Medicare For All Update – Getting the Math Straight

~600 words, ~3 min reading time

Okay, so I’ve been looking at the Mercatus numbers.

First, Think Progress IS wrong in their representation. (Think Progress makes the very simple error of acting like an ADDITION to cost is the WHOLE cost.)

HOWEVER,  my initial impression was also wrong. My error was a bit more complicated – I assumed constancy in some things that weren’t constant in the Mercatus estimates, and ended up misrepresenting the results, TOO.

So, let’s try to get it right, and we’ll just focus on one year.

Before we hop in, we need to figure out what we’re talking about. We’re going to look at National Health Expenditures (page 5 is my reference here). What this is: Personal Health Care Expenses + Government Administrative Cost + Net Cost of Insurance (Basically, private administrative costs, I would guess) + Government Public Health Activities

Mercatus starts by looking at personal health care expenses in 2022. They suggest these are projected, under our current system, as being $3.859 trillion. (Note: this includes both public and private systems.) With Medicare 4 All, there would be a big jump in healthcare utilization – amounting to $435 billion. This comes from the currently uninsured being covered and from Medicare covering things that some private insurance doesn’t, and from people using more medical care because they are no longer responsible for copays or coinsurance (so, on the margin, they go to the doctor more often – though I suspect this effect is small). BUT, providers would receive less because of M4A’s pay structure. That would cut $384 billion from provider payments, and $61 billion from prescription drug costs. Net effect: personal health care spending FALLS by $10 billion in 2021.

The other change is that total administrative cost is expected to fall by about $83 billion. Basically, we’re eliminating private health insurance costs,  but Medicare’s administration would have to eat that up – but with some economies of scale, there would be a net savings on the administrative side.

So, total effect: $93 billion in National Health Expenditure savings. The other years in the estimate project savings of up to $300 billion in NHE by 2031.

Now, Mercatus’s point is that, EVEN WITH this savings, the government would be spending an additional $2.535 trillion that year – since it is absorbing the private insurance industry’s costs. They want to know where the money is coming from, since doubling income taxes on both individuals and corporations wouldn’t be enough to bring in that money.

On the one hand, progressives can reasonably point out that we’re already spending this money, it’s just a matter of redirecting it. And there’s a point in that. This $2.535 trillion is not new to the ECONOMY, it’s just new to the GOVERNMENT BUDGET. Okay.

But, would progressives then suggest that we should just have the government absorb the health insurance premiums currently paid by employees, employers, and individuals? I suspect not. That would mean that each person’s premium would vary not based on income, but on their current employer. This would be an administrative nightmare, I suspect. So, while the money is there, there is still the practical question of how best to collect it in a way that isn’t politically disastrous.

Another big point: Blahous is very clear that he’s being generous in his estimates of savings because he wants to estimate the MINIMUM amount of additional tax revenue that would be required.

Letter to Mises U Students (2017)

To Mises U students – especially those planning to enter economics as a vocation – an autobiographical note:

TL;DR – You’re amazing. Act like it.

After this week, you may feel inspired and overwhelmed. This is normal. It happens to me, too. Still. Every year. The level of interest, talent, and devotion to the study of good economics that I see among the students and my colleagues on the faculty is inspiring. And overwhelming. I know there are many of you – and I’m speaking of the students and young faculty here, not just David Gordon – who have out-read me. Easily. Many – possibly most – are cleverer and more insightful than I. Many of you will out-write me – if you haven’t already.

I write these not as mere empty words of encouragement – I don’t believe in such things. I write them because they are true – and that is something that I find encouraging, and believe you should, too.

I also write these things with very little regret, regardless what the tone may sound like. The reality is that I love my life and the balance that I have achieved between the various aspects of it.

So, here is my advice to you based on my own – admittedly limited, but rapidly becoming less-so – experience:

(1) I was asked today what the threshold of significance is to write a paper and send it to a journal. My answer: Do you think it is worth your time to write it down? If so, then share it. The reality is that, early in your career, you haven’t the slightest clue how significant your ideas are. You don’t have the experience to make that call. That’s what editors and referees are for. So, simply tell yourself that the odds of rejection are fairly high (which is true even for excellent papers, by the way), do your best, and send the thing out. Yes, rejections hurt. Especially the first few. But, you will learn more from being shot down in a rejection than you will learn from any acceptance. Maybe what you learn is that that editor is a jerk, but far more often, you will receive feedback that will help you refine your ideas or the presentation of your ideas.

(2) At first, follow Carmen’s advice I mentioned in another post – that is, add to what the Masters are doing. Expand, explain, defend, and apply (in no particular order). I especially advise doing this with people who are currently alive. One paper I’m still working on connects Mark Thornton’s Skyscraper research with some basic, fairly mainstream, urban economics and Rothbard’s theory of wages. I presented a draft of this paper at the Austrian Economic Research Conference. What happened? Mark Thornton asked me to coauthor a response to a critic of the theory. It should be obvious but, DON’T SAY NO TO THAT. Coauthoring with an established economist is amazing. It’s far less work than working alone. You get the benefit of their name attached to what you’re doing. You get to observe their research process. And you get to build a relationship with them that can lead to further projects.

(3) Get started early. You’re lucky. Austrian economics is still a small field. As a result, we, frankly, can’t afford to be as credentialist as most other fields. You don’t have a PhD. So what? Look at the Quarterly Journal of Austrian Economics. It’s pretty common for there to be articles in there that are not written by PhDs – they might be grad students, or even undergrads. But, they all go through the same double-blind review process. Yes, if you have a PhD, your odds of acceptance are higher – but that’s because people with PhDs probably have more experience with academic writing and publishing than you do. So, get that experience. Read academic articles – I mean QJAE, not Mises Wire, for this purpose – and try to write them, too. You’ll learn.

(4) Go ahead and write popular pieces – like for Mises Wire and others. This is good practice for writing clearly – something that is far too often missing in academic writing. Confession: when I was a Fellow at the Mises Institute in 2004, I spent a great deal of time commenting on the Mises Blog. This caught the attention of Lew Rockwell, who asked to see me in his office. Yes, I thought I was in trouble for not taking the Fellowship seriously, and spending too much time arguing with people in comment threads instead of doing real economic research. Instead, he said he was going to set me up with a password so that I could post on the Mises Blog on a regular basis. This writing was important for my development, as I had to think far more about being sure that I was clear. Now, it’s true, I haven’t written a popular piece – self-published or published by anyone else – in a LONG time. But, that’s not my focus right now, and it doesn’t take away from the fact that you may learn a lot from doing it.

(5) Keep your life in balance. What that means is purely up to you. But don’t wear yourself out, beat yourself up, or put yourself down just because you don’t write 80 pages a day like Murray Rothbard did. You aren’t Murray Rothbard. Now, that doesn’t mean you aren’t as brilliant as he. But, it does mean that you very well may have different preferences. If you do, don’t pretend otherwise. Austrian economics may be a small field – but there are far more of us than there were just 20 years ago (before I even knew of Austrian economics). We each have a part to play in the division of intellectual labor. Take a break when you need to, and let others take on their roles.

It has been 14 years since I was in your shoes. From this side, it’s a very short time. Make the most of your time – whatever that happens to mean to you. I can only hope that, in 14 years, when you have filled my shoes again (and likely have outgrown them!), you will also find yourself inspired and overwhelmed – but, most of all, encouraged by the days ahead and the bright minds that will lead us there.

Fitness Friday – New Routine (Again…)

~300 words, ~2 min read time

It wasn’t that long ago that I mentioned switching to a new routine. This led to lunges killing me.

Well, I’ve been away from home for the past couple weeks, and took a break from my routine for that time. So, the past 3 days have been… a challenge, I’ll say. And it made me realize something.

I hate leg day.

So, today (I’m writing this on Wednesday – which is Leg Day #2 of the week under the routine I’ve been using), I made a decision. I’m not doing it. Now, that doesn’t mean I’m not going to do any more leg exercises – that would be a bit unbalanced. Rather, it means that I’m not doing leg day.

See, I found this routine. It is slanted toward upper-body exercises – which I prefer anyway. Its goal is more aesthetic – which I prefer, too. The split is a bit strange, and it brings back some exercises I’ve not done in basically FOREVER (Rear delt flyes? Been almost a year since I’ve done one of those, I think.).

An important lesson here – which is a continuing theme for me in many ways – if you hate a program, there’s nothing making you do it. You can always choose to do something else.

As I get older (and busier…)- and feel more pressed for time – the more I find myself willing to just stop doing things that I don’t like. In short – I have no moral obligation to have a “leg day”. It doesn’t serve any particular purpose in allowing me to reach my goals. It’s not something that the world needs from me. So, I may as well stop.

Fitness Friday – Get Paid to Exercise!

~300 words, ~2 min read time

It’s been a while since I’ve done a Fitness Friday – honestly, I’ve not had much to say about it, so I decided not to.

Anyway, this week, I’ve had the pleasure at being at Mises University. This is always a fantastic time to connect with other Austrian economists and students of Austrian economics. I was chatting with another of the faculty members, and he was asking if I knew some of the other Austrian or Austrian-influenced economists that graduated from Ohio State. There’s one that works about an hour from me, it turns out, who I had met once before, about 7 or 8 years ago. Anyway, I decided to look him up to see what his current research is. Most of it is empirical stuff (probably why I haven’t seen him in Austrian circles) now, and this paper jumped out at me.

The Effect of Exercise on Earnings (abstract)

It turns out that exercise does pay. In fact, regular exercise provides something like a 6-10% boost in your wage. Now, we might be tempted to try to explain this away as a result of effects on things like obesity. We know that obesity has negative effects on earnings. So, maybe exercise pays off because people that exercise are somewhat less likely to be obese.

Turns out that’s not the explanation. The study controlled for the effects of body composition.

In other words, regular exercise itself – even if you don’t see “results” in terms of weight,  body composition, etc. – seems to have a significant impact on your wages.

Put another way: exercise pays.

Hayek’s The Meaning of Competition

~300 words, ~2 min reading time

Summary of the full article. Article available from the Mises Institute.

In modern economic theory “competition” is used to describe a state of affairs that is probably best thought of as being the CONCLUSION of a competitive process adjusting to fixed underlying conditions. Something as simple as charging the same price is unlikely outside of the most organized markets. Yet, this is a key feature of the perfect competition model.

The common speech sense of competition understands competition to be a dynamic process – one that is typified by people finding and exploiting differences between themselves and their competitors. This is directly opposed to the perfect competition model which assumes a similarity between firms (and certainly between products!).

Making a fetish of the perfect competition model can lead to odd results – in particular, the suppression of an actual competitive process by the use of regulation to impose standardization.

A more productive path than comparing the real world to a hypothetical world of perfect competition is to compare the real world with competition as commonly understood with the real world with competition (as a process) suppressed by legislation. If we allow the competitive process to occur, entrepreneurs will continually adjust their products and processes to try to produce goods that best serve consumers at the best possible prices. Failure to serve consumers’ demands for quality and price will result in losing business to competitors. On the other hand, suppressing competition – perhaps by using price regulation to enforce a common price – will tend to suppress the desire to serve consumers well and efficiently.

Mises’s Economic Calculation

~300 words, ~2 min reading time

This summarizes a section of Ludwig von Mises’s Socialism titled “Economic Calculation”, available from the Mises Institute and Amazon.

Value is fundamentally subjective. For a single consumer, comparing the values of different consumer goods is fairly straightforward. Similarly, comparing the values of factors of production in fairly simple production processes is also fairly straightforward, as the connection between the factors of production and the resulting consumer goods are clear. However, once the production processes achieve any significant degree of complexity, a direct value comparison becomes impossible – especially since there are typically a multitude of possible methods of producing any particular good. In order to deal with this situation, we need economic calculation – the calculation of profits, losses, and equity.

Economic calculation requires two conditions: first, there must be exchange of the factors of production. (This is why socialism – which Mises uses in the strict sense of government control of the means of production – can’t calculate. With government controlling all the means of production, there can be no exchange of them.) Second, it must be a monetary economy. With these two conditions, factors will have money prices, which can be used to calculate costs, profit, and equity.

Economic calculation is not perfect. It cannot account for certain “non-economic” considerations. (Mises cites the example of a productive process that destroys the beauty of the natural landscape.) However, without economic calculation, there is no clear guide for how to produce what we would like to produce.

Socialism can stumble along for a bit, if it holds to the old pattern of production. Since preferences and resources usually don’t change very quickly, the old pattern of production won’t be far from the right one at first. However, in the real world, change happens – which means that holding to the old production patterns would cease to be rational as time passes.

Rothbard’s Fundamentals of Value and Price

~700 words, ~4 min reading time

Chapter 8 in the Rothbard Reader, available from the Mises Institute or Amazon.

One of the primary contributions of the Austrian school was moving from thinking of goods and people in terms of “classes” to think of them in individual units and as individual people. This emphasis on the individual provided three main insights.

(1) The Law of Diminishing Marginal Utility – while classical economics was stuck on the paradox of value (best seen in the diamond-water paradox, which points out that water is essential for life but cheap while diamonds are mere decoration but are expensive) and had to propose that there was a disconnect between use value and exchange value, Carl Menger pointed out that this paradox is resolved if we think about the usefulness of an additional (that is to say, marginal) unit of the good. While water, as a class, may be very important, the reality is that we have so much of it available in most places that humans live that ADDITIONAL water isn’t really very useful. As a result, water is cheap – we’re not willing to pay much to get more than we already have. Diamonds, however, are very rare. So, we are willing to pay a lot to get an additional one. By thinking in terms of exchanging individual units of the good, Austrians could discover this law of diminishing marginal utility – which connects exchange value with (marginal) use value.

(2) Time Preference – where does interest come from? With their faulty value theory, classical economists were stuck going one of two directions. One group – which led to the Marxian view – suggested that interest was a kind of “surplus value”. The labor embodied in the good was what gave it value, so if the exchange value was greater than that intrinsic value, then the difference was a “surplus” of value. Another group suggested that capital is productive. So, the reason that capitalists earn interest or profit is because they own productive resources. However, both of these views are incorrect. Austrian economist Eugen von Bohm-Bawerk builds on Menger’s individualist view of value to show that what distinguishes capital is not its exploitative nature (which competition between employers would diminish) nor its productivity (which should be fully embodied in the price of the capital good when it is purchased). Rather, it is time. When an individual acts, they demonstrate a preference for sooner want-fulfillment to later want-fulfillment. What a capitalist does, then, is pay for the production of a good up front – knowing that they won’t get the revenue until later. They would only do this if they expect the revenue to be enough greater than the cost that it is worthwhile to delay gratification. That is: if they receive interest. Meanwhile, workers are willing to work at a “discount” below the value of the product precisely because they do not have to wait for the final product to be sold before they receive their pay. They are willing to sacrifice some money in order to get their pay sooner rather than later.

(3) The law of diminishing marginal productivity – finally, thinking in terms of individual units allows for the Austrians to explain, for example, wages (and other factor prices). Factors are paid according to their marginal productivity – that is what an additional unit of the factor would add to production. We can’t arbitrarily divide production of goods from distribution of income. Rather the two are intimately connected. Distribution of income is not arbitrary – rather it comes about as a result of marginal productivity. This thinking also changes the question of class dynamics. Laborers and capitalists should not fight over how to distribute goods between them – the two are partners, as labor and capital are typically complements. (That is, most of the time, having more capital makes labor more productive – raising wages, while having more laborers makes capital more productive as well!) Rather, the conflict should be between members of the SAME class. Rothbard’s example: a new discovery of copper doesn’t hurt workers (who will now have additional jobs available) or consumers (who will find that copper goods are cheaper). It hurts those who ALREADY PRODUCE copper, as they see the price of their product decline. So, then, the Marxian approach suggesting there is some fundamental conflict between labor and capital is incorrect. Rather, conflict exists WITHIN each of these classes – labor v labor and capital v capital.

Mises’s Planning for Freedom (Selections)

~ 400 words, ~2 min reading time

Available from the Mises Institute or Amazon.

Planning for Freedom – interventionists claim that their version of economic planning is radically different from the socialists’ as well as the capitalists’. They claim to be able to achieve a best of both worlds. However, interventionism tends to create results that are counter to the stated intent. For example, minimum wage, rather than lifting all workers (and especially the least fortunate) tend to lift some workers’ wages while disemploying others entirely. Similarly, high union wages tend to end up suppressing nonunion wages. If we want to help everyone, we should allow for a maximum of freedom, which will encourage entrepreneurs to produce what consumers want and to do so as productively as possible (raising wages).

Middle of the Road Policy Leads to Socialism – Following from the previous chapter, the middle of the road policy tends to be a road to socialism (that is, full government control of the economy). Consider a price control on milk – which is intended to make milk more affordable and available to the lower classes. However, the price ceiling will lead some farmers to produce less milk – instead they’ll produce things like butter or cheese which are not price controlled. So, milk may be cheaper, but it is less available than before. To offset this, the government would have to place price controls on the inputs (and perhaps the other goods that milk producers would be tempted to switch to), so that it is profitable to produce milk even at the lower price. This would simply lead to fewer of those inputs being made available – leading to yet more price controls being needed. In the end, the government would have to take over control of all production in order to meet its goal of providing more, affordable milk – just as in full socialism. This path is not mere conjecture – it was largely along this path that the British economy became socialist through World War 2, and that the German economy became socialist (of the Nazi variety) in the lead up to World War 2. The march toward socialism is, however, reversible, if the people adopt an ideology that is not simply anti-communist and anti-socialist, but is a positive endorsement of the market system that has led to the prosperity we have.

Taylor’s An Introduction to Austrian Economics (Selections)

~200 words, ~1 min reading time

The full text is available from the Mises Institute or from Amazon.

Introduction – What distinguishes the Austrian school: (1) devotion to a deductive method aimed at conceptual understanding, (2) methodological individualism – seeing economic phenomena as the result of individual actions.

The Subjective Theory of Value – Value is fundamentally subjective. Even prices are the result of subjective valuations of amounts of money (and their expected eventual use) and the goods that are being traded for that money. Producing for exchange means that we need to consider not only our own preferences, but also the preferences of our buyers. The fact of subjective preference suggests that there is no “economic man” who is bound purely by monetary calculations. Rather, monetary concerns are balanced against other concerns as well. For example, anticipating modern behavioral economics and the idea of “bounded rationality”, Bohm-Bawerk points out that the process of economic calculation is, in itself, costly in terms of time and effort. So, for trivial matters, it is probably best to follow general heuristics, saving the effort of monetary calculation for larger matters where precision is more important.

Mises’s Economic Freedom and Interventionism (Selections)

~200 words, ~1 min reading time

Full text available from the Mises Institute or Amazon.

The Individual in Society – This chapter is about the meaning of “freedom”. Mises suggests that there is no such thing as “freedom” from nature. All people are bound by scientific laws. To be meaningful, “freedom” then is freedom from the arbitrarily imposed will of others. At the same time, complete freedom from the influence of others would come at the price of abandoning all social relations. A market economy based on private property allows for interactions that enhance our productivity, while still allowing people to be free from compulsion and coercion. Historically, those who want to subvert freedom have tended to shift the definitions of terms – suggesting that employees are “wage slaves” rather than being really free, for example.

The Elite Under Capitalism – People are born unequal in certain respects – leading to “superior” and “inferior” people. In precapitalist societies, the superior used violence to take advantage of the inferior. In the market economy, the superior can only benefit by serving the inferior – producing products that the inferior are willing to pay enough for. So, in a market economy, the consumers – most of whom belong to the “inferior” group – end up “ruling” the superior – in that it is the masses of consumers that determine how profitable a business will be.