Outsized Wall Street pay packages diverting scientists from the real economy.

Science magazine reports on a study (pay wall) of the pipeline for native-born scientists:

The findings suggest that the United States risks losing its economic competitiveness not because of a work force inadequately trained in science, as conventional wisdom holds, but because of a lack of social and economic incentives to pursue careers in science and technology.

Other reports, this one, e.g., suggest that top physics Ph.D.s are being lured to Wall Street to develop trading programs.  Many months after the start of the banking crisis, a UCLA physics professor told me that many of his top graduates are still going to Wall Street. 

Republicans object to Obama's interference with their right to die of H1N1.

From the Onion.

Update on Tuesday, November 3, 2009 at 09:18PM by Skeptic

Congressman Joe ("you lie") Wilson is blaming the Obama Administration for not having an adequate supply of vaccine for the H1N1 flu, which has recently afflicted his wife.  Congressman Wilson voted against the the bill to authorize the production of the vaccine.  Link.

US healthcare prices (costs) have escalated far faster than inflation because the third-party payment system devised to evade WWII price controls got locked in. (Guest post)

[This is John's response to the email forum question I reproduced here. He has a nice historical summary of how we got to where we are. In other communications, John says his main point is that we need to understand why healthcare "prices" keep outpacing inflation and maybe, eventually, go after the root cause of the problem—lack of market discipline.]

To clarify the discussion, it should be emphasized at the outset that the current national debate is not about the health care system – or not much.   The health care system is fair to pretty good, maybe a C+ or B-.    The debate is about the health care financing system, which is seriously broken and is dragging us into national insolvency.    Roger's framing of the issue is correct, "how healthcare is paid for in America and perhaps also how it is delivered," but this must be emphasized since most of the national debate is off the mark.

Put me down as a number 10, "none of the above."   Of course, many of the others are correct, in my opinion, but I think that the most important problem is not clearly spelled out by the other responses.

The most important problem is that there has been very little operation of market forces in the health care sector for the better part of fifty years.   The fact that most health care charges are paid by third parties has eliminated any incentive for the consumer of health costs to seek out and bargain for more economical alternatives and any incentive for the providers of health care to compete on the basis of price.

It is desirable to understand the history of the current health care financing system, to see how we got here, and to think some "what ifs" about other roads we could have chosen.

At the beginning of World War II, in an effort to prevent the inflation which would be expected to follow a scarcity of consumer goods coupled with full wartime employment, the government imposed a series of price and wage controls.   In general, both wages and prices were frozen at a benchmark level.  Early in the war, organized labor clamored for increases in wages, pointing out that the large manufacturers were making unprecedented profits, and that notwithstanding price controls, the CPI was increasing, about 15% from January, 1941 to May, 1942.    The controlling agency, the National War Labor Board, was reluctant to grant concessions, but was faced with credible threats of strikes in critical industries.   In 1942 it ruled that increases in "fringe benefits" not paid in cash, up to a limit of 15% of base wages, would not be considered inflationary.   Thereupon, in the words of the Bureau of Labor Statistics, "As a result of wage restrictions, employers who needed to attract labor resorted to providing a growing range of fringe benefits, such as pensions, medical insurance, and paid holidays and vacations. These benefits were considered non-inflationary, as they were not paid in cash and, thus, did not violate the wage ceiling. Additionally, payments for overtime afforded extra income to workers, without violating the limits on hourly wage payments. During the late 1940s, fringe benefits became more common as part of settlements reached in collective bargaining." (http://www.bls.gov/opub/cwc/cm20030124ar04p1.htm)  Concurrently, tax policy was codified by the Revenue Act of 1942, which imposed taxes of up to 90% on "excess profits," basically any profits higher than pre-war levels.  The Act provided that employer contributions to group health and pension plans were a tax-deductible expense and so were not included in the definition of profits.

Large employers, with the aid and urging of the then-fledgling commercial health insurance industry, began aggressively to offer company-funded health insurance plans.  In part, this move was motivated by the desire to show the company's benevolence independent of the union, to ward off unionization where it did not exist, and to limit the union power where it did exist. Hence, both during and after the war, health insurance became a major bargaining issue between unions and employers. This was a principal reason why a national health care payment system, as attempted in the Wagner-Murray-Dingell bill of 1942, and in President Truman's programs of 1946, never got out of the starting blocks.   The fight became one over who would control the commercial health insurance, and what share, if any, of premiums would be paid by employees. 

In 1948 the National Labor Relations Board ruled that fringe benefits were a subject of collective bargaining, and in 1949 the Wage Stabilization Board ruled that fringe benefit increases were not inflationary.  Fringe benefits, including most prominently health insurance, became the principal subject of collective bargaining.  The number of workers covered by negotiated health insurance plans increased from 1 million in 1946 to 12 million in 1949 (plus 20 million dependents). 

A trend during this period was the growth of "experience rating" by the commercial insurers.  Experience rating means that the "premium" for health insurance, which is paid by the employer, is calculated in arrears, and is simply the total amount paid by the insurer for last year's health insurance costs for that employer, plus a factor for overhead and profit.  At Tosco, our health care insurance was experience-rated.   This had the effect of giving employers to bargain with the insurer for policy exclusions for "pre-existing conditions" and chronic problems.  Blue Cross was, in those days, a non-profit which did not, as a matter of principle, contain these exclusions, and as a result it began to lose business to the commercial insurers.   (Note that market forces will work, no matter how they are hedged about with regulation, but often not in the desirable way.)

A short excursion: what is called "health care insurance" is not really much like insurance in the normal sense.   Casualty insurance, such as fire insurance, is based on the idea that either you or I may suffer a loss which is beyond our individual economic ability to bear; if we agree that each of us and many others will pay into a fund which would reimburse this loss, we have insurance.  The key is that the insured losses must be unexpected and relatively rare, so that the amount we have to pay into the fund is relatively small.   "Health insurance" commonly reimburses a number of costs which are ordinary and routine, and is not limited to "catastrophic" occurrences.   Therefore, it is a blend of a payment agency and a little true insurance, but mostly the former.  From the viewpoint of the employer in an "experience-rated" plan, there is no "insurance" component at all, but only a payment agent.

Returning to the history, the rapid growth of health insurance in unionized industries led public employees to demand the same, and health insurance soon became common among government employees.   With these pressures, employer-provided health insurance gradually became an accepted norm in most employments, but was not anywhere near universal as late as the 1960s. (When I was a young lawyer, I worked for a progressive "Wall Street" law firm in New York, large by the standards of the day with 95 lawyers.  Health insurance was not provided when I started in 1961, but became available a few years later.)

By the mid-1960s, "health insurance" had become the norm, and it was tied to employment.  The elderly retired were not covered by employer plans, by and large, and this ultimately led to the enactment of Medicare during the "Great Society" days of Lyndon Johnson, over the bitter opposition of the AMA and the NAM.

The foregoing account is, of course, oversimplified, but captures the main events.  As a result of these occurrences, the dominant mode of paying for health care became the third party payment system, the payer being either the government or a health insurer (including HMOs, which had their start in the Kaiser Permanente system created in World War II by Henry J. Kaiser to provide health care for the hugely increased number of war workers in California.)

This system eliminated the usual market incentives and forces from health care.   Consumers no longer had any reason to shop for bargains.  (A "consumer" includes a doctor or hospital contemplating the purchase of the latest medical device or gadget, because the cost, no matter how inflated, can be quickly amortized by billing its use to third party payers.)  As a result, the price of health care began to diverge from general inflation and has continued to do so ever since.

Another short digression: it is useless and misleading to talk about increases in the "cost" of health care, or about controlling the "cost" of health care.   What we are talking about is the price of health care.  Since we are all consumers of health care and few of us are providers, it is natural that we think of the payments as a "cost," but economic understanding will be greatly enhanced if we remember that it is really "price" we are considering.  No one has the faintest idea what the "cost" of health care is.

I have not been able to find clear records of the beginning of this divergence, the increase of health care prices relative to general inflation.  I would expect that the trend commenced at least as early as mid-century.   However, the effect is clear in available records from the Bureau of Labor Statistics, for the period January, 1988 to January, 2009, reproduced at http://www.buckconsultants.com/buckconsultants/Portals/0/documents/publications/newsletters/key_indicators/cpi.html

In January, 1988, the CPI-All Urban Consumers (the index most commonly used to measure inflation) stood at 115.7.  The medical care component of this index stood at 134.4.  In January, 2009, the CPI-U was 211.143, while the medical component was 369.83.  Over this period, general inflation measured by the CPI-U was 82%, while the medical care component increased 275%.   (The actual divergence was larger because the medical care component was part of the CPI-U.)

In my opinion, it is the third-party payment system itself which is the principal cause of the serious health care payment problem.  

Let us do a gedanke experiment, a simple little "what if" thought exercise.  Suppose that the War Labor Board and the Revenue Act of 1942 had determined that employer-provided groceries were not inflationary and were deductible expenses to the employer, the theory being that well- nourished war workers were essential to victory.   Instead of "Blue Cross," a national "Blue Plate" would have come into existence, paying grocery chains and farmers alike for food consumed by members of the plan.   Whatever groceries one ordered would be paid for by Blue Plate, which would pass on the costs to employers; the elderly would be covered by the government Nutricare program.   This makes one grin, but it can be argued that while most of us can continue for quite a while without medical assistance, none of us can long survive lack of food.    If this had happened, what do you think a pound of potatoes would cost?

So, I have indicted the third-party payment system itself as the root structural cause of the problem.   What can be done about it?   Well, various things have been tried.   When it became evident that health care prices (usually misidentified as "costs") were outpacing inflation, blame was laid on the health care insurance companies.  They were, it was claimed, paying for inflated charges, fraudulent billings, unnecessary procedures, and so on.   Pressure was put on them to hold down the amounts they paid by fly-specking and nit-picking every bill.  With what result?

Those of us who are older can remember a visit to the doctor's office "back in the day."  The office consisted of the doctor, and one woman who was nurse, receptionist, and bookkeeper.  Today, the doctors' office consists of three or more doctors (who can no longer bear the overhead as sole practitioners) and an army of clerks who are on the telephone haggling with insurers about the details of bills.  At the other end of the line is an even larger army of clerks, trained in the Nancy Reagan phrase "just say no."   Has this stemmed the increase of health care prices?  It would seem that it has had the opposite effect, since an estimated 25% of the American health care dollar goes to administration, far in excess of any other nation.  (Caution, this figure is controversial, and some estimates are as small as 8%.  I find the 25% figure persuasive, and you can research it yourself.)

Turning to the second part of the question, "The best legislative solution would be . . . . ," the answer should now be obvious.   Unfortunately, it is also totally unthinkable and impossible. The best legislative solution would be for Congress to pass a law, to the farthest limit of its power under the Commerce Clause, which would have two sections.  Section One would provide: "On and after January 1, 2015, it shall be a felony for any person, firm or corporation to pay for the medical care of a natural person who is not a dependent member of the household of the party making the payment."  Section Two would provide: "Notwithstanding anything to the contrary in Section One, it shall be lawful for a person, firm of corporation to pay for the medical care of any person, if that medical care is for a catastrophic condition, as hereinafter defined," followed by the usual 2,700 pages of excruciating detail what is "catastrophic" on a means-tested basis.

Bang goes the current system, and health care insurance is confined to true insurance, protection against unexpected but unmanageable occurrences.

For routine health care, consumers would resume bargaining with and shopping for providers. The effect can be seen by studying health care procedures which are not routinely covered by insurance, such as Lasik surgery or dental implants.   There is a lively industry in such areas, advertising and competing on the basis of price. 

This solution is clearly a political non-starter, and won't happen.  Even the most rabid and revanchist let's undo-the-New-Deal right cannot even conceive of life without something much like our current third-party payment system.

Another alternative is a single-payer system, Medicare for all.  Medicare's administrative costs are, by generally accepted estimates, significantly lower than those of private sector health care insurers, and its processing times and "customer service" are faster.   However, while this might be an incremental improvement, it would not be responsive to the basic structural problem.

Is anything left?  Can this problem be dealt with by a legislature?   The answer would seem to be that a lot of tinkering with details can be done, and the current Congressional efforts and administration program would seem to fall into this category.   Electronic record-keeping, for example, could cut overhead and reduce malpractice.   End-of-life counseling might not kill your granny but it could increase the popularity of voluntary do-not-resuscitate orders.  And so on.

All of these things could make a marginal difference.  A limit on deductibility of employer-provided "Cadillac plans" would return to the original anti-inflationary component of the 1942 War Labor Board ruling.   A universal mandate to carry insurance would make the system more like real insurance, because the well, not just the sick, would pay into the fund.

A popular GOP fix is to provide for increased competition among health care insurers by, for example, removing them from the jurisdiction of state insurance regulators, so that any insurer can market its product nationally.  Proponents point out that "intermediaries" between consumer and producer, like Wal-mart, have been powerful forces for moderating price increases.   It seems to me that this analogy is flawed.   Wal-mart wishes to sell as much stuff as it can to everyone who has cash or credit.  A health insurer wishes to sell only to the young and healthy, and to avoid the payment of claims (delivery of the goods) to the maximum lawful extent.  Therefore, such increased competition might well lead to a "race to the bottom."

In conclusion, this problem seems to be extraordinarily difficult of legislative solution.  Given the political impossibility of a comprehensive answer, it would appear that marginal tinkering is the best that can be hoped for.

What if Wall Street cut everybody's pay by 50%?

The blogosphere blazes with criticism of outrageous Wall Street pay packages, and the White House has joined in on the Sunday talk shows according to this WaPo report.  So here's my question:  What would become of the money if it were not paid out in bonuses?  Wouldn't it all go to shareholders as dividends or retained earnings? 

When the big investment banks went public about 10 years ago, the partners were able to cash out a lot of their capital and henceforth play with other people's money--heads they win, tails the shareholders lose.  They did not, apparently, change their compensation practices substantially.  Shareholders were compensated a little better than debt holders and as well as the shareholders of other financial institutions, but almost all of the great gobs of earnings were still available for distribution to management and employees.  The shift of risk and the great increase in the amount of capital that had to be put to work seems to have contributed greatly to Wall Street's diving into trading and investment practices that caused the recent crash.  Certainly strong regulation of the financial industry to prevent those harmful practices is required, and such regulations might well make Wall Street firms less profitable and, therefore, reduce compensation.  I'd have no problem with that, but simply to require compensation reductions without changing the business models would seem to benefit nobody but the shareholders. Why is populist rage aligning itself with shareholder rights? 

I've written about this before, and I think the danger is that some loophole-laden law nominally limiting executive pay and doing nothing to fix dangerous business models and agency problems will get passed and thereby dissipate the political pressure to act. 

Update on Sunday, October 25, 2009 at 09:00AM by Skeptic

Gretchen Morgenson also sees executive pay as a sideshow distracting--perhaps intentionally--from what government should be doing to protect the financial system from future meltdowns.

For all the apparent action in Washington, some acute observers say that it was much ado about little. Last week’s moves, they say, were tinkering around the edges and did nothing to prevent another disaster like the one that unfolded a year ago.

The white-hot focus on pay, for example, looks like a way for the government to reassure an angry public that they are making genuine changes. But compensation is a trifling matter compared to, say, true reform of derivatives trading.

“The American public understands the immorality of paying people huge bonuses for failures that damaged the economy,” said Michael Greenberger, a law professor at the University of Maryland and a former commodities regulator. “What they don’t understand is that those payments are only a small fraction of the irregularities that took place and that, in essence, the compensation problems, as bad as they are, are a sideshow to the casino-like nature of the economy as it existed, pre-Lehman Brothers, and as it exists today.”

Update on Friday, October 30, 2009 at 09:49AM by Skeptic

Floyd Norris says To Rein in Pay, Rein in Wall Street.  His column includes a graph showing how financial industry profits, which had hovered around 1% of GDP from 1930 to 1980, then grew rapidly to 3% in 2005.  He describes some of the practices that increased profits without commensurate economic benefit in allocating capital to productive uses, and suggests Congress should focus on these causes of the mess instead of addressing the effect of outlandish compensation.  Of course, I agree.

Update on Friday, October 30, 2009 at 10:01AM by Skeptic

The Washington Post has started a Next Great Pundit contest. My entry, which follows, was not one of the ten finalists from the 4800 entries. (BTW, this post was made non-public while my pundit entry was being considered.)

What if Wall Street cut pay 50%? 

Outrage about Wall Street pay packages is rampant.  Hardly anybody thinks any trader or executive is “worth” $100 million for gambling with other people’s money.  However, directly regulating compensation in healthy, non-TARP banks would be a misdirection of our anger and could make things worse. 

If compensation were reduced, the difference would presumably go to shareholders as dividends or retained earnings and/or as avoided dilution of equity.  That would benefit undeserving shareholders and do nothing to change the reckless Wall Street behavior that led to the recent financial collapse. 

What could save financial institutions from themselves, and us from them, is prudential regulation to prevent them from taking unreasonable risks.  Tinkering with compensation and other financial incentives, even including compensation claw-backs, is no substitute for regulation.  Every firm inevitably takes the same risks its competitors take, and they will advance together again onto dangerous ground if they are not legally barred and actively policed.  

When the big investment banks went public in the 1980s and 1990s, the partners were able to cash out a lot of their capital and henceforth play with other people's money--heads they win, tails the shareholders lose.  The shift of risk to public shareholders and the increase in the amount of available capital may be factors that eventually caused the recent financial collapse.  Pay practices may have changed too, but mainly paydays got bigger because profits skyrocketed.  Strong new prudential regulations for the financial industry might well reduce firms’ profits and compensation, but to impose pay reductions without changing the reckless business practices could do the same and benefit nobody but possibly the shareholders. 

Focusing the politics on outrageous pay would likely divert support away from useful legislation and into some loophole-riddled new law that nominally limits executive pay but lets dangerous business models and destructive behavioral incentives continue.  That’s what happened in 1993 when popular outrage led to adoption of a change that disallowed tax deductions for top executive compensation in excess of $1 million per year unless “performance-based.”  This led directly to abuses of stock options and bonus plans, which made things worse for shareholders.  And executive pay went up.  Is it too cynical to suppose there are those who would like to see this head fake work again? 

Update on Friday, October 30, 2009 at 10:06AM by Skeptic

Richard Posner says the world would be better place if financial industry pay packages were smaller, but they should not be regulated, and he has no stomach for regulating industry practices either. 

So I think regulating financial compensation is a mistake. At the same time I think financial executives probably are overpaid from a social perspective. The reason is that their high incomes are generated mainly by speculative trading of stocks and bonds and other financial assets. Speculative profits are not net additions to economic welfare, because they are offset by the losses of the speculators on the other side of successful speculators' trades. That is not to say that speculation has no social value. It generates great social value by bringing about improved matching of prices to values, which encourages investment in productive activities. But the amount of profit that a speculator makes is not the measure of the social value of a successfl speculation. The increase in social value is probably only a small fraction of the speculator's profits.

. . . .

Recipients of Harvard Ph.D.'s in physics are said to have two career tracks open to them: academia and Wall Street. No doubt many are attracted to Wall Street by the much higher incomes they can expect there. Yet their social value might well be greater in academia.

Higher marginal income-tax rates, or a stiff tax on financial transactions, might go a slight distance toward correcting the financial brain drain, but probably it is a problem that we shall just have to live with.

Update on Friday, October 30, 2009 at 10:18AM by Skeptic

This long NYT editorial takes a more nuanced position.  It endorses the Fed's initiative to have banks modify pay practices so that actors are not incentivized to do bad things and are subject to lock-ups and claw-backs if the effects of their actions turn out to be illusory or harmful in the longer term. But, the editorial says, "We still worry about leaving all of these critical details up to the banks — even with a promise from the Fed to be more vigilant."

The editorial goes on to argue for stronger regulation of derivatives than is being proposed in Congress and for a robust consumer financial product protection agency, both of which would reduce financial industry profits and, presumably, pay.

If there are some classes of “private” digital communications the federal government will not decrypt and read, what are they?

Since 9/11/01, the federal government has vastly expanded its interception of digital communications within the US. Public debate about this has mostly occurred after the fact in court cases and in Congressional hearings about the Patriot Act and other bills. As I recall, the justification for additional governmental invasions of privacy was that we needed to do this to protect our country from physical attack by foreign terrorists. However, the new legal authority and actual practice seem to have gone much beyond that, according to this LAT article.

Immigration and Customs Enforcement plans to hire 1,000 computer experts to fight cybercrime, including money laundering, arms trafficking, child pornography, and sex tourism. ICE also has password breaking facilities to "overcome encrypted defenses used by online criminals." It appears that the ICE Cyber Crimes Center investigates any crime as to which their technical capabilities are useful, without regard to whether there is an obvious international element. I'll bet a nice bottle of wine they're not getting judicial warrants for much of this. In any event, ICE is having jurisdictional disputes with other federal agencies with similar capabilities, and who knows if they are formally constrained by any cross-border requirement.

Some officials have returned to the private sector, citing frustration with fighting among the Homeland Security Department and other law enforcement agencies over leadership of cyber-security efforts.

We seem to be on a slippery slope. We've been persuaded that government must have extraordinary powers once thought denied it by the Bill of Rights in order to protect the nation from massive explosions and other violent terrorist attacks projected onto the homeland from abroad. With that decision behind us, we naturally begin to notice that there are conventional non-terrorist threats to our domestic safety that are more real, more prevalent, and actually result in hundreds or thousands of deaths every year, for example gang violence, drunk or reckless driving, and violations of food safety regulations. Why should government not use its enhanced powers to crack down on those criminal threats to our personal safety also? Indeed, why should it not do so for tax evasion, securities fraud, and property crimes also, or for any crime—even a "minor" one—for which the techniques are useful?

Back in the 20^th Century we thought that government could not, without probable cause and judicial warrants, intrude into communications as to which the participants had a reasonable expectation of privacy. But if we know Big Brother can and does intercept any communication, it's not reasonable ever to have an expectation of privacy, is it? If we have not already reached a point where the government might intercept any of our digital communications (and crack our passwords and encrypted text if necessary), what types of communications are still reliably private? My guess is none.

The Dysfunction and Corruption of our Healthcare System, Its Damage to the National Economy and Other Basic Healthcare Matters (Guest post)

(Guest blogger Christine was preparing this piece for publication as a series in a regional paper, which accounts for omission of links and longer explanations and the not-quite-finished editing.)

The current U.S. healthcare system is tragically corrupt and dysfunctional. It is destructive to the American business economy and our ability to compete globally. The structure of the system violates fundamental insurance risk principles and has inherent conflicts of interest that prevent quality national health care delivery and cost efficiency. The only rational solution is one universal, single payer healthcare system for all U.S. citizens.

Part I. The U.S. Healthcare System is Corrupt, Perverse and Dysfunctional

Corruption and dysfunction in the U.S. health care system are due to inherent and irresolvable conflicts of interest under the private provider system. This corruption and dysfunction are damaging to welfare of the nation and the lives of its citizens. The U.S. is now 20^th, close to the bottom of the list of developed countries, on the World Corruption Index.

Rationing of health care by insurance company employees is a direct result of a conflict of interest between providing insurance benefits to paying members in need of health care, and earning profits for corporate shareholders. Employees of insurance companies are paid bonuses based on how little care they approve. Companies have denial and delay procedures that cause suffering and death. Much is made of the waiting lists in foreign countries; but there is little or no awareness of the waiting and denial lists in this country because of the veil of privacy behind which insurance companies operate. And, of course there is the ultimate rationing: no healthcare at all.

The private insurer bureaucracy is a mechanism used to justify not paying hospitals and providers, including doctors, in a timely manner and refusing to pay for all services provided. This creates a cash flow nightmare. A U.S. House bill to force private insurers to pay hospitals within 90 days was defeated by the insurance lobby. Insurance companies aggressively negotiate contracts with hospitals and other providers that often result in the actual cost of the services not being covered. Finally, hospitals, while operating in an environment with insurers and Medicare controlling the majority of pricing and payments for services, are required by the EMTALA (The Emergency Medical Treatment and Labor Act) to admit and treat anyone with an emergency medical condition for free. A system where treatment of the uninsured is done in the least cost-effective setting, after their conditions have become serious enough to warrant emergency room treatment, is ironic to the point of absurdity, with the final contradiction being that there is no payment at all.

Fraud on the part of insurers and providers has skyrocketed since 1980 as the amounts of money in healthcare also skyrocketed. In 2000 the U.S. Supreme Court unanimously agreed that insurers could be sued for racketeering under RICO. Humana and HCA have lost lawsuit after lawsuit for not passing negotiated discounts on to medical providers and customers. There are 6 health care lobbyists for every member of Congress, 3300 lobbyists in all, pouring $263.4 million dollars into Congress in 2009.

Drug makers alone spent more than $134 million on lobbyists. The manifest tragedies of the pharmaceutical industry in the U.S. include the fact that it benefits from huge public welfare investments on the front end since almost all drug research has some public funding component. Then private market advocates insist that there be no negotiation for lower prices on drugs. The industry has perverted the integrity of top end professional journals by squelching publication of unfavorable data and by publication of false data, sometimes leading to horrific human suffering and death. Beyond all of this is the unbelievable and extravagant advertising machine of pharmaceuticals and the impact it has. Americans are the leading prescription drug addicts in the world.

Then there is one final sad dysfunction, that of wildly divergent pricing and treatments. The consumer is caught in an impossible position of not being able to understand how much procedures will cost or are worth. When an M.D. can bill $23,500 for an emergency appendectomy for which the insurance company will pay an out-of-network fee of $4,629, when someone without insurance is charged massively more than someone with insurance in the same hospital for the same procedure, when M.D.s have to enter unreasonable contracts with insurers who pay at a rate too low to cover the procedure, or not at all, it is time for a big change in the system. The recent study of medical care in McAllen, Texas, the second highest cost provider area in the U.S, one where malpractice reform has already been enacted, showed that overtreatment and overtesting by M.Ds are a result of the profit motive, pure and simple. Thus, more and more Americans are going abroad for healthcare. A surgery that will cost $100,000 in the United States can be done at the excellent Bunlungrad Hospital in Thailand for $20,000. For an insured with an 80% co- pay plan this is a savings of $13,400 (after transportation and accommodation for 2) and $64,000 for the American insurance companies which have made the Thai hospital a preferred provider.

Part II. The U.S Economy and Destructive Healthcare Chaos

The U.S. economy is losing ground in critical ways and our disastrous healthcare system is part of that downward trajectory.

U.S. companies that provide employer paid and subsidized healthcare are unable to complete with companies of other developed industrialized nations, all of which have a national healthcare in some form. The corporate cost for healthcare in the U.S. adds between 6 and 16% to payroll expenses, with larger companies employing the most workers at the higher end of the range. This healthcare cost is cited as one of the reasons for U.S. industries and companies going offshore, downsizing or collapsing altogether.

The loss of industry hurts our foreign exchange, causes Americans to buy foreign products and weakens the nation economically.

The U.S. has the highest percentage of GDP going to health care in the world: 16%. This means there is less money in the U.S. economy available to go to constructive development of new businesses and infrastructure. Contrary to popular perceptions, the United States has a much smaller small-business sector (as a share of total employment) than other countries at a comparable level of economic development. This is consistent with the view that high health care costs discourage small business formation, since risk both to the employer and employee is higher in the U.S. where there are no government safety nets. It is estimated that more than 20% of all U.S. workers are afraid to leave their jobs because of the effect of loss of health insurance on them, or their family members.

At least 60% of U.S. personal bankruptcies are due to medical bills. Of these, 68% of the bankruptcy filers had health insurance but could not cover the deductibles, co-pays and treatment denials or became so sick that they lost their jobs and their insurance. These bankruptcies affect the cost of credit for everyone else in the country.

Part III. The Misunderstood Basics

A basic principle of insurance is that a large diverse demographic pool spreads the risk. The U.S. has perverted the risk principle completely by removing the Medicare population with the highest risk, the government employees with the richest benefits, and the military, and put them all on the public purse. We have then segregated the youngest and healthiest citizens whose risk should be subsidizing all of the above and placed them in the hands of cherry picking, profit-driven, private insurers with high bureaucratic overhead. This is such an irrational arrangement that it beggars belief. The U.S. health care bureaucracy costs $399.4 billion annually, of which the 2004 Harvard study estimated that $286 billion could be saved. This $399.4 billion is 31% of U.S. healthcare spending as opposed to 16.7% in Canada where all citizens are insured.

Tort reform will not offer savings. Tort reform has already taken place in 27 states, including Texas and California and has had no impact on pricing. The McAllen, Texas M.D. study showed that the profit motive drove overtesting and overtreating. Malpractice insurance and claims are estimated to add 2% to medical costs. To give a specific instance of spending in the hospital area, Childrens Hospital in Los Angeles, with a $600,000 million annual operating budget, spends $3.25 million on total malpractice costs, including insurances. This is less than ½ of 1% of the budget. The malpractice boogeyman is the product of ignorance, or, once again corrupted interests fanning ignorance.

American health care is not the best in the world. At its best, it is of course, equal to the best in the world and, in some high tech areas certainly the best. However, Americans go to Europe and elsewhere for procedures and treatments that are not available in the U.S. On an overall basis, the U.S. ranks poorly among developed nations. Medical education in the U.S. has also been corrupted by money in that students are opting for high income specializations while basic care, family, geriatric and internal medicine are being neglected. Obviously this drives costs up even further since there is a marketing of the specialized services.

There are other conflicts: environmental diseases such as cancer are almost exclusively the result of corporate and government decisions for profit, but the cost is borne by individuals; lifestyle diseases such as those related to obesity are heavily driven by the agencies of agribusiness and food corporations, whose profit taking through pushing and advertising terrible health choices starts with children. Drunk driving, cell phones and texting, the shocking number of American gun homicides all a result of "free choice" and rugged individualism, have tragic, innocent victims and the healthcare system pays, or doesn't, along with the individuals and their families who are hurt, not once, but twice.

For the budget conscious, the cost of the Bush tax cuts was almost $2.5 trillion over the decade after they were enacted, 2 ½ times as much as the House Democrats' health care proposal, which is weak on meaningful financial reform. The budget-deficit disaster of the Bush wars in Iraq and Afghanistan loom far beyond this and are generating future health care liabilities.

The United States needs to confront and abolish the corruption in its medical care system. There are several universal single payer system models in other countries, all of them in line with basic insurance risk principles of a full pool, and all of them more economically efficient than the one that exists in the United States. The aging population in developed countries is going to put pressure on all of the health care systems. The systems that are inherently dysfunctional and corrupt will be bankrupt first. Medicare will certainly sink with the unreformed corrupt ship of U.S. healthcare.

How bad is the economy? Some humorous answers.

The economy is so bad that:

• I got a pre-declined credit card in the mail.
• I ordered a burger at McDonalds and the kid behind the counter asked, “Can you afford fries with that?”
• CEO’s are now playing miniature golf.
• If the bank returns your check marked “Insufficient Funds,” you call them and ask if they meant you or them.
• Hot Wheels and Matchbox stocks are trading higher than GM.
• McDonalds is selling the 1/4 ouncer.
• Parents in Beverly Hills have fired their nannies and learnt their children’s names.
• A truckload of Americans was caught sneaking into Mexico.
• Dick Cheney took his stockbroker hunting.
• The Mafia is laying off judges.
• Exxon-Mobil laid off 25 Congressmen.
• Congress is looking into the Bernie Madoff scandal Oh, great!!  The guy who made $50 Billion disappear is being investigated by the people who made $1.5 Trillion disappear!

From Steve Keen's Debtwatch.

The core problem with US healthcare is that it costs too much, and until that’s fixed the crisis will continue.

I'm participating in an email forum on healthcare. It provoked me to think about this more carefully and decide what I think the key problem is. First the question, and then my answer.

Congress is working on broad legislation to change how healthcare is paid for in America and perhaps also how it is delivered.  Perhaps because problems are defined in substantial part by analysis of data from the real world, and solutions are largely defined by politics, there is no assurance that the resulting legislative solutions will ameliorate the most important problems.  What do you think is the most important problem, if any, with the US healthcare system, and what would be the most effective legislative solution for it? 

1. The most important problem is that ~15% of Americans are not covered by a plan that has negotiated reduced fees with providers, as a result of which many of them delay/forego important medical services and then require too much expensive ER treatment that is paid for indirectly by those who do have coverage.  The best legislative solution would be . . . .
2. The most important problem is that medical care is simply too expensive in America because certain parts of the system (which ones?) are overpaid.  The best legislative solution would be . . . .
3. The most important problem is that many people's access to healthcare is insecure because it's tied to employment, because they have pre-existing conditions, or for some other reason.  The best legislative solution would be . . . .
4. The most important problem is overutilization of medical services and products that cost far more than their value to particular patients under the circumstances.  The best legislative solution would be . . . .
5. The most important problem is that providers do not have immediate access to all relevant parts of a patient's medical records.  The best legislative solution would be . . . .
6. The most important problem is that patients and/or providers have suffered a loss of liberty because they are only cogs in a vast bureaucratic machine.  The best legislative solution would be . . . .
7. The most important problem is that the federal government is already too much involved in healthcare; we would have better healthcare and/or lower costs if the government's role were reduced or eliminated.  The best legislative solution would be . . . .
8. The most important problem is that the quality of healthcare available to Americans who can afford it is not improving as fast as it could.  The best legislative solution would be . . . .
9. The most important problem is a shortage of primary care givers and an oversupply of specialists.  The best legislative solution would be . . . .
10. The most important problem is none of those but is ____________________.  The best legislative solution would be . . . . 
11. There is no problem with the US healthcare system big enough to warrant federal legislation.  Of all the ideas that seem likely to get passed into law, the worst idea is ______________ because . . . . 

Skeptic answers:

#2. The most important problem is that medical care is simply too expensive in America because certain parts of the system (which ones?) are overpaid.  I don't know which specific parts are "overpaid," maybe all of them compared to what their customers can afford. I am mindful that my "cost" is somebody else's "revenue," and that cost reduction necessarily means income reductions for people in the healthcare system. But we need to do that, and if it isn't a bloody brawl we didn't do it right.

This chart from the Kaiser Family Foundation, via Ezra Klein, shows that real American per-capita healthcare costs have risen at an average annual rate of 3.6% since 1960.

At 3.6% per-annum growth, per-capita healthcare costs double in 20 years (Rule of 72) and redouble in another 20 years. That's how US healthcare costs have gone from 7% of GDP in 1970 to 15.3% in 2004 and to 17.6% in 2009. [Please see 7/23/2012 Update for more complete data and a working link.] There is no evidence that we are 2 to 3 times healthier as a result.

In stark contrast, average real hourly earnings for the 5/6 of Americans in the private workforce who are not bosses have not changed since 1973.

Some say the reason these money incomes stagnated is that increasing costs of employer-provided healthcare gobbled up potential wage increases. Probably that was one of the causes, but I have no data. If middle class money incomes had increased at the same rate as healthcare costs, hardly anybody would think there is a healthcare crisis today. But they didn't, and there is.

Hello, healthcare system, your customers can't afford what you're selling! Not even with taxpayer subsidies because the taxpayers are mostly the same folks who can't afford to pay you directly. When 5/6 of your customers have had on average no income increases you cannot get more revenue from them unless they spend less on other things—things like the 2/3 of their incomes that typical families spend on rent, food, and transportation. So how has it been possible for the healthcare sector to keep growing like a cancer? Because markets don't work in healthcare. Prices are administered. Even the fraction of aggregate personal income that is steered into healthcare is administered. Administered by Congress, Medicare authorities, insurance companies, drug companies, hospitals, and employers, rather than being negotiated between patients or groups of patients and providers. There are few normal downward sloping demand curves in healthcare, which is nicely illustrated by the counterpoint that there is effective price competition for LASIK surgeries and other procedures not generally covered by insurance.

Increases in Medicare Part B (outpatient services) reimbursements are limited by law to changes in the CPI, but Congress waives that every year and allows larger increases. Medicare Parts A (hospital services) and D (drugs) have no such limit, and Medicare authorities are forbidden by law to negotiate drug prices. Even the income differentials among medical specialties are lobbied rather than set by market forces. There is general agreement that we have too few primary care physicians like pediatricians and gerontologists and more than enough of some of the higher-paid specialties, whose work seems to expand to consume any amount of resources without reducing prices. Yet, nobody seems able to increase reimbursements for primary care physicians and reduce them for specialties that may be overpopulated. (How American Healthcare Killed My Father in the Atlantic provides a credible overview of this and other problems in the system.)

Since I see no prospect for functioning markets in healthcare, I'm just focusing on how to administer better. The best legislative solution would be for Congress to impose uniform rules on health insurance similar to those for Medigap policies: Everybody is eligible (no pre-existing conditions or employment status considered) during annual open enrollment periods, and insurers have to offer standard contracts. This would eliminate underwriting costs and force insurers to compete on price for identical products. Add a public option, and private insurers would really have to get busy turning themselves into austere public-utility-like transactions processors and eliminating things like "innovations" in marketing and claims denial that give no value to patients. Taxpayer subsidies for non-standard Medicare policies should be eliminated.

Congress should also stop waiving every year the law that requires increases in Medicare reimbursements to be limited to inflation and should repeal the provision that forbids Medicare from negotiating drug prices. Provider incomes must stagnate and go down along with their customers' incomes. But that doesn't mean they'll be worse off because, just like the working and middle classes whose incomes have already stagnated, the professional and managerial class will still enjoy hedonic improvements in the goods and services they are able to buy with their stagnant money incomes. ;-)

Will drug companies stop developing and making drugs if US selling prices come down? No, but they may raise their prices to Canadians and Europeans when Americans stop subsidizing them, which would be fine with me.

Will there be too few docs if their real money incomes stagnate and even shrink? No. What else are they going to do? Write novels? Emigrate to Canada? Go straight from college into the labor force? Become lawyers? US docs are paid way more than their counterparts in other OECD countries, and if necessary we can open the immigration doors a little wider to foreign docs. If we're going to have globalization and wage convergence, every American should face vigorous foreign price competition, not just the working class and middle class whose lobbyists failed them.

Will providers stop taking Medicare patients? No, they can't. (Well, mine might, but in the aggregate, no.) About one-third of all patients are on Medicare, Medicaid, or some other government-paid program. If those patients are not treated somewhere in the system, there are going to be an enormous number of underemployed medical professionals beating the bushes for salaried jobs or some other source of revenue or offering big discounts to insurers in order to fill their schedules.

Maybe our cost cutters will overplay their hands and have to retreat occasionally. That's OK. You never know where the price line is unless you go over it occasionally.

Do I think this will happen to any significant degree? No. What needs to be done would be very painful to the healthcare industry, which owns all parts of Washington, DC not owned by Wall Street. For me the most telling sign that a healthcare bill on the President's desk is a bad bill is that the health insurers let it get there—if they do.

I would not enact a mandate for 45 million uninsured Americans to buy into this broken system. If the cost problem is not fixed first, the mandate would be worse than a tax; it would deliver people into the hands of insurance companies that view them as legitimate prey. Furthermore, a mandate would probably fail. The Senate Finance Committee markup bill requires families with annual pre-tax incomes over $66,000 to purchase insurance without any taxpayer subsidies. Since insurance for a family costs on average almost $13,000 (other sources say more) and would be an incremental family budget item of about 25% of after-tax income, Congress might as well require pigs to fly!

Update on Thursday, October 8, 2009 at 09:06AM by Skeptic

Re: "legitimate prey," whether Cigna's coverage decision was right or wrong, this conduct, reported in LAT, was despicable. 

Surrounded by supporters, Hilda Sarkisyan marched into Cigna Corp.’s Philadelphia headquarters on a chilly fall day, 10 months after the company refused to pay for a liver transplant for her daughter.

"You guys killed my daughter," the diminutive San Fernando Valley real estate agent declared at the lobby security desk. "I want an apology."

What she got was something quite different.

Cigna employees, looking down into the atrium lobby from a balcony above, began heckling her, she said, with one of them giving her "the finger."

Update on Thursday, October 22, 2009 at 09:52AM by Skeptic

Ezra Klein has a 1990-2007 graph and story that strongly suggest increases in healthcare costs were to a large extent taken out of potential wage increases. A recent Wall Street Journal article, summarized here, reports on a trend among employers to reduce permanently their contributions to employee healthcare and retirement plans. From the WSJ article (subs. req'd):

The deep recession appears to be drawing to a close, but not its effect on the workplace.

Since the downturn began, thousands of employers have cut pay, increased workers' share of health-care costs or reduced the employer contribution to retirement plans.

Two-thirds of big companies that cut health-care benefits don't plan to restore them to pre-recession levels, they recently told consulting firm Watson Wyatt. When the firm asked companies that have trimmed retirement benefits when they expect to restore them, fewer than half said they would do so within a year, and 8% said they didn't expect to ever.

So if the costs of employer-based healthcare and retirement plans go down, would wages start to rise faster than CPI?  I'm not so sure.  We will still have the downward pressure of globalizing labor markets, and with unions almost out of the picture wage increases are largely administered by employers.

Update on Monday, November 2, 2009 at 08:12AM by Skeptic

Faced with a choice between lowering healthcare costs to help sick people and raising them to benefit providers, House Democrats are—once again—lining up behind rising prices, according to this report on the healthcare reform bill that emerged from the Speaker’s office last week: 

For months, many leading Democrats, including President Obama, have pushed for the creation of a government-run insurance plan to compete with private insurers.

A main argument was that a public plan would save people money. It would not be under pressure to earn profits, pay high private-sector salaries or deny needed care.

But after House Democratic leaders unveiled their health care bill on Thursday, the Congressional Budget Office said the public plan would cost more than private plans and only six million people would sign up.

One reason the public plan would not save customers money is that it would have to negotiate payment rates with doctors and hospitals just like private plans.

The House speaker, Nancy Pelosi, wanted a more “robust” public plan with payment rates tied to Medicare. But in the end she could not muster the votes, largely because of opposition from lawmakers in states where Medicare rates are lowest.

Who are these lawmakers who want higher healthcare prices?

Update on Sunday, November 15, 2009 at 04:51PM by Skeptic

Robert Reich takes up the cost issue and encourages Harry Reid to draft a bill--or at least an amendment--that provides a robust public option available to everybody, knocks out the provision extending the monoloply for generic drugs to 12 years, and holds Medicare reimbursement rates to the COLA formula enacted years ago.  Reich says Reid should use the reconciliation procedure (requiring only 51 votes for passage) and get tough with Blue Dogs--if they don't support this kind of cost containment, they should get no help from the Democratic Senatorial Campaign Committee.  Cross posted at HuffPo. 

Update on Wednesday, November 25, 2009 at 12:07PM by Skeptic

I've spent some time looking for historical data on physician incomes and didn't find anything comprehensive.  The best I could do was this composite of data from two sources for 1985-2000, Health Affairs using the American Medical Association's (expensive) Socioeconomic Monitoring System and the Kaiser Family Foundation.

It appears that the mean inflation-adjusted incomes rose nicely until the early 1990s and then stagnated.  This is consistent with news reports in the 1990s that "managed care," threatened in the Clinton healthcare reform proposal, was actually adopted by insurers and employer-sponsored plans. This put downward pressure on average physician incomes.

This government report, also based on AMA statistics, shows more detail for the period 1982-2000. A chart there says mean physician inflation-adjusted incomes grew smartly from 1985 to 1989, and then stagnated. I have no data for the 21st Century.  If anybody knows of a good data set, I would appreciate your leaving a link in comments. 

BTW, this Kaiser Family Foundation report has a nice pie chart showing where our healthcare dollars went in 2007. Physicians and clinics got only 21%, hospitals got 31%, and all other sectors were smaller. Clearly, there is no one simple answer to cost containment/reduction.

Update on Wednesday, November 25, 2009 at 02:17PM by Skeptic

Here's an example of how Americans are not well served by healthcare price administration. MRI machines are sold in Japan for half what they sell for in the US. That can happen because a prospective US purchaser can count on a much larger revenue stream from MRI procedures and, after deducting variable costs, there is much more cash left over to pay back the capital cost of the machine and yield a nice profit. I understand that in the US it is common for groups of doctors to buy MRI machines because they can be very attractive investments if the utilization rate is kept high; that would not happen in Japan because the rate of return on investment would be much lower. Why do MRI procedures in the US cost up to 10 times what they do in Japan?  Because the Japanese government sets the prices for these procedures, and it has been very aggressive in containing healthcare costs. The US government has been more diligent in protecting the incomes of healthcare providers and equipment, device, and drug manufacturers.

Hat tip to Mort for flagging this example. 

Update on Tuesday, December 8, 2009 at 10:18AM by Skeptic

Ezra Klein has more here on the inverse relationshp between employer healthcare costs and wages. 

From 1989 to 1995, median wages actually fell a bit. Then, managed care kicked in. Annual growth in health-care costs fell from more than 10 percent in the early 1990s to less than 5 percent in the late '90s. Meanwhile, wages shot through the roof, rising more than 11 percent from 1995 to 2000. Then we ended the managed-care experiment, and health-care costs resumed their normal speed of growth. Predictably, wages slumped back down from 2000 to 2006. "By every observable indicator," says Harvard's David Cutler, "managed care was a huge success. It cut spending, cut the growth of spending and didn't seem to kill anyone. And yet everyone hated it."

Update on Friday, December 11, 2009 at 11:17AM by Skeptic

Robert Reich explains why the pending healthcare legislation, including the latest Senate "compromise," will not slow the flow of economic and political power to a few giant healthcare insurers.

From the start, opponents of the public option have wanted to portray it as big government preying upon the market, and private insurers as the embodiment of the market. But it's just the reverse. Private insurers are exempt from competition. As a result, they are becoming ever more powerful. And it's not just their economic power that's worrying. It's also their political power, as we've learned over the last ten months. Economic and political power is a potent combination. Without some mechanism forcing private insurers to compete, we're going to end up with a national health care system that's controlled by a handful of very large corporations accountable neither to American voters nor to the market.

Update on Friday, December 18, 2009 at 03:58PM by Skeptic

David Brooks has come out against the pending Senate bill after a pro/con analysis that largely reflects my view that the Senate bill has become a sell-out to health insurers instead of being the grand bargain giving them more customers and us meaningful cost controls. On the same op ed page, Paul Krugman says Senators should vote for the bill in hopes that its huge deficiencies can be fixed in future years. More often than not, I'll take Krugman's advice over Brooks', but not this time.

Update on Saturday, December 26, 2009 at 08:01AM by Skeptic

Here is a link to support for the statement in the original post that "about one-third of all patients are on Medicare, Medicaid, or some other government-paid program." Actually, it was 46% in 2007 according to the chart Paul Krugman took from the Centers for Medicare and Medicaid Services.

Update on Monday, July 23, 2012 at 04:05PM by Skeptic

An email from Karen points out the second link after the first chart in the main post is broken and offered an alternative.  Thanks, Karen.  I decided to dig back into official data and found a good report at the Centers for Medicare and Medicaid Services.  The following charts are based on Table 1 of this CMS pdf.  The first shows total HCE as a percent of GDP.  The second shows annual HCE expenses in nominal dollars.  Comparing the two reveals that the noise in the HCE/GDP ratio is almost all due to GDP expansions and recessions rather than changes in the rate of increase in HCE.  The ratio leveled off in the 1990s when GDP growth was booming and rose sharply when GDP declined in the recessions of 2001 and 2007.  

Update on Tuesday, March 20, 2018 at 09:06AM by Skeptic

Los Angeles Times reports today on a study published in JAMA comparing eleven rich nations on factors contributing to the large system-wide cost differences between USA and ten peer nations.  Summarizing the LAT summary, contributing substantially to the much higher USA costs are higher prescription drug prices, higher administrative costs, and across-the-board higher incomes for doctors, nurses, and other providers.  Hypotheses rejected in the study were: Americans use more health services, we don't spend enough on social programs, we have too many specialists and not enough primary care physicians, American docs order too many tests (to inflate earnings or prevent lawsuits), and cutting back on "wasteful" utilization would make a substantial cost difference. 

David Brooks says America needs a moral revival, but it’s really about the role of government.

David Brooks says the reason ordinary Americans are suffering economically is that they lack the moral fiber of their parents—it's their own fault, and they must redeem themselves morally and culturally:

Centuries ago, historians came up with a classic theory to explain the rise and decline of nations. The theory was that great nations start out tough-minded and energetic. Toughness and energy lead to wealth and power. Wealth and power lead to affluence and luxury. Affluence and luxury lead to decadence, corruption and decline."

. . . .

But in the U.S., affluence did not lead to indulgence and decline.

That's because despite the country's notorious materialism, there has always been a countervailing stream of sound economic values. The early settlers believed in Calvinist restraint. The pioneers volunteered for brutal hardship during their treks out west. Waves of immigrant parents worked hard and practiced self-denial so their children could succeed. Government was limited and did not protect people from the consequences of their actions, thus enforcing discipline and restraint."

. . . .

Over the past few years, however, there clearly has been an erosion in the country's financial values. . . .

. . . [I]n the three decades between 1950 and 1980, personal consumption was remarkably stable, amounting to about 62 percent of G.D.P. In the next three decades, it shot upward, reaching 70 percent of G.D.P. in 2008.

During this period, debt exploded. In 1960, Americans' personal debt amounted to about 55 percent of national income. By 2007, Americans' personal debt had surged to 133 percent of national income.

Over the past few months, those debt levels have begun to come down. But that doesn't mean we've re-established standards of personal restraint. We've simply shifted from private debt to public debt. . . .

. . . . [T]hese numbers are the outward sign of a values shift. If there is to be a correction, it will require a moral and cultural movement."

There is nothing to the "Calvinist restraint" myth.

Brooks gives no evidence of any change in financially-relevant character or morality in recent decades. To make that case, he should at least argue that the parents and grandparents of today's citizens would make different decisions under today's circumstances, or that they would make more profligate decisions than their ancestors if transported back in time to those circumstances. For example, newly unemployed fathers in today's Great Recession often max out their credit cards to try to maintain a standard of living. That didn't happen in the Great Depression, but was it because of character differences or because there was no access to credit then? Would a typical young father transported from the 1930s to today not borrow to keep his family fed and housed?

Brooks tells us that the American living standards surpassed those in Europe as early as 1740 and continued to grow rapidly because Americans "believed in Calvinist restraint." Really? Free land, abundant natural resources, open immigration policies, rapidly growing population, relative isolation from frequent European wars, use of slavery, and being athwart important trade routes had nothing to do with economic growth in America? C'mon. And whose "restraint" is he talking about? Could he possibly mean that what uber-Calvinists Andrew Carnegie and John D. Rockefeller were exercising was "restraint."

Brooks seems to mean that it's ordinary citizens that must exercise Calvinist restraint in order to prosper, and when they don't, their incomes suffer. Actually, that's the only thing he could mean because incomes have stagnated and declined only for the working class and middle class. Upper economic classes have had their incomes increase faster than before this alleged moral decline suddenly overwhelmed the nation--in about 1973 according to the following charts from here, here, and here.

Wealth is highly concentrated among elites and power even more so, and always has been. How is it that the moral decline of ordinary citizens causes the wealthy and powerful to go soft and stop exercising Calvinist restraint? If moral decline is truly the problem, isn't it the wealthy and powerful, instead of the masses, that should be packed off to re-education camps? These are the people who have been making the rules of the economic game for the last three decades and are its most influential players. For example, ultralow interest rates and other policies that have discouraged saving were put into place not by ordinary consumers who turned into spendthrifts almost overnight but by elites who want the masses to spend as much as possible. So whose values need to change? And who would be doing the re-educating, Brooks' conservative friends of high Calvinist morality who gained ever-increasing control over economic policies in the last 30 years and kept making things worse?

The real issue is whether government can and should adjust the rules to make capitalism work or whether we should blame the victims and let economic powers run free without checks and balances.

The idea that people are poor because they are sinners, or are simply pre-destined to be inferior, resurrects (as historian and sociologist Brooks surely knows) the social Darwinist side of the political argument with the Progressive Movement a century ago. Please forgive the oversimplification as I try to summarize in two paragraphs Robert H. Nelson's fascinating and extensively researched book Reaching for Heaven on Earth—The Theological Meaning of Economics.

In the late 1800s, the ideas that a "social gospel" commanded humans to strive for heaven on earth and that scientific knowledge enabled selfless government technocrats to facilitate that by channeling the animal spirits and dark impulses of powerful economic players powered the Progressive Movement. Progressives drew on Aristotle, St. Thomas Aquinas, the traditions of the Roman Catholic Church that all men are equal and all can be saved by their lifetime behavior, the optimism that Isaac Newton's discovery of important physical laws could be extended to all fields of inquiry including what came to be called the social sciences, and the writings of John Locke, Adam Smith, Jeremy Bentham, et al. And, of course, they recruited every other possible argument for their ideas about the proper role of government.

Arrayed against them were protestant ideas that this world is irredeemably sinful, that only a few "elect" will go to heaven, and that our earthly deeds cannot influence God's decision in that regard. Those on this side of the argument were influenced by the ideas of Plato, St. Augustine, Martin Luther, John Calvin, Jean Jacques Rousseau, Charles Darwin, Karl Marx, Herbert Spencer, Sigmund Freud, et al. This "social Darwinism" of Herbert Spencer was actually in play before Darwin wrote about the survival of the fittest in the evolution of species. In this view, for government to "interfere" by tipping the scale or changing the rules against the elect and in favor of the damned was a sinful interference with God's ordained natural order.

In this context it seems to me that Brooks has defined the problem and the solution as requiring that the masses of men must repent and change their essential morals and culture and that unless they do, nothing can—or should—be done. The problem has not been caused by improvident government policies, and government should not try to change outcomes by some technocratic policy adjustment, he's saying.

My view is closer to the progressive side, although it has from time to time clearly overestimated its ability to understand economic science and optimize the workings of government. Government has an essential and unavoidable role in making and enforcing the rules of the economic game. It need not (and should not) be the central planner or the owner of all capital, but all games must have rules and there is no other entity that can make and enforce them. In an NFL metaphor, government is the "competition committee" that periodically adjusts the rules for the protection of players and maximization of the fan base and revenues. None of the rules, and none of the rule changes, can be entirely neutral. For example, rule changes that protect quarterbacks and wide receivers increase the advantage of teams that are staffed to pass, and rule changes that protect defensive linemen from low blocks may make them stronger against running plays. A game with no rules, or "rules" made up on the fly by the players, is doomed to failure.

I'll tell you who's gone soft, and it's not the American people. Usually hard-headed David Brooks has become a squishy romantic (unless he's a cold-blooded acolyte of Herbert Spencer, which seems more likely).

Update on Wednesday, September 30, 2009 at 07:30AM by Skeptic

Paul Krugman sees the finger prints of Ronald Reagan, Irving Kristol, et al. instead of moral decay. Andrew Leonard characterizes it as The Decline and Fall of David Brooks. 

Update on Wednesday, September 30, 2009 at 02:48PM by Skeptic

Jason Burwen's comment on Mark Thoma's blog presents data that it's upper income strata that saved less in the 1990s:

When you disaggregate US consumers by income quintile, you will see that top incomes account for the dive in American saving--and middle and lower incomes have remained fairly constant in their savings. See Maki and Palumbo's 2001 paper, DISENTANGLING THE WEALTH EFFECT: A COHORT ANALYSIS OF HOUSEHOLD SAVING IN THE 1990S, Figure 4.

Not that I buy the "declining moral fiber" story, but if you do believe it, then it would indicate that the decadence and collapse is led by the wealthiest...

Update on Tuesday, October 6, 2009 at 11:27AM by Skeptic

Brooks confirms in today's column that he is thinking in terms of the great philosophical divide of 100 years ago as we are "about to have a big debate on the role of government."  He says we should be following David Hume (Calvinist) because that will unleash innovation, but regrets we're probably going to follow Jeremy Bentham (progressive) in healthcare and climate change legislation because that's what entrenched interests want. 

Update on Friday, May 6, 2011 at 02:53PM by Skeptic

David Brooks blames the victims again in today's column, and Paul Krugman calls him on it. 

Irving Kristol, the midwife of supply-side economics before he became the Godfather of neo-conservatism

David Warsh summarizes Irving Kristol's contributions to supply-side economics and other tenets of 1980s conservatism here.

The side he picked in economics was an odd one. A 1975 issue [of The Public Interest founded and edited by Kristol] featured a pair of articles: "The Social Pork Barrel" launched the career of a young Michigan Congressman, David Stockman, who would become budget director for Ronald Reagan; and "The Mundell-Laffer Hypothesis – a New View of the World Economy," by Wall Street Journal editorial writer Jude Wanniski, introduced the world to economists Arthur Laffer and Robert Mundell, and their newly-invented brand of "supply side economics."

The striking thing about Wanniski's article was its anti-establishment tone, anti-Chicago as well as anti-Cambridge, Mass. The new hypothesis might be as transformative as the Copernican Revolution, he averred – or at least that of John Maynard Keynes. Mundell and Laffer's enthusiasms for a gold standard, fixed exchange rates, large tax cuts and tight money were picked up and greatly amplified by the editorial page of The Wall Street Journal. The Republican Party was divided – insouciant economic populists in one wing, sober technocrats in another.

In the neo-conservative firmament, the stars of ordinarily first-magnitude conservatives Milton Friedman and Martin Feldstein dimmed, while Laffer and Wanniski brightened. The success of The Way the World Works, Wanniski's 1979 book for editor Midge Decter, nearly ripped apart the boutique social science publisher Basic Books, where Kristol worked as an editor as well.

By then The Public Interest was losing its force. As James Q. Wilson wrote the other day in The Wall Street Journal, "It began to speak more in one voice and the number of liberals who wrote for it declined." Daniel Bell quietly resigned, in 1980. It didn't matter. The Republicans were in power; and Kristol was ready for a second act. He would become widely known as "the Godfather" of neo-conservatism, dispensing favors and advice as a political activist operating out of the American Enterprise Institute in Washington.

In its obituary last week, The Economist summed up this second act of Kristol's career: "American conservatism, before he began to shake it up, was dour, backward-looking, anti-intellectual and isolationist, especially when viewed from the east coast. By the time Mr. Kristol … had finished with it, it was modern and outward looking, plumped up with business-funded fellowships and think tanks and taking the lead in all policy debates."

Economist Brad DeLong found and posted this quotation showing Kristol was interested in political messages, but economic science—not so much.

Among the core social scientists around The Public Interest there were no economists.... This explains my own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority - so political effectiveness was the priority, not the accounting deficiencies of government...

A comment on Mark Thoma's blog supplies the link to the original source of this quotation. 

Update on Friday, May 7, 2010 at 07:03AM by Skeptic

Bruce Bartlett has posted the contents of Jude Wanniski's influential 1976 National Observer article here.

The problem with executive pay is not the size but how they earn it.

The ongoing political furor about gigantic executive pay packages is largely misdirected at mechanisms for capping compensation. I have pointed out here and here that much of this has been abusive rent-skimming from captured institutions and manipulated markets. However, I see these as only shareholder rights issues because the macroeconomic impacts seem tiny. For example, ousted GM CEO Rick Wagoner's total compensation of $14.9 million in 2008 was 0.01% of COGS ($2 for a $20,000 vehicle), and Jeff Immelt's compensation equaled $48 for each of GE's 323,000 worldwide employees (2.4 cents per hour).

Even the astronomical paydays in the financial economy have little impact on the real economy until a big bust occurs. I doubt the pay practices on Wall Street have changed much since the investment banks went public about 10 years ago, but they may have started taking bigger risks when they stopped playing with their own money. The problem for us ordinary folk is not that they got paid so much but that their compensation contracts incentivized them to take grossly imprudent risks and were generally focused on very short-term revenue or income metrics.

This Working Knowledge article quotes liberally from three HBS professors and makes lots of sense about solutions as well as providing a good background. The background includes counterproductive changes in the law the last time we got exercised about excessive executive pay. Let's do something effective this time and not just enact a sop to populist rage.

Update on Monday, September 21, 2009 at 03:40PM by Skeptic

The Conference Board is out today with a report recommending businesses reform themselves on executive pay practices instead of waiting for regulation.  The report was drafted by a committee headed by Los Angeles lawyer Bob Denham and is available here.  Marketplace has this summary and some reactions. 

Update on Thursday, October 8, 2009 at 05:52PM by Skeptic

Nell Minow's career fighting profligate pay packages--including her own father's--is described in this New Yorker article.  She is concerned about misalignment of pay and performance, but also seems offended that typically executives are generously paid even when their performance is disastrous for the shareholders. 

Update on Tuesday, October 13, 2009 at 05:41PM by Skeptic

Yves Smith has this fine post to the same effect at Naked Capitalism:

Pay is the wrong way to tackle this problem. It’s a lazy, crowd-appeasing, intellectually dishonest approach. The out of line pay is a symptom, and any attempt to treat symptoms as causes is likely to be ineffective, more likely dysfunctional.

. . . .

The financial services industry now has an unimaginably rich deal: privatized gains and socialized losses, and with tons of leverage too, which amps up the apparent profits and hence the pay levels these looters can claim they deserve. The way to attack this problem is to constrain the level of risk assumption. That in turn requires understanding the products and the markets, something the authorities have completely abdicated. With so much “talent” looking for jobs, now would be the perfect time to invest in catching up.

Newspapers are obsolete--Part 3: New Horizons

As the financial difficulties for print journals pile up, lessons about what works and doesn't work online are being learned, and a variety of new models for delivering news and analysis are being tested.  Are the days of free content over?  Could the future be a non-profit news network organized around NPR and PBS?  Or Google?  Michael Massing explores it all in this NYRB article. 

At the bottom of the financial crisis--powerful minds with strange ideas

Keynes' biographer, Robert Skidelsky, echoes Keynes' assertion that ideas are more powerful than vested interests:

"The root cause of the present crisis lies in the intellectual failure of economics,” Mr. Skidelsky writes. “It was the wrong ideas of economists which legitimized the deregulation of finance, and it was the deregulation of finance which led to the credit explosion which collapsed into the credit crunch. It is hard to convey the harm done by the recent dominant school of New Classical economics. Rarely in history can such powerful minds have devoted themselves to such strange ideas."

(From Dwight Garner's NYT book review.)  Yes, and Alan Greenspan admits his powerful mind held some of these strange ideas. 

Orthodox economics has failed, and Notre Dame ousts the heterodox professors.

In 2003, Notre Dame imprisoned its teachers of economic history, "saltwater economics," and economic theory compatible with Catholicism in a department of economics and policy studies.  A new department of economics and econometrics was organized and staffed to do orthodox, mathematically sophisticated, "freshwater" economics.  As the culmination of several moves crippling to the heterodox department, it is reported that Notre Dame will dissolve it and scatter the professors into other departments.  They are no longer allowed to teach introductory or intermediate level courses.  The orthodox types have consolidated their power just at the moment of the most spectacular failure of their theories in the real world. Apparently, the Catholic Church learned nothing from that Galileo affair. 

Update on Saturday, September 19, 2009 at 07:59AM by Skeptic

Commenter SS on Mark Thoma's blog highlights here the inconsistency between the Notre Dame choice and papal encyclicals. 

Update on Wednesday, January 6, 2010 at 07:02AM by Skeptic

Notre Dame economics students have a blog, and this is what one posted about the crisis in economics and the missed opportunity at Notre Dame. The post is mostly excerpts from Jamie Galbraith's paper for the NEA Higher Education Journal.

The battle to discredit orthodox macroeconomics is getting interesting.

The sub-prime mortgage meltdown and the Great Recession have unleashed a tremendous battle among macroeconomists over the almost complete failure of orthodox economics to predict and prevent these calamities, or even to allow for the possibilities that they could occur. Paradigm shifts have occurred several times in economics in the last 100 years, and we seem to be witnessing another. For a really good historical perspective as well as layman-friendly descriptions of some of the disputed doctrines, read Paul Krugman's NYT magazine piece How Did Economists Get It So Wrong? I've been a more-than-casual reader in the history of economic thought for the last 4-5 years and this is by far the best read-in-one-sitting piece I know of.

Krugman describes the schism between the "freshwater" economists and the "saltwater" economists and explains key concepts like the "Chicago School," neo-classicism, monetarism, free market fundamentalism, efficient market hypothesis, rational expectations, behavioral finance, general equilibrium models, "real business cycles" theory, mathematical vs. "literary" methods, monetary vs. fiscal stimulus, supply-siders and Keynesians, asset price bubbles (including the belief that they can't happen), and "zero-bound" interest rates. He discusses the influential contributions and views of individuals like Olivier Blanchard, Robert Lucas, Ben Bernanke, John Cochrane, Brad DeLong, Adam Smith, John Maynard Keynes, Joseph Schumpeter, Milton Friedman, Anna Schwartz, Eugene Fama, Michael Jensen, Larry Summers, Robert Shiller, Alan Greenspan, Raghuram Rajan, Edward Prescott, Greg Mankiw, David Romer, Andrei Shleifer, Robert Vishny, Mark Gertler, Nobuhiro Kiyotake, John Moore, Casey Mulligan, and even H. L. Mencken. The article concludes this way:

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: "There is always an easy solution to every human problem — neat, plausible and wrong."

When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won't be neat; but we can hope that it will have the virtue of being at least partly right.

The arguments among economists in the blogosphere are more detailed, more intense, and often bitter. For example, John Cochran blasts back at the Krugman article, and Krugman replies on his blog with language that probably wouldn't pass NYT standards for gentility in the print version. David Warsh, who has done a lot of fine writing about the history of economic thought, has a different take here and a link to a recent paper by Robert Gordon with his version of recent history and what should come next. Warsh reminds us that the last big paradigm shift 30 years ago involved discrediting the dominant Keynesian view by associating it with the "Phillips curve" (which claims a tight inverse relationship between unemployment and inflation). Mark Thoma has collected here links to very diverse sources who have weighed in on the future of macro, and Mark has been otherwise very active in the discussion.

Below, strictly for my own convenience, are links to other Realitybase posts on the pending (I hope) paradigm shift.

http://www.realitybase.org/journal/2009/4/1/my-kind-of-economist.html

http://www.realitybase.org/journal/2009/3/15/blame-the-economists-not-economics.html

http://www.realitybase.org/journal/2009/2/11/economic-theory-in-crisis-another-view.html

http://www.realitybase.org/journal/2009/1/28/orthodox-economics-is-in-crisis-or-maybe-not.html

http://www.realitybase.org/journal/2009/1/25/economics-professors-are-training-virtual-reality-gamers.html

http://www.realitybase.org/journal/2009/1/15/liberal-and-libertarian-economists.html

http://www.realitybase.org/journal/2009/1/7/how-many-pinheads-can-dance-on-a-virtual-austrian.html

http://www.realitybase.org/journal/2009/1/6/the-financial-theory-king-is-dead-now-what.html

http://www.realitybase.org/journal/2008/12/6/theyre-baaaack-keynesians-to-the-rescue.html

http://www.realitybase.org/journal/2008/10/24/two-economists-views-on-whats-wrong-with-their-profession.html

http://www.realitybase.org/journal/2008/6/13/rubinomics-in-crisis.html

http://www.realitybase.org/journal/2008/5/23/even-milton-friedman-has-said-mainstream-economics-does-not.html

Update on Saturday, September 19, 2009 at 07:21AM by Skeptic

Krugman focuses here on the time (1980-81) and issue (the failure of the Lucas rational expectations modification of the Phelps employment model to account for stagflation) that split the "freshwater real business cycle" types and the "saltwater new Keynesians." 

Declining civilian incomes are spreading to government employees.

When the people who provide your revenue, whether customers or taxpayers, have shrinking incomes a decline in your income too is probably unavoidable.  President Obama announced today that instead of federal employees getting a statutory formula pay increase of 18.9% worth $22.6 billion next year, they will get only 2.0% worth $2.7 billlion. In California, most State employees are taking year-long mandatory unpaid 3-days-per-month furloughs, which reduces their incomes by 15%.

Realitybase anthology

Realitybase is acquiring more "authority" according to Google PageRank. This is a kind of peer review process in which Google counts the number of inbound links from other websites and weights them according to their PageRanks.  In Google searches, pages with high PageRank will be displayed higher than low ranked pages.  For a list of Realitybase posts that appear in the top 10 in certain Google searches and some comments about "search engine optimization," go here.  www.realitybase.org is now ranked 6/10, which means it's an order of magnitude "less important" than a site ranking 7/10 like Robert Reich's blog and 2 orders of magnitude below a 8/10 ranked site like Paul Krugman's blog or Huffington Post.  But it reflects a lot of progress from 0/10 and 3/10, which were the numbers I saw for many months. 

Lately I've noticed that 11 of my approximately 300 posts have earned their own PageRanks.  While my list of the 11 best posts would have been different, here's what the rest of the world thinks.  Have a look.

Google pagerank 4/10

How mortgage backed securities increase systemic risk

The American Dream died in February 1973.

Risk management means taking the risks your competitors take.

Google pagerank 3/10

George Soros explains "The Crash of 2008" again

The US trade deficit is tribute paid to foreigners. And it's big.

Two hypotheses for why US CEO pay is so high

The energy efficiency (and political) geography of corn to ethanol

Greenspan confirms foreign competition depressed US wages

Stiglitz on the causes of the financial crisis and how to prevent the next one

Lots of crude oil hoarding a year ago, and still some now

Google pagerank 2/10

Hydrogen fuel cell vehicle technology is on a road that doesn't go to market.

And here's a post that is too recent to have a pagerank, but since posting has been accessed more than any other Realitybase post by a large margin.  [Update 11/8/09: The following post is now ranked 4/10.] If you Goggle "comparative advantage," this post is listed 11th out of 3.84 million pages:

Comparative Advantage--the Unicorn of Free Trade.

Why we acquire beliefs and refuse to change them

John Maynard Keynes concluded his magisterial General Theory of Employment, Interest and Money (1935) with these observations about the power and persistence of beliefs:

[T]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Although Keynes did not expect those old enough to hold political power to change their beliefs, he expressed optimism that subsequent generations can and will adopt better ones. In contrast, the quotation from Josh Billings in the subtitle of this blog reflects a frustration with the slowness with which new ideas take hold because of the inability of old dogs to learn new tricks. To a large extent the purpose of this blog has been to confront prevailing beliefs with contrary facts to see what, if anything, would happen. In this post, I speculate a bit on why beliefs are so persistent. [UPDATE 10/15/2010: The Josh Billings quotation, which has been replaced, was "The trouble with people is not that they don't know but that they know so much that ain't so."]

By "belief" I mean any idea we are reluctant to change or re-examine. Such a belief may have been acquired via a rigorous analytical process based on measurements, by received wisdom or folklore, by experience, or in other ways. We may have forgotten the details of how and why we acquired the belief and be unable to explain it to others. A belief may have deep emotional importance such as religious dogma or be devoid of emotional content such as a belief that there are 50 States in the USA or that 8 x 9 = 72. A belief may be true or false, but either way we resist consideration of contrary proofs because we "know" we are right.

Perhaps the tendency to unchanging beliefs has evolutionary advantages, for example:

Aids Learning. Our minds seem to discern, create, and use patterns to see, hear, think, etc., and things that don't fit a familiar pattern are likely to be rejected or distorted.  Random facts like nonsense syllables are more difficult to learn and recall than facts that can be anchored to an existing body of knowledge.  If a new idea contradicts the existing knowledge, one may have to do a great deal of mental work to reorganize and/or prune old ideas in order to incorporate the new idea.

Constitutes Intellectual Capital. To the extent our beliefs derive from education and experience, they constitute part of our "intellectual capital," which increases our efficiency. We can make more decisions faster if we can plug a few facts into a template instead of having to start anew to solve a problem as though we'd never seen anything like it before. In large part, this is the difference between an experienced lawyer (or other professional) and a newbie.  A smart newbie given enough time can perhaps solve any problem that is presented, but the valuable professional is one who already has solved 80% of the problem by having worked through similar situations in the past. 

Minimizes the Discomfort of Uncertainty. Perhaps it is stressful to feel confused and in a strange and meaningless situation with no patterns that seem familiar.  Perhaps such stress aids survival by keeping us away from situations that may be dangerous because we don't know how to handle them. If gaining knowledge to eliminate that stressful feeling is a deep psychological need, perhaps people would feel better about having an objectively false or foolish belief than about saying to themselves, "I don't know."  If so, when a belief is challenged, there is a threat to remove a "security blanket." 

Provides Tribal Glue. Beliefs are tribal glue, I think.  There is practical value in believing or pretending to believe what people important to us believe, even if such beliefs are entirely false and utterly stupid.  Churches are typically upset by heretics in their midst even if they are very tolerant of disbelievers outside the church.  Our public beliefs are part of our social identity, and it doesn't matter whether the beliefs are about "facts" or about theory or something that is unverifiable.  It may well be difficult to trust or rely on a tribe member whose behavior we cannot predict. Perhaps this social cohesion function explains the odd finding that scientists as a group are very unlikely to believe in God. "Most polls show that about 90% of the general public believes in a personal God; yet 93% of the members of the National Academy of Sciences do not."—Sam Harris here. That doesn't mean scientists function without beliefs. They just have a different set of beliefs including a belief in the sanctity of facts observed in the physical world, that the world is orderly and (eventually) understandable by mortals, and that there are no miracles or interventions by a Supreme Being. 

Improves Social Status. Belief may be better than actual knowledge in a contest for leadership of the pack. It's hard to be the leader when you admit you need to study the issue and a rival confidently expresses a belief.  A blog comment I read recently on the subject of why very smart economists often publish dumb economic analysis and advice said he was told by a "smirking" professor, that "it's better to be wrong than to be irrelevant." 

Reinforces Authority. Beliefs may be useful to maintain hierarchical or social control and discipline. One whose conduct has been inconsistent with orthodox beliefs is not permitted to challenge the correctness of the beliefs. He may argue that his conduct was in fact consistent with the beliefs or reaffirm the beliefs and explain why it won't happen again. On such occasions, Homer says miscreant Greeks blamed "ate," translated as blindness or confusion temporarily thrust upon them by the gods. 

Update on Monday, August 31, 2009 at 12:25PM by Skeptic

 An email this morning asks why I lump "facts" with "beliefs." My response:

I was looking at belief subjectively, from inside the head of the believer. From that perspective, I doubt there is any difference between beliefs that are objectively true and those that are objectively false because I doubt we choose to “believe” things we recognize as false. I expect that neurologically we process identically true ideas and false ideas we erroneously believe to be true. Of course, Realitybase concerns itself with the social problems created by false beliefs, but I can imagine that true beliefs can cause problems also, at least for individuals.  For example, if you believe the US has 50 States, you may have difficulty fitting into a cult where everybody believes there are only 48 or 13.

Update on Saturday, September 19, 2009 at 04:00PM by Skeptic

Joel Stein believes in vaccinating babies. His wife wasn't so sure. So they attended a seminar by a doctor who gave all the reasons not to vaccinate.  They left at the break, and their infant got vaccinated.  Joel explains: 

. . . . I'm pretty confident in the way I get my knowledge. Even in the age of Google and Wikipedia, we still receive almost all of our information through our peers. I believe in evolution not because I've read Darwin but because everyone I know thinks it's true. When presented with doubts, I don't search for detailed information from my side. I go with the consensus of mainstream media, academia and the government. Not because they're always right but because they're right far more often than not, and I have a TiVo to watch. Also, unlike antivaccination people, they usually shut up after a little while.

That sounds like belief as tribal glue.

Update on Saturday, October 24, 2009 at 08:24AM by Skeptic

The following about the tribal glue aspect of belief is copied from an earlier post on the problems created by how economics is taught. Who you are is defined by what you believe?

There are millions of citizens and public officials who graduated from college believing that what they were taught in two semesters of economics was "true." That's how the text books are written, and teaching the current standard model may be the easiest way to cover a lot of material. For the rest of their lives, most of these graduates will start their thinking about every economic issue from these same core beliefs--including beliefs that professional consensus later finds objectively false or rarely relevant in the real world. Pete Peterson is an egregious but typical example.

In a little while, the standard model in economics texts will be revised, and some different set of "truths" will be instilled into the next generation of collegians. Whatever they are, these new truths will eventually be spectacularly contradicted by the real world and will be replaced, leaving millions of angry and distrusting believers unable to adjust. So updating the standard model does not get at the fundamental problem that economics is often taught, and even more often received, as a secular religion. Professors, you're more responsible for this than your alumni.

Perhaps if the first (for most students, the only) year of economics were taught as history of economic thought and political philosophy, professors would portray less certainty and, thus, do less long-lasting damage. Or teach the course by the case method in which students are exposed to a full range of conflicting arguments and materials and come to the realization that we don't know for sure why what happened happened, that subtle differences in the facts might have led to different outcomes, and that there is a lot more uncertainty in the real world than in the virtual reality models of economic "science." Perhaps graduates of such programs would be more apt to analyze unique real world problems with the tools of economics rather than to thoughtlessly apply the same "solution" to every problem.

On the other hand, David Brooks praises institutional conformity and indoctrination here.

As we go through life, we travel through institutions--first family and school, then the institutions of a profession or a craft. Each of these institutions comes with certain rules and obligations that tell us how to do what we are supposed to do. . . . New generations don't invent institutional practices. These practices are passed down and evolve. So the institutionalist has a deep reverence for those who came before and built up the rules that he has temporarily taken delivery of. . . . The rules of a profession or an institution are not like traffic regulations. They are deeply woven into the identity of the people who practice them.

He offers this in contrast to the vision of a faculty committee at Harvard on the purpose of education. “The aim of a liberal education” the report declared, “is to unsettle presumptions, to defamiliarize the familiar, to reveal what is going on beneath and behind appearances, to disorient young people and to help them to find ways to reorient themselves.”

Update on Saturday, February 6, 2010 at 07:48AM by Skeptic

John Quiggin asks why some economists are still talking about The Great Moderation in the present tense, and gives his answer:

The answer can be sought in the internal dynamics of the economics profession. The Great Moderation vanished in 2008 and 2009, but the academic industry built to analyze it did not. Research projects based on explaining, measuring and projecting the Great Moderation, were not abandoned, and the careers based on those projects could not be diverted quickly into other ends.

Perhaps this is an example of beliefs as intellectual capital.  Objectively, the investment one has made has become worthless, or worth less, and needs to be written down.  A graduate student and his professor are confronted by the need to write off several years of hard work and just can't bring themselves to do it.  Probably, there are tribal glue and heirarchical maintenance aspects to this too--if the professor were to declare the field dead and move on, that abandonment would upset many social relations, not least with his Ph.D. candidates. 

Update on Thursday, February 18, 2010 at 09:15AM by Skeptic

Macroeconomic Resilience, writing about how it was advantageous to banksters engaging in extremely risky trading activities to convince themselves that their strategies were safe because a true believer is better able to convince others, discusses here the more general question of why we believe things in the face of contrary evidence. The post suggests two reasons, which are similar but not identical to some of my six: First, being a true believer makes you more persuasive, and being persuasive makes you more successful.  Second, ignoring contrary evidence avoids the expenditure of time and energy that would be necessary to revise your beliefs and the "directionless indecision" of trying to live and act while aware that you don't know something important.

There is another question which although not necessary for the above analysis to hold is still intriguing: How and why do people transform into true believers? Of course we can assume a purely selective environment where a small population of true believers merely outcompete the rest. But we can do better. There is ample evidence from many fields of study that we tend to cling onto our beliefs even in the face of contradictory pieces of information. Only after the anomalous information crosses a significant threshold do we revise our beliefs. For a neurological explanation of this phenomenon, the aforementioned paper by V.S. Ramachandran analyses how and why patients with right hemisphere strokes vehemently deny their paralysis with the aid of numerous self-deceiving defence mechanisms.

Jeffrey Friedman’s analysis of how Cioffi and Tannin clung to their beliefs in the face of mounting evidence to the contrary until the “threshold” was cleared and they finally threw in the towel is a perfect example of this phenomenon. In Ramachandran’s words, “At any given moment in our waking lives, our brains are flooded with a bewildering variety of sensory inputs, all of which have to be incorporated into a coherent perspective based on what stored memories already tell us is true about ourselves and the world. In order to act, the brain must have some way of selecting from this superabundance of detail and ordering it into a consistent ‘belief system’, a story that makes sense of the available evidence. When something doesn’t quite fit the script, however, you very rarely tear up the entire story and start from scratch. What you do, instead, is to deny or confabulate in order to make the information fit the big picture. Far from being maladaptive, such everyday defense mechanisms keep the brain from being hounded into directionless indecision by the ‘combinational explosion’ of possible stories that might be written from the material available to the senses.” However, once a threshold is passed, the brain finds a way to revise the model completely. Ramachandran’s analysis also provides a neurological explanation for Thomas Kuhn’s phases of science where the “normal” period is overturned once anomalies accumulate beyond a threshold. It also provides further backing for the thesis that we follow simple rules and heuristics in the face of significant uncertainty which I discussed here.

Update on Monday, March 1, 2010 at 01:17PM by Skeptic

Lawrence M. Krauss discusses the function of belief for theoretical physicists in Hiding in the Mirror, Viking Press (2005).  After describing the development of theoretical models of the universe that attempt to tie all the known forces of nature, including especially gravity, and quantum theory together into one model that explains everything, Krauss says none of these conjectures has been proven experimentally but that efforts have nevertheless been worthwhile. 

It does a disservice to the most remarkable century in the history of human intellectual investigation to diminish the profound theoretical and experimental discoveries we have made in favor of what is at the present time essentially well-motivated, educated speculation.  It is also simply disingenuous to claim that there is any definitive evidence that any of the ideas associated with string theory yet bear a clear connection to reality, or that they will even survive in their present form for very much longer.  Perhaps more to the point, the deeper we probe these theories, the hazier they seem to have become.

At 247.  Krauss goes on, at 247-49 to discuss the role of Edward Witten, who has been the leading force driving string theory since the mid 1980s.” 

Ed may be a “true believer” in string theory, but that simply reflects the very nature of his position on the theoretical forefront.  It is, as I have stressed, very difficult to devote the incredible intellectual energy and focus that are required over long periods of time in the attempt to unravel the hidden realities of nature if one does not have great personal conviction that one has a good chance of being on the right track. . . .

The same level of personal conviction is required of artists and writers, as well.  But what makes science somewhat different, I believe, is that great scientists are prepared to follow an idea for as long as decades, but at the same time are equally prepared to dispense with all of this effort in a New York minute if a better idea or a contradictory experimental result comes along. 

Two comments:  First, the “belief” discussed by Krauss and attributed to Witten is probably not the belief that the various conjectures are actually and literally truth but perhaps only that they are promising avenues for investigation and that they may very well turn out eventually to have an important element of objective, proven truth in them.  However, as Krauss points out at 249, when you talk to some theoretical physicists, their enthusiasm may well sound like belief in “truth.”  Second, if Thomas Kuhn is right in The Structure of Scientific Revolutions (1962), then it takes a great deal more than a “New York minute” to dispense with all the work of one’s career.  Doing that goes against all six of the reasons for belief outlined in the initial post:  Learning the new paradigm is difficult because it doesn’t accrete to the existing body of knowledge.  One has to “write down” intellectual capital.  One must live with the stress of uncertainty—at least until one adopts as certain a replacement belief.  One tends to lose his/her tribal affiliations (unless the whole tribe migrates together from old belief to new belief).  One is likely to suffer diminution of social status and authority because others will have greater expertise in the new paradigm and will be perceived as having been "right" instead of "wrong."

Update on Monday, July 12, 2010 at 12:33PM by Skeptic

John F. Kennedy said believing that we know makes us comfortable.

Update on Sunday, February 20, 2011 at 09:39PM by Skeptic

David Warsh suggests many beliefs are shibboleths, which are verbal means of protecting tribal integrity.  His example:  Belief that the Smoot-Hawley tariff act not only caused the Great Depression but also the precipitating event of the stock market crash 9 months before enactment. This loyalty test didn't really exist until WSJ editorial writer Jude Wanniski invented it in 1978.  It's been thoroughly refuted by students of the facts and disowned by even Milton Friedman but is still a shibboleth of conservative politicians.

Update on Saturday, December 28, 2013 at 11:20AM by Skeptic

Mathbabe has an interesting post on how the opinions of others affect our own opinions and conviction levels. How do opinions and convictions propagate?  She discusses a scientific paper reporting on the results of experiments on a small sample of people re opinions not likely laden with strong emotions. It appears people tend toward consensus and gain increasing conviction from either a small group with strong convictions or a large group of people weakly holding the same opinion.

The next result they found was that the dynamical system that was the opinion making soup had two kinds of attractors. Namely, small groups of “experts,” defined as people with very strong convictions but who were not necessarily correct (think Larry Summers), and large groups of people with low convictions but who all happen to agree with each other.

Mathbabe explores the implications and, e.g., wonders how these findings might be relevant to political opinions. 

I'm not sure how this report fits into the taxonomy of my original post. Tribalism?  Avoiding uncertainty?  Something else?

Update on Monday, January 13, 2014 at 07:21AM by Skeptic

Noah Smith writes about shared falsehoods as tribal glue and speculates about the origins of that tendency. Before technology, nobody had a superior ability to observe reality and there was no reason to doubt the reports of a tribe member with no apparent motive to dissemble. Then we began to have people with superior observational powers enhanced by technology.

At first, Western society reacted the way any sensible low-tech society would - by punishing the people who claimed to have some special knowledge. But as it became clear that This Time Really Was Different, Western civilization grew to embrace the iconoclast. The lone inventor, the brave whistleblower, the brilliant scientist, the skeptic - these are some of our greatest heroes. "Think different", our billboards tell us. "If all your friends jumped off a bridge, would you jump off a bridge too?" is a question we ask our kids, and we teach them to say "No!" (even though if you think about it, the sensible answer is probably "Yes").

. . . .

What Western civilization had done is to discover a kind of reality that was beyond Tribal Reality, and was beyond even the more general phenomenon of Consensus Reality. They discovered Extant Reality, the reality that hits you in the head even if you and everyone you know fails to believe in it. Extant Reality is a pitiless, cold, frightening thing. It's a monster from an H.P. Lovecraft story. It is not something you would choose to have exist, but that's the point - you don't get to choose. Western civilization, by being the first to get past that technological critical point, was the first to be forced to reconcile itself to the inability of Tribal Reality to stave off Extant Reality. So the West was the first to begin the hard, painstaking, uncertain task of bending Extant Reality to the will of humankind.

Noah goes on to discuss the Wisdom of Crowds and the Efficient Market Hypothesis.

The other American Dream of rising incomes—Horatio Alger stories

I have framed the American Dream as the expectation that new generations should do better economically than their parents, and have lamented the fact that real incomes of lower and middle economic strata have been stagnant and declining for 36+ years. In other words, what I'm calling "class mobility" has essentially stopped for the lowest and middle classes, making that version of the American Dream a mere memory. Another version of the American Dream is that individuals can rise out of poverty and disadvantage, get a good education, establish useful relationships, work hard, and achieve abundant lives while leaving their parents and peers behind—like characters in Horatio Alger stories. There is a lot of writing about this "re-ranking mobility," including ways to measure and increase it—especially where it seems to be limited by past or present invidious discriminations. One such post is here. I write to point out that class immobility and re-ranking immobility are different problems and that improving one does not necessarily improve, and could adversely affect, the other.

Class mobility, re-ranking mobility, age-related mobility and relations among them

Class mobility is measured by taking an entire population, arranging them in rank order of income, and then dividing them into equal size groups, commonly 5 groups or quintiles. From the rankings one can derive the top and bottom incomes for each quintile, the average income of all persons in each quintile, and in US Census data demographic statistics like age, race, family status, and education. Incomes can be converted to "real" dollars to eliminate the effects of inflation. What I showed here is that average real incomes for the bottom 3 quintiles have increased only slightly or not at all between 1979 and 2003 and that progress of the second quintile was nothing to brag about. In contrast, from 1947 to 1973 there was a factual basis for the dream that all Americans would be better off than their parents at equivalent life stages: Real average incomes of the 5/6 of income earners who are non-supervisory workers (roughly but not exactly the bottom 4 quintiles) climbed steadily at a compound rate of more than 2% in that era. Post.

Now watch what happens to class mobility when our Horatio Alger hero uses re-ranking mobility to leap out of poverty in the bottom quintile and get into the middle quintile overnight. Nothing. The person who was at the bottom of that middle quintile is displaced to the fourth quintile, and the person who was at the bottom of the fourth quintile becomes the top of the bottom quintile. Because the number of persons in each quintile cannot change, simple arithmetic makes rank order mobility a zero-sum game.

It is also important to note that rank order of individuals can be confused by "age-related mobility," meaning the tendency for people's incomes to increase with age as they progress from entry-level jobs to peak earnings before typically declining with retirement or disability. That means that our hero may start in the bottom quintile with his parents, rise to the middle quintile in his most productive years, and fall into the fourth or bottom quintile in retirement years. We cannot usefully compare people's earnings at age 40 to the current earnings of their parents or to their own earnings at age 20, even if we adjust for inflation. Correcting for age-related mobility to measure how many people permanently migrate upward from the quintile of their parents can be challenging and uncertain, as described by "the buggy professor" in comments here.

But what if a million Horatio Alger heroes leapt from the bottom quintile to about the middle of the third quintile, wouldn't all three of the lowest quintiles have improved average incomes? After all, a million people just went from earning, say, $17,000 per year to, say, $40,000, for a total of $23 billion per year. Even if the number of people in each quintile must stay the same, the million people who lost rank will raise the averages in their new lower quintiles, and since our heroes landed near the middle of the third quintile, the average for that quintile will also increase. The answer is, "No," unless our heroes got one million new jobs created especially for them. If there are not that many new jobs waiting for them, then our heroes must have won the labor market competition for jobs that either were already filled, or were destined to be filled, by persons in the middle quintile, who were then displaced to lower income jobs or unemployment.

Actually, unless a million or so new third-quintile jobs are created for our heroes, the situation is worse than creating a false hope of $23 billion of additional labor income. The million new qualified applicants for those $40,000 per year jobs would competitively bid down the wages thereof to something lower, and those who lose out on those jobs would move down the ladder to jobs for which they may be overqualified and bid down those wages, etc. Thus, instead of increasing by $23 billion, total labor income would decrease by some amount due to a surplus of qualified workers competing for higher-skill jobs.

People who study re-ranking mobility tend to be concerned about the inequality of opportunity experienced by youth in socio-economic environments that are poorly correlated with economic success compared with youth who start out in upper quintile or non-minority families. Typically, studies that document such disparities propose costly ameliorative programs such as enhanced educational effectiveness and opportunities targeted at disadvantaged populations. That's fine. I'm for that. There is great moral and social-stability value in avoiding a permanent, self-perpetuating, alienated, underclass. Such social mobility programs will, hopefully, result in a "fairer" distribution of jobs, but do such programs create the millions of new jobs that are necessary to serve my primary interest, the restarting of long-term class mobility, i.e., steadily rising real incomes for all four of the bottom quintiles?

Rapid economic growth is necessary, but not sufficient, to raise labor incomes.

First, it seems, I have to address what economic forces tend to cause real incomes to increase in all quintiles. The answer is that the laws of supply and demand strongly apply in "labor markets." Anything that creates an oversupply of labor is advantageous to employers, which is presumably why employers consistently support tax expenditures to oversupply the labor market with the "public good" of "intellectual capital." Conversely, a labor shortage during the dot-com era (1997-2003) caused real median incomes to rise for the only time since 1979. Post. In my own experience, labor shortages and rising real wages occur only during periods of rapid growth and stagnate or decline when growth is slow. Adam Smith thought so too. From Wealth of Nations, bk. 1, ch. VIII:

When in any country the demand for those who live by wages; labourers, journeymen, servants of every kind, is continually increasing; when every year furnishes employment for a greater number than had been employed the year before, the workmen have no occasion to combine in order to raise their wages. The scarcity of hands occasions a competition among masters, who bid against one another, in order to get workmen, and thus voluntarily break through the natural combination of masters not to raise wages.

. . . .

The demand for those who live by wages, therefore, necessarily increases with the increase of the revenue and stock of every country, and cannot possibly increase without it. . . .

It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest. . . .

. . . .

Though the wealth of a country should be very great, yet if it has been long stationary, we must not expect to find the wages of labour very high in it. The funds destined for the payment of wages, the revenue and stock of its inhabitants, may be of the greatest extent; but if they have continued for several centuries of the same, or very nearly of the same extent, the number of labourers employed every year could easily supply, and even more than supply, the number wanted the following year. There could seldom be any scarcity of hands, nor could the masters be obliged to bid against one another in order to get them. The hands, on the contrary, would, in this case, naturally multiply beyond their employment. There would be a constant scarcity of employment, and the labourers would be obliged to bid against one another in order to get it. If in such a country the wages of labour had ever been more than sufficient to maintain the labourer, and to enable him to bring up a family, the competition of the labourers and the interest of the masters would soon reduce them to this lowest rate which is consistent with common humanity. . . .

In this passage Smith credits booming growth and a chronic labor shortage in the American colonies as causing higher real wages than in England. In contrast, he describes the low wages, unemployment, and widespread poverty in very wealthy but stagnant China, and the mass starvations in Bengal under the exploitation of The East India Company.

Although Smith said above, "The demand for those who live by wages, therefore, necessarily increases with the increase of revenue and stock of every country, and cannot possibly increase without it," that has turned out to be partially, and crucially, untrue. We have observed in recent decades that wages do not "necessarily" increase with growth. We have had "jobless recoveries" from the 1991-92 and 2001 recessions, and there seems to be a consensus of experts (Krugman, for example) that we should expect another jobless recovery from the current Great Recession. Furthermore, US job creation has been in a long secular downward trend since 2001, even through the recent housing boom, and has fallen way behind the population growth rate. (The NYT graph is here, and my discussion is here.) But the other half of Smith's sentence, that wages cannot increase without increases in national wealth does certainly seem to be still true. So, robust growth is necessary but not sufficient to support a rising wage level.

Why job growth has gotten disconnected from GDP growth and why it has become so much more difficult to create well-paying jobs and wage growth in America is beyond the scope of this post, but there is growing consensus that foreign labor demand arising out of globalization is a substantial cause.

How might increased re-ranking mobility create jobs and rising wages, or might wage levels be depressed instead?

First, to avoid confusion, I'll explicitly exclude one issue. Some argue that there will soon be robust job growth, especially for "knowledge workers," under business as usual conditions. For example, McKinsey Global here. For them, programs to increase re-ranking mobility are neither expected nor necessary to create millions of new jobs for college graduates. I think BAU conditions will not do that, that we already have a glut of college-educated labor, and that we need a demand-side strategy to create tens of millions of domestic jobs, as explained here, here, and here. But whether the optimists are right or I am, that has nothing to do with the question whether increasing re-ranking mobility will increase class mobility, as I will now explore.

In America, about 1.3 million youth leave school each year without graduating high school. Link. Consider what might happen if we implemented programs that drastically reduced that number of dropouts and increased by 0.5 million per year the number ready for college, compared to the 1.5 million who actually start college each year. The most plausible (IMHO) suggestion is that large numbers of jobs are created by just a few individuals having very rare combinations of innovative talent, entrepreneurial drive, and other skills, and that some of these rare individuals are in the group of 0.5 million presently being stifled by unfavorable socio-economic-educational circumstances. We can't identify them now, but if we can help this cohort break those bounds, the rare few will eventually emerge to perform at their full potential and create whole new industries. On the other hand creating 0.5 million additional college entrants each year could worsen the competitive situation that is already depressing earnings for college graduates. Which is the larger effect? Will there be enough future job creators in each 0.5 million cohort to employ all of them and more? Some might choose to believe that, but I don't think there is any supporting evidence.

Perhaps instead of expanding college enrollment, the additional 0.5 million high school graduates (who otherwise would have been dropouts) will just increase the amount of competition for a static number of college slots. Some of them will get to begin college careers, forcing others who under present circumstances would have gotten in to compete in the job market as high school graduates. Under this scenario, the average ability of entering freshmen should be higher, and the increased competition might make many more high school students work harder, further raising the average level of college readiness. Perhaps in this way, we could unblock the rare job creators without flooding the market for college graduates. Yet I don't see it working out that way. Employers want a surplus of college graduates. Groups who fought to free primary and secondary children from their stifling disadvantages will not want to see higher education denied their proteges, particularly when it's still true that college graduates have substantially higher lifetime earnings than high school graduates. And if there is a funded demand for higher education, colleges and universities will inevitably expand the supply. Probably there would be an expansion of enrollment, but less than 0.5 million per year.

Bottom line: An effective program to increase re-ranking mobility (typically by enhancing educational opportunities) would probably both unleash some stifled talent and bid down the wages of college graduates and cannot be relied on as a solution to the stagnant wage, class immobility problem. (Of course, if you're an employer, you probably think stagnant wages are a feature instead of a bug.) 

Update on Friday, August 28, 2009 at 11:50AM by Skeptic

Conor Clarke presents data here showing a strong correlation between family income and academic test scores and refuting Greg Mankiw's assertion that the difference is because smart parents have high incomes and dumb parents have low incomes and they pass on their intelligence genetically.  If Mankiw is wrong and Clarke's authorities are right, then there is a possibility that rising incomes of whole classes of people might result in rising educational achievement by their children.  So, while I argued in this post that improving educational achievement of disadvantaged children would not increase class mobililty, it is possible that causation works in the opposite direction. 

Update on Thursday, October 22, 2009 at 10:19AM by Skeptic

Ron Brownstein reviews here Creating an Opportunity Society, a new book by Brookings scholars Ron Haskins and Isabell Sawhill.  They found that Americans believe that America is still the land of opportunity for reranking mobility, but that in recent decades the tendency for people to stay in the same income classes into which they were born is stronger in America than in Europe.

One tenet that separates the United States from other countries is our belief in upward mobility. A study of attitudes in 27 countries found that Americans, more than people elsewhere, tend to believe that intelligence, skill, and effort will be rewarded with success.

. . . .

More than 60 percent of Americans whose parents scaled the top fifth of the income ladder have reached the top two-fifths themselves, Haskins and Sawhill found. By contrast, 65 percent of Americans with parents from the lowest fifth of earners remain stuck in the bottom two-fifths. Though we venerate the American Dream, studies show that children born to low-income parents in the United States are more likely to remain trapped near the bottom than their counterparts in Europe, the authors report.

Update on Saturday, October 24, 2009 at 07:59AM by Skeptic

The work of three OECD researchers suggests that Horatio Alger stories are more likely to occur in Denmark, Norway, Finland, Canada, and Australia than in the US, France, Italy, or Britain, according to Inside Story, an Australian publication.

Last month, after Barack Obama invoked the American Dream at Wakefield High School in Virginia, Inside Story looked at what the statistics show about social mobility in western countries. Although a family’s socioeconomic status invariably influences children’s prospects, the data revealed the influence to be large and inequitable in some countries. In France, Italy, Britain and the United States, family background plays a very significant role in determining adult income; in Denmark, Norway, Finland and Canada the effect is much smaller. Australia falls somewhere in between, closer to Denmark than to the United States. This puts the United States among a group of countries that are regarded as class-bound and stifling of individual initiative.

. . . .

[P]arents’ socioeconomic status obviously plays a vital role in school performance. Its influence is strong in the United States, France and Belgium and weaker in some Nordic countries and in Korea and Canada. Interestingly, it’s not necessarily only the child’s parents’ status that counts: “In over half of the OECD countries, including all the large continental European ones, students’ cognitive skills are more strongly influenced by the average socioeconomic status of parents of other students in the same school… than by their own parents’ socioeconomic status.”

The first link in the quotation is to the Economic Mobility Project of the Pew Charitable Trusts.  The second is to an earlier Inside Story article.  These writings may be a good way into further research about factors correlated with (and possibly influencing) reranking mobility. 

Update on Monday, April 26, 2010 at 02:13PM by Skeptic

This arresting chart showing dramatic declines in reranking mobility in the 1980s and 1990s is from this NYRB essay by Tony Judt based on his new book Ill Fares the Land.

The bars show the percentage of sons' incomes explained by their fathers' incomes. It seems likely that this has continued to rise since 2000 and may be approaching 50% in 2010, compared with 15% in 1950 declining to 11% in 1980, when the trend reversed and rose like a hockey stick.

Judt's essay also presents five other figures showing (i) how social immobility is correlated with income inequality across eight nations, (ii) the correlation of inequality and ill health across 19 nations, (iii) the correlation across 12 nations of inequality and mental illness, (iv) the correlation across 23 nations of inequality and homicide rates, and (v) the lack of any apparent correlation between health expenditures per person and life expectancy in 23 nations. Judt credits the figure to British epidemiologists Richard Wilkinson and Kay Pickett in their book The Spirit Level (2009). Professor Wilkinson has a slide show here in which he shows correlations between income inequality and many other adverse social phenomena.

Comparing efficiencies of 2 health care systems

Which of these nations has the more efficient healthcare system? (One of them is the USA, and the other is the UK.)

	Nation A	Nation B
Outcomes
Life expectancy at birth (years)	79.1	77.8
Life expectancy at age 65, females	19.5	20.0
Life expectancy at age 65, males	17.0	17.2
Infant mortality per 1000 live births	5.0	6.7
Cancer deaths per 100,000 people	173.3	157.9
Respiratory system deaths per 100,000 people	75.3	59.8
Acute myocardial infarction deaths per 100,000 people	45.3	37.9
Cerebrovascular disease deaths per 100,000 people	52.0	33.4
Diabetes deaths per 100,000 people	6.7	20.3
Resources
Annual doctor consultations per capita	5.1	3.8
Physicians per 1000 people	2.5	2.4
Nurses per 1000 people	10.0	10.6
Total hospital beds per 1000 people	3.4	3.1
Acute care beds per 1000 people	2.8	2.7
Psychiatric beds per 1000 people	0.7	0.3
Ave. length acute care hospital stay	7.2	5.5
MRI units per million people	8.2	25.9
CT scanners per million people	7.6	34.0
Coronary bypasses per 100,000 people	43.4	84.5
Angioplasties per 100,000 people	93.2	436.8
C-sections per 1000 live births	256.0	311.0
Costs
Healthcare spending per person (US$)	2,992	7,290
Healthcare spending as % of GDP	8.4	16.0

Deaths from cancer, respiratory system disease, acute myocardial infarction, and cerebrovascular disease are 16% lower per 100,000 people in Nation B, but 303% higher for diabetes. Overall, life expectancies are about the same in both nations. Nation A seems to devote more resources to standard health care, including more physician consultations and longer hospital stays, while Nation B devotes substantially more resources to high tech diagnostic equipment and expensive surgeries. Nation B spends 2.4 times as much per person on healthcare, as a result of which Nation B's healthcare sector is almost twice as large as a percentage of its GDP.

All data are for most recent year (2005, 2006 or 2007) for which OECD reports data for both nations.

Update on Wednesday, August 19, 2009 at 07:28PM by Skeptic

Christine provided this link to a BBC article comparing the US, UK, France, and Singapore health systems--how they work, some comparative outcome statistics, and relative costs.

Update on Sunday, September 13, 2009 at 02:22PM by Skeptic

Prescriptions at NYT reports that US healthcare is badly behind France, which by some measures has the best system in the world.  France rates #1 in rate of avoidable deaths, the US is #19.  The US has 2.5 times as many avoidable hospitalizations.  France has 31% more doctors per 10,000 people.  France devotes only 11% of GDP to healthcare, compared to 16% for the US.  Organizationally, the French system uses public funding for private delivery, like Medicare for everybody.