THANKS FOR THE OASIS

In a few weeks I'll be flying to Las Vegas for Mike Konczal's bachelor party. It will be my 3rd trip to that man-made colossus in the middle of the desert. I've also been to Phoenix four or five times, which is something one endures in furtherance of being a Cardinals fan. I've also been through most of New Mexico, Utah, Colorado, and southern California. Generally I like the Southwest immensely, although I must admit that Vegas is more depressing than fun in my opinion. What never escapes me whenever I visit these places, though, is the stark reality that none of it should be there. It's a desert.

The cities of that region, especially Las Vegas and Phoenix, are growing exponentially. In 1900, Las Vegas didn't have a single permanent structure. It was a tent mining camp of 50 souls. In 1930 it was a barren railroad depot of 5,100. In 1960, well into the development of its glitzy casino and entertainment image, it held 64,000 people. In 2010 the Las Vegas metro area (including Henderson and North Las Vegas) checked in at 2,100,000 permanent residents. Phoenix was slightly bigger historically. In 1950 it had a population of 106,000. In 2010, Phoenix and its massive, sprawling, contiguous suburbs (Mesa, Chandler, Tempe, Glendale, Gilbert, etc.) totaled 4,200,000 residents. This represents an increase of 900,000 in just ten years following the 2000 Census. And I won't even get into Los Angeles, the Imperial Valley, and southern California.

There is one and only one reason that this kind of unprecedented growth has been possible:

That isn't an oversimplification; no Hoover Dam, no Phoenix. No Las Vegas. No Los Angeles. Vegas and Phoenix barely existed in 1900 because they're in the middle of a goddamn desert. There is no water and there were no power resources. The dam brought the electricity and fresh water that allowed the growth of infrastructure, industry, and population in places that could not otherwise have any of it. Now, for a million bonus points, who built the Hoover Dam?

A) The Free Market
B) The Federal Government
C) State and Local Government

Congratulations, B is correct!

The passage of the legislation to build it took many years and was vociferously opposed by private utilities in Arizona and California (Nevada basically had no population to speak of until the Dam) because they feared competition from government electricity. They used allies in the media, particularly Hearst and Chandler, to label the project as socialism. Eventually Republicans in California realized that the overall economic growth of the state would be more beneficial in the long run than parochial concerns about the profits of Southern California Edison, and they threw support behind the bill that Calvin Coolidge eventually signed. In the long run I'd say that thousand-percent growth of population and industry in the Southwest has made local utilities more money than they lost to Socialist Electricity.

It casts the reactionary, ultraconservative politics of Arizona, Orange County, Utah, and Nevada in high relief to point out that the coyote population would outnumber the humans in the region if not for Big Government doing what private industry would not – elevate national, long term interests over short term profit. It also underscores how dramatically politics have changed over time, although much does remain the same. For example, Congress is no longer willing to elevate long term economic growth – say, the kind private industry might experience if the government took on the burden of providing health care for the population – over the limited, shortsighted interests of a small, powerful lobby.

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88 Responses to “THANKS FOR THE OASIS”

  1. Caleb Says:

    @blahedo

    Very well put. You assume correctly that I do not live in the Southwest. I never plan to. You also correctly assert that anti-socialists who assume the positive value of those cities face the dilemma you describe. I do not pretend to speak for them. I would be hard pressed to come up with an argument that deals with that inconsistency.

    However, I would assert that enjoying the benefits of a socialist (small “s”), politically mandated program while arguing against them in general (and even that program specifically) is not hypocritical. There are several reasons. First, many public programs are de facto monopolies. I can’t drive on private highways, because all the highways are public. I can’t build and operate my own private highways because 1) it’s probably illegal and 2) the price of using public roads (zero, in most cases) would undercut my price. Same with first class mail, currency, water, sewer, public services, ect. I can’t choose the alternative because there isn’t one. Second, the effects of large social programs are so vast, it is near impossible to escape them. I could live off the land by myself in a cabin in Idaho, and I would still benefit directly and indirectly from many of the myriad of effects that pervade the entire nation. Third, opposition to a political system that imposes a centrally controlled distribution of resources does not equate opposition to programs of socialized costs and benefits. As I said before, I freely admit that the socialist model may be the most efficient model for providing some goods in some situations. What I oppose is the assumption that this is always the case, and the elimination of any competing models. I would be fine with the USPS if I could opt out and use a private carrier instead if I wanted to. But the law gives the USPS a monopoly, so I can’t. It could be that current USPS structure is actually the best model for distributing the mail. But we don’t know that, because we haven’t tried anything else.

    @eau

    Actually, I would gladly have that conversation. I would tentatively assert that the formation of the US was overall a positive action. Having a codified constitution with explicit institutionalized legal rights and the balance of powers has done great things for both our society and the world. However, I acknowledge there are many events that weigh heavily on the other side of the scale. The treatment of the native peoples, imported Africans, each other during the Civil War and other people during our other wars are chief among them.

    I reject your implicit assertion that I assume the value of the US, or any human institution for that matter. We must examine all we do, and assume nothing.

    @Xynzee

    There is a difference between a “public good” and a good simply provided by the “public.” A public good is non-rival and non-excludable, while a good provided by the “public” is simply anything supplied by the government. I’m not going to walk you through it, please read this: http://en.wikipedia.org/wiki/Public_good
    Bridges, roads, and dams, are both rival and exclusive. The internet is relatively non-rival, but still exclusive. None fit the definition of a public good.

    The models I put forward were merely analogies to illustrate a point. They are thought problems, not actual assertions. Feel free to challenge the assumptions I made. But they have no bearing on anything outside the thought problem.

    The investment thought problem was simply illustrating the concept of opportunity cost. With any given course of action; the costs of taking it are not only the direct costs. The costs also include the benefits foregone by not taking the next-best alternative. If the benefits foregone from the action you didn’t take are higher than the net benefits from the one you did, then you actually lost value.

    The car thought problem was actually an analogy to government-provided services, illustrating the principle-agent problem. You are absolutely right, I would have been better off if I bought the car myself or if I chose more carefully in an agent. This illustrates my point perfectly. I have to spend the $200k (taxes) to buy the car (some social program). I have to use the agent (government) to purchase the car. (I’m legally not allowed to do it myself, or pay anyone else to do it.) I have very little choice in what car I get (the agent chooses for me). The agent then pockets the difference. (Or, to make it more parallel with how things actually work: the agent pays the Honda dealer $200k for the car, then the Honda dealer uses some of the money to make sure the agent gets re-elected to his job.)

    In examining the value of government run programs, one of three things must be true: 1) they are always net value positive; 2) they are always net value negative; or 3) they are sometimes positive, sometimes negative, with an unknown distribution between the two. I pointed out the absurdity of 1). I then conceded that 2) is unlikely as well. So that leaves us 3). David then asked how I would tell the difference between the two. Implicit in his question was the premise that it is desirable to try to do so, and then use that determination to facilitate only net positive social programs. I answered his question from that perspective, but I do not actually concede that premise.

    I actually agree with you 100% about economics. Your argument, again, proves my point. Economics is not a hard science, and massive scale interventions in the economy have unpredictable and chaotic results. If assertion 3) is correct, but economics is as uncertain as you say, then we in general and politicians in particular have no way of telling what overall effect any intervention in the economy will have. This line of reasoning undermines the entire argument for political intervention in the economy. After all, the entire concept of centrally controlled socialized spending rests on the premise that those persons in control of the entire process have the knowledge and ability to predict and control the effects of those programs. If economics as a tool fails to give our political leaders the knowledge necessary to intelligently and effectively guide the effects of government programs, then what does guide and motivate our leaders to make the decisions they do? I’ll let you fill in the blank.

    @ Robert
    Neither or both, depending on how you look at it. The problem is that political ideology does not fit on the one-dimensional right-left scale so popularized in mainstream thinking. A lot of philosophical errors occur because people try to fit complex ideological factors on this highly simplistic scale.

    The phenomenon of distributed costs and concentrated benefits is not the prodigy of any one ideology. It is, in a word, power. The desire for power is a universal human trait.

  2. Doug M. Says:

    Minor correction on the Ogallala Aquifer: the Aquifer itself is just a few million years old, not "as old as the dinosaurs". And most of the water in it is much younger — roughly as old as the last Ice Age.

    Of course, that's not /much/ better. ~150-200 years to drain something that took several thousand years to fill: still bad.

    Doug M.

  3. David Says:

    David: "David then asked how I would tell the difference between the two. Implicit in his question was the premise that it is desirable to try to do so, and then use that determination to facilitate only net positive social programs. I answered his question from that perspective, but I do not actually concede that premise."

    I got the idea that you opposed projects like the Hoover Dam because it was a waste of resources, money, men, etc. But you say here that's not the case. Why for instance would you support a government at all unless you think it, in some form, has benefits outweighing its costs?

  4. David Says:

    Oops, that quote was from Caleb.

  5. Caleb Says:

    You wouldn’t. Like I said in the previous post, I don’t think that we should assume the value of any existing human institution. My argument points out the difference between ex-ante and ex-post evaluation. Our current system, at least theoretically, uses ex-ante evaluations. That is, it uses predetermined methods of system creation (the “democratic process,” technocratic engineering, institutional rule making, back-room deals, ect.) to hash out the supposedly optimal solution for any given problem. It then implements this solution, assuming that the validity of the creation process equals validity of result. The problem is, even if the creation process is at its most ideal (which, as I’ve hinted at, is a very dubious proposition), the logical connection between the effectiveness of system creation and the effectiveness of that system in addressing the problem is simply not there. Even if the people who come up with a program are the smartest and most incorruptible persons imaginable, their solution to the problem could be disastrous. Very rarely do politically created programs come under scrutiny once created. When they do, the process of review is usually politicized and rendered toothless by now-vested interests who want to protect their benefits and others who want to get in on the act. The program continues whether or not it actually effectively or efficiently solves the problem.

    Ex-post evaluation emphasizes the comparison of actual rather than expected results. The idea is to implement, rather that just propose, as many solutions to a problem as possible. You then want a mechanism for fairly weighing the results, and eliminating the inefficient and ineffective solutions. This mechanism would, by definition, have to exist independent of any one person’s or groups of people’s control. (Or else, they could make the same mistakes as the ex-ante evaluators.) This is where I challenge the premise that any one central perspective or authority should attempt to evaluate social programs and then dictate their determination on others. After all, cost and benefit valuations are inherently subjective.

  6. David Says:

    So you are an anarchist?

  7. Caleb Says:

    Not at this point. I think the existence of some form of a hierarchical legal system continues to meet ex-post justification standards. Observations of a few regions in sub-Saharan Africa seem to demonstrate that. However, Africa is not the North America or Europe. There are social and cultural differences that may account for systemic failure in one region and not another. I would be interested in seeing the results of an attempt at a truly independent, voluntary anarchist society somewhere in the western world. (One could argue that the aftermath of Hurricane Katrina was an example of anarchy, but there are still differences. For one, lack of government was imposed on the people of New Orleans, they did not engage in it voluntarily.) However, such an experiment is verboten. This puzzles me. Anarchists insist that a voluntary anarchist society would succeed. Everyone else thinks it would fail. Why don’t we let them put their (proverbial) money where their mouths are, rather than engaging in sophomoric, speculative debate? If it doesn’t work, fine. We know what not to do. If it does, maybe we could learn a thing or two. Take that same idea, and apply it to socialism, communism, strict democracy, authoritarianism, ect. We need to keep experimenting, gathering data, innovating, and finding new methods of arranging human society. I don’t buy that there is one ideal, best-possible form of political society. Humans are too diverse and too dynamic for that.

  8. bb in GA Says:

    For those who were hatin' on the ATL (DRY! yuppie scum)

    A 3 judge panel of the 11th circuit handed GA a victory in the "water war"

    http://www.ajc.com/news/atlanta/1111th-circuit-hands-georgia-991143.html

    'Perhaps the 11th Circuit panel's most important finding was that when Congress authorized the construction of Buford Dam in the 1940s, it intended Lake Lanier to be a source of water supply for the Atlanta area. Magnuson had determined that Congress built Lake Lanier for only three primary purposes: hydropower generation, navigation and flood control.

    But the 11th Circuit noted that before Buford Dam was built, the Chattahoochee River supplied almost all of Atlanta's water. The building of the dam posed a threat to the city if the corps intended to shut off water flow from the river for extended periods of time, the court said.

    "Congress very clearly did not intend the dam to harm the city's water supply," the court said. The language of the Rivers and Harbors Act, which authorized the dam's construction, "clearly indicates that water supply was an authorized purpose of the Buford Project."'

    That was my point in the early comment for which I was tweaked about eating the fixin's of the free pizza.

    I don't know if this will stand up in the long run, but I have 3 judges agreeing with me:

    The water was there before the damn dam was and it AIN'T Federal water. The Feds do have a proper interest to make sure that GA doesn't use more than its share so a reasonable amount is available for AL and FL, but inside GA our share is ours to carve up as we see fit.

    It has nothing to do whether this massive project is/is not socialism and whether or not I like it (on that basis.)

    //bb

  9. Xynzee Says:

    @Caleb: it sounds like you assume that it's about you, only you and that you are an island and that we are here to serve you and only you. That's ultimately the point of libertarianism. Hate to break it to you, but we are in a society. That said one point of Govt is to deliver the most good to the most people. Therefore while all of us may want a Ferrari, only few could get one. How do we distribute said Ferrari? Lottery? So if you get a Ferrari you're happy, if you don't you cry foul. Correct? Therefore it's Hondas for everyone (noted that you apparently don't believe in American products). If you're not completely happy with said Honda you can still buy your Ferrari, but that doesn't abnegate your participation in society. Just as, though I do not have kids a portion of my taxes still goes to education. So buy yourself an island if you don't like it or deal.

    So you assert that it's only Govt intervention in the Market that causes distortions. Let me ask something that has been a hot topic as of late making health care affordable and accessible to all. Why isn't it? What is happening in the healthcare market that puts it out of reach for the average consumer? Was it always this way? If we look closely, there's actually an agency that distorts the healthcare market. Healthcare has a huge pool of money that is tappable ie the insurance funds. This pool of money forces prices up, as doctors and the pharmaceuticals try to get piece of it.

    What would be the effect if healthfunds were removed from the equation? Without this huge pool of money would not prices be forced downwards? Drs would only be able to charge what the Market will bear. Effects on labour markets would be significant. Many people are in roles that they have out grown mainly for the healthfund. Thereby reducing productivity, and putting barriers to new and upwardly moving enterents to the labour market. Real wages would go up as a majority of wage packages have an insurance component. Operating and management costs would go down for the organisation due to the paperwork of managing the accountancy and tax structures.

    As healthcare is no longer the awesome money spinner it is, only those who really want to be in medicine will enter the field. Making the education for which less competitive and thereby reducing educational costs. This forces will correct themselves downwards to a new equilibrium, however, this new equilibrium will now be affordable for all.

    So it appears that it not just the Govt that distorts the Market, but the "free" Market also works to distort itself.

  10. Caleb Says:

    You would do well to read and understand what libertarian arguments actually are. It is intellectually dishonest and poor practice to rely on strawmen, misrepresentations, and hyperbole when characterizing your intellectual opponents. This means going to the source of the intellectual well, not simply gaining your “knowledge” of opposing arguments from derivative sources.

    That said, where in my arguments do you perceive my desire to have everyone serve my interests? I have framed all my reasoning in terms of maximizing social utility. My argument is that maximizing individual choice tends to be the optimal method of increasing social utility. You seem to be saying that any focus on individual choice is per se anti-social and damages overall welfare. This does not follow. You can’t conflate premise with conclusion.

    You say that one role of government is to provide the most good to the most people. Let’s say I grant that premise. Good by whose definition? Value and utility are largely subjective. What is great for one person is horrible for another. The more people you subject to the same definition of “good,” the more likely it is you will have people whose own definitions fall outside of yours. This is part of my argument: the broader and more generalized the program; the overall benefit versus cost accrues on average to fewer people. The role of government may be to provide the most good to the most people. But what if the majority of govenment actions are, in actuality, counter-productive to that goal?

    You continue to miss the point of my car analogy. The “me” in that analogy is the people as a whole, while the “agent” is the government. All I was saying there is that even government programs that give everyone some benefit need to be subject to ex-post efficiency analysis. Let me change it: let’s say there is a government program that supplies lunch to every person in America. Participation is mandatory, and all funds necessary come from fees. If that programs can supply a decent quality lunch for under $1 (total cost, which should equal price) to every person, that’s great! It would seem that government mandate and economy of scale makes that supply structure more efficient than the relatively laize-faire system we have now. If however, the lunch costs $100, or even $10, and is your typical fruit-and-sandwich fare that you could make from home, we have a problem. That program *is not* maximizing social utility, because most people can supply their own lunch of similar quality for much cheaper. Now, this conclusion still holds if the source of the funds shifts to some complex tax scheme. It still holds if the tax funds come entirely from the wealthy 1%. It still holds if the up-front price for the lunch is $0. “There is no such thing as a free lunch,” as the saying goes. If some people, even a majority of people, benefit from some resource distribution scheme; it does not mean that social utility is maximized.

    The “Honda’s for everyone, Ferraris if you want to pay” model is indeed what we have in this nation for education. Although, it’s more like: “anything from a Yugo to a Lexus for everyone, depending on where you live, for the total cost of a Ferrari.” If we wonder about public school results, however, we are told that there isn’t enough money in the system. That is absurd. We are pouring a huge amount of money into the public school systems. We are getting abysmal results for those resources. The problem isn’t funding. Something is broken.

    A big problem in healthcare costs is, as you pointed out, what’s called “third party payer” structures. Essentially, the person seeking the care is not the one (directly, at least) paying for it. Since they aren’t paying for it, why should they shop around for the best care at the lowest price? They will just go to the best place that their plan will cover. A rising tide raises all boats. You may want to look into the history of third party payer systems. A major one in the US, the employer-backed insurance pool, came about when FDR froze wages. Since they couldn’t offer their employees higher pay, they offered them other benefits, including full-coverage heath insurance. The system has been with us ever since. File that one under “unintended consequences of well-meaning laws.”

    So yes, the free market fails and creates distortions. So does the government. Neither is perfect, or even close. The question is: which, on average, is worse?

  11. David Says:

    Caleb states "the free market fails and creates distortions. So does the government. Neither is perfect, or even close. The question is: which, on average, is worse?"

    Each market has differences that makes a single answer to this question meaningless. Also, since you state that "cost and benefit valuations are inherently subjective" then I'm not sure how you can answer the question you pose.

    You earlier state in regards to the cost of health care that "A big problem in healthcare costs is, as you pointed out, what's called "third party payer" structures." This is a problem, but how do you propose to deal with it? A third party pays because people have insurance, and people have insurance because costs are large and unpredictable for them as individuals and hopefully rare.

  12. Caleb Says:

    David: I wasn't speaking about an overall comparison. Quite the contrary. I was speaking universally about a comparison that needs to be made for every market and its government counterpart. As I hinted at before, the type of good supplied changes the outcome dramatically. Markets tend to chronically under-supply public (non-rival and non-excludable) goods. Government action is a plausible alternative. Meanwhile, government tends to do nothing more than promote rent-seeking and destructive incentives when providing private (rival and excludable) goods. Markets, despite their failures, are probably better here. My point is that just because government (or markets) are efficient at supplying one type of good does not mean that government (or markets) will be any good at supplying another. However, the types of efficiencies relative to the types of goods are largely unknown. Worse, they change as society changes and advances technologically. Therefore, constant, measurable and verifiable experimentation is needed to revel this information. What I oppose (and which the original post exemplifies) is a declaration of success based on a project so large that the results are unfalsifiable, based on a politically driven resource distribution system which has gone largely untested for the past century.

    As to how you determine and compare individual subjective valuations for the purpose of maximizing overall utility; there are several ways. First, you can get people to tell you what their values are, and then set up a system that approximates an average. Voting is one way of doing this. The problem is, people have a rather large incentive to lie about how much they need a program that benefits them specifically. Meanwhile, all other voters have almost no incentive to spend time and resources becoming informed about detrimental programs, particularly when their one vote is unlikely to change anything. They are "rationally irrational." Second, you can use force to make people's values conform. This won't necessarily persuade them, but it will place the value of "not getting killed" above all others, leaving the subjective values yours to bend. Third, you can try to rationally persuade everyone to adopt one system. The problem, again, is that people who benefit from irrational programs have an incentive not to adopt rational values that counter them. Fourth, you can adopt a system which forces people to reveal their value preferences. A system that revels preferences forces people to make trade-offs, both with each other and within their own value hierarchy. Done well, such a system maximizes utility well, since individual people themselves are the ones that know their own value preferences best. So long as the transactions are voluntary, every transaction tend to trade a less-preferred value for a more-preferred one, thereby maximizing value.

    The problem with third party payers isn't large, infrequent, and unpredictable costs. Those costs are what insurance is for, and there are many working models outside healthcare. The problem is when we use third party payers for mundane, every-day, foreseeable costs. Imagine we used "food insurance" rather than cash transactions every time we went grocery shopping. That is, you pay a flat rate, determined by your known food consumption, to gain access any food up to a certain price limit. What incentive do you have to keep your spending below the limit? Do you care that the apple you're buying is $5 instead of $1, when you know you're nowhere close to your limit?

  13. David Says:

    So using dollars is an acceptable way to compare costs and benefits. And you "freely admit that the socialist model may be the most efficient model for providing some goods in some situations." And you state that a lot of the things that government buys are (or are at least almost surely) wastes of dollars, e.g. the Hoover Dam, and as a consequence the government ought to be doing far less than it is or has been. But you also state "it is [not] desirable to try to [determine which government programs are beneficial], and then use that determination to facilitate only net positive social programs." You can't have it both ways. Either some programs are to be ruled out because of their consequences and others ruled in for theirs, or that's not the argument you're using.

    You state that making some assumptions about revealed preferences etc a market will maximize utility etc. etc. But the assumptions required to get these results in general equilibrium are actually stronger than the handwaving presented here and require complete markets and perfect information, which do not exist in the real world. The lack of these is the source of many of the market failures that are studied, e.g. incomplete markets for education on account of children being children and having no money or decision making ability leads to lack of investment in education and of course. James Heckman who has studied the effects of education on very young children thinks there ought to be targeted intensive early childhood education for the very poor for instance despite being otherwise a conservative. And of course Ken Arrow identified asymmetric information as a large problem in the market for health care both on the part of buyers and the part of insurance underwriters about the potential insured several decades ago. There is a tremendous amount of work on these topics nowadays and it ought to be notable that the most rigidly 'libertarian' economics department, that at GMU, is also a department of no consequence in terms of research.

    Regarding insurance, this doesn't wash. Routine exams are not driving the growth in the cost of health care or of health insurance; routine exams are the among the cheapest services in health care and insurers encourage the insured to get them as it is a form of preventive care that can save money; much insurance has visit copays and deductibles that discourage extraneous doctor visits; predictable costs are predictable — the insurance underwriter can simply include them in the cost of insurance. You assume in your example that you pay a flat rate but that is what is doing all the work; that is not what happens in the health insurance market.

  14. Caleb Says:

    My positions is: it is not desirable to use the political system to determine utility for any given program before it is implemented; and then using that process as justification for creating programs of unmeasurable value or simply foregoing any objective evaluations after it is implemented. So yes, inefficient programs should be eliminated because of their *consequences*. What I object to is programs whose consequences are predetermined in the political process, and then whose actual results are never tested or never acted on because of a combination of confirmation bias, status quo bias, and the acts of vested special interests.

    As I've stated many times here, I do not assert that markets are perfect. They are incomplete, and only reveal imperfect information. That does not mean that the information they do reveal is valueless. Nor does it make government by default the optimal alternative. Many (most) transactions that take place (at least in the US) take place in the private sphere, voluntarily, among actors who lack perfect information. The results, I think, speak for themselves.

    As for education, there are actually two issues you raise: first is wealth-effects, second is market failure. The difference is between people who would pay for an optimal level of education, but lack the resources, and those who will not despite access to adequate resources. I'll grant the wealth effect side for now, meaning I'll assume that there is some method in place for providing adequate resources for those who lack them. The "under-demand" argument requires several foundations. First, it requires parents that are not motivated enough to sacrifice resources for their children's future well being. There have to be some parents like this on the margin, due to simple statistics. But for the average parent, this claim is outrageous. Second, it requires an under-supply of education, such that each marginal level of education leading up to the optimal level is not worth the investment. This certainly can be the case, with some private schools reaching into college-tuition levels. But once again, on average, this claim seems hollow. With the rise of home-schooling, teaching co-ops, and charter schools, it is quite apparent that relatively cheap, high-quality education is readily available. Third, it requires the assertion that education, at least as we define it, is as valuable as the political system says it is. This, ironically, is something the GMU economists are looking into, despite your claim that they essentially do nothing. The basic idea is: education that imparts the necessary material (the 3 R's) is very easy and very cheap to achieve. For their cost, public schools are horribly inefficiency at it. Meanwhile, more specialized subjects are, more often than not, imposed on people who will never use that knowledge. Moreover, the skills necessary for on-the-job success in any one field are almost always taught on the job, since schools are piss-poor at teaching them anyway. Secondly, twins studies show that overall knowledge and economic success is more controlled by genetics and less by formal education than anyone really is conformable with acknowledging. The main value from education, then, comes from "signalling," where you use your education to show potential employers and peers how you stack up. A degree from Harvard isn't valuable because you got a Harvard education. It's valuable because it shows you are smart enough to get into Harvard. There's way more, I encourage you to look into it, rather than claiming the GMU economists do nothing.

    Asymmetric information is everywhere. It's there when you buy a car, buy a house, hire a lawyer, doctor, plumber, or go to a restaurant. There are market mechanisms (including signalling!) that compensate for asymmetry. I won't go into them all, since that really is Econ 101 stuff. The main question is: what is it about medical care that makes it different?

    Yes, my illustration of the health insurance market was hopelessly simplified. There are many, many, complex variables and incentives at work. Market forces, regulatory standards, massive money pools, complicated compensation schemes, malpractice and other legal standards, and constantly changing research make medical economic analysis a nightmare. I will note, though, that the solution the government provides is to take this complexity and dial it up to 11. Then remove all profit motive for making the system more simplified, and channel it into the incentive to use the complexity to game the system. I'm not saying it won't work for certain, but I'd put money on it.

  15. David Says:

    Ok, so government programs can only be ruled out and not in. I agree that government is not always the right alternative even if there are market failures. The market for lemons pointed out that there occasionally market solutions like certified used cars that solve in a sense a market failure. But it is sometimes the alternative, which you grant on occasion. But that doesn't get you to the 'libertarian' position of no government except for defense of property rights. The point of the barb at GMU is the vast majority of econ departments, even the places people like Krugman derides as freshwater, don't take a reflexive stance like yours against the value of some government action. And instead of saying look into it, perhaps you could actually name someone?

    You state "etc. etc. the value of education comes from signalling, education does not impart skills" — see Heckman (who is at University of Chicago) as stated previously on early childhood education. I repeat Heckman because he's a universally respected econometrician (even if he is not well loved) Furthermore, signalling can signal the result of education and not just some selected for trait.

    Wrt health care/health insurance, I would've preferred a single payer system but Jon Gruber, David Cutler, Uwe Reinhardt etc. say the PPACA system will be better than our current system. The practical effect of your suggestions is to give everyone less health insurance generally which is rather missing the point.

    If you think we ought to have no government involvement in health care at all, I think you'll have to take that up with the people or with democracy itself, and since the government has taken a large part in health care in every industrialized democracy, I think you will have to take that up with democracy.

  16. Caleb Says:

    Not at all. Destructive policies that are implemented but shouldn't be are half the problem. The other half is beneficial policies that should be implemented, but aren't. The latter might even be a more significant problem. The problem with preconceived notions and standards for what constitutes “good” policy is that they presumptively eliminate possibly successful policies because they don't look like what “good” policy is supposed to look like.

    Your argument against the GMU economists sounds a little too appeal-to-authority to me. Popularity and prestige are not relevant. Arguments are. I read Krugman, Delong, Goldin, Katz, Yglesias and Gruber, along with people like Mankiw and Beckner. I also read GMU economists, particularly Arnold Kling, Bryan Caplan, and Tyler Cowen. The latter, I think, have better arguments. (This is not to say that traditional “saltwater” or “freshwater” economists don’t have many very good ideas – they do. One aspect of the GMU economists I like is that when Krugman or Delong or other intellectual opponents make a good point, they will acknowledge it. The mainstream, prestigious economists tend not to even consider the GMU economist’s arguments. They simply dismiss them with a wave of the hand and a flourish of the credentials.) The fact you think that the GMU economists advocate a government that only defends property rights tells me you are not familiar with their arguments. They advocate “competitive government,” where government policies are subjected to market efficiency analysis like any other human-made good. This may result in far more government for most people than traditional libertarians are comfortable with. That’s fine, so long as the transactions are voluntary.

    For the record, I do not say that education does not impart any skill. I’m saying that it imparts skills to those people who are already adept at learning new skills. Furthermore, the skills our education system imparts to children (apart from basic skills) are typically not the ones needed in modern employment. Education, therefore, does not generally impart skills needed for employment. Rather, it tells employers which individuals are the ones who are adept at learning new skills. If education signaled the result of education apart from pre-existing intelligence, then why do we have on-the-job training, internships, workshops, mentors, ect? Let me pose a thought experiment: You are an engineering firm HR director, looking to hire someone for a very complex nuclear technician position. Your two candidates: Person A went to MIT, and got all A’s in theoretical mathematics. Person B went to a generic state school, and got a B average in nuclear engineering (or some other relevant major). They have 8 months to train for the job. You are guaranteed to have them work for the firm for a decade. Who do you hire?

    From what I understand of Heckman (correct me if I’m wrong), his studies find that success in education is controlled by what he calls “unobservables,” or developmental vectors not usually addressed in classical education, from very early in life. He also acknowledges the importance of genetics. Once this pattern is set, however, it is very difficult or impossible to change cognitive skills. The positive childhood experiences must be imparted to children very early on. Furthermore, the vast majority of the positive gains from early childhood development programs accrue to children who are raised in very negative environments. That is, research-determined early childhood development programs help improve children in very distressed homes quite a bit, children in sub-optimal homes somewhat, children in average or above households not at all. However, all of this has very little to do with the educational system, since their Heckman traits are pretty much set when they get into the traditional K-12 schools. From then on, the rate of return in education is determined by set cognitive skills. That is, education benefits those students who would probably purchase it anyway, not the marginal student who needs persuasion. Education does not ‘bring the bottom up.’ From that standpoint, I think Heckman’s research actually supports what I’m saying. The GMU economists seem to think so as well. http://econlog.econlib.org/archives/2010/10/common_sense_an.html

    How is giving everyone less health insurance, per se, bad? If the reduction of health insurance overall leads to a significant reduction in price levels, such that less health insurance is needed, isn’t that an acceptable outcome? This is what I’m talking about. The assumption that there is only one desirable outcome, and the assumption that there is one optimal way of getting there, is precisely the systematic process I oppose. The PPACA took many of its core operating provisions from the Massachusetts healthcare law. That law by almost any metric, except in those who have “coverage,” has not done well. This result should have given law-makers pause, if all that motivated them were objective results.

    If the people in a democracy establish a policy, does that make that policy a good one? Does the validity of the process equal validity of result? If the vast majority of industrialized democracies legitimately established a policy of, say, killing a minority or erecting giant statues everywhere that consumed 99% of their resources, would your reaction be the same? Democracy is useful, but it is not the ultimate means of determining value. There must be limits, or else democracy is simply mob rule.

  17. David Says:

    Regarding GMU, fair enough that it's an appeal to authority, which generally one avoids, but it ought to be notable that all of the other departments and places liked the regional Fed banks, responsible for the vast majority of economic research, also think that "government policies [should be] subjected to market efficiency analysis like any other human-made good" (whatever market efficiency analysis means) and yet disagree with the thrust of GMU types.

    "You are an engineering firm HR director, looking to hire someone for a very complex nuclear technician position. Your two candidates: Person A went to MIT, and got all A’s in theoretical mathematics. Person B went to a generic state school, and got a B average in nuclear engineering (or some other relevant major). They have 8 months to train for the job. You are guaranteed to have them work for the firm for a decade. Who do you hire?"

    I studied applied mathematics at an engineering school. I had classes with people who became nuclear engineers who studied in an on-campus nuclear reactor. The two courses of study are quite different.

    You exclude early childhood education from education arbitrarily. The problem with education is not wealth effects (which is something other than what you describe) but that the benefit of education accrues to the child; whatever the parents get is determined by social norms and are not legally enforceable claims like bonds or equity.

    "If the reduction of health insurance overall leads to a significant reduction in price levels, such that less health insurance is needed, isn’t that an acceptable outcome?"

    Yes, it would be, but why should we assume that will be the case? Why are insurers unable to negotiate with health care providers to keep down costs? For a while now more and more people have lost health insurance entirely, health insurance has become more expensive (which is equivalent to a drop in coverage, unless everybody simply pays the higher rate) and it hasn't helped. And what about the people who aren't insured? I don't really care for the Mass health care approach either, but it is a better than nothing response to a genuinely embarrassing situation in the US and it at least has succeeded in improving access to health care. What do you think it has it failed at? More importantly, when you aim at even more market solutions, I can point to any number of more state-oriented examples that are superior to the market oriented US system.

    Regarding democracy, I gave a real world example of how democracies respond to market failure in health care. If you want to avoid that, you will probably have to consider erecting rather stronger barriers to democracy than I would.

  18. Caleb Says:

    "Market efficiency analysis" basically means subjecting policies to a cost/benefit test relative to other similar polices through the mechanism of supply and demand. I assure you, both neoclassical and Keynesian economists disagree with this approach (if they've even bothered to think about it). Both those schools think we can use various econometric methods to either prospectively through pattern analysis or retroactively through causation theory determine optimal policy. Both are relatively anti-democratic, btw. I think all econ schools tend to be. The point of GMU economists is pointing out the flaws in the econometric method, which at some level presumes the validity of method that really should not be presumed.

    Yes, those two courses of study are very different. That was the point. If given the choice between an obviously brilliant person who studied a highly complex but irrelevant subject at arguably the best institution in the world for the subject, versus a probably capable person who studied the relevant topic at a mediocre institution, who would you pick?

    I don't discount early childhood education. I simply point out that the average parent places enough utility on the well-being of their children that they act as if the benefits of that child's education accrued directly to them. You will note that this not being the case was the first presumption I mentioned in laying out the "under-demand" foundation four posts ago. As I said there: yes, there are some parents who lack the average parent's motivation for investing in an optimal level of development for their children. But this group is marginal. Why would we treat all parents as if they were not properly investing in their children if only a small percentage actually are not?

    Mass. health reform failed at reducing medical-expense based bankruptcies, reducing premiums (or even the rate of increase of premiums), reducing private heath expenses, reducing the rate of increase for overall expenditure, and decreasing waiting periods. It has failed at basically everything except for increasing "coverage" whatever that means.
    http://journalistsresource.org/studies/society/health/health-reform-medical-bankruptcy-massachusetts/
    http://www.mass.gov/Eeohhs2/docs/dhcfp/cost_trend_docs/final_report_docs/health_care_cost_trends_2010_final_report.pdf
    http://www.mass.gov/Eeohhs2/docs/dhcfp/r/cost_trends_files/part3_exec_sum_health_spending_trends.pdf
    http://money.cnn.com/2010/06/15/news/economy/massachusetts_healthcare_reform.fortune/index.htm

    You say the Mass. health care law is better than nothing. How do you know? Have we tried "nothing" since the invention of electricity? If modern policy making is so scientific, where's the null hypothesis?

    We should not assume anything. I'm all for letting Mass. keeping their health law. Let Vermont establish a single-payer if they want. But we need tests going in the opposite direction. Have Texas establish HSAs. Deregulate New Hampshire entirely. (That includes removing federal laws, especially ones that forbids the buying of insurance interstate.) Let people vote with their feet, we'll know the winner soon enough. I would bet that progressives would not be happy with it.

    The US system is market oriented? By what definition? US state and federal law dictates: doctor licensing, best practice procedures, minimum care standards, insurance pool policies, price level negotiations, contract negotiations, hospital policy, drug access, liability standards, billing procedures and indigent free access. There is much more. Yes, compensation is privately funded (if you're not on Medicare, Medicaid, SSI, VA benefits, ect.) But the policies insurance companies follow socialize the incentives and costs to a level that true socialized provision probably wouldn't be that big of a step. Other nation's heath systems may be more desirable (an assertion that needs proving). That may simply be because their regulatory structures are less bizarre. (or not) But don't pretend our current system is market oriented.

    What about the poor people who aren't insured? Easy: they walk into an ER and get treatment. They don't pay, and the hospital swallows the cost. Happens all the time. What about the chronically ill, who need constant treatment? SSI. If you're a child, or the illness keeps you from working, it's stupidly easy to qualify. Old? Medicare? Poor? Medicaid. Aside from the people who are voluntarily go without health insurance (like me: under 25, healthy, not engaged in dangerous activity, too cheap to buy anything but cheap-o insurance) I struggle to imagine up with the who the PPACA actually helps to a significant degree.

    But you would erect some barriers to democracy? Where, and on what principle?

  19. David Says:

    "Market efficiency analysis" basically means subjecting policies to a cost/benefit test relative to other similar polices through the mechanism of supply and demand." Can you give an example? Because as far as I can tell, this doesn't mean anything. Keynesians are neoclassicals, the difference is in the frictions (e.g. price stickiness) involved in the models.

    "GMU … points out the flaws in econometric methods" Any organization requires forward looking projections to come to decisions. You can do this using statistics and models involving decision-making agents and/or structural features of the economy, or you can not do it. Giving these estimates is completely independent to the decision making method of the organization, whether democratic or not. Now, you can say, as you have been, that it would be better to conduct actual experiments, but you can't always get what you want — it is impractical in most cases, which is why you make these models based on past economic data.

    "If given the choice between an obviously brilliant person who studied a highly complex but irrelevant subject at arguably the best institution in the world for the subject, versus a probably capable person who studied the relevant topic at a mediocre institution, who would you pick?" I would pick the person who has worked in a nuclear reactor. A combinitorist can't necessarily understand a topologist's work despite both being pure mathematicians, and the gulf is greater if he attempted to venture further afield. Just because someone is 'good at math' doesn't mean they can pick up other disciplines that use some kind of math without much effort. I work with applied mathematicians who can't construct a structural regression model and statisticians who can't program. In physics and economics you will occasionally see people criticized as technically quite proficient but having poor conceptual understanding or insight, e.g. everyone concedes that Kevin Murphy of University of Chicago is extremely 'smart' but he hasn't produced much in the way of valuable economic research. And these examples involve things that would seem to be quite similar, rather than the difference between an abstract pursuit and one involving practical knowledge about operating very expensive, very finely engineered, and potentially very dangerous equipment.

    "Why would we treat all parents as if they were not properly investing in their children if only a small percentage actually are not?" Targeted investment by the state. Also, to be clear, this isn't the parents not properly investing, it's a problem of incomplete contracts — the child can't invest in himself.

    "You say the Mass. health care law is better than nothing. How do you know? Have we tried "nothing" since the invention of electricity? If modern policy making is so scientific, where's the null hypothesis?" I'll concede I don't know a lot about the outcomes in Mass, but it is easy to see that the control would be neighboring states that didn't have a similar law and you could use a difference in difference to see how outcomes differ from the 'control'. And honestly I don't want to get into a detailed defense of a policy I don't particularly like, but for one point, the people who are uninsured (and in Mass it's a high income state with a low uninsured population so the effect is going to be small there) act like an externality in imposing costs on others. A requirement to purchase insurance internalizes the cost. However, I think a consistent libertarian would argue against any requirement to purchase health insurance and against any requirement to treat those without health insurance or who can otherwise pay, but I would not look highly upon a society which does the latter.

    "The US system is market oriented?" You have for-profit health care providers and for-profit insurers who compete for customers. The existence of regulations doesn't mean it's stopped being a market. There are regulations on the pollution from raising cattle, on preparation and working conditions in slaughterhouses and warehouses, on the transportation of goods, and on the storage and preparation of food in grocery stores and restaurants, but regardless of all that, your steak is provided by a market. "Socializ[ing] the incentives" is how insurance works.

    Regarding other nations' health systems, they cost less, see slower growth in costs, and have better health outcomes. As a proponent of market provision of health care, I don't think you can in good faith assume the existence of SSI, Medicare, and Medicaid. Medicaid also doesn't apply to all of the poor, e.g. single men are in at least several states not eligible. And regarding SSI, I was actually involved as a consultant in building the models that examine all their incoming applications — it isn't 'stupidly easy to qualify'.

    With regard to democracy, I think that constitutional limits protecting individual rights at least are good. Since you think that it is ok to try out state provision or some kinds of limitations on markets in some places, I am not sure this particular thread of argument is worthwhile to continue.

  20. David Says:

    I probably ought to clarify: the models SSI uses don't make the decisions, which are actually given (mostly) by the state decision making bodies. And children and workers are more likely than some other populations to be accepted, but they're still more likely than not to be denied.

  21. David Says:

    Also, Lawrence Summers is another example of someone who is very smart but who was for example not a good president of Harvard as far as I can tell, which is why they fired him.

  22. Caleb Says:

    Sure: school vouchers. While politically unpopular and usually derided by both the political and educational establishment, school voucher programs are incredibly successful and popular with those parents and students who actually use them. The cost reductions and greatly improved educational results speak for themselves. Vouchers place enough competitive pressure on existing public school systems that even the public schools in the districts where vouchers are implemented tend to improve. Vouchers are really the dark horse of educational reform. There weren't any major econometric models or sweeping policy proposals for school reform that predicted cost saving and improvements through that avenue. Yet, after implementing vouchers in several very diverse school districts, one thing is clear: they work.

    Don't tell people who call themselves neoclassicals or Keynsians that. But you are right, there is a great deal of theoretical interplay. On the other side is the Austrians, who challenge the validity of the entire enterprise of econometric-driven policy.

    You are right, there is a difference between measures and implementation. It is the conflation of the two that I oppose. E.g:" X model is a valid econometric measure. X model recommends Y policy as the optimal solution. Therefore we will implement Y policy as the only valid solution." More often than not, complexity and chaos strike at some point, rendering the entire process invalid.

    How would it be impractical to implement experimental policies, if you are going to implement a single broad policy as recommended by econometric models? If you're going to do something, it's worth making sure you've done it well and it actually works.

    You miss the point of my thought experiment. My whole argument is that workforce driven training and experience is far more valuable than what passes for education in our schools. I purposefully set up the choice as being between two people with zero work experience, one who signals great intelligence but lacks educational investment in the subject, versus one who signals mediocre intelligence but has relevant educational investment. You can't pick the person who has worked in the nuclear reactor. (Unless you concede the point.) If you think the MIT student's choice of study shows lack of technical ability, very well. My point: that is still signalling!

    If the parent treats the child's interest as strong a motivator as their own (if not stronger), and make contracts (purchasing education) on behalf of their children, why are incomplete contracts a systemic problem? Targeted investment by the state could work well, presuming the state can target effectively, can construct a blanket policy of overall value maximization, can control for dynamic shifts by dramatically deceasing supply when needed without being influenced by vested interests, ect. All of these are not safe presumptions.

    Interesting that you would look poorly on a society that did not force medical providers to care for the indigent. Do you realize that the English common law tradition establishes no duty to aid others, so long as the actor is not a fault for the victims' plight? Meaning, if you are walking along a lake and see someone drowning, you have no duty to save them. Even if you could do so with little to no danger or cost to you. This continues in this nation even today. Medical providers are actually a narrow statutory exception. Even states that do have "good neighbor" laws rarely enforce their (rather weak) provisions. So, do you think there should be a general legal duty to render aid, or are medical providers somehow different?

    There is a big difference between market-oriented and profit-driven. Why do doctors in Greece or France practice? Why do pharmaceutics companies in Sweden (assuming they have them) develop new drugs? Because they get paid. If not by individuals, then by the government. Even in Cuba, the suppliers of healthcare are better off after the transaction than before (the definition of profit.) We all seek to better our own well-being. We all engage in actions which will induce other people to give us the goods and services to do so. If market-oriented is to mean anything, it must be divorced from profit motive.

    There is even a difference between competition and market-oriented. If two large corporation dominate a market, but use a regulatory structure to raise the barrier of entry to new suppliers, their "competition" is overshadowed by the fact that factors other than market-driven forces dominate supply. Yes, the existence of regulation does not automatically make a market not a market. It is a range that depends on the nature of the regulations. But certain regulations can remove the qualities that make a market a market: voluntary exchange, freedom of contract, freedom of association, decentralized growth and progress, ect. Healthcare crossed that barrier in the US years ago.

    As it so happens, I work the other side of SSI. I'm in a firm that represents people applying for the program. Out of recent memory, I only recall two individuals who were turned down. Neither actually needed it. It isn't easy overall to qualify, but it is easy if you need it. I don't assume the existence of these programs, however. I was simply pointing out how, in light of their existence, the need for PPACA seems scant. Yet that law was framed in terms of "we have no other alternatives." I think the way that issue was framed is illustrative of the entire flawed system.

    Once again, however, you need to distinguish between wealth effects and market failure. If the problem is simply with poor people who can't afford adequate care, there are far simpler methods of remedying that problem.

  23. Caleb Says:

    Re; democracy. I don't see why not. Constitutional limits need to be fixed in order to mean anything. Limits that change are not limits. Yet, the entire intellectual foundation of progressive intervention in the economy is premised on changing Constitutional limits. Massive interventions in the economy on the federal level may be good or bad. But one thing is certain: they do not fall within originally defined Constitutional limits.

    My provisions for state intervention is premised on one significant difference: voluntary participation. I would be fine with Social Security if I could opt out. I would be fine with a state implementing a single-payer, since I can move. The final test for government policy should be how many people voluntarily participate.

  24. David Says:

    Ok, you can compare like that in the case of vouchers. This doesn't distinguish Austrians from anyone else. The MIT Poverty Action Lab conducts studies like these. And applied economics generally is entirely about making comparisons like these using natural experiments. But you cannot do something similar for monetary policy, financial regulation, etc. You have to look at the past and at what models predict would happen based on the behavior of economic decision making agents and institutions.

    Regarding Keynesians and neoclassicals: Mankiw is a (new) Keynesian and a neoclassical economist. The distinction between saltwater and freshwater, as much as it exists, is precisely these frictions.

    You state "I purposefully set up the choice as being between two people with zero work experience, one who signals great intelligence but lacks educational investment in the subject, versus one who signals mediocre intelligence but has relevant educational investment. You can't pick the person who has worked in the nuclear reactor."

    Why can't I pick the one who has worked in a nuclear reactor? Students in nuclear engineering study in nuclear reactors. Likewise students in electrical engineering build robots and serve internships at engineering firms, students in medicine work in hospitals, etc.

    "Do you think there should be a general legal duty to render aid, or are medical providers somehow different?" I don't know; I haven't thought about it. I think good samaritan laws aren't necessarily a bad things. Do you think that people who are sick and can't pay should not get health care?

    "If the parent treats the child's interest as strong a motivator as their own (if not stronger), and make contracts (purchasing education) on behalf of their children, why are incomplete contracts a systemic problem?" Incomplete contracts are the theoretical problem; I wanted to make that clear. The fact that they don't turn out to be a problem everywhere is the result of social norms and other institutions available beyond preschool age.

    Wrt health care and health insurance, you're free to go purchase insurance of your choosing, and at least for now you're free to not purchase it. You're also free to visit doctors of your choosing (within the constraints of your insurance). The firms that provide these are private firms. What is it that makes the health insurance or health care not a market? Canada has a market for health care provision, it just happens to be a monopsonistic one, which is the result of no market in health insurance.

    Regarding SSI, I see I misunderstood your intent. But SSI doesn't even cover medical care, which is at issue. I agree it's a flawed system — I would rather have a system like nearly any other industrialized democracy.

    A wealth effect is the effect on consumption from the change in the value of an asset, and it's used as one of the transmission mechanisms in aggregate models of the macroeconomy. Poor people don't get care because they have too little income, and that may or may not be due to market failure either in say the labor market or in the health insurance market, but it's not because their 401k went down.

  25. David Says:

    "The final test for government policy should be how many people voluntarily participate." This cannot be your test, since it would reject the existence of a state.

  26. Caleb Says:

    I’m sure MIT has a number of brilliant economic studies and relevant policy proposals. They seem like a rather sharp bunch. But as you pointed out earlier, there is a difference between formulating policies and implementing them. From an economic standpoint, vouchers are a success. From a political standpoint, they are still quite unpopular. There’s a disconnect here. The difference between Austrians and the rest of the establishment is that Austrians advocate establishing logical dependency between the two fields. What is objectively an economic success should be implemented, or at least allowed, politically. I see nothing wrong with prospective econometric-based policies. But the political system needs to be structured such that they can be measured objectively after implementation. If they don’t work, the political system should be structured in a way so that they go away. On the flip side, the political system should be structured so that novel policies that don’t stack up to the status quo are still tried out. If they are a success, they need to be kept.

    Econometric models can be useful, particularly when used in narrow contexts. But not all policies that model well are successful policies. Not all successful policies are policies that model well. It is the assumption of logical connectivity between policies that look good on paper and policies that work well in practice that Austrians question. The same goes for the connection between democratically popular policies and objectively successful or desirable policies. One does not imply the other.

    “Why can't I pick the one who has worked in a nuclear reactor?”

    Because that’s not how a hypothetical works. But I take your meaning. Perhaps nuclear engineering is a field where 100% of all necessary knowledge and skills for gainful employment in that field is imparted through established and wide-spread educational curricula. Bad choice on my part. ( I chose that field because I have two friends who are employed by Westinghouse, testing reactor failsafe systems. One majored in theoretical mathematics, the other in generic mechanical engineering. They must exceptions to the rule.) Are all, most, or even a small percentage of educational fields that practical? You cite internships and residencies. I certainly agree that these practices are probably the most valuable of what the education system offers. I would say that is because they are least like traditional education, and most like actual work experience. The educational system has little control over their substance, thank goodness. This does little to dent my argument on how traditional education is overvalued, and how government and related establishments’ over-promotion of the value imparted through that system is perverse.

    “Do you think that people who are sick and can't pay should not get health care?”

    No. But do I think that government should force medical providers to supply it? Also no. There is a difference between making a value claim, and using coercion (which is what the government is) to force that value claim on others. I will use my own efforts and my own resources to promote charitable medical care. (And charitable housing, food, ect.) Many others will as well. But just because we desire an outcome does not mean we should use the government to achieve it.

    “The fact that they don't turn out to be a problem everywhere is the result of social norms and other institutions available beyond preschool age.”

    So if the problem is theoretical, and largely prevented by social norms, why do we need a coercive legal “solution?”

    Medical insurance terms are so homogenized by legal requirements that choice between providers is nearly meaningless. Same goes with standards of medical care, each practitioner’s quality and procedures, and contract terms. If both Chevy and Ford sold cars, but the government dictated their design to the point that there was no significant difference between comparable models, would you say that there truly is a market?

    Like all other supposedly “market” designations, private legal description is not necessarily descriptive. The Fed is “private.” Defense and other military contractors are “private.” Yet no sane person would say the market controls these institutions.

    “Market driven” means driven by the laws of economics: supply, demand, scarcity, opportunity costs, wealth and information effects, voluntary association, ect. As the “general practitioner shortage” illustrates, the evidence points to a failure of supply and demand in that field. http://www.becker-posner-blog.com/2011/07/primary-care-physicians-and-the-reform-of-health-careposner.html Required treatment and indigence forgiveness policies make emergency care perfectly elastic. Laws that mandate access to insurance pools encourage moral hazard and adverse selection. Third party payment structures are propped up by tax incentives and numerous other policies that benefit legally savvy insurance providers. These compound already severe agency and information costs. Demand usually drives solutions to such problems. The fact that this is not happening tells me the system is not market-driven. Whether this is because market failure encouraged government involvement, the other way around, or a little of both is beside the point. The point is: market forces are not at play.

    SSI applies to the aged, blind, and disabled. These are the precise demographics that incur high medical costs. My experience is that applicants that have more severe medical costs are the most likely to get it. SSI may not nominally go to medical costs, but that is what is does.
    Poor people may or may not be poor due to some market failure. But that market failure is distinct from the ones that supposedly prevents them (ceteris paribus, without the wealth effect) from consuming a “suboptimal” level of education or medical care or what have you. The policies that address wealth redistribution and the ones that address the supposed market failure in these areas should be distinct. Right now, they are hopelessly muddled.

    “This cannot be your test, since it would reject the existence of a state.”

    Not necessarily. I would assert that some of the most functional parts of the government are the ones that require voluntary participation. For example: we have no laws requiring that civil disputes be settled in court. In the past last century, our courts became increasingly expensive and time consuming. Mediation and other alternative dispute resolution methods thereby became popular as mitigation to that cost. In response, however, many courts have made a conscious effort at reducing time and cost of litigation, to prevent being marginalized by alternative resolution methods. What incentive would these courts have to reform if dispute resolution in court was mandatory? Many other institutions that allow an alternative have similar incentives. Even the military has improved in both its treatment to soldiers and its effectiveness by becoming an all-volunteer force.

  27. David Says:

    "Because that’s not how a hypothetical works."

    Your hypothetical is, in other words, "suppose there is no practical training taking place in a university, then what do employers use to select candidates?" Ok so you chose a bad example; it would be unfair to suppose that's the only argument. Excepting science, medicine, nursing, law, engineering, etc., The question is now no longer education, but traditional (higher) education, i.e. the liberal arts, which granted doesn't really teach specific job skills. But to say that a person accepted to a highly ranked school, even before going, is more skilled than a person from a low ranked school after finishing, is not the same as saying that the person from the low ranked school is no more skilled than he was prior to going or would have been otherwise. Even if universities do literally nothing but sort out people by preexisting traits, that doesn't mean they are a waste — information cant be extremely costly to acquire; this is Hayek's argument for markets.

    "No. But do I think that government should force medical providers to supply it? Also no. […] I will use my own efforts and my own resources to promote charitable medical care."

    Uncharitably, this is specifying off-equilibrium solutions, like saying that the criminals in the prisoner's dilemma game should cooperate. The market won't necessarily disappear, but it is worth considering that granting people access to free care is the first step in one of the causes of market failure in health care.

    "[if] the government dictated their design to the point that there was no significant difference between comparable models, would you say that there truly is a market?"

    Yes. One of the requirements for perfectly competitive markets is homogeneous goods. The USDA defines standards for beef. Commodities like steel are standardized (not necessarily by government).

    "So if the problem is theoretical, and largely prevented by social norms, why do we need a coercive legal “solution?”"

    If you look up the page, I brought up education as an example of where there were hidden suppositions behind your argument for markets that do not hold. That the institutions in place prevent education from being not all that bad doesn't mean the suppositions are right; the original argument just happened to be incomplete and unrealistic. And vouchers are just as coercive as Heckman's proposal; they seem in fact basically the same. By rights you should be in favor of trying it.

    "SSI may not nominally go to medical costs, but that is what is does." Good point.

    Regarding health care/health insurance, "Demand usually drives solutions to such problems. The fact that this is not happening tells me the system is not market-driven." Usually is doing a lot of work here and the second sentence will not admit to the existence of market failures.

    In the current setup, you can (or not) go to an insurer, get evaluated by an actuary and get a price for some level of insurance, if they will insure you. They are currently free to refuse to insure you and to charge you your expected cost to them. If the second were not the case, insurers would not be profitable. This is a market. In turn, the insurer bargains with health care providers. It can refuse to pay for certain providers. This is also a market. If your employer compensates you with health insurance, then it bargains the insurers. It is also free to pay you in lieu of providing health insurance. There are regulations and tax incentives in these markets, like many others. Other countries however have vastly more 'coercive' ie less market-like arrangements that also happen to be less expensive, control costs better, cover more people, and have better outcomes. (see below regarding coercion and its justification)

    "Poor people may or may not be poor due to some market failure. But that market failure is distinct from the ones that supposedly prevents them (ceteris paribus, without the wealth effect) from consuming a “suboptimal” level of education or medical care or what have you." Wealth effect doesn't mean what you think it means — it's got a Wikipedia article. My note here is merely a suggestion to avoid using jargon confusingly.

    "I would assert that some of the most functional parts of the government are the ones that require voluntary participation." Coercive arrangements can have voluntary elements, as the US government does. If your argument is that we should have as little coercion as possible, then you'd have to make some other argument for when coercion is required and then you wouldn't be able rule things out just because they're coercive. To say that some of the more functional elements are not coercive is not to say that lacking coercion leads to more functional elements (maybe true, I wouldn't argue strongly against) or most importantly, that the non-coercive elements do not ultimately rely on the coercive power of the state.

    This will be my last post. Feel free to respond. I'll read it…but this has gone on for a week now and it's been rather time consuming.

  28. David Says:

    oops, first para "information cant be extremely costly to acquire" should be "information can be extremely costly to acquire"

  29. Caleb Says:

    I’m certainly not excepting law, since that is what I know. Law school teaches you *nothing* about the practice of law. That is actually a very popular axiom in the field. They say it “teaches you to think like a lawyer,” whatever that means. I’m also not excepting medicine. I have multiple doctors in the family, all who claim that 80-90% of the knowledge and skills they use in their practice, they acquired in residency and not med school.
    “Even if universities do literally nothing but sort out people by preexisting traits, that doesn't mean they are a waste — information [can] be extremely costly to acquire; this is Hayek's argument for markets.”
    Assuming no distortions in demand; yes, precisely. My point is that many government and social institutions assume value in non-Heckmen effect education beyond signaling and other information discovery solutions. These assumptions lead to incentive programs and compensation schemes that drive up demand. Add this to rigorous accreditation and a very strict hierarchical structure which determines what counts as “education,” and you have a recipe for skyrocketing prices. This is unfortunate, because there are other, far cheaper ways to: 1) signal “innate” (or at least, very set) abilities, and 2) impart skills necessary for gainful employment. Our current system conflates the two, which leads to another set of false assumptions.
    “The market won't necessarily disappear, but it is worth considering that granting people access to free care is the first step in one of the causes of market failure in health care.”
    This may be true, but it is true whether voluntary human coordination or government action dictate the free access. I’m simply saying the former is more susceptible to external factors that lead to sustainable equilibrium.
    “One of the requirements for perfectly competitive markets is homogeneous goods.”
    That would be homogenous goods within the same pool. (Widget x1 is the exact same as widget x2.) Perfectly competitive markets do not require homogeneity across different, even substitution, goods. (widget x’s are different from widget y’s) Competition between two firms implies at least slight differentiation in either production costs or goods produced. Otherwise, the two “competing” firms are making the same product for the same costs, and are acting essentially as one large monopolistic firm. This is my point: if you have the same product for the same price, supplied with the same overall costs, you functionally don’t have two different suppliers.
    The USDA defines standards for beef. Commodities like steel are standardized (not necessarily by government).
    But their supply levels, operating procedures and overall costs are not. This allows them to differentiate themselves, and utilize comparative advantage to innovate and respond to market forces.
    “If you look up the page, I brought up education as an example of where there were hidden suppositions behind your argument for markets that do not hold. “
    You stated that my suppositions required perfect information and complete markets to work. I don’t think you’ve proven that, more than simply assumed the conclusion. My key argument is not that social conventions and informal institutions are perfect substitutes for complete contracts in providing education. My argument is that complete contracts are not possible, and informal cultural institutions are more desirable alternatives than most government solutions. You can’t compare reality with the ideal, you have to compare it with the next-best alternative.
    “And vouchers are just as coercive as Heckman's proposal; they seem in fact basically the same. By rights you should be in favor of trying it.”
    But they are less coercive than the current alternative, which is why I support them. We should try Heckmen’s proposal too, so long as overall progress is made.
    “Usually is doing a lot of work here and the second sentence will not admit to the existence of market failures.”
    Sure it will. I accept market failure as a reason for the current government-driven system. There’s a bit of double-speak going on in the ranks of those who support the PPACA or single-payer: On one hand, when opponents point out the current invasive nature of government in the healthcare system, they say “the market failed, and thus government intervention was needed.” When opponents point out the failing nature of the system today, they say “the system is market-driven, and thus needs government intervention.” How it is that massive government involvement in the current system is justified, but only market forces get the blame for the current system’s failure? I freely admit the market may fail, and that government involvement may make the situation better. But those problems and those solutions should be precisely defined and rigorously measured and controlled. The opposing arguments smack of circular reasoning.
    “In the current setup, you can (or not) go to an insurer…”
    Licensed, policy certified, only in your state…
    “…get evaluated by an actuary and get a price for some level of insurance…”
    Whose tables are government-backed industry standard…
    “They are currently free to refuse to insure you and to charge you your expected cost to them. If the second were not the case, insurers would not be profitable. This is a market.”
    I’m speaking more broadly. Yes, the insurers don’t have to take you. Emergency doctors do. If you fall within the covered categories, government programs do. The costs are fixed, and their distribution is dictated by law. Where they fall is negotiated largely in legislatures and courts, not in boardrooms.
    “In turn, the insurer bargains with health care providers. It can refuse to pay for certain providers. This is also a market.”
    Depends on where the negotiations take place. If privately, between voluntary parties, then yes. If in the public sphere, between regulators and lobbyists, then no.
    “Other countries however have vastly more 'coercive' ie less market-like arrangements that also happen to be less expensive, control costs better, cover more people, and have better outcomes.”
    When comparing outcomes, you need to control for pre-existing conditions and unrelated cultural factors. Even then, aggregate ranking tend to be highly questionable. E.g: http://online.wsj.com/article/SB125608054324397621.html
    I’d be interested to know what defines, and how you measure, “better outcomes.”
    “Wealth effect doesn't mean what you think it means — it's got a Wikipedia article. My note here is merely a suggestion to avoid using jargon confusingly.”
    I’m using wealth effect to mean the increased consumption that takes place after a perceived increase in personal wealth. It can also mean the converse: lack or reduction of consumption when there is a perceived stasis or reduction in wealth. As far as I’m aware, this is pretty standard. (I’m using it for its micro rather than macro implications, perhaps that’s the confusion?)
    Anyway, the point is that these effects on the levels of medical consumption as compared to direct market failures are distinct and should be treated as such.
    “If your argument is that we should have as little coercion as possible, then you'd have to make some other argument for when coercion is required and then you wouldn't be able rule things out just because they're coercive.”
    Coercion is required when enforcing pre-existing and previously arranged legal duties and relations. (Basic social contract theory) If someone wants my $500, coercion is not a socially desirable way of letting them get it. If I enter into a contract that gives him the $500 for his used car, and then I renege, coercion is socially desirable to enforce the deal. The problem with a political system is when it starts looking less like the second arrangement and more like the first.
    “To say that some of the more functional elements are not coercive is not to say that lacking coercion leads to more functional elements (maybe true, I wouldn't argue strongly against) or most importantly, that the non-coercive elements do not ultimately rely on the coercive power of the state.”
    Very true. The key is to distinguish between elements which may or may not inherently rely on coercion; and those which, by definition, must. The problem with many people’s political philosophy is that it implicitly denies that there is a distinction. If you agree there is, then all we disagree on is the contents of those categories.

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