Paul Krugman Is an Economist?

I’ve frequently criticized Paul Krugman for not extending his facility with economic analysis to politics, but Steven Landsburg criticizes him for not extending his facility with economic analysis to…economic analysis.

Here’s Krugman:

The House plan [to replace medicate with vouchers] assumes that we can cut health-care spending as a percentage of G.D.P. despite an aging population and rising health care costs.

The only way that can happen is if those vouchers are worth much less than the cost of health insurance.

And here’s Landsburg:

Well, this is just plain illiterate. In fact, the only way that can happen is if the voucher system affects people’s health care choices. Which is, you know, the whole point.

How about that? A Nobel Prize winning economist who doesn’t understand marginalism. Is that what happens when you spend too much time focusing on macroeconomics?

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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26 Responses to Paul Krugman Is an Economist?

  1. D. C. Sessions says:

    Rather than criticize Prof. Krugman’s argument via a strawman proxy, it might be better to actually go to the source. He specifically deals with the options available to private party purchasers of health insurance and the prospects of meaningful changes due to market forces in that context.

    As I like to ask people, how much comparison shopping do you do when you’re in the ambulance?

    Says dcs, currently sitting with right leg elevated to minimize postoperative swelling on his knee. I got lucky — my physical therapist tells me that my surgeon is one of the two or three best in Arizona for this. Not like I had a clue in advance, despite having tried to educate myself in advance of elective surgery.

  2. AMW says:

    D.C. – I’m dealing with what I think is a broken toe at the moment. I’m insured and could get it checked out, but based on a little investigating it doesn’t seem like there’s much the doctors could do beyond taping it up, and I can do that myself. So unless my foot swells up and turns green I prefer to save my coinsurance and just live with it as is.

    Incentives matter.

  3. D. C. Sessions says:

    The incentives in the case of a broken foot have very little to do with the cost of treatment — unless things go wrong. Broken metatarsals have the worst record of pseudoarthrosis of any fracture, so saving an office visit (cheap) and the prescribed rest (poor compliance) will work most of the time. When they don’t, you’re looking at surgery, long recuperations, high likelihood of retreatment, etc.

    Whether this little bit of medical lore has any bearing on the larger issue? Good question.

  4. James Hanley says:

    As I like to ask people, how much comparison shopping do you do when you’re in the ambulance?

    That’s as meaningful as asking, “how much comparison shopping do you do for car insurance when you’re about to be hit by someone running a red light.” I’ve never understood why so many people who actually do buy car insurance before an accident would think that nobody would buy health insurance before they get injured.

    I’ve already stated my objections to Ryans’ Medicare plan, so don’t think I’m defending it. But when Krugman says “The point here is that privatizing Medicare does nothing, in itself, to limit health-care costs,” he’s claiming that private markets don’t do anything to limit costs, which could only happen if consumers never responded to incentives like price increases by reducing consumption. I.e., he’s claiming that people don’t respond to incentives.

    Or else it’s to claim that there is no waste in American healthcare due to consumers’ lack of incentives to consume wisely, which is nonsense.

  5. Dan says:

    James, is there a reason why you’ve stop your entire posts on you’re rss feed and are only giving excerpts?

  6. James Hanley says:

    Dan,

    Umm, I don’t really know anything about that, being a luddite with only the vaguest grasp of the technical side of this blogging business. Is it better to allow the entire posts on rss feed? If so I’ll dig around in the tools and figure out how to do that. I have no preferences on that except to do what smarter people tell me is the best way to do it.

    [Update: OK, changed that to full text. I hope that makes the world a marginally better place.]

  7. Lance says:

    Paul Krugman is a self-important political flack.

    His pronouncements on climate change, and how we should completely restructure the entire world, not just its economy, are messianic in scope and arrogantly pompous in their level of condescending scolding.

    All without the benefit of any actual scientific training or insight.

    I guess when you have a “Nobel” you don’t need to have an actual understanding of an issue, or the underlying facts, to pontificate to the unwashed masses.

    After all, we commoners haven’t been beatified by the TNT merchants politically motivated endowment.

  8. Michael Heath says:

    Here is the quote in its full context:

    The point here is that privatizing Medicare does nothing, in itself, to limit health-care costs. In fact, it almost surely raises them by adding a layer of middlemen. Yet the House plan assumes that we can cut health-care spending as a percentage of G.D.P. despite an aging population and rising health care costs.

    The only way that can happen is if those vouchers are worth much less than the cost of health insurance. In fact, the Congressional Budget Office estimates that by 2030 the value of a voucher would cover only a third of the cost of a private insurance policy equivalent to Medicare as we know it. So the plan would deprive many and probably most seniors of adequate health care.

    Here’s a couple of graphs noting how Medicare has managed its costs better than private health insurers: http://goo.gl/0mFgG . Paul Krugman’s ‘middleman’ point is in fact an underestimate of the failure of the health insurance market relative to Medicare, i.e., that PHIs are worse and becoming increasingly worse at procuring a volume of healthcare for the monies extended to healthcare providers in addition to their higher overhead costs that Krugman references.

    James – I’d appreciate your thoughts on what I quote here along with Dr. Krugman’s column in its entirety relative to the Ryan plan regarding Medicare.

    I was extremely disappointed that Republicans increased their obstructionism regarding over treatment for end-of-life care. Eradicating government funded end-of-life overtreatment care doesn’t negate the option, it negates the taxpayer funding that option (where much of this cost hits Medicaid, not just Medicare). As someone whose signed several advance directives for a diverse group of relatives, the pattern I’ve encountered is surprisingly consistent – they don’t want over treatment.

    It’s my understanding that Rep. Ryan’s plan is a covert backdoor attempt to address this issue which I think makes Krugman’s critique too broad – there is treatment taxpayers shouldn’t fund and therefore Krugman should have distinguished the two. But that criticism of Krugman is mild since I’ve seen other arguments from him where he’s not shy about openly addressing over-treatment costs.

    The bigger argument Krugman’s making here is a good one; that Ryan’s plan doesn’t confront the reality of the conflation of an aging demographic and rising healthcare costs independent of that aging demographic. Instead the Ryan plan denies that reality (big surprise given the new nature of the GOP) and runs from it where I think Krugman’s prediction can be confidently held given the unique characteristics of the failed health insurance market where the restriction of healthcare funding to seniors with the Ryan plan extends well beyond over-treatment of end-of-life care.

    I understand your point was a technical critique arguing Krugman’s not considering marginalism. I couldn’t understand his point at all within your context and even in the full context don’t get the sentence you critique (nor do I find it central to the subject he’s addressing though I admit I could be wrong because I don’t understand that sentence’s meaning). From my perspective his article’s general thesis states the obvious, especially since the country almost universally perceives a lack of sufficient care to be a moral outrage with the exception of 20 or so percent that forms the voting base of the GOP though even they demand a full ride from the taxpayer upon retirement.

  9. Lance says:

    Michael Heath,

    Unsurprisingly your post’s concluding paragraph focuses on “moral outrage”.

    Your quote from Krugman completely misses the point, as apparently you do also, that allowing consumers to choose their own level of care and their own provider places market pressure on prices that government mandated plans can never hope to accomplish.

  10. Michael Heath says:

    Lance responds to my earlier post:

    Unsurprisingly your post’s concluding paragraph focuses on “moral outrage”.

    I wasn’t making a ‘moral outrage’ argument, that quip has nothing to do with my own position. I was instead describing the public’s demand for healthcare when the need is dire. That public expectation is wildly different than even several decades ago when people didn’t expect healthcare if they couldn’t pay for it. This is the political context within which we debate healthcare financing policy which again has nothing to do my desires.

    Currently I pay a significantly more for my health insurance policy to subsidize healthcare provided to those who can’t pay but are able to access it anyway. So this cost already exists. The argument is instead whether we could realize more healthcare per dollar of this currently externalized cost if we stopped avoiding this portional cost in the public sphere, access earlier where preventative care reduces the need for most costly procedures later along with the added economic burdern of a sicker society. Universal coverage provides economic benefits of about $70 billion per year (0.5% of GDP).

    Reading comprehension by boy. I suggest next time blockquoting that which you respond to, you may find like in this case you attack an argument which was not made.

    Lance:

    Your quote from Krugman completely misses the point, as apparently you do also, that allowing consumers to choose their own level of care and their own provider places market pressure on prices that government mandated plans can never hope to accomplish.

    I find it amusing that you claim I miss the point by my asking James to respond not to a point lacking its entire context but instead to its full context. I’m also perfectly cognizant of the naive, uninformed and misinformed criticisms by conservatives regarding healthcare financing reforms, naive in the sense that healthcare financing long ago failed to perform to market principles that generally hold but not in all industries no matter what Rush Limbaugh or Michelle Bachmann assert.

    Lance stated:

    . . . allowing consumers to choose their own level of care and their own provider places market pressure on prices that government mandated plans can never hope to accomplish.

    Do you have a cite for both your points specific to the U.S. health insurance industry? I get the general concept you’re asserting given that I learned it in middle school long ago and can’t remember when economically illiterate demagogues didn’t use this exact rhetoric in place of informed literate substance. I also recognize the reality that the health insurance industry doesn’t operate like this but instead has been a failed market for a number of decades. In fact my econ classes back in the mid-80s used this industry as a poster-boy of a failed market which government had avoided addressing, that political pressure was eventually unsuccessfully confronted in President Clinton’s first term. David Broder’s “The System” is considered the authoritative history of why the Clinton iniative failed in spite of both parties realizing that the market was both broken and would have serious ramifications if you care to bone-up on why your assertion finds little to no company with any economists I’ve encountered (where I attended a university whose economists respected Milton Freidman every bit as much as they did John Keynes). Please also note my linked cite in my previous post that reports the facts regarding prices per healthcare delivered by financier type which at a minimum challenges your notion.

  11. James K says:

    Michael Heath:

    Do you have a cite for both your points specific to the U.S. health insurance industry? I get the general concept you’re asserting given that I learned it in middle school long ago and can’t remember when economically illiterate demagogues didn’t use this exact rhetoric in place of informed literate substance.

    I think we’re past the point where markets need to be demonstrated effective to be considered so, centrally directed economics has failed spectacularly, and it is to the credit of the mainstream left that genuine socialism is now considered off the table. But still you see these “I’m for free market, but …” style arguments. There certainly are exceptions to the general principle “markets work”, but one needs a robust means of identifying those exceptions and working out what to do about them. The best answer policy economics has produced is that market interventions are justified only if they are responses to clearly identifiable market failures (distributional concerns are the only exception I can think of, and those are generally better addressed by redistribution than intervening in the market directly).

    There are definitely market failures in health care, but I am mystified as to how the ACA is supposed to help address those market failures. Adverse Selection and Moral Hazard are both problems with insurance markets, but the ACA makes the former worse, and papers over the latter by making people buy a service that is often worth less than what they are paying for it.

    The existence of a market failure doesn’t justify any given policy response. One has to target the intervention to the problem one is solving, with a firm understanding of the way the market works and fails to work.

  12. Michael Heath says:

    James K in response to me:

    I think we’re past the point where markets need to be demonstrated effective to be considered so, centrally directed economics has failed spectacularly, and it is to the credit of the mainstream left that genuine socialism is now considered off the table.

    I have no clue how this assertion remotely relates to my questions towards James Hanley.

    James K:

    I am mystified as to how the ACA is supposed to help address those market failures.

    It’s chock full of them. I suggest boning up.

    James K:

    The existence of a market failure doesn’t justify any given policy response.

    I agree and never claimed otherwise.

  13. James Hanley says:

    Michael,

    Krugman wrote: In fact, it almost surely raises [costs] by adding a layer of middlemen.

    That’s another error by Krugman, assuming that middlemen necessarily increase costs. Try cutting out all the middlemen in your economic transactions and see if your costs go up or down.

    I agree that health care is a problematic business for the market, but Krugman clearly ignores one of the major issues, which is that we don’t currently have an actual free market in health insurance, so any criticism that effectively ignores that fact suggests someone who’s arguing based on ideology–which Krugman does in spades on a regular basis–rather than from a real analysis.

    Basically there are two ways to potentially cut health care spending as a percentage of GDP despite an aging population and health care costs. One is to impose price controls–an idea that hasn’t exactly proven itself empirically. The other is to actually try to use market forces to cut costs, but apparently Krugman is saying you can’t cut health care costs by giving consumers incentives to spend more efficiently. I’d say the burden of proof is on him, but he’s not accepting it–he’s just making assertions and acting as though they’re self-evident.

  14. Michael Heath says:

    James:

    That’s another error by Krugman, assuming that middlemen necessarily increase costs. Try cutting out all the middlemen in your economic transactions and see if your costs go up or down.

    Wow James. Krugman is referring to a specific industry where we know the cost differential is about 25% IIRC. You respond with a general point.

    James:

    I agree that health care is a problematic business for the market, but Krugman clearly ignores one of the major issues, which is that we don’t currently have an actual free market in health insurance, so any criticism that effectively ignores that fact suggests someone who’s arguing based on ideology–which Krugman does in spades on a regular basis–rather than from a real analysis.

    I’m sorry but I don’t see how your argument applies though I present this humbly since I’m not a regular reader of Krugman’s though I probably read a dozen or so his articles a year. I have seen enough of his arguments to observe he does in fact present arguments in the context of benchmarking best practices by states and other developed countries.

    In fact the whole pattern of your criticisms here James is criticizing Krugman with generally-held principles that not only don’t hold in all cases, but where the healthcare finance industry is a long-used example of how and why exceptions do exist.

  15. Michael Heath says:

    James:

    Basically there are two ways to potentially cut health care spending as a percentage of GDP despite an aging population and health care costs. One is to impose price controls–an idea that hasn’t exactly proven itself empirically. The other is to actually try to use market forces to cut costs, but apparently Krugman is saying you can’t cut health care costs by giving consumers incentives to spend more efficiently. I’d say the burden of proof is on him, but he’s not accepting it–he’s just making assertions and acting as though they’re self-evident.

    I do not leap to the conclusion that Krugman’s position is so strawman-like and lacking nuance as you characterize it, he certainly doesn’t make the argument you represent him making. Nor do I accept that price controls haven’t worked to some extent or there is no empirical evidence for such, e.g., a number of other developed countries have controlled prices better by having single negotiator such as France who deals with a mixed though still largely private healthcare industry. Your claiming there is no empirical evidence makes me think it’s you who haven’t boned-up where Krugman assumes his audience is informed.

    From my perspective Krugman’s policy arguments are based upon the general attributes of the market as its described by economists in that sector, both our market and markets in other similar countries.

    We also need to be clear that there are attributes of this market that are not equivalent to other forms of insurance, e.g., most of us make claims which can be predicted with high probability (retirees, young familes, those with chronic conditions), certain demographics can’t afford coverage if their premiums were pegged to their risk (e.g., retirees), switching is difficult, it’s nearly impossible for individuals or families to properly analyze their choices (including me in spite of having been a long-time purchasing professional), insurers have become less able to make reliable money on the investment on the side of their business – making claim denial even more imperative (this is common to all insurers), the industry is matured to the point insurance providers have become very adept at avoiding coverage on issues that greatly impact people’s health and can even hide this fact in their boilerplate language (which has burned me twice in the past couple of years) – the power imbalance between customers and suppliers is enormous with the exception of the employer-funded market where even there the customer’s only advantage is their purchasing power, their understanding of that which they purchase remains nearer to nil. (And most companies do not put their best business people in Human Resources but instead in sales, business development, marketing, engineering, operations and purchasing).

  16. James K says:

    Michael Heath:

    I have no clue how this assertion remotely relates to my questions towards James Hanley.

    It’s a reference to this exchange:

    . . . allowing consumers to choose their own level of care and their own provider places market pressure on prices that government mandated plans can never hope to accomplish.

    Do you have a cite for both your points specific to the U.S. health insurance industry?

    Lance’s general point is sufficiently well established that it should be presumed true in the absence of contrary data. People do respond to incentives.

    It’s chock full of them. I suggest boning up.

    Chock full of what? While I must admit I haven’t ploughed through the thousands of pages of legalese in the Act (frankly I wouldn’t read US legislation without being water-boarded first), from what I’ve read the key provisions are:
    1) Creating an exchange where people can buy certain kinds of health insurance. I have no idea what this is supposed to accomplish.
    2) Preventing insurance companies from charging people for the expected cost of insuring them. This is simply insane, it effectively legislates adverse Selection. The first rule of correcting market failures is don’t make them worse.
    3) Restricting the kinds of insurance one can effectively sell, particularly preventing catastrophic insurance. Once again this is exactly the opposite of correct.
    4) Increasing health care spending for old and poor people. This doesn’t really bother me (apart from the deficit of course).

    Is there somethign I’m missing? If so, please enlighten me.

  17. James Hanley says:

    Michael,

    Yes, Krugman is referring to a specific industry. But middlemen in general cut transaction costs, despite popular belief otherwise. So the burden is on him to demonstrate that in this case middlemen will only raise costs, not cut them. His repeated assertions of it do not amount to evidence.

    Krugman’s “best practices” of states are his own idiosyncratic beliefs, which are regularly criticized by other colleagues in economics. Krugman generally accepts the “ideal fallacy,” comparing market failures to pretty unspecified government action and concluding the government action would be superior. When government actions don’t work out so well, he again compares them to some not-too-well specified “better” government program and again concludes, without evidence, that his preferred government action would be superior. He vigorously ignores the ideas of public choice theorists that might shake his faith in government’s ability to correct the market.

    You don’t see how the argument that we don’t currently have a free market in health care applies? For pete’s sake, 90% of the criticism of our health care industry is that “a free market doesn’t work in health care,” but they’re all ignoring that we don’t actually have a free market in health care. I think that’s pretty relevant. Yes, there are specific reasons to believe such a market would be imperfect, adverse selection and all that, but that’s no reason to think that some of the basic effects of a market wouldn’t have any effect–and I’ll repeat that Krugman is claiming that giving consumers incentives to be more cautious in their spending won’t have any effect on costs. That’s an extraordinary claim that requires real evidence, that he doesn’t provide. It’s no use saying he’s making a specific point while I’m making a general point–the general point is one that generally holds, so it gets the assumption of correctness. The specific point is saying that the general point doesn’t hold in the particular case, so it’s the one that has the burden of proof. A burden Krugman doesn’t satisfy.

    The issue here isn’t about how good a true free market in health care/health insurance would be in general. It’s about his specific claim that customer incentives would not have any effect on costs, and whether that makes sense or not. I argue that it doesn’t.

    a number of other developed countries have controlled prices better by having single negotiator such as France who deals with a mixed though still largely private healthcare industry.

    That’s wholly beside the point. You’re discussing whether there might be a better way, which is not the point I’m addressing. The point is simply what I said above, whether customer incentives will have an effect on prices.

    Your claiming there is no empirical evidence makes me think it’s you who haven’t boned-up where Krugman assumes his audience is informed.

    You’re awfully fond of accusing those who argue with you of not having done their reading, which is pretty rich considering you’ve not actually presented any of the evidence you claim exists. But if there really is empirical evidence that consumer incentives won’t have any effects on health care costs, please show it to me. If you can’t show it to me, then admit that your accusation is unwarranted.

    The rest of your post is also off point, because you want to make this about all of health care in general. The point is quite specific, and you can’t prove Krugman right on it by going off on a variety of tangents.

  18. James Hanley says:

    James K,

    Creating an exchange where people can buy certain kinds of health insurance. I have no idea what this is supposed to accomplish.

    Currently there’s no true market in health care in the U.S. Usually, employers choose the health insurance for the end users, their employees. States regulate health insurance and prevent most insurers from operating effectively as part of a competitive national market.

    The exchanges are supposed to be a national market, so to that extent it would seem to be a positive move toward a better health insurance market. As written, though, they’re supposed to create common rules governing the pricing and offerings of health insurance plans, which doesn’t sound good, as I think it involves some of the concepts that you’re criticizing. So I’m not sure the exchanges are a bad idea in concept, but as our legislators have designed them–in their wisdom that they can design better markets than decentralized action can–they don’t look like they’ll be so good in practice.

  19. James Hanley says:

    I would add that there’s a world of difference between arguing that there are market failures in the health care industry and that fundamental economic concepts don’t hold. There are market failures in the industry precisely because fundamental economic concepts do hold.

    Also, if we really want to bring down the percentage of GDP spent on health care, getting government out of it and shifting wholly to the market, however flawed, would be the most effective way to do it. We might not be politically satisfied with the outcome, but it sure as hell would bring down the amount spent.

  20. James K says:

    James Hanley:

    Yes that’s as I thought it was, but it just seems odd to me that one would respond to a legislatively crippled market by legislating a new market into existence. I’d advocate (as I’m sure you would) simply not stopping people from buying insurance from other states. That way you get a national market with no cost to the government.

  21. A Bear says:

    James Hanley; You assert that a wholly market controlled health system would be preferable to one with government controls but you don’t provide a working example or propose a model. In the real world, as Michael Heath points out, the american system delivers less medical care at a higher price than other first world countries.
    Americans spend $8086 per person with a life expectancy of 70 years versus Canadians that spend $3463 per person with a life expectancy of 73 years.
    How would the invisible hand fix that discrepancy and why hasn’t it been done?

  22. James Hanley says:

    You assert that a wholly market controlled health system would be preferable to one with government controls

    Really? Where in the world did I do that? Thanks for starting your argument with a straw man.

    As to the rest of your argument, since you’re referring to an American system that is currently not a free market system, you’re not actually comparing a free market system vs. a government system as you seem to think you are. I do wish people who talk about this issue would at least recognize that basic truth–that the U.S. does not have a competitive market in health care. Recognizing that doesn’t mean you need to advocate one; it just means you need to recognize the empirical reality of our current system so that you don’t begin debates from an empirically false position.

  23. A Bear says:

    James, I was paraphrasing the last paragraph of your post#19.
    Where did I say the american system was a free system? I asked you for an example of an existing free market system and didn’t intend to argue America had one.
    My comparison of systems was meant to show how efficient single payer systems can be.
    Allow me to rephrase my last question to ask what a free market healthcare system is, do you have any example of a working one, and how would they achieve better results than single payer government systems?

  24. James Hanley says:

    Bear,

    Your paraphrase was a false statement of what I have argued and your questions are irrelevant to what I have argued.

    I’m sorry you have fallen for the typical approach that sees everything as a “my-side vs. their-side” argument. But that’s not the debate I’m involved in here. It’s a giant leap of logic from the fact that I agree that Krugman made an error on a rather simple point of economics to the assumption that I am arguing for a pure free market in economics. I’m not going to participate in that game, though.

  25. A Bear says:

    James; I guess I have misunderstood your statement:”Also, if we really want to bring down % of GDP spent on health care, getting government out of it and shifting wholly to the market, however flawed, would be the most effective method to do it.”
    That appeared at the time to be a statement endorsing unregulated, free market health care. My Bad!

  26. James Hanley says:

    Bear,

    You stopped reading too soon. I also wrote, “We might not be politically satisfied with the outcome,”

Comments are closed.