Friday, March 12, 2010

Paul Krugman: Spreading Economic Myths to Debunk What He Calls "Health Reform Myths"

Economists like to debunk what we call economic myths. For example, I have used this blog to debunk Paul Krugman's Herbert Hoover myths about the Great Depression. However, I must admit that Krugman does all of us one better when he employs economic myths in an attempt to "debunk" what he says are "Health Reform Myths."
...reform still has to run a gantlet of misinformation and outright lies. So let me address three big myths about the proposed reform, myths that are believed by many people who consider themselves well-informed, but who have actually fallen for deceptive spin.
OK, fair enough. What are these myths?

The first "myth" is that government is taking over a sixth of the U.S. Economy. Krugman says that government already controls much of the healthcare sector, and THAT sector runs very, very well. The "failing" healthcare sector, he says is the so-called private part:
The only part of health care in which there isn’t already a lot of federal intervention is the market in which individuals who can’t get employment-based coverage buy their own insurance. And that market, in case you hadn’t noticed, is a disaster — no coverage for people with pre-existing medical conditions, coverage dropped when you get sick, and huge premium increases in the middle of an economic crisis. It’s this sector, plus the plight of Americans with no insurance at all, that reform aims to fix. What’s wrong with that?
The next "myth" is that the proposed law "does nothing to control costs." According to Krugman, "Realistically, health reform is likely to do much better at controlling costs than any of the official projections suggest."

Krugman's third "myth" is that this reform is "fiscally irresponsible." He defends the pending legislation:
How can people say this given Congressional Budget Office predictions — which, as I’ve already argued, are probably too pessimistic — that reform would actually reduce the deficit?
I will try to answer Krugman by concentrating on one item: the notion that this bill will "cut costs" and, thus, reduce the federal deficit.

Perhaps the most charitable thing I can say is that Paul Krugman, being a "macroeconomist," really does not understand costs. To the economist (that is, an economist who actually has real economics training), a cost is an opportunity cost, which is the subjective value of the next-highest-valued alternative. THAT is a cost. Krugman, however, continues to insist that a cost is nothing more than an arbitrary monetary outlay.

Cost ruduction, then, according to Krugman, is nothing more than slapping down price controls. If government decrees lower prices for medical care, then like magic, prices will fall, and there will be ample care for all. Now,I have no idea what Krugman was doing the day price theory was discussed in his graduate micro class, but I doubt he was listening.

No competent economist will endorse such cost controls. For that matter, most pricing in medical care (and especially in hospitals) already is heavily regulated by federal authorities. So, if regulated prices already are spiraling out of control, how does Krugman get away with claiming that another layer of the same stuff is going to do the trick?

Economists like Krugman who do nothing but deal in aggregates have no understanding whatsoever about prices. None. To Krugman, a price is just a number, an arbitrary number, and if government lays down new sets of numbers, then there will be no dislocations whatsoever.

That is nonsense, and dangerous nonsense at that. We know from thousands of years (yes, thousands) of government price controls that such controls are followed by dislocations, economic chaos, and stunted economic growth. If Krugman cannot understand that fact, then he is not an economist, but rather just another political operative.

Is the ObamaCare plan irreponsible? Of course, it is! Anyone who believes that Congress and the Executive Branch can construct by fiat a plan that centrally directs medical care that replaces the voluntary choices of the millions of individuals involved in this industry and not create real problems does not understand economics at all. Why am I not surprised that Krugman cannot and will not understand this simple point?

NOTE: At a session of the Austrian Scholars Conference, economist Lowell Gallaway, a co-author with Richard Vedder of the excellent book, Out of Work, noted sarcastically that Krugman has been vocal in peddling the same high-wage theories that Herbert Hoover promoted during the Great Depression. In other words, far from being the opposite of Hoover, Krugman is his intellectual soul mate!


econophile said...

Great comment, Bill. I really detest this guy. Today Bloomberg reported that the Chinese should revalue the yuan, sell all US assets and that would be, in effect, quantitative stimulus and raise world GDP 1.5%. He said it would cure the liquidity trap we're in. Why does he not understand that this is not an increase in money supply or liquidity? Why does he not see the impact on US consumers and taxpayers? Ay yi yi.

Jeff Harding

ToddO said...

Professor -

You are of course correct about price controls and opportunity costs, but I was hoping more for a point by point refutation of what Prof. K wrote. I believe that is where the masses operate: they are more interested in the superficial rhetoric that supports their position than the core immutable truths that render it moot.

Can you address the myths one by one and tell us more why you think they are either truths or irrelevancies?


William L. Anderson said...


I have said I am going to write a longer piece on healthcare, and need to do it. My other projects keep getting in the way, as I have had two conferences and two papers, along with a major (50-page) project for my college. But, I still need to get this one done!