Assorted links

1. How to avoid having a frustrated dog.

2. Seems to me this fellow should get a reward for thinking for himself rather than being arrested.

3. Noam Scheiber at the New Republic has an interesting profile of Zeke Emanuel at OMB.

4. An interesting, and at times moving, portrayal of Detroit's black middle class, from the NYT.

5. Top ten fetishes (okay for work).

Various hat tips.

Prescription drug coverage in Denmark

When I was at a conference in Copenhagen last month, I got to this this paper, which makes use of kinks in the reimbursement schedule of the Danish prescription drug insurance scheme to get a handle on the price elasticity of drugs.

What really struck me was not the analysis (which is very nice) but the system itself, and how starkly it contrasts with the system produced by congress and Bush II. The Danish system has the following features:

(1) a step function subsidy that starts at zero and ends at 100 percent for a very high level of annual drug expenditures.

(2) when there is a generic, the subsidy only applies to the price of the generic, though individuals can pay out of their own pocket to get the branded drug

(3) there is no coverage of recreational drugs such as Viagra

The one oddness to the system, which is not really completely avoidable, is that the expenditure total that determines the subsidy amount cumulates over calendar years, so that there is an incentive to concentrate drug expenditures in every other year by buying stocks where possible, so as to maximize the subsidy received under the non-linear schedule.

I am also not sure exactly how the system determines whether or not to cover certain drugs. I expect there is some sort of expert agency that does this, which is not ideal but likely better than having politicians directly involved.

The US system (called Medicare Part D), though its political motivation was news stories about old people eating pet food because their prescription drugs were so costly, includes first dollar coverage, which then disappears over a certain range of expenditures - the famous donut hole.

First dollar coverage makes no sense from any sort of economic standpoint or even from any sort of equity standpoint. It is pure and simple vote-buying. One way to reduce the deficit or to afford universal coverage (or a convex combination of the two) would be to reform Medicare Part D by making it look like the Danish system. Even a proposal along these lines would show some seriousness on the fiscal side and a willingness to taken on the narrow self-interest of a powerful constituency.

Change you could believe in, anyone?

Cash for klunkers and heterogeneous treatment effects

Ken Troske points me to this letter to the editor that notes one perverse effect of the "cash for clunkers" program that subsidizes owners or old cars to trade them in for new cars. The program raises the market value of old cars and thus makes it harder for a poor person without a car to afford to buy one. Of course, at the same time, poor people are presumably over-represented among the owners of clunker cars. So, for some poor people the the program is a windfall.

Of course, the program is not really about poor people, or about the environment. It is about shoveling more tax dollars to the big three auto companies.

That flushing sound you hear is your tax dollars, including the two billion recently added to the program.

Some simple, and not so simple, economics of health care

This recent column by Paul Krugman claims to make the case that "markets" can't cure health care.

Part of the column is very good. Health care, at least big ticket health care, is not like other goods. This is less true of day-to-day things like glasses and cavities, which is part of why there is not a lot of talk about these markets. But, for big things there are two key issues. First, there is a lot of uncertainty. Big costs - very big costs - can arise suddenly. This suggests the value of insurance, which is of course something that can and does arise in markets. Second, there is an information asymmetry. The doctor typically has more information than the patient about the available treatments. As a result, just as with car repairs, doctors have a financial incentive to mislead and sell more treatment than is necessary. Insurance helps to work against this tendency by limiting what doctors can do via selective reimbursement. As Krugman notes, though, insurers have incentives that push in the opposite direction from physicians, though this point is oversold in Krugman's piece because insurers also have long-run concerns about their reputations, which affect their future profits. So, there is no question that health care is not like bread or even cars. No economist would disagree with this.

The trickier question is what implications this has for policy. If the government provides insurance, it has much the same incentives as private insurers to cut costs. Treatment provided to individuals is as much a "medical cost" to the government as it is to a private insurance company. I think it is reasonable to argue, given the different institutional incentives, that government run insurance is more likely to respond to the situation by approving more treatment and running a deficit. But that is not socially optimal either if it means, as it certainly does, for example, in the case of medicare's payments for treatments near the end of life, that a lot of treatment is provided that does not come even close to passing a social cost-benefit test. Saving administrative costs by failing to limit treatments that do not pass such a test is a fool's bargain.

I guess what puzzles me is that there is not more emphasis on the non-profit sector in the current policy discussions. As I have learned from my colleague Paul Courant, we rely on non-profits to solve similar problems of information asymmetry in the higher education field. Why not in the health field? Non-profits would seem to avoid some of the problems with both for-profit private insurance (your care is not some shareholder's loss in profits) and government insurance (because non-profits face a hard rather than a soft budget constraint).

So, I applaud Krugman's focus on the particular nature of health shocks and on the information asymmetry between patients and providers. One can certainly find discussions in libertarian and conservative quarters that do not face these issues as they should, but such discussions represent the low end not the high end of the debate. Simply pointing out that health care is not the same widgets, though critically important, does not alone make the case for the Obama plan, or for a single payer system, or indeed even for many aspects of the current design of Medicare and Medicaid.

Ed Glaeser on education

This piece on teachers by Ed Glaeser has been sitting in my queue for a while. I think it falls short of Ed's usual standard on a number of dimensions. First, it is easy to say we should have better teachers and much harder to actually have them for two reasons. First, the literature makes pretty clear that we do not (yet?) know what observable characteristics make for a good teacher. Thus, at the moment, there is no clear way to change the hiring process to bring in more individuals who will be good teachers. Ed is more coy about this fact than he should be. Second, it takes some time to sort out who is a good teacher and who is not through classroom observation. By the time it is sorted out, teachers in most public schools will have tenure and essentially be impossible to fire.

This line of argument suggests that what is needed is a change in the industrial organization of schools, away from a predominately government / union near monopoly model toward a model that includes a more flexible labor market. Oddly, Ed does not mention this but instead suggests throwing good money after bad by putting more money into the current system. That makes little sense given that in the current system teacher salaries are essentially a constant plus a fixed amount times number of years in service plus another constant for having a master's degree. In such a system one cannot raise the salaries of the good teachers without similarly raising the salaries of all the mediocre ones.

Finally, I have always thought that (former Chicago economics professor) Sherwin Rosen's model of hierarchies suggested that you do not really want the "best and the brightest" in teaching. Teachers influence a small number of people at a time a little bit. That is important, but not important enough that, from a social standpoint, you want to take someone who would otherwise develop some great new product, or start a new firm, away from that and put them into teaching.

Medical marijuana in California

This Rolling Stone piece suggests pretty strongly that, at least in the Golden State, medical marijuana is a big step towards legalization.

My favorite bit:

I always say, 'Never compare yourself to the mediocre -- use the entrepreneurial drive to bring yourself to a higher level,' " says Daniel. "The biggest problem facing this industry right now is the stoner mentality."

I remember talking with one of my colleagues last fall before the election about the medical marijuana initiative on the ballot in Michigan. He was concerned about exactly the sort of scenario described in this article and was going to vote against the initiative. For me, it was this scenario that made me keen to vote in favor of it.

Movie: Hurt Locker

We saw Hurt Locker last week at the State Theater. I am not sure it is *quite* as good as the hype would have it, but it is very good indeed and worth seeing. It has a mostly realistic feel about it, though without the long periods of waiting and boredom that combat includes. The movie works as either a surprisingly thoughtful war movie or a surprisingly violent character study. The grocery store scene alone is worth the price of admission.

Recommended.