Economics – General

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How to invest your retirement savings and does it matter?

May 8, 2012 in Economics - General | No comments

Surprisingly (or perhaps not) most Americans have limited liquid financial resources during their retirement years.  From the NBER Bulletin on Aging and Health:

“…for many households “discussions of whether to purchase an annuity or draw down wealth in another fashion are largely moot; the amount of retirement support that their savings will provide is very limited. For example, nearly half (43 percent) of households would not be able to make the $25,000 minimum investment typically required to purchase an annuity even if they liquidated all of their financial assets.”

Source:

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NBA Coaches and Spoiled Children

April 28, 2012 in Books, Economics - General | No comments

In honor of the start of the NBA playoffs…

“After personal fouls, points scored per minute have the largest impact on minutes per game.  The result directly contradicts the rhetoric from coaches.  Again, coaches tell players to focus on something besides scoring.  Players, though, can see that the most effective way to get more playing time is to score more points.  In essence, coaches are like the parents of a spoiled child.  Although the coach may tell the player he will be sitting if he doesn’t look past scoring, the player knows this is an empty threat. If the player just shows the coach he can score, he will be rewarded with more playing time.  In turn, additional playing time will inflate scoring totals, which will increase a player’s future salary.”

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The Downside of Concentrated Health Care Markets

April 23, 2012 in Current Events, Economics - General | No comments

Many recent healthcare policies aim to consolidate the provision of medical services.  For instance, Accountable Care Organizations consolidate providers with the goal of providing seamless, integrated patient care.  Consolidation can increase efficiency and (potentially) drive down prices.  If a market is highly concentrated, however, problems in a single supplier can lead to shortages.  Consider the case of Sandoz in Quebec.

“On March 4 a fire broke out at a Quebec manufacturing facility of the multinational generic drug manufacturer Sandoz. The fire halted production and led to medication shortages across the country….

The resulting shortage has hit hospitals especially hard because the Sandoz plant manufactures the vast majority of injectable medications used in Canada….But why was one factory manufacturing such a large proportion of so many important drugs?…

Hospitals in Ontario purchase most of their drugs through group purchasing organizations (GPOs). The two largest GPOs in Ontario are Medbuy and HealthPRO. Both organizations are governed by their member organizations, which are mainly hospitals and other health care providers. GPOs were established to increase efficiency for member hospitals. Instead of each hospital signing its own contracts with multiple different pharmaceutical companies, GPOs deal with the pharmaceutical companies and the hospitals only have to deal with GPOs.

GPOs drive down prices by buying in bulk. But the downside of negotiating aggressively is that sometimes only one manufacturer remains willing to supply a particular drug at the negotiated price. And what appears to have occurred in Canada is that Sandoz was the only willing manufacturer not just for one important medication, but for dozens.”

There are parallels in the car industry as well.

“The company is a chemical plant in a town called Marl. That explosion there killed two people. It was a tragedy, but did not seem to have global significance….Until car companies realized that Marl is vital to their business….

In [Marl], there’s a plant that makes a chemical…that is used in another material called Nylon-12, which is a material that is used – it’s a very basic material. It’s simply a coating that’s used in some of the critical parts of the vehicle, like fuel lines and brake lines.

It’s the kind of thing where it’s so specialized, that not a lot of companies make the product, but a lot of companies end up using it. The plant is one of very few – less than a handful – that make the chemical in the world.”

Concentrating production in a single company can produce economies of scale.  A lack of diversification of suppliers (whether its suppliers of medications or car parts) make producers vulnerable to disruptions in their global supply chain.

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The Physician Banker

April 18, 2012 in Current Events, Economics - General | No comments

On Monday, the World Bank announced that its new president would be American Jim Yong Kim.

Unlike previous World Bank Presidents, who typically have economics, finance or business backgrounds, Kim is a physician who built his reputation developing public health programs for poor countries.

Not everyone likes the decision.

A physician with a doctorate in anthropology, Kim was criticized by some development professionals concerned that his narrow expertise was wrong for such a diverse institution. The bank offers loans and grants to the poorest nations and pursues an array of projects in better-developed nations as well — from helping fund power plants and other infrastructure to helping countries strengthen their financial markets and government institutions.

Nigeria is unhappy that their candidate, Nigerian Finance Minister Ngozi Okonjo-Iweala, was not chosen.

[Analyst for the African Center for Leadership, Strategy and Development Otive] Igbuzor said in a phone interview that without providing a greater role to emerging economies, the World Bank risked irrelevance — and a threat that in future those economies could form their own development bank.

What should be Kim’s first course of action?  Take a look at the opinions from guest posts at the Guardian and the Financial Times.

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Will the Welfare State Cause the Next Great Depression?

February 29, 2012 in Economics - General | 2 comments

According to Robert Samuelson’s article in the Wilson Quarterly, the answer is yes.

Just as the gold standard amplified and transmitted the effects of the Depression, so the modern welfare state is magnifying the effects of the recession. The United States, Europe, and Japan, together representing about half of the world economy, face similar pressures: aging societies, high government spending, and soaring debt levels. These pressures impose austerity on country after country—just as the gold standard did. The cumulative effect is to make it harder for the world to recover from what started as an ordinary, though severe, recession—just as happened under the gold standard…What has brought the welfare state to grief is not an excess of compassion, but an excess of debt.

Alex Tabarrok would certainly agree.

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American Declaration of Independence: Ideology or Economy?

February 20, 2012 in Economics - General | No comments

On this President’s Day, let’s revisit America’s founding document: the Declaration of Independence.  The Declaration of Independence includes broad ideological statements such as “We hold these truths to be self-evident, that all men are created equal,” and claims that the British have violated “certain unalienable rights.”

But were the real reasons for the American Revolution economic?  According to to Lynd and Waldstreicher, the answer is yes.  Wilson Quarterly reports:

“Scholars tend to view the ideological arguments for independence as building to a critical point and preoccupying the colonists thereafter. That’s inaccurate, Lynd and Waldstreicher write: From the mid-18th century right up to the signing of the Declaration, Americans objected to a myriad of British imperial policies principally on economic grounds. The antitax sentiment of the Boston Tea Party in 1773 is well known, but Americans also protested British attempts to requisition resources during the Seven Years’ War (1756–63), imperial currency manipulation that left the colonies strapped, and prohibitions on trade with the French West Indies, along with many other policies.”

The authors claim to make the strongest case for their course of action, these early Americans subsumed their economic frustrations within a broader argument for sovereignty based on the violation of rights.

In today’s Presidential races, we also see economic arguments couched in ideological terms.  Obama’s argument to raise taxes is delivered under a fairness argument.  President Obama says it’s the ‘height of unfairness‘ that the very wealthy can pay a lower percentage of their income in federal taxes than many in the middle class.

Tea Party candidates that argue for lower taxes do so using the language of “fiscal responsibility, constitutionally limited government, and free market economic policies.”

The take-away is that political rhetoric–both now and in colonial times–often is used to justify fundamentally economic arguments.

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Who are the 1%?

January 30, 2012 in Economics - General, HC Statistics | No comments

Although executives and managers lead the way, in large part, the answer is doctors.  See the chart below.


Sources:

  • John Bakija, Williams College ”Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data.” November 2010, Working Paper.
  • Hat tip: Mother Jones.

 

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Add to Your Skills Toolkit: The Oaxaca Decomposition

January 26, 2012 in Econometrics, Economics - General | No comments

Suppose you look at health care spending in two different regions and observe a significant difference.  You may want to know what the cause of this difference is.  Is it because one region has a mix of people who are sicker; or is because the reason treat patients with a given disease more intensively?

One way to answer this question is to use the Oaxaca decomposition.  This approach was originally formulated by Ronald Oaxaca. This document provides a nice overview of how to use the Oaxaca Decomposition and I apply that framework to the health spending case.

Differences in Health Spending

Assume that there are two regions: Region A and Region B. The spending for the two regions can be modeled using a linear regression framework:

  • YA = βAX + εA
  • YB = βBX + εB

The Y term represents spending and the variable X represents the patient’s health status. Health status could be measured as a vector of factors or as a single indicator (e.g., healthy or sick). The term β describes much an area spending on medical resources to treat a patient with a health status of X. Thus, average difference in spending per person the two regions is:

  • YA – YB = βAXA – βBXB

where XA is the average case mix in the area.

Determinants of Health Spending Differentials

Now the question is whether case mix or spending practices conditional on case mix is the key driver of the differences in spending between regions A and B. One can differentiate these two components using the following Oaxaca Decomposition:

  • YA – YB = ΔXβB + ΔβXA
  • YA – YB = ΔXβA + ΔβXB

In the first equation, the differences in health status (X‘s)are weighted by the coefficients for region B and the differences in the coefficients are weighted by the X’s from region A, whereas in the second, the differences in the X‘s are weighted by the coefficients of from region A and the differences in the coefficients are weighted by the X‘s of from region B.

There are basically three factors that effect health spending in the region: i) differences in health status across regions ii) differences in treatment patterns conditional on health status, and iii) the interaction of health status and conditional treatment effects. One can see this clearly below:

  • YA – YB = ΔXβB + ΔβXB + ΔXΔβ
  • YA – YB = H + T + HT

The equations above show the health status effect (H), the treatment effect (T) and the interaction (HT).

The specification chosen for the Oaxaca decomposition determines whether the interaction effect is placed with the health status effect or the treatment effect.  More precisely:

  • YA – YB = ΔXβB + ΔβXA = H + (HT + T)
  • YA – YB = ΔXβA + ΔβXB = (H+ HT) + T

In effect, the first decomposition specification incorporates the interaction term with the treatment effect whereas the second specification places the interaction term together with the health status effect.

Sources:

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At the AEA

January 7, 2012 in Economics - General | No comments

I am currently attending the American Economic Association (AEA) Annual Meeting in Chicago.  The Presidential Address was given by Bengt Holmstrom (Massachusetts Institute of Technology) on “The Nature of Liquidity Provision: When Ignorance is Bliss.”

Although there are numerous presentations on health care, such as the Health Insurance and Health Care Practice seminar lead by Amy Finkelstein. Other sessions of note include:

  • The 2006 Massachusetts Health Care Reform
  • Children’s Health and Education in China
  • Selection and Moral Hazard in Health Insurance
  • Behavioral Economics and Health
  • The Dynamics of Health and Wealth among the Elderly
  • Medicare and Prescription Drugs
  • What Determines the Performance of US and International Healthcare?

The full schedule is available here.

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The Economist Gives Thumbs Up to Economics Blogs

January 4, 2012 in Blogging, Economics - General | No comments

Although mainly discussing the quality of economics blogs focused on Macroeconomic issues, the Economist endorsed the blog-o-sphere as a productive forum for intellectual debate.  To give it some historical context:

“Previous publishing revolutions, such as the advent of printing, prompted similar concerns about trivialisation and extremism. But whatever you think about the impact of blogging on political, scientific or religious debate, it is hard to argue that the internet has cheapened the global conversation about economics. On the contrary, it has improved it.”

Sure, writing an economics blog improves the quality of intellectual debates, but why do bloggers do it?  Blogging takes time and resources away from other pursuits (e.g., publishing, other work, leisure).  For only a few blogs does the ad revenue earned make up for the time spent working on the site.

One reasons blogging is attractive is that it helps the reputation of the blogger.

“Research (by two blogging economists at the World Bank) suggests that academic papers cited by bloggers are far more likely to be downloaded. Blogging economists are regarded more highly than non-bloggers with the same publishing record. Blogs…have also given voice to once-obscure scholars advancing bold solutions to America’s economic funk and Europe’s self-inflicted crisis.”

If blogging can help promote the intellectual debate of a boring topic like macroeconomics, imagine what it is doing for the much more interesting (in my completely unbiased opinion) debates surrounding health economic issues.

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