Lunch with a Nobel laureate in Economics

I talked at lunch today with a Nobel laureate in Economics (name withheld because he is a friend’s relative; let’s call him “Bob”). Bob is an expert on macro-economics and we talked about unemployment in the U.S. and the high cost of health care, especially government-funded health care such as Medicare.

Like other economists, Bob impressed me with his ability to ignore the details and texture of real life. I reminded him that two years ago I suggested that a lot of the 15 million unemployed folks simply did not have the skills and/or work ethic to be worth hiring in today’s economy, e.g., one where a sloppy worker can ruin a $10 million batch of goods or download a virus and cost the IT department $50,000. I had also suggested that the cost of health care was too high to make it worth hiring Americans in any job where providing health insurance was customary (see this posting). At the time Bob had castigated me for my pessimism and assured me that growth was just around the corner due to the upcoming fiscal stimulus spending.

Two years and about $3 trillion of deficit spending later, the U.S. economy has not responded the way that Bob predicted. I tried to engage him on the skills and education question and he responded that we don’t know how to fix K-12 education so we shouldn’t put more money into it (a fair point, perhaps). Better to spend on physical infrastructure such as roads, airports, dams, etc. He cited a report that showed America’s airports to be in “Grade D” condition. This was a surprise because most U.S. airports (the runways and taxiways, not the terminals) strike me as being in excellent shape. Mostly I was impressed by Bob’s lack of interest in what goes on at the individual level. For example, he hadn’t thought about what it would take for an individual business person to hire a new worker here in the U.S.

The debate over Medicare is very abstract when politicians and economists talk about it. Nobody can quite figure out how we spend twice as large a slice of GDP on health care as other countries. Yet a single conversation with a doctor would add a lot to an understanding of the problem. A friend of mine (“Joe”) is a pulmonary/critical care doctor. An elderly patient comes into the hospital. Dr. Joe tells them “Your father is going to die within two weeks. To keep him alive beyond tonight will require a lot of machines and about $300,000 of Medicare expense. What would you like to do?” The response was “Everything.” Dr. Joe says “It didn’t make a lot of medical sense, but I get paid by Medicare either way so we did everything.”

Reasoning and making decisions from anecdotes is obviously not very sound. On the other hand, it seems that economists are led to a lot of unsound conclusions by ignoring the anecdotes.

25 Comments

  1. Jose Camoes Silva

    October 5, 2011 @ 12:02 am

    1

    The problem with most planning done by outsiders (not just regulators and other central planners, but also every person who believes they could do a better job than manager X/CEO X/Board of X, without any details of what X’s job entails) is that details are boring and big pictures are fun to contemplate.

    Unfortunately details are usually very important to understand reality.

    JCS

  2. J

    October 5, 2011 @ 1:09 am

    2

    “..the 15 million unemployed folks simply did not have the skills and/or work ethic to be worth hiring in today’s economy..”

    There are fifty hamburger flipping jobs and wheelchair pushing and street swiping jobs for each high-skill job in “today’s economy”.

  3. philg

    October 5, 2011 @ 1:26 am

    3

    J: Even a job flipping hamburgers can be performed a lot better by someone who always shows up on time and who tries hard to be efficient. That’s the kind of “work ethic” to which I was referring.

  4. Tom Welsh

    October 5, 2011 @ 3:28 am

    4

    Your comment about Bob the economist being out of touch with everyday reality and the details of real human beings’ lives strikes me as apt. This is the downside of abstraction, and a very serious downside it is too.

    There has come to be a cult of abstraction, because everyone – even the least intelligent and educated – can see that the cleverest and most successful of us do a lot of abstraction. Scientists and mathematicians deal routinely with abstract models of reality that work very well – provided their limits are recognized and respected. However other fields of what we might best, perhaps, call “inquiry” have aped the hard sciences and tried to set up their own paraphernalia of abstraction. Economists in particular like to define mathematical models for aspects of reality, and if those models have any power at all, they are then wroshipped as idols. Unfortunately economists don’t know what they don’t know, and so are continually blindsided by factors they left out of their models because they did not notice them, or neglected them. That’s the main reason their models have no predictive power.

  5. Jim T

    October 5, 2011 @ 6:50 am

    5

    Hmm, I take it that not spending $300,000 dollars to extend someones life with 2 weeks of suffering is the Death Panels that people are continually bleating about …

  6. David Krider

    October 5, 2011 @ 6:54 am

    6

    You hit the nail on the head with Medicare, and it’s the same basic problem with various insurance plans in general. If beneficiaries have little or no skin in the game, and they won’t account for cost in their decisions. If Medicare was an 80/20 plan like the rest of us have (and THAT doesn’t kick in until a high deductible is met), your story would have probably ended differently. I think the entire problem with our system IS insurance, and all the different ways the system is gamed.

    It’s like home owners insurance. We had a hail storm roll through this summer. East of us, it blew holes in vinyl siding. Here? No damage at all. Yet, a third of the houses in my suburban neighborhood within viewing distance of me got new roofs. They basically scammed their insurance companies into re-roofing their houses because the shingles they were using when they started building out this neighborhood were running their colors. Home insurance being what it is, they probably paid $100 or $250 deductible to get a $10,000 benefit. That just drives up the cost for everyone.

  7. Z. Constantine

    October 5, 2011 @ 7:12 am

    7

    The real kicker is “Bob”‘s avoidance of individual interactions – obviously, “Bob” knows that confounding factors are in play and would prefer to stick to theories which do not address the weaknesses of economic theory itself (chiefly, the concept that individuals *can* act in rational – or even emotional – self-interest when information asymmetry is working in favor of the institutions and corporations which they encounter).

    It’s ironic, though hardly surprising, that “Bob” and his ilk have been absorbed into the disinformation apparatchik. Perhaps the best question for “Bob” might be “How does one identify trustworthy, actionable information pertaining to the national economy?” (full credit if he figures out some way to finagle his opinion’s validity into the equation, bonus points if he can’t)

  8. Seanot

    October 5, 2011 @ 7:56 am

    8

    Back when I studying economics at the undergrad level about thirty years ago, my professors treated micro-economics with contempt. But this was no surprise as the department considered itself to be well rounded in the schools of economic thought. We were fed both kinds: Keynesinism *and* Marxism.

  9. Jagadeesh Venugopal

    October 5, 2011 @ 8:56 am

    9

    The question you bring up about the elderly patient is a difficult one to answer. Where do you draw the line? What if the old man was going to live four weeks? Six months? A year? What if it was a young mother with two small kids… how would we react differently?

    In poorer nations, its simple… you run out of money and that’s that. In a nation that can afford it, it’s a deeply personal and moral question as to the point where we give up further treatment.

  10. Jose Camoes Silva

    October 5, 2011 @ 2:44 pm

    10

    Phil, J:

    The problem is a little worse than how Phil presents it:

    Many of these “anyone can do it” jobs, like unloading boxes from trucks, for example, feed into other parts of more elaborate production processes. So, while it’s a little better to have a burger-flipper with work ethic than not, it’s crucial that the people unloading the boxes with supplies for a chemical factory have a work ethic: if a significant number of them arrive late (or miss a work day because there’s a sporting event they want to watch), the production process is affected: either the manager has to move high-paid chemical process specialists into box-unloading jobs (both wasting their time and decreasing the production throughput).

    Also, if your workers are responsible, they might tend to have uncorrelated absences (their absences are due to random factors in their lives), while some workers with lower work ethics may have correlated absences (for example, due to a sporting event).

    Few jobs have the larger inconsequentiality of burger flipping.

    JCS

  11. paul kramarchyk

    October 5, 2011 @ 7:11 pm

    11

    IF Demand flat AND Supply UP, THEN Price DOWN.

    The previous statement and its logical variations are all you need to know about economics. Hard to believe you can milk a Nobel Prize out of that.

    Phil, everything you said is correct. Ask anybody. (Except an economist. Or worse, a Nobel Laureate economist.) And you raised the right questions to test for real world understanding and penetrating insight. Test results: negative/negative — no real world understanding and no penetrating insight.

  12. Quagmire

    October 5, 2011 @ 8:16 pm

    12

    It seems even if you show up for work and have the smarts, no one is hiring:

    http://chemjobber.blogspot.com/2011/10/we-are-99-graduate-student-edition.html

    But maybe smart Americans are just getting trained in useless subjects. Trimming lawns and efficient burger flipping seem like in demand fields.

  13. Quagmire

    October 5, 2011 @ 8:17 pm

  14. Honest Dan

    October 6, 2011 @ 1:26 am

    14

    Maybe the better question to ask is why is it costing 300K to keep him alive for two weeks

  15. Steve

    October 6, 2011 @ 12:39 pm

    15

    Wait, though … the anecdote you provided from that doctor is interesting, but the high cost of health care in the U.S. is *relative* to other countries. So do other countries not have that anecdote?

    I’m genuinely curious about it. In Canada, for example, would elderly patients’ families not also say “everything”? Is the cost of “everything” managed in a different or better way by the Cdn gvmt vs Medicare to keep that “everything” cost down, then? Or do people in Canada really not say “everything” nearly as often?

  16. Dan Weber

    October 7, 2011 @ 10:21 am

    16

    My impression is that in lots of countries those choices simply aren’t presented. And the people are generally happier and richer as a result.

    The Paradox Of Choice gets really ugly with health care, where people are afraid to not do everything possible.

  17. Paul A. Houle

    October 7, 2011 @ 3:04 pm

    17

    I read a book on medical ethics a few years ago that mentioned that the population of people who were mostly likely to keep a family member in a persistant vegetative state for years in the U.S. were poor black people in the South. Religion played a role in this (maybe a miracle will happen), as well as the feeling that they’d been treated unfairly all their lives and that this was the one chance they had to stand their ground.

    I used to work out on my lunch break at a gym that had televisions running all day — a large fraction of TV ad in the daytime were aimed at people who had little or no income but who could get government benefits (usually Medicare) or who thought they could strike the jackpot by suing somebody.

    People who feel disenfranchised in life might be inclined to take as much as they can on their way out, since, as you point out, health insurance can easily make a lottery-sized payout, even if you don’t really enjoy it. That widespread feeling of disenfranchisement might be a worthy root problem to attack.

  18. philg

    October 7, 2011 @ 3:16 pm

    18

    Paul: Speaking of medical ethics, I wonder what would happen if Medicare said “We’ll give $150,000 for the grandchildrens’ 529 college savings accounts if you agree to let your elderly relative die a natural death rather than a $300,000 death in the ICU”.

  19. Glenn K

    October 7, 2011 @ 5:52 pm

    19

    Phil on the healthcare cost point, the US spends a higher percentage of its GDP than any other country chiefly for the reason that the quality of care is superior. It’s an obvious point which oddly never seems to be made in the debate, either by the economists or the politicians.

    Take diagnostic medicine for example. According to Wikipedia the US has 4x more MRI machines per capita than Canada. In Canada it’s not uncommon to wait weeks for a diagnostic scan, whereas in my limited experience in the US it’s done the day the doctor orders it. Those extra machines and their operators cost a lot of money to be sure. By limiting capacity and delaying diagnostics and, by extension, treatments, the Canadian and UK health systems spend less of their nations’ GDP than does the US system in this segment. The economists and the Democrats might have you believe that’s a good thing; not so for the guy in the early stages of primary liver cancer waiting a month for a diagnostic scan, or to borrow from your example, Dr. Joe’s Canadian equivalent who tells his patient to come back in 3 weeks when the expensive machine has an available slot.

    What’s true for virtually any good or service is also true for health care: better quality, better technology and better service costs more. Spending less will mean inferior quality, inferior technology and inferior service. That’s not progress. There are many aspects of the US healthcare system which should be up for debate, but to finger the overall cost as a percentage of GDP as the intractable problem which must be solved seems to me to be framing the debate in the wrong way.

  20. Roberto

    October 8, 2011 @ 8:25 am

    20

    Phil, too bad more politicians don’t subscribe to this blog. As usual, politics gets in the way of sound, detailed (anecdotal?) analysis and because of politics (read – self interests, especially of corporations, many of whose own economies are larger than many government’s) the “tough love” decisions couldn’t be implemented anyway. What to do? revolt? did that work for the French? is it working for the Greeks? if great economies like Italy and Spain, etc default will it be the final solution for all the world’s free market economies?

    How the hell do we get the colossal fortunes sitting in corporate and wealthy boomers’ accounts out into the economy? – these are fabulously rich countries by some standards. It won’t be philanthropy for the most part. We are fighting the ultimate law governing life on this planet – natural slection.

    Here in Canada, speaking of universal health care, the health care customer has no real idea of what his or her bill is for any given medical procedure. A co-pay programme, even a small one, would reveal by invoice or bill the real cost to the system. Even with the current (free) system just a statement from the government showing this cost and $0.00 due might shock some into having second thoughts about this or that test or procedure.

  21. David Lance

    October 8, 2011 @ 1:07 pm

    21

    At the risk of thinking merely from antecdote, and as an incompetent, and clearly worthless unemployed technical writer, I have to admit you may have a point. Perhaps all of us good-for-nothing, unwanted, unambitious and clearly substandard morons ought to quietly roll under a bus. You know, over a storm drain so as to spare you superiors the cleanup. Perhaps your analysis is correct. The American economy ought to employ only the best and the brightest. (Please excuse my childish impertinence for wishing to be seen AND heard.) Before I slink off to serve your kids McNuggets at the drive up window, I might like to point out a wee small tinge of an issue that you (inadvertently) failed to touch upon in your superior condescension of an article here. Economics is basically the sociology department studying the act of producing profit in a market place. When people produce some good or service, and it has more value in the market place than the raw goods and labor costs required to produce it – they create a thing called “profit.” Perhaps you might advise Bob to hire a few people who still remember something about producing profit. (Not stealing profit. Not swindling profit through crafty mortgage deals. Not that nonsense. Nor of producing profit by using Chinese slaves instead of market place labor. Or by selling portentous opinions to lawyers whose clients have deep pockets. I am talking profit here.) Perhaps, you might advise Bob to hire these people to help him better understand the intent of the economics department in the first place. You might even go against your basic superior vantage point of menacing genius, and advise Bob to hire the best of these, even if they are only mediocre, you know, lower caste type people. And by the way, macroeconomics and Keynesian ism are synonymous. Keynes offered a prescription to get out of a lingering depression: Stimulate demand through temporary governmental deficit spending. Perhaps you would better understand Bob’s expertise and system of analysis if you avail yourself of a copy of “The General Theory of Employment, Interest and Money” by John Maynard Keynes, and read it. Like some of us uneducated, worthless burdens on society have done.

  22. Duke Briscoe

    October 8, 2011 @ 2:54 pm

    22

    Glenn K: It is not clear that overall quality of care is superior in the US. It is not a big difference, as measured by lifespan. International comparisons of quality are complicated by cultural differences – such as obesity, handguns, and drunk driving.

    MRI machines are a big profit center, and often owned by small groups of physicians. This can create some bias for increased usage and expense. For instance, a friend of mine had a knee injury a few months ago. An MRI was recommended, but she has not had one done yet. Maybe she will eventually get around to it if it ever seems that she would want to consider the possibility of surgery. My point is that a lot of MRIs may not be that necessary or urgent. There can be a lot of “defensive” testing because of litigation fears.

    Also, testing and diagnostic procedures are not always beneficial, as in this week’s recommendation that the PSA test screening for prostate cancer is not worthwhile because it leads to risks from further procedures such as biopsies. The statistical judgement was that the PSA test did not lead to better end results.

    Some other recent studies have questioned the value of intensive chemotherapy versus palliative care for some cancers, where the palliative care actually resulted in longer survival times and better quality of life.

    “Evidence based medicine”, trying to make better use of statistical analysis of treatments, is important for improving care and might reduce costs in some cases. Improved quality of care should often reduce costs. Sometimes there can be profit motives that might bias (consciously or unconsciously) recommended treatments.

    There is a lot of profit taken out of US health care spending, and the fact that our spending is twice that of other countries which have comparable healthy lifespans suggests that we could find some significant efficiency improvements.

    I agree that spending less is not necessarily better care, but the current US health care system has some great inefficiencies. And there are particular aspects of health care that make it work differently than other consumer markets. I hope that a state run medical system would be responsive to consumer satisfaction in a functioning democracy, and also that there would be a non-state health care capacity for individuals to spend on care outside of the context of the state health system.

  23. Dan Weber

    October 8, 2011 @ 10:35 pm

    23

    Duke Briscoe points out, very well, that more health care is not the same as better health care. The US health systems (both public and private) have a mantra of “when in doubt, do more.”

  24. Glenn K

    October 9, 2011 @ 3:33 pm

    24

    Duke, I don’t know that life expectancy is a good basis for comparing the quality of national health care systems. The rationing of care under the cheaper Canadian and UK systems is, for the most part, directed to non life threatening conditions, but which can have a fairly significant effect on the user’s quality of life.

    Here’s a recent anecdote. My father, who’s in his early 70s and lives in Canada was diagnosed with a hernia a few years ago. The condition was non-life threatening but caused him a fair bit of discomfort and prevented him from doing the physically active things which he enjoys doing. His choice was to be on the ready and wait months for the call confirming a surgical availability, or to drive down to Rochester, MN and spend a few thousand dollars of his own money that month. He chose the former and finally had the surgery 9 months later, and spent much of the intervening time on the couch watching TV. My wife was diagnosed with a hernia this year. Same story – painful, debilitating, but not life threatening. We don’t live in Canada or the US. We took a weekend trip to Miami and after a couple of appointments and a few readily available diagnostic tests she had a surgery scheduled two weeks later. I have no idea what either surgery actually cost, but would hazard to guess that the US procedure was significantly more expensive. But more value was delivered. What’s the value to the patient of having a non-threatening but debilitating condition treated straight away, rather than being laid up and in pain for 9, 12 or 18 months? Of course anecdotes have their limitations, but the difference in quality of service for these identical procedures was really quite stark, and has nothing to do with life expectancy.

    In your post and others a number of reforms are mentioned which might reduce waste and costs. I don’t disagree, particularly with respect to co-pay schemes and tort reform, the latter which might go some way toward ending defensive medicine and the unnecessary procedures it entails, and if done comprehensively should have the added benefit of reducing costs to scores of ailing US industries. However, even with the most intelligent and far reaching reforms, the bill for a reformed US health care system which maintains its present level of technology, quality and service is in my view going to be much closer to the bill for the present unreformed US system than to those for Canada’s or the UK’s chintzy systems. For the most part, you get what you pay for.

  25. John E. Davenport

    October 13, 2011 @ 2:10 pm

    25

    There is no nation in the world that can conceivably provide all possible healthcare to all patients all the time and the subset of Medicare is clearly no exception. The debate over inordinate expenditures during the last few weeks or months of life, for example, raises many questions of which the thorniest is ethical and the answers to which are not clear.

    What is quite clear, however, is that waste is a major element in the impending failure of Medicare and is something that could be improved easily and without additional bureaucracy. Major medical equipment (“scooters”, hospital beds, lift chairs, etc.) should be leased instead of purchased outright with Medicare dollars. Nursing home PT and OT payments should be limited to prevent nursing homes from providing services of questionable value just to keep their employees productive. Doctors should be required (and paid) to meet with patients and/or patient families to review just what equipment or services are really appropriate before blithely signing off on such major Medicare expenses. The list goes on. Fraud, of course, is another issue and will require tighter oversight than has been brought to bear heretofore.

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