The Economic Way of Thinking

Miscellany

*  Five myths of the health care reform bill.  (HT Steve Horwitz)

* Video on Keynes vs. Hayek.  (Note:  It is really about Keynes with little to no Hayek.  Anyway, although I think Russ Roberts is a very good economist, I still dislike rap regardless of who writes it and regardless of the subject matter.)

* Mr. John Allison on the current Federal Reserve System.

* Hardrock, Coco, and Joe: Millions of us who watched WGN in Chicago enjoyed this Christmas video.  Joe steals the show.

Assorted Links

(1) So this is Christmas?  When everyone has a right to something...

(2) A very good interview by Jan Helfeld about health care.  (HT: Sam Sholander)

(3) Why you should watch Fox News.  I'm sympathetic to Jim's point, but I find Fox, MSNBC, and most other news programs to be doing too much yelling.  I'll stick with Stewart, Colbert, and a newspaper for most of my news.  Though Stewart's biased as heck, he still get's a huge free pass from me because of this memorable CNN moment. 

(4) Speaking of Colbert: congrats to my friend and Red State blogger, Erick Erickson, for landing an interview on Colbert!   

(5) Alex Tabarrok and Bryan Caplan discussing the future of higher education.     

A Creative Genius

The quirky interview questions aside, this interview of John Mackey over at Reason TV is one of the smartest hours of television I've watched in a long time.  The man is a Misesian.  He has implemented an "outside the box" solution to rising health care costs at Whole Foods.  And, his discussion of monopoly and the FTC sounds like something straight out of Heyne, Boettke, and Prychitko's EWOT textbook. 

"Because The CBO Says So..."

Back in late August, Dean Baker of the Center for Economic Policy and Research (CEPR) wrote a nice piece on how politicians shouldn't irresponsibly follow the Congressional Budget Office's (CBO) forecasts.  In the piece, Baker recalls some of the more recent CBO mistakes, and he says politicians continue to fall back on the CBO's flawed forecasts because it's a way for them to pass the buck and avoid taking direct responsibility. 

Given the CBO's long history of forecasting mistakes, perhaps we should discount the supposedly good news for Democrats that the CBO thinks the Senate Finance Committee's health care bill will have less of a budgetary impact than originally predicted.

Health Care: Price And Cost

Suppose the new health care proposal does what it intends to do -- allows for more people to demand services.  Think, now, in terms of our simplest supply and demand story.  The demand for health care rises, with a largely inelastic supply.  This puts upward pressure on prices that somebody will have to pay (taxpayers, largely).  Prices tend to determine and justify costs.  Increased demand will lead to increased prices and that in turn will lead to increased costs of supplying health care services. 

The economic way of thinking would predict, in other words, that costs will rise dramatically if universal insurance legislation were adopted.  Legislators would likely call for further interventions to contain costs, and also price controls to contain price increases, politicizing the industry all the more.  Of course, any student of economics will be able to predict the results of effective price controls.

We should focus instead on finding ways (through deregulating the industry) to increase the elasticity of supply, which would tend to drive down prices and cost of services and therefore increase quantity demanded.

Meet the Free Marketeers!

Tonight a new, Mercer sanctioned student group that I'm very proud of, The Free Marketeers, holds its first formal meeting.  We'll be discussing Frederic Bastiat's "The Seen and Unseen," Michael Tanner's "Obamacare to Come," and Paul Krugman's "Why Markets Can't Cure Healthcare" over pizza and beverages. 

I hope to avoid doing much of the talking, but I'm sure I'll somehow find a way to bring this set of slides into the conversation.  Here's a picture of my favorite one:

 

There's No Such Thing As A Free Lunch

I've shown for years in my EC 101 class how insurance increases demand and drives up the price of health care.  Here's a brief video of John Stossel on health care insurance, which is consistent with my argument.

It Just Doesn't Have to Be This Way

Anemone pointed me to this eye opening article in the September Atlantic last night.  The article talks about one of America's more dangerous and deliberately hidden killers: infections in hospitals.  According to the author, David Goldhill, 

My dad became a statistic—merely one of the roughly 100,000 Americans whose deaths are caused or influenced by infections picked up in hospitals. One hundred thousand deaths: more than double the number of people killed in car crashes, five times the number killed in homicides, 20 times the total number of our armed forces killed in Iraq and Afghanistan. Another victim in a building American tragedy.

Goldhill continues by asking, "How does a nation that might close down a business for a single illness from a suspicious hamburger tolerate the carnage inflicted by our hospitals?"

And, here's the gist of his answer:

All of the actors in health care—from doctors to insurers to pharmaceutical companies—work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also all behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity, and discourage transparent competition based on price or quality. That result in a generational pyramid scheme rather than sustainable financing. And that—most important—remove consumers from our irreplaceable role as the ultimate ensurer of value.

It's a pretty depressing read, but ATSRTWT. 

The Public Option And Monopsony: Greg Mankiw's View

Recall a basic lesson of economics: A market participant with a dominant position can influence prices in a way that a small, competitive player cannot. A monopoly — a seller without competitors — can profitably raise the price of its product above the competitive level by reducing the quantity it supplies to the market. Similarly, a monopsony — a buyer without competitors — can reduce the price it pays below the competitive level by reducing the quantity it demands.

This lesson applies directly to the market for health care. If the government has a dominant role in buying the services of doctors and other health care providers, it can force prices down. Once the government is virtually the only game in town, health care providers will have little choice but to take whatever they can get. It is no wonder that the American Medical Association opposes the public option.

To be sure, squeezing suppliers would have unpleasant side effects. Over time, society would end up with fewer doctors and other health care workers. The reduced quantity of services would somehow need to be rationed among competing demands. Such rationing is unlikely to work well.

Here's more of Mankiw's New York Times article.

Before Debating...

... take the time to read some source material, even though the content always seems to change.