Economics

Favorite Economics Dialogues in Movies, by David Henderson

Fri, 03 Jul 2009 14:00:59 GMT

Here's one of mine, from Alfred Hitchcock's Rear Window. It's about one of the most important things economics deals with--incentives. Lisa (played by Grace Kelly) and Jeff (played by Jimmy Stewart), are listening to a man in another apartment play one of his songs on a piano:

LISA: Where does a man get the inspiration for a song like that?
JEFF: From his landlord -- once a month.

What are some of your favorites?

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Sat, 04 Jul 2009 16:18:26 GMT

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Social Science and Public Policy, by Arnold Kling

Fri, 03 Jul 2009 13:44:38 GMT

How do economists and other social scientists influence public policy?

Yesterday, I recommended Jeffrey Friedman's article on the financial crisis. Its theme is regulatory hubris, and Friedman disparages "economism," which might be described as a belief that wise economists can guide government policies to correct market failures. Note the echo of Hayek's disparagement of scientism.

Also yesterday, Mencius Moldbug wrote,

By far the most significant source of decisions in the modern American system of government is something called public policy. In the 20th century, it was discovered that the task of governing, thought in all previous centuries to be an art requiring wisdom, talent and experience, is in fact a science, like chemistry or card-counting. This set of sciences is often described as the social sciences, a slippery name if I ever heard one.

However, in a review of a book by John H. Wood on the history of macroeconomic policy, David C. Wheelock writes,

Economists have rationalized more than influenced policy, Wood contends, and the direction of influence between economic theory and practice is primarily from the latter to the former.

That would be closer to my view on public policy in general. To find that review, I followed a trail from Pete Boettke to Peter Klein.

The main science of political economy is the science of obtaining and retaining power. As far as expertise goes, the pollster, the fundraiser, and the media expert are all fundamental to the operation. The public policy expert is for decoration. If you want to be an economic policy adviser when you grow up, then my advice is to learn to rationalize the methods used by leading politicians to obtain power.

Is health care reform about health care? No, it is about seizing and retaining power. Was the stimulus about stimulus? No, was about seizing and retaining power. Is cap and trade about global warming? No, it is about seizing and retaining power. Was TARP about saving the financial system? No, it was about seizing and retaining power.

The social scientist's role in the political process is to say, "X is a problem. Government must solve X. Here are some solutions." The solutions that rationalize seizing and retaining power will bubble to the top.

Suppose you believe that regulators cannot possibly have the wisdom to direct human activity. Suppose you believe that politicians spending other people's money tend to choose less wisely than people spending their own money. If you want to get anywhere as a public policy adviser, keep those beliefs to yourself.

The Danger of Safety

Thu, 02 Jul 2009 18:44:42 GMT

In case you haven't heard, an accident on the Washington metro claimed nine lives last week. But then again, chances are you have heard, as the crash got wide coverage over the airwaves, on the net, and in the papers (by my count, at least five articles appeared in The Times). This is usually the case when trains or planes are involved in deadly disasters.

Quotes Uncovered: Who Said You're Always Where You Are?

Thu, 02 Jul 2009 17:23:18 GMT

A while back, I invited readers to submit quotations for which they wanted me to try to trace the origins, using The Yale Book of Quotations and more recent research by me. Hundreds of people have responded via comments or e-mails. I am responding as best I can, a few per week.

Not Darwin's Year?

Thu, 02 Jul 2009 16:16:09 GMT

this year, Darwin's 200th anniversary, Americans favor intelligent design over Darwinian theory. According to the poll, 33 percent of respondents said they agreed with Darwinism, but 52 percent agreed that "the development of life was guided by intelligent design." On the other hand, the poll was commissioned by The Discovery Institute, which advocates intelligent design.

Jeffrey Friedman on the Financial Crisis, by Arnold Kling

Thu, 02 Jul 2009 16:12:54 GMT

Critical Review is publishing a special issue on the financial crisis. I have uploaded Jeffrey Friedman's introduction. I strongly recommend the entire issue. The paper by Acharya and Richardson is the one that most closely reflects my own views.

Friedman's introduction is much more than a summary. He writes,

if we take seriously the possibility that market participants are making cognitive rather than incentives-based errors, the case for regulation loses considerable force.

His point is that regulators made the same cognitive mistakes as financial executives--trusting the rating agencies, for example.

He says,

Indeed, what may have saved the world from complete economic chaos in 2008 was the fact that the regulations were loose enough that many investors and many bankers had resisted buying the "safe" securities that most banks seem to have bought. Heterogeneous behavior like that, however, is allowed for, encouraged, and rewarded by capitalism; and is either discouraged or prohibited by regulation, depending on
how tight the regulations are.

Which is more vulnerable to catastrophic failure: a relatively unregulated system, in which participants pursue diverse strategies; or a strongly regulated system? For Friedman, the latter is more vulnerable, because of the risk of promoting homogeneous behavior, so that one mistake affects everyone.

All of us have our intellectual hobby horses. Friedman's hobby horse seems to be the existence of cognitive weakness or ignorance. He is constantly asking what happens if leaders have cognitive biases or information gaps. In general, I think when you take that problem seriously, you fear strong government.

Reading the Employment Report: Focus on Hours, Not Heads

Thu, 02 Jul 2009 15:23:19 GMT

The latest employment numbers are out, and they are dreadful. Those commentators who saw "green shoots" out there had been focusing on the fact that in May, the economy "only" shed 322,000 jobs, which is good news when compared with the fact that the economy had been losing over 600,000 jobs per month in January, February, and March. Squint hard enough at the black line in my chart, and you can see why many were hopeful that job losses were slowing down.

Great Questions, Matt, by Bryan Caplan

Thu, 02 Jul 2009 14:59:09 GMT

Over at U.S. News and World Report, Matt Bandyk has a follow-up question for my last post on mandatory insurance and adverse selection:

Here's my question to Dr. Caplan: But far from being populist anti-intellectualism, isn't the objection that "poor people will not be able to afford health care in a free market and so the sick ones will die" a very real challenge that requires a response? Does the fact that, by Caplan's own admission, a free market in health insurance would underserve sick people show a real problem with the laissez-faire approach?

There are several layers of responses to this question. I'll start with the textbook answer, then move on to successively more controversial observations:

1. The smart response to market failure varies sharply depending on what the market failure is supposed to be. If the problem with free-market health care is just that poor people can't afford health care, then the smart response is simply to give poor people more money (or possibly a cash voucher), and leave insurance companies alone. Think about how we usually handle hunger among the poor. We don't set up byzantine regulations for grocery stores. We give the poor welfare checks and/or food stamps, and leave the grocery stories alone.

2. On further reflection, the fact that health insurance is too expensive for the poor is actually an important argument for deregulation of the health industry in order to bring costs down. For starters, there are many regulations on the books that specify what health insurance companies have to cover - mental health being the most notorious. In a free market, insurance companies could offer more restrictive policies that the poor might actually be able to afford.

More importantly, though, health insurance is expensive because regulation sharply raises the cost of health care itself. Medical licensing regulations, for example, sharply raise the cost of medical labor. Economists like Milton Friedman have been arguing for decades that mere certification, or even reputation, could give you the same protection at much lower cost. And while you probably want an M.D. to do your brain surgery, licensed physicians are over-qualified for much, if not most, of the work they do - as you might have noticed if you ever saw a dermatologist for acne.

3. On top of all of this, almost everyone familiar with the data admits that at least in First World countries, the difference in health between rich and poor has little or nothing to do with access to medical care.* It's easy to find anecdotes of poor people who suffered or died because of inadequate medical care, but when you look at the big picture, you realize that these anecdotes must be quite rare. So despite response #1, more redistribution wouldn't actually help the poor's health very much.

4. My most controversial point: While redistribution is the most logical response to the health market's performance, I still oppose it. In the grand scheme of things, poor people in the First World are doing fine. If they weren't, why would millions of people be delighted to immigrate here to take low-skilled jobs? For thoughtful humanitarians, the quest to improve the health care of the U.S. poor is a red herring. The crusade that deserves our support is open immigration.

Matt also asks me to reply to a point from Ezra Klein:

I would pose to Caplan a question that Ezra Klein, a good representative of the anti-free-market view on health care, asked on his blog recently:
Are we really sure we want a bustling market in how to cleverly revoke the insurance of people who prove to be sickly?

If you read Ezra's post, there are actually two distinct complaints about free-market health care. The first is that insurers engage in near-fraud - rescinding coverage on flimsy pretexts when people get seriously (and expensively) ill. If this were more than an anecdotal problem, which I doubt, I don't see why lawsuits or advertising couldn't handle it.

Ezra's second complaint, though, is "insurers rid themselves of unprofitable accounts by slapping them with intentionally unrealistic rate increases,'" a business practice known as "purging." Frankly, this story makes no sense. If a customer is expensive, a company might want to raise his rate so he'd be profitable to insure. As long as there's competition, though, firms have no reason to raise the rate higher.

Of course, if the problem is that you want to buy insurance against the possibility of becoming a high-risk customer, you should pick a company that lets you lock in your rate. See e.g. life insurance, where you can get a fixed low rate for life if you buy your policy when you're young.

Any more questions, Matt?

* Start reading the link on p.181.

How the Market Influences What Language You Read In

Thu, 02 Jul 2009 14:41:46 GMT

My Dutch friends tell me that they read foreign (non-Dutch) novels that are translated into English rather than into Dutch. Their English is very good, but their Dutch is clearly better. So, I ask, why read in English?

Virtual Secession, by Arnold Kling

Thu, 02 Jul 2009 12:56:32 GMT

Patri Friedman launches secession week, a discussion of secession.

In one of my forthcoming books, Unchecked and Unbalanced, I discuss a number of mechanisms for limiting the power of government. You can think of these as mechanisms for achieving virtual secession, although I do not use that term.

The problem with physical secession is that it is very difficult to achieve critical mass. There is probably not much overlap between the people you want to live with and the people who want to choose your particular form of government. The vast majority of us put up with government we dislike in order to live in proximity to people with whom we want to work and play.

With virtual secession, you could still live in San Francisco or Manhattan or Silver Spring while seceding from much of the government at the city, state, and Federal level. You and your next-door neighbor might belong to very different governmental units.

Suppose, for example, that instead of having your taxes allocated for you by legislators, you were given a list of programs and could choose how to allocate your taxes. What percent of your taxes should go to TARP? What percent should go to fund the mohair subsidy? What percent should fund DC school vouchers? What percent should go to Barney Frank's affordable housing initiatives?

Further Reply to Matt: Who is "We"?, by David Henderson

Thu, 02 Jul 2009 23:45:01 GMT

Like some commenters, I found Bryan Caplan's post on health care today to be one of his best. And he's already set a high bar. But, believe it or not, given that Bryan is a more-radical libertarian than I am, I think he sold freedom short.

In his point #1, Bryan wrote:

If the problem with free-market health care is just that poor people can't afford health care, then the smart response is simply to give poor people more money (or possibly a cash voucher), and leave insurance companies alone. Think about how we usually handle hunger among the poor. We don't set up byzantine regulations for grocery stores. We give the poor welfare checks and/or food stamps, and leave the grocery stories alone.

His first sentence is absolutely correct. The smart response is to give them more money or health care vouchers. But in the last three sentences, he used the word "we" where he really meant "the government." The government is not us. It's some of us, but it's not us. Many of us do give money to poor people to provide various things and, as Russell Roberts documents in his article on Charity, a large fraction of charitable contributions, before the government started massive welfare programs in the 1930s, was to poor people. Notice Russ's Table 1 showing that as the Great Depression deepened before the New Deal, charitable contributions to poor people rose. Government welfare rose too but it rose massively during the first years of the New Deal and then charitable contributions to poor people fell.

Because Bryan used "we" where he meant "the government," he got himself in a box with his point #4. He wrote:

My most controversial point: While redistribution is the most logical response to the health market's performance, I still oppose it. In the grand scheme of things, poor people in the First World are doing fine.

What happened to his idea that the smart thing to do is to give poor people money or health care vouchers? Did it quit being the smart thing to do? It's clear from context that by "redistribution," Bryan meant forced distribution by government. I oppose it too. And here's where I think he sold freedom short. If he hadn't used "we" to mean the government but had instead used it to mean "Americans" or "people who live in America," then he wouldn't have had to take the position he took in the part of point #4 that I quoted above. If Bryan opposes giving money to poor people in America, then, fine, he doesn't have to and, if he so chooses, he can persuade other people not to. But there will be some of us who still want to give money to poor people in America knowing full well that Bryan is right that we are helping people who, in the larger picture, are already quite wealthy. That's what's so great about freedom: everyone can choose whom to help and whom not to.

The problem all came about because Bryan used the "we" word inappropriately. For more of the hot water that can get you in, see my "Who is 'We'?" and "Who is 'We'? Part Two."

Berlin Bans Brakeless Bikes

Thu, 02 Jul 2009 13:44:53 GMT

Not long ago, cycling enthusiasts took fixed-gear racing bikes out of velodromes and onto the streets, where they were a hit among bike messengers and hardcore urban cyclists. The appeal had to do with the stripped-down simplicity of the bikes.

Bubble Science

Wed, 01 Jul 2009 17:40:20 GMT

Gary Stix looks at recent developments in the science of human decision-making and economic bubbles. Stix examines the growing influence of behavioral economists, the neuroscience behind various economic phenomena, and the research of George Akerlof and Robert Shiller, Cass Sunstein and Richard Thaler (), and Andrew Lo.

It Takes a Free Market to Build a Toaster

Wed, 01 Jul 2009 16:08:13 GMT

It takes a lot of people to manufacture even the simplest products, so making a household appliance on your own shouldn't be expected to be easy. It may even be impossible. That's what the artist Thomas Thwaites is finding as he tries to make a toaster from scratch, traveling around the world to collect raw materials and refining his own petroleum for plastic moldings.

Better Bus Rides, Please

Wed, 01 Jul 2009 15:22:31 GMT

The Tri-State Transportation Campaign makes a case for improving the Hudson River bus crossings connecting New Jersey and Manhattan using a combination of animation and statistics, such as

A Closer Look at Adverse Selection and Mandatory Insurance, by Bryan Caplan

Wed, 01 Jul 2009 15:05:02 GMT

If an economist wants to ward off the spirit of laissez-faire insurance policy, all he has to do is repeatedly chant "moral hazard and adverse selection." The funny thing about this two-part mantra, though, is that the "moral hazard" part doesn't do any of the work. Almost no one even pretends that governments do anything to mitigate it.

When we get to the "adverse selection" part, the plot thickens. There is, in theory, a regulation capable of solving the problem: mandatory insurance. To see how mandates can help, consider a simple example. Suppose there are two equally common types of people who buy insurance:

High-Risk Consumers: They have a 20% chance of losing $2000. Since they're risk-averse, they value full insurance at $1000 ($600 more than the actuarially fair premium of $400).

Low-Risk Consumers: They have a 1% chance of losing $2000. Since they're risk-averse, they value full insurance at $50 ($30 more than the actuarially fair premium of $20).

If insurance companies can't distinguish High- from Low-Risk consumers, an actuarially fair premium for an average consumer would cost .5*$400+.5*$20=$210.

If consumers purchase insurance voluntarily, though, the Low-Risk will drop out of the market - they won't pay $210 to get a policy worth $50 to them. With only High-Risk consumers in the market, the competitive price of a policy is $400. The market fails to realize $30 worth of consumer surplus per Low-Risk consumer.

In a mandatory insurance regime, however, the Low-Risk have to buy the policy. The result: The regulation is efficiency-enhancing, because it takes $160 from every Low-Risk person in order to give $190 to every High-Risk person.

So far, so good. It's conceivable for mandatory insurance regs to improve market performance. But their argument jumps the shark when defenders of government insurance regulation notice the existence of mandatory insurance regulations, and infer that these regs are doing something about adverse selection. When you actually look at these regs, you'll notice some peculiarities:

1. Mandatory insurance is most prominent in the auto insurance industry. But these regulations don't target low-risk drivers. Their main purpose, contrary to the adverse selection model, is to make sure high-risk drivers get insurance.

2. Even more shocking: The regulations usually go on to somehow subsidize the rates that high-risk drivers pay. This is necessary because, contrary to the adverse selection model, insurance companies are able to detect high-risk drivers, and do not want to cover them at a loss.

3. Economists usually mention adverse selection in the context of health insurance. But in the market for individual health insurance - precisely where you'd expect adverse selection problems to be most severe - governments very rarely mandate insurance coverage. Instead, they focus on mandatory employer-provided health insurance, where the adverse selection problem is likely to be milder.

4. When governments do mandate health insurance, they almost always subsidize the rates that high-risk buyers pay. This is once again necessary because, contrary to the adverse selection model, insurance companies are able to detect high-risk customers, and do not want to cover them at a loss.

Bottom line: Real-world insurance regulation has little or nothing to do with economists' "moral hazard and adverse selection" mantra. The "intellectual" bases of real-world regulation of insurance are rather populism and paternalism: Big bad insurers won't cover people unless it's profitable, and simple-minded consumers don't care enough about their own health to pay for it themselves.

Contrary to e.g. Krugman, insurance isn't a "special" market where laissez-faire doesn't work. Instead, it's a normal market where democratic politics doesn't work, because both the public and economists remain wedded to populism and paternalism.

Is Free Free?

Wed, 01 Jul 2009 14:12:48 GMT

You can read Malcolm Gladwell's review Chris Anderson's Free: the Future of a Radical Price online for free--except of course for the price you paid for your computer, mobile device, electricity and internet connection. This hitch is just one problem Gladwell has with Anderson's idea...

Casnocha on Tyler's Next Book, by Arnold Kling

Wed, 01 Jul 2009 12:07:35 GMT

Reviewing Tyler Cowen's Create Your Own Economy, Ben Casnocha writes,

when culture is free and a click away, as it is on blogs and Twitter and the broader Internet, we sample broadly and consume it in smaller chunks: "When access is easy, we tend to favor the short, the sweet, and the bitty. When access is difficult, we tend to look for large-scale productions, extravaganzas, and masterpieces," writes Cowen. "The current trend--as it has been running for decades--is that a lot of our culture is coming in shorter and smaller bits." Think 30-second YouTube clips instead of a full movie, iTunes singles instead of complete albums, two paragraph blog posts instead of an entire essay. And now the 140-character limit on Twitter instead of a blog-style free-form text box.

The second reason is the intellectual and emotional stimulation we experience by assembling a custom stream of bits. Cowen refers to this process as the "daily self-assembly of synthetic experiences." My inputs appear a chaotic jumble of scattered information but to me they touch all my interest points. When I consume them as a blend, I see all-important connections between the different intellectual narratives I follow a business idea (entrepreneurship) in the airplane space (travel), for example. Because building the blend is a social exercise real communities and friendships form around certain topics my social life and intellectual life intersect more intensely than before. And I engage in ongoing self-discovery by reflecting upon my interests, finding new bits to add to my stream, and thinking about how it all fits together.

I think that Casnocha does a better job of imposing order on Tyler's book than my own review.

Sometimes, a book will consist of one idea for an essay, stretched to book length. Create Your Own Economy is more like the opposite. It is many essays, some of which are so compressed that you have to sit for a while and fill in some of the explanatory material yourself. If you read Tyler's blog at marginalrevolution.com, you will be familiar with that feeling.

Why Are You Spending More Time With Your Kids?

Tue, 30 Jun 2009 18:56:40 GMT

An exceptionally neat new working paper points out that parents' time spent with kids has increased hugely since the early 1990's, particularly among highly educated parents. This is a remarkable fact, and surprising; these are the same parents whose value of time (their wage rate) has increased relative to that of all parents, as, unsurprisingly, have their hours working for pay (since we know that labor supply responds to wage rates). They thus have less non-work time available and are spending even more of it with their kids. Why the surprising result?

Baseball in Pictures

Tue, 30 Jun 2009 17:17:39 GMT

Readers of this blog know that we like baseball and explanatory graphics, so we were excited to hear about Craig Robinson's site, Flip Flop Fly Ball. Robinson presents a series of informational baseball graphics.

So Long and Thanks for All the F-Tests

Tue, 30 Jun 2009 16:44:02 GMT

I've been reading a truly excellent book by Joshua Angrist and Jorn-Steffen Pischke called Mostly Harmless Econometrics: An Empiricist's Companion. It's not written for a general audience, but if you pulled an A- or better on a college-level econometrics course (and if you love Freakonomics), then this is the book for you. It should be required reading for anyone who is trying to write an applied dissertation. It is the rare book that captures the feeling of how to go about trying to attack an empirical questio; and it does this by working through two or three dozen of the neatest empirical papers of the last decade (often coauthored by Angrist). It is also peppered with references to Douglas Adams's writing -- so what's not to like?

Why Traditionalists Should Prefer Libertines to Hypocrites, by Bryan Caplan

Tue, 30 Jun 2009 14:40:50 GMT

I've repeatedly encountered the following social conservative meme, most recently in an argument over the Mark Sanford affair:

We've got to stop acting like hypocrites are the worst thing in the world. At least hypocrites have moral standards; they're just not living up to them. All the war on hypocrisy really accomplishes is to give people a strong incentive to become libertines, people who openly flout traditional moral standards. What could be worse?

I could argue that traditional moral standards are a mixed bag of truth and error. But I don't have to. Even if traditional moral standards were infallibly correct, ardent social conservatives should still prefer libertines to hypocrites.

Why? Because they can and usually do avoid close social relations with libertines! A conservative Christian needn't worry that she will accidentally disgrace herself by marrying a libertine, because the libertine has the decency to make his intentions known.

In contrast, it's hard to avoid close social relations with hypocritical traditionalists. Since they pretend to share socially conservative values, they worm their way into your life and your family. Then like the hypocrites they are, they shirk, lie, and adulterer, bringing shame to their spouses, children, and extended families.

As an opponent of nationalism in all its forms, I share neither the revulsion people feel against "traitors," nor the grudging respect people feel for the loyal soldiers of enemy nations. But for traditionalists' evaluation of libertines versus hypocrites, the nationalist model makes sense. Libertines are like the loyal soldiers of enemy nations; you may not like them, but at least you know what you're dealing with. Hypocrites, in contrast, are like traitors in your midst - and the wise social conservative will hold them in the highest contempt.

HT: An argument with John Nye, my favorite social conservative.

P.S. For the best movie about hypocrisy you're likely to see, try Harakiri.

Does Fee-for-Service Explain Rising Health-Care Costs? (by Don Boudreaux)

Tue, 30 Jun 2009 10:49:24 GMT

I argue here that rising medical-care costs are not explained by the fee-for-service method of delivery.

Genetics and the Future of Religion, by Bryan Caplan

Mon, 29 Jun 2009 21:39:15 GMT

Religiosity is partly genetic, and the religious the are out-breeding the secular. It follows, then, that societies will get more religious over time. But over at Gene Expression, Razib argues that while the premises are true, the conclusion is false. He starts by looking at Turkish data from the World Values Survey, then doggedly argues in the comments with a slew of critics. When one reader insists:

If the religious outbreed the secular - which they do; and if religiousness is correlated with heritable psychological traits - which it is; then society will get more religious.

The only question is how quickly it will happen.

Razib replies:

please. spare me. religious people have been outbreeding non-religious for most of history i assume given the social profiles we know (the same stuff about religious outbreeding the non-religious was true in france in 1840). and the non-religious keep increasing as a fraction. as t -> ? you're certainly right, but i really don't care, that's trivial. you seem to live in a world where dynamics are never cyclical.

So, Western society will be getting more religious, and pretty soon.

give me numbers. no qual, quant. in the long run we're dead. you must have quantitative metrics in mind if you're offering an opinion. percentages at time X based on particular parameters.

I learned a lot from the comments. But by the end of the debate, I just wanted Razib to propose a bet...

Resources for Home-Schooled Economists, by Arnold Kling

Mon, 29 Jun 2009 23:51:32 GMT

reviews of economic research.

Pointer from David Warsh

Krugman Misstates Arrow, by David Henderson

Mon, 29 Jun 2009 22:40:46 GMT

My co-blogger Bryan Caplan comments today on Paul Krugman's blog post on Arrow's famous 1963 article on health insurance. There is more to be said. Krugman writes:

Both George Will and Greg Mankiw basically argue that we don't need a government role because we can trust the market to work -- hey, we do it for groceries, right?

Um, economists have known for 45 years -- ever since Kenneth Arrow's seminal paper -- that the standard competitive market model just doesn't work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.

In a literal sense, Krugman is right about the standard competitive model. After all, at UCLA, Ben Klein and Armen Alchian taught us that the standard competitive model, if by "standard competitive model" you mean "perfect competition," doesn't work well even with gasoline stations and repair shops. When a company can invest in reputation, what Ben Klein called "brand name capital," the perfectly competitive model goes out the window. But if you read just Krugman's short post, you might think that Arrow is arguing for a government role in health care, as Krugman is, right? And I would bet that Krugman wants you to think that. Yet, nowhere in Arrow's article can I find such an argument. Rather, Arrow is saying that there are things peculiar to health care and health insurance that mean that we have to supplement our standard models. And, as for free-market principles, although Arrow might think that they are not enough, he doesn't say that in the article.

Unfortunately, many economists of various persuasions have said that Arrow's article makes a case for why competitive markets in health insurance will fail [which is different from saying that standard competitive models will fail] and why government regulation is needed. That's what I had remembered it saying. But, as I noted in January, when I went back and read the whole thing, I found no such thing. In fact, Arrow's article is much more careful and nuanced than I had remembered.

Also, and contrary to Bryan's claim, Arrow points out that optimality in health insurance requires that higher-risk people be charged higher premiums.

I won't be surprised if someone can find Arrow saying good things about socialized medicine or other government interventions in health care. What I am saying is that you can't find him saying those things in his seminal 1963 article.