Archive for March 25th, 2010

Freefall, Joseph Stiglitz’s most recent book on the economic crisis, contains an interesting chapter dedicated to “Reforming Economics” where the author explains that “Economics had moved… from being a scientific discipline into becoming free market capitalism’s biggest cheerleader.” For a mainstream economist, he makes some strong critiques of neoclassical economics. For example, he writes that Arrow and DeBreu proved the existence of general Walrasian equilibrium under conditions “so restrictive as to question the relevance of the view that markets were efficient at all.” He challenges the existence of perfect information and that preferences should simply be taken as given. Regarding the notion of rationality: “I soon realized that my colleagues were irrationally committed to the assumption of rationality.” He also challenges the use of the representative agent in macroeconomics, which is the core of the Dynamic Stochastic General Equilibrium models used in graduate macro courses everywhere across the country.

What strikes me most, however, is how little of these ideas undergraduate economics majors are exposed to (much less the general public). Even intermediate theory courses do not touch on DSGE or the restrictions necessary to prove the existence of full General Walrasian Equilibrium or ask why preferences are simply taken as given. Undergrads are lucky if they even learn the names of Arrow and DeBreu. I agree with Stiglitz that these reforms sound nice. But how can this reform actually happen? Especially when no one can assess to what extent the ideas of economists caused the crisis because even undergraduates are not taught what economists really believe.


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A new NBER paper (h/t Thoma) by Richard Burkhauser and Kosali Simon says that it does. From the abstract:

 We show that ignoring the value of health insurance coverage will substantially understate the level of economic well being of Americans and its upward trend and overstate the level of inequality and its upward trend.

This argument is one of the key ones we often here to rebut the wage/productivity divergence we’ve witnessed in the last thirty years. It’s definitely landed me in uncomfortable “gotcha” moments at times. However, digging into the paper a little bit, the argument is left a bit wanting.

If we accept the methodology, the results are robust. For instance, using the standard measure of income, the 90/10 ratio increases from 8.3 to 8.5 from 1995 to 2008. Using their measure of income including health insurance, the ratio decreases from 9.3 to 9.1 over the time period. Similarly, instead of having the Gini coefficient increase from 0.422 to 0.433, it increases only slightly, from 0.396 to 0.398. With the new measure, income gains are much broader across deciles; except for the lowest 10%, income gains are uniformly higher as one moves down the income distribution.

I have two issues with this study:

1) They use the insurance value of health care in all cases, including Medicare and Medicaid, when we all know that costs have increased over time while quality has remained stagnant. Thus, as a measure of economic well-being, their “total income” metric will almost certainly overstate the reality. Further, health insurance “income” is a much higher share of “total income” at the bottom of the distribution, so the exercise will naturally lead us to less inequality. My suggestion would be using cross-country metrics of health expenditure to capture the well-being. With this change, the added income would likely be reduced by half and the picture would be much different.

2) The authors will inevitably argue that their study is positive economics, not normative. They are right; in fact, much of their paper could be construed as an argument in favor of health care reform. My concern is that many will take their paper as a sign that we should worry less about wage inequality and its systemic drivers, especially if health care is the main explanatory factor. I think their analysis is useful, because of my reservations above, I worry it might be useful for wrong and normative purposes, and the systemic causes of wage inequality are ignored enough as is.

So, to answer my question from the title, I think health insurance does reduce inequality, but less so than the authors state insofar as we are concerned about economic well-being.

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I saw a film last night called Lords of Nature: Life in a Land of Great Predators, which demonstrated that the elimination of great predators can have vast effects on their ecosystems. Predators in general have been run out of the lower 48 states; in particular, the absence of the wolf in places like Yellowstone National Park, Minnesota, and Wisconsin has had surprising effects on the forests they used to stalk. The basic argument in the case of wolves is this: wolves prey on deer and elk, whose foraging stunts the growth of new forest flora, leading to tree decline and thus struggles for lower species and the landscape itself.

The filmmakers pointed to a number of examples, including Yellowstone and Zion National Park in Utah where tourist fears of wolves led to their expulsion from these areas and thus to the decline of the overall ecosystem. Wolf reintroduction has been successful in restoring the ecosystems. Thus, the next frontier for wolf reintroduction are areas where human conflict is more direct- with cattle ranchers in the West and sheep herders in the North. However, concerted efforts among government agencies, NGOs, and even Deer Hunter Associations have allowed successful cohabitation of domesticated livestock and wild predators. Targetted herding can ensure that wolves primarily prey on the overpopulated deer and elk, and not on valuable livestock.

Of course, the buildup to the predators’ decline was decidedly human. Shortsighted interventions aimed to protect “assets” and maximize profits led to the one-sided demonization of particular species. Forgive me if I’m reaching as I argue this case is an example of capitalism’s unilateral drive for profit and ignorance of their long-term folly.

A not dissimilar thing is happening with bee colonies- the New York Times has an article about the collapse of wild bee populations and the failure of domesticated beehive increases to compensate. The problem isn’t necessary bee collapse itself- it’s that humans are asking too much of them.

This wouldn’t mean the end of human existence, but if we want to continue eating foods like apples and avocados, we need to understand that bees and other pollinators can’t keep up with the current growth in production of these foods.

The reason is that fruit and seed crops that are most dependent on pollinators yield relatively little food per acre, and therefore take up an inordinate, and increasing, amount of land. The fraction of agriculture dependent on pollination has increased by 300 percent in half a century.

What happens when lands are converted for crops? Wild bee populations decline:

The paradox is that our demand for these foods endangers the wild bees that help make their cultivation possible. The expansion of farmland destroys wild bees’ nesting sites and also wipes out the wildflowers that the bees depend on when food crops aren’t in blossom. Researchers in Britain and the Netherlands have found that the diversity of wild bee species in most regions in those countries has declined since 1980.

Human replacement of wild bee populations can only go so far, and it cannot replace the biodiversity necessary to sustain an ecosystem. Of course, this aspect was present in Lords of Nature as well. The presence of great predators does not just favor certain types of flora in a zero sum-game; it also forces the rapid evolution and adaptation of fauna, creating a bevy of biodiversity. Try as we may, we’ll never be able to put a value on this biodiversity. As these episodes point out, ecosystems are complex, and it’s very arrogant for humans to assume that simple valuation will preclude unintended consequences.

Reducing human impact on nature is a good in and of itself. It may mean sacrifices as well:

If we want to continue to enjoy almonds, apples and avocados, we have to cultivate fewer of them, more sustainably, and protect the wild bees that help make their production possible.

Similarly with the predators, we may have to be willing to pay more for livestock goods and consume less, as further predator reintroduction will result in losses. However, the benefits that come from these sacrifices appears to compound over time, so it’s necessary that we not underestimate the value of nature.

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