A comment on hospital costs

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The commenter wrote,

At one level, hospital costs are simple. People, supplies, and buildings. There aren’t big Scrooge McDuck vaults sitting around filled with healthcare lucre. . .

Frequently underutilized resources. A hospital, especially a large hospital, needs to have certain services available whether they are being used or not. Trauma teams are an example, but there are lots of small hidden resources that are also there ‘just in case’. Worse, these resources tend to be scaled to peak usage, not average or median usage. That means that at any given time there are unused resources sitting around. But woe betide if they aren’t available one of the 2 times per month they are needed. Medflight helicopters spend a lot more time on the ground than in the air.

Read the whole post. The helicopters are an interesting example. My guess is that if you divide the annual cost of the helicopter service by the number of times it is used, it comes out to hundreds of thousands of dollars, and nobody gets charged that. The people who complain about being over-billed for aspirin or bandages don’t complain about the under-billing for helicopter services.

My point–and I think that the comment supports it–is that you just cannot interpret hospital bills as if they were based on variable cost. Costs are dominated by overhead, and how hospitals choose to recover that overhead is bound to seem arbitrary.

MMT and Venezuela

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In The Nation, Atossa Araxia Abrahamian writes,

Inflation, MMT’s proponents contend, can be controlled through taxation, and only becomes a problem at full employment—and we’re a long way off from that, particularly if we include people who have given up looking for jobs or aren’t working as much as they’d like to among the officially “unemployed.” The point is that, once you shake off notions of artificial scarcity, MMT’s possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.

Pointer from Tyler Cowen. MMT stands for “modern monetary theory,” which is the doctrine that because the government prints money, it can spend whatever it wants. I would accept this, but with a caveat. I would say

the government can spend whatever it wants. . .until it can’t.

This changes everything, because the prospect of reaching the point where “it can’t” some time in the future constrains what is prudent to do today.

To me, the hyperinflation in Venezuela exemplifies what happens when a country reaches the “it can’t” point. The country is not at full employment. But the government can’t seem to spend its way out of difficulty. Somebody should ask these MMT rock stars about the Venezuela example.

Kevin Erdmann responds to Dean Baker

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Erdmann writes,

we imposed the “inevitable” bust on the owner-occupier housing market. Instead of looking for ways to stabilize mortgage markets, lending was largely cut off to the bottom half of the market from 2008 on, and we can see the devastating effect if we look within cities, most of which look like Atlanta, where low tier prices took a post-crisis hit to valuations, frequently of 30% or more. This has caused the market price of low tier homes to drop below the cost of construction, causing new building to dry up in low tier housing markets.

Read the whole post. Note especially the first chart. My thoughts:

1. That first chart depicts construction spending as a percent of GDP. Baker did the same thing. This makes 1986-1990 appear similar to 2006-2010. But the denominator, GDP, was rising in the early period and falling in the latter episode. So the slump in the numerator, construction spending, was probably much more pronounced in the latter period.

2. Some of the credit tightening in the mortgage market was inevitable. You could not keep lending on generous terms to non-owner occupants. At some point, the speculators had to get squeezed out.

3. But the political crackdown on mortgage lending was severe. I remember that it seemed as though in 2009 the only people who could get mortgages were those who did not need them.

4. Some day, people may look back at “quantitative easing” as a credit crunch. It steered banks toward holding interest-bearing reserves rather than lending to the private sector. I think of it as a credit-allocation scheme, in which government debt was favored (by the Fed, which n-tupled the size of its balance sheet) and private investment was dis-favored.

5. Instead of looking at aggregate demand, try to think of 2007 to the present from a PSST perspective. Perhaps patterns of specialization and trade related to the construction boom became unsustainable around 2007. Other patterns became unsustainable when the government took over the credit markets in 2008 and 2009. Other patterns became unsustainable when the Obama-era zeal for regulation had an impact. Only recently have new patterns of trade been emerging significantly faster than old patterns disappeared.

Notes on Nordhaus and Romer

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They are the newest Nobel laureates in economics.

1. They had very different career trajectories. Nordhaus, who is 13 years older, started out as a mediocre empirical macroeconomist, known for working on “the investment function.” His creativity emerged much later in his career. Those of us who are on the heterodox right tend to praise most his papers showing the tremendous drop in the cost of light over the centuries and the low percentage of value of innovation captured by innovators. But he will end up best known for his combination macro-econometric/climate model, which to me is multiplying two instances of faux science together.

Romer produced his most important research much earlier in his career. He detoured into creating Aplia, one of the first computer-based tools for economics teaching. He also detoured into a charter cities project, which fell apart amidst what I call corporate soap opera. He did a brief stint (although longer than I would have predicted) as chief economist for the World Bank.

2. David Warsh, in Knowledge and the Wealth of Nations, focused on Romer and Krugman. Warsh saw them as likely Nobel laureates, and he has now been proven correct.

3. Nick Schulz interviewed Romer for our book From Poverty to Prosperity (re-issued as Invisible Wealth. It was one of the best of the interviews.

4. I have never encountered Nordhaus. To me, Romer comes across as prickly, if not outright bitter. He and I have clashed in writing a few times in recent years. Just a week ago, I disagreed with him. I think of him as sharing Krugman’s tendency to impugn the motives of those with whom he disagrees.

Write as if Mrs. Clinton won

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Commenting on my post on the latest book by Francis Fukuyama, a reader emails,

The rise of Trump is the most overdetermined event in recent political history. For a short period following the election, the “this is how we got Trump” chatter was blessedly confined to periodicals and the web. Sadly, we’ve moved well beyond that, to the point where walking around in any bookstore, you can’t help but avoid the voluminous output of pundits, professors, and public intellectuals whose theories claim to be the *one missing explanation* for our societal moment. . .

Any abstract grand theorizing should not rest on the single day whims of 100,000 Midwestern voters. Simple heuristic: If it seems plausible that a book of social commentary would not exist if Trump had lost, or would have an entirely different thesis on the political moment we see either the republic or the world writ large, it does not merit reading.

Another way to put it is to imagine that Mrs. Clinton had won a narrow victory. Would your theory of contemporary sociology still be of interest? If not, then set that theory aside.

Yoram Hazony receives pushback

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1. From Yuval Noah Harari. Without referring to Hazony, Harari writes,

All attempts to divide the world into clear-cut nations have so far resulted in war and genocide. When the heirs of Garibaldi, Mazzini and Mickiewicz managed to overthrow the multi-ethnic Habsburg Empire, it proved impossible to find a clear line dividing Italians from Slovenes or Poles from Ukrainians.

This had set the stage for the second world war. The key problem with the network of fortresses is that each national fortress wants a bit more land, security and prosperity for itself at the expense of the neighbors, and without the help of universal values and global organisations, rival fortresses cannot agree on any common rules. Walled fortresses are seldom friendly.

Good point. But then he writes this:

Creating a mass global identity need not prove to be an impossible mission. After all, feeling loyal to humankind and to planet Earth is not inherently more difficult than feeling loyal to a nation comprising millions of strangers I have never met and numerous provinces I have never visited. Contrary to common wisdom, there is nothing natural about nationalism.

Harari recognizes that in order to scale up our tribal instincts we seem to require a common enemy. But he thinks that such an enemy could be something impersonal, such as climate change. Uniting all of humanity against impersonal enemies strikes me as a hope with little basis in experience.

2. From Alberto Mingardi, who writes,

One can agree with Hazony that it is naive to assume that “political life is governed largely or exclusively on the basis of the calculations of consenting individuals.” But to assume that governments are just bigger families is the oldest trick of the apologists for interventionism. “Paternalism” never goes with limited government.

Tyler Cowen loses his cool

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He writes,

Here is a new Lancet paper by Stephen S. Lim, et.al., via the excellent Charles Klingman. Finland is first, the United States is #27, and China and Russia are #44 and #49 respectively. There is plenty of “rigor” in the paper, but I say this is a good example of what is wrong with the social sciences and more specifically the publication process. The correct answer is a weighted average of the median, the average, the high peaks, and a country’s ability to innovate, part of which depends upon the market size a person has in his or her sights. So in reality the United States is number one, and China and Russia should both rank much higher (Cuba and Brunei beat them out, for instance, Cuba at #41, Brunei at #29). And does it really make sense to put North Korea (#113) between Ecuador and Egypt? I’m fine with Finland being in the top fifteen, but I am not even sure it beats Sweden. Overall the paper would do better by simply measuring non-natural resource-based per capita gdp, though of course that could be improved upon too.

I think the paper is fine. It seeks to measure human capital, using indicators of health and educational attainment, whereas Tyler seems to be looking for a measure of all intangible assets. Other intangible assets include skills acquired on the job, social norms, and institutions. One certainly can make a case that human capital includes job skills, but social norms and institutions fall in a different category.

If we look at human capital per person, then it strikes me as plausible that Finland is far ahead of the U.S. We make up for it with social norms that encourage successful risk-taking and with institutions like venture capital and deep capital markets in general. Suppose Cuba and China had governments that were equally inclined to tolerate markets. Would you bet against Cuba having higher per capita GDP than China? I wouldn’t. That bottom third of China’s population has got to be a real drag.

Norms and institutions matter. That is why average human capital is not a sufficient statistic to describe a nation’s intangible wealth. But average human capital is nonetheless worth trying to measure.

Tyler Cowen on conversations

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Reacting to a typical “be a good listener” sort of advice column, he writes,

I would stress the basic point that most conversations are bad, so your proper goal is to make them worse (so they can end) rather than better.

He didn’t invoke Tyrone, so I figure Tyler owns this contrarian position.

I will say that if you take the “good listener” approach, you definitely will be considered a great conversationalist. Yes, you also will have difficulty escaping from bad conversations. But think of it this way: when you get around to writing your novel, you can mine some of those bad conversations for amusing and colorful material.

Dean Baker on the Great Recession

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He writes,

Prices of non-residential structures increased by roughly 50 percent between 2004 and 2008 (see Figure 5 here). This run-up in prices was associated with an increase in investment in non-residential structures from 2.5 percent of GDP in 2004 to 4.0 percent of GDP in 2008 (see Figure 4).

This bubble burst following the collapse of Lehman, with prices falling back to their pre-bubble level. Investment in non-residential structures fell back to 2.5 percent in GDP. This drop explains the overwhelming majority of the fall in non-residential investment in 2009. There was only a modest decline in the other categories of non-residential investment.

Again, the collapse of Lehman hastened this decline, but the end of this bubble was inevitable. In this respect, it is worth noting investment in non-residential structures is pretty much the same share of GDP today as it was at the trough of the Great Recession, supporting the view that the issue was levels were extraordinarily high before the downturn, rather than being extraordinarily low in the downturn itself.

Pointer from Mark Thoma.

I pass this along not because I am inclined to agree with it or any other aggregate-demand story, but because:

1. Explaining the depth of the recession is hard. It is easy to point to the financial crisis and do hand-waving, but as Baker points out, the actual chain of causation is not so clear.

2. Baker is someone who does not succumb to mood affiliation. His views, correct or not, are arrived at independently.

3. I had forgotten about the bubble in commercial real estate.

4. I expect to see an insightful response from Kevin Erdmann.

Cognitive failure and the financial crisis

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My review of A Crisis of Beliefs, by Nicola Gennaioli and Andrei Shleifer.

GS directly attack the hypothesis of “rational expectations,” which has dominated the economics profession for forty years. The rational-expectations doctrine holds that when economic actors make decisions that require forecasts, they make optimal use of the available information. They are not guilty of predictable irrationality.

. . .Think of a forecast as employing two types of information about a variable being forecast. One is a “base rate,” which is a very generic property of the variable. The other is “recent information” about that variable or about factors that could affect that variable. Recency-biased forecasting over-weights the recent information and under-weights the base rate.