Wolf on Obama and Obamacare

Quoting from the Washington Time’s byline, “Dr. Milton R. Wolf is a board-certified diagnostic radiologist, medical director and cousin of President Obama. He blogs daily at miltonwolf.com.”  As an aside that must be dealt with, I do not care that he is a cousin to the president; it has nothing to do with his qualifications to write on healthcare reform.  His medical degree does. 

Section 2711 of the Public Health Service Act prohibits insurers from establishing annual or lifetime limits of benefits for any insured person or group.  In his Washington Times Op-ed, Wolf finds three problems with our nation’s recent healthcare reform based on the 733 exemptions to section of the act, political corruption, the implicit acknowledgement that healthcare reform increases healthcare costs, and lack of transparency.

Wolf views the granting of exemptions to several cities, Massachusetts, New Jersey, Ohio, Tennessee, businesses and unions including the Service Employees International Union as evidence of corruption.  Without additional evidence, I not only don’t see fire, I don’t even see smoke.  There were 733 exemptions granted.  Perhaps there were 733 applications.  Political donations are reported.  It would not be difficult to statistical estimate the probability of receiving an exemption for those making donations to the Obama campaign and comparing it to the probability of receiving an exemption for those making donations to the McCain campaign.  Until I see more rigorous evidence, I will not consider the allegation of corruption.

The other charges are more difficult to dismiss.  By prohibiting insurers from limiting coverage the cost the amount of claims paid must stay the same or increase.  They will only stay the same if the caps on coverage were set so high that they were never reached.  I believe that this hit low wage earners hardest.  Suppose your job is worth $10.00 per hour to your employer and that you receive this wage in the form of wages at $7.25 per hour and a healthcare benefit valued at $2.75 per hour.  If the cost of healthcare now rises to $3.50 per hour, the employer will either cancel the policy or fire the worker because the cost of the wages and benefits exceed the value of the job.

At best, the  lack of transparency is bad government.  I don’t know what the legal requirements of transparency are, and without additional information, I assume that the administration meets them.  Wolf writes that more than 500 waivers were granted in December but not reported until after the State of the Union.  That is not a high level of transparency from an administration promising new levels of openness.    
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Romer and Samuelson on the Deficit

Greg Mankiw (Greg Mankiw’s Blog) linked to two articles concerning the State of the Union that support contentions that I have made in class: economists are at least in part guided by their economic science, that economic consensus often transcends politics, and that economics is more important than politics.  The issue is the deficit; both economists, Robert Samuelson from the political right and Christina Romer from the political right, agree that burgeoning deficits and mounting debt that threaten the financial stability of the United State government and the economy. 

At this point, I must be careful about any consensus that may exist between economists on the importance of the deficits and the debts they cause.  Without the advantage of surveys or polls of economists, I can only write that I believe that a consensus exists on the issue and that it is widely held.  At the least I can write that two economists with different political views agree on many of the problems caused by the deficits.  On the size and budgetary challenges of the deficit, Samuelson writes (“A Missed Opportunity On the Budget”),

Americans think deficits are someone else's problem that can be cured by taxing the rich (say liberals) or ending wasteful spending (conservatives). Obama indulged these fantasies.

If deficits stemmed mainly from the recession, this wouldn't matter. They would shrink as the economy recovered; tax collections would rise and spending (on unemployment insurance, food stamps) would fall. Unfortunately, this isn't the case. In fiscal 2010, the deficit - the gap between government spending and revenue - was $1.3 trillion. Of that, about $725 billion was a "structural" deficit, says Mark Zandi of Moody's Analytics. That is, it would exist even if the economy were at full employment (5.75 percent by Zandi's estimate).

Even this arithmetic may be misleading. Falling interest rates - reflecting the recession and Federal Reserve policy - have lowered the government's interest payments despite ballooning debt. In 2010, federal interest costs were $197 billion, down from $253 billion in 2008. But as the economy strengthens, interest rates will rise, offsetting some of the recovery's beneficial effect on the deficit. By 2020, annual interest payments could approach $800 billion, projects the Congressional Budget Office.

If anything, Romer views the deficits as presenting a bigger challenge (“What Obama Should Say About the Deficit”).

President Obama should embrace the reality that his re-election may depend on facing up to the budget problem.

The economic need is also pressing. The extreme deficits of the last few years are largely a consequence of the terrible state of the economy and the actions needed to stem the downturn. But even with a strong recovery, under current policy the deficit is projected to be more than 6 percent of gross domestic product in 2020. By 2035, if the twin tsunami of rising health care costs and the retirement of the baby boomers hits with full force, we will be looking at deficits of at least 15 percent of G.D.P.

Such deficits are not sustainable. At some point — likely well before 2035 — investors would revolt and the United States would be unable to borrow. We would become the Argentina of the 21st century.

The root cause of the growing deficits and debt is growing expenditures on Social Security, Medicare and Medicaid.  Samuelson writes,

Myth: The problem is the deficit. The real issue isn't the deficit. It's the exploding spending on the elderly - for Social Security, Medicare and Medicaid...

Myth: Eliminating wasteful or ineffective programs will close deficits. The Republican Study Committee - 176 House members - recently proposed $2.5 trillion of cuts over a decade in non-defense, non-elderly programs. This plan would kill dozens of specific programs…The Republicans' cuts are huge, about 35 percent. Even so, they would reduce projected deficits by at most a third. Over the next decade, those deficits could easily total $7 trillion to $10 trillion.

Myth: The elderly have "earned" their Social Security and Medicare by their lifelong payroll taxes, which were put aside for their retirement. Not so. Both programs are pay-as-you-go. Today's taxes pay today's benefits; little is "saved." Even if all were saved, most retirees receive benefits that far exceed their payroll taxes. Consider a man who turned 65 in 2010 and earned an average wage ($43,100). Over his expected lifetime, he will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, compared with taxes paid of $345,000, estimates an Urban Institute study.

Romer writes,

By 2035, if the twin tsunami of rising health care costs and the retirement of the baby boomers hits with full force, we will be looking at deficits of at least 15 percent of G.D.P…

Respected analysts across the ideological spectrum agree that rising health care spending is the biggest source of the frightening long-run deficit projections. That is why the president made cost control central to health reform legislation. He should vow not just to veto a repeal of the legislation, but to fight to strengthen its cost-containment mechanisms.

One important provision of the law was the creation of the Independent Payment Advisory Board, which must propose reforms if Medicare spending exceeds the target rate of growth. But the legislation exempted some providers and much government health spending from the board’s purview. The president should work to give the board a broader mandate for cost control.

The fiscal commission recommended that military spending — which has risen by more than 50 percent in real terms since 2001 — grow much more slowly in the future. It also proposed thoughtful ways to slow the growth of Social Security spending while protecting the disabled and the poor. And it recommended caps on nonmilitary, non-entitlement spending.

Both economists explicitly criticize the party with which they are commonly associated.  Samuelson writes,

Americans think deficits are someone else's problem that can be cured by taxing the rich (say liberals) or ending wasteful spending (conservatives).

Romer’s criticism is more subtle.  She wrote her article, (“What Obama Should Say About the Deficit,” before the State of the Union.  If President Obama had broadly addressed the issue of the deficits and the ensuing debt, it would not have been a criticism, but he did not. 

Romer and Samuelson will disagree on many issues.  Economics is not easily subject to controlled experimentation, models are complex and statistical inference testing is less conclusive than it might otherwise be.  With more room to wander from the scientific path, personal biases might be more important than in a science such as chemistry in which controlled experimentation is the rule, but these difficulties obfuscate an important point; their guiding light will be the economic science. 
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Confirmation Bias (Repost II)

As classes begin, I urge students to avoid confirmation bias. Robert T. Carroll of the Skeptic's Dictionary describes confirmation bias as

a type of selective thinking whereby one tends to notice and to look for what confirms one's beliefs, and to ignore, not look for, or undervalue the relevance of what contradicts one's beliefs.

Expose yourself to new ideas. Students tend to think of economics in terms of the Democrat and Republican debate. Although economists are often partisans, their debates frequently turn on a different axis. For example, economists might debate the relative effectiveness of monetary policy and fiscal policy in achieving full employment. Both a Democrat and a Republican might favor stimulative fiscal policy but differ on who gets tax cuts. Many of the economists who believe that fiscal policy is effective may not like the tax cut plans of either party.

Greg Mankiw posted a letter from the "perfect" student in “A Question about Learning Economics,” or at least that's how I think the student. The student reads books by economists with very different perspectives, and respectfully engages professors in discussions. The student mentions having a professor who was a Friedman disciple and another who was New Keynesian. Mankiw's reply is sold. In part, he writes,

You are lucky that you have professors with different viewpoints. Your job, as a budding economist, is to learn from all of them. Ideally, at the end of the day, you should be able to understand and appreciate (although not necessarily agree with) each point of view. You should try to construct in your mind a debate between your Friedmanite professor and your Keynesian professor. What points would each raise, and how would the other respond?

In a valuable EconTalk, Ian Ayers suggests that listeners attempt to name things that they have learned but that they don't like. If you can't think of any, you are a biased consumer of education.
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The Views of Economists and Non Economists On The Economy (Repost I)

In a previous post, “Economists as Experts (Repost I),” I stated that economists deserve respect as experts on economics, and that common accusations about their objectivity were wrong. In this post, I describe how the views of economists differ systematically from non economists. As in my previous post, I rely heavily on Bryan Caplan’s book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies. His work is based on a survey on 1,510 randomly selected Americans and 250 Ph.D. economists that was conducted by the Washington Post, Kaiser Family Foundation, and Harvard University in 1996. The survey had thirty seven questions about the state of the economy and how it functioned.

Claiming that economists are nonbiased experts and that their opinions are the best representation of reality, Caplan compares their views to the public’s, and finds that they differ in four areas that he calls public biases. The first, antimarket bias, is the tendency to underestimate the effectiveness and benefits of the market mechanism. Caplan writes,

Economists across the political spectrum criticize anitmarket bias. Liberal Democratic economists echo and amplify Schumpeter’s theme. Charles Schultze, head of Jimmy Carter’s Council of Economic Advisors, proclaims, ‘Harnessing the ‘base’ motive of material self-interest to promote the common good is perhaps the most important social invention mankind has yet achieved.’ But politicians and voters fail to appreciate this invention.

Schultze is not the first economist who supported liberal political agendas to speak to the strengths of markets. In fact, I have difficulty using the political term liberal to define economists and do so with some caution. In this post, I will only call an economist liberal if he or she is a self proclaimed liberal, or supported Obama over McCain in the last election. One such economist is Nobel Laureate (1970) Paul Samuelson who penned these words in a SpiegelOnline article titled, “The Dynamic Moving Center,”

Based on my observations of economic history, both short run and long run, I believe that there is no satisfactory alternative to market systems as a way of organizing both economically poor and economically rich populations.

Also for SpiegelOnline, Edmund Phelps, a Nobel Laureate (2006) writes in a article titled, “What Has Gone Wrong Up Until Now,”

It is preposterous to speak, as some Europeans have, of the "end of capitalism." A good life requires a rewarding workplace -- one of change and challenge -- and that requires some sort of well-functioning capitalism.

Economists recognize greater strengths in markets than does the public in general.[1]

The public also expresses antiforeign bias, a tendency to underestimate the benefits of economic interchange with foreigners. As examples of the differences between economists and the public at large, economists express less concern about outsourcing of jobs and immigration. They also overwhelmingly support policies that lower restrictions on trade.

The general public is also more likely to underestimate the benefits of conserving labor, what Caplan calls the make-work bias. Economists generally favor the introduction of labor saving technology. It allows more of a good to be produced with the same amount of labor, freeing that labor to produce other things. Technological advance in agriculture freed 17 million workers as yields per acre increased. Displaced workers retrained, found new jobs, and produced other things. It might have been difficult to see how the displaced farmers and farm workers would benefit from increasing agricultural productivity, but most did, and certainly the country prospered. Economists measure progress within an industry and in the country by increasing productivity, not by employment numbers. Job creation tends to expand to cover all who wish to work, and flows to areas in which it is most highly valued.

Finally, Caplan argues that non economists suffer from pessimistic bias, the tendency to overestimate the severity of economic problems and underestimate the past, present, and probable future performance of the economy. As a demonstration of the optimism of economists, Brad DeLong writes in the abstract of his paper, “Cornucopia: Increasing Wealth in the Twentieth Century,”

There is one central fact about the economic history of the twentieth century: above all, the century just past has been the century of increasing material wealth and economic productivity. No previous era and no previous economy has seen material wealth and productive potential grow at such a pace. The bulk of America’s population today achieves standards of material comfort and capabilities that were beyond the reach of even the richest of previous centuries. Even lower middle-class households in relatively poor countries have today material standards of living that would make them, in many respects, the envy of the powerful and lordly of past centuries.

As experts in economics, economists have studied economic progress, see its incredible advance over the last century, understand some of its causes, and extrapolate that success into the future.[2]

[1] To be sure, “liberal” economists will speak more about the limits of markets because of imperfections such as asymmetry of information, externalities, public goods, or market power than “libertarian” economists like Milton Friedman, just follow the link on Samuelson’s article as an example, but they both recognize the same flaws as well as the same strengths.

[2] At the risk of repeating a common theme of other posts, one of the disconcerting features of the debate about the current recession is the level of pessimism expressed about the outlook for the U.S. economy in the near term.
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Economists as Experts (Repost I)

Economists have a chip on their shoulder, or at least I do. Nobody argues gravity with a physicist, or covalent bonding with a chemist, but they do argue supply and demand with an economist. Nobody ever asks if a physicist or a chemist is biased, but people make these claims all the time about economists. Like Rodney Dangerfield, economists, "don't get no respect."

In his book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies, Bryan Caplan describes two common biases that many think economists possess. They are self-serving bias and ideological bias.

Self-serving bias is based on a literature that suggests that people form beliefs that are comfortable and support their financial interests. As an expression of self-serving bias, Lincoln said of slaveholder,

The effect on the minds of the owners is to persuade them that there is no wrong in it. The slaveholder does not like to be considered a mean fellow, for holding that species of property, and hence he has to struggle within himself and sets about arguing himself into the belief that Slavery is right. The property influences his mind. [1]

The argument implies that economists are on average well-to-do, and have job security and therefore support policies that help the rich through markets. Caplan's statistical analysis suggests that self-serving bias does not explain economists' views. If economists had the same level of income and job security as the average person, their opinion on policy would still mirror those of other economists.

Ideological bias suggests that economists beliefs were shaped by their free market mentors. If Republicans are more conservative than Democrats, implying that they are more likely to support free market policies, the accusation does not fit. Economists are more likely to be Democrats than Republicans. Daniel Klein and Charlotta Stern (How Politically Diverse Are the Social Sciences and Humanities? Survey Evidence from Six Fields) surveyed six social science disciplines. The overall response rate of 30.9% and the small number of academic economists responding (96) suggests that results should be interpreted with caution. Academic economists were defined as those working at four year colleges or above. They found that three times as many economists vote regularly for Democrats as compared to Republicans.

The Economist.com (Examining the candidates) surveyed 683 research economists at the National Bureau of Economic Research, and found similar results to Klein and Stern.

A total of 142 responded, of whom 46% identified themselves as Democrats, 10% as Republicans and 44% as neither. This skewed party breakdown may reflect academia’s Democratic tilt, or possibly Democrats’ greater propensity to respond. Still, even if we exclude respondents with a party identification, Mr Obama retains a strong edge—though the McCain campaign should be buoyed by the fact that 530 economists have signed a statement endorsing his plans.

Their nonscientific results find that Democrats outnumber Republicans 4.6 to 1, an even stronger result.

Caplan compares the political beliefs and policy views of 250 Ph.D. economists and concludes,

Compared to the general public, the typical economist is left of center. Furthermore, contrary to critics of the economics profession, economists do not reliably hold right-wing positions. They accept a mix of 'far right' and 'far left' views.

Economists may have biases, but they are not self-serving bias or ideological bias as often claimed.

[1] Miller, William Lee. Lincoln's Virtues: An Ethical Biography, Alfred A. Knopf, New York , 2002, page 388.
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Confirmation Bias (Repost I)

As classes begin, I urge my students to avoid confirmation bias. Robert T. Carroll of the Skeptic's Dictionary describes confirmation bias as

a type of selective thinking whereby one tends to notice and to look for what confirms one's beliefs, and to ignore, not look for, or undervalue the relevance of what contradicts one's beliefs.

Expose yourself to new ideas. Students tend to think of economics in terms of the Democrat and Republican debate. Although economists are often partisans, their debates frequently turn on a different axis. For example, economists might debate the relative effectiveness of monetary policy and fiscal policy in achieving full employment. Both a Democrat and a Republican might favor stimulative fiscal policy but differ on who gets tax cuts. Many of the economists who believe that fiscal policy is effective may not like the tax cut plans of either party.

Greg Mankiw recently posted a letter from the "perfect" student in A Question about Learning Economics, or at least that's how I think the student. The student reads books by economists with very different perspectives, and respectfully engages professors in discussions. The student mentions having a professor who was a Friedman disciple and another who was New Keynesian. Mankiw's reply is sold. In part, he writes,

You are lucky that you have professors with different viewpoints. Your job, as a budding economist, is to learn from all of them. Ideally, at the end of the day, you should be able to understand and appreciate (although not necessarily agree with) each point of view. You should try to construct in your mind a debate between your Friedmanite professor and your Keynesian professor. What points would each raise, and how would the other respond?

In a valuable EconTalk, Ian Ayers suggests that listeners attempt to name things that they have learned but that they don't like. If you can't think of any, you are a biased consumer of education.

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Experts Vs. Partisans (Repost I)

I love college football; my favorite team is Southern Cal and it has been since I was ten. I love tailgating before the game, and walking into the stadium in a wave of cardinal. Then the game starts. USC defers to the second half. Ray Maualuga smacks a back for a five yard loss and the band plays Conquest. Mark Sanchez hits Patrick Turner on a slant up the middle for a thirty yard gain and the band plays Conquest. The band plays Conquest a lot. After the game, the players, the band, and the fans gather at one end of the stadium to chant traditional cheers, often led by players. I love being a fan and surrounded by other fans.

If I had money on the game, I would not listen to my fellow fans; I wouldn’t even trust my own opinion. As a fan, I have too much skin in the game. With money on the line, I would look at a computer model, or read what an expert or experts say. I would also try to get a consensus opinion of experts by looking at the Las Vegas betting line, or prediction markets. Experts and aggregations of experts somehow stay above the fray and remain objective.

There is a similar relationship between economists, politicians, and citizens; economists are the experts and politicians are the players, the media, the band, and voters, the fans. Politicians and voters are partisans, allegiance to the team comes before objectivity. Politicians enact policy through law, and economists study the impact of policy and advise politicians. Politicians need good positive economics to achieve their normative goals. But if I were a politician, I would like to know my advisors had my back, and would not hire an advisor unwilling to show allegiance to me.

Economists advising politicians walk a fine line between holding to their science and remaining objective, or becoming partisans. Occasionally, a good advisor might contradict the politicians they advise as did Greg Mankiw when he said,

Romney has had to distance himself from his top economics adviser after Mankiw _ a Princeton-trained economist now teaching at Harvard _ voiced his support for an immigration bill Romney strongly opposes [1].

At some point, an economist must become a partisan, or at least bite his tongue when his team supports policy that contradicts good science as Greg Mankiw did when he supported tax cuts that important Bush administration officials said would raise tax revenues. Mankiw is on the record as stating that tax cuts don’t increase tax revenue. He took incoming fire from fellow economists for his silence, but defended himself by parsing words, noting that, “Being opposed to a tax cut as a policy and being critical of an argument for tax cuts are two different things. [2]” In response to Mankiw’s relative silence and awkward position on the revenue impact of the tax cut, Brad DeLong noted,

Mankiw was indeed correct in thinking that he personally could do more good for the country and the world working inside than if he were to march up to Dick Cheney, tell him "you have to stop saying that tax cuts raise revenues," and so get fired. But the Bush administration did frequently argue that tax cuts raised revenue. And there is the much harder question: is it worth the sacrifice of the economics profession's outside credibility and the further confusion of the public that is entailed when good economists defend bad policies on the outside that they are working to change on the inside? I don't know the answer to that.

The world has need for both experts and partisans, and it is difficult to do both simultaneously. Anyone who reads my blog for any period of time will note that I do not like economists surrendering their science for partisanship. I believe that most economists share my sentiments. I hope that I can be fair. Best wishes to the Obama economics team that now must walk that fine line.

[1] Glen Johnson, “Romney Finds Advisors Both Help And Hurt,” The Washington Post, June 19, 2007.

[2] Nathan Strauss, “Mankiw Defends Tax Cut Stance, Faces Online Flak,” The Harvard Crimson, July 13, 2007.
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