Gregory Mankiw Fails Economics

N. Gregory Mankiw, distinguished professor of economics and former head of the Council of Economic Advisors to the President (Bush), has just failed economics. In his latest op-ed for the NYT on Obama's preference for public health care, he writes that

"[The President's] economic logic regarding the public option is hard to follow. Consumer choice and honest competition are indeed the foundation of a successful market system, but they are usually achieved without a public provider. We don’t need government-run grocery stores or government-run gas stations to ensure that Americans can buy food and fuel at reasonable prices."

He goes on to point out the problems of having a government entity providing health care:

"Recall a basic lesson of economics: A market participant with a dominant position can influence prices in a way that a small, competitive player cannot. A monopoly — a seller without competitors — can profitably raise the price of its product above the competitive level by reducing the quantity it supplies to the market. Similarly, a monopsony — a buyer without competitors — can reduce the price it pays below the competitive level by reducing the quantity it demands.... To be sure, squeezing suppliers would have unpleasant side effects. Over time, society would end up with fewer doctors and other health care workers. The reduced quantity of services would somehow need to be rationed among competing demands. Such rationing is unlikely to work well."

Here's the thing, Greggy-boy. All those things you're worrying about? - lack of competition, higher costs, poor service - they already exist in the private sector-dominated American health care system. According to The Economist's devastating review of the regime, Americans are getting health care that is both more expensive and of lower quality than most of the rich world. And the system suffers from lack of competition and poor incentives, to boot. Given the current state of things, it's very possible that a government provider will increase competition. Horrors.

Now Greg Mankiw wrote the book I used for my introductory courses to economics, but it doesn't seem to me that he's been able to escape from the first 5 chapters of his textbook and enter the real world. Those little supply and demand curves that line up nicely for the classic "pizza and beer" examples don't always apply in the real world because in the real world there is market failure. Health care is not, as Paul Krugman has pointed out, a bowl of cherries- that is to say, the economic logic explaining why we don't need government to set up our grocery stores is not the same as economic logic explaining why we need government to set up basic health care (and education, and the military, and environmental regulation, and contract laws, and police services, and...). This has been known to the economics and wider health community for decades.

[Intermission: Brad DeLong pokes yet more holes in Mankiw's flawed thinking.]

Mankiw retorts that "Why! If a public plan was such a good idea, there would be nothing stopping someone from setting it up right now!" You mean, aside from powerful vested interests, an army of lobbyists and a convoluted behemoth of a legislative system? A better question might be: why has the private health sector failed the American people so badly?

I'll give you a hint: the answer is not found in the first 5 chapters of your introductory economics textbook.

Monday Morning Round-Up

- Bernie Madoff has been sentenced to jail until he is 221 years old.

- Willem Buiter shares his thoughts on the backroom rubber-hose-beatings that were carried out by the US and UK financial regulatory authorities to force the mega-mergers of Bank of America & Merrill Lynch and Lloyds TSB & HBOS, respectively, last autumn. Even to someone who barely understands these things (me), Buiter's suggestion of a rapid resolution mechanism for dealing with the insolvency of highly-leveraged banks seems like a really, really good idea.

- Incentives, incentives, incentives. They matter. Both when it comes to environmentally-friendly technology and also for health care (a good discussion on incentives the whole way through, but check out the bit on how Sweden dealt with hospital wait lines, at the end).

Financial Literacy Update

A few months back I laid out some arguments for why improving people's basic financial literacy is not only good for individuals, but for society as a whole. This morning, Canada announced the creation of a national task force on financial literacy that is based upon that very assumption. If this task force can make even a dent in our collective financial ignorance, it is something to be happy about.

The Canadians are by no means trailblazers on this front: Australia commissioned a report published in 2004 that, among other things, led to the creation of a website called Understanding Money. This is good stuff, and there may be yet more examples out there.

The real challenge is getting the people who most need the advice to actually read these things. This is similar to the problem facing national health agencies who produce those little charts explaining how many portions of fruits and vegetables, etc, you should be consuming per day: positive selection bias. The people who put the charts on their fridge are those who are already consciencious of their health. Or mothers. How they plan on approaching this issue remains to be seen, but this is a welcome development all the same.

Does anyone know of similar websites, government or otherwise, that provide this kind of information? Throw 'em at us.

Hey Big Spender

The FT has produced this little set of charts illustrating how government spending in the United Kingdom is nearing 50% of GDP. In fact, the National Health Service now ranks behind only Wall-Mart and the People's Liberation Army of China for largest employer in the world. Wow.

Note that every bar on the first graph has been moving in the same direction since 2002-03. (Scroll left/right for more graphs).

[via Free Exchange]

Iran

These are two must-reads on the turmoil in Iran:

1) Paul Wells, who points out that Khameini has put the legitimacy of the Islamic Republic on the line.

Choices force more choices, and events force events. This business did not start out as a people’s revolt. Everyone knows Mir Hossein Mousavi had no plan to to question the regime. He had every intention of serving it faithfully, perhaps a tad less belligerently than Ahmadinejad, but essentially without making any real waves. Everyone can hear that this resistance is one that chants allahu akbar every night; if the regime’s actions had remained even minimally compatible with their faith they would never have questioned the regime. Not like this. Not in massive crowds in every large city, crowds that do not stay away for long even when the regime’s last loyal thugs beat them and tear-gas them and shoot them dead where they stand, dozens so far and more to come.

2) Roger Cohen's latest NYT piece out of Tehran, which looks at the internal divisions in Iran. He concludes:

Whatever happens now, all is changed utterly in Iran. Opacity, a force of the Islamic Republic, has yielded to a riveting transparency in which one side confronts another. The online youth of Iran will not be reconciled to a regime that touts global “ethics” and “justice” while trampling on them at home....I bow my head to the youth of Iran, the youth that is open-eyed, bold and far stronger and more numerous than the near-beardless vigilantes.

A Busy Week

It has been a very busy week for news, even if it hasn't been busy on the blog. A quick review:

- Protests in Iran: This is what can happen when you insult a large portion of your population with blatant electoral fraud. You might not have thought a couple of weeks ago that Iran was about to provide a lesson in Civil Society 101 for the rest of the world, but this week's protests have been impressive. You need more than a little courage to take to the streets in largely non-violent protests facing riot police, tear gas and gunfire.
(UPDATE: The BBC has some shocking raw footage of just how ugly this thing is getting)

- The white paper on US financial regulatory reform was released this week. I have no intention of actually reading the thing, but Felix Salmon does point to an interesting tidbit: the policy wonks have inserted legislation forcing opt-out, rather than opt-in, retirement plans for corporate employees. This is a nod to the lessons of behavioural economics, which have shown that people will resort to the default, even on important decisions like saving for their retirement. If successful, this legislation will make retirement plans the default option, and Americans are therefore more likely to save. Score one point for the nanny state!

- The BRIC Summit. Brazil, Russia, India and China had their inaugural summit this week, and most reviews suggest it mainly produced rhetoric and little of substance (just for fun, let's compare this to the G8 in early July, shall we?). Some of the rhetoric on the US dollar did seem to have an impact, however. President Hu's 4-point plan was pretty high-level, but certainly hit on the main issues.
It remains to be seen if this summit is a one-off deal or if it will evolve into something with teeth. The first G-somethings were born out of shared economic interest in the 1970s; it's less clear to me that the BRICs have enough similarities (aside from export-led growth) to produce anything more than statements and photo-ops. But I'm holding off judgment for now.

Stat of the day: how low can you go?

The British House of Commons released over one million heavily redacted pages this morning outlining MPs expenses claims. A highlight:

Jeremy Hunt, the Shadow Culture Secretary, submitted a phone bill for 1p in October 2005.

You read that correctly: 1p.

Hooray for Iranian Democracy...oh, wait

According to the Interior Minister, Iranian President Mahmoud Ahmadinejad has been reelected by a landslide 62% to 34% over rival Mir Hossein Mousavi, confirmed by the Supreme Leader this morning.

This result is really hard to believe.

According to Cliff Kupchan of the Eurasia Group, Ahmadinejad's rural political base totals somewhere in the range of 10-15 million people. And while Mousavi's Obama-like appeal to the apathetic youth vote has been widely heralded in the international press (with the expectation of a higher voter turnout), less has been said of Ahmadinejad's inspiring campaign. The very heated, very visible nature of this election boosted participation across the political spectrum, including amongst the incumbent's supporters. So the fact that his share expanded in yesterday's polls is unsurprising.

But with a reported turnout over 85% of eligible voters, around 50 million, Ahmadinejad simply cannot secure 60% of the vote without a massive political shift or widespread fraud. The numbers just don't add up. Iran's large, sophisticated middle class was polling overwhelmingly in favor of Mousavi, and when you add a presumably higher youth turnout, getting to 60% seems like an improbable feat in a referendum on the incumbent's rule.

Alshin Molavi of the New America Foundation makes an interesting point. He says that the Supreme Leader's hand is, naturally, all over the results, but not because he necessarily disapproved of Mousavi. Reformists are elected quite often in Iran, and no one takes office without the Supreme Leader's implicit approval. Rather, he thinks Khamenei looked over Mousavi's shoulder and feared what he saw: young educated men, an internationally-minded middle-class, women, business. It was less the candidate, more the door into Iranian politics he seemed to be opening that threatened Khamenei, a door that this morning looks to have been slammed shut.

Economists Do It With Models

Jokes about economics & economists

Friday Links

- Wired has a fascinating article on the attempt by one man to create an alternative currency using the internet: E-Gold. Although E-Gold has failed (due largely to its attracting the attention of unsavoury types, and subsequently the FBI), this story raises all sorts of interesting questions about what money actually is, and whether national/supranational bodies are going to be able to maintain their control over the currency we use in day-to-day transactions.

- Nouriel Roubini analyzes Latvia's economic troubles, drawing parallels with Argentina's default in 2001. He writes: "At this point, a currency and financial crisis is pretty much unavoidable." Who cares? you might ask. But there are also strong parallels with Thailand's situation leading into the East Asian financial crisis which began in 1997. Only this time it is Europe's fragile economies that are on the line.

- Raging against bad statistics: Buiter on the costs of smoking and Ben Goldacre on the costs of illegal downloading.

A Nifty Map

Le Monde has produced this little interactive map showing the outcomes of the recent European Parliamentary elections (warning: c'est en francais).

Electoral participation ranged from a dismal 19.6% in Slovakia to a whopping 91% in Belgium. The average, however, was closer 40%. For analysis, see The Economist's article here.

America's Next Top Model, part II

Don't you just love a healthy debate? The New York Times Economix blog questions whether the Canadian banking system is really all it's cracked up to be. At almost the exact same time, Robert Zoellick, president of the World Bank, is praising the Canadian system for its financing and suggesting that any country would happily trade spots with their economy (but not their weather!).

For more detail, see our previous post on this topic.

The Fall of the EMH, continued

The FT reviews a new book by Justin Fox called The Myth of The Rational Market. The book tells of how the Efficient Markets Hypothesis - the theory which underpinned many dominant financial models in recent years - travelled from hypothesis to fact to myth. This is a topic our blog reviewed (in considerably less detail) a couple of months back [with addendum].

Friday fun: Not about Gordon Brown

Lest we become little more than a Labour gossip rag, a much-needed break from British politics.

Have you ever wondered what German football, 1970's fashion, fat sideburns and Brazilian samba have in common (I know, who hasn't)? Well, you can sleep soundly tonight boys and girls...



I love Germany.

'This changes everything'

The angel of death came for Gordon Brown this evening in the form of James Purnell, whose shock resignation and public call for the PM to stand down has shaken the government to its core.

It is hard to see how Brown lasts through the weekend, as the Labour backbenches are sure to seize the opportunity afforded by Purnell's resignation. Everyone has been been waiting for the big move on Brown, and Purnell has delivered.

Brown has proven his constitution, and he will no doubt fight to salvage his premiership, but the sirens will be piercing tomorrow, and he will go by Sunday...maybe.

Brussels movers and shakers

The FT identifies 30 'Eurostars' who wield and influence power in Brussels.

Obama's Speech in Cairo

Video and text of US President Barack Obama's speech in Cairo, Egypt.

The 'stalking herd' of the 'Hotmail Conspiracy'

The Times of London partially lifts the veil of a very modern revolt...

while The Guardian has the full details of the 'Hotmail Conspiracy'...

but if The Times is right, look no further than Hazel Blears, Jacqui Smith, Caroline Flint and the 'Pugin Room Plot'...

so much intrigue, such creative plot names.

The Fall of Gordon Brown

The drama surrounding Britain's Labour Party and the political fate of Prime Minister Gordon Brown is growing by the day.

Following the surprise resignation of Communities Secretary Hazel Blears, The Guardian reports that Labour backbenchers have devised a timetable for a leadership challenge and are mulling a formal letter asking the PM to step down. The plan envisions a new PM installed by the first week of July. It is widely assumed that another high-profile, 'unplanned' resignation would all but seal Brown's fate. In fact, The Guardian is reporting that there are rumours of mass resignation this evening, what would effectively amount to a coup.

The past week has been a case study in how quickly a government can lose control, particularly if it fails to stay on message. It was known that Brown was planning a major cabinet reshuffle following the European elections, a last-ditch attempt of sorts to redefine his premiership and close Labour ranks around 10 Downing Street. But then came the leaks: the PM wants Blears to stand down, Blears doesn't want to stand down, Darling will go, Ed Balls to be new Chancellor, Darling will not accept a move to Home Office, Mandelson to Foreign Office, and on and on and on. The government quickly lost control of the cabinet reshuffle and, more importantly, the media cycle. It went from planning a carefully orchestrated show of leadership and fight to seemingly helpless in less than 48 hours. The frenzied speculation has only stoked the fires burning on the Labour backbench. The last straw appears to be the leak of Jacqui Smith's resignation, a development that led The Guardian to report that "the government was spinning out of control."

For a man who pledged "less spin, more substance" upon taking office, Brown must be yearning for the dark arts of Labour governments past...

I have found The Guardian's reporting on Labour's implosion unrivaled, and expect it to define the coverage of Brown's seemingly inevitable departure. If you are as captivated as I am by the events unfolding in Whitehall, check out the Politics Blog with Deborah Summers, a real-time account of the rumours and reporting of "Gordon Brown's Leadership Crisis (Live!)."

'...the wheels falling off the government'

The Guardian looks at a Labour government losing control, and wonders whether a leadership challenge to Gordon Brown is imminent.