Home > financial crisis, The Economics Profession > Economists tend not to be very good at economics

Economists tend not to be very good at economics

from Dean Baker

The $ 1.2 Trillion Health Care Tax
Economists tend not to be very good at economics, which is one of the main reasons that the world is facing such a prolonged downturn. Few economists were able to recognize the enormous imbalances created by housing bubbles in the United States and elsewhere, nor to understand that the collapse of these bubbles would lead to a prolonged period of stagnation in the absence of a vigorous response by governments.

Economists’ grasp of economics has not improved since the start of the downturn. There is little agreement within the profession on the appropriate way to bring the economy back to its potential level of output. Nor is there even agreement as to whether this is possible.

Instead, many economists are running around like chickens with their heads cut off, yelling that we have to do something about budget deficits. This concern is bizarre since it is easy to show that the current deficit in the United States is almost entirely due to the collapse of the housing bubble. The loss of revenue from this collapse, coupled with the measures taken to offset the impact of the downturn, explain almost all of the rise in the deficit since 2007, when it was just 1.2 percent of GDP.

The financial markets presumably recognize this fact, which is why the interest rate in 10-year Treasury bonds remains near a 70-year low. The more serious among the deficit hawks will acknowledge that current deficits don’t pose a problem, but then point to scary projections of large deficits 10 years and further down the road.

While some of these projections can look scary, these projections are driven almost entirely by projections of exploding health care costs. If the United States paid the same amount per capita for its health care as people in Canada, Germany or any other wealthy country we would be looking at long-term budget surpluses, not deficits.

This is where the response of the deficit hawks is truly bizarre and shows their poor grasp of economics. They invariably complain that health care costs are hard to control, so instead we must rely on cutbacks to public sector health care programs, like Medicare and Medicaid.

The reason why this response is bizarre is that a bloated health care sector has pretty much the same impact on the economy whether or not the government pays for it. The bloated payments for health care have pretty much the same impact regardless of who pays the bill.

To be concrete, imagine that because of their ability to use licensing restrictions to limit the supply of doctors, physicians in the United States can charge twice as much as their counterparts in Germany or Canada (that’s pretty close to the reality). These excess fees have roughly the same impact on the economy as if doctors got German or Canadian salaries and the government imposed a tax of $100,000 a year on each physician. In both cases, patients would have an excessive amount of money drained from their pockets to pay for their doctors’ services.

It would be the same story with an insurance industry that adds $200 billion a year or more to the cost of health care in the United States. From the standpoint of the economy, there is little difference between a situation in which insurers drive up the cost of care by $200 billion and a situation in which we have a more efficient system of health care delivery and the government imposes a tax on health care of $200 billion.

The same can be said of all the other areas where the enormous inefficiency of the U.S. health care system drives up costs: drugs, medical equipment and supplies, and hospital services. In total, the difference between the cost of care in the United States and the cost in countries with comparable care, like Germany or Canada, comes to more than $1.2 trillion dollars a year. According to the OECD’s health care data, this would be the annual savings to the United States if its per person health care costs were equal to those in either of these countries.

You would think that economists would be upset over a $1.2 trillion annual tax due to the inefficiency of our health care system. This is at least an order of magnitude larger than most issues that economists spend their time worrying over. Yet there are few economists who make this obvious point when debates over the budget come up. Instead, they typically chime in with the choir saying that we need to cut the budget, not fix health care.

The cynical among us might point out that fixing the budget mostly means beating up on older people getting Social Security and Medicare benefits. Fixing health care means going after powerful lobbies such as the insurers, the drug industry and doctors. But whatever their motive, the facts are clear. The vast majority of economists in the United States are not especially concerned about a $1.2 trillion annual health care tax; they have much less important matters to take up their time.

See article on original website

  1. Ignacio
    August 22, 2012 at 11:18 am

    When you wrote that

    “There is little agreement within the profession on the appropriate way to bring the economy back to its potential level of output. Nor is there even agreement as to whether this is possible.”

    you are assuming that economists at least agree that the main issue is to bring the economy back to its potential. It may not be the case.

  2. August 22, 2012 at 11:43 am

    Dean, how would you prevent the next boom/bust house price event, due in about 13 years?

    • August 23, 2012 at 4:19 pm

      CW, The main enabler of sizable asset price bubbles is keeping the real price histories nearly unseen. http://www.showrealhist.com/yTRIAL.html
      SO, stop this massive deception by omission!

      • August 24, 2012 at 8:18 am

        This does not apply to house prices, surely. In the UK the Land Registry publishes every landed property transaction, albeit with a delay. The biggest mortgage lender, Nationwide, also publishes its data more speedily.

    • August 24, 2012 at 4:38 pm

      CW, Housing is correct for USA, and up to date. I use S&P/Case-Shiller national index, published quarterly — that for 2012 Q2 is scheduled for release next week, 8/28.

      • August 27, 2012 at 8:19 am

        Along those lines, I note that the Updated link you provide presents a very different, and more negative, picture from the pre-housing (read: pre-land) crash in 2008, as well as the post 2000 stock market. Also, all the major stock indexes such from inclusion bias; that is, they only measure stocks that continue to be included in the indexes. They don’t measure stocks that have been dropped out, been absorbed in mergers, or have gone to zero due to bankruptcy, even though millions of investors held them through those prices too. These “extinguished” stocks matter more to the overall returns of the average investor and explains why most people fail to equal even the dumb S&P 500 index.

  3. August 22, 2012 at 10:30 pm

    Dean – in The economist, for june or july, there is a letter from the Chairman of Oglivy and Mather, who refers to “autistic rational” economist
    I don’t have a sub (i saw it in the Dr office) but I think you and other rwer’ers would be very amused

  4. Alice
    August 23, 2012 at 2:02 pm

    Many mainstream economists are very happy to work for the interests that caused the mess in the first place. Until the US fixes its corruption of government representatives and political representatives by industrial sixed quantities of money (bribes actually) they have no hope of fixing the hordes of economists happy to chase the falling money and devote themselves to peddling anti economics as if is a genuine science.
    There is no easy way out of this, especially when ithings have now gotten so rotten that many economists themselves are being trained in universities, not to think, but to mimic and parrot.

  5. QP
    August 24, 2012 at 9:54 am

    CW, there are lots of omissions in the UK Land Registry, cash purchases for example often go unrecorded and transfers of equity are not properly documented. It needs significant reform IMO.

  6. QP
    August 24, 2012 at 10:07 am

    So in essence: Economic rents, particularly those of the FIRE sectors, are the correct target for taxation rather than the productive economy (actualling delivering health care and building houses, etc).

  7. August 27, 2012 at 4:40 pm

    scottonthespot :
    Along those lines, I note that the Updated link you provide presents a very different, and more negative, picture from the pre-housing (read: pre-land) crash in 2008, as well as the post 2000 stock market. Also, all the major stock indexes such from inclusion bias; that is, they only measure stocks that continue to be included in the indexes. They don’t measure stocks that have been dropped out, been absorbed in mergers, or have gone to zero due to bankruptcy, even though millions of investors held them through those prices too. These “extinguished” stocks matter more to the overall returns of the average investor and explains why most people fail to equal even the dumb S&P 500 index.

    In my view, the real price histories are seldom shown because they show bubbles/MISpricing so well. I use stock indices as is, as does Shiller, as does WSJ:
    showrealhist.com/WSJ_3-30-99+RealDow.html

  8. September 17, 2012 at 5:19 pm

    Carol Wilcox :
    This does not apply to house prices, surely. In the UK the Land Registry publishes every landed property transaction, albeit with a delay. The biggest mortgage lender, Nationwide, also publishes its data more speedily.

    At this 9/17 writing, my Real Homes is thru 2012 Q2, and my RealDow is thru Aug. 2012.
    http://www.showrealhist.com/RHandRD.html

    • November 30, 2015 at 12:56 am

      So leasehold purchases are not recorded?

  9. November 29, 2015 at 11:04 am

    Hi Donna. You can search for an environmental specialist or toxicologist in your area and they can test you and your son for mycotoxins, they’ll be able to tell your levels if you test positive as well as the types of mycotoxins you test positive for. If you don’t have one of these specialists in your area, you can order a mycotoxin urinalysis through real time labs and present the results to your GP/family doctor. As for the house, order a reliable test such as the ERMI from mycometrics which tests air as well as dust samples which is more accurate. Good luck, I’ll be praying for you and your son.

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