Douglass C. North, 1920-2015

I received word today that Douglass North passed away yesterday at the age of 95 (obit here). Professor North shared the Nobel Prize in Economic with Robert Fogel in 1993 for his work in economic history on the role of institutions in shaping economic development and performance.DoughNorth_color_300-doc

Doug was one of my first professors in graduate school at Washington University. Many of us in our first year crammed into Doug’s economic history class for fear that he might retire and we not get the chance to study under him. Little did we expect that he would continue teaching into his 80s. The text for our class was the pre-publication manuscript of his book, Institutions, Institutional Change and Economic Performance. Doug’s course offered an interesting juxtaposition to the traditional neoclassical microeconomics course for first-year PhD students. His work challenged the simplifying assumptions of the neoclassical system and shed a whole new light on understanding economic history, development and performance. I still remember that day in October 1993 when the department was abuzz with the announcement that Doug had received the Nobel Prize. It was affirming and inspiring.

As I started work on my dissertation, I had hoped to incorporate a historical component on the early development of crude oil futures trading in the 1930s so I could get Doug involved on my committee. Unfortunately, there was not enough information still available to provide any analysis (there was one news reference to a new crude futures exchange, but nothing more–and the historical records of the NY Mercantile Exchange had been lost in a fire).and I had to focus solely on the deregulatory period of the late 1970s and early 1980s. I remember joking at one of our economic history workshops that I wasn’t sure if it counted as economic history since it happened during Doug’s lifetime.

Doug was one of the founding conspirators for the International Society for New Institutional Economics (now the Society for Institutional & Organizational Economics) in 1997, along with Ronald Coase and Oliver Williamson. Although the three had strong differences of opinions concerning certain aspects of their respective theoretical approaches, they understood the generally complementary nature of their work and its importance not just for the economic profession, but for understanding how societies and organizations perform and evolve and the role institutions play in that process.

The opportunity to work around these individuals, particularly with North and Coase, strongly shaped and influenced my understanding not only of economics, but of why a broader perspective of economics is so important for understanding the world around us. That experience profoundly affected my own research interests and my teaching of economics. Some of Doug’s papers continue to play an important role in courses I teach on economic policy. Students, especially international students, continue to be inspired by his explanation of the roles of institutions, how they affect markets and societies, and the forces that lead to institutional change.

As we prepare to celebrate Thanksgiving in the States, Doug’s passing is a reminder of how much I have to be thankful for over my career. I’m grateful for having had the opportunity to know and to work with Doug. I’m grateful that we had an opportunity to bring him to Mizzou in 2003 for our CORI Seminar series, at which he spoke on Understanding the Process of Economic Change (the title of his next book at the time). And I’m especially thankful for the influence he had on my understanding of economics and that his ideas will continue to shape economic thinking and economic policy for years to come.

Do Medical Marijuana Laws Increase Hard-Drug Use?

According to a recent study by Yu-Wei Luke Chu in the Journal of Law & Economics, the answer is not just “No,” but that medical marijuana laws may actually decrease heroin use as consumers substitute the legal marijuana for heroin. Below is the abstract:

Medical marijuana laws generate significant debate regarding drug policy. For instance, if marijuana is a complement to hard drugs, then these laws would increase the usage not only of marijuana but also of hard drugs. In this paper I study empirically the effects of medical marijuana laws by analyzing data on drug arrests and treatment admissions. I find that medical marijuana laws increase these proxies for marijuana consumption by around 10–15 percent. However, there is no evidence that cocaine and heroin usage increases. From the arrest data, the estimates indicate a 0–15 percent decrease in possession arrests for cocaine and heroin combined. From the treatment data, the estimates show a 20 percent decrease in admissions for heroin-related treatment, although there is no significant effect for cocaine-related treatment. These results suggest that marijuana may be a substitute for heroin, but it is not strongly correlated with cocaine.

Fun (Facts & Fiction) With Numbers: Health Care Edition

The graph below, courtesy of the Kaiser Family Foundation, is featured in a VOX post purporting to explain why your health bills are gettng larger (all in one chart!).

kff deductiblesThe article focuses on the fact that deductibles have risen so dramatically as a major explanation for why it seems like we’re spending so much more on health care, even as health care expenses have been growing more slowly. There is some truth in the claim, and especially to the argument that people are more careful spending on health care when they have to pay for more of it up front, but there are some serious problems with this chart that can lead one to some pretty wrong conclusions.

First, what the graph doesn’t reflect is that the increase in premiums and the increase in deductibles are not, as the picture would appear, necessarily moving together for the people paying them. These are averages, and averages hide lots of information. Moreover, the graph makes it look like the two are increasing are independent of one another; i.e., that people are paying both 24% more in premiums and 67% more in deductibles since 2010. But that’s not the case. Since the ACA, many employers have moved to high-deductible plans that have lower premiums than the low-deductible plans that were popular pre-2010 (see below). What the graph hides is that people with low-deductible plans have seen higher than 24% increases in premiums while people with high-deductible plans have seen much lower increases in premiums–if not actual reductions in their premiums. What has changed is not necessarily how much people are paying for healthcare, but how they are paying it: in premiums or in deductibles. The graph above fails to show that.

Second, looking more closely at the news release on the Kaiser website, the 67% increase in deductibles is an increase in total deductibles paid–not the increase in the average deductible per employee. It reflects not only any increase in deductibles, but the increase in the number of people who have (higher) deductibles. That’s a pretty sneaky way to inflate the numbers on the graph to make it look like the average person is actually paying that much more. Consider the following two graphs, also from the Kaiser Family Foundation 2015 survey. kff-mkt-share-type kff-premiums The table on the left shows that premiums for high deductible plans (HDHP/SOs) are significantly lower than premiums for other types of policies. The table on the right shows that the market share of HDHP/SO plans has increased tremendously since gaining ground in 2006. In fact, to relate this to the first graph above, participation in HDHP/SO plans almost doubled from 2010 to 2015, meaning that 50 points of the 67% increase in deductibles could be attributable solely to more people choosing high deductible plans, specifically because the premiums are so much lower. And what the Kaiser report doesn’t say is how much employers contribute to the HSA plans that often accompany HDHP/SO plans. For some individuals, switching to the HDHP/SO plan may actually reduce their total out-of-pocket expense for health care. So while the original graph makes it look like everyone is paying more, that is likely not true for many people–and certainly not at the rate the original graph might suggest.

Finally, because the first graph is in percentages, it hides even more information that changes the story. Suppose deductibles had been $500 and increased to $1,000 or even $2,000. That’s would be a 100-300% increase! 300%! But that’s only $1,500. Not that $1,500 is chump change, but compared to the average annual premium of $6,251 (see the left-hand table above), that’s just 24%–ironically, about the total increase in premiums over the past five years. Even if that $500 deductible grew at the 67% shown in the first graph (which we know from #2 that it didn’t), the increase in actual out-of-pocket health care costs would have been $335–not quite the cost of two lattes a week.

Mark Twain is famously quoted as saying (and actually quoting Disraeli), “There are three kinds of lies: lies, damned lies and statistics..”  I’m not saying VOX (or Kaiser) are lying. But be careful when you see things like VOX’s report about some “fantastic new chart.” It’s far too easy to be misled if you don’t think carefully about the numbers being thrown about.

Bonus: If you’re interested in what the research says about the effects of high deductible plans, RAND has a nice summary site with links to additional resources.

Health Insurance Mandate Increases the Federal Deficit….?

A new report by the Congressional Budget Office (CBO) suggests that eliminating the mandate for purchasing health insurance would actually reduce the federal budget deficit by $305 billion. How? Because the estimated additional 14 million people in 2025 who would choose not to be insured would save the government roughly $311 billion on subsidies and health care expenses, while sacrificing $6 billion in revenues from the expected penalties (or taxes, depending on how you follow Chief Justice Roberts’ logic).

Two important observations:

  1. 14 million uninsured people?! Yes…but that would be the expected total to 41 million in 2025 (meaning even with Obamacare as it currently is, the CBO expects 27 million uninsured people anyhow).
  2. Another consequence of eliminating the mandate: insurance premiums for those who DO purchase insurance are estimated to go up another 20% on top of existing expected rate increases. This reflects the free-riding problem that led to the mandate being implemented to begin with: people who have low expected health care expenses (i.e., healthier people) are the very ones most likely NOT to buy insurance. Without the healthier people in the risk pool, the expected cost of caring for those who DO buy insurance goes up, which increases the cost to the insurer–and that cost is going to be passed along to the people who buy the insurance. So without the mandate, the health care costs are covered by the people who value the insurance enough to participate (i.e., the ones who expect to benefit from having it available). The mandate forces healthier people (who expect not to need medical care) to subsidize the cost of care for everyone else by paying more into the risk pool than they expect to get back from it.

You can see the CBO’s preliminary estimates here.

An Economist’s Approach To Buying A Car

Good personal finance skills are not exclusive to economists, but this little piece by Theodore Cangero provides great instruction for thinking through the economics and executing the plan for buying a car.

One part he glosses over is the decision to buy new rather than used. Precisely because cars depreciate rapidly with high mileage (especially the first bunch of miles), the opportunity cost of buying a new car is pretty high relative to buying a (relatively) low-mileage used car. The question is in large part one of risk aversion due to uncertainty about the reliability of a used vs new car, and the availability of information about the car in question (e.g., CarFax reports, maintenance records, model reviews, etc.). If one is going to put lots of miles on a car anyhow (like the author), letting someone else take the depreciation hit for the first bunch of miles may be a better deal…depending on one’s risk attitude over repair costs.

Another factor that he doesn’t touch on is how long one plans to keep the car. If you are one that likes to trade in/up every so many years (as he seems to imply), then the value retention he talks about is more important. If you are one that drives a car until its useful life is nearly over (or if you plan on putting a couple hundred thousand miles on it before selling it, or even handing it down to your future teenage driver), value retention may be less important–though certainly a factor to consider at the margin. That said, value-retention and expected reliability tend to go hand-in-hand. So focusing on expected reliability for long-term use will likely result in choosing a vehicle that tends to hold its value better anyhow.

Despite the quibbles, the article lays out a pretty good approach that might help you make the best car-buying decision you can.

Healthcare in the 21st Century: The Role of Competition

This looks like a very interesting program, if you happen to be in the Seattle area on Sept 18.

Healthcare in the 21st Century: The Role of Competition
Friday, September 18

Seattle University School of Law


Healthcare is the single largest sector of the economy, it is undergoing extensive and controversial reform, and the central goals of reform – universal coverage and cost control – have not yet been achieved. Since the Affordable Care Act relies heavily on private markets to provide health services and health insurance, competition will play a crucial role in reform. Yet, competition policy issues are especially challenging in healthcare, where markets are distorted by the fee-for-service payment system, insurance coverage, and market power. Competition can help correct these distortions, enhancing access and affordability, but it can also threaten the supply of doctors, new drugs, and higher levels of care. The challenge is to develop policies that achieve the right balance of these goals. The symposium will address many of the key current competition issues in healthcare, including Accountable Care Organizations, acquisitions of physician groups by hospitals, reverse-payment settlements, federal negotiation of drug prices, mergers of insurance companies, off-label uses of prescription drugs, the regulatory environment for the healthcare workforce, and market provision of assisted reproduction technologies.

See the conference page for the agenda and registration information.

HT: D. Daniel Sokol

Thursday’s Interesting Reads

A couple of interesting articles came across my screen today.

The first, by Alex Tabarrock over at Marginal Revolution, corrects a popular misconception about the relative bargaining power of workers. He points out the problems (both conceptually and factually) in framing employment issues as “firm versus worker,” which focuses on the threat of worker unemployment. He also shares a nice chart from the St. Louis Federal Reserve illustrating how this perception of employers having control over employment relationships is quite incorrect. One of my favorite lines/points:Buyers don’t compete against sellers, buyers compete against other buyers (and sellers compete against other sellers). See how that’s important in this context.

The second, by Andrew Flowers at FiveThirtyEight Economics, reports on a recent study by Montazerhodjat and Lo (MIT) that argues how the Food and Drug Administration (FDA) should change its one-size-fits-all approach for approving drugs to take into account the opportunity cost of making the wrong decision. This idea isn’t at all new to economists. Currently, the FDA uses the same standard for all drugs, regardless the severity of the consequences of making the wrong decision (in the trade-off between Type 1 and Type 2 errors). Montazerhodjat and Lo’s study (available here) is pretty technical, but Flowers’ piece does a great job of summarizing the economics and the results in a much more lay reader-friendly way.

Happy reading!