Society

Today is the 10th anniversary of Hurricane Katrina‘s destructive collision with the Gulf Coast. “The surge and battering waves smashed into levees, which collapsed, causing extensive flooding throughout the New Orleans region. Ultimately, 80 percent of New Orleans and large portions of nearby parishes became flooded, and the floodwaters did not recede for weeks. The National Guard was called in to help with evacuations. Thousands sought refuge in the New Orleans Convention Center and the Superdome, which were overwhelmed. It was one of the largest displacements of a population since the Great Depression, according to the NOAA.” The federal government’s response became highly politicized due to its multiple day response and lack of preparation. What is often overlooked is the response from the private sector. A case in point is Walmart. Though often maligned as nothing more than a greedy corporation, the incentives and preparation of Walmart allowed it to respond quickly and effectively to the Katrina disaster. As we reflect on the lessons learned from that day 10 years ago, we should attempt to learn the right lessons. Economist Steven Horwitz provides some of those below.

There’s an oft-expressed view that getting all those people covered could actually save the health system money. The argument goes something like this: Once people have insurance, they’ll go to the doctor instead of an expensive emergency room. Or: Prevention costs far less than a serious illness down the road.

…This argument for the cost savings from universal health coverage makes some intuitive sense, but it’s wrong. There’s strong evidence from a variety of sources that people who have health insurance spend more on medical care than people who don’t. It also turns out that almost all preventive health care costs more than it saves.

So begins an informative New York Times article by Margot Sanger-Katz. She points out that the actuaries in 2014 “estimated that health spending that year jumped by 5.5 percent, a bigger rise than the country had experienced in five years. That’s actually not a huge increase by historical standards…But it still marks the end of an era of record-low spending growth in the system.”[ref]The author is careful to note, “Those facts don’t mean that giving people health insurance is a waste of money, since those dollars spent may improve their health and financial security. But there are only a few situations in which giving someone more health care will actually end up saving money.” People of good faith can argue over whether the increased costs are worth it.[/ref] There were three main reasons for this increase:

1. Aging of the population and the sickness that comes with age.
2. “[T]he improving economy, which will enable more people to afford medical care — or the time off from work it might take to attend to their health needs.”
3. Obamacare’s expansive coverage.

It’s the third point that Sanger-Katz spends the article explaining:

There’s evidence about the link between insurance status and health spending from many sources. A famous randomized study of health insurance, started in the 1970s by the RAND Corporation, was designed to answer this exact question. It found that the less expensive you made it for people to obtain medical care, the more of it they used. That follows the pattern for nearly every other good in the economy, including food, clothing and electronics. The cheaper they are for people, the more they are likely to buy.

That finding was echoed recently by researchers who conducted another randomized controlled trial — this one of uninsured low-income people in Oregon. Low-income Oregonians who wanted to sign up for the state’s Medicaid program were placed in a lottery. Only some got the insurance, but the researchers tracked both groups. In the first year, they found that the lottery entrants who were given Medicaid spent more on health care than those who remained uninsured.

This is virtually what Nathaniel laid out over two years ago in his comparison of health insurance to a hypothetical food insurance. This is because the situation is, as noted above, basic economics:

One of the reasons for the political popularity of price controls in general is that part of their costs are concealed…Price controls are therefore particularly appealing to those who do not think beyond stage one…Artificially lower prices, created by government order rather than by supply and demand, encourage more use of goods or services, while discouraging the production of those same goods and services. Increased consumption and reduced production means a shortage…Quality deterioration often accompanies reduced production…Quality declines because the incentives to maintaining quality are lessened by price control. Sellers in general maintain the quality of their products or services for fear of losing customers otherwise. But, when price controls create a…shortage-fear of losing customers is no longer a strong incentive.[ref]Thomas Sowell, Applied Economics: Thinking Beyond Stage One, Revised and Enlarged Edition (New York: Basic Books, 2009), 54-55.[/ref]

Last month, I posted a few links on why today’s middle-class salary may actually be better than we often think. Harvard professor and president emeritus of the National Bureau of Economic Research Martin Feldstein adds more food-for-thought on the subject:

…[I]t is frequently said that the average household income has risen only slightly, or not at all, for the past few decades. Some US Census figures seem to support that conclusion. But more accurate government statistics imply that the real incomes of those at the middle of the income distribution have increased about 50% since 1980. And a more appropriate adjustment for changes in the cost of living implies a substantially greater gain.

The US Census Bureau estimates the money income that households receive from all sources and identifies the income level that divides the top and bottom halves of the distribution. This is the median household income. To compare median household incomes over time, the authorities divide these annual dollar values by the consumer price index to create annual real median household incomes. The resulting numbers imply that the cumulative increase from 1984 through 2013 was less than 10%, equivalent to less than 0.3% per year.

Any adult who was alive in the US during these three decades realizes that this number grossly understates the gains of the typical household. One indication that something is wrong with this figure is that the government also estimates that real hourly compensation of employees in the non-farm business sector rose 39% from 1985 to 2015.

The official Census estimate suffers from three important problems. For starters, it fails to recognize the changing composition of the population; the household of today is quite different from the household of 30 years ago. Moreover, the Census Bureau’s estimate of income is too narrow, given that middle-income families have received increasing government transfers while benefiting from lower income-tax rates. Finally, the price index used by the Census Bureau fails to capture the important contributions of new products and product improvements to Americans’ standard of living.

Worth a read.

Stanford’s Josiah Ober has a recent article in Foreign Affairs based on his new Princeton-published book The Rise and Fall of Classical Greece that should interest those concerned about economic matters:

Greek states competed fiercely with one another, and with their imperial neighbors, notably Persia. Wars were frequent and bloody. But in the midst of conflict came new forms of social cooperation and a sustained era of rapid economic growth.

The total population of Greek speakers rose from some 330,000 persons in 1000 BCE to 8-10 million by the fourth century BCE. In the same period, average per capita consumption appears to have roughly doubled across the Greek world, and it probably tripled in Athens, the most advanced and among the most democratic of the city-states. The aggregate growth rate was low compared to high-performing modern states, but the rate was blistering compared to other pre-modern civilizations…Trade in commodities (including slaves), manufactured goods, and luxury goods boomed within the Greek world and between the Greeks and their neighbors. Among the remarkable features of the ancient economy of democratic Athens was the relatively low level of income inequality. Athens was home to many foreign “guest workers” and Athenians employed large numbers of slaves. But even taking slaves and foreigners into account, the distribution of Athenian income was much less unequal than in most premodern societies. Athenian wages for non-skilled laborers were high—comparable to the wages being paid in the most advanced economy of early modern Europe, Holland during its seventeenth century Golden Age…As…economists have long pointed out, there is a strong correlation between relatively low inequality and robust and sustained economic growth. 

The mounting evidence for the remarkably strong performance of the ancient Greek economy helps to explain what is sometimes called the “Greek Miracle”—the cultural explosion of Greek literature, visual and performing arts, and science that laid the foundations for Rome, the Renaissance, and the Enlightenment.

…So what made the impressive growth of the ancient Greek economy possible? The basic answer is good institutions.[ref]This notion of open institutions in ancient Greece reminds me of the work of economists Daron Acemoglu and James Robinson.[/ref] Greek city-states were governed by a range of regimes, but, by the fourth century BCE, the typical Greek city-state was, by world historical standards, very democratic. In Athens, and hundreds of other Greek states, most native adult males were participatory citizens, who set policy in citizen councils and assemblies, judged legal cases as jurors on people’s courts, and were elected or chosen by lot to serve as public officials.

See the full article for a good read.