June 29, 2011
Links for 2011-06-29
Some quick links to recent analyses of health care costs, oil price shocks, and forecasting commodity prices.
Health care costs.
David Cutler and Dan Ly break down the causes of higher medical costs in the United States.
Jonathan Gruber tries to evaluate the impacts of the Patient Protection and Affordable Care Act.
Oil price shocks.
A summary of my research on oil price shocks appears in the latest NBER Reporter (begins on page 10 of the linked pdf).
I also participated in a roundtable discussion last week on causes and macroeconomic effects of high gas prices hosted by focus.com (click on arrow to hear podcast).
Forecasting commodity prices. To Menzie's discussion of recent research let me add:
Forecasting the Price of Oil by Ron Alquist, Lutz Kilian and Robert Vigfusson
Real-Time Forecasts of the Real Price of Oil by Christiane Baumeister and Lutz Kilian
Investor Flows and the 2008 Boom/Bust in Oil Prices by Ken Singleton
Craig Pirrong comments on the Singleton paper
Posted by James Hamilton at June 29, 2011 11:27 AMdigg this | reddit
I was wondering if you can share (or have shared somewhere) your opinion on the elimination of tax breaks and subsidies for oil companies. My opinion is that if a subsidy is specific to oil, then it is fair game for consideration. However, I seem to recall hearing that (some/all) the subsidies that politicians are considering for removal, are subsidies that companies in other sectors also enjoy. and would continue to enjoy.
Investment in the development of a single oil well can run into the 10's of billions of $'s so that the ROI is average relative to the other sectors. (and that does not account for different levels of risk across different sectors) It seems that current policy recommendations will only reduce ROI and thus further reduce risk taking, ie, we end up with less domestic production.
Posted by: tj at June 29, 2011 12:16 PM
Milton Friedman was sure the increase in medical costs was due to increased demand for more variety of medical services...
here is the video of it...
Posted by: Edward Lambert at June 29, 2011 09:45 PM
Could you post some pro-Dem, pro-union propaganda so Menzie will feel at home?
Posted by: Dave at June 30, 2011 10:01 AM
Thank you. Very useful.
Posted by: Steven Kopits at June 30, 2011 01:40 PM
I think eliminating tax cuts and subsidies would be great if it is accompanied with reduction in regulatory risk and regulation in general.
Posted by: aaron at June 30, 2011 05:34 PM
The big question on healthcare is how much of the demand due to lack of knowledge.
Posted by: aaron at June 30, 2011 05:35 PM
The very first research paper I ever wrote - in junior high - was about medical costs, which were just then beginning to rise dramatically. The main reason then was catch-up; the medical area, outside of doctors, was underpaid and the money coming into the system raised salaries. I think the catch-up factor was over 60% of the effect for several years. The underlying causes were complex: medicine had finally become something more than a black art, not only the anti-biotic revolution but procedures like angiography - my father was an early user of that and other diagnostics - which made care more technical than treating with observation, rest, care and a limited variety of real drugs. This tapped a vast pool of underlying demand: people died of things we can now treat. Remember, basic antibiotics didn't reach masses of US civilians until after WWII.
A lot of the material in the linked paper resonates. We see admin growth - at the hospital and insurer level - because the sector as a whole competes for resources. It's like telephony or cable tv: each sector wants your money and it grows to fit what it can grab, what it is allowed to grab. This hits at a common fallacy, that competition always lowers prices.
Another thing that hit me was the way we treat without sufficient awareness of outcomes. I think the paper describes the effect as very large, on the order of 14%. We do lots of angioplasty but Canada doesn't. Look at the survival rates, at life expectancies and expectancies at various ages. Like any system, we define ourselves by what we do. One of the biggest roles of a consultant is to unravel a company's self-expectations, self-defined habits using benchmarks and other external metrics. It's not easy to do that because we naturally self-define our system, especially when it's as big as our national health. Consultants to companies hear all the time the same kind of denials we hear about health: our food isn't really fast food, our service isn't exactly the same as the other companies in the niche. Self-definition versus actual definition: the customers think your food is fast food and they view your services as functionally equivalent to the others. Stop pretending and maybe you can address your problems. Relatively easy to say to companies, relatively difficult to get them to listen, nearly impossible to get a country to pay attention and then to act.
Posted by: jonathan at July 1, 2011 09:34 AM
Note that 50% of US "health care" spending goes to the most chronically ill 5% of the population (primarily a consequence of the combined effects of advanced age, an unhealthy diet, little or no exercise, tobacco, and excessive alcohol consumption), whereas 50% of the population accounts for just 3% of spending.
This means 5-50% of the population account for 50-97% of all spending for costly medical services, which, of course, follows that this is where the "sick profits" come from.
Total public and private "health care" spending has grown at TWICE the rate of private GDP for 30 years, which is mathematically and financially not sustainable. At the trend rate of differential growth of "health care" and private GDP, "health care" spending will reach 100% of private GDP by mid-century.
Clearly, the growth of "health care" spending will cease and (1) grow at a much slower rate to converge with a sustainable level to private GDP or (2) contract significantly over the next 10-20 years.
With the population aging and multi-decade effects of high-glycemic and high-fat diets and no exercise set to decimate Boomers' health conditions at end of life in the next 10-30 years, we cannot afford the cost of "health care" as it is currently delivered for the overwhelming majority of the population.
If gov't does not ration costly, ineffective medical services, "the market" will by making services so costly in terms of premia, deductibles, and coinsurance that the bottom 80-90% of the population will forgo services.
As an example of the practical lack of affordability of medical insurance in my locality, for a family of four to self-insure via private insurance, it would cost at least $800-$1,000/month for the premium and up to $15,000-$20,000 out of pocket for the deductible and coinsurance payments before the insurer would pay a penny. For much of the country, the premium alone would be as much as rent for middle-income working-class neighborhoods, and total costs, should one be required to pay out of pocket before making claims against the insurance, would be equivalent to a monthly mortgage payment plus property taxes and insurance in an professional middle-class or upper-income neighborhood in the US.
The obvious implication is that the true total costs of "health care" for individuals, workers, businesses, and the gov't are equivalent to a mortgage or rent payment for the vast majority of the population. In effect, we cannot afford medical insurance AND be ill AND afford a place to live.
"Health care" spending at 17-18% of GDP, growing at a doubling time of 9-11 years to the private GDP's doubling time of 23-24 years, and now at an equivalent monthly cost of housing for most households, DOES NOT constitute "wealth", just as was not the case when the nominal, debt-based value of real estate was growing at 50-100%+ of GDP was not real "wealth"; that is, except to bankers who were lending the debt-money, scalping fees, and passing on the growing risk of default to the public.
Therefore, it is imperative that business leaders, economists, politicians, policy makers, medical professionals, and the public face the fact that we cannot afford the medical services we have promised ourselves, especially to the sickest among us who are in their condition primarily because of lifestyle choices made decades before, and who cannot afford the services someone else is paying dearly for.
Thus, the costs of lifestyle choices that contribute primarily to the illnesses for which we are spending most of the 17-18% of GDP should reflect the costs of treating the conditions. But "the market" is encouraging 24/7 via mass-media advertising the consumption of the unhealthy substances and pricing the costs of the unhealthy choices displaced in time by some 20-40 years, concentrating the costs in woeful disproportion to the healthiest individuals either by virtue of their youth or healthy lifestyle choices.
Rationing of costly medical services is happening now, and it will continue whether by necessary gov't mandate or by way of "the market".
Posted by: Bruce at July 2, 2011 08:30 AM
You papers on oil are always interesting but you always fail to account for two factors. First, monetary conditions have a huge effect on oil (and other commodities). The Civil War period saw the introduction of the "greenback" and resulting inflation. This expansion of the money supply naturally flowed into commodities especially oil. That is not to day that the items you mention did not have an impact. This is an omission from not a replacement to your analysis.
During the 1970s you have the most significant monetary change in world history. Nixon, by taking the US off of the gold standard and making the dollar a fiat currency, created for the first time a world monetary system with no anchor to world currencies. Omitting this most significant event from you analysis is a serious oversight.
Then our current situation is totally emersed in the monetary easings of the Federal Reserve not to mention the huge rise in world gold prices.
Monetary conditions must be considered.
The second factor you omit is the impact of government intervention. You do hint at it when you address the Civil War period but only briefly and indirectly. Probably the greatest omission in most economic papers is the detrimental impact of government on events. But this is omission is somewhat understandable because those presenting such papers are significantly fed by the government and we all know what happens when you bite the hand that feeds you.
Posted by: Ricardo at July 2, 2011 09:48 AM