Some applause please for Casey Mulligan. Mulligan has been a strong opponent of the Affordable Care Act and the expansion of Medicaid provided under the act. However he used his column today to dispel a misunderstanding of a study of the health impact of increased Medicaid enrollment in Oregon.
The study was written up in an article in the New England Journal of Medicine which noted that the study found no statistically significant impact of Medicaid enrollment on health care. However Mulligan makes the point that the study actually did find that the people enrolled in Medicaid had improved health by several important measures. While the improvements were not large enough to meet standard tests of statistical significance this does not mean that they were not important. As Mulligan notes, given the limited number of people in the study and the relatively short time-frame (2 years), it would have been highly unlikely that it could have found statistically significant gains in health outcomes.
Mulligan deserves credit for clarifying this point, especially when the implications seem to be directly at odds with his view of the policy. It would be great if debates on economic policy were always like this.
Addendum:
I’m glad to see that I have people knowledgeable about statistics reading this blog. Since I guess I was too quick in my post and folks apparently did not read the Mulligan piece or the study, let me be a bit clearer. The study had very little power. There were not enough people in it. As a result you had relatively few people with any specific condition, which meant that it would be almost impossible to find statistically significant results.
To see this point, suppose we chose 100 people at random for a study to determine if drug X was effective in preventing heart attacks. We gave 50 people drug X and the other 50 got a placebo. After a year, 2 people in the placebo group got a heart attack but only one person in the treatment group. Okay, this is a nice result, but almost certainly not statistically significant. Since we had not selected people with heart conditions and heart attacks are relatively infrequent in the population as a whole, it would have been almost impossible to have a statistically significant finding.
That is the story of the Oregon study. It had some encouraging results. They were not statistically significant, but it would have been almost impossible given the design of the study to have statistically significant results. That was the point of Mulligan’s piece — and he is 100 percent right.
Some applause please for Casey Mulligan. Mulligan has been a strong opponent of the Affordable Care Act and the expansion of Medicaid provided under the act. However he used his column today to dispel a misunderstanding of a study of the health impact of increased Medicaid enrollment in Oregon.
The study was written up in an article in the New England Journal of Medicine which noted that the study found no statistically significant impact of Medicaid enrollment on health care. However Mulligan makes the point that the study actually did find that the people enrolled in Medicaid had improved health by several important measures. While the improvements were not large enough to meet standard tests of statistical significance this does not mean that they were not important. As Mulligan notes, given the limited number of people in the study and the relatively short time-frame (2 years), it would have been highly unlikely that it could have found statistically significant gains in health outcomes.
Mulligan deserves credit for clarifying this point, especially when the implications seem to be directly at odds with his view of the policy. It would be great if debates on economic policy were always like this.
Addendum:
I’m glad to see that I have people knowledgeable about statistics reading this blog. Since I guess I was too quick in my post and folks apparently did not read the Mulligan piece or the study, let me be a bit clearer. The study had very little power. There were not enough people in it. As a result you had relatively few people with any specific condition, which meant that it would be almost impossible to find statistically significant results.
To see this point, suppose we chose 100 people at random for a study to determine if drug X was effective in preventing heart attacks. We gave 50 people drug X and the other 50 got a placebo. After a year, 2 people in the placebo group got a heart attack but only one person in the treatment group. Okay, this is a nice result, but almost certainly not statistically significant. Since we had not selected people with heart conditions and heart attacks are relatively infrequent in the population as a whole, it would have been almost impossible to have a statistically significant finding.
That is the story of the Oregon study. It had some encouraging results. They were not statistically significant, but it would have been almost impossible given the design of the study to have statistically significant results. That was the point of Mulligan’s piece — and he is 100 percent right.
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Ireland has been repeatedly touted as a success story by advocates of austerity. However as Floyd Norris points out in a nice piece today, the widely touted turnaround is mostly a quirk in the data.
For tax purposes, several large UK companies have moved their headquarters from the UK to Ireland. This changes nothing in terms of Ireland’s actual GNP, in the sense of money flowing to people living in Ireland, but it does lead to an increase in reported GNP. The profits of these UK companies now show up in Ireland’s GNP rather than in the UK. When an adjustment is made for this switch Ireland’s GNP growth looks considerably weaker the last four years. Instead of turning positive in 2010 its current account just turned positive last year, and even then just by a small amount.
It seems like the austerity advocates will have to look elsewhere for their success story.
Ireland has been repeatedly touted as a success story by advocates of austerity. However as Floyd Norris points out in a nice piece today, the widely touted turnaround is mostly a quirk in the data.
For tax purposes, several large UK companies have moved their headquarters from the UK to Ireland. This changes nothing in terms of Ireland’s actual GNP, in the sense of money flowing to people living in Ireland, but it does lead to an increase in reported GNP. The profits of these UK companies now show up in Ireland’s GNP rather than in the UK. When an adjustment is made for this switch Ireland’s GNP growth looks considerably weaker the last four years. Instead of turning positive in 2010 its current account just turned positive last year, and even then just by a small amount.
It seems like the austerity advocates will have to look elsewhere for their success story.
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Chrystia Freeland notes the rapid growth in the wealth of the extremely rich. Then she follows Greg Mankiw in arguing that this growth is largely positive insofar as it resulted from people like Steve Jobs and J.K. Rowling producing great innovations or creative material enjoyed by hundreds of millions of people.
While Freeland notes problems from the resulting inequality, she does commit the same error as Mankiw in implying both that the enormous wealth of these people is a natural outgrowth of the market and that these creative people would not have been as productive absent these enormous rewards. Neither claim is remotely plausible.
The choice of Jobs and Rowling is especially ironic in this context since the wealth of both individuals is so obviously dependent on the intervention of the government in the form of patent and copyright monopolies. These monopolies are a prize awarded by the government as a way to provide incentives for creative work. These are quintessential forms of government intervention, they are 180 degrees at odds with the free market.
Of course the government could have easily structured these monopolies in ways that did not allow Jobs and Rowling to get quite as rich. Suppose the length of these monopolies was cut in half or by 75 percent. (In the good old days copyrights lasted for 14 years, subject to an option for renewal. The duration is now 95 years.) Suppose the scope was drawn much more narrowly so that these monopolies did not apply to derivative works or were not enforced with the same vigor.
Even if we decide that these prizes of government monopolies are the best way to support innovative and creative work, the fact that they are structured to allow for such enormous wealth is a decision by governments. It was not the market. Mankiw has apparently made the sort of Excel spreadsheet type error for which Harvard professors have become famous.
Btw, we have many other mechanisms already in place to finance innovation and creative work. Ever hear of universities? foundations? the National Institutes of Health? the Department of Defense, as in the Internet? These alternatives could easily be expanded and altered to replace patents and copyrights. Going in this direction may or may not be the best way to finance innovation and creative work, but the point is that the choice of mechanism is a policy choice made by governments. It is not the result of the natural working of the market.
Oh, and there is some reason to believe that the individuals who get incredibly rich through patent and copyright protection will use their wealth to ensure that patent and copyright protection become stronger and last longer and that alternative mechanisms never get seriously considered in policy circles. (How much has the Gates Foundation contributed to supporting alternatives to patents for developing drugs and vaccines?)
The other obvious flaw in the Mankiw logic is the implication that the great wealth received by a Jobs or Rowling was necessary to persuade them to be enormously creative people. The history of science is full of people who did great work without achieving anything remotely comparable to the wealth of a Steve Jobs or Bill Gates. Anyone know the names of the individuals responsible for the big breakthroughs that gave us the Internet?
How about Jonas Salk who developed the first polio vaccine, protecting hundreds of millions of people from a horrible disease? He did this work without the promise of getting as rich as a Bill Gates.
In terms of creative work, there are countless writers, musicians and other creative workers who never made any substantial sum from their work. Is J.K. Rowlings’ work more valuable to society than the paintings of Vicent van Gogh, the music of Charlie Parker, or the writings of Franz Kafka? These people produced work that hundreds of millions of people have enjoyed over the decades without anything like the compensation of a J.K. Rowling.
Clearly we can structure a system in which a small number of creative people can get very rich. But that hardly implies that great wealth is a necessary incentive for generating work of great creativity.
In short, Mankiw has told us that the government has provided prizes that allow people to get enormously wealthy. He has no evidence that these prizes are the most efficient way to promote innovation and creativity, but he doesn’t see anything wrong with the resulting inequality.
Note: You can find further ruminations on this issue here.
Chrystia Freeland notes the rapid growth in the wealth of the extremely rich. Then she follows Greg Mankiw in arguing that this growth is largely positive insofar as it resulted from people like Steve Jobs and J.K. Rowling producing great innovations or creative material enjoyed by hundreds of millions of people.
While Freeland notes problems from the resulting inequality, she does commit the same error as Mankiw in implying both that the enormous wealth of these people is a natural outgrowth of the market and that these creative people would not have been as productive absent these enormous rewards. Neither claim is remotely plausible.
The choice of Jobs and Rowling is especially ironic in this context since the wealth of both individuals is so obviously dependent on the intervention of the government in the form of patent and copyright monopolies. These monopolies are a prize awarded by the government as a way to provide incentives for creative work. These are quintessential forms of government intervention, they are 180 degrees at odds with the free market.
Of course the government could have easily structured these monopolies in ways that did not allow Jobs and Rowling to get quite as rich. Suppose the length of these monopolies was cut in half or by 75 percent. (In the good old days copyrights lasted for 14 years, subject to an option for renewal. The duration is now 95 years.) Suppose the scope was drawn much more narrowly so that these monopolies did not apply to derivative works or were not enforced with the same vigor.
Even if we decide that these prizes of government monopolies are the best way to support innovative and creative work, the fact that they are structured to allow for such enormous wealth is a decision by governments. It was not the market. Mankiw has apparently made the sort of Excel spreadsheet type error for which Harvard professors have become famous.
Btw, we have many other mechanisms already in place to finance innovation and creative work. Ever hear of universities? foundations? the National Institutes of Health? the Department of Defense, as in the Internet? These alternatives could easily be expanded and altered to replace patents and copyrights. Going in this direction may or may not be the best way to finance innovation and creative work, but the point is that the choice of mechanism is a policy choice made by governments. It is not the result of the natural working of the market.
Oh, and there is some reason to believe that the individuals who get incredibly rich through patent and copyright protection will use their wealth to ensure that patent and copyright protection become stronger and last longer and that alternative mechanisms never get seriously considered in policy circles. (How much has the Gates Foundation contributed to supporting alternatives to patents for developing drugs and vaccines?)
The other obvious flaw in the Mankiw logic is the implication that the great wealth received by a Jobs or Rowling was necessary to persuade them to be enormously creative people. The history of science is full of people who did great work without achieving anything remotely comparable to the wealth of a Steve Jobs or Bill Gates. Anyone know the names of the individuals responsible for the big breakthroughs that gave us the Internet?
How about Jonas Salk who developed the first polio vaccine, protecting hundreds of millions of people from a horrible disease? He did this work without the promise of getting as rich as a Bill Gates.
In terms of creative work, there are countless writers, musicians and other creative workers who never made any substantial sum from their work. Is J.K. Rowlings’ work more valuable to society than the paintings of Vicent van Gogh, the music of Charlie Parker, or the writings of Franz Kafka? These people produced work that hundreds of millions of people have enjoyed over the decades without anything like the compensation of a J.K. Rowling.
Clearly we can structure a system in which a small number of creative people can get very rich. But that hardly implies that great wealth is a necessary incentive for generating work of great creativity.
In short, Mankiw has told us that the government has provided prizes that allow people to get enormously wealthy. He has no evidence that these prizes are the most efficient way to promote innovation and creativity, but he doesn’t see anything wrong with the resulting inequality.
Note: You can find further ruminations on this issue here.
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Suppose the price of corn plummets. Does that mean that the world economy is going down the tubes?
Well, it could be the result of the collapse of demand in the world economy leading to less demand for all commodities or it may just be the result of a bumper corn crop. The latter would be good news for the world economy even though it would be bad news for farmers who produce lots of corn.
Such is the case with stock markets. Stock markets move up and down all the time often for reasons that have nothing to do with the state of the economy. They also have very little predictive power. The market has more than doubled from its 2010 lows even though growth has averaged a pathetic 2.0 percent over the last three years.
Their effect on the economy is also limited. Few companies rely on the stock market to raise capital for investment. The main impact of the stock market on the economy is through the wealth effect on consumption. This is usually estimated as being in the range of 3-4 percent. That means a 10 percent run-up in the stock market, which would generate roughly $2 trillion in wealth, would eventually lead to $60-$80 billion in additional annual consumption. (The impact is usually estimated to be felt over a 2-3 year period.) With a multiplier of 1.5 this implies an impact of 0.6-0.7 percentage points of GDP. That is not trivial, but it is hardly the difference between a booming economy and stagnation.
This is why the NYT badly misled readers with a lead sentence in an article that said:
“Tumbling stock, bond and commodity prices around the world are demonstrating just how reliant the global economy has become on the monetary policies of the Federal Reserve.”
The movements in markets showed that the markets respond to actions of the Fed. The plunge in stock prices is bad news if you own a lot of stock, just as a plunge in corn prices is bad news if you have lots of corn. It is not necessarily bad news for the economy.
Suppose the price of corn plummets. Does that mean that the world economy is going down the tubes?
Well, it could be the result of the collapse of demand in the world economy leading to less demand for all commodities or it may just be the result of a bumper corn crop. The latter would be good news for the world economy even though it would be bad news for farmers who produce lots of corn.
Such is the case with stock markets. Stock markets move up and down all the time often for reasons that have nothing to do with the state of the economy. They also have very little predictive power. The market has more than doubled from its 2010 lows even though growth has averaged a pathetic 2.0 percent over the last three years.
Their effect on the economy is also limited. Few companies rely on the stock market to raise capital for investment. The main impact of the stock market on the economy is through the wealth effect on consumption. This is usually estimated as being in the range of 3-4 percent. That means a 10 percent run-up in the stock market, which would generate roughly $2 trillion in wealth, would eventually lead to $60-$80 billion in additional annual consumption. (The impact is usually estimated to be felt over a 2-3 year period.) With a multiplier of 1.5 this implies an impact of 0.6-0.7 percentage points of GDP. That is not trivial, but it is hardly the difference between a booming economy and stagnation.
This is why the NYT badly misled readers with a lead sentence in an article that said:
“Tumbling stock, bond and commodity prices around the world are demonstrating just how reliant the global economy has become on the monetary policies of the Federal Reserve.”
The movements in markets showed that the markets respond to actions of the Fed. The plunge in stock prices is bad news if you own a lot of stock, just as a plunge in corn prices is bad news if you have lots of corn. It is not necessarily bad news for the economy.
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Harvard’s standing in economic policy debates took a big hit when the famous Reinhart-Rogoff 90 percent debt-to-GDP growth cliff was shown to be the result of a simple spreadsheet error. Niall Ferguson’s strange rant in the Wall Street Journal about the United States becoming the land of government regulation continues the downhill slide.
The gist of the piece is that the country is going down the road to economic stagnation and suffocating bureaucracy because of excessive regulation. The Affordable Care Act (ACA) is the main villain in this story.
It’s fair to say that just about everything in the piece is wrong. Starting with the meat, rather than being some horrible burden for small businesses, the main effect of the ACA on the vast majority of small businesses will be to provide them with a subsidy if they offer their workers insurance. The mandate only applies to firms that employ more than 50 workers, most of whom already provide insurance that would meet the mandate anyhow. So these engines of innovation will grind to a halt if the government offers them subsidies for insurance? Interesting theory.
Ferguson then cites a number of hack studies that find enormous costs to regulation. The main trick in this sort of study is to add up every possible cost associated with restrictions without taking account of the benefits of these regulations.
Suppose we had a new law that allowed oil, gas, and other mineral companies to dig up anyone’s property without any compensation whatsoever. This would undoubtedly lead to huge growth in these extractive industries and a big gain in GDP that the Fergusons of the world would celebrate.
Of course there would be no accounting of the destruction to people’s property or the loss in value they may experience as a result of having an oil rig next to their front porch. Ferguson is effectively mourning that in the United States companies don’t enjoy this freedom to excavate or to in other ways damage the environment and the public’s health.
Other parts of Ferguson’s argument are equally off the mark. His main measure of regulation is the number of pages in the Federal Register. It’s not clear that this is a measure of anything. The originally proposed Volcker Rule, which prohibited banks with government insured deposits from engaging in speculative trading, was quite short. It grew an order magnitude larger as the industry watered down the restriction with gobs of exceptions.
By Ferguson’s measure, the watered down Volcker Rule means more regulation than the strong Volcker Rule because it involves more pages. There would be a similar story with many rules in the Federal Register.
Finally, Ferguson is badly confused when it comes to economic growth. He tells us:
“The last time regulation was cut was under Ronald Reagan, when the number of pages in the Federal Register fell by 31%. Surprise: Real GDP grew by 30% in that same period.”
Apparently Ferguson is impressed that the U.S. economy grew in the 1980s. Of course the U.S. economy almost always grows, economists usually ask about the rate of growth. At the peak of the Reagan business cycle in 1990, the economy was 33.8 percent larger than at the prior business cycle peak in 1981. By comparison, the economy was 41.1 percent larger in 2001 than it had been in 1990. In other words, the economy grew more rapidly after the evils of regulation had returned in the post-Reagan era.
The economy grew much more in the 1960s, the highpoint of liberal intervention. It was 51.6 percent larger in 1970 than in 1960. Even the dreadful 1970s had more growth than Ferguson’s low regulation Reagan days, expanding by 39.9 percent from 1970 to the business cycle peak in 1981. The productivity data, which measures growth per hour worked, would show a similar picture.
So there you have it: Ferguson has no serious measure of either the cost or the extent of regulation. And he gets the story on growth completely backward. This is the sort of wisdom on economic policy that we are coming to expect from Harvard University and the Wall Street Journal opinion page.
Harvard’s standing in economic policy debates took a big hit when the famous Reinhart-Rogoff 90 percent debt-to-GDP growth cliff was shown to be the result of a simple spreadsheet error. Niall Ferguson’s strange rant in the Wall Street Journal about the United States becoming the land of government regulation continues the downhill slide.
The gist of the piece is that the country is going down the road to economic stagnation and suffocating bureaucracy because of excessive regulation. The Affordable Care Act (ACA) is the main villain in this story.
It’s fair to say that just about everything in the piece is wrong. Starting with the meat, rather than being some horrible burden for small businesses, the main effect of the ACA on the vast majority of small businesses will be to provide them with a subsidy if they offer their workers insurance. The mandate only applies to firms that employ more than 50 workers, most of whom already provide insurance that would meet the mandate anyhow. So these engines of innovation will grind to a halt if the government offers them subsidies for insurance? Interesting theory.
Ferguson then cites a number of hack studies that find enormous costs to regulation. The main trick in this sort of study is to add up every possible cost associated with restrictions without taking account of the benefits of these regulations.
Suppose we had a new law that allowed oil, gas, and other mineral companies to dig up anyone’s property without any compensation whatsoever. This would undoubtedly lead to huge growth in these extractive industries and a big gain in GDP that the Fergusons of the world would celebrate.
Of course there would be no accounting of the destruction to people’s property or the loss in value they may experience as a result of having an oil rig next to their front porch. Ferguson is effectively mourning that in the United States companies don’t enjoy this freedom to excavate or to in other ways damage the environment and the public’s health.
Other parts of Ferguson’s argument are equally off the mark. His main measure of regulation is the number of pages in the Federal Register. It’s not clear that this is a measure of anything. The originally proposed Volcker Rule, which prohibited banks with government insured deposits from engaging in speculative trading, was quite short. It grew an order magnitude larger as the industry watered down the restriction with gobs of exceptions.
By Ferguson’s measure, the watered down Volcker Rule means more regulation than the strong Volcker Rule because it involves more pages. There would be a similar story with many rules in the Federal Register.
Finally, Ferguson is badly confused when it comes to economic growth. He tells us:
“The last time regulation was cut was under Ronald Reagan, when the number of pages in the Federal Register fell by 31%. Surprise: Real GDP grew by 30% in that same period.”
Apparently Ferguson is impressed that the U.S. economy grew in the 1980s. Of course the U.S. economy almost always grows, economists usually ask about the rate of growth. At the peak of the Reagan business cycle in 1990, the economy was 33.8 percent larger than at the prior business cycle peak in 1981. By comparison, the economy was 41.1 percent larger in 2001 than it had been in 1990. In other words, the economy grew more rapidly after the evils of regulation had returned in the post-Reagan era.
The economy grew much more in the 1960s, the highpoint of liberal intervention. It was 51.6 percent larger in 1970 than in 1960. Even the dreadful 1970s had more growth than Ferguson’s low regulation Reagan days, expanding by 39.9 percent from 1970 to the business cycle peak in 1981. The productivity data, which measures growth per hour worked, would show a similar picture.
So there you have it: Ferguson has no serious measure of either the cost or the extent of regulation. And he gets the story on growth completely backward. This is the sort of wisdom on economic policy that we are coming to expect from Harvard University and the Wall Street Journal opinion page.
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While meandering the streets of Paris, Paul Krugman apparently awakened to the fact that the assignment of claims to wealth through patents, copyrights, and other forms of intellectual property is a really big deal. This is good news for those who have been jumping up and down yelling about this issue for the last 15 years or so.
There is really big money in this area. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs). We would probably spend about one-tenth this amount in the absence of patent protection. The difference is equal to about 20 percent of after-tax corporate profits.
And this huge gap between price and marginal cost gives drug companies enormous incentive to push their drugs as much as possible. This means concealing evidence that they are ineffective or even harmful. We routinely see stories about the drug companies responding exactly as economic theory predicts.
Of course the huge gap between price and marginal cost leads to all the predicted distortions on the consumer side as well. People have to struggle to find the money to pay for drugs that cost hundreds or even thousands of dollars a prescription when the price would be largely a non-issue if they sold for the generic price.
In the case of the tech sector, Google, Apple, Microsoft, and Samsung compete at least as much in their legal departments as in the quality of the products they develop. Patents are more often used to harass competitors than to protect innovation — and that is what the business press says.
In the realm of copyright, we have the efforts by the entertainment industry to turn us all into junior copyright cops through measures like SOPA or PIPA.
So intellectual property is a really big deal in the modern economy. And what is neat about it is that these property relations are almost infinitely malleable. (Okay, all property relations are malleable, but IP seems to offer much more room.) That’s the key point that we all have to understand because the bad guys want to convince us that patents and copyrights came to us from on high and that it is our obligation to enforce them in their current or strengthened form, otherwise we are dirty communists.
It’s great to see that Krugman may now be on the case. Perhaps he will be able to teach the economists a bit of economics. (Hint: an intro textbook goes far here. Large gaps between price and marginal cost are bad in trade, much larger gaps between price and marginal cost are really bad when it comes to intellectual property.)
While meandering the streets of Paris, Paul Krugman apparently awakened to the fact that the assignment of claims to wealth through patents, copyrights, and other forms of intellectual property is a really big deal. This is good news for those who have been jumping up and down yelling about this issue for the last 15 years or so.
There is really big money in this area. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs). We would probably spend about one-tenth this amount in the absence of patent protection. The difference is equal to about 20 percent of after-tax corporate profits.
And this huge gap between price and marginal cost gives drug companies enormous incentive to push their drugs as much as possible. This means concealing evidence that they are ineffective or even harmful. We routinely see stories about the drug companies responding exactly as economic theory predicts.
Of course the huge gap between price and marginal cost leads to all the predicted distortions on the consumer side as well. People have to struggle to find the money to pay for drugs that cost hundreds or even thousands of dollars a prescription when the price would be largely a non-issue if they sold for the generic price.
In the case of the tech sector, Google, Apple, Microsoft, and Samsung compete at least as much in their legal departments as in the quality of the products they develop. Patents are more often used to harass competitors than to protect innovation — and that is what the business press says.
In the realm of copyright, we have the efforts by the entertainment industry to turn us all into junior copyright cops through measures like SOPA or PIPA.
So intellectual property is a really big deal in the modern economy. And what is neat about it is that these property relations are almost infinitely malleable. (Okay, all property relations are malleable, but IP seems to offer much more room.) That’s the key point that we all have to understand because the bad guys want to convince us that patents and copyrights came to us from on high and that it is our obligation to enforce them in their current or strengthened form, otherwise we are dirty communists.
It’s great to see that Krugman may now be on the case. Perhaps he will be able to teach the economists a bit of economics. (Hint: an intro textbook goes far here. Large gaps between price and marginal cost are bad in trade, much larger gaps between price and marginal cost are really bad when it comes to intellectual property.)
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