Thursday, June 30, 2005

In Re: David Souter's House

The liberty wing of the Internet is incandescent with reports that a developer in California plans to file an application with Supreme Court Justice David Souter’s hometown to seize his house to be converted into what he contends is a much more valuable use, a hotel and museum devoted to the disappearance of American freedom. (A Google search with Justice Souter’s street address, which I choose not to repeat here, already yields over 5200 hits, fewer than 72 hours after the proposal was announced.) Making it all the more delicious is that the proposal relies heavily on the tortured reasoning of Kelo et al. v. New London, to which Justice Souter attached his name.

There are several things to think about here. The Manchester Union Leader has a story that depicts the effort as a warm and fuzzy piece of Americana, fun for the media for a few days but unlikely to come to much. The quotes about the affair in the article and elsewhere are revealing. One resident indicates that to take his home in particular would be a disaster, arguing that "It's a horrible idea. That's a very historic part of Weare." The Boston Herald has a New Hampshire state legislator saying that “Justice Souter's property will be protected by the good sense of New Hampshire townspeople.” Undoubtedly the residents of New London now soon to be displaced from their homes wish they had similar guardian angels.

Making it more interesting is that the property-tax assessment of Justice Souter’s home is apparently only $100,000. This seems like a relatively low value for a home in the red-hot real estate market of New England. The MSN House and Home site allows the comparison of various aspects of towns and cities all around the country. While there is no listing for Justice Souter’s bucolic burg of Weare, the town of Peterborough in the same county has an average home value of $163,900, with appreciation last year of 8.96%.

Why such a low assessment? There are several possibilities. The first is that the assessment is an honest one. The Concord, NH Monitor has a picture of the home, and frankly from the photo it does seem a bit of a dump. But given the nature of New Hampshire home prices generally, this seems to be an implausible explanation by itself. Perhaps Justice Souter’s influence keeps his assessment down, although in such a small town that too may be unlikely. Perhaps as a well-educated and well-connected attorney he is highly skilled at getting low assessments, which is quite a game in itself. Or perhaps he has friends looking out for the eccentric local who made good.

But none of those latter reasons inspire confidence. Save the Souter-lives-in-a-hole explanation, they all suggest that the assessment process is some mix of corrupt and arbitrary. People who can game the system get low assessments, people who can’t, don’t.

And that is revealing of the entire problem with Kelo, and with the expansion of eminent domain generally. We can’t tell, despite Justice Stevens’ optimism, whether the process is driven by the public good or is fundamentally corrupt. The increased freedom of action given to authorities to pick their own reasons for seizing (and assessing) property gives the opportunity for the government to reward its supporters and punish those who don’t support it in sufficient degree. Even if the decision is taken properly, there is no way we can know that, and certainly no reason to assume that everything is in order. It looks like the well-connected are protected, and the lumpen citizenry must simply sit there and take it. That local officials react so skeptically to a proposal to turn Justice Souter’s reasoning on the property most dear to him cannot help but reinforce this notion. When it is his house, the system works. When it is the homes of anonymous people without benefit of Justice Souter’s reputation and influence in New London, or in Freeport, TX or in Palmdale, CA, things turn out differently. Yet Kelo is predicated on trusting that any seizure that comes through the legal process must be deferred to. As with any action that increases the government’s power to act capriciously, this is a recipe for increasing skepticism by the citizenry about the hidden corruption of their government, whether it exists or not. A process built on such contradictions generally ends badly.

Wednesday, June 29, 2005

The Senescent Society: Aging and the Economy in Germany and Japan

The Daily Telegraph reports that Germany appears to be sliding into the same sort of deflation/depression trap that has gripped Japan for years. Quoting a report by the HSBC firm, their reporter writes:

"Germany is perilously close to deflation. We believe it is only a question of time before there are generalised price falls in the country. This will in turn raise more questions about the rules governing EMU and the sustainability of the single currency itself."

The bank said the Netherlands and Italy were also in danger.

Italy was in "dire straits" after a "collapse" in productivity and negative growth for five out of the past nine quarters. "Italy has completely failed to adapt to the rigours of the fixed exchange rate," it said

The dreaded term "liquidity trap" was used by economist John Maynard Keynes in the 1930s when traumatised consumers and investors refused to spend, pushing prices ever lower.

Deflation renders conventional monetary policy impotent as it is impossible to cut interest rates below zero (though there are other methods). Inflation-adjusted rates rise as the crisis deepens, causing mass bankruptcy.

Germany and Holland may now be slipping into this trap. Their core inflation is around 0.7pc, but on a downward glide path.

One of the more interesting stories of our time is the collapse into economic malaise of Japan and much of Europe since the end of the Cold War. Anatole Kaletsky, referring to the European half of this spectacular collapse, has described it as a “disaster almost unparalleled in modern history.” This is surely an overstatement, but there is something odd going on – sustained lack of growth in countries that have grown, other than during war or worldwide depression, for over a hundred years. Its causes are numerous, but one wonders if the aging of these societies is part of the story. The only honest answer is that we don’t know, because there has been little systematic research on the consequences of aging societies, other than the effects on state pension systems. So this is as good a place to start as any.

The standard macroeconomic model that every undergraduate economics major learns strongly suggests that depression and deflation could accompany the rapid aging of the European and Japanese populations. Contrary to the predictions of the economist Franco Modigliani in his work on consumption over the lifespan (which was part of why he won the Nobel Prize in 1985), it is apparently not true now (if perhaps it once was) that the elderly have a high propensity to consume. His belief was that most people save over their working lives and spend in their retirement. Aging therefore does not cause consumption to fall much, so that in the standard model (at least in the short term) an older society should not be a slower-growing society. Gary Becker in his household production model in 1965 implied that someone who is retired, because of declining productivity of time as an input into consumption, will substitute purchased goods for time and hence spending will go up. The retired couple who eats out a lot and cooks at home seldom is the classic example.

But that prediction is apparently not true. What a lot of elderly apparently do is to scrimp in fear of outliving their retirement savings, and save to leave substantial amounts of wealth to their children. One Federal Reserve Study indicates that about 70% of the elderly single population will die with a positive net worth, and that subset will by design spend $4000-$7000 less annually on consumption as a result.

If one accepts that the elderly draw in their horns and become very conservative in their spending habits, then an older population becomes a reluctant population. If one believes that deflation happens because aggregate demand falls, then (if deflation is something that accompanies depression, which not everyone accepts) an aging population becomes a deflationary population. Collectively, we would expect to observe that as population ages the inflation rate falls (perhaps to below zero) and so does economic growth. And that is in fact what we may be observing. Below are the inflation rates and percentages of the population over 65 for Germany and Japan, two of the countries hardest hit by stagnation and aging:

This is admittedly not much to go on, and so one would be foolish to conclude too much from such a simple exercise. It is an interesting question whether aging populations become deflationary and depression-ridden, and whether therefore Germany and Japan are going now where other European countries with aging populations will soon follow. Of course, the textbook macroeconomic model, based on the old concepts of aggregate demand and supply, is of very limited usefulness for a social remaking as revolutionary as this, but it does to explain at least some of what we are seeing. (Another implication would be that older societies would have higher savings rates. A third is that railing against the European Central Bank for slow European growth is pointless.) This sort of Keynesian modeling of the problem does not even consider the increased expenditures on state pensions and the potential destruction of entrepreneurial creativity, topics for another time.

Monday, June 27, 2005

What is the Public Good? The Limits of Eminent Domain

The end-of-session ruling by the Supreme Court in Kelo et al. v. City of New London has generated a firestorm at three corners of America’s unusual political map. In ruling that urban redevelopment, in substantial part for the ultimate purpose (de facto if not de jure) of increasing tax revenues, is a legitimate exercise of the eminent domain power, the Court has angered both libertarian conservatives and anti-big business activists on both the left and the right. Many in the former group, believers in limited government, were surprised at the loss and that it was in some sense Justice Anthony Kennedy’s fault as the Reagan-appointed swing vote.

The anger derives from different conceptions of what qualifies as a legitimate exercise of public power in annulling property rights for particular individuals. The Court engaged in a rather substantial rhetorical sleight of hand in speaking ultimately of “public purpose.” The Constitution, alas, requires something else altogether, which is that the property be put to “public use.”

This is not just idle quarreling over words. It derives from fundamentally different visions of what the state is for. In one, that which leads to Justice Stevens’ invocation of “public purpose,” government is an essential entity for affirmatively promoting the greater good. When compared to its alternative, property rights and consensual trading, the latter allegedly comes up short on all too many occasions. To tear down old, small houses and replace them with gleaming office towers, or with superstores or factories that employ huge numbers of people and therefore fatten the tax rolls and enable the expansion of government doing good, is a self-evident improvement. (Whether that is true is certainly debatable: see here and here for examples in which "carefully considered" state plans generally work worse than expected, while decentralized trading in lieu of a master plan works better.)

In his ruling, Justice Stevens is quite clear about several things. First, while simple redistribution of property from one party to another, perhaps more powerful one is verboten, the fact that the government jumped through the proper procedural hoops rules that possibility out:

As for the first proposition, the City would no doubt be forbidden from taking petitioners’ land for the purpose of conferring a private benefit on a particular private party. See Midkiff, 467 U.S., at 245 (“A purely private taking could not withstand the scrutiny of the public use requirement; it would serve no legitimate purpose of government and would thus be void”); Missouri Pacific R. Co. v. Nebraska, 164 U.S. 403 (1896). Nor would the City be allowed to take property under the mere pretext of a public purpose, when its actual purpose was to bestow a private benefit. The takings before us, however, would be executed pursuant to a “carefully considered” development plan. 268 Conn., at 54, 843 A. 2d, at 536. The trial judge and all the members of the Supreme Court of Connecticut agreed that there was no evidence of an illegitimate purpose in this case. Therefore, as was true of the statute challenged in Midkiff, 467 U.S., at 245, the City’s development plan was not adopted “to benefit a particular class of identifiable individuals.”

The “therefore” is puzzling. It is not clear that just because the normal process unfolds, therefore the motivation and effect is not a raw transfer of wealth. But that is the price of embracing the belief that that which the public authorities do is of necessity the public interest.

Second, meanings of words can change. Once upon a time “public use” meant, well, “use by the public.” But no more:

But although such a projected use would be sufficient to satisfy the public use requirement, this “Court long ago rejected any literal requirement that condemned property be put into use for the general public.” Id., at 244. Indeed, while many state courts in the mid-19th century endorsed “use by the public” as the proper definition of public use, that narrow view steadily eroded over time. Not only was the “use by the public” test difficult to administer (e.g., what proportion of the public need have access to the property? at what price?), but it proved to be impractical given the diverse and always evolving needs of society.

The last clause is of course always the historical recipe for trouble. If the functioning of Constitutional rights is to rope off certain spheres of individual freedom of action – the freedom, say not to sell your house to someone who wants to convert it to a beachfront pedestrian walkway – is to mean anything, it is presumably to define rights permanently. The right to be free from self-incrimination must certainly take account of technological change, e.g. new surveillance equipment, but does not itself become diluted simply because of the “evolving needs of society.” This is as likely as not another exercise in the diminution of security in property relative to other rights, which is longstanding but has been in decline for some time. One is hard-pressed to imagine a Court endorsement of a "carefully considered" plan to lessen social conflict by planning what kinds of political speech are permissible. But the right to property is nonetheless seen in that light, as a diminished second-order privilege.

Finally, and most disturbingly, individuals are not possessed of rights themselves, but of privileges to be evaluated in the context of the master government plan:

As with other exercises in urban planning and development, the City is endeavoring to coordinate a variety of commercial, residential, and recreational uses of land, with the hope that they will form a whole greater than the sum of its parts. To effectuate this plan, the City has invoked a state statute that specifically authorizes the use of eminent domain to promote economic development. Given the comprehensive character of the plan, the thorough deliberation that preceded its adoption, and the limited scope of our review, it is appropriate for us, as it was in Berman, to resolve the challenges of the individual owners, not on a piecemeal basis, but rather in light of the entire plan.

The syllogism seems to be that because the state had a rational basis, because the government asserted that it had the authority after following the usual rules, therefore the plan must operate and the individuals and their rights must be subservient.

It is possible to start from another premise about why governments act the way they do. In this alternative conception of the state there are a very small number of things that free individuals do poorly, and they can be objectively identified through economic theory. With respect to eminent domain, the relevant market failure is the “public good.” That economists have settled on this term is unfortunate, because it is all too easily conflated with “the good of the public,” which in the eyes of Justice Stevens is whatever the legislature and executive say it is.

But a public good is a very specific thing. It is a good that has two non-euphonious features – it is “nonrivalrous” and “nonexcludable.” The nonrivalrous good – an over-the-air television signal is an example – occurs when my consumption of it doesn’t lessen your consumption possibilities at all. Most goods – think of a gallon of milk or the computer on which you are reading this – do not really have this feature. Nonexcludability means that people who don’t pay can’t be prevented from consuming the good. Broadcast television solves this problem by relying on an excludable and rivalrous good – commercial time – as its financing system. There is thus no need for the government to be the television broadcaster. Rather, the classic textbook example of a nonexcludable good is national defense. Because of the way military services are provided the military must defend me whether I pay or not.

Voluntary negotiation – the free exercise of property rights fully enforced – does a poor job of providing true public goods - goods with both of these features. Thankfully, they are relatively few in number. But when they exist, people don’t pay the way they must when they obtain private goods and hence the public good is never provided in sufficient amounts.

The limits of eminent domain, and the longstanding refusal to equate "public use" with "public good," are revealing of a split among academic believers in limited government. On the one hand are the dismal theorists of the state, who see it as prone to growing without limit and to abusing whatever power it has for the private ends of the people who make up the state. This is one of the primary strains of thought that motivated the American Revolutionary generation. In this way of looking at the world, the language is moral. Big government is immoral on its face, and its primary sin is the violation of rights accruing naturally to free men. It is also vulnerable to takeover by pressure groups –- the factions that so preoccupied James Madison’s Federalist 10 -– and therefore it must be harshly constrained. The dismal advocates of limited government are skeptical about the nature of man, especially when he takes to power, and they conclude that a limited state is therefore a moral imperative. Man reduces to self-interest and faction, and is not to be trusted with power. In the eminent domain example, the seizure of the New London land is presumptively an exercise in pure rent-seeking until otherwise proven.

On the other hand are many economists, such as Donald Wittman at UC-Santa Cruz and Gary Becker and Richard Posner of Chicago itself, who believe that politics is a competitive process where factions do seek special privileges but where they face competitive pressures from politicians who appeal to a broader public by offering ways to mitigate the costs of this type of activity. This school of thought seem to implicitly adopt a philosophy of raw utilitarianism in all things – where the state outperforms the market in achieving the greatest good for the greatest number it should act. The problem is to figure out when that is true in a particular case, and it just so happens that the answer is not very often. In his highly and justifiably influential textbook Economic Analysis of Law Judge Posner has written that an expansive view of eminent domain may be justified because of the aforementioned holdup problems. In his earliest comments on Kelo he views it, as he generally does, as a question of value creation – does the redistribution of property, by overcoming holdout problems, increase wealth? IWhether Justice Stevens is right is just a problem of measurement rather than philosophy. In general, Chicago-style political competition means that the government tends to find its own efficient level, i.e. the level which makes society as wealthy as it can be given the unavoidable constraints created by the existence of rent-seeking behavior.

The two views – the one operating in the language of harsh morality and the other hinging on pragmatism – are irreconcilable when it comes to thinking about eminent domain. For the dismal theorists, it is an invitation to rewarding the supporters of the government, and must be sharply constrained, like all other exercises of government power. Insisting on the rigorous definition of "public good" as a requirement for eminent domain is a way of limitng the otherwise ever-expanding state that takes land for a military base one day, for a railroad the next, because owners' houses don't make for a productive neighborhood the next and for some other "carefully considered" purpose the next. For the latter, the state is one tool among many (albeit one with unique coercive powers) in maximizing something or other, and so while an expansive vision is not obviously right neither is it obviously a bad idea. Ironically, there is some common ground between the evocation of the public will that is Rousseau’s heritage and that motivates Justice Stevens’ opinion, and the efficiency that motivates Chicago libertarians.

Friday, June 24, 2005

China as a Long-Term Play

China as a long-term play

In a previous post I explored the possibility (which I think likely) that China is an overheated economy due for a major correction. It is overbuilt and has property speculation that looks like a lot of bubbles we have seen in the past. But history is replete with examples of rapidly industrializing nations that suffered major economic crashes only to rebound smartly and continue to grow. One need only think of the U.S. in the second half of the 1800s or even Thailand and Korea after the 1997 crash. In those cases major economic corrections were followed by cleaning out of the late-boom rot and resumption of solid growth after a period of time. In principle even a major Chinese adjustment crash – one in which the most egregiously politicized and excessive investment projects were messily excised – could be followed by a period of many more high-growth years.

But must it be so? Start from the premise that the change from pre-industrial to industrial or even substantially post-industrial society is a relatively consistent process. The same changes – e.g., mass urbanization, increasing acquisition of physical and human capital – happen every time, whether it is Britain in the 1800s or Taiwan in the 1960s. Can a nation start down this road and then have it all collapse as a mirage? There are no historical examples of which I am aware of nations getting halfway to the modernization transformation through significant reliance on market processes and then stopping. (If anyone knows otherwise I would appreciate hearing about it.) Of the nations that suffered in 1997 in East Asia Indonesia appears to have had the weakest recovery, and so may yet serve as an example of modernization being brought up short, but that remains to be seen.

But just because something hasn’t happened doesn’t mean it can’t happen. There are some reasons to be skeptical of China’s long-term prospects. Civil conflict and public protest in China is apparently on the rise. The RAND corporation, crunching official Chinese data (which probably underestimates the problem) reports that 58,000 protests involving over three million people occurred in 2003. South Korea's YTN television network has video of the violent suppression of a smaller protest. Press reports have it that these protests are often caused by seizure of farmers’ land to be converted into commercial space, excessive tax obligations, and the other petty indignities of a very corrupt state undergoing rapid growth. The trick for China is to keep the economy growing fast enough to continue to outpace the growth of civil unrest. If enough migrants to the cities and farmers thrown off their land can find work, then violent social conflict can be avoided. That western China has the potential for unrest among non-Han minorities resentful of the economic success in the east and continued impoverishment in the west adds to the pressure. This is why a short-term popping of the current Chinese bubble would be such a threat, and why the government appears desperate to slow growth enough to avoid overheating leading to a crash, without lowering growth so much that unemployment and the resulting discontent increases. The recent opportunistic whipping up of nationalist fervor against Japan (with huge, seemingly manipulated protests against Japanese textbook sections on World War II occurring not just in Beijing but throughout much of the country) can also be seen in this light. The angrier people are at perfidious Nippon, the less time they have to be angry about corruption, unemployment and the like.

Also on the negative side of the long-term ledger lies the astonishing imbalance in sex ratios. The ratio of boys to girls 0-4 years old is already about 1.2:1 nationwide, and perhaps as high as 1.3:1 or 1.4:1 in rural areas. (In the U.S. it is not quite 1.05:1 nationwide.) This is not a recipe for a stable society. For every girl not allowed to be born or to grow up, there is one frustrated man who will never marry. Valerie M. Hudson’s and Andrea M. den Boer’s Bare Branches: The Security Implications of Asia's Surplus Male Population speculates, based on anecdotal reading of history, that China is due for immense social instability – crime and military adventurism, e.g. – because of the growing tendency of parents in these societies under tremendous population-control pressure to weed out fetal or newborn girls.

On the other hand such demographic patterns are not cast in stone. The full totalitarian apparatus of the Chinese state is apparently being brought to bear on those who would facilitate or engage in the aborting of girls, and as China gets wealthier its population pressures may abate in any event.

On the bright side is the tremendous progress China has made in instituting the rule of law. At first blush, in light of China’s tremendous corruption, its vast array of substantially unaccountable prison factories and other legal atrocities, this seems like a preposterous characterization. But the proper comparison to 2005 China is not 2005 Sweden or Singapore but 1976 China. Compared to the era of the Maoist personality cult and the madness that accompanied it, the average Chinese finds himself with many more legal rights, and is much more in charge of his own life. He is certainly vulnerable to the depredations of powerful officials, but at least locally he has recourse to the courts to correct the worst abuses, and will benefit from the pressure that global investors demand for better governance. China has a long way to travel in this respect, but so too has it come a long way.

In addition there is the question of Chinese culture. Development economists, like economists generally, historically have not much liked to think about culture as a determinant of successful modernization, because culture has not lent itself easily to the standard economic model of preferences, scarce resources and available production technology. But there does seem to be something to the idea that some groups have a cultural tendency (and, obviously, a cultural tendency is not genetic determinism) toward commercial dynamism. The economist Thomas Sowell has noted that emigrants from Japan after 1868 went all over the Western hemisphere – not just the U.S. but Canada, Brazil, Peru and elsewhere. Invariably, they began work at the most menial levels, often in backbreaking agriculture, and invariably within two generations were economically one of the most successful tribal groups. So too expatriate Chinese have not just had tremendous success in the U.S. and Canada but have powered economic activity throughout Southeast Asia, often incurring the resentment of other tribal groups in the process. If one believes that culture can be a productive (or destructive) input to economic growth, then from observation of their success in other societies the Chinese seem, like the Indians and the Lebanese, to be well-suited to quick modernization once the obstacles to their entrepreneurial energies are removed.

It is my view, in which I do not have inordinate confidence, that these positives outweigh the threats. Whatever its short-term difficulties, China appears to be arriving as Japan, Korea and Taiwan arrived before it. The modern sector of the world will in twenty years time probably include China, and therefore the world will have to make its peace with the demands that China, like all rising powers before it, will make.

Tuesday, June 21, 2005

To Live and Die in America, and Elsewhere

Does “single-payer health care” deliver better results? Few questions more clearly distinguish the state and freedom as ways of making choices. Health treatment, like anything else that is valuable, is scarce. Both a government health-care system of the sort that prevails in many countries, as well as a market-based health-care system, which partially prevails in the U.S., are ways of resolving that fundamental scarcity by different criteria. When health care is provided by the “market,” what is really meant is that people get the resources they from others to maintain or improve their health by asking for them via competitive bidding. The immediate bargaining partners need not be doctors or nurses – midwives, employers paying insurance premiums, drugstore owners dispensing both FDA-approved medicine and “nutritional supplements,” all of these actors are part of the grand market bargain over health care.

Several things about such a system are going to be true. First, those who are willing to pay more will generally obtain more health-care resources. This is the basis for the common claim that single-payer systems better serve the poor. (Of course, the same thing is true about food, clothing and housing, and only in the latter case do most rich countries attempt to make the state a substantial provider.) Second, the primary driving force in determining what kinds of health-care choices are offered is competition. Individuals make claims to particular kinds of resources, and subject to whether those resources can be obtained at a sufficiently low opportunity cost, they are made available. If you want an MRI today and have the means to compensate someone for the opportunity cost of providing it to you, you will get one in a market system. Of course, higher-quality care – more and better machines, less waiting time – costs more, and so part of the explanation of why U.S. health-care is so costly is that it commands higher opportunity-cost resources in order to provide these things. In that sense comparing health-care systems by their “cost” may mislead as much as illuminate. (The economist Gordon Tullock once noted that as a percentage of GDP transportation expenditure surged in the 1920s, not because there was a “transportation crisis” but because the Model T had made vastly superior transportation possibilities available to huge numbers of people.) Third, and most important, reliance on decentralized individual choice promotes not just greater visibility of tradeoffs – forcing somebody to ask whether that higher nurse-to-patient ratio is really worth fewer surgeons, or patients to ask whether that trip to the doctor is really worth the copay – but a greater willingness to engage in competitive experimentation to explore alternative ways of providing more health care at lower opportunity cost.

Ronald Bailey at Reason has written that an unappreciated virtue of market health care is that it promotes innovation:

Which suggests the following thought experiment—what if the United States had nationalized its health care system in 1960? That would be the moral equivalent of freezing (or at least drastically slowing) medical innovation at 1960 levels. The private sector and governments would not now be spending so much more money on health care. There might well have been no organ transplants, no MRIs, no laparoscopic surgery, no cholesterol lowering drugs, hepatitis C vaccine, no in vitro fertilization, no HIV treatments and so forth. Even Canadians and Britons would not be satisfied with receiving the same quality of medical care that they got 45 years ago.

Everybody pays more to obtain improved pharmaceuticals, imaging technologies, cancer therapies, and surgical techniques. The happy result is that average life expectancy has increased by about eight years since 1960.

As [Harvard University economist Kenneth] Rogoff suggests, the nationalized health care systems extolled by progressives have been living off the innovations developed by the "only country without a universal health care system." I wonder how Americans would vote if they were asked if they would be happy freezing medical care at 2005 levels forever?

Relying on individual choice to make social health-care decisions promotes both competition and entrepreneurial innovation. The effect here is not just that the pursuit of profit means a greater willingness to take risks and provide expensive services, or that competition replaces poorer service with better, although these are both true, but, as Hayek taught us, that decentralized competition means more health-care delivery experiments are tried more often, so that in the end the collective members of society are able to try out a greater number of medical-provision experiments.

A government health-care system is also a way of making choices, but the rules are different. Here, the production of political decisions, which looks different in every society, governs. In European and North American countries we would expect voting to matter a lot. In the U.S., the popularity of Medicare with broad swaths of the public (nearly all of whom will eventually have parents whose health care costs can be transferred to others via its use) undoubtedly partly explains its expansion over time, while the struggles of advocates of Medicaid, the program for the poor (a small minority of the U.S. population), to prevent it from shrinking in many states, let alone expanding, is another predictable result. Apart from raw voting, the application of political pressure by other means will also result in particular types of choices. In the U.S., pharmaceutical manufacturers, doctors, nurses, hospitals and many other pressure groups find reward in influencing the government to funnel resources their way just as they do in improving care for patients. The health-care system will reflect this collective production of political pressure. The elderly will do well because everyone has parents; the poor will do well in broadly egalitarian societies. But the tradeoff of relying on politics instead of decentralized bidding to make health-care choices is that consumers, being largely replaced by politics, are unable to give signals to potential health-care providers about the value of various alternatives.

So which system “works better”? The question is meaningless without some stipulation of what moral goal we are pursuing. Achieveing some level of average outcomes or a certain distribution of outcomes is one, but hardly the only, such goal. It is often alleged that the U.S. system, with its greater reliance on markets, does worse by such measures as infant mortality and life expectancy, both of which are worse for the poor than other Americans. Below are data for five countries on death rates per 1000 live births for children under five and for life expectancy, from the WHO for 2003. (They round to the nearest whole number, unfortunately.)

CountryInfant MortalityLife expectancy
United Kingdom679
United States877

But that is only part of the story. Outputs are a function of the inputs. And the inputs to health-care outcomes are substantially a function of individual choices and idiosyncrasies. The most obvious instance is Japan, with the world’s longest lifespans despite high smoking rates and spending less on health care as a percentage of GDP than any of the above five countries save the U.K. As for the U.S., Americans are much fatter than the other four nations. The data simply must be seen to appreciate this. Obesity rates were, respectively for the above countries, 14.9%, 9%, 9.2%, 22% and 30.9% in 2000, according to OECD Health at a Glance 2003. (Notice this is not being overweight, which may affect as many as 60% of Americans, but out-and-out obesity.) We also drive a lot more. (But on the other hand we smoke less than all of the above nations save Sweden.) For life-expectancy differences as small as the above it is risky to attribute these outcomes to the health-care systems. Obesity alone has a sizable impact on life expectancy. If we assume that obesity (again, not simply being overweight) takes four years off the average lifespan (and a controversial study in the New England Journal of Medicine by S. Jay Olshansky and others in March of 2005 puts the impact at at least two to five years), then we can calculate a hypothetical life expectancy when no one in the population is obese. Those become:
CountryObesity-adjusted LE
United Kingdom79.9
United States79.2

In other words, eliminating obesity by itself significantly diminishes the gap with the other countries. If obesity wipes ten years off life expectancy, the gap becomes essentially meaningless. So too with infant mortality. It is sometimes argued that most, all or perhaps more than all of this gap is accounted for by the heroic efforts to save very premature newborns in the U.S. who are left to die, and hence counted as stillbirths rather than neonatal deaths, in other countries. This is a hard hypothesis to test. The OECD keeps track of (Table 22) perinatal mortality (deaths within seven days after birth or in utero after the 28th week of gestation). The U.S. now has the second-worst rate (ahead of, for statistically artificial reasons, the U.K.) rather than the worst, but the gap is much closer. But even that may understate the importance of this effect because it is not uncommon, at least in the U.S., for babies to be born in the 23rd-25th week. Because of the lack of data I am unable to make much of a judgment about which system better promotes lower infant mortality.

In any event, infant mortality and, as we have seen, lifespan, are dependent on choices made (in the infant-mortality case, not by the patient but by the parents). Defenders of single-payer systems would say that part of a well-functioning health-care system is to use state power if necessary to improve the choices that such parents make. But is that intrusiveness worth the entrepreneurial-deadening effects?

Another measure of health-care quality is what happens to you when you eventually get sick. The same source from which the perinatal data came (tables 32-35) lists five-year survival rates contingent on getting four types of cancer. In one case (lung cancer) the U.S. ranks second in survival rates among nine OECD jurisdictions, very marginally trailing France. In the other three types of cancer (breast, colon and prostate) the U.S. ranks first, in the prostate case by a substantial margin. Much of the other available information in which the U.S. leads measures inputs rather than outputs – rates of cardiac surgery, pharmaceutical use, etc.

The picture that emerges is about what one would expect in a relatively market-oriented environment. American producers use the (somewhat diminished in our mixed system) incentives to bring new advances in medical technology to patients, which are generally made available to broader groups of the public. The American consumer plays a hugely disproportionate role in driving medical innovation, signals which would be lost in a full single-payer system. But at the end of the day the difference in the two systems is probably less dramatic than first appears. Whatever gets invented anywhere can be duplicated, technologically if not economically, elsewhere in short order. The trick, though, is how to spur that invention. If the U.S. consumer vanished as a guide for medical entrepreneurs, it is hard to be confident that innovation would continue at anything close to the same rate.

Penultimately, perhaps the ultimate judge of the quality of a health-care system is how the people living under it judge what they are getting. The U.S. leads the above group in terms of the number of people who report that their health is “good” or better than before:
CountryHealth Satisfaction
United Kingdom74.0
United States88.2

As a final note, recall that the morality of a health-care system is judged by much more than data. In much of Canada (with the brand-new exception of Quebec), as in North Korea and Cuba, if you and I want to exchange medical care for money outside the confines, and the queues, of the state health-care system, that is a criminal offense. The morality of that is dubious at best.

Wednesday, June 15, 2005

What Would a Chinese Economic Crash Look Like?

Is the Chinese economic miracle running out of steam? There is increasing reason to wonder, given that the economy shows more and more symptoms of previous financial crashes in other countries. Most obviously, the Shanghai stock exchange has been in decline for over four years, as the Yahoo chart of it indicates:

To be fair, the stock market is not nearly the presence in the Chinese economy that it is in an advanced economy, or even in other middle-income Asian countries. Relatively few Chinese are stockholders, and so there is no substantial direct effect of this decline on the wealth of the average Zhang San.

But the stock market is interesting not as a cause of trouble but as a symptom. There are numerous anecdotal reports of excessive building of factories for political rather than economic reasons. Every mayor, it seems, has to have his own high-technology center, his own steel mill, etc. The Asia Times reports that computer chip factories in particular are being overbuilt at a ridiculous rate. When you are spending other people’s money, as ambitious politicians are wont to do, you tend to be less concerned about long-term consequences, such as whether opportunity cost and generation of consumer value justify that use of those resources. And whether the Chinese growth rate even now is what it is claimed to be is questionable. The University of Pittsburgh economist Thomas Rawski questions the reliability of Chinese macroeconomic data, although he attributes it more to statistical immaturity than to malice by Chinese bureaucrats. But when every province reports a higher growth rate than the national growth rate, as is said to have happened a few years back, that is a sign of trouble. That the Chinese government is apparently contemplating propping up the stock market through share purchases is another warning flag, another example of shooting the messenger.

Many recent financial crashes in developing countries have occurred because economies with tremendous potential because of fundamentals – entrepreneurial drive, natural resources, human capital, etc. – but tremendous waste because of years of corrupt mismanagement of their economies have opened themselves to the merciless competitive probing of foreign investors and domestic entrepreneurs. People can suddenly try new resource combinations and see if they work, in the sense of providing more value to society than the cost of creating that value. Some of those experiments are wise, and some are foolish, but the less transparent and more corrupt the society the more difficult it is to tell which is which. For awhile there is immense excitement when an economy reforms, but eventually the economy’s opacity (both innate opacity because it is young and uncertain and aggravated opacity because of corruption) creates a backlog of mistaken ventures which must eventually break loose. A shakeout financial crash then ensues. This is the story of Mexico 1994, East Asia 1997, Russia and Brazil 1998, Turkey 2000, Argentina 2001, etc.

So is China vulnerable to such an event? Probably. But how would it play out? China’s currency does not provide the means of speculative attack that undid several other countries in recent years because of restrictions on taking it out of the country. And the problem is generally acknowledged here to be an undervalued currency rather than, as in Asia in 1997, overvalued ones. But markets tend to find a way. Improperly priced assets that are subject to government price controls get properly priced one way or another, as anyone who pays a huge finder’s fee to get an apartment in New York City or waits in line for hours to buy gasoline can tell you. The thing to look for as a sign that the yuan is vulnerable would be the setting up of overseas accounts in the currency at a more realistic rate, similar to the Eurodollar accounts of the late 1960s that undid Bretton Woods.

But in any event currency attacks are again the symptom and not the disease. If China is overbuilt in a short-term sense things can collapse even without the currency channel to get the ball rolling. Among the symptoms to look for would be falling property prices (perhaps already begun in Shanghai, according to this report). Unlike stock prices, that is an event that immediately affects large numbers of people, and so could precipitate a larger bust, even as it is also a symptom of other problems. One way or another, if China has accumulated a lot of economic mistakes, those mistakes will be pruned from the economy.

But lest things sound too pessimistic, it is worth noting that these are short-term issues. That China is overbought and overbuilt right now does not mean that the Chinese miracle is a mirage. More on that later.