Intuitively Couterintuitive

Arguing that Economics is more intutive than usually presented, Bryan Caplan over at EconLog gives some examples of intuitive economic arguments:

1. Counterintuitive claim: Free trade makes countries richer, even if the other countries have big advantages like cheaper labor or more advanced technology.

Intuitive version:  We’d be better off if other countries gave us stuff for free.  Isn’t “really cheap”
the next-best thing?

2. Counterintuitive claim: Strict labor market regulation is bad for workers.

Intuitive version: Employers don’t like hiring people if it’s hard to get rid of them.  Suppose you had to marry anyone you asked out on a date!

3. Counterintuitive claim: Egalitarian socialism creates poverty… even starvation.

Intuitive version: If everyone gets the same share whether or not they work, you’re asking people to work for free.  People don’t like working for free, especially when the work isn’t very fun.  (This is my response to Sumner’s Great Leap Forward Challenge: “But how do we explain to school children that millions had to starve because of a policy that encouraged people to share?”)

4. Counterintuitive claim: Prices are determined by supply and demand.

Intuitive version: If the good were free, consumers would want a lot, but producers wouldn’t feel like making much.  If the good cost trillions of dollars, producers would want to make a lot, but consumers wouldn’t want to buy any.  In between there’s got to be a price where consumers want to buy as much as producers want to make.


John Stossel explains the problem with Government run health care:

Medical care doesn’t grow on trees. It must be produced by human and physical capital, and those resources are limited. Therefore, if demand for health care services increases—which is Obama’s point in extending health insurance—prices must go up. But somehow Obama also promises, “I won’t sign a bill that doesn’t reduce health care inflation.”

This is magical thinking. Obama, talented as he is, can’t repeal the laws of supply and demand. Costs are real. If they are incurred, someone has to pay them. But as economist Thomas Sowell points out, politicians can control costs—by refusing to pay for the services.

It’s called rationing.

Advocates of nationalization hate that word because it forces them to face an ugly truth. If government pays for more people’s health care and wants to control costs, it must limit what we buy.

So much for Obama’s promise not to interfere with our freedom of choice.

This brings us back to end-of-life consultation. As the government’s health care budget becomes strained, as it must—and, as Obama admits, already is under Medicare—the government will have to cut back on what it lets people have.

So it is not a leap to foresee government limiting health care, especially to people nearing the end of life. Medical “ethicists” have long lamented that too much money is spent futilely in the last several months of life. Are we supposed to believe that the social engineers haven’t read their writings?

And given the premise that it’s government’s job to pay for our heath care, concluding that 80-year-olds should get no hip replacements makes sense. The problem is the premise: that taxpayers should pay. Once you accept that, bad things follow.

In the end, perhaps the biggest objection to nationalized health care is the “principal-agent problem.” For whom does the doctor work? Ordinarily, the doctor is the agent of the patient. But when government signs the checks and orders doctors to reduce spending, it is not crazy to think that this won’t influence their “advance care planning consultation.”

Right, but Wrong

From Hot Air:.

Rep. Anthony Weiner (D-NY) returned to the ObamaCare battle on MS-NBC’s Morning Joe today, preaching the public-plan gospel just as he did yesterday on CNBC. However, this time, Joe Scarborough goaded Weiner into a little more honesty than he’s offered on the effort to “reform” health care. Declaring that “health care is not a commodity,” Weiner says his aim is to eliminate all private insurance — which is why he will not yield on the public-plan option.

Weiner repeatedly says “health care is not a commodity.” The article tries to refute this by saying that anything with a cost is a commodity… but that’s not really true. Health care is a service, health insurance is a good, and aspirin is a commodity.

The essential characteristic of a commodity is fungibility. We say that X has been commodified if there is little to no difference between the utility of the product across suppliers. That’s obviously not true of services. The utility (quality, effectiveness, price…) of health care depends on the abilities of individual health care providers.

So Weiner is right. Health care is not a commodity. It’s a service.

But what does that mean for the “reform” debate?

Does it mean that we should try to treat health care as a fungible commodity? Or does it mean that we should respect the individual services provided and work to improve the quality and availability of those services?

If we work to eliminate private insurance (a good that increases utility by spreading risk) and force all service providers to negotiate with a single payer (a monopsony) then we are saying that while Health care is not a commodity, we sure wish that it was.

The monopsony power of a single payer system works to bring the price of the good/service in question down. But good intentions don’t exempt markets from economics. Prices cannot be arbitrarily lowered without affecting supply. In the case of services, especially in the case of capital intensive services (where the providers require years nad years of expensive training), monopsony price controls result in an overall reduction of the supply and quality of available services. Expensive services are eliminated and the numbers of service providers dwindle in response to market pressures.

Finally, because monopsony power in health care generally fails to distinguish between the quality of health providers (every doctor is paid a fixed amount per procedure), it reduces the incentives for providers to improve the marginal quality of their work.

Weiner also asks, “What is [the health insurer’s] value? What are [the health insurers] bringing to the deal?”

This is, I think, a common concern. It doesn’t seem as though health insurers do very much other than collect large premiums and deny coverage. Partly this is because for the average American, the actual cost of health care is a mystery. $20 co-pays and $8 prescription fees mask the actual cost of providing those services. Health insurance hasn’t actually been insurance for a long time. For most of us, the bulk of our annual health care costs are paid for directly out of our premiums. What would otherwise have been deductible expenses are simply front-loaded in higher premiums. Since we often don’t see actual health care bills (until payment has been denied!) we don’t get that the money we’ve paid as premiums has actually been used as a deductible.

But there’s another reason why I think we’ve come to distrust health insurers (in a way that we don’t distrust our flood insurance providers or our fire insurers): health insurance has in many ways already acquired a kind of monopsony power. Because we have so tilted the tax codes to favor employer provided coverage, health insurance has become structured around actuarial pools (an employer’s workers) that are in many ways arbitrary. Sensible regulation concerning privacy and portability has meant that insurers have had a harder time finding accurate actuarial tables against which to price health insurance, which increases the cost of insurance. Additionally, employer provided insurance has mean that a disproportionate amount of purchasing power has been placed in the hands of insurers with large group policies. The insurer who covers 40% of a community’s workforce, for example, is in a strong position to dictate prices to providers. (But as I’ve said, that power comes with a cost of its own: decreased supply and quality.)

In essence, when you buy your health insurance through your employer, you’re trying to treating health care as a commodity! The insurer packages your care with the care all your coworkers will receive into a big bundle, prices the total bundle of services, and then splits the cost more or less evenly among the subscribers. That’s treating individual services as a kind fungible commodity. If health insurance were really insurance–with reasonable deductibles–then this kind of packaging would work primarily to spread risk, but since we’ve increasingly started using premiums to pay for maintenance and routine care, we’re not so much spreading risk as we are spreading cost–and ultimately–quality.

The solution to this mess is to stop treating health care as a commodity. Increase the number of insurers, increase the numbers of providers. Extend the health care tax deduction to individuals and allow insurance companies to package products that account for real actuarial differences. Increase deductibles, reduce premiums, and extend catastrophic insurance.

The solution to monopsony power is not to increase the power of the monopsony. The solution to a commodification of services is not to increase the commodification of those services. The solution is to increase the number of players in the market and allow specialization, competition, and innovation to increase product differentiation and serivce quality.

Weiner’s right, health care isn’t a commodity. But he’s wrong to try and treat it as one.

The Broken Clunker Fallacy

Shikha Dalmia has an article in Forbes detailing the hidden costs of the Cash for Clunkers program.

Some excerpts:
One, even if one accepts LaHood’s numbers, the fuel savings add up to only 72 million fewer gallons of gasoline every year–about what Americans consume in four and a half hours. This translates into 700,000 tons fewer carbon dioxide emissions annually–about what Americans emit every 57 minutes. …

the program might severely disrupt the ability of the used-car market to recycle parts, producing all kinds of negative unintended consequences for the environment. (Where is the green obsession with recycling when you need it?) The engine, combined with the drive train, accounts for about 35% of the value of the used car. But with this destroyed, it will make far less sense for recyclers to incur the cost of cleaning up mercury and other toxins to mine the remaining parts from the discarded vehicle. The upshot is that the car is more likely to land in scrappage with many valuable parts–engine, pistons, brakes–still intact. …

So, to recap, the Cash for Clunkers plan involves restoring the economy by destroying wealth and healing the environment by destroying resources. By this logic, we should use the stimulus money to fund a new Godzilla brigade to mow down the country and rebuild it in a more environmentally friendly way. Imagine how much richer and cleaner the planet would be.

This is about as classic an example of the broken window fallacy as you can imagine.

It’s a program built around a theory of economic stimulation that was debunked in 1850.


Jeffrey Rogers Hummel’s article, “Why Default on U.S. Treasuries is Likely,” is troubling.

In it, he argues that inflation alone won’t be enough to compensate for the coming Social Security/Medicare budgetary shortfall and that Treasury will instead repudiate a large portion of its debt. I recommend reading the whole thing.

Defaulting on our debt would be bad.

Right now, U. S. treasury bills are traded as essentially “risk free” investments. They form the backbone of the global financial system.

He closes the article with this:

All the social democracies are facing similar fiscal dilemmas at almost the same time. Pay-as-you go social insurance is just not sustainable over the long run, despite the higher tax rates in other welfare States. Even though the United States initiated social insurance later than most of these other welfare States, it has caught up with them because of the Medicare subsidy. In other words, the social-democratic welfare State will come to end, just as the socialist State came to an end. Socialism was doomed by the calculation problem identified by Ludwig Mises and Friedrich Hayek. Mises also argued that the mixed economy was unstable and that the dynamics of intervention would inevitably drive it towards socialism or laissez faire. But in this case, he was mistaken; a century of experience has taught us that the client-oriented, power-broker State is the gravity well toward which public choice drives both command and market economies. What will ultimately kill the welfare State is that its centerpiece, government-provided social insurance, is simultaneously above reproach and beyond salvation. Fully-funded systems could have survived, but politicians had little incentive to enact them, and much less incentive to impose the huge costs of converting from pay-as-you-go. Whether this inevitable collapse of social democracies will ultimately be a good or bad thing depends on what replaces them.

Only four things can happen when the bills come due:

1)  We can raise taxes to cover the shortfall.

This is problematic for several reasons. Revenue does not increase linearly with tax rates and higher tax rates reduce growth rates which further reduces revenue. The target rates, as Hummel points out, would need to be in excess of 45%, a level that far exceeeds anything Americans have shown a willingness to put up with. I think this is a political non-starter. Taxe rates would have to climb across the board and I don’t see any politician in the next twenty years seriosuly campaigning to double the taxes on middle-class earners.

2) We can cut benefits and services, end Social Security and radically reduce Medicare commitments.

Political suicide. No politician will do it. Won’t happen.

3) We can radically inflate the money supply.

Hummel argues that we actually can’t do this because there’s so much private money in the world. I think he’s probably right, but I’ll offer another reason why we can’t do this, and it’s the same as the reasons we won’t do 1) or 2). It’s political suicide. Hyper-inflation affects everyone equally. Everyone’s wealth is reduced both here at home and abroad. Think this recession looks bad? Significant inflation would cripple the global economy.

4) We can repudiate some of our debt.

In other words, we’d just default on T-bills. But of course, we wouldn’t default on the T-bill rate, we’d default on particular T-bills. I’m guessing we’d default on debt obligations held by foreign banks and foreign governments. I’m also guessing that we’d be less likely to default on our debt obligations to Western Europe than we would be to default on our debt obligations to China.

The economic fallout of debt repudiation would be bad, very bad. We’d likely lose the dollar as the world’s reserve currency, some inflation would likely attend any debt default, and the global economy would take a significant hit. But the consequences would obviously be most dire for whoever holds the debt we choose to default on. How will our creditors respond?

Bjorn Lomborg

Bjørn Lomborg has a great commentary up at Project Syndicate (great name) on the Waxman-Markey bill.  I’ve been a fan of Lomborg‘s for some time (and had the pleasure to see him speak some time back), but it’s his last sentence that really resonates, “Wanting to shut down the discussion is simply treason against reason.”

You can get his books here. They’re worth reading. Lomborg is a left-liberal Danish scientist who set out to debunk the claims made by Julian Simon. When he found he couldn’t, he had the courage to admit as much and then took the time to re-examine environmental issues from a rational perspective. The result was The Skeptical Environmentalist, a book that incited enormous outrage. Lomborg was villified and even formally accused of scientific dishonesty. (Cleared of all charges.)

Lomborg’s arguments (heresy!) are relatively simple. In essenece, he’s argued that since we have limited funds and limited means, we should focus our energies where they could do the most good. Not surprisingly, his recommendations (clean drinking water) aren’t sexy or politically fashionable (apostate!). But if you’re interested in a scientific approach to environmental problems, check him out. (For the record, Lomborg is a staunch believer in anthropocentric climate change.)

For more, visit

From the commentary,

Gore and Hansen want a moratorium on coal-fired power plants, but neglect the fact that the hundreds of new power plants that will be opened in China and India in the coming years could lift a billion people out of poverty. Negating this outcome through a moratorium is clearly no unmitigated good.

Likewise, reasonable people can differ on their interpretation of the Waxman-Markey bill. Even if we set aside its masses of pork-barrel spending, and analyses that show it may allow more emissions in the US for the first decades, there are more fundamental problems with this legislation.

At a cost of hundreds of billions of dollars annually, it will have virtually no impact on climate change. If all of the bill’s many provisions were entirely fulfilled, economic models show that it would reduce the temperature by the end of the century by 0.11°C (0.2°F) – reducing warming by less than 4%.

Even if every Kyoto-obligated country passed its own, duplicate Waxman-Markey bills – which is implausible and would incur significantly higher costs – the global reduction would amount to just 0.22°C (0.35°F) by the end of this century. The reduction in global temperature would not be measurable in a hundred years, yet the cost would be significant and payable now.

Is it really treason against the planet to express some skepticism about whether this is the right way forward? Is it treason to question throwing huge sums of money at a policy that will do virtually no good in a hundred years? Is it unreasonable to point out that the inevitable creation of trade barriers that will ensue from Waxman-Markey could eventually cost the world ten times more than the damage climate change could ever have wrought?

Today’s focus on ineffective and costly climate policies shows poor judgment. But I would never want to shut down discussion about these issues – whether it is with Gore, Hansen, or Krugman. Everybody involved in this discussion should spend more time building and acknowledging good arguments, and less time telling others what they cannot say. Wanting to shut down the discussion is simply treason against reason.