With this story, we have the within-country extension of the infamous Summers Memo of 1991.
Category: microeconomics
Innovations in Distance Grandparenting
Jennifer 8. Lee reports in today's New York Times on "The Incredible Flying Granny Nanny," with examples of grandmothers who commute by airplane on a weekly basis to look after their grandchildren while both parents are at work. Here's one example:
Terri P. Tepper of Barrington, Ill., made a similar trek every week for a year to help care for her granddaughter so that her daughter could pursue her career. Beginning in 2001, Ms. Tepper flew to New York on Sundays and returned to Chicago on Thursdays.
“It was cheaper than getting a nanny,” said Ms. Tepper, 64. The round-trip tickets, which her daughter paid for, cost between $190 and $230. “I actually saved them a lot of money,” Ms. Tepper said. Her daughter later made partner in her consulting firm.
It's fascinating to see how relative prices can drive behavior here. The article has the economics right, but I think it gets the sociology and history wrong, in the following passages (with my emphasis):
Even at a time when grandparents are more involved than ever in the lives of their children and grandchildren, the efforts of Mrs. Kim and Ms. Tepper are extraordinary. But many grandparents these days are making extreme efforts to help their children bridge the work-life divide.
[...]
Intercity commuting is just one way they provide that help. Grandparents are also taking time off from work, retiring early, moving to the United States from overseas or selling their home to be near grandchildren.
The greater involvement results from a confluence of factors, including the financial burdens of child care and anxiety over the quality of care. But most notably it is influenced by a generation of grandparents who have the time and the financial wherewithal to pitch in.
“This is the first generation where we have so many older people living long enough, being healthy enough and being affluent enough to provide these services on a large scale” since women entered the workplace in large numbers, Dr. Cherlin said.
While it is true that more grandparents are living to old ages and are more affluent than earlier generations of grandparents, it is also true that parents are having their first children later in life and are having fewer children than in earlier generations. (The latter effect is compounded, since it is true of both the parents' generation and the grandchildren's generation.) That generates less opportunity for interactions between grandparents and grandchildren. In addition, the children and grandchildren are often living further away from the grandparents than in prior generations. The article is motivated by the unusual expenses that some families are incurring to recreate what used to occur for free.
In prior generations, the grandparents were needed to help the non-working parent take care of a larger number of young kids. Now, the grandparents are stepping in to take care of one young kid while both parents work. It is not the least bit clear to me that longevity and affluence trump fertility and proximity in this comparison, but I'd be curious to know what others think.
The Cystic Fibrosis pledge drive is still on. If Great Strides is not your thing, how about donations in honor of Mother's Day?
Congestion Pricing in Manhattan
I applaud Mayor Bloomberg for proposing congestion pricing in Manhattan as part of his Earth Day initiatives, patterned after a similar system in London. From The New York Times on Sunday:
The proposal that is sure to attract the most attention, and possibly objections, is one to impose the $8 fee on car drivers, and $21 for truck operators, to drive in Manhattan south of 86th Street.
The mayor said congestion on the city’s streets is the source of many of the city’s health, environmental and economic problems.
“We can’t talk about reducing air pollution without talking about congestion,” he said.
“As our city continues to grow, the cost of congestion to our health, to our economy and to our environment are only going to get worse,” he said. “The question is not whether we want to pay, but how do we want to pay — with an increased asthma rate, with more greenhouse gases, with more wasted time, lost business and higher prices. Or do we charge a modest fee to encourage more people to take mass transit.”
The fee the mayor is proposing would only be imposed during the week, between 6 a.m. and 6 p.m.. And motorists driving the major highways along Manhattan’s east and west sides would not be fined, so it would be possible to go from Brooklyn to Harlem along Franklin D. Roosevelt Drive without entering the zone.
The article contains other information about the implementation that suggest that it has been reasonably well thought out. But this doesn't stop the critics from making a raft of self-serving claims. Let's take a look at a few:
State Assemblyman Richard Brodsky said he opposed the mayor’s proposal for a congestion fee because it is a regressive tax.
“The middle class and the poor will not be able to pay these fees and the rich will,” said Mr. Brodsky, who is chairman of a committee that oversees the Metropolitan Transportation Authority. “There are a lot of courageous things in the mayor’s package, but this one is not very well thought out.”
According to this logic, all prices for services not linked to income are regressive, since the rich can more easily pay them than the poor. It might technically be true, but it isn't particularly helpful. Besides, when I go to Manhattan, I see the middle class and the poor on the subways and buses, not their own cars.
Here's some more, of the more nakedly self-serving variety:
Clayton Boyce, a spokesman for the American Trucking Association, a national industry group, told The Associated Press, “It will be a real problem for operations for trucking companies and shippers, including all the retailers in Manhattan, which is substantial.”
“And all the people who get FedEx and UPS deliveries will have problems and will bear extra expense, so we definitely see problems with it,” he said.
It's time to give Mr. Boyce a refresher course in microeconomics. Start by considering what his answer might have been last week to the question, "What is the biggest problem your industry faces in providing excellent service to lower Manhattan?" Based on what I've seen on those streets, my answer would have been "congestion." So the mayor has proposed to tax the thing that has been encumbering the trucking industry, and its spokesman is complaining because his clients will need to pay the tax in proportion to the congestion they cause.
Think of it by the numbers. How many packages are on the typical FedEx truck in Manhattan? If it were 210, then the extra expense would be a dime per package. That's trivial. How does $21 compare to the total value of each truck's cargo in a given day? It has to be tiny. And look at what the FedEx truck drivers get in return--fewer passenger cars clogging up the city streets where they need to make pickups and deliveries. They waste less time and less gas. It doesn't take much abatement of that wasted time and gas to make back the $21 per truck. The trucking industry should be this proposal's biggest supporters.
Is Labor Now the Mobile Factor?
David Jackson reports in USA Today that President Bush is making a visit to Arizona to tout his proposal for a guest worker program. I get as far as the fourth paragraph before getting bent out of shape:
The president said measures must be taken to protect the border from immigrants who come over with impunity; but he said there also needs to be an organized system to accommodate workers who are doing jobs Americans refuse to perform.
There are no jobs that Americans refuse to perform. There may be jobs that Americans refuse to perform at the prevailing wage rates. This simply means that the wage rates should rise and the number of jobs should fall, until the number of jobs matches the number of people authorized to work in the country who are willing to perform them. If it turns out that with these higher prevailing wage rates, the employer can no longer operate at a profit, then the employer should cease operations--or relocate to a place where labor and other costs are sufficiently cheap as to allow a profitable business. The "organized system" that accommodates this is simply a free market and enforcement of the most basic immigration laws.
When I was first learning economics, we always spoke of capital, not labor, as the mobile factor of production. Maybe something has changed. In the current environment, I would expect to see capital going south across the border with Mexico, drawn by the high returns available due to the large amount of low-wage labor. But that's not what we are seeing. We are seeing the labor cross the border--at considerable personal cost--to take the low-wage jobs and then send remittances back to Mexico. (Even in agriculture, where the land is obviously not mobile, I would be surprised if much of the agriculture in the Southwestern U.S. couldn't also be produced in Mexico. But there is nothing in the argument that requires the unskilled labor to work in agriculture or any particular industry.)
How bad must the environment for business and investment be in Mexico for the capital to stay here and the labor to cross the border?
Tit for Tat
Continuing on my Richard Dawkins theme, I came across this period piece, in which Dawkins responds to some early misunderstandings about his pathbreaking work in The Selfish Gene, the treatise of which was that it made more sense to think about natural selection as operating on the level of the gene rather than the organism. He was particularly concerned that people understand that if genes are "selfish," then the behavior of the organism would display a high degree of cooperative behavior.
As an example of this, he discusses Robert Axelrod's seminal work in the repeated Prisoner's Dilemma, in which a simple tit for tat strategy turns out to be extremely effective. The reasons for its success, as Dawkins summarizes them, are that:
- It is nice. It seeks to cooperate initially.
- It forgives quickly after retaliating.
- It is not envious. It does not measure its status in relative terms. It cannot win in an individual game against a single opponent, and it cannot do well unless other parties also cooperate.
- It is simple--easy to read and uncomplicated.
Some days, I wish those characteristics were more pervasive in the population.
Is It Really Adverse Selection?
Tyler Cowen of Marginal Revolution weighs in with a very thoughtful post challenging the notion that it is adverse selection, driven by informational asymmetries, that plagues the health insurance market:
To be sure, this is a real point but it is not adverse selection. Adverse selection requires asymmetric information, namely that I know more about my brain tumor than does my potential insurance company. The more likely problem is that the tumor is common knowledge, or would be if I applied for insurance, and the company won't sell a policy for any price cheaper than the costs of treatment. There is no asymmetry of information, rather insurance simply is no longer possible. In the limiting case, imagine that a predictor-demon could forecast your lifetime medical expenditures with certainty, and then blog them by your social security number. Such a person, no matter how healthy, couldn't buy insurance either.
Scream all you want, but that is not inefficient per se (don't complain in the comments about the limits of the efficiency concept, and the cruelness of economists, I'm already on that one, scroll down to #7 under "microeconomics", alternatively you might make a complicated Rawlsian argument.) Covering these people, by the use of government policy, is a transfer, not an efficiency improvement, with an added caveat for imperfect capital markets.
Defenders of the adverse selection argument in reality believe the following: if someone is going to face death, or a very bad medical outcome, and can't buy their way out of it, government should put up the money, at least within limits.
Maybe yes, maybe no, but now we are comparing competing investments and which will bring the greatest utilitarian good and the greatest moral good. I'm far from convinced health care access wins that race or even comes in second.
Why does this matter? Because if it's adverse selection, that leads very quickly to a policy argument for a mandate on coverage and, in this market, a single payer system. Not so fast, say the bloggers at MR, and I think they are right.
Economics Missing in Action: Opportunity Cost
In today's Washington Post, Joseph Fuller (founder of the Monitor Group) and Brock Reeve (executive director of the Harvard Stem Cell Institute) argue that the United States may soon lose its leadership position in stem cell research. Their concluding paragraph:
In short, the stem cell sector is at risk of experiencing a failure to launch at the national level. Yes, some progress is being made: WARF has just revised some of its licensing policies; venture capital activity has picked up recently; and academic research and clinical centers, disease foundations and patient-advocacy groups are adopting a more aggressive stance in breaking down existing barriers. But will this be enough? Or will foreign governments, using America's biotech success as a model, systematically encourage the development of stem cell research and, not satisfied with emulating our competitive performance, succeed in outstripping us?
This experience is contrasted in the body of the op-ed with past successes in biotech, and the consumer electronics and automotive sectors are held out as examples where the United States "fumbled" its global leadership position.
It is quite possible that everything the authors argue is true, but even in that case, their argument is incomplete. Consider the last question they pose in their concluding paragraph. So what if foreign governments tax their citizens to support stem cell research? What have we lost?
We will not have lost the opportunity to benefit from that research. Some part of the research will find its way into products--those products will be available here at prices similar to what they would be if the products were developed domestically. No loss to the consumers.
We will not necessarily have lost the opportunity to invest in these technologies as private entities--the capital markets in Europe and Asia are generally open to U.S. investments. The governments on these continents would have to specifically block or discourage that investment.
We will not have taxed our citizens to support production of these goods. So we will have that money, whether in the government or the private sector. How do we know whether that money is better spent on stem cell research than keeping it in the private sector or with the government?
That's the key element that is missing from the op-ed: what is the opportunity cost of committing the money to stem cell research relative to its best (or most likely alternative use)? Ultimately, the authors cannot be persuasive just by claiming that the gross returns to stem cell research conducted domestically are positive or high. The returns to the activity--net of the opportunity cost of the investment--must be positive or high.
Jon Gruber on Health Insurance Reform
Via the Economic Research Initiative on the Uninsured (ERIU), here is an interview with Professor Jon Gruber of MIT, who played a key role in the recent Massachusetts health insurance reform. Here's his assessment of the recent proposal by the Administration (with my emphasis added):
Bush's proposal is a step forward and two steps backward. He's rightly drawn attention to the largest hidden expenditure on health care, the $200 billion a year that we spend on subsidizing the provision of employer-provided health insurance. Basically, people who get paid wages get taxed on those wages, but individuals who are paid in the form of health insurance don't get taxed on that compensation. And if they were, we would raise about $200 billion more a year in tax revenue. This is a very inefficient use of money for several reasons. First, it's very regressive; the richer you are, the bigger tax break you get. Secondly, it's what we call a marginal subsidy; every dollar an employer spends on health care is cheaper than that spent on wages, leading to excessively generous, even gold-plated, health insurance. The third problem is that it props up the system of insurance being tied to employers, extending a number of inefficiencies and distortions in how the labor market works.
However, what the president has done is say 'let's blow up the existing system by taking away the entire employer exclusion and rededicating it to an individual tax break where every person, as long as they were insured, would get an individual tax break of $7,500 or $15,000 per family.' The reason that is two steps backward is that it doesn't address the two things you need to address to get rid of this employer exclusion: 1) he doesn't acknowledge that this system is devoting most of the money to the rich. Under his proposal, the system becomes even a little more regressive than the existing one; and, 2) even more importantly, if you're going to blow up the employer-based system you need someplace else where people can go. Bush doesn't do that, and that's the fundamental flaw. Overall, he has raised an important issue, but he chose to do it in a dangerous context.
I remain convinced that the first reform is to remove the tax exclusion for health insurance premiums. Phase it in over time if you like, but sunset it in any case. Use the money saved--$200 billion a year according to Gruber--to start fixing the gaps in coverage.
Optimal Saving?
Some students of mine referred me to an article by Damon Darlin in Saturday's New York Times which merits a Voxy for posing the question:
Could it be possible that you are saving too much for your retirement?
That's a fascinating question, and the article goes on to quote some of the economists who have done very interesting research on it, including Karl Scholz of Wisconsin and Larry Kotlikoff of Boston University. Here's the crux of the matter:
Nevertheless, a small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less than they are being told to by the financial services industry — and spending more — while they are younger. The negative savings rate, they say, is wildly distorted.
According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.
The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.
Here are the excerpts from the researchers:
The economists answer that people would get more out of their money by using it when they are younger. “There is risk in saving too much,” Mr. Kotlikoff said. “You could end up squandering your youth rather than your money.”
Mr. Scholz said he and his co-authors of a study, “Are Americans Saving ‘Optimally’ for Retirement?” found oversaving across all economic and education levels and most ethnic or racial groups as well. (It found that Hispanics tended to save less.) Those who were not saving enough were usually missing their target by only a small amount.
The one exception to this optimism involves people who enter retirement single, either because their spouse died early, they divorced, or they never married. The studies found this group did not save enough.
I think some of the confusion in the article is due to a focus in the financial planning community on how much people are saving rather than when they do it. I think typical households are forward-looking but very impatient. That they are forward-looking means that they will enter retirement largely without surprise or regret about what they can afford. That they are impatient means that they will delay most of the saving that will get them to that level of comfort until retirement is just a decade or so away.
So if you see a 50-year old with not that much in savings, how do you decide whether that's a 50-year old who is optimally waiting to save a lot over the next 10-15 years or a 50-year old who does not recognize the need to save for retirement?
How Long Does It Take for the Long Run To Arrive?
Some of the discussion from the last two posts has carried over to Mark Thoma's blog. Krugman responded to Mark as follows:
Aha - I was wondering if anyone would raise that. I was taking it as true to a pretty good approximation that the long-run supply curve for medical services is horizontal. Unless you think that there's permanently limited supply of medical education, or something, why should we think otherwise?
And I would guess that very few people would read Bush's statement to mean that it's bad if other people have extensive insurance, because it drives up doctors' paychecks.
So in a comment, I noted:
Based on Krugman's response (must be nice to have him on speed dial), we're now in the much more comfortable environment in which this is a few economists talking about the magnitude of various key parameters.
One could point out that if he was "wondering whether anyone would raise this point," then he seems to realize that he was going a bit overboard in claiming that "no economic analysis I'm aware of says that when Peter chooses a good health plan, he raises Paul’s premiums."
On the substantive point, one could assert that almost any market has a long-run supply curve that is flat. Exceptions would be made for markets like diamonds--there is a finite quantity available to be mined. At this juncture, it becomes quite relevant how long we think it will be before we are in the long run.
As evidence against this happening any time soon, I don't think the AMA is going to give up its near-monopoly on certifying medical practitioners. Licensed practitioners will be in short supply for a long time even if wholesale medical prices rise. In order to get more services when prices change over this long run, we have to build a lot of buildings--medical schools and hospitals--and fill them with really expensive equipment. I'm guessing that long run will take a while to get here.
A commenter on Mark's blog noted that we could allow more immigration of medical personnel, a policy to which I don't object. Chiming in, Brad DeLong posts his views:
It's not clear to me that Paul Krugman is wrong. It is also not clear to me that Paul Krugman is right. One of the things patients are buying with more expensive health-care plans is the freedom to choose their own doctors, and that gives the doctors they choose some monopoly power in their bargaining over reimbursement rates with the insurance companies.
I don't have a handle on how big this effect might be, however.
I think that makes four of us. I also think that Krugman's larger point about the key market failure being adverse selection rather than moral hazard is right, and I would like to stop having policy makers focus on the tax code to try to improve the health care market. As for constructive solutions, I hope to have more in future posts.