Wise Words from Peter Thiel

He says (via Marginal Revolution):

...there is no good scenario for the world in which China fails.

Why American Health Care Is So Expensive

Slate.com reports that it isn't the fault of the insurance companies or health care providersd; rather, it's our fault:

The debate about health care tends to be informed by three notions about health insurance:

The profits of private insurers are so big that cutting them out would meaningfully lower costs.
Private insurance clearly costs more than a government-run system such as Medicare.
Mergers that have created a small number of huge and powerful insurers increase health care costs.
None of these is true.

Myth No. 1: Insurers' profits are responsible for our health care costs.

This is the most pervasive and most crowd-pleasing of the health care myths. The profits of the big health insurance companies are central to the rhetoric of the health care debate, figuring heavily in the Democratic primary campaign. Barack Obama's platform includes a promise to force insurers to spend enough on care "instead of keeping exorbitant amounts for profits and administration." Michael Moore, the director of Sicko, has hammered the point repeatedly, thundering about how insurers maximize profits by "providing as little care as possible."

The problem here is that between them the five biggest health insurers—UnitedHealthCare, Wellpoint, Aetna, Humana, and Cigna—which cover 105 million members, last year had profits between them of $11.8 billion. This is not a small number; these are very profitable companies. But total U.S. health care costs last year were in the area of $2.3 trillion.

So, with a membership that included a little more than half of the Americans covered by private insurance, these five insurers' profits came to 0.5 percent of total health care costs. (One interesting point of comparison: In 2006, the income earned by the 50 biggest nonprofit hospitals alone came out at $4 billion.)

Critics also argue that insurance companies pass along excessive administrative costs to their customers. Wellpoint, for instance, spends 18 percent of the premiums it takes in on sales and administrative costs. That represents a real concern but merely raises the next question: Can a government-run program that cuts out insurers do it for less?

...

Diagnosis

Patient, heal thyself. It's not insurers that push expensive drugs, long-shot end-of-life treatments, and redundant procedures. It's customers who ask for them. And mainly doctors and hospitals who profit. How to deal with those issues is a question that will affect the health care bottom line more than whether it's the government or private companies that provide insurance. Too bad it's one we have hardly even started to answer.

I wonder if Michael Moore is ready to lose his (free) lunch?

The Subprime Crisis Explained

Oh, and it's hilarious:

Gas Taxes, Meet Econ 101

McCain and Clinton want a summer cessation of the gas tax. Obama says that it is political pandering and won't help people who are hurting at the pump.

Obama is right.

When the short-term demand for a good is inelastic (meaning: short-term demand is relatively unresponsive to variations in price), as the demand for gasoline is, then a reduction in taxes will lead immediately to increased consumption until the price of gas once again reaches the market-clear price. In other words, if the gas tax is suspended the price will fall. When the price falls, people will buy more gas. Because of the increase in the quantity of gas demanded, the price will go right back up to its pre-tax-suspension level.

However, the quantity of gasoline demanded will increase if the tax is suspended. So such a policy would essentially be a hand-out from taxpayers to oil companies, with the added cost of environmental degradation and an increase in carbon emissions. 

In short, it's a remarkably stupid policy proposal. Obama should be commended for refusing to pander when given such an easy opportunity. He is losing ground in the polls for the sake of intellectual honesty, while Clinton and McCain are gaining cheap points by preying on peoples' ignorance. So good for him, and bad on them.

(P.S. This economic intuition is a fundamental assumption for members of the Pigou Club. If you share their goals and ethical assumptions, then it's easy to share their conclusion that gas taxes should be significantly higher; not lower.)

UPDATE:

Bryan Caplan likes the idea. But not for the same reasons as Clinton. His support is of a more cynical nature: he thinks that lowered taxes will preclude price controls, which he views as a greater evil, and in any case he thinks that eliminating the taxes won't have any strong negative effect. The second part is almost certainly true, and the first part is likely but not assured (and it is likely true because of American political tradition and our aversion to price controls; not because of the "irrationality" of the citizenry). If the profits of oil companies increase while gasoline prices continue upwards (as seems likely), then it seems likely that populist policies -- including price controls or other ill-minded ideas -- would become more likely, not less. I could draft the speech now: "Oil companies are getting rich on the backs of hard-working Americans. We tried to lower the burden by cutting out the taxes, but the greedy oil executives just grabbed more of the surplus. And so we should act punitively to re-direct money from these robber-barons back to the American people." And so price controls begin.

I know that Caplan knows more about game theory than I do, so maybe I'm missing something. But it seems to me as if he's acting as if this were a one-shot game, when it clearly isn't. 

Money... it's a gas

Money might not be able to buy love, but it can buy a lot of other things which make us happy (including more time off, easier travel, and longer, healthier lives). That according to a new study (PDF) by Betsy Stevenson and Justin Wolfers (economists from UPenn). Will Wilkinson reacts:

The bottom line:

The accumulation of more recent data (and a re-analysis of earlier data) suggests that the case for a link between economic development and happiness is quite robust. Moreover, we establish that the relationship between happiness and income within a country is similar to the relationship between happiness and national income across countries. Finally, we show that the within country relationship between economic growth and happiness is similar across countries.

And this effect shows up despite all the reasons — scale renorming, unbounded income scale vs. bounded happiness scale — that you would expect to flatten the trend. Taking the methodological considerations about surveys into account, the most reasonable conclusion is that these findings set the lower bound on the contribution of income to happiness. ...

MONEY IS GOOD FOR PEOPLE. I will continue to wait with bated breathe for conventional wisdom to catch up.

Meanwhile, the NY Times notices that the Easterlin paradox -- in which richer nations aren't happier than poorer ones -- is contradicted by this study:

In 1974, Richard Easterlin, then an economist at the University of Pennsylvania, published a study in which he argued that economic growth didn’t necessarily lead to more satisfaction.

People in poor countries, not surprisingly, did become happier once they could afford basic necessities. But beyond that, further gains simply seemed to reset the bar. To put it in today’s terms, owning an iPod doesn’t make you happier, because you then want an iPod Touch. Relative income — how much you make compared with others around you — mattered far more than absolute income, Mr. Easterlin wrote.

The paradox quickly became a social science classic, cited in academic journals and the popular media. It tapped into a near-spiritual human instinct to believe that money can’t buy happiness. As a 2006 headline in The Financial Times said, “The Hippies Were Right All Along About Happiness.”

But now the Easterlin paradox is under attack.

Even Daniel Kahneman -- Nobel Prize winner in economics who helped started the behavioral economics movement, and long a proponent of the Easterlin paradox -- seems convinced:

Mr. Kahneman said he found the Stevenson-Wolfers paper to be “quite compelling.” He added, “There is just a vast amount of accumulating evidence that the Easterlin paradox may not exist.”

Easterlin isn't giving up yet, but the evidence is mounting against him. It turns out that people don't act irrationally all the time, and that more money can bring more happiness.

Increasing Illegal Immigration = Fiscal Responsibility

Immigrants are great for the federal balance sheet. Why? They don't file for tax returns but have taxes withheld.

Illegal immigrants are paying taxes to Uncle Sam, experts agree. Just how much they pay is hard to determine because the federal government doesn't fully tally it.

But the latest figures available indicate it will amount to billions of dollars in federal income, Social Security and Medicare taxes this year.

One rough estimate puts the amount of Social Security taxes alone at around $9 billion per year.

Paycheck withholding collects much of the federal tax from illegal workers, just as it does for legal workers.

The Internal Revenue Service doesn't track a worker's immigration status, yet many illegal immigrants fearful of deportation won't risk the government attention that will come from filing a return, even if they might qualify for a refund. Economist William Ford of Middle Tennessee State University says there are no firm figures on how many such taxpayers there are.

"The real question is how many of them pay more than they owe. There are undoubtedly hundreds of thousands of people in that situation," Ford said.

Dave Barry on Taxes

Via Andrew Sullivan, some gallows humor:

Taxpayers: It's almost April 15, and you know what that means. It means the Miami Dolphins already have been mathematically eliminated from the playoffs.

But it's also time to file your federal tax return. Yes, this is a pesky chore, but remember that paying taxes is not a ''one-way street.'' When you send your money to the government, the government, in return, provides you with vital services, such as not putting you in prison. The government also uses your money to pay for programs that benefit all Americans, such as the Catfish Genome Project.

CGP is real, as are plenty of other crazy/preposterous examples of government spending listed in Barry's article.

Happy Tax Day!

To celebrate, let's recall the Jane Galt Tax Plan:

1) Get rid of all our poverty programs, except those aimed at the disabled, and temporary unemployment assistance, and institute the negative income tax. That is to say, the system should be continuously progressive, from a steep negative rate of up to 100% on very low earners, gradually declining until it zeroes out around $28,000 a year, and then rising gradually until it maxes out around 35% on the top brackets.

2) Eliminate FICA and pay for Social Security and Medicare out of general revenue. It's time to stop pretending it's a pension system, when there are no assets in the "trust fund"

3) Eliminate the corporate income tax

4) Eliminate the special treatment for capital gains. All income should be taxed at the same level, regardless of its source.

5) Eliminate all deductions. Period, end of statement. No mortgate, student, child, etc. All causes are equally worthy in the eyes of the person who possesses the deduction; it is a waste of our time as a nation to sit around arguing about who deserves what.

6) Just say no to the Value Added Tax. In theory, it's a good tax. In practice, because it is extremely hard to tell what proportion of the price of anything represents the tax, it removes the good and natural pressure upon tax rates.

7) Get rid of the estate tax, and tax the capital gains on whatever is sold.

Explication if you click through. Needless to say, I don't think I'm in disagreement with any of the seven proposals. And there is no way in hell that any of them will be enacted, except (possibly) #7, which is the least damaging of any simply because of its small scale. In time, #2 might become necessary or at least we might transition to that point de facto. #4 is common-sensible enough that some bold legislator or president might propose it as part of a larger tax plan and sneak it through, but it would never pass on its own.

Elsewhere, we learn that in order for a flat tax to be revenue-neutral, it would have to be ~ 32% for all income above $35k (all income under $35k would be untaxed as a standard deduction).

Ugh

The new Farm Bill is even worse than its predecessors.

Greenspan on the Economy

He runs down the situation. In his conclusion, he advocates not throwing the baby out with the bathwater by over-regulating financial markets.

(ht: Mankiw)

The EU Rises

The recent decline of the dollar relative to other currencies now means that the EU has the largest economy in the world.

Not in per capita terms, of course. But in a strict non-normalized comparison, the EU economy is now bigger.

Pessimism Grows

Marty Feldstein, President of the National Bureau of Economic Research, thinks that we could be in the worst recession since WWII.

Meanwhile, Ned Phelps, 2006 Nobel prize winner in economics, opines: "We may see in the near future higher interest rates and higher unemployment than have prevailed in the recent past."

In other words, stagflation is a very real risk for the first time in decades.

Greg Mankiw, former chair of the President's Council of Economic Advisers (who originally posted both links), has been more optimistic than many other economists about the current state of the economy. But he offers no commentary on these more pessimistic views.

As for me... I don't think the sky is falling. But a realignment is occurring, and I think that it's pretty obvious that we have not yet seen the toughest times.

Upside-Down Town

From Greg Mankiw, we see that real interest rates are now negative. Is this a big deal? Mankiw says... probably not:

In standard models of asset pricing, negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high. Low growth expectations encourage households to save, which drives down equilibrium rates of return. High uncertainty drives up risk premiums, which in turn drives down the return on safe assets, perhaps below zero. Both forces seem to be working now.

In other words, this is a reflection of other bad things in the economy, esp. low confidence, but it isn't actually a horrible thing in and of itself.

However, credit markets are already having trouble staying afloat. With real rates of return now negative, it might be harder to get the credit markets back on their feet.

Uh Oh

The Fed's Beige Book is talking about stagflation. Here's hoping it doesn't happen.

The Ignored Emerging Economic Power

Brazil is now the world's largest "emerging economy," pushing past China, as measured by Morgan Stanley's country index of equity markets.

Cool Stat-Heavy Blog

Here, pointed by one of Andrew Sullivan's guest-bloggers. The posts on causal direction are great.

The Audacity of Nit-picking

Greg Mankiw reads The Audacity of Hope and mostly likes what he finds. But he does find something to quibble with:

The sloppiest sentence so far (page 146):

Over the past decade, we've seen...hefty corporate profits, but a shrinking share of those profits going to workers.

I am pretty sure that the share of profits going to workers has been stable--at zero. Profits are what owners get to keep after workers have been paid.

In strictly econo-speak, Mankiw is right, of course. But Obama is not an economist, and neither are 99.99% of his readers. What Obama meant is clear: corporate profits have been increasing, while salaries have remained stagnant -- or declined, in real terms -- for most of the population. This is also an economic statement, with empirical backing, which Mankiw completely ignores.

The Moderation in the Business Cycle

This is striking.

Via Brad DeLong

The Death Knell for Chavez?

In response to Chavez's seizure of oil company assets when he nationalized Venezuela's oil industry, the British government has frozen $12bn of Venezuela's assets. In protest, Chavez has once again threatened to stop selling oil to the U.S., saying that Venezuela would join an "economic war," and that they would not be the only country to do so. Daniel Drezner makes the obvious point:

If Chavez were to attempt an embargo, there's no doubt that the United States would feel a twinge of pain.

On the other hand, whatever twinge the U.S. felt would be mild compared to the massive spasms that would rip through Venezuela's economy from such a move -- especially since the only refineries that can handle Venezuelan oil are based in the United States.

This is one of those situations where, if economic warfare breaks out, the U.S. holds most of the cards.

I strongly suspect that Chavez's self-preservation motive will force him to back down -- but it would be kind of amusing if he believed his own bluster.

Drezner goes on to link to this NY Times article, describing how Chavez is losing his grip on Venezuela because of his economic mis-management:

These should be the best of times for Venezuela, blessed with the largest conventional oil reserves outside the Middle East and oil prices near record highs. But this country’s economic and social problems have become so acute lately that President Hugo Chávez is facing an unusual onslaught of criticism, even from his own supporters, about his management of the country.

In a rare turnabout, it is Mr. Chávez’s opponents who appear to have the political winds at their backs as they reverse policies of abstention and prepare dozens of candidates for pivotal regional elections. Mr. Chávez, for perhaps the first time since a recall vote in 2004, is increasingly on the defensive as his efforts to advance Venezuela toward socialism are seen as failing to address a growing list of worries like violent crime and shortages of basic foods.

While Mr. Chávez remains Venezuela’s most powerful political figure, his once unquestionable authority is showing signs of erosion. Unthinkable a few months ago, graffiti began appearing here in the capital in January reading, “Diosdado Presidente,” a show of support for a possible presidential bid by Diosdado Cabello, a Chávez supporter and governor of the populous Miranda State.

Outbreaks of dengue fever and Chagas disease have alarmed families living in the heart of this city. Fears of a devaluation of the new currency, called the “strong bolívar,” are fueling capital flight. While the economy may grow 6 percent this year, lifted by high oil prices, production in oil fields controlled by the national oil company, Petróleos de Venezuela, has declined. Inflation soared by 3 percent in January, its highest monthly level in a decade.

Inequality

Greg Mankiw points to Cox and Alm in the NY Times, and pulls this quote:

So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.

Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1.

The trouble is this: nobody who is concerned about rising income inequality is comparing the top quintile with the bottom quintile. People who are concerned about rising income inequality are comparing the stagnant wages of the bottom 2/3 of the population with the sky-rocketing wages at the very top (i.e. 10%, 5%, & 1%) of the distribution.

Measuring inequality through consumption data is also misleading, since it is only one way to use income. The saving rates of those in the bottom quintile are negative (as Cox and Alm point out, but Mankiw), by a factor of two. In other words, the bottom quintile consumes twice as much as it makes, which makes future consumption impossible. For some -- like the retired, who often have no income but quite a bit of consumption -- that's fine. But for the rest, this means that their children don't have college funds, they don't have retirement plans or investment portfolios, and/or that their future consumption will have to decline. For those at the top of the distribution, the opposite is true.