Monday, June 20, 2005

Health Insurance and the Dangers of Making Assertions without Empirical Evidence

This week is easy. Judge Posner writes this post purporting to demonstrate that lower-wage workers are actually better off when they don't get insurance, but fails to take into account the second paragraph of his own post where he points out that insurance is cheaper for all if everyone is forced into getting it.

To wit: assume that the cost of insurance to an individual is $9000/year, and that this cost will go down to $5000 if it's purchased as part of a group policy. Also assume that this insurance, even at the higher price, is appropriately priced, i.e. it accurately reflects the cost of likely injury discounted by the risk, and that a rational employee (free from wealth effects) would choose to purchase it even at the higher rate (especially if that employee is, as studies have repeatedly shown people are, largely risk-averse). Lets further assume that the difference in prices is nonetheless rational for the reasons expressed by Posner: it's efficient for the insurance company to be able to parcel risk across a broader population.

Now lets take Posner's figures and correct them with this in mind.

If the employer is prepared to pay an employee a salary of $45,000 and give him an insurance policy that costs the employer $5,000, then if the employee doesn't want the insurance the employer will be willing to pay him a salary of $50,000. Suppose the employee has no significant assets--a realistic assumption if he is a low-income employee. Then if he becomes ill he'll be able to obtain medical care free of charge under Medicaid, though it will be of lower quality than paid-for care. Suppose the value of that lower-quality care is only $3,000. Nevertheless the employee is better off without the insurance; his net income will be $53,000 ($50,000 in salary plus $3,000 in insurance value) versus $50,000 ($45,000 in salary plus an insurance policy worth $5,000) with the insurance.

Crit Cowboy:

If the employer is prepared to pay an employee a salary of $45,000 and give him an insurance policy that costs the employer $5,000, then if the employee is forced to purchase his own insurance, the employer will be willing to pay him a salary of $50,000, but the employee will have to spend $9,000 of his own money on insurance, suffering a net personal loss of $4,000. Alternatively, he can forego medical insurance altogether. Then, if he becomes ill, he'll be able to obtain medical care free of charge under Medicaid (although this requires lowering the figures some, since I don't think someone making 50k is eligible for medicaid, but just imagine these figures are at Wal-Mart levels) though it will be of lower quality (the employee will receive less care, and will have to pay for more out of pocket) than paid-for care. Suppose the value of that lower-quality care is only $3,000. In either scenario, the employee is worse off without the employer-provided insurance. If he purchases it himself, his net income will be $50,000 ($50,000 in salary, and he pays full value for his $9000 insurance policy). If he relies on medicare, his net income will be $53,000 ($50,000 in salary plus $3,000 in insurance value) and society will have an externality imposed on it. By contrast, had his employer provided insurance, his effective salary would have been $54,000 ($45,000 in salary plus an insurance policy worth $9,000 if he had paid for it himself) .

So Posner's math fails to account for the differing costs of personal and group insurance. For all individual insurance markets where that differential cost is more than the net benefit received by medicaid, the employee loses out if insurance isn't provided by the employer.

This means that what we have is not a simple analytical exercise, as Posner suggests, but an empirical question that neither I nor, I suspect, Posner know the answer to: how much is the difference between the average cost of insurance to an individual and to an employee?

Now lets move to Becker. Becker says that there's over-use of medical care. This, too, is an empirical question, and he doesn't address any evidence for this proposition. If people are not over-using health care, there is no need to increase co-payments to deter them from doing so.

Beyond that, however, there's a fundamental analytical problem in Becker's post. Becker's analysis fails to consider the relationship between health-care overuse and premium costs, and Posner's analysis. If people over-use health care, their premiums will rise over time. If their premiums rise over time, their salaries will go down. So they're not externalizing the costs onto anyone. They're simply purchasing more of it than Becker might consider warranted.

Is this a problem? To an economist? Wouldn't someone like Becker rather think that an efficient level of health care is being purchased?

Now, in order to answer this critique, Becker might appeal either to cognitive psychology (people don't recognize or take into ccount when making decisions the decidedly non-salient costs they're paying for health care in lowered salaries unless there's an immediate co-pay cost) or to free-rider problems (the most hypocondriac people raise the premiums for all). Neither would be sufficient. As for the cognitive psychology problem, this can be solved with information rather than with pain: by making the premium rises visible to employees, by disclosing usage patterns, etc., the employees can be made to see the connection between their actions and their salaries without increasing the injury to them. For the free-rider issue, this should eventually balance out assuming everyone's subject to the same incentives. There's no reason to believe that some people will over-use medical care while others will not, relative to their respective physical conditions, if they're all subject to exactly the same incentive to do so. Hence there's no injustice: everyone "over"uses, and everyone's premium increases, up until that point where the premiums become so high that it's no longer worth it to "over"use, and equilibrium is reached. It's really microeconomics 101: this is how it's supposed to work. (Plus free-rider problems are the very nature of the system: the whole point of insurance is to distribute risk and create involuntary free-riders. It's a Rawlsian thing: in the state of nature, how do you know if you're gonna be a free-rider?)

Wednesday, June 15, 2005

Non-Economic Factors

The previous post seems to rest on two assumptions:

1. Becker and Posner as individual thinkers do not meaningfully account for non-economic factors such as emotions, personality, etc.

2. Economics as a discipline is unable to account for these factors.

Regarding the second point, I'm not sure I'm qualified to comment, not having any formal training in economics. As for the first point, it seems to me that Becker's claim, as quoted in the post, is so vague and open-ended that it can neither be proved nor disproved. What would it mean to "deal in a useful way" with nonmaterial factors? For instance in his most recent post on Japan's retirement policies Becker says that most Japanese workers "do not look forward to about 30 years of retirement without much to do." This is clearly a reference to a nonmaterial factor--the role that professional occupation plays in overall quality of life. Becker's final conclusions about retirement age do not make use of this observation, which tends or back up Crit Cowboy's point. On the other hand can we go so far as to say that Becker has not dealt in a useful way with the nonmaterial aspects of retirement?

Monday, June 13, 2005

Becker and off-hand assertions of sweeping propositions

Becker notes as follows:

I have always believed that economists have to consider nonmaterial aspects of life like character, love, and the like. Economics can deal in a useful way with these traits.

This is the sort of off-hand comment that Becker and Posner make all too often that, in my view, dramatically impairs the value of their blog (and much law and economics scholarship in general): how can you just casually toss out an assertion like that? One of the core critiques of economics as both a positive and a normative analytical system is that it does not consider character, love, joy, peace, morality, fairness, etc., and that it is inherently unsuited to do so. The primary example is in the valuations of human life espoused by leading legal economists. Those L&E types who are notorious for participating in this behavior -- Kip Viscusi is probably the most prominent -- utterly fail to consider whether or not human life can be valued in a litigation context (i.e. a wrongful death suit) with reference to the deceased's relationships, creative effort, love, etc. etc.: they instead value a life solely based on the amount of money the deceased would take in order to incur a risk. See e.g. this article. and this one and (sigh) this one and this one etc.

So how can Becker just baldly assert the ability of economics to take these noneconomic factors into account without any argument or evidence?

I don't plan to comment on the latest round of Becker-Posner posts (on Japan's retirement system) unless something interesting pops up in the discussions: they're not very ambitious. Maybe Leisure Theory wants to do so.

Saturday, June 11, 2005

More on terrorism

First of all I want to commend critcowboy for starting up the Anti Becker-Posner Blog and for allowing me to post here.

The topic I'd like to explore is terrorism. There has been a lot of analysis of its nature, causes, and effects; most recently, both here and at the Becker-Posner Blog, people have been debating whether terrorism is at least partially caused by poverty.

Whether one believes that poverty is a root cause of terrorism, or whether the concept is broadened to include political disenfranchisement and cultural dislocation, there is one point that strikes me as very significant that I haven't seen discussed anywhere.

Why didn't black Americans ever resort to terrorism? In this case we see every factor which has been associated with terrorism in its rawest form:

--A clear-cut and longstanding historical grievance;

--Poverty in the midst of general prosperity;

--Political disenfranchisement, both institutionalized and informal;

--The disruption of family and cultural ties in the Great Migration to the industrial north.

I would be very interested to hear what anyone had to say about this. I am discounting the Black Panthers and similar groups because I don't think their activities fit any coherent definition of terrorism.

Monday, June 06, 2005

I do respect Judge Posner...

although I disagree with him on almost everything. Particularly for having the class to specially note the existence of this anti-him blog. Of course, this anti-him blog would be much more effective if others would join up... hint... hint...

Response to Various Initial Comments

Retirement and Feeding the Old

Oh lordie, lordie, me. Both Becker and Posner want to repeal ADEA. Posner also wants to give out competence tests, which would be a good idea, except he wants to exempt incompetent young people for reasons that totally escape me.

Lets start with the ADEA.

How, pray tell, does ADEA for non-life-tenured employees give rise to widespread incompetence, as Becker seems to imply (by coupling a suggestion to repeal the ADEA with an argument that permitting the market to have fixed retirement ages can permit exceptions to be made for the competent)? Firing someone for demonstrated incompetence is not unlawful age discrimination. (Of course, if Becker did not intend to imply that ADEA increases incompetence among non-life-tenured employees, the question then becomes what imaginable harm does the ADEA do?)

Nor does it seem likely that there is vast overenforcement of the ADEA such that incompetence-firings are inappropriately punished as age-firings: in fy04, the EEOC only found reasonable cause in 3.3% of charges and settled an additional 5.0%. Even acknowledging that a certain percentage of the administrative closures were people yanking it to bring federal lawsuits, some of which would be successful, the EEOC still killed 60.6% of the cases in the initial stages. While these statistics don't have any independent meaning without knowing how many charges were actually meritorious, it does suggest that those who are charged with enforcing the statute are alert against frivolous claims. If they can catch 60% of supposedly bad claims, it's unlikely that blatantly implausible claims are getting by.

Posner's post sadly agrees with Becker: "Repealing the Age Discrimination in Employment Act would be a superior alternative to requiring tests of elderly professors, but is politically infeasible."

What would the consequences of this be for our economy? They seem likely to be extremely severe. Social Security is likely to face serious cuts one way or the other in the near future. The vulnerability of 401k plans was seen in the wake of the recent corporate scandals (Enron, Worldcom, etc.). Anecdotally, it seems that employers are much less willing to give out pensions. Similarly, mass layoffs are much more common now than they were when Becker and Posner were facing entry into the job market. In this context, they want to permit employers to refuse to hire people over 40, or over 50, or occasionally "clean house" and get rid of everyone with grey hair?


This is a more general complaint many people have against "the shamans of law and econmics." They all too often ignore what they term the "distributive" effects of their proposals. The basic theory is that if their principles lead to the "efficient" result (overall utility-maximing, society-wide), the distributive effects can be solved directly though e.g. tax and transfer. The problem is that (a) tax-and-transfer itself has costs, so requiring it to do more work might reduce overall efficiency, and (b) tax-and-transfer is difficult to achieve when political power is connected to wealth. There's a path-dependence at work here: the people who get the wealth under any given set of legal rules then use the political power that this wealth confers to ensure that said wealth isn't redistributed away from them. (For an easy-to-understand summary of many of the deeper theoretical critiques of "law and economics," by the way, read the start of this review of a l&e book in the Yale Law Journal by a legal philosopher.)

So we can't just say "injuring the elderly just means that we'll have to tax the beneficiaries of the purportedly increased workplace competence and transfer it to the elderly." The beneficiaries of that competence will not go quietly. Realpolitik.

The consequence of an ADEA repeal would thus be that as more people find they can't change jobs beyond a certain age, or get laid off and can't find new work, the cat food industry will surely boom from its new elderly customer base.

I agree with Posner on the issue of giving out a competence test of some kind, but why age? Why not in general? My most incompetent professor in undergrad was a woman who looked to be in her late 20s. Possibly the most horrifying experience in my life was to observe her draw a map of Asia, in her international relations class, to illustrate some point or other: she put India north of China. Why not give a competence test to all life-tenured employees, every five years, regardless of age?

(More reading: Over at Prawfsblawg, Daniel Solove makes the important point that Posner [and Becker too] never provided any reason to believe that there is a significant problem with incompetence that demands these drastic measures.)

Wednesday, June 01, 2005

Poverty and Terror -- Crit Cowboy

Becker and Posner each argue that there is no connection between poverty and terrorism. I will not engage their emprical data, but rather attempt to complicate their theoretical grounding. They fail to distinguish between state-sponsored and non-state-sponsored terrorism. State-sponsored terrorism is a geopolitical question, not an economic one.

Any analysis which fails to distinguish between state-sponsored and non-state-sponsored is fundamentally incoherent. State-sponsored terrorism likely has entirely different motivations from non-state sponsored terrorism. Non-state-sponsored terrorism is often revolutionary (such as the various Marxist groups like the Red Brigades and Baader-Meinhof [to the extent they were not sponsored by the Soviets] cited by Becker, and also like the IRA), while state-sponsored terrorism may have as a significant motivation changing the balance of power in traditional realpolitik terms (consider the various groups sponsored by various Arab states, historically, as a way to conterbalance Israel military power, after direct military force failed. Note that some, but not all, of the Arabic groups might fairly be described as "terrorist" -- the modern PLO, for example, has been fundamentaly non-terroristic since Arafat and Rabin came together in 1993).

Non state-sponsored terrorism seems to be largely correlated with (a) ethnicity, (b) religion, and/or (c) ideology. This is the basic "one man's terrorist is another man's freedom fighter" point. Those ethnicities, religions, and ideologies which are out of power in the states in question, and see no direct electoral way of success, are more likely to resort to terrorism. There, I agree with Becker and Posner that there is no reason to believe poverty will be a significant factor in the non-state-sponsored terrorists, except insofar as poverty is a consequence of the same disenfranchisements that lead to the terrorism in the first place.

However, when we consider state-sponsored terrorism, a different picture appears. The paradigm case of state-sponsored terrorism, of course, are the groups historically sponsored by Syria, Libya, Iran, etc. -- most famously Hamas and Hezbollah.

The key feature to notice about these groups is their forming in response to the military failures of their sponsor states. Many Arab nations allied to destroy Israel by ordinary military force, but were utterly humbled in the Suez War, the Six-Day War, the Yom Kippur War, etc. etc. etc.

The allied terrorist groups (and groups like the PLO that turned their back on terrorism) can be seen as first an extension of this effort, and, finally, a response to the failure of this effort. The Arab states realized they could not defeat Israel by ordinary military force: Israel had the backing of the U.S., superior armed forces, superior technology, etc. -- all driven by the wealth of the U.S. -- and so they took a page out of Che Guvera's book and went to guerilla warfare, also known as terrorism. (Military weakness, of course, is correlated with poverty. Oil notwithstanding, running a military is very expensive, and only those nations rich both in population, resources, trade and industrialization, can afford to compete in that particular market. Each of those is a form of wealth: raw materials like oil alone do not confer wealth if the country doesn't have the population and tax base to support an army.)

If we look at state-sponsored terrorism from a geopolitical standpoint, we see thus that it is indeed connected to poverty, or at least to weakness: those nations that are too weak/poor to realize their (choose your bias: imperialist/liberational) ambitions through ordinary warfare attempt to do so through terrorism.

(Even to the extent the Marxist groups were sponsored by the Soviets, this was so only because the Soviets didn't have the resources to conquer the contries involved directly. They didn't need to use terrorist groups to destabilize Eastern Europe, and so they didn't.)

Monday, May 30, 2005

An Invitation to the Public

This blog is intended to be a community blog. At least one main post will be dedicated to each subject covered on the Becker-Posner Blog. Anyone who catches any mistake or omission in any post by Becker or Posner is invited to comment to that post. Sufficiently compelling critiques will be elevated to main posts. (By commenting on this blog, you give permission for the maintainer to do so.)

I also invite anyone who is interested in regularly exposing Becker's and Posner's errors to join the team and make this into a group blog. Comment here.

Judge Posner: you asked for it.

From Judge Posner:

There is nothing to prevent the commenter from creating his own "anti-Becker-Posner" blog devoted to correcting our mistakes and omissions!

Well, here goes nothin'... content to follow shortly. Correcting, naturally, the Becker-Posner blog's mistakes and omissions.

(Note: I am not the original commenter who complained about Becker and Posner not responding to comments.)