Economics

Hospital Competition, Pricing, and Quality

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AEI’s James Pethokoukis has a brief blog post on a brand new study looking at healthcare costs. He reports:

“We have this large body of evidence covering many, many years that consistently shows if you happen to live in an area with only one hospital you are going to pay a lot more,” [Carnegie Mellon economist Martin] Gaynor said.

That helps explain why a C-Section in one Oregon market costs more than $15,000 and can run for as little as $3,000 in St. Louis, where there’s lots of competition. For years, hospital executives have defended these prices saying it’s about quality, or that they see sicker patients, or lots of folks on Medicare. “That’s just not true,” said co-author Yale economist Zack Cooper.

I mention Pethokoukis’ blog specifically because it provides a number of informative links on the subject, including one from The New York Times appropriately titled “The Experts Were Wrong About the Best Places for Better and Cheaper Health Care.” This is what makes central planning so dangerous: experts are often wrong when it comes to making sweeping societal changes via laws and policies. When the market is allowed to work, as in the case of hospitals, prices drop and quality improves.[ref]For example, recent research suggests that competition between hospitals improves managerial quality and thus hospital performance (e.g. increase in survival rates of emergency heart attacks).[/ref]

Give it a read.

 

Minimum Wage and Low-Skill Employment: The Evidence

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My friend Chris Smith recently authored a piece over at Approaching Justice on how minimum wage opponents get it wrong on economics. As I commented elsewhere, providing nuance to the discussion by pointing out some studies that find no effect on employment or by discussing trade-offs is important. But I think it is quite a stretch to say that minimum wage opponents believe in an “oversimplified economic theory that is not borne out by empirical research.” It’s not just that “many studies” show an increase in unemployment among the least skilled and least educated. That’s what most studies over the last couple decades have shown (as Neumark’s MIT-published book from a few years ago demonstrates as well as his literature reviews) along with plenty of recent research. There is also a difference between low-wage workers and low-income families. Many low-wage workers are not the primary breadwinners and are simply bringing in extra money for middle-class families.

Other studies show that an increased minimum wage causes firms to incrementally move toward automation. Now, this too could be seen as a trade-off: automation and technological progress tend to make processes more efficient and therefore increase productivity (and eventually wages), raising living standards for consumers (which include the poor). Nonetheless, the point is that while unemployment in the short-term may be insignificant, the long-term effects could be much bigger. For example, one study finds that minimum wage hikes lead to lower rates of job growth: about 0.05 percentage points a year. That’s not much in a single year, but it accumulates over time and largely impacts the young and uneducated.

Princeton’s Thomas Leonard has looked at Progressive Era policies and found that the minimum wage was wielded by progressive economists as a form of economic eugenics; a way of ridding the labor force of those considered “unemployable” or “unfit” such as women, immigrants, and blacks. It was a matter of social control rather than social justice, but now it is heralded as the latter.

I was reminded of all this when I read David Neumark’s (mentioned above) new Wall Street Journal article on this very subject. He explains, “Economists have written scores of papers on the topic dating back 100 years, and the vast majority of these studies point to job losses for the least-skilled. They are based on fundamental economic reasoning—that when you raise the price of something, in this case labor, less of it will be demanded, or in this case hired.” He cites some of the same research I mention above. He addresses some of the recent research showing no effect on low-skill employment:

But as Ian Salas of Johns Hopkins, William Wascher and I pointed out in a 2014 paper, there are serious problems with the research designs and control groups of the Dube et al. study. When we let the data determine the appropriate control states, rather than just assuming—as Dube et al. do—that the bordering states are the best controls, it leads to lower teen employment. A new study by David Powell of Rand, taking the same approach but with more elegant solutions to some of the statistical challenges, yields similar results.

Another recent study by Shanshan Liu and Thomas Hyclak of Lehigh University, and Krishna Regmi of Georgia College & State University most directly mimics the Dube et al. approach. But crucially it only uses as control areas parts of states that are classified by the Bureau of Economic Analysis as subject to the same economic shocks as the areas where minimum wages have increased. The resulting estimates point to job loss for the least-skilled workers studied, as do a number of other recent studies that address the Dube et al. criticisms.

Overall, I think all of this is good evidence for a healthy skepticism toward the minimum wage. Future evidence may convince me otherwise (I’ve been known to change my mind), but as of now, I think my position is as empirically grounded as any.

 

The Emerging Consensus on Zoning

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A recent piece in The Washington Post illuminates an often overlooked obstacle to economic mobility:

In recent years, and especially over the last few months, economists and other public policy experts across the political spectrum have come to realize that zoning rules are a major obstacle to affordable housing and economic opportunity for the poor and lower middle class. By artificially restricting new construction, zoning and other similar land-use restrictions greatly increase the price of housing, and prevents the market from adjusting to increasing demand. This emerging consensus is a good sign, though it may be difficult to translate it into effective policy initiatives.

We’ve highlighted zoning here before, especially from more market-oriented economists. Yet, there seems to be a growing bipartisan consensus. Good thing too:

The growing left-wing critique of zoning is particularly significant because the most liberal cities also tend to be ones with the most restrictive zoning laws, and the highest housing costs. In earlier posts on this subject, I have argued that this tendency is probably the result of voters’ ignorance of the effects of zoning, rather than callous indifference to the needs of the poor. Nonetheless, it would be good if more politically influential liberals become aware of the problem, and began advocate measures to curb zoning.

The whole piece is worth reading. Check it out.

Ideological Education and Terrorism

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With the sting of the latest terrorist attacks still lingering, questions regarding radical Islam have once again surfaced, from the legitimate to the Islamophobic. When it comes to support for ISIS, the Economist reports that a Pew study from last spring finds that attitudes toward the terrorist group in 10 Muslim-majority countries were “overwhelmingly negative.”:

It found that 99% of Lebanese and 94% of Jordanians, for instance, held “very unfavourable” views of the group. Even in Saudi Arabia, a country whose Wahhabist creed is seen as a wellspring of jihadism, there is little indulgence: in a face-to-face poll in September sponsored by the Washington Institute for Near East Policy, a think-tank, a scant 4% of Saudi respondents expressed any degree of support for the group.

However, the same article provides this interesting, if not disturbing, insight about those who do support the terrorist organization:

“Teachers and preachers and professors declare support for the bombings, and stay in their jobs, and then we wonder why youths go and join [IS],” laments a Twitter message from Ali al-Jifri, a popular Sufi leader in Abu Dhabi. Muhammad Habash, an exiled Syrian Islamic scholar, argues on the website All4Syria that IS is not a product of some conspiracy but the outcome of mainstream religious teaching: he notes that one of the group’s most effusive Facebook cheerleaders is a former professor at a Saudi university and the daughter of a noted Syrian preacher. Interviewed on SkyNews Arabia, Ibtihal al-Khatib, a Kuwaiti writer, contends that IS did not emerge from a void but from a heritage that Islamic thinkers refuse to re-examine: “We are paying a price for keeping silent for many years, but now that harm comes knocking on our doors we have to accept responsibility.”

Research indicates that many terrorists are both educated and well-off financially. While increased education may slightly decrease support for terrorism, economist and Brookings fellow Madiha Afzal finds that ideological curriculum (specifically in Pakistan) may be responsible for the rising extremist views among the younger population:

My regressions also show that older people have more unfavorable opinions toward the Taliban, relative to younger people; this is concerning and is consistent with the trend toward rising extremist views in Pakistan’s younger population. The problems in Pakistan’s curriculum that began in the 1980s are likely to be at least partly responsible for this trend. Urban respondents seem to have more favorable opinions toward the Taliban than rural respondents; respondents from Punjab and Baluchistan have more favorable opinions toward the Taliban relative to those from Khyber Pakhtunkhwa, which as a province has had a closer and more direct experience with terror.

Afzal’s research finds that across the educational spectrum, an overwhelmingly majority hold unfavorable views of terrorism. But her data provides an important counterpoint to those who simply think education in the abstract is the answer. One can be highly educated, but when that education is ideologically biased, intolerant, and exclusionary, then those indoctrinated are likely to be as well.

 

Inequality: More How Nots

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I shared a post by AEI’s James Pethokoukis last month on how not to reduce inequality. In a recent post, he provides more reasons to be wary of the usual “solutions” provided by the hardcore anti-income inequality crowd. These include:

  • “[C]ompanies that are best able to navigate the globalized, technologically intensive modern are more profitable and pay their workers better than those who can’t.”
  • “A new study on preschool finds that kids who attended Tennessee’s pre-K program were worse off by the end of first grade than kids who didn’t. And a new study on Quebec’s universal childcare program finds that “children’s outcomes have worsened since the program was introduced along a variety of behavioral and health dimensions.”
  • “Economist Alan Krueger, a former chairman of President Obama’s Council of Economic Advisers, cautions that a national $15 an hour minimum wage “is beyond international experience, and could well be counterproductive.””
  • ““What Is the Case for Paid Maternity Leave? by Gordon Dahl, Katrine Løken, Magne Mogstad, and Kari Vea Salvanes  looked at a series of policy reforms in Norway which expanded paid leave from 18 to 35 weeks and found that “the expansions had little effect on a wide variety of outcomes, including children’s school outcomes, parental earnings and participation in the labor market in the short or long run, completed fertility, marriage or divorce.””

In other words, income inequality is in part driven by inequality between companies, pre-K schooling doesn’t help and might actually make kids worse off, minimum wage hikes won’t do the trick, and neither will paid maternity leave.

He ends, “I dunno, maybe there needs to be a bit more humility, more skepticism — particularly from the media— as we hurtle forward toward IKEAmerica.“

World Bank: End Extreme Poverty by 2030

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The World Bank reported last month that for the first time in world history, extreme poverty will likely fall below 10% of the global population this year. This is encouraging and provides strong evidence that the goal of eradicating extreme poverty worldwide by 2030 is achievable. World Bank Group President Jim Yong Kim said,

This is the best story in the world today — these projections show us that we are the first generation in human history that can end extreme poverty…This new forecast of poverty falling into the single digits should give us new momentum and help us focus even more clearly on the most effective strategies to end extreme poverty. It will be extraordinarily hard, especially in a period of slower global growth, volatile financial markets, conflicts, high youth unemployment, and the growing impact of climate change. But it remains within our grasp, as long as our high aspirations are matched by country-led plans that help the still millions of people living in extreme poverty.

Poverty continues to be concentrated in Sub-Saharan Africa and South Asia, yet both have seen reductions in poverty: South Asia dropped from 18.8% in 2012 to 13.5% in 2015 and Sub-Saharan Africa dropped from 42.6% in 2012 to 35.2% in 2015.

This is one of the greatest stories never told.

Shkreli, Price Hikes, and Capitalism (Act 2)

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780 - Smarm Cat

779 - Perfect CapitalistBack in September the Internet was momentarily preoccupied by news that Turing Pharmaceuticals (run by Martin Shkreli) had purchased a company which made the generic drug Daraprim. Darapim “is used to fight toxoplasmosis, an infection to which unborn babies, AIDS patients, and certain cancer patients are vulnerable,” wrote Martin Tillier at NASDAQ.com. Darapim had been sold for less than $15 / pill, but Shkreli raised the price by more than 5,000% to $750 a pill. This–along with the news that VW had been faking emissions tests–made it “a bad week for capitalism.”

Lots of folks used this as an object lesson in why capitalism is bad, and so the torrent of memes began. I’ve collected a few in this post to give you a sample.

778 - Capitalism and Sociopaths

But then the story got a little bit more interesting. As the Daily Banter so elegantly phrased it: Free Market Capitalist Martin Shkreli Gets Screwed By Free Market Capitalism.

You see, Darapim is not protected by any patents because it is such an old drug. If it was protected by patents, then Shkreli could charge whatever he wanted without fear of immediate competition, but that wouldn’t be the free market at work. That would be government regulation at work, since government regulation is the thing that would be preventing competitors from selling the drug, too. So Darapim was only being manufactured by one company (the one that Shrkeli bought), but there was nothing to prevent other companies from entering the market.

When Darapim was priced at $13.50, no one bothered to compete. This is primarily because setting up a new drug manufacturing line is expensive and–although Darapim is a life-saving drug for the folks who need it–not many folks need it. But when Shrkeli hiked the price to $750, it created plenty of room for competitors to offer their own products.

And now one has. San Diego-based Imprimis Pharmaceuticals Inc. has stepped in to offer Darapim from their website for less than $1/pill. Live by the sword, die by the sword. Or, in the words of finance professor Ramon P. DeGennaro, “Nothing protects consumers better than competition.”

Couple of notes for those interested in the economics, by the way. This isn’t just a textbook econ 101 case of market entry. If nobody wanted to compete at $13.50/pill, then any company who entered after Shkreli raised the price to $750 would have offered their competing product at a price lower then $750, but higher than $13.50. If they could have made a profit at less than $13.50, they would likely have done so already. But Imprimis is selling Darapim for less than $1/pill. Why?

The answer is PR. Imprimis will probably lose money on every pill they sell, but–because Darapim is not a product that is going to get popular–they also already know the maximum amount they stand to lose, and they see that as an expenditure for a brilliant marketing campaign. Think of all the goodwill and publicity that Imprimis gets from standing up as the good guy to oppose Shkreli’s creepiness and greed. So this is about competition, but it’s about competition in a dynamic, interactive system with many, many products and services rather than just a simple case of competition in a single market with a single product.

 

Balancing the Evidence on Family Structure

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Economist Steven Horwitz has a recent post that is well-balanced in its approach to the social science on family structure. Responding specifically to W. Bradford Wilcox’s latest National Review piece, Horwitz brings up some excellent points that should be considered:

  • “[T]here are differences among single-parent households formed through: 1) the choice to have and raise a child by oneself; 2) death of a spouse; and 3) divorce. Each of these presents a different set of circumstances and tradeoffs that we might wish to consider when we think about the role of family structure.”
  • “The empirical evidence under discussion has to be understood with an “all else equal” condition. A healthy marriage will indeed produce better outcomes than, say, single motherhood. But there is equally strong social scientific evidence about the harm done to children who are raised in high-conflict households. Those children may well be better off if their parents get divorced and they are raised in two single-parent households with less conflict.”
  • “[T]o say that married parents create “better” outcomes for kids does not mean that other family forms don’t produce “acceptable” outcomes for kids. It’s not as if every child raised by a single mother, whether through divorce, widowhood, or simply not marrying the father, is condemned to poverty or a life of crime. Averages are averages.”
  • “[P]arents matter too…That parents matter too is most obvious with divorce, where leaving a bad marriage may be extremely valuable for mom and/or dad, even if it leads to worse outcomes for the kids. The evidence from Stevenson and Wolfers that no-fault divorce has led to a decline in intimate partner violence as well as suicides of married women makes the importance of this point clear. We can acknowledge that higher divorce rates have not been good for kids, but we can’t do single-entry moral bookkeeping. We have to include the effects of divorce on the married couple, because adults matter too.”

Definitely worth chewing on.

The Capitalist Conscience

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The above graph comes from the World Values Survey Database. As you can see, the vertical line moves from traditional values (religion, ritual, hierarchy, authority) to secular values, while the horizontal line moves from survival values (economic and physical security) to those of self-expression. Social psychologist Jonathan Haidt provides this helpful explanation:

The best way to understand the graph is to consider that nearly all societies used to be agricultural societies. Pre-industrial farming cultures generally have traditional and survival values (they cluster in the bottom left quadrant of the map). Life is hard and unpredictable, so you should do your duty, pray to the gods, and cling to your extended family for protection.

But as countries industrialize and people leave the land and enter factories, wealth rises and values shift.  Interestingly, countries don’t just move diagonally, from the poor quadrant (currently occupied by the Islamic and African nations) to the rich quadrant (anchored by Scandinavia, in the upper right). Rather, there is a two-step process. First, countries move upward, from traditional/survival values to secular/survival values. When money comes from fitting yourself into the routines of factory production, there’s little time or room for religious ritual. People express materialistic values in this quadrant—they want money, not just for security, but for the social prestige it can buy.

…Societies [then] transition to more service-based jobs, which require (and foster) very different skills and values compared to factory jobs. Also, as societies get wealthier, life generally gets safer, not just due to reductions in disease, starvation, and vulnerability to natural disasters, but also due to reductions in political brutalization. People get rights. The net effect of rising security is to transform people’s values in ways that the modern political left should love.

Haidt’s conclusion? “Capitalism changes conscience.”

Strong Families, Prosperous States

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A brand new AEI study looks at the connection between marriage and family structure and the performance of state economies. The researchers found:

  • Higher levels of marriage, and especially higher levels of married-parent families, are strongly associated with more economic growth, more economic mobility, less child poverty, and higher median family income at the state level in the United States.
  • The share of parents in a state who are married is one of the top predictors of the economic outcomes studied in this report. In fact, this family factor is generally a stronger predictor of economic mobility, child poverty, and median family income in the American states than are the educational, racial, and age compositions of the states.
  • The state-level link between marriage and economic growth is stronger for younger adults (ages 25–35) than for older adults (36–59), suggesting that marriage plays a particularly important role in fostering a positive labor market orientation among young men.
  • Violent crime is much less common in states with larger shares of families headed by married parents, even after controlling for a range of socio-demographic factors at the state level.

Important stuff. Check it out.