A New Business Plan

At another blog, Troublesome Frog comments:

I managed to get through a BS in economics at a non-Chicago university without Samuelson's text, but I believe I purchased three (!) Greg Mankiw textbooks in the process. While I have to say that he writes a good textbook, Mankiw is an economist's economist. He knows how to extract maximum producer surplus. I was half surprised that he didn't convince instructors to change editions halfway through the semester just to get another $140 from us.

FYI, for those instructors teaching intermediate macro this summer: The new edition will be out any day now. Feel free to switch editions mid-course.

Interview with Burt

As a freshman at Princeton, I took econ 101 (introductory macro) from Burt Malkiel, and I got from my first exposure to modern finance from reading his book A Random Walk Down Wall Street. To this day, as Burt has long advised, most of my equity investments are in low-cost index funds. It is alway great to keep up with what he is thinking. Click here to read a recent interview.

Costs versus Efficiency

Advocates of government-run health insurance like to point to Medicare's low administrative costs (which, as I noted yesterday, is a controversial claim). But even if that factual claim were true, the argument would hardly be dispositive as to the greater efficiency of a publicly run system. As I put it in my recent Times article, "True, Medicare’s administrative costs are low, but it is easy to keep those costs contained when a system merely writes checks without expending the resources to control wasteful medical spending."

A reader finds support for this position in some recent testimony by Malcolm K. Sparrow, Professor of the Practice of Public Management at Harvard's Kennedy School of Government. Professor Sparrow suggests that greater administrative costs aimed at uncovering medical fraud might be money well spent. Here is an excerpt:

The units of measure for losses due to health care fraud and abuse in this country are hundreds of billions of dollars per year. We just don't know the first digit. It might be as low as one hundred billion. More likely two or three. Possibly four or five. But whatever that first digit is, it has eleven zeroes after it. These are staggering sums of money to waste, and the task of controlling and reducing these losses warrants a great deal of serious attention....

By taking the fraud and abuse problem seriously this administration might be able to save 10% or even 20% from Medicare and Medicaid budgets. But to do that, one would have to spend 1% or maybe 2% (as opposed to the prevailing 0.1%) in order to check that the other 98% or 99% of the funds were well spent. But please realize what a massive departure that would be from the status quo. This would mean increasing the budgets for control operations by a factor of 10 or 20. Not by 10% or 20%, but by a factor of 10 or 20.

The bottom line: Low administrative costs are not to be confused with high administrative efficiency. In other words, administrators are not necessarily a deadweight loss to the system.

Gruber on Financing Health Reform

In the New England Journal of Medicine, MIT economist Jonathan Gruber says we should eliminate or limit the income-tax exclusion for expenditures on employer-sponsored health insurance. He makes a strong case.

N.B.: During the 2008 campaign, candidate McCain proposed something along these lines, and the idea was met by withering criticism from candidate Obama.

Medicare has lower administrative costs?

Maybe not:

only an extremely small portion of administrative costs are related to the dollar value of health care benefit claims. Expressing these costs as a percentage of benefit claims gives a misleading picture of the relative efficiency of government and private health plans.Medicare beneficiaries are by definition elderly, disabled, or patients with end-stage renal disease. Private insurance beneficiaries may include a small percentage of people in those categories, but they consist primarily of people are who under age 65 and not disabled. Naturally, Medicare beneficiaries need, on average, more health care services than those who are privately insured. Yet the bulk of administrative costs are incurred on a fixed program-level or a per-beneficiary basis. Expressing administrative costs as a percentage of total costs makes Medicare's administrative costs appear lower not because Medicare is necessarily more efficient but merely because its administrative costs are spread over a larger base of actual health care costs. When administrative costs are compared on a per-person basis, the picture changes. In 2005, Medicare's administrative costs were $509 per primary beneficiary, compared to private-sector administrative costs of $453.

Thanks to Craig Newmark for the pointer.

Update: A reader points me to this related study. Also, see the discussion here and here. Finally, Paul Krugman disses the study I quoted above, and then the author of the study pushes back.

A Case to Watch

From the Washington Post:

A majority of the U.S. International Trade Commission recommended on Monday that President Barack Obama impose additional duties for three years on imports of low-cost Chinese tires the panel says are harming U.S. industry.

In a case seen as a test of how the Obama administration will cope with Chinese trade issues, four members of the six-member commission recommended that Obama impose additional duties of 55 percent in the first year, 45 percent in the second year, and 35 percent in the third year on imports of passenger vehicle and light truck tires from China.

"In our opinion, these tariff levels would remedy the market disruption that we have found to exist," the four said in a statement. The complaint was brought by the United Steelworkers union, which said a surge of Chinese tire imports have cost thousands of U.S. jobs.

Two other members of the commission disagreed, saying Obama should take no "trade-restricting" action because this would do more harm than good....

Trade experts are watching to see whether Obama, who criticized China for what he called unfair labor practices during his campaign and won strong labor support in his bid for the White House, will be tougher on China than predecessor George W. Bush. Bush routinely rejected petitions for restricting Chinese imports.

President Obama's views about international trade are still something of a mystery. As a senator and presidential candidate he seemed like a protectionist, but once elected he hired a bunch of free traders as economic advisers.

Larry Summers once said of Barack Obama, "When I’ve heard him talk about economic issues—with the exception of NAFTA, where I just hope he doesn’t believe what he says—he seems intelligent and serious. I wouldn’t say I’m bowled over by the brilliance of anything I’ve heard, but everything has a kind of thoughtfulness to it that’s sort of impressive." That is, even the president's chief economic adviser was discomfited by his campaign rhetoric concerning international trade.

This Chinese tire case may be one indication of the president's true feelings about trade. So let's wait and see what happens.

Happy Independence Day!