On the Nature of Truth: A Quick Bit of McArdle Gigging.
Belatedly cross-posted from Balloon Juice.
I shouldn’t get sucked in — I mean, I’ve got a ton of work to get done before the next semester brings its apocalypse with it. Dealing with Megan McArdle is just a poor investment of scarce time and attention…and yet….Oh the temptation!
Perhaps there is a middle way.
I’ll try. I just won’t let myself go all John Foster Dulles on McArdle’s recent attempt to show that she knows more about journalism than an actual journalist, and more about constitutional law than a constitutional law professor. Suffice it to say that hilarity ensues.*
Here I’m just going to look at a single little paragraph that contains one of McArdle’s standard party tricks. She asks:
…surely we can agree that it’s an open moral and political question as to whether it’s acceptable to respond to moral hazard problems with coercive comprehensive regimes? Maybe before you answer that, you’ll want to contemplate the gnarly moral hazard problems attached to many social insurance schemes
Look at the skeleton of her “reasoning” (sic — ed.):
(a) There are moral hazards associated with social insurance
(b) Some of those moral hazards are “gnarly” — i.e. too complex to confront. (I think that’s what she means.)
(c) Coercive comprehensive regimes are the tool used to respond to such moral hazards.
(d) That’s a bad thing.
There are a couple of problems here.
First, yes, there are indeed moral hazard issues associated with social insurance schemes.** (Moral hazard, by the way, as defined by one of McArdle’s favorite people, Paul Krugman, is “…any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”)
Unfortunately, the paper to whose abstract she links is not primarily concerned with what most people think of as the core moral hazard associated with providing pensions to old folk. It does address an important phenomenon. Published in 2005 by three University of Minnesota economists, Michelle Boldrin, Mariacristina De Nardi and Larry E. Jones, it argues that a bit more than half of the drop in fertility observed in Europe and America from the 1920s forward can be attributed to the emergence of old-age pension systems.
A couple of things here: first of all, this change in fertility is not exactly an unintended outcome. Because large families are associated with poverty (especially in recent studies of developing nations), fertility reduction can be seen not as a tangled trap for pension systems but as a sought-after policy result.
Still, there are consequences to reductions in family size. Dependency ratios change — how many active workers are available to support each retiree. So pension schemes could be said to suffer a burden of moral hazard, if in fact you treat fertility decisions as an unanticipated externality that unfairly shifts the costs of aging onto society, (as opposed to understanding them as a goal, or at least a useful secondary outcome of the policy). But in the real world, the fact that competing social (and economic) goods come into play is not exactly a shock. We do or as a society can choose to care about poverty, population, and old – age security all at once. That responses to such various concerns interact is not particularly surprising, and if there are externalities involved it is hardly “gnarly,” as in intractable. There is, after all, a difference between complicated and impossible.
But the real point is that this sonorous utterance of a scary sounding term — ooooh, “moral hazard” — and this very authoritative seeming invocation of the economics literature have little or nothing to do with what McArdle’s is talking about here, the “coercive” individual mandate in health care reform. Here’s how an economist friend of mine explains the matter:
There are two sorts of asymmetric information problems that undermine social insurance – moral hazard (if you can’t tell whether being poor is the result of bad luck or of lack of effort then insuring against it will reduce the effort people put into avoiding it) and adverse selection (if you can’t distinguish those who have higher and lower risk of falling into poverty then the greater attraction of voluntary insurance to those at highest risk drives costs up and undermines efficient design of insurance schemes). I bring this up because compulsion is usually thought of as a response necessitated by the latter problem not the former.
In the context of health care reform, this translates into having to find a way to keep people from gaming the system — waiting until they are sick, or at least until they’ve hit a high-risk stage of their lives, before forking over their ducats. The response, and it’s not gnarly, nor complicated, nor a mystery to most folks who lack the extra sophistication of the Business and Economics Editor of the Atlantic, is to make people pay for insurance before they “need” it.
So again, why thunder on about moral hazard or invoke a paper on fertility and pensions as a prop to a complaint about a government mandate? Most likely, IMHO, is that McArdle is just trying to overawe her audience into ignoring the flaws in her argument. I believe the technical term for this is “baffle them with bullshit.” (Heaven forfend! Could such a thing be?–ed.) (Yes — TL)
The moral of this story: McArdle employs her grand platform to one end, and one only: to comfort the comfortable. In her long running campaign to return to the status quo ante for health care in the US, she’s willing to sacrifice economic advantage, fiscal prudence, and any other inconvenient facts that get in her way. Her success is predicated on presenting the appearance of authority while spamming out so much economics-sounding stuff that it is weary work to catch up to all the errors more subtle than her inability to catch order-of-magnitude mistakes in her arithmetic. That’s how she rolls…and it’s why, tedious as it is, she needs to be called out on such stuff as often as possible.
*I have to say I feel for James Fallows, whose post sparked McArdle into verbiage. You know how Click and Clack have this running gag about how Scott Simon (or whoever) spits their soup when they hear the Tappet Brothers say “this is NPR.” That’s how I’d feel in Fallow’s shoes were I to hear McArdle refer to me as “my colleague.”
**For example, old age pensions — social security — shifts some of the risk of old age from the individual to society as a whole. In that case, some people may choose to work and save less than they otherwise would have, because they would know that they no longer need to pay for their entire retirement.
If/when people make that choice, the total output of an economy/society would go down—and that would increase the relative cost of the social insurance scheme, a cost which would be born by others than those who alter their behavior in this way. (Of course, enabling folks not to work till they drop is not necessarily an undesirable example of moral hazard at work. It could, just maybe, form a desired goal, a policy-outcome explicitly sought with benefits both moral/social and economic that devolve not just on individuals, but on any society that gets to see its older members as anything other than failing members of the labor force.)
Either way, of course, this is not all that “gnarly” a concept, pace McArdle.
There are well-known policy responses to this particular concern. For example, you address the incentives to slack-off created by social welfare programs by making sure that the benefits they provide are floors, not ceilings: keep the benefits low enough so that they serve as insurance, and not a total income replacement — which is exactly what Social Security does. As of the November 2010 monthly report, the average benefit for retired workers was $1,079. I don’t care where you live in this greatest country evah of ours, $13K a year is not going to lard your table with T-bones and caviar.
Contrast that with what we’ve come to know and love through our experience of recent events — for example — in which the banksters shifted the risk of highly leveraged bets on real estate from themselves to the taxpayer. Crucially, risks that ultimately fell to the taxpayers under a “too big to fail” notion were concealed in various ways, so that we (unknowing) ended up bearing the weight of the collapse of 2008 et seq. Now that’s how you do moral hazard.
Images: John Singer Sargent, The Daughters of Edward Darley Boit, 1882, with a shout out to my hometown Museum of Fine Arts, in which I look at this several times a year.
Vincent van Gogh, Ward in the Hospital in Arles, 1889.