If the Washington Post wants to be a major newspaper, it needs to hire reporters who either (a) know some economic theory, or (b) are curious enough to learn some economic theory on the job. If it did, it would spare us stories like this that assert:
washingtonpost.com: Theoretically, Tax Reform Should Fly: If you want to understand why the Bush administration is pondering eliminating the tax deduction for employer-provided health insurance, consider this year's Economic Report of the President. There, White House economists assert that the deduction unfairly subsidizes employees of some companies while encouraging overly generous health policies that focus on routine medical care.... In crafting a broad agenda for his second term, Bush is trying to adhere strictly to economic theory, perhaps even more so than during the Reagan administration's early battles over deregulation and taxes.... N. Gregory Mankiw, chairman of the White House Council of Economic Advisers, spoke repeatedly of "standard economic theory," "textbook economic theory" and "scholarly literature in economics" to bolster his arguments...
For this assertion that Bush is trying to "adhere strictly to economic theory" is simply and totally false.
I can think of five principles of economic theory that apply to employer-sponsored health insurance:
1. Cost shifting: coverage for those who don't have health insurance is ultimately paid for by those who do, causing all kinds of financing and incentive problems. Thus there is very good reason to subsidize coverage to try to minimize the number of uninsured.
2. Adverse selection: markets in which one party knows much more about the value of the deal than the other are markets that work badly. Health insurance markets work much better when what is insured is a group with statistically-predictable risks than an individual with idiosyncratic risks difficult for the insurer to discover.
3. Moral hazard: when insurance companies rather than patients bear the marginal costs of treatments, there is an incentive to overtreat--except where treatment has public-health external benefits, and except where the insurer has written the contract to control utilization.
4. Coase theorem: Whenever informed and knowledgeable parties have reached agreement on the terms of a contract (i.e., comprehensive health insurance), do not presume that the government is doing anybody any favors by reaching in and monkeying with the contract terms.
5. Transaction costs: pointless churning of industry structure can be very expensive indeed.
Of these five principles of economic theory that apply to employer-sponsored health insurance, only one--number 3--would suggest that removing its tax deductibility is a really good idea, and then only to the extent that (a) large tax preferences were retained for employer-sponsored catastrophic coverage, (b) large tax preferences were retained for appropriate preventive and public health-related care, and (c) insurers were not able to appropriately manage care and utilization in the first place.
The other four principles of economic theory strongly suggest that trying to push the country out of its current pattern of health-care financing into one in which individuals bargain one by one with insurers for their coverage would be a very bad idea.
So why is Jonathan Weisman--the Washington Post reporter in this case--so easily snookered? Because he doesn't know enough to know that he should ask Republicans who talk about economic theory and health care, "What about adverse selection?" "What about moral hazard?" "What about the Coase theorem?"
Posted by DeLong at December 4, 2004 04:56 PM | TrackBack