Sunday, April 17, 2011

Fiscal Policy

I am a little behind on this, as I have had too many other things to do this week. Here is my attempt to dissect the current issues. To do this properly would take a lot of time and some serious modeling, but I'll do my best.

The discussion starts with Paul Ryan's proposal for 2012 and beyond, which was passed by the House. To the extent that the details are fleshed out in the proposal, this is quite radical. Ryan proposed a major downsizing in the federal government, and the policy plan would also implement a serious redistribution in wealth - from the current young to the current old, and from the poor to the rich. Also, it does away with some social insurance, in particular health care for unhealthy poor senior citizens, among other things. The United States differs from most other developed countries in that it provides much less in the way of social insurance. This proposal, if implemented, would make it differ a lot more. Maybe this is what most Americans want, but I don't think that Americans are fundamentally different human beings from the ones that inhabit Scandinavia, France, Germany, or Canada, for example, where most people seem happy with more social insurance than what we have here.

Given the radical nature of Ryan's proposal, one would think that an honest and detailed description of the proposal would be apropos. After all, we want to understand exactly what we are getting into. But that is not quite what is written up in the document I link to above, which is replete with somewhat devious language and scare tactics. For example, in the charts on page 8, I would love to know what assumptions imply that the federal government will spend 80% of GDP with a debt/GDP ratio of 900% in 2080. So much for that.

Now, on to President Obama's April 13 speech. Obama starts by getting us to buy into the idea that we made some decisions in the past about providing social insurance, through medicare, social security, and other programs, and that we all share a commitment to those programs. But there is a demographic problem, which we recognized long ago: the large baby boom cohort that we need to provide for. Adjustments were being made to recognize this, at least up to 2000:
As a result of these bipartisan efforts, America’s finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt free, and we were prepared for the retirement of the Baby Boomers.
Then, what happened?
But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program -– but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts -– tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

To give you an idea of how much damage this caused to our nation’s checkbook, consider this: In the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.
Notice the use of "we" here. No mention of the words "Bush" or "Republican." If he had wanted to, he could have made this more partisan. Presumably he would rather make the enemy Ryan and friends rather than George W.

So, we have now been through a major recession, which has further increased the size of the government deficit, and added to the government debt, but why do we care?
Now, ultimately, all this rising debt will cost us jobs and damage our economy. It will prevent us from making the investments we need to win the future. We won’t be able to afford good schools, new research, or the repair of roads -– all the things that create new jobs and businesses here in America. Businesses will be less likely to invest and open shop in a country that seems unwilling or unable to balance its books. And if our creditors start worrying that we may be unable to pay back our debts, that could drive up interest rates for everybody who borrows money -– making it harder for businesses to expand and hire, or families to take out a mortgage.
Thus, the bad effects of having too much government debt are, well, essentially everything bad. We can certainly give him this, as I think you can construct a rigorous economic argument that will give you all of these effects. Basically he is describing the Argentinian debt experience, which is what you have to face if you are permanently fiscally irresponsible.

So, we have to do something, but what, and when?
A serious plan doesn’t require us to balance our budget overnight –- in fact, economists think that with the economy just starting to grow again, we need a phased-in approach –- but it does require tough decisions and support from our leaders in both parties now. Above all, it will require us to choose a vision of the America we want to see five years, 10 years, 20 years down the road.
Actually, he might have worded this "some economists think..." Some other economists might think that, for example, whether we pay the taxes now or defer them does not make much difference.

Obama then goes on to criticize the Republican proposal that was passed in the House. Then, he gives us this:
I believe it [the Republican plan] paints a vision of our future that is deeply pessimistic. It’s a vision that says if our roads crumble and our bridges collapse, we can’t afford to fix them. If there are bright young Americans who have the drive and the will but not the money to go to college, we can’t afford to send them.

Go to China and you’ll see businesses opening research labs and solar facilities. South Korean children are outpacing our kids in math and science. They’re scrambling to figure out how they put more money into education. Brazil is investing billions in new infrastructure and can run half their cars not on high-priced gasoline, but on biofuels. And yet, we are presented with a vision that says the American people, the United States of America -– the greatest nation on Earth -– can’t afford any of this.
There is some truth in this. Ryan's proposal certainly does have the: "We are beaten down by the crushing burden of this huge government, and we're just not up to supporting these poor people" tone to it. What I don't like about what Obama is saying is that we are supposed to be motivated by the desire to compete with those people-who-do-not-look-like-the-average-white-American. Obama could have said: "You wusses! Canadians have universal health care, insure their unfortunate generously, and they are fiscally responsible to boot! Do you hear them whining about it?"

So what do we plan to do? Here are some principles:
To meet our fiscal challenge, we will need to make reforms. We will all need to make sacrifices. But we do not have to sacrifice the America we believe in. And as long as I’m President, we won’t.
Specifics? This involves, on the spending side: (i) continuing with the budget cuts passed last week; (ii) cuts in defense spending; (iii) reductions in health care costs, without affecting actual benefits; (iv) changes to social security. The defense department is certainly a good place to look for spending cuts. In the past, we know inefficient contracting practices have taken place, that we have built weapons systems that we do not need, and that we have engaged in wrongheaded military campaigns. Surely we can improve on that. On health care, we know that the fraction of GDP we spend on health is extremely high relative to any other developed country. Further, much of this simply represents inflated prices. Doctors' salaries in part reflect the monopoly rents from the restrictions on supply imposed by the American Medical Association. Drug prices are high in part because of the the monopoly rents generated by patent protection. Medicare and Medicaid could surely deliver equivalent health outcomes at much lower cost. Obama is vague about social security reforms, but what seems to be needed here is to use sound actuarial science to properly calibrate benefits, perhaps to an average retirement age of 70. Social security taxes have to give here too, but maybe we can mitigate this by allowing the immigration of some highly-skilled people who would be more than willing to pay those taxes.

Now, on the taxation side, it seems that all the talk about honesty and shared sacrifice go out the window. Obama wants to refer to a tax increase as a cut in tax expenditures, for example. Then, we get this:
In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans. But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. We can’t afford it. And I refuse to renew them again.

Beyond that, the tax code is also loaded up with spending on things like itemized deductions. And while I agree with the goals of many of these deductions, from homeownership to charitable giving, we can’t ignore the fact that they provide millionaires an average tax break of $75,000 but do nothing for the typical middle-class family that doesn’t itemize. So my budget calls for limiting itemized deductions for the wealthiest 2 percent of Americans -- a reform that would reduce the deficit by $320 billion over 10 years.

1. Earlier in his talk, Obama told us that in 2000, before the Bush tax cuts were put in place, everything was fine. If he wanted to follow through on that thought, the logical conclusion would be that we should let the whole package expire, after the two-year extension. In itself, that would give some redistribution from rich to poor, but why load all of the tax increases on the rich?

2. Why not go after the mortgage interest tax deduction? Obama says he agrees with the goal of that deduction, but I think he would be hard-pressed to articulate what the goal is. The mortgage interest tax deduction certainly contributed to the financial crisis by subsidizing debt and encouraging households to leverage their housing wealth, and there is no sound economic rationale for the existence of such a deduction.


1. The Paul Ryan plan is radical. If this is what the Republicans want, they should base the 2012 election campaign on it, and see how far they get. If the average American understands what it means, I don't think he or she will vote for it.

2. Why does Obama cling to the tax-the-rich plan? We know it won't fly given the current composition of Congress, and it's not consistent with the thrust of his other ideas.


  1. "Why does Obama cling to the tax-the-rich plan? We know it won't fly given the current composition of Congress, and it's not consistent with the thrust of his other ideas."

    Income effect, substitution effect, backward bending labor supply curve, tons of empirical evidence, ginormous positional/context/prestige externalities, and it's far less of a sacrifice for the rich to pay more in taxes than the middle class and poor.

    He should present a plan involving tax hikes on the rich to show the public the difference between the two parties, how the Democrats' vision can cut the debt far more with far less pain and suffering, without slashing high return public investment and therefore growth, and not a great move toward cruel plutocracy that leaves the vast majority constantly at great risk of tragedy and ruin.

  2. the IMF recently described the mortgage interest deduction as "expensive and regressive". odd that a dem wouldn't want to get rid of a regressive tax...

  3. Richard, there is NO amount of taxation that can make Medicare/Medicaid solvent. PV of healthcare entitlements = 58tn. Household net worth = 57tn. Even confiscating ALL household wealth (which is neither desirable nor even feasible) would not work. Benefits must be cut --- the choice is whether that's by government fiat or the market. That's is the real debate.

  4. Richard,

    You need to get away from the idea that there is a very small group of rich guys with a large pot of wealth that we can take away with no adverse consequences.

    Last anonymous,

    I don't think this is an either/or choice. Obviously the government needs to make some choices, but as economists we are good at working through incentive problems and market-based solutions to make things more efficient. Control of health care costs is about saying no. The key question is: How do you say no, and how does that affect different groups of people?

  5. "Maybe this is what most Americans want, but I don't think that Americans are fundamentally different human beings from the ones that inhabit Scandinavia, France, Germany, or Canada"

    The difference is that America has been a multi-racial society for a long time. Wealthy races resent being taxed to support poorer ones, so American aversion to welfare has deep roots. As Europe becomes more diverse, its pro-welfare consensus will weaken. Divide and conquer.

  6. "ginormous positional/context/prestige externalities"

    There is no evidence these things are large; they exist, but you'll have to work pretty hard to convince people that they are so large that massive redistribution is justified.

  7. David,

    Yes, I was trying to be positive, but I'm afraid you have hit the nail on the head. Human beings are not fundamentally different, but some people have a hard time buying into social programs that they think benefit people they see as different. Some of this I learned by living where I do and listening to what people say. You're pessimistic about Europe, but I think there is hope. Look at Canada. There has been a large and steady flow of immigrants, and a lot of visible diversity exists, particularly in the large cities. There is some friction, but on the whole the Canadians are pretty harmonious. How come?

  8. David: "Wealthy races resent being taxed to support poorer ones, so American aversion to welfare has deep roots."

    Wrong. Wealthy Americans (drop the race card crap) do NOT resent being taxed to support those truly in need. What they resent is being taxes to support those who want to live off the government dole (i.e., the permanent welfare class...created, I might add, by past government policies. ).

  9. Steve: The U.S. is 28% black and Hispanic. Canada is 2.5% black and less than 1% Hispanic. In 1971 the percentage was 0.2% black. If these percentages increase significantly, Canadian racial attitudes will change. Iowa City was nearly all white 20 years ago, but public school enrollment is now 25% black and Hispanic. Attitudes are changing fast.

    Racially homogeneous countries tend to become welfare states. Diverse countries do not unless they can exclude minorities from obtaining benefits.

    Anonymous: I appreciate your position against welfare, but I think you are fooling yourself about the role of race in the U.S. American politics is now and has always been about race. See, for example, Deborah Ward, The White Welfare State (2005).

  10. But, particularly after the 1990s welfare reforms, I think you will have trouble finding that "permanent welfare class." Your impression may be that such a thing exists, but if you go out and measure it, I think it will be small, in the sense that people are not poor because of welfare programs, but for other reasons. The poor, the unemployed, and the incarcerated are disproportionately African American. That's not "race card crap," it's fact.

  11. Are there any comparisons of tax rates between Canada and the US especially for the wealthier tax brackets? There is a stereotype that Canada is more "European" than the US and I was wondering if this extends to the philosophy of over-taxing the rich as well.

    Further could you comment on why there hasn't been a serious consideration of a consumption tax (like the GST) as a part of stimulating saving and investment (although I realize it affects the labor-leisure decision of households)? The revenue from it could be used to balance the budget or cut distortionary taxes on K.

  12. For replies to my initial comment see:

  13. And with regard to Medicare, yes any excess exponential growth in any cost can never be sustained long term no matter what you do, that's just the nature of excess exponential growth if it's allowed to go for very long periods. Over many decades health care inflation will have to be slowed to no more than wage growth. Nonetheless, raising taxes on the wealthy will help in addition to controlling health care costs, which Obamacare started to do big time.

  14. "The poor, the unemployed, and the incarcerated are disproportionately African American. That's not "race card crap," it's fact."

    These facts are not the 'race card'. The race card is what Dems constantly play as a way of pitting one group of Americans against another.......without, I might add, ever noting that 'The poor, the unemployed, and the incarcerated are..' in the shape they are in largely because of government policies that support minimum wages, that put teacher unions ahead of students, that refuse to decriminalize drugs, and that do anything about illegal immigration.

  15. As you note, the Canadian federal government collects a large fraction of its revenue (not sure how much) from the GST (goods and services tax) which is a value-added tax, essentially a tax on consumption. In principle, that's neither progressive nor regressive, i.e. no redistributive implications. The last I looked at Canadian income tax rates, the top marginal tax rates are similar to what they are in the US, though I can't remember how the provincial taxes factor in. The top marginal rate may kick in at a lower level of income though. The total tax burden is larger, but obviously the typical Canadian is not paying for health care through a private plan. Maybe someone knows some references here, but my impression is that the tax burden on a rich Canadian is not that large - maybe larger than here, but not so bad.

  16. last anonymous: Sometimes relatively short periods of disruption to incentives and institutional structure in a culture or society can have very long-lasting effects. The Berlin Wall stood for 27 years and, after it fell, East Germany looked very different from West Germany, and some of those differences persist today - more than 20 years later. The first slaves arrived in North America in 1619. Slaves were "emancipated" in 1865, but explicit segregation persisted well into the 1960s. More than 200 years of slavery severely disrupted institutions and incentives among our African American population, and perhaps it's not surprising that those disruptions persist. The juxtaposition between the first world and the third world that you see in many American cities is pretty stark, and many people who come to this rich country for the first time are surprised by it. That juxtaposition I think has little to do with any social policies introduced by Democrats, and everything to do with the fallout from slavery.

  17. David,

    I don't know. Here is the Wikidepia entry on Canadian demographics:

    The last census information gives 16.2% visible minorities: 4% South Asian, 3.7% Chinese, 2.5% black, 1.3% Filipino, 1.0% Latin American, etc. Important things to note are that essentially all those people chose to come there, and they were selected based on passing some high-human-capital threshold. Canada hasn't had to deal with the after-effects of slavery, it is much harder to get there illegally, and the immigration policy is very different.

  18. Stephen

    No offense, but you sound like a sociologist rather than an economist. Read Thomas Sowell.

  19. I'm actually trying to be scientific. It doesn't matter to me what this sounds like. These are interesting, and thorny, problems. On the topic of sociologists, I ran into some at dinner last week. Christina Romer was in the room, which was very interesting too, in a weird way. The sociologist next to me started talking about poverty, so I asked him what solutions he had. All he could come up with was "people need jobs," which was hardly helpful. Christina was not too helpful either, but that's another story.

  20. Asians may be visible, but they are not on welfare. North Americans resent their taxes going to blacks and Hispanics (Canadians, too - see while Europeans resent payments to Arabs and Gypsies.

  21. Stephen,

    Would this be (former) CEA Christina Romer who claimed the Obama stimulus program would create 3 million jobs?

    What a shame given that all evidence suggests she a fine economist. Nonetheless, she likely will be most remembered for her 'paper' with Bernstein claiming unemployment would not rise above 8% if Obama Stimulus was passed, a claim (in retrospect) that was the economic equivalent of Neville Chamberlain's "peace in our time" after the 1938 (?) Munich conference.

  22. It's the same Christina alright. She's quite a pleasant person, but firmly convinced that the world works like an IS/LM model, with a multiplier of 1.6 or greater. Also has no respect for modern macroeconomics - much in the mold of Krugman/Summers/DeLong. Sometimes she can talk sense, and speaks to the virtues of market solutions, etc., but somehow that does not extend to how one should think about short-run phenomena, apparently. It seems now that her claim is that (in line with Krugman) the fiscal stimulus was not large enough, and we need more monetary stimulus (a QE3 I think) as well.

  23. David,

    Speaking of sociologists. In spite of these things, don't you think tolerance is on the rise though? You seem pretty pessimistic.

  24. "For replies to my initial comment see: "

    There is nothing there that suggests the existence of large positional externalities, just a bunch of unrelated statements about data. Try harder.

  25. I think Richard buys into Robert Frank's ideas. Frank, as far as I can tell, seems to think that people buy luxury goods for the status, and not because they actually like Beamers, for example. Thus, they should be prevented from doing so. One way to do that is to just take their income away. I assume Robert lives like the Amish.

  26. But if they like status, and Beamers give them status, then they indirectly like Beamers.

    Serlin thinks if he asserts something it is true. He is quite the prolific crackpot.

  27. "don't you think tolerance is on the rise?"

    That is an excellent question, but I don’t know the answer. A simple story would be that the income elasticity of tolerance is positive, so with minor fluctuations people are becoming more tolerant over time. Another possibility is that tolerance depends on the first (and/or second) difference of income, not the level, like in a habit persistence model. In this case, once we get used to a level of income, if it drops we are upset and look for someone to blame, even though we were happy a few years ago when we last had that level of income. If so, then we would expect tolerance to be cyclic. Since major economic disasters are bound to happen (see Barro, we will see periods of strong intolerance in the future.

    But maybe intolerance depends on factors other than income. Maybe it is a nonlinear, chaotic process that just explodes at unpredictable intervals, like weather. Or maybe it is now being artificially suppressed (by the EEOC, for example), as some believe it was in Tito’s Yugoslavia, and will someday come back stronger than before.

    I have no idea of which model is best, but if I were Rip Van Winkle and woke up after 500 years, I would be surprised to learn that humans had become more and more tolerant of group differences and that racial, ethnic, and religious violence had faded away.

  28. Stephen:

    A little more thinking may be in order wrt your claim that, "That juxtaposition I think has ... everything to do with the fallout from slavery." For example:

    The "third world" component of that juxtaposition is often populated by Hispanics. What role did/does slavery play in that stylized fact?

    Also, a strong connection between out-of-wedlock births and poverty has long been recognized (the Murphy Brown case, which so bothered George Bush I's VP, is not representative). At the time of the 1965 "Moynihan Report," circa the end of de jure state-sponsored discrimination in the US, roughly 25% of black children were born to unmarried mothers. Today that rate is around 70%. Do you believe that slavery per se was responsible for this near tripling of the African
    American out-of-wedlock birth rate? Or perhaps some other factors were operative (which also played a role in doubling the white out-of-wedlock birth rate, now around 25%, over the same period)?

  29. Phil,

    We're getting far outside the area of my expertise, but casual empiricism suggests that the Hispanic population in the US and the African American population behave in observably different ways, and that the former tend to be more upwardly mobile. Anyone have evidence on this?


    There is always friction associated with immigration. Some of these things eventually calm down (more or less), as with the Irish and Jewish immigrants to the US. Problems arise when some people are seen as having no right to be here, or when they were brought here against their will, or when some immigrants are treated differently in a legal sense (as in Europe).

  30. "Over many decades health care inflation will have to be slowed to no more than wage growth"

    Richard, the US does not have "many decades". It does not even have a single decade. Using CBO figures, by 2025, tax revenue will be entirely consumed by entitlements and interest payments alone.

    [from Anon @ 518]

  31. Why does the U.S have to be like all those other countries? Someone who wants a system like Canada's can always threaten to move to Canada (as was the case in the Bush years). Where do those who don't want it have to go if the U.S adopts that kind of system?

    "Anyone have evidence on this?"
    There's a book, "Generations of Exclusion", written by a pair of (gasp!) sociologists

  32. Second last anonymous,

    Yes, don't forget about the interest payments. We are doing nicely with that right now, but I think we'll be out of the low-interest-rate period soon.

    Wonks anonymous,

    Yes, those other countries could certainly have got it wrong. There is more migration out of Canada to the US than going the other way, though maybe that's not the case recently. However, take an example. If you were allowed to create a universal health care system from the ground up in the United States, and did not have to worry about all the political obstacles to getting it put together, I think you could have a system with excellent incentives that would be highly-efficient and would free up an enormous quantity of resources that would make us all richer. What was passed is essentially just redistribution. It does little to increase efficiency and will provide health care for the poor at the expense of the rich, which I guess is what the rich are complaining about.

  33. This comment from Phil Rothman:

    We're also far away from my area of expertise. But some stylized facts about the economic welfare of Mexican Americans, a quantitatively important component of the Hispanic demographic group in the US, can be found at:

    But returning to the "juxtaposition" you mentioned, I was wondering: aren't those who are surprised by it familiar with, e.g., the level of safety and security found in some of the banlieues east of Paris (e.g., Clichy-sous-Bois) and various council estates in the UK?

    Also, in your main blog post you wrote, "Obama could have said: 'You wusses! Canadians have universal health care, insure their unfortunate generously, and they are fiscally responsible to boot! Do you hear them whining about it?'" It's possible he chose not to because, if he had, some reasonable (non-rabid non-Fox News) commentators might have respectfully pointed out that: (1) Canadians and the rest of our wealthy allies whose societies provide relatively high levels of social insurance serially free-ride off US taxpayers/consumers by way of funding for medical research; (2) access to medical specialists, past the general practitioner gateway, is considerably restricted (perhaps optimally so, but nonetheless far more restricted) in Canada versus the US; and (3) concerning "whining," evidence suggests that a good number of Canadian health professionals have expressed their views by voting with their feet:

    Raising points such as these in response to the statement you proposed Obama make would not imply the absence of serious problems in the overall US health care system.

  34. Yes, all good points. There is an issue in general of free riding, by the Canadians in particular. You could argue that they get away with low defense spending and low expenditures on private R and D in general by free riding on the United States. However, on the medical "innovations," it's not clear how much of what is spent in the United States on so-called innovation, is actually socially useful. How much progress has been made on curing cancer, given the resources put into it? Some of the innovation in terms of introduction of "new" drugs is just tweaking the molecular structure slightly to get an extension of patent protection. There certainly is a brain drain of medical professionals from Canada to the US, particularly in the specialties. Being an anesthesiologist is much more lucrative in the US. You could say, though, that this is in part driven by some of the inflated prices I was talking about. On the issue of "access to medical specialists" in Canada, that's certainly true, but that's how you gain control of costs. There has to be serious gatekeeping, with someone saying "no" at various stages in the process. Actually my relatives have no problem with this. My brothers have had their bad knees fixed, and fixed well, with no problems, for example.

  35. Steve, tell me that you didn't zap my comment.

    Tell me that the blog ate it.

  36. Some studies which provide analysis of the economic benefits of medical/pharmaceutical research:

    But however high these benefits are, satisfying the US intertemporal government budget constraint in a sane and smooth manner is unlikely to be an easy political act.

    On outcomes in the Canadian health care system, there are plenty of anecdotes from which we can draw with lots of sample selection bias. A personal one includes a friend in Calgary who waited 8 months to be treated by a specialist for very nasty back pain. In the backwaters of Greenville, NC (where I live), he would have been seen by an orthopedist within a couple days (conditional on having health insurance of the sort that roughly 90% of people in the US legally have).

  37. " it's not clear how much of what is spent in the United States on so-called innovation, is actually socially useful."

    This argument is not consistent with the dominance of US-based researchers in winning Nobel prizes in medicine. After the 1950s, the US has a grossly disproportionate number of Nobels in medicine.

  38. "On the issue of "access to medical specialists" in Canada, that's certainly true, but that's how you gain control of costs. There has to be serious gatekeeping, with someone saying "no" at various stages in the process."

    I think that this argument ignores the significant costs of non-price rationing. How about introducing some serious market-based rationing measures, like actual price competition and letting people internalize the marginal cost of their care?

  39. Chris,

    Other people have had this problem. If it's too long, in fact the blog will eat it. It's what the Google software does. I'll look and see if I have some control, but I may not.

  40. Phil, Chris,

    I have plenty of personal experience with both the Canadian and American health systems, as I have lived in both places. Though I am generally healthy, I have had close and extended family who have made intense use of health care in both countries.

    Canada: (i) up side: dealing with the bureaucracy is easy. Routine treatment gets done quickly and efficiently, and you never have to deal with some bureaucrat to settle a claim. Everyone has access to a minimum level of care. It burns up far fewer resources. There's less physical capital, but as far as I can tell the human capital is as high-quality as in the US system. (ii) Down side: You may have to wait for non-life-threatening care. Your buddy's back was killing him for 8 months, but he did not actually die, and eventually he got treated. My brother had to wait 6 months to get his knee fixed, but he didn't die, and it got fixed well.

    US system: (i) Up side: If you are in a good pool, like mine, it's not that expensive, and the level of care is excellent. (ii) Down side: Health insurance is tied to employment, which reduces labor mobility. Suppose you are self-employed, and say you have something like bipolar disorder. Now you are uninsurable. We also have a shortage of doctors. When I came to St. Louis, I would not be able to see a family doctor on demand until I had an initial appointment, but I could not set up my initial appointment for less than 4 months in the future. I have spent hours on the phone with insurers settling claims. What a pain in the butt. Another thing: too much testing, too much treatment.

  41. Steve,

    My view of the UK system (based on experience there) is similar to your view of Canada. I'd add that in the UK, it seemed very hard to see a specialist, i.e. there seemed to be some deliberate rationing of care by family doctors. In the US, by contrast, seeing a specialist involves nothing more than asking the doctor, and appointments are available very quickly.

    Anon @ 518

  42. Steve:

    Perhaps your proposed speech for Obama should be amended to include: "Yes, you'll have to wait, say, 6 months before seeing the specialist you can now see within 1 or 2 days. But you won't die!" It's hard to picture the crowds going wild with that last line.

    The connection between health insurance and employment in the US is both a serious source of inefficiency and morally suspect. I think the Swiss health insurance system is the way to go (though they also free-ride off of US medical research). Politically, an 'impossibility theorem' preventing the US from ever getting there is probably operative.

  43. Yes, the Swiss system is an alternative model that seems to work well. Some people think there is path-dependence in how these different countries adopted these things, with a good degree of randomness along the way. Why did the US adopt government-provided health insurance only for old people and veterans, and not make it universal? Why did the Swiss go with private insurers instead of a single-payer system?

    As you say, no one is going to go wild if told the truth about what it takes to control the monster. As you say, it seems impossible politically to take the US to a Swiss, French, or Canadian system, for example. Wealthy people with good insurance will at least think they are losing a lot, though my perception is that the loss is actually marginal, and that they would more than make up for it indirectly with the freeing-up of resources. It's like free trade, where you never see the benefits directly.

  44. Stephen:

    Paul Starr's "The Social Transformation of American Medicine" gives a good account of how path dependence played out in the US health care market; the roles of WWII price controls and the 1954 IRS decision to treat employer-paid health insurance premiums as tax-free income were non-trivial.

    Pieces like this, from today's issue of the US's newspaper of record, would not help Obama's hypothetical case in referring to the provision of health care in Canada:

  45. On the NYT story: Is that some horror story about Canadian health care, or is it a story that tells you that if you want some kind of treatment in the United States, wrongheaded or not, extremely costly or not, you can get it?

  46. Steve,

    Easy call: The government should not generally decide what kind of treatment that you get.

    With respect to "wrongheaded", perhaps you missed this part: "St. Louis doctors said the procedure provides Joseph with increased mobility and comfort while providing a more stable airway. It protects his lungs from inhaled saliva or other material that could cause aspiration pneumonia."

    As far as "costly" goes, it isn't my money. I applaud Cardinal Glennon if it wants to give away care.

  47. Chris,

    That's the story in the NYT. We don't know all the details. The hospital of course is going to say it was a good idea, and the resources didn't come out of thin air. The key point is that, when your life is on the line, any individual is going to want to spend infinite amounts to stay alive, but for society the cost of keeping you alive may just be too large. It's a tough thing, but that's reality.

  48. Stephen:

    Perhaps it's simply a stylistic choice in writing, but I think it's an exaggeration to say that, "when your life is on the line, any individual is going to want to spend infinite amounts to stay alive," since millions gracefully acknowledge and accept their highly likely path to a soon-to-arrive death each year. Indeed, that's part of the foundation of the hospice movement.

    Still, there are lots of very tough choices to make. Economists can help out in the discussion by clearly characterizing the opportunity costs.

  49. "That's the story in the NYT."

    I have to meet you halfway on that one. The Times is not known for veracity. On the other hand, their politics would tend to push the story the other way, if anything.

    "...the resources didn't come out of thin air."

    Steve, if you buy a fancy BMW next week, does it make me any poorer?

  50. "The key point is that, when your life is on the line, any individual is going to want to spend infinite amounts to stay alive,..."

    Certainly an exageration if the money is yours and you have a bequest motive.

    "...but for society the cost of keeping you alive may just be too large."

    Which is exactly why people should be spending their own money and making their own decisions. I include privately contracted insurance payments in "their own money."

    Let govt pay for basic services for the poor and mandate high-deductible, catastropic policies for everyone else.

  51. Phil,

    Sorry, I didn't see your response to Steve before I wrote my own similar comment.

    BTW, Phil, I agree with almost everything that you have written but I object to the measured, reasoned tone. I prefer a more fevered, wild-eyed approach.

  52. Chris: I'll see what I can do about that tone.


    "NHS budget squeeze to blame for longer waiting times, say doctors

    Latest performance data reveal number of English patients waiting more than 18 weeks has risen by 26% in last year"

    that's the British experience.