Monday, June 29, 2009

Nobel Freakonomics

We don’t read Paul Krugman much these days—not since the New York Times outsourced its newsroom to the White House press office—but we did catch his column, “Not Enough Audacity,” in which the Nobel Prize-winning economist frets that Obama’s health care efforts aren’t radical enough:

On one side there’s Barack the Policy Wonk, whose command of the issues — and ability to explain those issues in plain English — is a joy to behold.

But on the other side there’s Barack the Post-Partisan, who searches for common ground where none exists, and whose negotiations with himself lead to policies that are far too weak.

Now you’d think Obama’s masterful “command of issues” might have included the notion that the person nominated for Treasury Secretary should be a guy who paid his taxes on time. But leaving that aside, let’s look at the President’s “ability to explain those issues in plain English,” which skill leaves Krugman all weepy:

Mr. Obama offered a crystal-clear explanation of the case for health care reform, and especially of the case for a public option competing with private insurers. “If private insurers say that the marketplace provides the best quality health care, if they tell us that they’re offering a good deal,” he asked, “then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical.”

This is very smooth, and it certainly seems “crystal-clear,” assuming you don't think about it for, oh, half a second.

But it is nothing like logical: Government has no profit motive. Private insurers do. So a government payer, even as badly run as it will be, will wreck the private insurers' business models.

Stock-market-wise, we couldn't care less how the health-care model gets resolved. In the investment business, you deal with facts as they are, not as how you wish them to be.

But we wonder: how did a Nobel Prize-winner like Krugman get fooled by a slick bit of rhetoric with no inherent basis in fact?

Well, the Times’ web site describes the economist thusly:

His professional reputation rests largely on work in international trade and finance; he is one of the founders of the "new trade theory," a major rethinking of the theory of international trade.

Let’s hope he’s not working on a major rethinking of the theory of human health care...

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Mark said...

Obama is an out and out socialist who has no understanding of what made this country great, nor of where the money to feed the government comes from. Anyone who disagrees with this just needs to listen to the sneering, contemptuous manner in which he (in multiple press conferences) has cited "those of you who believe in the free market", clearly implying that he is not one of "those people".

The bottom line is that there are only two possible ways (forget all of the "tinkering on the margins", none of which will add up to squat) that the Federal government can provide cheaper healthcare:

Either lose money and subsidize it from the taxpayers (which Obama explicitly said in the news conference he won't do), or jam prices down so far for provider reimbursement that no smart young person with any common sense whatsoever will be willing to go through the arduous medical training process. So we will then have two beautiful choices: Higher deficits or dumber doctors.

It's too bad the Republicans are too morally hypocritical to run moderate, middle-of-the-road candidates (i.e., fiscally conservative and socially liberal, like the vast majority of Americans) for Congress and the Presidency, because if they were smart enough to do it, Obama would be a one-term wonder and then could go join Krugman editorializing in the dying (perhaps soon to be socialized) New York Times.

Anonymous said...

We Republicans hired an idiot twice who then hired more idiots with gigantic egos that believed the nation's interests and their own careers were the same thing. We are getting what we deserve, and are lucky it is not a whole lot worse.

reeb said...

And maybe no profit motive would work a whole lot better for health care. Having the insurance company have a direct interest in denying my claim and hoping to get me off their covered list to be passed along to someone else (hopefully the government!) makes no sense either.

Namazu said...

In order to provide more 'public options,' why don't we nationalize GM, Citigroup, and perhaps a bankrupt airline for good measure?

Anonymous said...

There should be a requirement that when someone knocks the "obama" plan for healthcare they come up with alternatives. I would suggest they include at least two components and be honest about how they address medicare (e.g. kill it) and funding along with how they get they suggestions passed.

Anonymous said...

@ Reeb. The incentives on the not-profit-seeking gov't side aren't all that better for patients. State-run healthcare systems around the world routinely deny or harshly delay service because it would break the budget. The gov't option replaces one faceless burauecracy determining what treatment you can receive with another faceless bureaucracy. At least the profit motive yields more MRI machines, shorter wait times, nicer facilities, and all the other things that make healthcare in America a bit more pleasant than it is in many other nations, or at least in the UK, where I lived for several years.

John said...

Who did you read when every paper and every TV news room in the country was buying into the Bush nonsense about 9/11 and Iraq ?

cargocultinvestor said...

With all due respect Mark., pronouncing that X "doesn't know what made this country great" implies that you on the otherhand do. A little pompous don't you think?

Health care is a real problem. The US spends more than any other country and yet arguably gets worse results. Eg vis a vis Canada, the US spends about $3 for every $2 in Canada, yet Canadians live 2 years longer on average and everyone is covered. At minimum, not an indication of a superior or cost effective US system . Costs are getting close to 18% of GDP and rising fast. Yet the richest country in the world has the largest % of uncovered citizens in the developed world. If you think that the US has the best health care in the world hands down, I'd have to ask on what basis did you form that opinion. In any event it is unsustainable.

Why on earth would anyone think attracting money hungry individuals to the medical professions will insure optimal care? You might want Gordon Gecko for a doctor, I don't. This might baffle you, but the best doctors aren't in it for the money. Do you believe that doctors in the rest of the developed world are barely eeking out a living?
Those largely motivated by money would probably do themselves and potential patients a favour by pursuing a career in stock trading, like all the really smart people do.

Mark said...


1) Yes, I do think I know what made this country great: entrepreneurial free enterprise. If you want to call me "pompous" for believing that, so be it.

2) You question the quality of the U.S. healthcare system. If we don't have the best system in the world (at least for those who can pay for it) then why, when they get sick, do the world's wealthiest people inevitably come here (at Sloan, Cornell New York, the Mayo, MD Anderson, etc.) to be treated?

3> You write: "Why on earth would anyone think attracting money hungry individuals to the medical professions will insure optimal care?"

Please do not confuse "money hunger" with a desire to earn an upscale living commensurate with one's intelligence and education (i.e., four years of college plus four years of medical school plus four years of residency plus (often) three or more years of a fellowship. Obviously, no one becomes a doctor primarily for the money, but if you cap doctors at, say, $150,000 a year, I guarantee you that we will lose a lot of people that you wish were doctors.

Jeff Matthews said...

Cargo Cult:

"Eg vis a vis Canada, the US spends about $3 for every $2 in Canada, yet Canadians live 2 years longer on average and everyone is covered. At minimum, not an indication of a superior or cost effective US system."

No, but not an indication of a superior Canadian system when applied to the U.S. Just ask Canadians who come to the U.S. for procedures, or the Brits who resort to a cash-pay system to circumvent the care-rationing NIH.

Statistics are slippery, especially in the hands of policy wonks who don't live in the countries whose healthcare systems they're promoting.

Statistically speaking, Cuba has a lower infant mortality rate. Should Cuba be our model?

Our own model is probably, as you say, unsustainable. But there are harsh realities here that nobody on either side is talking about.


doug said...

The problem is not that government doesn't have a profit motive, since the market already includes non-profits like Blue Cross & Blue Shield, but that the urge to offer insurance at less than cost will wreck the market.

Social Security offers a pretty good idea of what government-run insurance will look like. Sure, there's a "trust fund," but it's been impossible to tell the current beneficiaries that it can't be raided. They, of course, think it's a great deal since they're getting a lot more than they put in.... kind of like Bernie Madoff's investors.

Anonymous said...

It is difficult to compare the health outcomes across countries - Canadians live longer for slightly lower costs, but Canadians also weigh a lot less than we do. The US is a rich country whose people are able to make poor lifestyle choices (smoking, obesity) and then spend a ton of money trying to put off death as long as possible. People will spend discretionary income (mainly their time when they have good health insurance) in pursuit of medical procedures / drugs that could extend their life. Often these solutions have marginal utility when evaluated across the population, but when evaluated individually, individuals want to pursue the benefit regardless of the cost.

Ben said...

Obama is the latest iteration of Jimmy Carter. The problem with government sponsored anything is it is almost always flawed from the start to begin with. Whether the government can execute on anything or not is really irrelevant, because the law as it is written is generally poorly concieved. Look at the stimulus plan. Anyone who reads that document will conclude we are truly in trouble indeed. There is very little in the "stimulus" that is grounded in any economic theory or based on anything this country needs. Cap and trade? Give me a break, I am becoming more cynical about our country by the day.

It is too bad, because we finally took some pain of a recession and started saving in this country. If we had a serious government we could use said collective savings, even through a budget deficit for a while, to build some true infrastructure we actually need. Like a decent airport in New York, or energy infrastructure that would limit our addiction to foreign oil. But that would make too much sense.

Anonymous said...

a lot of people don't seem to have any understanding of how the UK delivers health care and talk about how if you go down the route of "socialised" health care you will end up with rationing of services. the NHS offers universal health care to everyone in the UK. yes there are in certain cases instances of rationing but we STILL HAVE A PRIVATE HEALTHCARE SYSTEM THAT COMPLEMENTS AND COMPETES WITH THE NHS. this means that the poorest and most vulnerable have a minimum standard of care available for free but if you want top-line healthcare you can pay for it.

Tirel said...

I wasn't aware that preserving the business models of companies that routinely charge confiscatory premiums in non-competitive markets and then weasel out of paying for care they deem "too expensive" was part of Obama's job.

Seems like wrecking that sort of business plan and forcing them to come up with one that actually includes competition would be a good thing for everyone--except the people who have gotten exorbitantly rich off the misery of the poor. Yes, insurance companies should be able to make a profit from running a competitive business--the problem is, and I'm pretty sure you know this, they don't face anything like competition in far too many markets.

DaleW said...

I would add the Blues have no profit motive, either. If a profit layer is all that stands between MCOs and the promised land of low-cost, high-quality healthcare, the Blue Cross/Blue Shield would have the market cornered.

Jeff Matthews said...

Well, we hit a nerve, anyway.

"RN" left an especially bilious commentary, full of the kind of Yahoo Message Board-style language we don't publish here at NMTU. (Suffice to say it closed with this: "God help US from people like you.")

A reminder to all: if you can't keep it rational, at least keep it clean, please, whatever side you're on.

"RN" is welcome to re-post in a less un-hinged manner. He/she was trying to make some worthwhile points, as far as I can tell.


outlaw josey wales said...


1) Free enterprise is great for delivering goods and services. Is health care like a tomato? Is health care like getting your lawn mowed?

2) Contra to your example of wealthy individuals coming here for specialized treatment, why do we have Americans going overseas as medical tourists? Why do some insurance companies reimburse for that?

Actually, maybe that's not a bad idea. Why not just outsource these things overseas?

As for doctor salaries, that's just an entitlement complex. I have a doctorate in chemistry that took 6 years to complete, should I be entitled to $150K just for working hard? (I wish I was, believe me).

If Obama is a socialist, how come his whole finance team is full of Goldman alumni? I guess GS is a well known socialist organization.

My fundamental premise is that a for-profit health care system (as the main system) is immoral. Obviously you disagree.

cargocultinvestor said...


Yes statistics are "slippery". But anecdotal evidence of "Canadians who come to the US for procedures" or "Brits who cash-pay" isn’t any use at all. How many Canadians come to the US for "procedures"? What "procedures" exactly?
Perhaps you have different data. If you’re getting your information about Canada’s healthcare system from that joker Rick Scott’s commercials, you’re being flat out lied to.

I have personal experience with both systems. The standard of care seems comparable. Studies of treatment outcomes comparing the 2 countries confirm there is little difference. If outcomes are the same the more expensive one would be inferior wouldn’t it? And it is hugely more expensive. Actually close to double. That’s not to say that the American system doesn’t have some advantages – faster access and cutting edge technology for those with the resources – but apparently it doesn’t translate into appreciatively better outcomes.

“should Cuba be our model?” That the richest country in the world has a higher infant mortality rate than a poor country like Cuba is shameful beyond words. If this is the best the US system can do then maybe yes, Cuba should be the model.

As a comparison I’ll stick to Canada because it is the only other one I know well. Although you seem think not, Canadians are reasonably content with their system. That’s not to say they are completely satisfied. But I can assure you that any political party that ran on a platform of dismantling Medicare and introducing American style healthcare would be vying with the Marijuana Party for fewest votes come election day. It is in the US that pressure is building to change the system, not Canada.

As it stands now, private insurers cover Americans during there working life and then hand them off to the government when they get old. Think about that in light of this rough but not at all slippery statistic. On average, roughly 50% of healthcare costs are incurred during your life. The other half are incurred during the last 3 months you are alive. If the government does all the heavy lifting at the end of the day, what use are the private insurers really?

It’s complicated but clearly the present hodge-podge is wasteful and not cost effective. Americans pay top dollar and then some for healthcare. They should get a clearly superior product. Instead, other than a few bells & whistles that don’t drop to the bottom line of a healthier existence, they get about the same as the guy paying half as much. That’s all I’m saying.

cargocultinvestor said...


Where did I question the quality of American healthcare? I certainly do question the cost and efficiency of the delivery system.

Yes the Mayo Clinic et al are state of the art facilities and offer world best services. So what? How many Americans get treated there? Not enough to affect any outcome statistics that’s for sure. In any case nobody wants to shut them down, at least that I’m aware of.

Physicians in all developed countries are compensated well enough. What are you worried about?

This whole debate has a decidedly Dr Strangelovian flavor to it. Commies do indeed drink water just like you and I.

Jeff Matthews said...

Cargo Cult: Da Vinci prostatectomies, for one. Ask Intuitive Surgical.

This ain't coming from TV commercials. Please upgrade your straw man.


cargocultinvestor said...


You lost me.
Funding the development of new medical technology is essential. Both those companies have made real advances. Is it that you think innovation will cease if the funding of healthcare changes? Or are you claiming that droves of Canadians are heading south for these services? Sorry but I really don't get your point. Maybe I'm a little thick.

OID02 said...

Great dialogue - it would be nice to see more of this done on a national scale so people are aware of the issues.

Personally, I would like a little price discovery when it comes to health care - what is the cost/price for the service? Why should a cash/non-insured person pay more for the same service than someone covered under a healthcare plan?

Jeff Matthews said...

Cargo Cult: You highlight the Canadian healthcare system as a role model--it's cheaper and they live two years longer than Americans etc.

But if the Canadian system is truly so great, why do Canadians come to the U.S. for, among other things, prostatectamies using Intuitive Surgical's daVinci robotics tool?

Well, because there is a cost to rationing healthcare.

That's all.

Something else to consider is this: doctors aren't the money-grubbing "Gordon Geckos" you seem to think the U.S. attracts.

Most of them--except the guys who head to Florida for the Medicaid scams--like figuring out what is wrong with someone and tyring to heal them.

For this they have to hire admins strictly to figure out how to collect what they're owed, and they get sued when something goes wrong.

The system, as it is constructed, is indeed broken. Politicians helped create this system. In my view, it is unlikely they will improve on it.


A Former American said...

How is it a fair criticism of private health care providers if a government run health care will wreck the privately run business models? Only to those who benefit from the current system, or whose ideology prevents them from considering obvious alternatives. Sometimes things have to change, and companies have to change too.

Who would be concerned if these companies went down because the government run system had better results and people voted with their new choices? Only the shareholders. The other alternative would be to protect shareholder wealth at a higher priority then the general social well being. This, in my not so humble opinion, is what caused the problem in the first place.

The US health care system is currently set up to provide maximum profits for a few people at the expense of the general social well being. The fact that a better off people for whom the cost of health care is not a issue get excellent service is mostly a by-product of the model. The system has created two classes of citizens: those privileged to get excellent care, and those to whom cannot get good care will likely face financial ruin at some point in their lives and have all their assets confiscated. The companies running the system set rules to the extent they can to benefit themselves, and it is the politicians jobs to set these rules to the general benefit. The failure of the politicians means there are undesirable outcomes, and now the politicians look at significant ownership of the system as a means to control it. This is a fair result, I believe, to achieve better outcomes. Perhaps if the health care providers had not tilted the marketplace so far in their favour, so that more and more people were left without reasonable coverage and face financial ruin with any major health care problem, the system would still be considered worth saving for most.

I am sure that the system works perfectly well for those that can easily afford it, but that is not a reasonable metric to judge how a health care system is working.

There are many jobs and industries that are necessary to society, but should not be for profit: roads, water supply, garbage pickup, intelligence/police/court services, electric utilities companies with a monopoly or non-competitive marketplace, fire fighters, military and health care providers. Looking at just some of the inefficient behaviour that results from private, for profit companies with enough power to set their own rules in these areas. (1) these industries have the ability to charge anything because their customers have no real alternatives, so prices levels would be far higher then necessary to achieve a reasonable return on investment. (2) these companies would also likely manipulate the market to keep new providers out. (3) these companies also seek to stimulate demand for their service ensuring continuous growth.

Oh, and it's also not a fair criticism of the Canadian system that some Canadians travel to other places to seek health care. I'm quite sure that people in the US go to Mexico and India for health care services too. Cubans would probably do the same if they could easily travel. People travel and Canadian have options too. I doubt that the number of Canadians travelling to the US for health care service is significant to the population as a whole. I have never seen US health care companies advertising in Canada.

p.s. your newspapers, radio and tv companies are broken too.

Anonymous said...

Jeff - an EXCELLENT piece!! thank you.

Sean said...

I generally love this blog, but I find it somewhat striking the Jeff Matthews and company are busy critiquing a Krugman opinion piece without giving mention to the fact that the WSJ is printing Karl Rove and Arthur Laffer editorials every week. These are, if you go to the web site, often the most read articles in the entire paper.

Krugman, for all his progressiveness (or socialist tendencies, whatever) is at least a well-reasoned and accomplished economist.

If you want to take issue with him, I think it's only fair to take issue with the opinion pieces coming out of the other side of the political spectrum. Read these editorials (especially anything by Laffer, the man famed for his pointless curve) and you'll see what I'm talking about.

s said...

Canada's health care system

6 month wait lists , forcing those who can afford it , to travel to the US for proper care

fewer MRI machines in the whole country than Boston has

closing 1500 beds in Ontario hospitals because the deficits are too big for the municipalities to cover