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james buchanan and the stealth plan for insurance copays

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I’ve been thinking about James Buchanan again in light of Jennifer Burns’ new critical review of Nancy MacLean’s Democracy in Chains. (Steve Teles and Henry Farrell both defend their own positions — and their independence from Charles Koch — one last time as well.)

I’m done talking about Democracy in Chains, but Buchanan was on my mind today. I don’t know how much direct influence he had on public policy. He hasn’t come up that much in my work, although obviously public choice arguments bolstered the case for deregulation.

Recently, though, I’ve been trying to wrap my head around health policy a little bit, in part to test whether arguments I’ve worked out looking at other social policy domains apply there as well. And here Buchanan plays an interesting — though quite indirect — role.

Health economics as a field only emerged in the 1960s. After federal health spending shot up with the 1965 passage of Medicare and Medicaid, government became increasingly interested in supporting such research.

One of the early papers that shaped that field — and indeed, the whole policy debate over universal health insurance — was Mark Pauly’s 1968 American Economic Review paper, “The Economics of Moral Hazard.”

The paper points out that individuals who are insured against all health costs are likely to seek out more care, at least of some types, than those who are not insured. Thus insurance that includes no deductible or cost-sharing is likely to result in overuse of care. The argument seems obvious now, but at the time — while familiar to insurers — it was novel in economics.

(Interestingly, in Kenneth Arrow’s comment on the paper, his counterargument to Pauly is basically, “this is why we have norms” — to prevent people from consuming more than they need: “Nonmarket controls, whether internalized as moral principles or externally imposed, are to some extent essential for efficiency.”)

Anyway, Pauly was a student of James Buchanan, and credits Buchanan with turning his attention to health policy. Pauly thought he’d do a thesis on “designing the economic framework for a government-funded voucher system for public education” (ahh, now we’re getting into MacLean territory).

But the passage of Medicare had created new pools of money for health research, and Buchanan suggested Pauly might look at health care instead.

Focused on his studies as well as his new wife, 25-year-old student Pauly was only vaguely aware and not much interested in these outside happenings until his mentor, James M. Buchanan, PhD, explained that the law creating Medicare also provided funds for academic health economics studies. He suggested that Pauly switch his thesis focus from education to health care economics and apply for a federal grant.

“Broadly speaking, I was interested in government and public policy,” Pauly remembers. “But the thing that drew me to health care economics was the money. I wish I could be more noble, but that was the reason. I got the grant and the rest is history.”

Three years later, the moral hazard paper was published. It significantly eroded the economic case for universal health insurance without meaningful cost-sharing—just the sort of plan that Ted Kennedy was then advocating—although economists like Rashi Fein would spend the next decade trying to build support for just such a plan.

Capture

The moral hazard argument also led the Office of Economic Opportunity to initiate the RAND Health Insurance Experiment, which was intended to estimate the effects of different pricing structures on healthcare consumption and outcomes.

After a decade of study and nearly $100 million in expenditures, the Health Insurance Experiment found that cost-sharing reduced the use of care without harming outcomes. (There was, of course, much debate over the results.) Employers took note: “The fraction of major companies with cost-sharing insurance plans rose from 30% to 63% in the years immediately following the publication of the experimental results.”

The next couple of decades would see repeated attempts to reform healthcare, but the principle of social insurance — of some kind of broad-based, universal coverage like Medicare — stayed on the margins of health policy conversations, replaced by a focus on cost-sharing, means-testing, and the promotion of competition.

So James Buchanan never got the education vouchers he would have liked, and that MacLean focuses on the context of Virginia’s multiyear desegregation battle. And he hardly would have been a fan of Obamacare, which gave government a sizable new role to play in healthcare. And really, whatever credit — or blame — there is should go to Pauly, not Buchanan. Buchanan was just there with advice at a critical moment.

But maybe, just a little, we can point to James Buchanan for helping to give us the healthcare system—with plenty of copays and high deductibles, and still no universal coverage—that we have today.

[With credit to Zach Griffen, who knows much more than I do about both health economics and health policy, for pointing me in the right direction.]

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Written by epopp

September 18, 2018 at 8:47 pm

Posted in economics, health, policy

winter book forum 2018, part 2: what do people actually get out of college?

This Winter, we are discussing Bryan Caplan’s The Case Against Education. The main issue: We invest a ton in education and it seems to do good. But is that because schooling acts as a filter or because schooling gives your concrete skills or better ways of thinking? If education is mostly a filter (the signalling model), we should probably cut back on education a lot.

In this post, I’ll discuss the types of evidence that Caplan reviews. His book is empirical in that the strength of the argument relies on what other researchers have found. A short blog post does not do justice to this work. For example, he asks – how much do people learn in college? How much do people use specific skills (like algebra) in the workplace? Is there any evidence that learning is transferable – that people acquire “critical thinking?” Each of these topics commands one’s full attention, but we can only skim through the best here.

As you can expect from the title of the book, the direct benefits of education are pretty sparse. Probably the most damning evidence are studies that show that people don’t learn that much in college to start with. Another important fact is that few people ever use the skills – the few they may remember  – in work. Thus, it is very hard to argue for the simple human capital argument – educations makes you better because you learn valuable things. This can’t be right because people don’t learn or retain much in college.

Two related points: In response to those who argue that education imparts critical thinking, he points to evidence that learning is actually domain specific. Learning one area doesn’t seem to help in most others. This is called “transfer learning” in psychology and it’s been rejected for a long, long time. Another fascinating point – if education improves you via human capital development, we’d expect your income to increase for every year of education you get. Instead, Caplan reports that studies of income show no increase in income until you hit 4 years of college – a classic sign of signalling – which economists call sheepskin effects.

Of course, no single study seals the deal and it may be that Caplan has misread some, or even a lot, of the studies. But is is unlikely he misread it all and it is consistent with the everyday view that formal education is not a particularly good way to impart skills. Thus, we should be very skeptical of claims that education is a great way to train people for the labor market. Next week: So what?

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Written by fabiorojas

February 19, 2018 at 5:01 am

winter 2018 book forum: bryan caplan’s the case against education

This month, I will write a series of blog posts about Bryan Caplan’s The Case Against Education: Why the Education System is a Waste of Time and Money. Normally, I will summarize a book, then praise it and then offer some criticism. In this case, I will deviate slightly. A lot of people will criticize the book, so I will focus on describing the core argument and explain why sociologists should care about it. If Caplan’s main point is even partially correct, it has big implications that any educational researcher should care about. In this first installment, I’ll provide a little background and then lay out the main argument. Later this month, I’ll describe the nuts and bolts of the argument in more depth.

I’ve known Bryan for many, many years and I’ve grown a deep appreciation his style of thought. The way he approaches an academic topic is to first boil down the main claim. Then, he will massively research the claim to find out how much of it is true. When I say “massive,” I mean massive. He’ll read across disciplines. He’ll read flagship journals and obscure edited volumes. He’ll even email the authors of papers to make sure that he got their main point correct. Once he is done this obsessive review, he’ll summarize the main points and the then re-assess and redevelop the original claim. He re-estimates models and the draws out the conclusions, which often cut against common opinion.

The Case Against Education proceeds in this same way. Caplan starts with a simple idea that a lot of people believe in: education improves you and that is why it should be subsidized and supported. This basic idea comes in a few flavors. For example, in academia, economists believe in human capital theory – education gives you valuable labor market skills. Other people may believe that education improves you because it makes you a better citizen or it otherwise improves your critical thinking skills. Caplan then contrasts this with another popular theory called “signalling theory” – education doesn’t make you better, but it works as an IQ/conformity test. In other words, people who do well after getting an education aren’t better in any concrete sense. Rather, the college degree is a signal that you are smart to begin with.

Why the emphasis on the human capital/signalling distinction? The theory that you believe in has huge policy implications. If you believe that education gives you a lot of skills and benefits, then it may make sense to pay for a lot of education or to subsidize it. In contrast, you believe it is mostly signalling, it is a sign that you should scale back education.

Then, Caplan delves into hundreds of studies in education, economics, sociology, psychology and other fields to actually see if education actually makes you better, or if it is merely a hoop you have to jump through. For example, is it true that education makes you a better “critical thinker?” It turns out that there is psychological research on “transfer learning,” which means that learning a skill in field A helps you in field B. Answer? Nope, not much transfer learning. Is it true that college graduates learn alot? he reviews work like Richard Arum and Josipina Roska’s Academically Adrift, which shows that people don’t learn a lot in college. The list of debunked effects of education goes on and on.

As you can sense from my thumbnail sketch, Caplan (correctly, in my view) arrives at the conclusion that education doesn’t really make you better in any direct sense. If that is true, then much of education might be a costly and inefficient signalling game and maybe we should seriously consider cutting back on it and that entails a massive change in policy.

Next week: What education does and does not do to a person.

50+ chapters of grad skool advice goodness: Grad Skool Rulz ($4.44 – cheap!!!!)/Theory for the Working Sociologist (discount code: ROJAS – 30% off!!)/From Black Power/Party in the Street / Read Contexts Magazine– It’s Awesome!

Written by fabiorojas

February 9, 2018 at 7:15 am

book spotlight: culture and commerce by mukti khaire

khaire_book

A very,  very long time ago, Mukti Khaire was a guest blogger at orgtheory. Since then, she’s been a successful management researcher at the Harvard Business School and Cornell Tech. It is thus a great pleasure for me to read her new book Culture and Commerce: The Value of Entrepreneurship in Creative Industries. The book is a contribution to both the study of art markets and the study of entrepreneurship. The book’s premise is that art and business exist in a sort of fundamental tension. Khaire’s goal is to offer an account of what entrepreneurship means in the world of artistic markets.

The key element of Khaire’s theory is that artistic goods are not only introduced by entrepreneurs, but entrepreneurs do a lot of work to reshape markets so they can accept radically new categories of goods. For example, getting people to accept high quality, but expensive, produce is the work that Whole Foods did in the grocery market about twenty years ago. Such people, who reshape old markets into new markets, Khaire calls “pioneer entrepreneurs.” Similarly, Khaire identifies people who add value because of their ability to provide commentary to products that need explanation.

The strong point of Culture and Commerce is that Khaire digs deeper into the production chain of artistic goods. There are market actors who specialize in bringing in the new products, those who specialize in educating the audience, and those who add quality signals (e.g., giving awards). It’s a very rich account of entrepreneurship that many blog reader will enjoy. Recommended!

50+ chapters of grad skool advice goodness: Grad Skool Rulz ($4.44 – cheap!!!!)/Theory for the Working Sociologist (discount code: ROJAS – 30% off!!)/From Black Power/Party in the Street / Read Contexts Magazine– It’s Awesome!

 

Written by fabiorojas

November 28, 2017 at 5:08 am

does piketty replicate?

Richard Sutch reports in Social Science History that Piketty does not replicate very well:

This exercise reproduces and assesses the historical time series on the top shares of the wealth distribution for the United States presented by Thomas Piketty in Capital in the Twenty-First Century. Piketty’s best-selling book has gained as much attention for its extensive presentation of detailed historical statistics on inequality as for its bold and provocative predictions about a continuing rise in inequality in the twenty-first century. Here I examine Piketty’s US data for the period 1810 to 2010 for the top 10 percent and the top 1 percent of the wealth distribution. I conclude that Piketty’s data for the wealth share of the top 10 percent for the period 1870 to 1970 are unreliable. The values he reported are manufactured from the observations for the top 1 percent inflated by a constant 36 percentage points. Piketty’s data for the top 1 percent of the distribution for the nineteenth century (1810–1910) are also unreliable. They are based on a single mid-century observation that provides no guidance about the antebellum trend and only tenuous information about the trend in inequality during the Gilded Age. The values Piketty reported for the twentieth century (1910–2010) are based on more solid ground, but have the disadvantage of muting the marked rise of inequality during the Roaring Twenties and the decline associated with the Great Depression. This article offers an alternative picture of the trend in inequality based on newly available data and a reanalysis of the 1870 Census of Wealth. This article does not question Piketty’s integrity.

The point isn’t that income inequality hasn’t risen. Like most social scientists, I am of the view that, for various reasons, income inequality has risen, but it is important to get the magnitudes right, which can support or undermine other hypotheses about wealth accumulation. Sutch’s article shows that Piketty made a good effort, but it depends on some questionable choices. Let there be more discussion of this issue.

50+ chapters of grad skool advice goodness: Grad Skool Rulz ($4.44 – cheap!!!!)/Theory for the Working Sociologist (discount code: ROJAS – 30% off!!)/From Black Power/Party in the Street / Read Contexts Magazine– It’s Awesome!

 

Written by fabiorojas

November 13, 2017 at 5:44 am

book spotlight: the inner lives of markets by ray fisman and tim sullivan

inner lives

The Inner Lives of Markets: How People Shape Them and They Shape Us is a “popular economics” book by Ray Fisman and Tim Sullivan. The book is a lively discussion of what one might call the “greatest” theoretical hits of economics. Starting from the early 20th century, Fisman and Sullivan review a number of the major insights from the field of economics. The goal is to give the average person a sense of the interesting insights that economists have come up with as they have worked through various problems such as auction design, thinking about social welfare, behavioral economics, and allocation in a world without prices.

I’ve taken a bit of economics in my life, and I’m somewhat of a rational choicer, so I am quite familiar with the issues that Fisman and Sullivan talk about. I think the best reader for the book might a smart undergrad or a non-economic social scientist/policy researcher who wants a fun and easy tour of more advanced economics. They’ll get lots of interesting stories, like how baseball teams auction off player contracts and how algorithms are used to manage online dating websites.

What I like a lot about the book is that it doesn’t employ the condescending “economic imperialist” approach to economic communication, nor does it offer a Levitt-esque “cute-o-nomics” approach. Rather, Fisman and Sullivan explain the problems that actually occur in real life and then describe how economists have proposed to analyze or solve such issues. In that way, modern economics comes off in a good light – it’s an important toolbox for thinking about the choices that individuals, firms and policy makers must encounter. Definitely good reading for the orgtheorist. Recommended!

50+ chapters of grad skool advice goodness: Grad Skool Rulz ($4.44 – cheap!!!!)/Theory for the Working Sociologist (discount code: ROJAS – 30% off!!)/From Black Power/Party in the Street / Read Contexts Magazine– It’s Awesome

Written by fabiorojas

October 19, 2017 at 4:08 am

when was the last time an economist rocked the social sciences?

Question: When was the last time an economist had big impact outside economics? It’s been a while. Gary Becker might be the best example, but that was in the 1970s – forty years ago!!! Of course, there are individual papers or research findings that attract interest (e.g., Deaton’s recent work on mortality), but more recent examples of work that change areas outside economics are hard to find. For example, Steve Levitt is hugely popular, but he hasn’t changed the way people think about areas outside of economics. At best, the big message of early 2000s “cute-o-nomics” is that we can try harder to find clean identification in naturally occurring data. Not a bad message, but not epic, either. And a lot of people were kind of doing that already.

More recently, one might think of Daron Acemoglu, for his massive work on development, or Esther Duflo for field experiments. Both are clearly high impact scholars, but I’d guess that they are high impact within specific areas. You don’t see conferences on the theoretical implications of Duflo or Acemoglu on other disciplines, or even on areas outside of their expertise. Their work doesn’t travel the way Becker’s did, or the way game theory or early econometrics did

Why? Unclear to me. In terms of quality, the average economist is probably stronger than in the past. On the other hand, most of the training in economics programs is on model building. Culturally, economists have developed a disdain for other areas, so they have little incentive to produce work that speaks to anyone except themselves. Then, there are financial incentives. If your salary is way above other disciplines, and you have great job prospects, influencing other fields probably isn’t worth your time. The only thing worth your time is really impressing elites within the field. Not a bad thing per se, but it is not the right environment for work that will reverberate across the academy. Maybe the simplest explanation is low hanging fruit – you have a big impact by bringing a simple idea to an adjacent area. Once that is done, all you are left with are hard problems that only insiders care about.

That’s too bad. I love sociology but I also feel excitement and challenge when a major figure steps up and offers a new way forward. I’d like to see more of it. Not just from sociology, but also from other fields.

50+ chapters of grad skool advice goodness: Grad Skool Rulz ($4.44 – cheap!!!!)/Theory for the Working Sociologist (discount code: ROJAS – 30% off!!)/From Black Power/Party in the Street / Read Contexts Magazine– It’s Awesome

Written by fabiorojas

August 29, 2017 at 12:01 am