The visible hand in economics

Where have all the socialists gone?

Posted on: September 20, 2007

Over at Cato Unbound the health care debate rages on. David Cutler and Dana Goldman reply to Robin Hanson’s original article by almost agreeing with him. They both begin by acknowledging that much of our current health care spending is wasted. The gist of their criticism is that when you reduce health care consumption then you reduce necessary as well as ‘wasted’ health care. Consequently they call for increases in the effectiveness of spending rather than cuts to it. Note that Hanson never claims that the spending that does happen shouldn’t be controlled by doctors to ensure that necessary procedures still get performed.

Moreover, the criticism really seems to be an attempt to avoid the problem by simply wishing it away. Nobody denies that it would be nice if no health spending were wasted and it were all highly effective for treatment purposes: the fact is that it’s not and it probably never has been. As Hanson asks in his reply, “why must this distant possibility [of better health care] stop us from publicizing and acting now on our consensus that we expect little net health harm from crude cuts?”

Ezra Klein claims that some of the spending might be justified in order to raise peoples’ quality of life showing that we care. This might be a valid point, but I question whether that money couldn’t have a greater impact on peoples’ quality of life if it were spent elsewhere in the government’s budget. I have never been one to call for slashing social spending indiscriminately, but I’m surprised by how weak the replies to Hanson’s rather radical essay have been. The overwhelming response seems to be a knee-jerk rejection of such extreme spending cuts without a real refutation of the reasoning behind them.

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7 Responses to "Where have all the socialists gone?"

Someone who gets it! :)

I think there are socialists out there James. The only problem is they have decided to shut there ears to reason, and so will base arguments on emotion rather than logic. I like emotion, but there is a time and a place :)

I am sure that someone could make a strong economic case for current health spending, without falling into the old trap of blaming institutional design. However, I can’t, all I can think about is the poor institutional design of health care. Maybe you could do a post on it, I know you’re good with micro models ;)

In fact, how would your ideal health system work? Mine would be funded from a tax on the risks associated with different activities. The only problem with this would be the fact that we do not know the risks associated with many of these activities, and the cost of setting up such a scheme would likely be ridiculous:p

Hey Matt, the whole risk-tax idea is a good one, but because you can’t define let alone price the specific risk in a specific activity, nor do this for every possible activity in a persons life, a scheme of what I like to call “pooling of risk” may be the way to go.

I am going to follow it up, but if I am right, in a few generations there may be an entire industry devoted towards a “pooling of risk”.

Specifics to follow.

I’m fairly receptive to Hanson’s argument. If one was forced to mount a defense of the status quo, I think you’d start by pointing out effectively we have three facts:

1) People’s health (lifespan) has improved over time
2) Micro-studies (ie of individual drugs or treatment) do show health benefits
3) Macro-studies do not show health benefits for aggregate health spending

Hanson has convincing arguments for why 2) is the erroneous fact, but given 1) and 2) there had to be some chance that 3) is in fact the suspect result. I’m not familiar with the studies upon which 3) is based, but it strikes me that it would be rare to completely get rid of problems of endogenity. Or maybe it’s like compulsory seatbelts, where more healthcare encourages off-setting behaviour.

I know the Rand study is the best experiment for answering questions like this, but it is only one study, it’s out of date, and it didn’t follow subjects for a long-enough duration. Hence I’d concur that a good first step would be repeating the study. In fact, I think that public policy in general is desperately short of random experiments.

Megan McArdle argued the other day that US health spending subsidizes the rest of the world (I believe this is at least true in pharmaceuticals), and from memory I think Tyler Cowen made the point once that to the extent American medical care is just over-priced, it just works out to being a transfer rather than a waste of resources. I’m too lazy to provide links sorry.

BTW, if we’re this wrong about healthcare then surely we could be wrong about the benefits of most spending. Perhaps the opportunity cost of wasteful health spending is just wasteful spending elsewhere.

That’s the best my evil twin can do today.

I think in NZ we already have half or less of US health care spending, especially if you measure in PPP terms. And our life expectancy is better (at least before you throw in controls)

But why would a socialist disagree with evidence that the % of GDP spent on health care in the USA is too high?

Hanson presents good evidence that keeping medical spending lower as a % of GDP is a good thing.

But that’s not a valid attack on socialist provision of health care. Consider which system causes a greater % of GDP to be spent on medicine and medical technology – a socialist health care system or a private health care system? Answer: ‘private’ health care leads to greater (not lesser) spending on medicine and medical technology. The inefficiencies in free market health care are famous (mostly caused by the fact that it’s actually insurance-based health care, not a simply user-pays system).

So an obvious conclusion to draw from the evidence Hanson cites is that a socialist medical system is the right way to go.

Of course, many readers are leaping from “we should reduce health spending as a % of GDP” to “we should move to a more free-market system” – but the two are not the same at all. And don’t let misinterpretation of that RAND study fool you – that isn’t a study of the two approaches to health care but is instead a study of highly insured vs less insured participants in a free market.

Interesting topic. Health care is important and how it’s delivered – whether it’s cost effective or not – is paramount. Could it also be that since people want to keep their job, despite its possible ineffectiveness, that they’ll do whatever they can to “leave no job behind”? Could it be some type of self-denial perpetuated for easy profits? (Easy profits in that they don’t have to learn a new trade; go back to school. Progress can be like a thief too.) Either way, the whole idea of not letting go of the nut, and why, will be on my mind for a while. Thanks for the mind food.

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