The Relative Strength of US Health Care

When it comes to US health care, I have to admit that my knowledge of policies and data is rather limited. I’ve been fortunate to avoid needing much medical care during my life, to this point, but have certainly experienced my share of long wait times and other frustrations. Given those experiences and countless stories from others, I was generally willing to accept the reports and claims about how poor the US health care/insurance system is when compared globally. A few recent items, however, have altered my impression and made me skeptical about the actual inferiority of the US health care system.

Two weeks ago, Russ Roberts hosted a podcast with Scott Atlas, Senior Fellow at Stanford University's Hoover Institution and author of In Excellent Health. Atlas discusses the methodological and data inconsistencies contained in several widely heralded reports, then dismantles the impression that health care and services are more widely and readily available in other countries. He also touches upon a surprising difference in level of care for patients with and without health insurance:

Guest: there are studies in the literature--in fact numerous studies, study after study--that show in a variety of settings, whether it's heart disease, cancer, transplants, all kinds of things: people have better outcomes, better medical care, if you just take the people who are just as sick from each of those populations--private insurance, Medicaid, and no insurance whatsoever. Private insurance has far better outcomes than Medicaid. Even the same sickness of person. It has nothing to do with how sick somebody was when they started. And then, the even more alarming thing is it is very common in these studies--these are peer reviewed studies in the medical literature--that the people with Medicaid do worse than the patient with no insurance whatsoever.

Later in the podcast, Atlas draws into question the true number of uninsured individuals within the US:

Guest: I do a lot of international traveling, I read the newspapers and speak to people outside the United States, and it is portrayed as scandalous that we have 50 million or so Americans with no health insurance. Which I mentioned is equated with no health care. As if they're synonymous. Russ: As if they are out on the streets if something happens. Guest: But I think here, this is a measure that really has to be scrutinized. And I did in my book. This so-called 50 million uninsured--because when you look who is this population, the raw data, the documents, the U.S. Census Bureau documents, and others, you find out that it's not really 50 million people. After you say: Well, okay, about 10-15 million people are not U.S. citizens in that group--and I'm not saying they shouldn't get health care, but I'm not sure you are going to reform the U.S. health system to get non-citizens insured. Russ: Correct. That's going to be a challenge. Although not that group, but there are others who are illegal who do get health insurance. Guest: Who do have health insurance. Right. And then you take a look at who answered the U.S. Census Bureau survey and said they didn't have health insurance, and it turns out--let's just say, I don't remember the exact number, but about another 10 million or so that said they didn't have insurance that actually were using insurance. And we know that because the Census Bureau people went and looked, looked up and found medical records; these people had insurance that they were using, and mainly Medicaid. Russ:They didn't consider that insurance. Guest: They probably when they answered the question, they thought the question meant: Do you have private insurance? But, be that as it may, this is in one of the Appendices of the U.S. Census Bureau documents, Appendix C-- Russ: Good to know--Guest: Is that they actually were aware--the U.S. Census Bureau were aware. But they didn't change the response to the question. And then there's another 13 million adults and children--of these 50 million people, 13 million who actually are already eligible for public insurance--Medicaid, a tiny bit Medicare, and the Children's Health Insurance Program (SCHIP or CHIP)--that simply did not sign the paperwork because they haven't accessed the system. So, they haven't used it. Common sense says you wouldn't want to redesign another system to make them eligible for that when they are already eligible for the current public health insurance system. So, you are left with a population of less than 5% of people in the United States who don't have insurance or who are not already eligible for current government insurance programs. I would not call that a crisis in the uninsured.

Separate from this conversation, John C. Goodman at The Beacon recently wrote about Private-Sector Socialism: What the Right and Left Don’t Understand about Healthcare in Other Countries. In this post, one of several regarding the broad topic of health care, Goodman comments on the immense similarities between US and global health care systems:

The pluralism of US healthcare is important to keep in mind in thinking about health reform. Suppose you are dissatisfied with the way the healthcare system is working in your city or your locality, and you are curious about whether somewhere in the world people have found a better way of doing things. Odds are that you are going to find better answers somewhere within the United States than outside of it.

People on the left and right who are prone to stress the differences between US healthcare and the healthcare of other countries invariably ignore the 80 percent commonality and focus on the remaining 20 percent. On the left, the focus is usually on the ways we appear to be worse; on the right, the focus is usually on the ways we appear to be better. But even here the differences are narrowing, and I expect that trend will continue.

There may be equally good reasons to be skeptical of the perspectives provided by Atlas and Goodman, but my intention is simply to offer a counter argument to the frequent claims that America’s health care system is a disgrace among advanced economies. In my opinion, the thoughts provided by Atlas and Goodman, at the very least, suggest taking a more critical look at the supposed successes and failures of health care systems worldwide. Failure to do so may encourage policy decisions that push current levels of care in the wrong direction. The current US health care system is certainly not great, but relatively it may be far better than many realize.

Quote of the Week

...is from Russell Robert’s 2009 book  The Price of Everything: A Parable of Possibility and Prosperity

“Genetic mutation is random. Natural selection accepts the good changes and rejects the bad ones. Economic evolution isn’t random. Changes in products aren’t random. The knowledge and innovation come from entrepreneurs trying to anticipate what people want and what will survive in the marketplace. That makes it more focused than biological evolution. And you get progress, not just survival.”

In this novel, Roberts masterfully portrays the emergent order of our world and economics through a dialogue between a student and teacher. The story is very compelling and inspiring for anyone with visions of becoming a teacher. A great read for anyone with even a remote interest in economics.

Quote of the Week

The first installment of the Quote of the Week comes from Time on the cross: can fiscal policy save Japan?, by Paul Krugman (9/21/99):

“What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.”

For the past few years Krugman has been vigorously promoting the Japanese strategy he had previously ridiculed. To be clear, I do not disparage Krugman for simply changing his mind on this issue. What I do question is whether or not his view of other economic models has changed.

Heterodox economics has been gaining recognition over the past couple years, including this recent piece in The Economist (Marginal revolutionaries). One of the noted economists in the article, Scott Sumner, drew my attention to this quote during a recent podcast with Russ Roberts (Sumner on Money and the Fed; listen to the whole thing for a better understanding of market monetarism and NGDP targeting). Sumner is a primary proponent of greater monetary stimulus, who is perplexed that the above quote is now playing out in the US. Meanwhile other branches of economics, namely post-Keynesianism, are working to encourage acceptance of models with multiple equilibrium (which had reasonable success in forecasting the previous crisis).  

During the next few weeks I will outline the strengths and weaknesses of several branches of heterodox economics. Hopefully by acknowledging different models, the benefits of each can be combined to better shape policy responses.

Roberts: The Microeconomics of the Broken Window Fallacy

As a DC resident, last week I experienced both an earthquake and a hurricane. Thankfully neither resulted in significant injuries within the impacted areas and property damage was also less than some might have expected. These experiences have provided opportunity for several economists to once again discuss the economic effects of natural disasters. Earlier this year, when Japan was hit by a terrible earthquake and tsunami, numerous economists and market "experts" noted that the destruction would be positive for economic growth due to rebuilding efforts. Similar comments sprung up following Hurricane Irene's treacherous path across the eastern seaboard.

These discussions are precisely when better definitions of economic growth are needed apart from GDP. Based on my understanding, if someone's car was destroyed and they choose to replace the vehicle by purchasing another, that purchase adds to GDP, while the lost vehicle subtracts nothing. From a real world perspective, the person whose car was demolished is now worse off, since they still own only one car but are now out a significant sum of money. Meanwhile, the car salesman is only better off by the amount the other individual spent. On the whole the economy is not better off since the amount of goods remains the same. GDP therefore fails to account for the depreciation or destruction of asset value, which plays a significant role in establishing wealth and economic well-being.

Russ Roberts of Cafe Hayek, who helped create the "Fight of the Century" videos (linked below), provides a wonderful example of what's known as the broken window fallacy. His counterpart on the website, Don Boudreaux, also had a humorous retort to Peter Morici (Professor at University of Maryland) regarding this fallacy and his willingness to destroy property for payment in order to benefit others (http://cafehayek.com/2011/08/open-letter-to-peter-morici.html). I urge those not familiar with the argument to read the articles and determine which theory is more compelling.

The Microeconomics of the Broken Window Fallacy:
The Keynesian defense of breaking windows or the economic virtues of hurricanes would go something like this:

Yes, breaking windows is destructive. Yes, it reduces wealth. But when there are large amounts of unemployed resources, say in the glass business, then breaking windows is close to a free lunch. In a world of unemployed glaziers, breaking windows can jump-start the economy by putting the unemployed back to work. They will spend the money they receive for repairing the broken windows.

When confronted with the claim by those of us who like Bastiat, that the money to repair the windows will now be unavailable to spend on something else, the Keynesian responds like this:

But people are sitting on money that is doing nothing. The insurance company that will now pay back the homeowner whose house was damaged by the hurricane was sitting on piles of cash. That cash was sitting in the bank where the bank has excess reserves not being lent out, not being invested. So yes, breaking windows can improve the incomes of glaziers and start a process of recovery.

What do we respond, those of us who are enamored with Bastiat and who think he’s right?
I would re-state the Bastiat story and tell it a little differently than it is usually told. The usual point is that the money has to come from somewhere–we see the repaired window but ignore the things that don’t get built or bought. But I think a better way to tell the story is to point out that the RESOURCES have to come from somewhere. The hurricane increases the demand for glaziers and that is good for glaziers. But that is good for all glaziers, employed and unemployed. It pushes up the price of glass repair. That discourages some folks from having glass work done who otherwise would have done it. So there is some offset of the hurricane’s impact on glazier employment. And as the Hayek character says in “Fight of the Century“:
You see slack in some sectors as a “general glut”
But some sectors are healthy, only some in a rut
So spending’s not free – that’s the heart of the matter
Too much is wasted as cronies get fatter.
So while glaziers (and carpenters) may be unemployed, other sectors (such as the wood market) may not be having such problems. The hurricane has a big impact on the price of wood, discouraging a bunch of would-be demanders of wood from buying as much as they did before. Again, there’s an offset. The point is that “aggregate demand” doesn’t tell the whole story.
But the real problem with breaking windows is that it’s not productive. I know. That’s obvious. But think about what the words mean. Right now, there are a lot of unemployed construction workers. What does a hurricane do? A hurricane IS good for carpenters and glaziers and roofers. But it’s unproductive work. It gets the home owner back to the status quo. It doesn’t create anything new or valuable. I’m not saying the production is wasted. I’m saying it’s a repair. Why is that important?
Imagine a world where there hasn’t been a hurricane and I want to help the unemployed carpenter. Here are two ways to do so. One is to burn my house down and then call the carpenter and give him $100,000 to rebuild my house. Here is the second way. I call the carpenter and say, I feel bad that politicians artificially increased the demand for housing at the end of the 20th century, pulling you into an industry that cannot be sustained at its current leve. I feel bad that you’ve been unemployed for three years. So I’m going to give you $100,000.
Which of those two policies would have the bigger stimulative effect? The charity should have a bigger effect. No offsets from pushing up the price of lumber and so on. But giving people money doesn’t change the underlying problem that there are more carpenters than work available for them. Creating temporary work either by burning down houses deliberatively or accidentally through a hurricane doesn’t change the fact that there are too many carpenters and glaziers relative to demand.
So the hurricane will put carpenters back to work. But it would be even better if there had been no hurricane and people had just given them a check. Charity is more productive than destroying stuff and paying people to get back to square one.
But the charity approach is what we’ve been doing for the last few years. It’s called unemployment insurance. I know, it’s supposed to be stimulative but there’s no sign that it is. Why would it be? It doesn’t solve the problem that there are too many carpenters.
This is related what Arnold Kling calls “Patterns of Sustainable Specialization and Trade.” Repairing houses damaged by a hurricane isn’t sustainable. And if I just give carpenters money because I feel sorry for them, that isn’t trade. That’s charity. Both have the same stimulative effect–very little, because they don’t get at the underlying problem. Prosperity is the way we specialize and serve each other, creating products and services that we each value. Destruction cannot be the source of prosperity.