An Interview Of Abundance

Health care is a confusing subject. Do Americans devote 16% of the US GDP to this sector because of the vast array of new treatment options, because of our wealth, because our system is too private, or because it is too public? Bombarded by rhetoric from all sides about this important question, we think it's time to stop listening to industry flacks and policy wonks and see what an economist has to say.

Here is Arnold Kling from EconLog on his new book: Crisis Of Abundance: Rethinking How We Pay For Health Care.

Some choice quotes:

Kling on Kling:

"My third motive [when blogging] is to let off steam."

"I have very bourgeois tastes. Our vacations are not exotic. Other people have a comparative advantage in enjoying Paris or Bangkok."

Kling on politics:

"We'll just take power and then we can do whatever we want." (things that libertarians don't get to say)

"Basically, redistributionism is playing God using government as an instrument. Very scary, once you understand what it's really about."

"I think that if more people knew economics, we would have better public policy. The government is not going to be any wiser than the people. If the people think that high gas prices are caused by a sudden outbreak of greed among oil company executives, then our public policy is going to wind up reflecting that, regardless of whether the elites know better."

Kling on health care:

"There is very little chance that my house will burn down. But if it happens, and I'm not insured, it's a financial disaster. So I insure. For most people in most years, fire insurance pays no claims. With health "insurance," most people in most years are paid claims. I call it insulation, because it acts as a layer of insulation between the consumer and medical bills."

"The doctor is the gatekeeper to the hospital and to the pharmacy. My guess is that you'll have to pry away their keys to those gates from their cold, dead fingers."

The full interview is below the cut.


Where does your interest in economics come from? What do you like most about teaching economics?

I guess that I should make it clear that I fell off the academic wagon more than 25 years ago. I only teach one college course, as an adjunct, and that I've only done for two years.

When I teach, I say that the main indicator of whether you will enjoy economics used to be whether you read a newspaper. I'm not sure what the equivalent is today, but following the front page news is highly correlated with an interest in economics. When I teach, I often bring in current news articles and discuss them.

Anyway, I was always into the news when I was young, and our household was one of those that discussed current events around the dinner table. If you have that background, an interest in economics is pretty natural. The only thing that would hold you back would be math phobia.

You've also written an economics textbook, Learning Economics. Why is it important to teach people economics?

I think that if more people knew economics, we would have better public policy. The government is not going to be any wiser than the people. If the people think that high gas prices are caused by a sudden outbreak of greed among oil company executives, then our public policy is going to wind up reflecting that, regardless of whether the elites know better.

But I am not sure that teaching economics actually works. As I say in the introduction to my book, most people who take econ courses don't seem to learn it. Teaching is a Sisyphean effort.

You blog at EconLog with Bryan Caplan. How has blogging affected your career? What role do you see blogs having in economics?

I was an early blogger--in late 1999 and early 2000 I had a blog devoted to the Internet bubble. It was therapeutic, but I had an instinct that blogging was going to be popular. I think your motive has to be primarily personal. My primary motive for blogging is to create a record of interesting articles that I come across. It's like a set of note cards in that sense. My secondary motive is to practice writing. My third motive is to let off steam. I suppose that if there were no audience it might bother me, but I don't think about them when I'm blogging. It affected my career because my original economics blog was noticed by Russ Roberts back when he was at Washington U., and he connected me to econlib, which got me noticed by the George Mason crowd, and led to other things.

Who is your book aimed at? Who do you have in mind as potential readers? Is it targeted at policy wonks, readers of your TCS articles and blog, or the general public?

I don't write as a wonk. That is, I'm not trying to offer legislative proposals to politicians. I write to educate. I want the book to be for anyone who wants to be more informed about health care policy. If you are someone who forms opinions about public policy issues, then reading this book will help sharpen your understanding of health care policy.

In layman's terms, what is the purpose of insurance? And how does this differ from what we call health insurance?

The purpose of insurance is to spread risk. There is very little chance that my house will burn down. But if it happens, and I'm not insured, it's a financial disaster. So I insure. For most people in most years, fire insurance pays no claims.

With health "insurance," most people in most years are paid claims. I call it insulation, because it acts as a layer of insulation between the consumer and medical bills. If you wanted to design a health insurance policy that worked like fire insurance, it might be insurance that is driven by events. Get diagnosed with cancer, and the insurance company writes you a check for $50,000. Get diagnosed with diabetes, and you get $150,000. Suffer a broken arm and get $5000. Conceptually, that is one way to have health insurance work like real insurance. As a practical matter, that approach has issues with implementation. So my book focuses on a different approach, which I call long-term catastrophic coverage.

Many people view the US healthcare system as "free-market" and the rest of the world, especially England and Canada, as "socialized". Is this the case?

The more I look at, the less free-market it seems. Take health care finance. In every major country, the consumer is insulated from at least 80 percent of health care costs. In the U.S., it's 85 percent, which is one of the highest rates of third-party payments, or what I call insulation. In most other countries, it's 80-85 percent government, and 10-15 percent paid for by consumers out of pocket. In the U.S., it's about 45 percent government and 40 percent private insurance, with 15 percent out of pocket. So if we're more market-oriented, it's because of that 40 percent that's paid for by private insurance. That is not a big deal.

As I have realized lately (since writing the book), health insurance is a favorite playtoy for state regulators. You could say that in most states, insurance products and services are designed by regulators, and the private companies just compete in terms of marketing. So insurance companies cannot innovate either in terms of product or in terms of risk management. In my book, I say that the main benefit of markets is innovation. The way the insurance market is regulated, we don't get that. What's not in my book is my rant about regulation of health care providers, with its heavy credentialism and rent-seeking. My latest pet peeve is physical therapy, which I suspect could be taught reasonably well in a one- year trade school course to high school graduates, and which recently instead had its requirement raised to three years of post- graduate training!

Two of my co-bloggers, Jonathan Wilde and Trent McBride, are physicians in training, and both favor a larger role for markets in healthcare. Is there a tension between having market incentives in healthcare and the duties prescribed by the Hippocratic oath? Should doctors think of patients as consumers?

Doctors should think of patients as adults. That's not necessarily the way today's doctors prefer it. I think many of them prefer, "Me doctor, you patient. You do what I say." In a market-oriented system, a doctor would give a recommendation and explain the costs (including monetary costs), risks, and alternatives. For patients who have difficulty digesting that information, he would present a standard recommendation, and if his own recommendation differs explain why. But then leave it to the patient.

Trent, a pathology resident at the University of Kentucky, asks whether a purely socialized health care system might be better than what the US has now.

I think that socialized health care would be worse, but what we have is so flawed that one cannot be sure. One point that I make in the book is that there are many different versions of socialized health care. My guess is that an American version might look quite different from versions that we observe elsewhere.

If you could sum up your policy prescription in a sentence, what would it be?

Try to use policy to steer the health insurance market away from the insulation model and toward a model of long-term catastrophic health insurance.

If I want to buy a new computer, there are plenty of websites that have independently obtained data on hardware testing, and if I want to take a vacation, it's easy to find reviews of hotels and what the best time of year to go is. Yet, if I get sick, it's hard to learn cost of procedures, rates of complications, and quality of outcomes. Why is information about healthcare so difficult to find for patients? And where do you like to go on vacations?

I have very bourgeois tastes. Our vacations are not exotic. Other people have a comparative advantage in enjoying Paris or Bangkok.

The question about why information is difficult to find is an interesting one. I don't think that the analogy with computers and vacations works exactly. With those examples, when you make your choice, you know what you are getting. Health care is more of a discovery process. You do step A, and based on that you might choose step B or try step C. Since it's not all laid out in front of you ahead of time, it's trickier.

In my book, I propose that government charter a commission to obtain more statistical information about the performance of various medical protocols. Some people think that if we had more market-oriented health finance, then a market for that kind of information would evolve naturally. But at this point, we have a chicken and egg problem. Without that information, consumers cannot make intelligent decisions. And if they cannot make intelligent decisions, they probably will not be happy with market- oriented health care. And if they resist going to market-oriented health care...you get the idea.

Would you say that many of the problems in healthcare stem from the awkward 3-way triangle between patient, doctor, and insurer? I ask partly because in my business, search, there is also a 3- way triangle between the search engine, advertisers, and users, which sometimes leads to incentive incompatibilities. For example, Google (my employer) has gone out of its way to structure the company so that its advertising relationships don't affect search, and to promote a reputation for unbiased results. Is there a health care equivalent? Should there be?

If doctor A recommends a procedure that is going to profit doctor A, that is a potential problem, and economists have historically made a big deal about it. However, I think that most of the cost comes in when doctor A calls in specialist B or orders a procedure done by lab C. I think that incentive incompatibility is not the problem. I think that asymmetric information is not the important problem (asymmetric information is that doctor A knows whether he is recommending a procedure in order to benefit the patient or merely to earn revenue, and the patient does not know that).

I think the important problem is that neither the doctor nor the patient knows whether the protocol is cost effective. They don't much care, because this third party--the insurance company--is paying for it. And the insurance company does not much care, because if the patient is happy, then the insurance company stays in business whether the procedures it pays for are worth the money or not.

While you come out in favor in free-market reforms in your book, how politically feasible do you think these reforms are?

Not at all. The most important proposal I make is to phase out Medicare. That's a non-starter politically. But these ideas only become possible if you start to talk about them and people begin to understand that they make sense.

How can we expand the supply of doctors when the AMA has such a tight grip? Do you think technology and offshoring can help - will people get medical advice via teleconference to India?

Credentialed professionals, such as real estate agents and doctors, serve as gatekeepers to important systems. The realtor(TM) is the gatekeeper to the multiple listing service, for example. The doctor is the gatekeeper to the hospital and to the pharmacy. My guess is that you'll have to pry away their keys to those gates from their cold, dead fingers.

You say that American cultural expectations will have to change to rein in health care costs. How can this be accomplished? Is this issue outside the economic sphere?

I think it will take a combination of economic education and policy experimentation to get more consumers comfortable with the idea of making health care decisions in an adult manner.

You apply the public choice criticism to the health care sector, saying "Once government takes over an industry, any innovation must pass through the political process. However, politics is dominated by interest groups, whose focus is on maintaining their incomes. In the case of health care, organizations such as the American Medical Association, which represent the interests of providers, would be better organized than consumers to influence the political process". However, one of your policy suggestions is to "Establish a Medical Guidelines Commission to coordinate research and recommendations for medical protocols." Isn't this subject to the same criticism? Won't a politically-formed commission be dominated by special interest groups like the AMA?

It's a risk. But I think that without it, you'll never get past the chicken-and-egg problem I referred to earlier. And putting economists and statisticians on the commission might serve as a check against the AMA.

In general, given the nature of the political process and it's catering to special interests, how is it possible to get better health care policy? Who will listen? How can we change be accomplished?

More people need to read my book. My joke is that it makes a great gift, and that every household should have two copies. But seriously, I think if you're a libertarian you have to believe in persuasion. You don't have the luxury of saying, "We'll just take power and then we can do whatever we want."

In your book, you go through an example of marginal analysis on healthcare. When comparing two different procedures, the marginal cost and benefit can only be computed with respect to alternatives. Is this analysis done much in health care? Do insurance companies perform it? Or does health care need a "Marginal Revolution"?

Insurance companies absolutely do not do it. My guess is that if they did they would face all sorts of legal liability, as well as revolts from consumers and doctors. That's why I am so adamant that we need to remove the insulation and make consumers confront the cost of health care, with insurance trimmed back to a safety net for really big expenses.

You describe how you became wealthy during the internet boom of the 90's with the help of some luck in an essay titled A Series of Miscalculations. In his book Fooled by Randomness, Nassim Nicholoas Taleb talks about the large role luck plays in wall street success, and implies that it might play just as large a role in other aspects of life. Based on your own experience with your business, do you think he is right, and if so, does it give credence to the leftist belief that one's station in life is determined to a large enough degree by luck to justify redistribution?

People who favor redistribution have a tough burden of proof. For example, suppose that out of every one hundred entrepreneurs, one is very successful and the rest are not. As a redistributionist, you announce that from now on whenever an entrepreneur succeeds, you will redistribute his winnings to the 99 entrepreneurs who fail. Now you've completely changed the game. Before, entrepreneurship was for people who are hard-working and willing to take a calculated risk. Now, you've opened it up to people who are lazy, or risk-averse, or willing to take rash gambles. You've completely fouled up the process.

Basically, redistributionism is playing God using government as an instrument. Very scary, once you understand what it's really about.

I like your distinction between Type M and Type C arguments (arguing about motives vs. arguing about consequences), and you have some powerful arguments about the poisonous nature of Type M arguments. Do you ever find yourself making Type M arguments? What is the best response to such arguments?

Sometimes, I'll say that people on the left get caught up in Moral Vanity--advocating a policy because it makes them feel holier than thou. That's a type M argument on my part. The best response is to focus on type C arguments instead.

In the article We Need 250 States, you suggest that reducing the size of governmental units will help increase the power of ordinary voters relative to special interests. I think this is a great point (I have an alternate proposal for increasing voter power, which focuses on how easy it is to move between the states, called Dynamic Geography.)

I just read somewhere--and then failed to blog it--that mobility in the U.S. is actually rather low. I believe it. I've been in the same house for more than 20 years, and we have a lot of the same neighbors. And this is suburban Washington, D.C., where mobility tends to be higher than other parts of the country. I think that there are a lot of lock-in effects for moving. I once half- jokingly suggested that we could have virtual mobility, so that I could continue to live in a blue state but have red-state laws and regulations.

You've described "Folk Marxism" as the set of folk beliefs that sees the political economy as a struggle between a group of oppressors and a group of oppressed victims. Do you think there is an element of Folk Marxism in the support among many of the lay public for more government involvement in healthcare?

Absolutely. The uninsured are a victim class. Their employers are too mean to give them health insurance, and private health insurance companies are just greedy exploiters, anyway.

Often, where the political left sees victims, the right sees villains. (Single moms are my favorite example of that) This paper by John Goodman [PDF] makes the case that the uninsured are villains, taking advantage of our generosity by refusing insurance when they are healthy and then obtaining it when they get sick (with the help of state laws that make it easy to do this) or relying on charity care.

In a way, one could argue that the real villains are the legislators who give people the incentive to remain uninsured--who probably do so on Folk Marxist grounds, thinking that they are helping the underprivileged.

You divide medical care into a black region (unnecessary), a white region (essential), and the difficult gray area (unknown whether benefits outweigh costs). People tend to think of the white region when making health care policy, yet you emphasize the importance of the gray region, which you say is very large. This looks suspiciously like what behavioral economists call the "availability bias" - when we think about health care, we think about ambulances, emergency bypasses, and other live-saving treatment. Do you agree? Is this a problem in selling health care reform?

I hadn't thought of that, but it's a reasonable way to look at it. It's not so much a problem with selling health care reform as it is a problem of enabling people to grasp the issue.

Your book gave the example of seeing a cardiologist for a heart problem. You could go check in once a year, or once a week, or any amount in between. This seems like a powerful general example of the gray area, because it holds for many types of diagnostic procedures and checkups. Have you tried using this method to convince people of how common the gray area is?

The gray area examples that are most compelling to me come from my own life. The three most expensive medical events for me in the last 10 years were all in the gray area. So I think I tell those stories with more impact than the cardiologist story.

Health care is a very emotional subject for many people, and your book takes a calmer, more rational approach. How can you convince people who don't believe health can be measured in dollars that your proposals are right?

I think it's pretty easy for people to get past that, because they know that the main problems that everybody talks about all involve dollars and cents. People can't *afford* health insurance. The U.S. *spends* way more than other countries on health care. Medicare faces *trillions of dollars* of unfunded liabilities. etc. I've never had to work to convince anyone that health policy issues require economic analysis. I run into doctors who think they know more economics than I do, but that's a different problem.

Thanks for the interview, and good luck with the book!

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Health care is a confusing subject. Do Americans devote 16% of the US GDP to this sector because of the vast array of new treatment options, because of our wealth, because our system is too private, or because it is too public? Bombarded by rhetoric fr...

Thank you, Patri...

Thank you, Patri... Excellent interview.

I think Arnold makes an important point about teaching economics in school, that if people had a basic economic understanding, it would completely change the way we viewed government. I think, in addition to that, teaching a basic course in fundamental logic would go a long way as well...

Either way, my IQ jumped a few points just reading that interview, so again, thanks...

Kling Interview I'm

Kling Interview
I'm interviewed over at Catallarchy. The main topic is Crisis of Abundance, but the interview ranges over a number of...

Thanks Patri, interesting

Thanks Patri, interesting interview.

I'm inclined to agree with Arnold's statement beginning with "Doctors should think of patients as adults", but after reading Schwartz' _Paradox of Choice_, I think that may be a little too simplistic. Schwartz relates studies in which respondents claim a preference to choose their treatment if disease X (cancer, for example) ever strikes, but among patients who actually get X, the patients prefer that the doctors make the choice. He reasons that the cost of making a mistake is simply too high for rational as well as emotional reasons, so the patients punt.

I think Arnold gets around this with exactly what I thought at the time of reading _Paradox_ (offer the standard alternative, etc.), but I'm afraid that may be still too simplistic for two reasons. First I think it's especially dangerous for us to think in those terms as being the best method for everyone - after all, most of us reading this blog (I risk overestimating here) are probably well educated, informed, and insured and acustomed to coming up to speed quickly on new things. The average person? Maybe not so much. Maybe they prefer having the doctor in "me doc, you patient, do what I say" mode, even if that isn't what they would say ahead of time.

The second reason that may be too simplistic is that healthcare is a "discovery process" as he describes it. Asking the patient to make iterative decisions in terms of "likelihood" and "risk" is perhaps asking too much of a significant portion of the population.

Not that I have an alternative answer that I like, but I think caution is warranted.

Kling: "I think that if more

Kling:

"I think that if more people knew economics, we would have better public policy. The government is not going to be any wiser than the people. If the people think that high gas prices are caused by a sudden outbreak of greed among oil company executives, then our public policy is going to wind up reflecting that, regardless of whether the elites know better."

People say this all the time as if it were a prospect when it's really nothing but a wish.

What's the incentive for individuals to learn economics? Having invested a lot of time and effort in studying economics does Kling get a better public policy then the economically uninformed?

The incentive needs to be

The incentive needs to be personal and not "so we can have a better public policy"- that would be a side effect.

For those who do learn economics, they get a positive benefit out of it (its a strong way of thinking about the world that gives insights where once there was confusion and mystery), but most people can get away without knowing any, and so there we go. Arnold pretty much says as much in the follow up- that it would be nice if everyone did, but its so difficult that it'll never happen.

Brian, Can most people

Brian,
Can most people "get away with not knowing any"? They may be surviving without a rudimentary knowledge of economics, but I'm sure they're not understanding the world around them, and could be doing much better. Economics is one of those things that you never knew you needed it until you learn it.

But instead of teaching even basic economics (or logic) in our public schools, we spend our time on multiculturalism and memorizing ancient history. If we taught at least some of this stuff in our schools, don't you think individual people would be much better off, and that would filter up through our votes to our elected officials?

Brad, Obviously people get

Brad,

Obviously people get along without it since we don't teach it and people still think that the only reason gas prices go up is due to an outbreak of greed (as though they weren't greedy before) and not because, er, the price of oil is $70/barrel vs. $10/barrel. We have some sort of hardwiring *and* cultural/social capital that allows us to operate within a market society without having to think much about it- trust networks, institutions, etc. THe irony and perhaps the silver lining is that we don't have to have everyone know economics for our economy to work well, we just have to have enough that do, and enough that did in the past, and institutions that sustain the work done in the past. Hayek and others have pointed out that advancing material well being means you have to think *less* about everything rather than more, and I think we see that in this particular instance.

The problem, of course, is that majoritarian democracy preys on primal ignorance and absent strong countervailing institutions in society will almost inevitably result in expropriation, plunder, and eventual general immiseration due to a negative sum predation on society.

Interesting Content

Interesting Content #2
Another batch of links, in lieu of actual original content here. Mostly economics, but not exclusively.

Brian, So Kling goes on to

Brian,

So Kling goes on to say: "I think if you’re a libertarian you have to believe in persuasion."

But your conceding it's futile to expect to persuade people in general, and you're saying Kling effectively concedes it too.

So why believe in persuasion? How is such belief better than any economic fallacy?

[LEVEL2] Catallarchy On

[LEVEL2] Catallarchy On Kling
Catallarchy interviews Arnold Kling, recently associated with the Cato Institute and author of a new...

I'm still wondering about

I'm still wondering about the bourgeois who doesn't enjoy Paris.

JTK- As I said in my post,

JTK-

As I said in my post, there is a critical mass (a minority) that can be and needs to be convinced in order to make the whole work- the power of the market is such that it can tolerate a great deal of free riding *and* that it doesn't require people to understand how it works for it to work.

Also, *if* there are countervailing institutions in a majoritarian democracy, there can be hope of either stalling the expropriation or confining it to a 'sustainable' level of parasitism (ala the US or UK). It also does not require a majority of folk actively and consciously accepting something to be true for it to work as a general institution- for both good and ill, the majority of us are heteronomous followers. We're rationally ignorant and so we'll follow cues of respected folk whom we vest with authority (role models, etc). Get enough role models to sign on, and like a lever you can move the mountains.

Thus while it is indeed probably futile to expect to achieve widespread economic literacy in the public, the good news is that liberals dont have to in order to succeed.

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