Archive for December 2019

The US Has the Least Poverty In the World -- Here Is How Metrics Are Crafted to Hide That Fact

A few weeks ago Matt Yglesias published a tweet (since deleted, which I don't totally understand as I thought it was pretty innocuous from a Progressive viewpoint) saying that he wanted to spend more time focusing on "relative child poverty."  What the heck is "relative" child poverty?  I want to spend a bit of time discussing why this is a useless metric, helpful only if one want to try to sell socialism in the US.

Relative child poverty is a metric based on the country's median income -- how many kids live in families with income that is X% of the median.  Here is an example (source):

If you click on the source, the headline presents this as "These rich countries have high levels of child poverty."   The implication is that the US has more child poverty than Latvia or Poland or Cyprus or Korea and only slightly less child poverty than Mexico and Turkey.  But does it really mean this?  No.  This chart is a measure of income equality, NOT the absolute well-being of children.

Many of the countries ahead of the US are there not because their poor are well off, but because their median income is so much lower than ours. In fact, you will notice the lack of African and Asian countries in this. I will bet a lot of money that certain countries in Africa and Asia everyone knows to be dirt poor would beat out the US in this, thus making the bankruptcy of this metric obvious.

Take Denmark in the #1 spot. It looks like 20% more kids in the US live in poverty than in Denmark. But per the OECD, the US has a median income 41% higher than Denmark. So what it really means is the US has 20% more kids living under an income bar that is set 41% higher.  How can this possibly have any meaning whatsoever, except to someone who wants to make the US look bad?

The chart below does the same thing -- it has nothing to do with absolute well-being, but defines poverty as living below some percentage of that country's median income. In this metric, a country where everyone equally made only $1000 or even $10 a year would have 0% poverty!

Within the US, the same game is being played with poverty stats.  Despite decades of government income distribution and poverty programs, the stats appear to show that the US has nearly unchanged poverty rates.   But this is because the census data on which the poverty stats are based EXCLUDE government transfers -- in other words, they exclude the effect of many or most of these poverty programs.  When this and other issues are corrected for, US poverty rates have dropped to all-time historic lows (source)

Here is another study coming to a very similar conclusion.

One thing you never, ever, ever see is comparisons of the poor in the US to poor in other countries on an absolute well-being basis after transfer payments. That is because the bottom 10 or 20 percentile in the US are among the top half of richest people in the world, and in many nations they would be among the top 10%. It is possible to make these comparisons, though. I did so several years ago from a data set I saw Kevin Drum using (ironically to try to make the point the US is worse than Europe, again by using relative poverty numbers).  I am sorry this data is old, but there is a long time-delay in the data source itself and I have not updated the analysis for a couple of years (on my to-do list, though).

Here are the US Bernie-Socialist favorites Denmark and Sweden:

I know progressives would argue that if you take more from the right end and give it to the left end, our poor would be even better off. But we have a control group for this -- Including Sweden and Denmark -- and that is clearly NOT the result one gets.  The problem with this theory is that forcible income redistribution policy and economic growth / prosperity are not independent variables. When you redistribute the pie, you get a smaller pie.

If one wishes to compare poverty across countries, the way to do it should be to compare the disposable incomes after taxes and transfers (adjusted for PPP) of the 10th or 20th income deciles in each country.  This seems obvious to me, after all we use the median (50th decile) income to compare prosperity across nations, so why not the same approach for poverty? But no one ever does it. My guess is the point is to exaggerate poverty in the US and understate it in socialist nations.

Update:  In related news:

Well, in 1820, 94 percent of the world’s population lived in extreme poverty (less than $1.90 per day adjusted for purchasing power). In 1990 this figure was 34.8 percent, and in 2015, just 9.6 percent.

In the last quarter century, more than 1.25 billion people escaped extreme poverty - that equates to over 138,000 people (i.e., 38,000 more than the Parisian crowd that greeted Father Wresinski in 1987) being lifted out of poverty every day. If it takes you five minutes to read this article, another 480 people will have escaped the shackles of extreme of poverty by the time you finish. Progress is awesome. In 1820, only 60 million people didn’t live in extreme poverty. In 2015, 6.6 billion did not.


Great Moments in Climate Prediction: 2020 Disaster Predicted in 2004

I am working on a bit of a climate update in a post called something like "Dear Greta, the climate is not about to kill you."  But until then, just so you can calibrate the current hype, here was the hype from 2004.  Specifically, an article in Guardian February 21, 2004:

A secret report, suppressed by US defence chiefs and obtained by The Observer, warns that major European cities will be sunk beneath rising seas as Britain is plunged into a 'Siberian' climate by 2020. Nuclear conflict, mega-droughts, famine and widespread rioting will erupt across the world.

The document predicts that abrupt climate change could bring the planet to the edge of anarchy as countries develop a nuclear threat to defend and secure dwindling food, water and energy supplies. The threat to global stability vastly eclipses that of terrorism, say the few experts privy to its contents.

'Disruption and conflict will be endemic features of life,' concludes the Pentagon analysis. 'Once again, warfare would define human life.'...

Already, according to Randall and Schwartz, the planet is carrying a higher population than it can sustain. By 2020 'catastrophic' shortages of water and energy supply will become increasingly harder to overcome, plunging the planet into war. They warn that 8,200 years ago climatic conditions brought widespread crop failure, famine, disease and mass migration of populations that could soon be repeated.

Randall told The Observer that the potential ramifications of rapid climate change would create global chaos. 'This is depressing stuff,' he said. 'It is a national security threat that is unique because there is no enemy to point your guns at and we have no control over the threat.'

Randall added that it was already possibly too late to prevent a disaster happening. 'We don't know exactly where we are in the process. It could start tomorrow and we would not know for another five years,' he said.

Of course being wrong then does not mean the same folks are wrong now, though it is amazing that being wrong over and over does not seem to dent these folks' credibility one bit in the media.  You would think there might be one journalist who would ask, "you keep predicting climate disaster, and it always remains 10 years away.  What's up with that?"

As always, my advice to you on climate is to be a good consumer of information.  Specifically, when the media claims a trend, look for the trend data.  And if they claim a long-term trend, check to see if the trend data is long-term.  You will be amazed how often the media will claim a trend from a single data point.   I will soon do an update on four of the most hyped climate "trends" -- hurricanes, droughts, crop failures, and sea level rise -- and show that the first three have no trend (or an improving trend) and the fourth, sea level rise, has a trend but that trend has been existent since before 1850, long before most manmade Co2 was put in the air.

A Proposal for Princeton and Other Ivy League Admissions -- Lottery 20% of the Spots

The Varsity Blues admissions scandal along with the lawsuits by Asian Americans against Ivy League schools' admissions processes have brought new scrutiny to private university admissions standards.  I was thinking about a small proposal to respond to this scrutiny that particularly falls on legacy, large donor, and athletic admissions.  I think this proposal would help restore some trust in the process.

I have a lot of problems with my alma mater Princeton and their admissions, so much so that I have dropped out of the recruiting process after participating in it as an interviewer for 20 years.  But one good thing that they and others have done is to apply some of their massive endowment to allowing need-blind admissions, and more recently, to making all financial aid grant-based so that kids can graduate debt-free and do whatever they like with their education, irrespective of how much money it makes.

Here might be a next step:  Draw a line in the admission pool designating kids (by grades and test scores) who we might designate as "Ivy-ready."  Many of these kids will not get admitted, because there are too many of them.  Most won't have the extra-curricular activities  or sports or alumni connections or rich donor parents that differentiate the 1450 SAT that got in and the 1450 SAT that did not.   In current parlance, all of these resume items are likely markers of privilege (including the extra curricular activities, many of which are driven by knowing parents more than real interest).

Proposal:  Save 20% of the spots.  After the other 80% are allocated by the traditional means, throw all the other folks who clear the Ivy-Ready line and throw them in a lottery and lottery the final spots.

Of course, these 20% will have to be freed up from current uses.  Princeton just had a 20%-ish increase in class size by building more residential college capacity, and I wish they had adopted this approach at the time.  I am not sure where it would come from, but my personal starting point would be athletic spots.  I think the Ivies spend way too many resources (including most especially valuable admissions slots) trying to be more competitive at college athletics.  And I say this despite my son having been a student-athlete at Amherst College.  (By the way, tiny Amherst uses so many admissions spots on athletes that pretty much everyone on campus is one.  The kids actually have a term "NARP" -- non-athletic regular person -- for the few unicorns not actually on a varsity team.)

Why Single Payer In the US Will Not Necessarily Lower Costs

A few days ago I wrote a multi-part tweet on the topic of whether single-payer in US health care would necessarily lower costs.  Twitter is a frustrating medium not only because of the short length but also because many critics just read the first tweet in the string (with the summarized hypothesis to be discussed) and comment without reading the rest.  That is probably why I got many comments like "but European single-payers get better pricing" as if I did not spend a number of tweets on exactly this topic.  So I will go back to my old medium of blogging to deal with this complex topic.

As a thought-starter, let's think about another industry where the US government is the single-payer in a complex industry that is a substantial part of GDP:  Defense.  The US government has always been the single payer in the defense industry and I think it isunlikely most of use think the US government gets particularly good pricing in that industry.  I have seen that a number of folks have instinctively rejected this analogy, without giving any specifics about why they do so, but I want to observe here that in fact Defense may have better price dynamics than single payer for pharmaceuticals, as at least in defense there are multiple sellers to play off against each other.  I am not going to insist on this analogy, and will provide another analogy later that I think is perhaps more apt, but I would challenge the reader to name a field where the US government is a single payer -- not a large payer in a larger market but the single only payer -- and gets better pricing than might be had in a free market.

A single-payer system eliminates market pricing and all the enormously valuable information that those prices contain.  In a real market, prices are set based on the knowledge and preferences and expertise of millions of people. In single-payer, you lose access to all that.

For this post I am going to focus mainly on pharmaceutical prices in large part  because, from observing the Twitter comments, that is what most folks seem to think about first as an area for cost reduction under single-payer.  I will return at the end to a discussion of other health care costs under single-payer.   I am also going to entirely avoid discussion of the many supply-side restrictions in the US healthcare system -- from pharmaceutical approval to physician licensing to hospital certificates of need.  I want to look primarily at the supposed beneficial (in some peoples' minds "huge") price reductions that might flow from single payer negotiating leverage.

Before I do that I want to discuss the misuse (IMO) of the term "economies of scale" in this discussion.  In my mind "economies of scale" refers to a real reduction in unit costs from an increasing volume.  In most cases, this is not what we are talking about with single payer.  There is nothing from single payer, to my understanding, that actually reduces the development, production, and distribution costs of pharmaceuticals.  I know folks like to point to the elimination of private insurance companies as a cost saving, but I find that hard to believe.  Most of the functions of the private insurance company would have to remain and profit margins in health insurance are tiny, on the order of low single digit percentages of premiums.  Eliminating these profit margins could theoretically save a few percent on costs, but only if one assumes that the government is just as efficient on claims processing and management.  One might get rid of some marketing costs, but the government has found under PPACA that communication and education costs, essentially not much different from marketing, have been pretty substantial.

The main potential advantage of single payer for pharmaceuticals is not one of economy of scale but of negotiating leverage.   With negotiating leverage, larger buyers can try to extract discounts vs. what other smaller buyers pay.  Certain countries like Canada have certainly been able to do this with pharmaceuticals purchased by their state health care systems.

For all those who want to point this out to me as if I don't know it, I freely stipulate that it is true.  To understand what is going on, let's take a step back.  Pharmaceutical prices will theoretically include three portions:

  1. Variable cost of actually manufacturing and distributing the pharmaceutical.  For many drugs, even expensive ones, this can be relatively low
  2. Fixed cost of developing the pharmaceutical and getting it through testing and approval.  This fixed cost also will contain a share of the costs of failed drug development efforts, just like one producing oil well has to cover the cost of the 10 dry holes drilled before oil was struck.  These fixed costs can be very very high
  3. For drugs still covered by their patents, a profit from having a monopoly position, which we allow to incentivize new drug and medical procedure development

Most US pharmaceutical makers treat the US as the main market for recovering 2 and 3.  They are willing to treat foreign markets and incremental, and price their drugs (either directly or via the licensing fees they charge) closer to marginal cost without full cost recovery.  This is in part because many other countries negotiate, and the US mostly does not -- Medicare has restrictions on pharmaceutical price negotiation and drug companies have limited negotiating leverage.  If you wonder why the latter is so, it is because insurance companies are required by law that they must buy a lot of these pharmaceuticals.  One's negotiating leverage against a single monopoly seller is extremely restricted if one cannot walk away and the seller knows it.

I have for years supported laws allowing drug re-importation from other countries.  I see no reason why US consumers should tolerate essentially subsidizing drug development for the rest of the world.  By the way, if you don't accept my cross-subsidy picture, watch what happens in the rest of the world if the US were to adopt drug re-importation laws.  My guess is that the other countries would ban their export, because they know such policies would serve to reduce the cross subsidy, lowering US prices but raising prices in their countries.

To understand my concerns over cost control in US single payer, let's think about negotiation at Walmart.  It is well known that Walmart uses its huge market size to get large discounts from suppliers.  In part, these discounts could be related to true economies of scale (ie if you are a niche seller and not yet in Walmart, getting into Walmart could drive huge new volumes for your product).  But for companies like Coke, Walmart's main leverage is the threat to walk away, or at least to give less shelf space, to your product.

But forget the leverage and negotiating strategy for a second, how does the negotiation actually go?  As I imagine it, Walmart does some research and finds the lowest price they can find Coke selling to anyone else is X.  They will then turn to Coke and say we want 10% off X.  The key point is that the negotiation begins in reference to an existing market price.   I will bet that's how you negotiate for a car, or for anything else.

But they key question is: "What happens when there is no market price."  I am the last one to say that US health care markets, with all their various inefficiencies and interventions, is anything like a free market, but there is still some sort of market there.  I would argue that if the US goes single payer, that will essentially end the only market for drugs and other health care services in the world.  How do you negotiate if there is no market price to start from?  What does negotiating leverage even mean in that situation (again, consider the Defense example above)?

I suppose for some years negotiation for pharmaceuticals under single payer will be in reference to the old, pre-single-payer price.  But that reference can only be meaningful for so long.  And how does one use negotiating leverage for an entirely new product?

Let's say a new drug comes along that's a better treatment for gout.  There is no market price or price history.  No one has ever bought it or sold it.  What does your negotiating leverage even mean?  There is no market price, so how can you get a discount?  You could say that you want a discount off list, but the inventor could just name the list price arbitrarily high.  You could ask to see their cost accounting but anyone who has ever made the mistake of taking net profit points in a movie can tell you that cost accounting can be gamed endlessly.

This is basically the situation in government defense procurement.  They can theoretically use their negotiating leverage to get a better price for hammers or sidearms, because a market price exists for those set by many other individual buyers. But how does it use its negotiating leverage for a Patriot missile?

And remember, the only way that negotiating leverage has any power is if one is willing to walk away from the table.  At some point, the single payer has to be willing to say, "F it, if that is your best price for Humira, we aren't buying any (and thus no American can have any)."  Does the government really have the ability / cojones to do this and make it stick?  After all, one reason why insurance companies overpay for a lot of medical procedures is that they HAVE to pay for it, by law.  They cannot walk away from the table.  Imagine negotiating for a car if next time the dealer you are buying from knows you have to leave the store that day with a car.  You are not going to get a very good price.

The situation is slightly different in other health care payments, such as to providers.  But this is only true because there are multiple providers and provider groups in a given area.  And here the negotiating leverage is still the same, the threat to walk away.  And in fact we have seen this, with low cost PPACA plans offering very limited networks -- essentially they have walked away from higher cost suppliers.  Note that this really pisses off consumers, and is one of the reasons they say they hate insurance companies, so its not clear if there would be the political will for the government to do the same thing as single payer.  Also note that providers and banding together into larger and larger provider groups -- essentially in this great game of monopsony and negotiation they want to grow to be too large and comprehensive to walk away from.

The likely outcome is to turn pharmaceuticals and other medical suppliers into regulated utilities.  In electricity, the government essentially acts not quite as single payer but in a very parallel role as single price negotiator.  They negotiate the prices to be paid for all consumers in their state or region.  They are negotiating as the single buyer with a company that is a monopoly provider.  This situation faces all the issues we discussed above, basically a negotiation without any market price reference.  So most governments regulating utilities choose an approach where the utility opens its books and sets prices so that the utility gets a minimum return on capital but not any "excess" profits.   In theory, they try to get the lowest price they can that still ensures that private capital will still have an incentive to flow into the company.

There are a number of problems with this approach vis a vis pharmaceuticals and other health care purchases

  • Its not at all clear it achieves a lower price than in a freer market.  Certainly non-regulated cogen companies in California have made a lot of money selling electricity below the regulated rates
  • There is little incentive for innovation.  Regulated utilities make the most money when they do nothing new or risky.  This may be OK in electrical generation, but it is not great for drug development.
  • There is a lot of potential for cronyism.  Even in electrical rates, certain politically favored groups get lower rates subsidized by less influential groups.  Military procurement often leads to bad decisions driven more by lobbying than reason.  In health care, changes in reimbursement rates in Medicare are already subject to immense political gamesmanship -- for example, the famous annual Congressional "doc fix" battles.

Of course the government could just fix prices by law at some low level, or even seize all pharmaceutical patents and offer drugs close to marginal cost (which tends to be low).  This might work great if you are perfectly happy with the medical treatments available today and want nothing new.  But if innovation is a concern of yours at all, this would obviously kill it (not to mention drive a lot of providers out of the business, reducing demand and increasing wait times to those of .. all the other single payer countries).

While the choice not cut off future benefits just to get current stuff cheaper may seem a no brainer to many of you, I would argue that many Progressives, whether from risk aversion or a lack of ability to perceive opportunity costs, might well take this deal.  Its a sort of Directive 10-289 solution and a preference I discussed way back in 2004 (yes, I was blogging at this same site then).

Ironically, though progressives want to posture as being "dynamic", the fact is that capitalism is in fact too dynamic for them.  Industries rise and fall, jobs are won and lost, recessions give way to booms.  Progressives want comfort and certainty.  They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.  That is why, in the end, progressives are all statists, because only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave.

Progressive elements in this country have always tried to freeze commerce, to lock this country's economy down in its then-current patterns.  Progressives in the late 19th century were terrified the American economy was shifting from agriculture to industry.  They wanted to stop this, to cement in place patterns where 80-90% of Americans worked on farms.  I, for one, am glad they failed, since for all of the soft glow we have in this country around our description of the family farmer, farming was and can still be a brutal, dawn to dusk endeavor that never really rewards the work people put into it.

This story of progressives trying to stop history has continued to repeat itself through the generations.  In the seventies and eighties, progressives tried to maintain the traditional dominance of heavy industry like steel and automotive, and to prevent the shift of these industries overseas in favor of more service-oriented industries.  Just like the passing of agriculture to industry a century ago inflamed progressives, so too does the current passing of heavy industry to services.

I understand the large numbers of people are concerned about the potentially bankrupting effects of a major medical condition.  The problem is that people keeps suggesting solutions that don't actually solve the problem, or make things worse.  I have suggested an intervention here that preserves much of the health care market while protecting folks in the case of major medical conditions.