Sunday, June 19, 2011

Mankiw's Total Confusion about Technology and Healthcare

The greatest economics textbook salesman ever, Greg Mankiw, is out with a column in today's NYT with truly one of the most misleading comments I have ever seen in some time. The column is chock full of nonsense, but I want to focus on the biggie. Mankiw writes:
Yet many economists believe that the rise in health spending is largely the result of medical advances, which prolong and enhance life at a high cost. Perhaps health spending will inevitably, and even should, keep rising as a share of national income.
Does Mankiw have any clue how technology works in a free market system? In a free market system technology brings about advances and decreasing prices. The computer I am using to write this comment cost a fraction of what computers cost ten years ago. The cell phone I use cost a fraction of what my first cell phone cost me and yet provides me with all kinds of enhancements that weren't even dreamed of ten years ago. My flat screen television costs a fraction of what my earlier big screen television cost, and with a better quality screen. Yet Mankiw tells us that health spending is increasing because of advances.
The truth of the matter is that health spending is climbing largely as a result of the distorted structure of the healthcare system, i.e., because of heavy government involvement in the sector. Government regulations on a large portion of the sector relative to what treatments will be used, and what prices will be paid for the treatments, eliminates the incentive for medical suppliers to become competitive on price and quality. Instead, they compete to get their products approved by the bureaucracy, and that is never, ever a prescription for low prices.

The only part of healthcare that seems to have patient pleasing advances and lower prices is the cosmetic surgery sector and the eyecare sector. One example is contact lenses. They are a fraction of what they used to cost and are of a much advanced quality. The big difference between the cosmetic surgery sector and the eyecare sector and the rest of the healthcare industry is that the government tends to stay out of these two sectors and so we have increasing quality and falling prices.

Note, this doesn't mean that new technologies don't come out in the private sector and quality only improves on given products. See for example the iPad, as New York Fed president Bill Dudley famously pointed out, this new technology has already seen advances in memory capacity. And other firms will soon be out with lower priced competing products. In other words, it is very dangerous to talk about a sector in terms of national income.

Mankiw's comment relative to what percentage, of national income, healthcare should be takes us further down the road to macro-economic planning. Who the hell talks about what part on national income cell phone expenditures should be or television set expenditures? Mankiw is misdirecting the discussion here. There should be no discussion about percent of national income. Healthcare providers should simply compete to provide services to patients, without these grand socialist, central planning concepts of spending as a part of national income. He should really be discussing how prices decline and quality improves in the private sector across the spectrum of the economy.

By framing his comment the way he does, he completely directs the conversation away from where the discussion should be and brings it toward a discussion of  when should we kill off the elderly because they cost too much to keep alive. This kind of question would never come up in a free market system where individuals would have to handle their own medical care. If someone has the ability to pay for a new technology that keeps them alive for an added hour, so be it. Remember that over time that technology that perhaps only the very wealthy can afford at first, in the private sector will fall in price and increase in quality. The super-rich, thus, are almost like test rats paying for inferior product at a very high price, which over time will improve and become affordable for all of us. Talking in terms of "percentage of national income" totally distorts the situation and causes thinking in terms of national micro-manged solutions, which always smothers the innovation resulting from free markets that comes about from decentralized efforts approaching a problem from many directions.


  1. Great catch, Bob. My jaw hit the floor too.

    This is not an economist. This is a state propagandist. That's all I can say.

    Because he's telling us - hey, as incomes rise and technology develops, don't you peasants get any ideas that you might be saving more. Nope. Your expenses are going up too...

    He's prepping our minds for inflation.
    In other words, through the mechanism of fiat money, well-connected financiers, rather than the population, should corner any additional value resulting from innovations and productivity.

  2. Just imagine the technology that could be dreamed up at this very moment but would not be made because it would cost too much to use. The cutoff has nothing to do with how much a machine costs, but how much the market will bear.

  3. By Mankiw's logic the printing press should have made it more difficult and more expensive to print books and therefore only the elites and royals should have retained the ability to print books.

    This is, of course, the opposite of what happened, the printing press made books cheaper and easier to the point any political activist with a steady income could publish their beliefs. Yet if the printing press was made illegal to operate or manufacture without years of government licensing and "training" I bet we'd still be stuck in the 1400s

  4. Just look at eye surgeries -- well not all eye surgeries, just LAZIK. A complex, computer controlled, high tech surgery that is mostly purchased outside the insurance/government healthcare industry and performed on an outpatient basis (very much like one of Henry Ford's production lines).

    Those prices have fallen, and the quality increases every year. Having had one of those surgeries almost 10 years ago, I've had nothing but spectacular results. Of course time will tell whether there's side effects over the long term, but it's definitely an example of a more free market in health care.

  5. In addition, why are primary care costs rising as well if Mankiw is right? primary care hasn't changed significantly since who knows when.

  6. "Mankiw is misdirecting the discussion here. There should be no discussion about percent of national income."
    Mankiw knows exactly what he is doing: Setting up the foundation for government takeover of healthcare.

  7. Anon@6:14

    I had LASIK(PKR) 10 years ago too.

    Best money ever spent- I went from nearly blind to perfect vision. Today, the same surgery is less than 1/2 the cost, and the results are amazing.

    Wonder why it was so cheap!?!? Could the free market really work?

  8. I disagree with Wenzel on this particular comment made by Mankiw.

    I think Mankiw was referring to procedures that didn't exist a few years ago IE knee replacement...not to general technological advancements. If knee replacements didn't exist a few years back, zero money was spent on them; people just limped around in pain and decreased mobility. Now, they're common and they're expensive. I think that is what the specific comment is referring to...not to tech in general.