Plain Sense Economics

With a tip to the Freakonomics blog we learn that there is a stronger market for pressure cookers in The Netherlands. The likely reason – the higher cost of electricity there. Pressure cookers are, apparently, energy savers – I guess by reducing cooking times. Electricity in The Netherlands is not subsidized nearly to the extent ours is in the US, so electricity conservation pays there.

For my new micro economics students, this is an example of cross price elasticity. This concept looks at how the market for one good (in this case pressure cookers) is impacted by a change in the price of another good (in this case electricity). Though I don’t know the numbers in this scenario, let’s assume that electrical rates went up 10 percent. If we then saw a 15 percent increase in sales of pressure cookers, we’d say that this relationship is elastic – that pressure cooker sales are very responsive to a change in price of electricity.

Hundreds of supporters attended and performed at two benefit concerts this weekend here in Ashland. The money was being raised to help a local, beloved musical leader who has a degenerative and terminal neurological disease. The efforts will probably raise well in excess of $20,000. That won’t come near to paying his accumulated medical bills, but will make a good dent in them.

As I was sitting and watching the concerts I was impressed by the wide range of talent represented on the stage. There were performers from every corner of the music world, and here in Southern Oregon that world is breathtakingly broad and rich. Yet, I bet that very few of those performers have health insurance. The recipient of all this support is widely known and extremely active. He conducts/directs at least three large choral groups, gives music lessons, and performs both on his own and with groups. None of those choral organizations, though, provide health insurance – so he has none, despite being at the pinnacle of activity and visibility in our valley. I thought about all of those talented performers who were sharing their talents and enriching our community, while leading those (as Thoreau put it) “lives of quiet desperation” – cobbling together a living from countless gigs, lessons, and the occasional minimum wage job.  These people are very different from the images of the uninsured that we conjure up when reading policy papers on healthcare reform.

In terms of cultural support Ashland is unusually generous. We are the home to the Oregon Shakespeare Festival, which has an acting corps and production company of 500 souls. Rare in the theater industry OSF operates in reperetory for 10 months of the year, with contracts that run from 6 – 10 months. And in most cases those company members are given health insurance benefits – unlike their colleagues even in other parts of Ashland who perform or support the several other “off-Bardway” venues. And we have a medium-size university and a hospital and city government and school district, all of whom provide insurance benefits. At a rough guess, though, those top five employers (OSF, SOU, Hospital, City, Schools) probably employ less than 20 percent of the Ashland households. Other than these our biggest economic base is tourism, supported by retail and service jobs all earning low wages, and seldom with health insurance.

This is why we need universal coverage.

Perhaps as a fitting sequel to our discussion on rationing healthcare, comes an op-ed piece in the Washington Post by Alain Enthoven and Denis Cortese. The authors point to the need for reform on the supply side of healthcare, as well as improving access on the demand side.

[...T]hese programs [technology, preventive care, and effectiveness research] will not yield the significant cost savings we need. Rather, this trio of planks must be placed firmly upon the foundation of organized health-care delivery and aligned incentives.

I had the pleasure of talking with Enthoven earlier this spring, at a memorial service for a long time friend of my father. Enthoven has been on the faculty of the Stanford Business School and continues as a consultant to Kaiser Permanente. He has been talking consistently about realigning organizations and incentives in healthcare for the 25+ years that I’ve known him.

Here’s the challenge. We know that bringing all Americans under some kind of healthcare insurance plan will increase demand for services, which in turn will put upward pressure on prices. The result – significantly higher healthcare costs. Some of those new services will improve the lives and quality of life for the currently uninsured, and will reduce some future expenses. However, much of the additional care delivered and much of the care delivered today will be wasteful – not improving health outcomes and often making them worse.

Healthcare reform will need reform on the supply side, as well as the demand side. It is a continuation of our discussion on scarce resources and rationing. In a market where demand is increasing, quantity and prices go up. If resources are scarce and the opportunity costs of those resources too high, then it helps to change the supply/production part of the equation.

Enthoven’s long association with Kaiser Permanente is consistent with his position. He has seen the benefits of reorganizing care – better outcomes using fewer resources. He also believes in incentives as a way to change both patient and provider behavior. As he and Cortese point out, the three cost saving initiatives proposed by the Obama Administration are necessary, but not sufficient.

As David Leonhardt points out in his article today in The New York Times, rationing has become an evil buzzword in the debate over healthcare reform. Leonhardt correctly points out that we have rationing now, and that all of the anguish over rationing in a new system is just wasted heat.

I commend the article to you, and add my own $.02. Leonhardt mentions three forms of rationing taking place now:

1. Employers have to decide how much of their compensation dollars go to health benefits and how much goes to other benefits and wages. The rapidly rising cost of health insurance premiums forces those employers to make a decision on allocating scarce compensation resources.
2. When insurance premiums are so high that employers feel they cannot afford to offer insurance to their employees, and workers go uninsured, the allocation of resources away from those workers means millions of Americans getting fewer and less effective care.
3. The high costs of providing care mean that doctors and other providers are hard pressed to provide the kind of integrated, thoughtful care that yields better health.

To this list I add (and move it to the top) – we ration care through price. High costs for care and for health insurance mean that some people don’t get what they need. Our semi-market oriented system of health care financing preserves a good deal of free choice and independence for those who can afford to pay. We often say that we treasure that free choice. For someone working a minimum wage job with no benefits, that free choice seems like a cruel hoax.  As an economist I value the efficient way that markets allocate scarce resources. Unfortunately, due to a long list of market interventions and incentives, the healthcare market is not efficient at all, and some form of rationing, other than through price, is warranted.

I’ve heard of lipstick sales being counter-cyclical (more sales when times are tough), but Gregory Mankiw’s blog posted a link to this item on MSN Money.

The central quote…

In fact, right now men’s underwear sales suggest that things have bottomed but not started to recover.

I dare you not to read more.

This post in Freakonomics is cool. Why kiwi fruit is cheap in New York City and other market imponderables.

Photo by Dhanira

State and local governments have a particularly hard time during economic downturns. The Wall Street Journal, in this article on June 3 reminds us how state tax revenues decline quickly and recover slowly during recessions. This graphic from the article shows that it can take as long as five years for revenues to reach pre-recession levels.

Wall Street Journal 6/3/09

Revenues to state and local governments are sensitive to economic conditions. Sales taxes are tied to purchases, of course. Income tax revenue is often more problematic. If a state, like Oregon or California, has a progressive income tax structure (higher income citizens pay a higher tax rate) then when incomes drop not only do taxes go down but they go down even faster as people fall into lower tax brackets. Oregon is particularly vulnerable because it does not have a sales tax. California has been buffeted by this phenomenon – seeing wide swings in revenue as economic cycles pass through.

On the costs side economic recessions increase demand for state and local services and programs. These are part of automatic stabilizers, and help a bit with increasing aggregate demand. They cost money, however.

And yet, unlike the federal government most state and local governments are prohibited from running or planning a deficit. They must operate in the black, even in the face of seriously declining revenue and increasing costs.

Not a pretty picture.

I found an interesting, if a bit tenuous, connection between the issue of securitized mortgages and policy implications for health insurance. Let’s see if the connection works…

All of us “hind-sight is 20/20″ folks have noted the dangers inherent in the securitizing of mortgages. In addition to all the risk factors and unknowns, this process also separates out those who originate and service a mortgage loan from those who now own the loan. In the good old days a local bank would get to know the borrower, make a thoughtful assessment as to their credit worthiness, and then stay in touch with the borrower for the length of the loan. When banks could sell mortgages to someone else, they lost the incentive to look carefully at the loan risks and also handed off the authority to do loan restructuring in hard times.

This article by Edward Glaser in the New York Times‘ Economix blog follows this discussion further – in terms of the willingness and ability of a creditor to modify the loan to avoid foreclosure. Again, in old times, a local banker could make a reasoned assessment of whether the borrower/home owner was just in temporary problems or whether the problems were longer term.

Economists have long believed that dispersed property rights can lead to a breakdown in efficient bargaining. A developer trying to assemble a land parcel owned by 100 separate owners faces immense bargaining difficulties, because one recalcitrant owner can hold up a deal that would be good for everyone. In the mortgage context, securitization has widely dispersed the rights to a mortgage’s cash flow across hundreds of bondholders. Dispersed ownership made it possible to believe that a similar breakdown in efficient bargaining might occur. Many observers took the view that the banks holding the mortgage, known here as servicers, were not engaging in sensible mortgage modification because they feared investor lawsuits. If that view is true, then there are win-win situations where loan modification can avoid foreclosure and benefit bondholders.

Insurance generally, and health insurance specifically works on the premise that if you assemble a large group of individuals, the law of large numbers will protect the insurer – we can accurately predict the number and cost of medical claims for that large population. Today’s health reform debate starts with an assumption that universal coverage will mean very large pools of insured people, and resulting lower and predictable costs – kind of like securitized mortgages. Yet large pools of people are made up of individuals, each with their own medical needs, and their own willingness to assume risk for the costs of those needs. In a sense insurance pools have become a popular tool because we couldn’t figure out how to customize a plan for a single person. (There are other reasons, too, but this is one of them.)

So, I plan to take another, closer look at the Glaser blog posting, and then think about insurance strategies in health care reform. Perhaps I can get my health economics class to wrestle this topic with me.

Data on job losses suggest that more men are losing their jobs than women. One result is that women now are almost half of the civilian labor force – a significant gain from a couple of decades ago. I followed a trail from the Economix blog to this article posted by the Center for American Progress. The Center appears to be progressive, left-leaning, for those on bias alert. The main conclusion from the article is that this recession has affected men more than women, in terms of losing jobs, and that there are significant differences in job losses by sector.

Here’s a still version of the graphic. But click on it to go to the source and see the graphic in action – pretty cool.

More men losing jobs

This gives me a chance to remind my students that unemployment levels typically lag behind economic cycles. When the economy slows down, employers are reluctant to lay employees off. The process is expensive and disruptive, and some employers actually care about their employees and don’t want to have to show them the door. So we will see numerous signs of an economic slowdown, but changes in unemployment won’t be a strong sign. On the other end of the cycle, unemployment will not improve as quickly as other elements of the economy. We’ll see an improving stock market, hopeful signs in GDP, and other indicators, but unemployment will continue to be a concern. Employers, having gone through the pain of layoffs, want to make sure the recovery is real. And in some past recessions, the layoffs have given employers the opportunity to try new productivity tactics. These sometimes lead to permanent reductions in work force.

Growing up in Michigan, we called that carbonated beverage pop.

Slate published this article, “Sweet Surrender: Taxing soda to make you stop drinking it.” This is another example of using an excise tax to change consumer behavior. If one believes that there are negative externalities to the consumption of sugar-laden, artificially-flavored, carbonated water, then these taxes fall under the Pigovian Tax label.