising prices, and flat supply curves in some areas at the same time.
Posted by: Ragerz at Jan 25, 2007 8:10:59 PM
So I guess my final question(s) are...
If the tax code is set up so that more people will get the "gold-plated" healthcare plans, how does that not effect the short term price of different medical goods and services and even the price of the high end insurance plans?
Geez, I also think that a more scarce labor supply could effect this outcome as well. (as unemployment goes down, employers try to attract new employees with their high end healthcare packages....maybe?)
Posted by: ChristianCB at Jan 25, 2007 8:24:59 PM
Certainly, subsidizing gold-plated health plans can lead to misallocations of investment dollars, as drug companies overinvest in certain types of innovations and engage in all sorts of marketing to get people to spend many more of their gold-plated insurer's dollars to get only marginally better drugs and treatments. Worse yet, doctors also get into the act with extremely cost-ineffective treatments. And certainly this welfare cost lands on the non-gold-plated insured. So Alex's analysis is actually supported by your example.
Really, get this Krugman albatross off your neck.
Posted by: Keith at Jan 25, 2007 8:25:48 PM
Christian CB asks:
"If the tax code is set up so that more people will get the "gold-plated" healthcare plans, how does that not effect the short term price of different medical goods?"
In the short-run, when employers introduce new "gold-plated" plans, it does affect the short term price. In the long-run, the market should react to the increase in demand.
Posted by: Ragerz at Jan 25, 2007 8:52:09 PM
Keith,
I don't get how curtailing Peter's ability to use medical innovation, such that it is not even invented, helps Paul.
If a market for a product does not even exist, Paul's consumption is zero. I don't see where your pecuniary externality comes into play. This is not Alex's cute drawing. This is erasing all supply and demand curves because the market does not even exist.
Posted by: Ragerz at Jan 25, 2007 8:56:05 PM
I buy the reasoning. There is a subsidy in place, so people buy more than the optimal quantity at no greater cost to themselves, but to society.
However, I was under the impression that the subsidy (lack of taxation on money used towards premiums) was of rather small magnitude. At any rate, I saw someone who thought that employer-paid health insurance is a subsidy at the cost of the employer, it's not. It's just a premium and it's reflected in your wages already. There's no such thing as a free lunch.
Posted by: Rob C. at Jan 25, 2007 9:08:44 PM
Sounds like nothing is going to help Paul, but I don't think it's about helping Paul, I think it's more about what could be hurting Paul (the distortion caused by the tax code).
If by increasing the amount of people that use the high end insurance increases the ability to produce newer and better advancements through higher investments, Paul would still be where he is anyways; not using the latest and greatest stuff, just as he was before.
The incentives to innovate are there as long as there is a profit to be made.
I also think that by creating the incentive that pushes the employers to only offer the best plans, the employees that don't need them are now out of a few extra bucks that they could spend on other things.
Maybe the benefits just don't outway the costs... ?
Posted by: ChristianCB at Jan 25, 2007 9:20:48 PM
"Sounds like nothing is going to help Paul, but I don't think it's about helping Paul, I think it's more about what could be hurting Paul (the distortion caused by the tax code)."
This is a distinction without a difference. Avoiding something harmful is a benefit. So, when I talk about "helping Paul" I am talking about anything that affirmative benefits him OR allows him to avoid something harmful.
"If by increasing the amount of people that use the high end insurance increases the ability to produce newer and better advancements through higher investments, Paul would still be where he is anyways; not using the latest and greatest stuff, just as he was before."
This is not true. First of all, the IP protections for innovation do not last forever. Second, competition from non-infringing innovation can drive prices down, despite IP protection. So, in the long-run, Paul benefits from the existence innovations that he cannot afford in the short-run. Second, if there is an emergency life and death situation, society will likely subsidize Paul's consumption of an innovation he could not afford on his own. So, curtailing innovation, even innovation that Paul cannot afford in the short-run, is not something that leaves Paul in the same position. Curtailing innovation makes Paul, and everyone else, worse off.
"The incentives to innovate are there as long as there is a profit to be made."
Recently, Pfizer just laid on 10,000 employees. Why Pfizer still has an incentive to innovate, it is clear that those incentives can be increased or decreased, and that in turn will effect the amount of innovation. Innovation is not binary. It either exists or it doesn't. Rather, innovation exists on a continuum. There can be more or less of it, depending on the amount of incentive.
"I also think that by creating the incentive that pushes the employers to only offer the best plans, the employees that don't need them are now out of a few extra bucks that they could spend on other things."
Employees who would do not benefit from healthcare plans explain the so-called "adverse selection death spiral" that is the focus on what Krugman was trying to say.
"Maybe the benefits just don't outway the costs... ?"
Maybe. That question is precisely what needs to be explored. What is the optimal level of innovation anyway? We should remember, that patent protection is a sort of tax/subsidy. Should it be 25 years instead of 20? 15 years? Regardless, we as a society DO subsidize innovation, and always have as long as we have had patent protection. By allowing companies to artificially increase prices way past marginal cost, patent protection is like a tax that subsidizes innovation. We can always ask whether we are giving companies too much or too little incentive to innovate.
BUT, that question cannot be answered by drawing a stupid little diagram in less than a minute, like Alex did. It takes industry specific analysis.
Krugman's original point stands, there is no serious and reliable economic analysis that demonstrates that robbing Peter will help Paul. And, obviously, those who want to rob Peter had better demonstrate with clear and convincing evidence it helps Paul before we do so.
Maybe getting away from the graphs would actually help certain economists actually think. Graphs are a great tool. They are no substitute for serious and reliable economic analysis.
Posted by: Ragerz at Jan 25, 2007 9:42:04 PM
Rob C writes:
"I buy the reasoning. There is a subsidy in place, so people buy more than the optimal quantity at no greater cost to themselves, but to society."
This doesn't really make sense. For those health products where long-run supply is flat or near flat, their are no pecuniary externalities to harm Paul. Instead we are talking of only a benefit to Peter.
If you are talking about the idea that subsidizing innovation leads to more than an optimal quantity of innovation, I don't think this makes sense divorced from a very specific analysis of innovation.
Patent protection is a form of tax/subsidy. It can be increased or decreased. Should we abolish all patent protection, on the theory that all subsidies prevent the "optimal" amount of innovation? What is your definition of "optimal" in the context of innovation anyway?
Posted by: Ragerz at Jan 25, 2007 9:47:41 PM
Poorly designed health insurance, and most is poorly designed, is a horrible negative externality causing overuse of health services and increasing the cost of medical care and medical insurance for everyone. Paul Krugman's statement to the contrary is further evidence that economists need to be licensed.
Posted by: WS Grizzard, MD at Jan 25, 2007 9:49:46 PM
Keith writes:
"Certainly, subsidizing gold-plated health plans can lead to misallocations of investment dollars, as drug companies overinvest in certain types of innovations and engage in all sorts of marketing."
Patent protection is a form of tax/subsidy for innovation. Patent protection attracts investment dollars from industries where patents aren't available, to industries where patent protection is available. Would you characterize that as a "misallocation of investement dollars"?? Companies that are eligible for IP protection also engage in marketing. Think iPod. Is all marketing socially wasteful? Surely, there would be less marketing of the iPod if we lessened IP protection for it.
When it comes to innovation, the question is not whether we should subsidize it. Because we always subsidized it with an implicit tax on consumers in the form of higher prices as long as we have granted patent protection. The question is how much should be subsidize it.
Everyone agrees with subsidizing innovation to some degree. Unless you think that people will innovate enough when they have no financial incentive to do so, which I don't think any serious person thinks.
In any case, if you want to argue that innovation is oversubsidized (perhaps we should decrease patent protection??) that is fine. But you aren't going to be able to make this argument without an industry specific analysis.
So sorry. Krugman was right all along. There is no serious and reliable economic analysis that shows that robbing Peter will benefit Paul. (1) For existing treatments, you would have to show the long-run supply curve is not flat or almost flat. (2) For innovative treatments, you would have to show that the benefits of the treatments outweigh the costs of the subsidy. This would obviously require an in-depth industry specific analysis AND would always be subject to debate. You may value a new cancer treatment different than the people who have the cancer. Not only that, you would have to show that this subsidy to innovation (in the form of gold-plated insurance plans) is the best one to eliminate, instead of say, making changes to patent law. And even if you show that this subsidy is not the most efficient, the reason isn't because it primarily benefits Peter at Paul's expense. So Krugman stands and is no albatross.
Posted by: Ragerz at Jan 25, 2007 10:06:15 PM
WS Grizzard, MD writes:
"Poorly designed health insurance, and most is poorly designed, is a horrible negative externality causing overuse of health services and increasing the cost of medical care and medical insurance for everyone."
No one is arguing for "poorly designed health insurance." But I think you have not grappled with another problem, that is underuse of health services when such services could prevent a more serious (and expensive) problem.
It is not an overuse of mechanical services to get an oil change when such maintenance will prevent a more serious break down later. So, I think one has to be specific about what they are concerned about being overused.
Second, if you are an MD, perhaps you should lose your license unless you can address the "adverse selection death spiral" that Krugman is concerned about. Your not really in an intellectual position to criticize Krugman, until you understand and address that issue.
Posted by: Ragerz at Jan 25, 2007 10:11:40 PM
Having commented a little much on this particular thread, I have decided that this will be my last comment.
For a very interesting summary as he sees it of the views of right-wing versus left-wing economists on health care by Brad DeLong, check out this post here.
Posted by: Ragerz at Jan 25, 2007 10:34:09 PM
First, Ragerz's desperate flailing to defend Krugman would be touching if it weren't also a tad creepy. Krugman's a great economist, but why would anyone spend so much energy trying to shore up Krugman's obvious error when he popped off in a New York Times column?
Ragerz can't seem to deal with the fact that when you subsidize people to take plans that have them pay a smaller fraction of their healthcare costs than they would on their own, you shift demand out. Ragerz also can't face the fact that Krugman's past concerns about rising health care costs imply a belief in an upward-sloping health care supply curve.
If you subsidize something, people want more of it. Since Krugman's expressed his concern about rising health costs, it's pretty clear he's expressed a belief in an upward sloping long-run supply curve in health care.
When he was called on his overstatement, Krugman went back and tried to assert a horizontal long-run supply curve in health care to save himself, but that would imply some very different things than what he's said in the past. Samwick and Alex in a rout.
But I give Ragerz the Randall "Tex" Cobb prize of taking so many punches so well in a doomed cause.
Posted by: Keith at Jan 26, 2007 12:37:44 AM
Interesting link Ragerz...I'm glad I'm not pushing either viewpoint. I got this thing about telling other people how to live; I guess I'm just another nice guy. :)
Posted by: ChristianCB at Jan 26, 2007 12:51:10 AM
Keith,
I couldn't help but respond, since you are blatantly mischaracterizing me.
You write:
Ragerz can't seem to deal with the fact that when you subsidize people to take plans that have them pay a smaller fraction of their healthcare costs than they would on their own, you shift demand out.
No argument from me here. If you subsidize something, it shifts the demand out. I think the relevant question is what happens to supply in the long-run. Is there some reason you thought I was denying that subsidies tend to increase demand?? I don't think I ever wrote anything that would justify you in thinking I don't accept that subsidies increase demand.
As a rule of thumb, when someone attacks a strawman, that often (but not always) indicates weakness in their own argument.
Ragerz also can't face the fact that Krugman's past concerns about rising health care costs imply a belief in an upward-sloping health care supply curve.
I think your confused. I already covered this point. Healthcare shouldn't be thought of us one market. At the very least, we need to divide it into existing technologies and innovative new technologies. It is perfectly possible for the long-run supply curve of existing technologies to be flat while only the long-long-run supply curve for new technologies (after patents expire) is flat. Since the intermediate supply curve for new technologies is not flat because entry is hindered and competing technology is subject to claims that it infringes on the patent of the original. Further new technologies are being invented fairly frequently, creating entirely new markets within healthcare. This alone would explain rising prices in the healthcare sector, despite a flat supply curve in the long-run in any new market invented through innovation.
Does that not make sense to you? You can have rising prices AND flat long-run supply curves if you have a lot of innovation. As soon as the patent expires on one technology, several new technologies and corresponding markets have already come into being. So, while prices fall for old technology, new technology is still expensive. Also, note that I have also brought up the concept of "mostly" flat supply curves to cover the possibility that a minority of supply curves might be other than perfectly flat. A few markets within healthcare varying from a norm of flatness does not change the overall landscape.
To make it simple, it is possible for there to be rising prices and flat long-run supply curves where in the short and intermediate term, new markets in healthcare are constantly being created and are characterized by something other than flatness and the number of new markets created by new inventions is significant. Think about it. You see rising prices overall, because prices to access new technology pushes up the average, even while the price of old technology is not increasing in response to increased demand. In the very long-run, when new technology loses IP protection, then it too will be characterized by long-run flatness. However, then the new technology will become old technology, and there will be new new technology.
All of this is not modeled very well with a single supply and demand curve. Which is why you should reject that model.
Overall, the flatness of old technology is relevant. It means that we don't have to worry about pecuniary externalities with respect to old technology. Nor do we really have to worry about it with respect to new technology. Curtailing Peter's consumption of new technology that would not be invented but for his consumption cannot possible increase Paul's access to that technology! If Peter's consumption did not exist, Paul's consumption would be zero! In no way can Peter's consumption be said to be decreasing Paul's consumption when the market would not even exist, but for Peter's consumption.
[1] If you subsidize something, people want more of it. [2] Since Krugman's expressed his concern about rising health costs, it's pretty clear he's expressed a belief in an upward sloping long-run supply curve in health care. (numbering added by Ragerz)
[1] Is obviously correct. (Usually.) No one has been debating this point.
[2] Is not correct, since good analysis would seperate healthcare into multiple markets. All existing markets could be flat in the long-run, but new markets that are created and are not flat in the short-run (but are in the long-run) would create rising prices.
Anyway, if you would pay closer attention to my previous posts, you would see that I already said this.
Posted by: Ragerz at Jan 26, 2007 1:43:37 AM
I would like to raise a point with regard to the graphical rebuttal which I haven't read so far in the comments (though it simply might have escaped me). The price for Paul can only go up if the excess demand of Peter exerts some market power. So you have to assume away the atomistic competition on the demand side in order to let that happen. Just my 2 cents, I am not so much into US health care policy, it's only Micro 1.
Posted by: Stefan at Jan 26, 2007 4:50:20 AM
"Steve Miller distorts what Krugman said by characterizing it as thus:"
Actually, I was characterizing what *you* said. I actually said "there's no point in pretending that Krugman believes" something he did not say. For example, there's no point in pretending that Krugman meant to
"Add the two adjectives, 'serious and reliable' to the phrase 'economic analysis'" when he didn't add those adjectives.
Posted by: Steve Miller at Jan 26, 2007 9:06:39 AM
"Is not correct, since good analysis would seperate healthcare into multiple markets."
Then Krugman himself performed poor analysis when he talked about health care costs rising, since he did not separate health care into multiple markets. In addition, Krugman himself claimed the long-run supply curve for health care was flat, meaning Krugman himself treated health care as a single market, and made a statement that he, in treating health care as a single market in the past, had flatly contradicted.
Since Krugman has discussed health care as one market, and you claim that some sub-markets in health care have rising long-run supply curves, then Krugman's one-market approximation has an upward sloping supply curve. Or are you now going to claim that there are sub-markets with downward long-run supply curves which balance out those upward-sloping supply curve markets?
And I've heard and seen real health care economists use the Micro 101 analysis Alex discussed. Krugman made a dumb statement, and he's basically been smartly backing off of it while using the flat long-run supply curve for health care as his fig leaf for his quick escape. But belief in a flat long-run supply curve clearly contradicts Krugman's past concerns about rising health care costs.
Dude, really, your boy really whiffed this one. It's okay. It happens to everyone. But don't fight harder for somebody else's mistake than the mistaken person themselves.
Posted by: Keith at Jan 26, 2007 9:08:06 AM
It seems apparent to me that Ragerz's technique here is of the 'baffle them with bull$#!+' school. He keeps trying to complicate things that are simple and obviously against him.
Posted by: Random J. Reader at Jan 26, 2007 11:24:08 AM
RJR-
Good comment. I will give the big R credit for sheer persistence. He does have an answer for everything and it is harder to hit a constantly moving target. Alex - thanks for pointing out Krugman's hidden assumptions. Nevertheless, he has been caught so many times that it's no longer very sporting.
Posted by: Rich Berger at Jan 26, 2007 12:03:20 PM
Ok, all this is nice and fancy, but living in one small and not-so-rich "new-Europe" countries I could say that we pay 4% of salary as mandatory health insurance + 9% paid by employer. For not employed state pays fix fee to public insurer. All medical treatments and at least one drug per category fully covered.
As a country we spend 4-5% of GNP on health beating USA in any available health statistic at the same time, enough said...
Plus, we were able to introduce plenty of breakthrough medical advances in last 20 years for the country of our size (this is for a "but, but USA pays all the medical research and all other are free-loaders" crowd)
Posted by: Jozo at Jan 26, 2007 12:32:50 PM
"Plus, we were able to introduce plenty of breakthrough medical advances in last 20 years for the country of our size (this is for a "but, but USA pays all the medical research and all other are free-loaders" crowd)"
This isn't a good answer when a large portion of the research is funded in anticipation of sale on the US market in order to cover research costs. The argument is not that the US government or US companies pay for a majority of the research (though in fact it is very close to a majority) but that sales on the US market cover research costs.
Posted by: Sebastian Holsclaw at Jan 26, 2007 1:54:43 PM
I think that the NYT editorial page editor should have removed the 'wows'. Seems rather unprofessional to me. One step away from saying "I know you are but what am I"? or something
Posted by: jbt at Jan 26, 2007 4:08:05 PM
There is also the fact when illegal alien Pedro is given health care at essentially no cost, that also increases demand AND raises healthcare costs as Paul's premiums and/or taxes are raised to subsidize this added cost burden.
Posted by: Matt at Jan 26, 2007 6:41:21 PM
Speaking of supply not being perfectly elastic in the long run, from the one Amazon reader review of Krugman's above-cited text, Microeconomics:
One Star.
This is probably a very, very good book. However, it turns out that this is simply one-half of the authors' book "Economics" and, currently, the complete book seems to sell for about the same price as this one piece of it! So, be economical -- buy "Economics" instead.
Posted by: edh at Jan 26, 2007 6:41:22 PM
>Krugman's original point stands, there is no serious and reliable economic analysis
It was one thing for you to reinterpret what Krugman must have meant (that's quite a gift you have, the power to read minds) and leave it in scare quotes, and quite another to subsequently refer to it in clean text as if it were now established and conventional wisdom. Overpowering intellect indeed.
Posted by: lrC at Jan 26, 2007 7:31:43 PM
Wow, that Ragerz fellow has me almost convinced, without even reading what Krugman wrote, that it's garbage. No one would flail so wildly and with such breathtaking illogic to defend a sound proposition.
Continuing to a more interesting point: I suggest, contra the Nobel laureate, that the long-term demand curve for health-care is vertical, because there is a finite limit to the stuff arising from the bare fact of mortality, and the fact that, in the end, most people will spend everything they have to gain an arbitrarily small postponement of their own death.
Since no conceivable technological advance can postpone death forever, it follows that in the long run we can never supply the amount of "health-care" (meaning postponement of death) that people demand.
The arguments about supply of doctors vs. price of healthcare, etc., miss the point that it's not just quantity of healthcare that matters (and affects its price) but also the quality. If a higher price of healthcare pays for the development of new, fancy, expensive but effective treatments, then people will bid it up, because they want those new treatments. Especially when they're older, with money to spend but plaque in the arteries.
Posted by: Carl Pham at Jan 26, 2007 9:13:05 PM
Keith,
How has Krugman contradicted himself with what he has said in the past? (I'm not recalling his specific comments.)
Posted by: Brian at Jan 26, 2007 9:17:31 PM
I was taking it as true to a pretty good approximation that the long-run supply curve for medical services is horizontal. Unless you think that there's permanently limited supply of medical education, or something, why should we think otherwise?
Is Krugman serious? Honestly. Is Krugman serious? "Why should we think otherwise?" Ummm...let's see how about the fact that the people who become doctors generally have a huge number of employment options? Maybe the fact that becoming a doctor is incredibly painful and usually involves going deep into debt? Perhaps the possibility that doctors are in a good position shift their work habits to account for the lower price of their labor?
Posted by: Bill Dalasio at Jan 26, 2007 9:21:02 PM
If Krugman predicts that more potential doctors will enter the health care provision market, then the worst thing he could prescribe is a change to the cost structure of the market that would deter new entrants to the market.
Or am I missing something?
Posted by: Birkel at Jan 26, 2007 9:48:12 PM
As Arnold Kling has pointed out, we receive "premium" medical which is not rationally allocated, because people are insulated from the cost of medical care. MRIs are the classic example.
Krugman seems to be arguing that's not the case, but it's hard to believe demand is very elastic when health care costs are rising 10% a year -- there's no incentive to keep costs down because consumers can't flcok to the Wal-Mart of health care. There isn't one.
"Unless you think that there's permanently limited supply of medical education, or something, why should we think otherwise?"
The supply, stupid. There's an unlimited number of possible new health care innovations which can cost an unlimited amount of money. If present trends continue, we will in my lifetime be spending 3/4 of our incomes on health care. That's not quite a Health Care Event Horizon, but it's close.
Posted by: TallDave at Jan 27, 2007 12:01:27 AM
"If a higher price of healthcare pays for the development of new, fancy, expensive but effective treatments, then people will bid it up, because they want those new treatments. Especially when they're older, with money to spend but plaque in the arteries."
The problem is, there's little incentive for new, fancy, cheaper but more effective treatments. Look at dicholoracetate; no major company will get behind it because it can't be patented. You can bet if people paid for most of their own cancer treatment, companies would be breaking down the door to test the stuff.
Meanwhile they spend billions developing and promoting statin drugs, which can have serious sides and have not been shown to improve mortality, just because they change a number on a test. And why shouldn't they? The market as currently built rewards that behavior.
Posted by: TallDave at Jan 27, 2007 12:15:58 AM
Somewhat lost in this analysis, is that Krugman is criticizing a statement made by President Bush, a politician. Politicians speaking to voter talk "in the short-term". Surely, Krugman will acknowledge that in the short-term subsidies will increase health insurance costs, which is the point the President was making. President Bush did not say, "in an abstract theoretical time frame that economist call "the long-term", subsidizing health care insurance will increase costs, because the long-term supply curve is sloped upward" Krugman made a stupid statement and was called on it. He then suggested a excuse for his mistake that makes no sense when consider in context.
Posted by: PaulD at Jan 27, 2007 7:59:18 AM
Ragerz:
The supply of computers, in the long-run, might be flat.Say there was a large increase in demand. This would increase the price of computers. This, in turn would lead to at least two effects. Existing computer makers would have more incentive to increase efficiency (i.e. technological changes) thus increasing supply. New entrants would an incentive to enter the industry. Also increasing supply.
If the increases in supply (shift in the supply curve) matched the increase in demand (shift in the demand curve) in the long-run, you would have a flat long-term supply curve.
This one statement alone ought to bar you from ever being taken seriously as an economist.
Computers are made from limited resources (specifically copper). An increase in demand for computers may in fact drive moanufacturing costs down, but it won't drive material costs down. Unless someone comes up with a replacement for copper in circuit boards (or a massive new copper mine), there's enough competing demand for copper in other industries to ensure that its price will increase without bound.
Therefore, the supply of computers cannot be flat.
For the same reason, the apportionment of health-care services cannot be. You might want to argue that health care insurance has the potential for a flat supply curve, but what is insurance but a contract to sell someone else's services? I can write contracts all day long. What happens to the cost of the services themselves when there are more contracts than there are medical personnel to fulfill them? One of two things (usually both) - my premiums go up by 18% a year, or my insurance company starts cutting benefits.
Unless, of course, everyone's a doctor.
Posted by: Brian at Jan 27, 2007 10:11:18 AM
"Look at dicholoracetate; no major company will get behind it because it can't be patented."
Yeah, yeah, the Evil Drug Companies and their government lackeys are preventing all innovations that can't be patented.
I assume that that study from the 80's that showed that small amounts of unpatentable asprin could prevent second heart attacks was a hallucination.
-dk
Posted by: Dick King at Jan 27, 2007 3:02:50 PM
Brian,
Copper? You can't be serious.
Such a scarce resource with absolutely no substitutes. I am sure that it makes the long-run supply curve practically vertical.
Your a moron.
Posted by: Ragerz at Jan 27, 2007 10:15:56 PM
I'm a big Krugman fan, read him a lot, and he very, very rarely makes mistakes (and I find him to be almost always illuminating and correct). With all that said, I think this is one of the times he spouted off and was wrong. It is definitely correct that subsidies for some can raise prices for all. The supply curve for many health services is probably not flat in the short or even medium term.
With that said, we have no good idea how much of health care is "overspending", how much people spend for things they "do not need", and how this is related to insurance policies. After all, the effect of health care financing on prices has no relation to whether people are "overspending" for useless things or just "spending". If we took away all subsidies for everyone's health insurance or health care, the price of health care would drop...but a lot of avoidable deaths would likely happen. The argument that problems with health care costs have to do with over generous insurance coverage to me trips up on the lack of definition of what exactly how and where supposed "overinsurance" causes "overspending", combined with the lack of plausible proposed mechanisms that would reduce only this "overspending" and not needed care.
Posted by: MQ at Jan 28, 2007 12:09:54 AM
"Actually, I think that you are fundamentally confused. Krugman isn't looking for analysis that assumes one thing or another. You assume it is sloping. I assume it is flat. But there is no serious and reliable economic analysis out there, that Paul Krugman is aware of, that demonstrates rather than merely assumes that long-run supply curve is other than flat or mostly flat."
Its been a long time since I was an undergraduate economics major, but it seems to me almost impossible to measure empirically a long-term supply curve. All data exists in a short-term time frame. Isn't the long-term supply curve is a theoretical abstraction--in that markets in the real world move towards but for the most part never actually reach a long-term equalibrium. So it is hardly a "wow" type statement to say, "there is no serious and reliable economic analysis out there that demostrates that the long-term supply curve is other than flat or mostly flat".
Posted by: PaulD at Jan 28, 2007 6:18:59 AM
PaulD,
I agree that you cannot prove, in an absolute empirical sense, the shape of a long-term supply curve, since economists cannot be expected to predict the future.
However, you can supply some empirical evidence combined with an industry specific analysis that may lead to a decent, although by no means certain, understanding of what the long-run supply is likely to look like.
Posted by: Ragerz at Jan 28, 2007 6:24:55 AM
Keith writes:
"you claim that some sub-markets in health care have rising long-run supply curves"
No, not exactly. My claim is that the shape of innovative medicial treatment while something it is protected by patent obviously is not flat while the patent protection lasts.
If you have a long-run long enough for the patent protection to expire, the curve probably would flatten out as well.
So, my claim is that there is an intermediate run period with a rising supply curve.
But, even so, I don't think robbing Peter helps Paul with respect to these submarkets, if Peter's consumption is necessary to give companies incentive to innovate in the first place.
Posted by: Ragerz at Jan 28, 2007 6:33:00 AM
So to get this straight, Krugman should have said: "Again wow. Although all economists agree that in the short-term, subsidizing health insurance costs increases demand and therefore prices, no economic analysis that I am aware of demonstrates conclusively that this is true when the market acheives long-term equilibrium." Yeah, sure. That is definately what he meant to say.
Posted by: pauld at Jan 28, 2007 8:38:19 AM
Ragerz -
Name for me the substitutes for qualified medical personnel. You're assuming a limitless supply of doctors, nurses, medicine, etc. But I'm the moron?
You admit that the supply curve for the most important input to a computer (copper) is vertical, but you still believe that the supply curve for computers is flat? And I'm the moron?
You claim that nobody can predict long-term economic trends, and then proceed in your next post to do precisely that? And I'm the moron?
Good sir, compared with you my intellect is a sun to your match.
Posted by: brian at Jan 28, 2007 11:58:01 AM
brian,
You just changed the subject. Remember, we were talking about copper. You were explaining how the long-run supply curve for computers can't be horizontal because of copper. And, since you think that, I am asserting that you are a moron.
I was being very sarcastic when I suggested that copper would make the long-run supply of computers veritical.
Posted by: Ragerz at Jan 29, 2007 1:13:19 PM
Late but still relevant: Amy Finkelstein at MIT has exactly the paper Krugman syas doesn't exist:
The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare 2007, Quarterly Journal of Economics. February.
http://www