Year: 2014

Back in 1986, 64% of the voters of California enacted Proposition 65: The Safe Drinking Water and Toxic Enforcement Act. Who could be against it? Well, I was working as an editorial writer for the San Jose Mercury News at the time, and I wrote the paper\’s editorial explaining why the law was misguided.

The main thrust of Proposition 65 was to require putting up signs to warn people when they were near something that was a known carcinogen. This sounds reasonable enough, until you realize that many common products have very small amounts of ingredients that, if consumed in bulk, could pose a risk of cancer. The law, which now requires notifications of over 860 chemicals, made no clear distinction between whether exposures were high or low. Michael L. Marlow looks at the current status of Prop. 65 in \”Too Much (Questionable) Information?\” which appears in the Winter 2013-14 issue of Regulation magazine.  Marlow gives an example of the Prop. 65 \”warnings that must be
issued by a typical California hotel.\” 

\”The warnings include: mercury in seafood; secondhand tobacco smoke; cleaning supplies and related activities; on-site construction; furnishings, hardware, and electrical components, including furniture, window treatment, locks, keys, electrical equipment, and carpeting; personal hygiene and medical supplies, including soaps, shampoos, and first aid supplies; hotel water supply systems, including faucets and other plumbing components; combustion sources, including automobile engines, gas stoves, fireplaces, and candles; office and art supplies and equipment, including carbonless paper, marking pens, copier machine chemicals, glues, crayons, and paints; landscaping supplies and pesticide treatment, including fertilizers, soil amendments, and pesticides; food and beverage service, including broiled and barbecued foods; transportation-related exposures, including motor fuels and engine exhaust; equipment and facility maintenance, including motor oil changes, carburetor cleaning, battery replacement, and facility repairs; retail sales; and recreation facilities, swimming pools, hot tubs and beaches,including beach sand (which can contain quartz sand, a form of carcinogenic crystalline silica).\” 

As the last example makes clear, the Prop. 65 rules don\’t distinguish between manufactured products and naturally-occurring carcinogens. Certain foods like bread and chicken have trace amounts of chemicals that, if fed to lab rats in large doses, can cause cancer. So restaurants need to post Prop. 65 signs, too. Unsurprisingly, when Marlow dredges through the statistics at some length, there isn\’t any clear evidence that Prop. 65 affected cancer rates.

But if the Prop. 65 signs raise consciousness a bit about health risks, even if in a potentially confusing way, is there any real harm? Well, this is where the \”bounty hunter\” provisions become important. The law was to be enforced by people bringing suit. Marlow explains:

\”Proposition 65 allows anyone bringing lawsuits to collect a portion of the civil penalties. Civil penalties of up to $2,500 per day for each violation are allowed, with one-quarter going to the party bringing suit. These payments are not linked to litigation costs, but are in effect “profits” without associated costs from litigation. Plaintiffs threatening litigation have increasingly switched their focus to demanding that businesses surrender payments directly to them rather than paying civil penalties. Plaintiffs are entitled to reimbursement of their costs of bringing a Proposition 65 suit. Businesses, however, are unlikely to collect their attorneys’ fees even if they prevail in court. Businesses are thus likely to be stuck with paying attorney fees on both sides of the case, as well as civil penalties, thus creating significant profit motives for the bounty hunters. Expert witnesses and the
indefinite nature of standards make for costly case-by-case litigation. …

\”The California Appellate Court in 2006 noted that bringing a Proposition 65 bounty-hunter action is so “absurdly easy” that the attorneys’ fees paid by defendants to avoid litigation are “objectively unconscionable.” … Over 2000–2011, there were 2,381 settlements. in 2011 alone, there were 338 settlements—the highest number of any year in this period. no information exists on how many settlements occurred prior to the 1999 amendments. Total settlement amounts over the 2000–2011 time frame totaled nearly $180 million (in 2011 dollars). that figure underestimates total costs to firms because it does not include legal and expert witness costs of defendants or court costs for cases that went to trial. Plaintiff s receive most settlement dollars in the forms of attorney fees and “other” payments made directly to organizations bringing suits or other organizations designated by filing organizations, with the California government receiving less than 15 percent of settlement costs in recent years.\”

I took some flak back in 1986 for opposing Prop. 65. But requiring a multitude of vague warnings, combined with a license to sue, is not sensible public policy.

For the Global Risks 2014 report, the World Economic Forum surveys over 700 of its members, asking them to look at 31 risks and rank their top five concerns. Top of the list? \”Fiscal crises in key economies,\” which beat out unemployment, water crises, severe income disparity, climate change, greater incidence of severe weather events, and others. The report notes:

\”The risk of fiscal crises features as the top risk in this year’s Global Risks report. … [M]ost emerging markets were able to quickly recover from the recent financial crisis. Latin American and Asian countries, which had experienced their own fiscal crises in the 1980s and 1990s, had implemented reforms to bring government debt under control. When they were hit by the fallout of the financial crisis, they had the fiscal leeway to  stimulate economic activity through the opposite of austerity – increasing spending and/or cutting taxes.  Advanced economies remain in danger of fiscal crises. Given the US’s official public debt of more than 100% of its GDP,  and Japan’s of more than 230%, investors may at some point conclude that these levels are unsustainable. In the short  run, the risks are higher for eurozone countries, which lack the option of devaluing their currencies to ease the necessary fiscal adjustment. Although ostensibly in a better position, many emerging markets have seen credit bubbles in recent  years that could turn into financial crises, and then fiscal crises, for example, the rapid credit growth in Asia since 2008. … Making fiscal frameworks more resilient in the future is even more important given the substantial longer-run fiscal challenges created by an ageing population.\”

To put some meat on the bones of that capsule description, I recommend \”Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten,\” written by Carmen M. Reinhart and Kenneth S. Rogoff as an IMF working paper (WP/13/266, December 2013).

As a starting point, here\’s gross government debt as a percentage of GDP, looking separately at advanced economies and emerging markets. The emerging markets had a surge of government debt in the 1980s, but since then, the growth of their economies has largely outstripped the growth of their debt The governments of advanced economies have been growing their debt/GDP ratios, with a few hesitations, since the 1970s, and are close to matching their post-World War II high.

But debt already owed by the government is not the only important measure of debt in an economy. When an economy has \”external debt\” owed to foreign investors, but has difficulty repaying, it has been common for the government to step in and assume some of that debt (fearing that otherwise the country might find it hard to access international capital markets in the future). Similarly, when certain kinds of private-sector debt, like banking debt, get so high that a default is imminent, it has also been common for governments to step in with some kind of a bailout. So what do these measures of debt look like? Here\’s a figure showing external debt–public and private–as a share of GDP. For emerging markets, the percentage is declining; for high-income economies, it\’s been climbing for most of the last 25 years.

What is we just look at private-sector credit as a share of GDP? For the emerging market economies, private credit as a share of GDP has been basically flat since the 1980s. For advanced economies, the ratio has been growing over time, but expecially took off in the late 1990s–at least before the Great Recession mildly deflated the private credit bubble.

The theme of these figures is that the size of debt in advanced economies, relative to the size of their GDP, is historically at high levels. This certainly doesn\’t mean that there will necessarily be a crash in the near future. But a high level of debt can make an economy more fragile when a nasty shock comes along. If the what Reinhart and Rogoff call the \”debt overhang\” is to be reduced, how might that happen? They lay out five possibilities.

The happy outcome would be a surge of sustained growth across the advanced economies that would help the growth of their GDP outstrip the growth of their borrowing. If we don\’t want to count on this happy outcome, the other possibilities are less cheerful.

Fiscal adjustment is a sustained pattern of lower spending and higher taxes to pay off the debt. A Greek-style default or restructuring would reduce the outstanding debt. An unexpected hit of inflation could reduce the value of the outstanding debt, although it might bring other undesired consequences as well like higher nominal interest rates while refinancing the remaining debt. The final option is \”financial repression,\” which is the catch-all term for rules that limit how the private sector can invest, and thus make it easier for the government to borrow money. None of these options are attractive. But when an economy has run up very large amounts of debt, the good option–minimizing the debt run-up in the first place–has already been forsaken.

To be sure, the technology isn\’t quite ready for fast food. \”From an economic perspective, cultured meat is still an experimental technology. The first in vitro burger reportedly cost about $335,000 to produce and was made by possible by financial support from Google cofounder Sergey Brin.\” Mattick and Allenby discuss a number of technological challenges. 

The U.S. economy relies to an increasing extent on immigrants for its innovative impetus. Consider two figures from William Kerr, writing in the NBER Reporter (2013, Number 4, pp. 13-16).

The first graph shows the share of U.S. patents received by various ethnic groups. The inventor needed to be living in the U.S. to be counted in this tally, but didn\’t have to be a U.S. citizen–at least not yet. Kerr writes: \”Figure 1 shows the tremendous increase in the ethnic contribution of U.S. inventors over the last 30 years, focusing only on inventors residing in the United States at the time of their work. The contribution of Chinese and Indian ethnic inventors displays exceptional growth, increasing from under 2 percent each to 9 percent and 6 percent respectively. Ethnic contributions are disproportionately concentrated in high-tech fields …\”

Here\’s a similar count broken down by company. This figure shows the share of patents by inventors of Chinese or Indian ethnicity for some high profile U.S. firms.

Many of these inventors are only in the U.S. on short-term H-1B visas, which seems foolish. We can argue back and forth about the issues involved in immigration of low-skill workers to the United States. But in a globalizing economy, high-skill immigrants bring a combination of technological moxie and international connectedness that can be deeply valuable.  Even if one just looks at high-skilled workers, innovation is not a zero-sum game: Kerr\’s research shows that when the number of high-skill immigrants on short-term visas rises in a city, and the innovation rate rises, the innovation rate for for other inventors in that city seems to rise slightly, too. It surely looks as if U.S. innovation is being sustained by recent arrivals and people who are here on a short-term basis. The U.S. education system and economy is a magnet for global talent, and we should play to that advantage.

The U.S. GDP is now about 22% of the global total, and very likely to keep declining in the next few decades. But policy discussions in the U.S. often don\’t really come to grips with the fact that the U.S. has limited power in this globalizing economy. Here are a few examples.

Concerning climate change policy: Here\’s a recent report from Reuters on China\’s announcements about expanding coal production. \”China approved the construction of more than 100 million tonnes of new coal production capacity in 2013 – six times more than a year earlier and equal to 10 percent of U.S. annual usage – flying in the face of plans to tackle choking air pollution. The scale of the increase, which only includes major mines, reflects Beijing\’s aim to put 860 million tonnes of new coal production capacity into operation over the five years to 2015, more than the entire annual output of India.\”  While U.S. can (and should) argue about appropriate policies to address carbon emissions, choices made in the U.S. and Europe will not be the primary determinants of future carbon emissions.

Concerning corporate taxation: American citizens and politicians can argue all they want about what it is \”fair\” for corporations to pay in taxes, but in an economy with global supply chains and rising trade, corporations will inevitably have greater power to shift operations and use accounting to move profits between jurisdictions.  Signing some international agreements about corporate taxation won\’t change this basic fact. If you want to tax high-income people, then it makes more sense to focus on their tax rates, rather than trying to tax corporation.

Concerning the directions of future technology growth: Here in America we like to have arguments over what kind of research on, say, genetic issues or using human tissue should be acceptable. But the U.S. share of global R&D fell from 38% in 1999 to 32% by 2009. China has now outstripped Japan for second place in global R&D spending, and China\’s R&D spending is similar to that of Germany, France, and Italy combined. A report just published in the New England Journal of Medicine notes that U.S. biomedical R&D spending dropped from 2007-2010, while the world total is rising. In the past, the rest of the world sometimes complained that global R&D was dominated by U.S. priorities. This complaint will be less true in the future.

Concerning blockbuster movies: The rest of the world used to complain, with some justice, that they were forcefed a diet of mass entertainment based first and foremost on the desires of U.S. customers. But now blockbuster movies are made with the global market in mind. Superheroes, cartoons, robots, global crime, and natural disaster play well everywhere.

Concerning globalization itself: When the subject of trade agreements comes up, like the Trans-Pacific Partnership, Transatlantic Trade and Investment Partnership, and Trade in Services Agreement, the tone of the discussion often seems to imply that U.S. policymakers are deciding on the future of globalization. But they are not. Globalization is speeding ahead without any permission from them, based on advances in transportation, information, and communications technology, along with actions by other countries. Trade policy is only trying to shape the direction of globalization a bit, and to negotiate around the margins some of the terms under which globalization will proceed.

Just to be clear, the U.S. economy is not becoming a economic minnow like Belize or Burundi. But 65 years ago, as the high-income countries climbed out of the wreckage left by World War II and today\’s emerging economies had not yet engaged in the global economy, the U.S. economy had an extraordinary time of dominance. For a time in the 1960s, it was common to hear that the planned economy of the USSR would outstrip the U.S. economy. In the 1970s and into the 1980, Japan was going to rule the world economy. Around 2000 and the launch of the euro, there was talk about the economic rise of the European Union. But now, we are seeing the rise of a multipolar and distributed world economy, with faster growth happening in the emerging economies, but with stronger linkages of trade and global supply chains reaching across the world economy. The U.S. can certainly be an active and leading participant in shaping the world\’s economic future. But neither the U.S., nor some combination of high-income countries around the world, has the power to dictate what configurations will emerge.

Back in 2006, the Nobel Peace Prize was awarded to Muhammad Yunus and Grameen Bank \”for their efforts to create economic and social development from below.\” With a few exceptions, like the award to Norman Borlaug for his work on the \”Green Revolution\” back in 1970, The award is usually given for efforts involving human rights, democracy, international affairs, and peace. I know I wasn\’t alone among economists in appreciating the recognition that improvements in economic life could contribute to peace, too.

\”All the allegations that you have listed, again and again have been demonstrated, we sent all the information to the public to make sure that they understand it’s all baseless, there is no ground for it. For example, the case of tax evasion, it was decided in the cabinet meeting that my tax information should be examined by the tax authorities and that report should be submitted to the cabinet itself, the cabinet of ministers. They did that, they said we’ve investigated every detail, so Professor Yunus has tax returns and if he did everything correctly, we have no problem, we have not missed any single penny in taxes, so we have no problem with that. But the cabinet was not satisfied with that report, they sent it back again to make more inquires so that they can find something else.\”

If it is possible to have less than zero knowledge of a subject, my knowledge about the internal politics of Bangladesh would qualify. I also know nothing at all about the personal finances of Muhammad Yunus. But it does appear as if the current government of Bangladesh views the Yunus and the Grameen Bank as a force that needs to be brought to heel. Yunus describes Grameen like this: 

\”We work it all over Bangladesh, every single village in Bangladesh has access to domain bank microcredit program, so we have borrowers all around the country, we have 8.5 million borrowers, 97 percent of them are women. They are all connected within our system. I should mention that the bank is owned by the borrower, so the borrower is not somebody outside this; she is in control, she is the borrower and she is the owner, and she sends a representative to sit in the board, whoever is making a decision is actually her representative and a borrower like her. So, it’s not something in some big banks when somebody came and give you a loan, and they don’t know you and you don’t know them, it’s not like that, it’s a family kind of thing, it’s 8.5 million women’s family. So, we work at it as a kind of organization to be with them and for them.\”

For an academic take on microfinance, a useful starting point is \”Microfinance Meets the Market\”

\”We estimate that roughly 40 to 80 percent of the populations in most developing economies lack access to formal sector banking services. All sides agree that access to reliable financial services might help hundreds of millions, perhaps billions, of low-income people currently without access to banks or at the mercy of exploitative moneylenders. Muhammad Yunus and Grameen Bank led the way by showing that with donor support a wide range of poor and very poor customers are bankable—they can borrow and save steadily and pay substantial fees. …

\”Microfinance will no doubt continue to expand and become part of the financial mainstream. Experience so far, though, suggests that the profile of commercial banks that offer microfinance in low-income communities looks different from that of nonprofit microfinance institutions run by nongovernmental organizations. Commercial microfinance banks are more likely to have for-profit status and to involve an individual lending method, larger loans, fewer women customers, lower costs per dollar lent, higher costs per borrower, and greater profitability. Nongovernmental microfinance organizations are more likely to be a nonprofit employing a group lending method, giving smaller loans, serving more women, employing subsidies more heavily, facing higher costs per dollar lent, and being less profitable. …

\”The original idea of microcredit focused on funding small, capital-starved businesses. Several decades of experience has shown that the demand for loans extends well beyond customers running businesses. Even customers with small businesses often seek loans for other needs, like paying for school fees or coping with health emergencies. … [H]half of recent loans taken by poor households in Indonesia were used for purposes unrelated to business. … The future will likely see a movement toward new loan products for general purposes, new savings products, and better ways to reduce risks. Poor and low-income households typically devote much energy to juggling complicated financial lives, and improving their basic financial capabilities can be greatly beneficial to them, even if it does not lead to wide-scale poverty reduction or national-level economic growth.\”

Larry Summers, The Man Who Always Has Something Interesting To Say, delivered the 2013 Martin Feldstein lecture at the National Bureau of Economic Research on the topic, \”Economic Possibilities for our Children.\” The title is a play on a famous 1930 essay by John Maynard Keynes called \”Economic Possibilities for Our Grandchildren\” (discussed here). In both cases, the speaker is attempting to look beyond immediate economic distress and consider longer-term trends. Here are a few thoughts from Summers, but the entire essay is short, readable, and worth reading.

On the predictions from Keynes back in 1930: 

\”At one level, by the way, Keynes did pretty well. He predicted that incomes in the industrialized world would rise eightfold between 1930 and 2030 and they\’ve risen a little more than sixfold so far, so he\’s looking pretty good on that prediction. But Keynes also got some things wrong. He predicted that as incomes rose eightfold, the workweek would fall to 15 or 20 hours. … The reason is that people with higher wages now work more hours than people with lower wages. … Over time, as we have all gotten richer, the number of hours worked for many people has risen.\”

\”When I was an MIT undergraduate in the early 1970s, a young economics student was exposed to the debate about automation. There were two factions in those debates. There were the stupid Luddite people, who mostly were outside of economics departments, and there were the smart progressive people, who at that time were personified by Bob Solow. The stupid people thought that automation was going to make all the jobs go away and there wasn\’t going to be any work to do. And the smart people understood that when more was produced, there would be more income and therefore there would be more demand. It wasn\’t possible that all the jobs would go away, so automation was a blessing. I was taught that the smart people were right. Until a few years ago, I didn\’t think this was a very complicated subject; the Luddites were wrong and the believers in technology and technological progress were right. I\’m not so completely certain now. … In the United States today a higher fraction of the workforce receives disability insurance than does production work in manufacturing. (Many workers in the manufacturing sector are not production workers.) … I think it is also fair to say that the evolution and growth of disability insurance is substantially driven also by the technological and social changes that are leading to a smaller fraction of the workforce working. At the same time, as has famously and repeatedly been noted, the share of income going to the top one percent of our population has steadily increased.\”

\”The extent to which differential productivity growth characterizes our economy is, I think, sometimes underappreciated. The Bureau of Labor Statistics normalizes the consumer price indices at 100 in the period 1982 to 1984. Below are some recent values of the Consumer Price Index (CPI) for 2012.

Television sets at five stand out. That is obviously a reflection of a rather energetic hedonic effort by the Bureau of Labor Statistics. One suspects that equally energetic hedonic efforts are not applied to every consumer price. But nonetheless, the simple fact is that the relative price of toys and a college education has changed by a factor of ten in a generation. The relative price of durable goods or clothing as a category and all goods has changed by a factor of almost two in a generation. This table provides a somewhat different perspective on the common and valid observation that real wages have stagnated in the United States. The observation that real wages are stagnant reflects wages measured in terms of the overall consumer price index. But this obscures the truth that real wages measured in terms of different goods have behaved very differently.\”

The table is worth mulling over. The average price increase for \”All Items\” from the 1982-84 period was from 100 to 231 by 2012–that is, an increase of 131%  A number of  categories increased by about that much: Services, Energy, Food, Housing, Transportation. But at the top, college education and health care increased in price by dramatically more. At the bottom, clothing, durable goods (like home appliances), toys, and televisions saw much smaller increases or an outright decline. (The \”hedonic\” adjustment that Summers refers to means that the government statisticians make an adjustment for the quality of the good–which is obviously necessary if one is to compare a 1982 television set to a modern one.) At some level, the differential movement in prices explains why so many Americans spend so much of their time looking at screens, while worrying about the cost of health care and education.

Douglas Clement has yet another in his string of excellent interviews, this one with Neil Wallace, in the December 2013 issue of The Region, published by the Federal Reserve Bank of Minneapolis. In much of the interview, Wallace discusses his views on the underpinnings and functions of money. The headings that follow are my own; the comments are from Wallace.

Money is Memory

A professor at Texas A&M put me onto a 1923 book called Monetary Theory Before Adam Smith. It was a Harvard Ph.D. dissertation on the history of thought concerning money. And its author, Arthur Eli Monroe, asks, did Aristotle have this absence-of-double-coincidence notion? Probably not. But he finds someone named Paulus, a Roman jurist in the second or third century A.D., who said something like, when two people meet, it’s often the case that one has something that the other person wants, but not vice versa. And without money, nothing can happen. …

Now, this story is incomplete. That’s what I tell students: It’s incomplete. Why is it incomplete? Well, think about some isolated pioneer family. At times, someone is going to not feel so well, so he or she isn’t going to be able to chop down wood for a fire. There’ll be lots of absence of double coincidences that arise in that family situation, many cases where one family member is called on to do a favor for another family member. … Now think about Robinson Crusoe, after he meets Friday. They don’t need money, but again, there might be plenty of absence of double coincidences. Now think further. Here we are in the middle of Pennsylvania. There are lots of Amish communities around here. When they’re isolated, the usual story about an Amish community—or an isolated Israeli kibbutz—is that they didn’t use money. … Think about this Amish community. The vision is, if my barn burns down, then everybody will come and help me rebuild it. In economics, we try to rationalize behavior without altruism, if we’re able to; so what makes that work without altruism? Everybody notices who shows up to help rebuild it. …  And the guy who doesn’t show up, if he does that repeatedly, will get kicked out eventually. This can work without money because people remember what people have done in the past. … Yes, “money is memory” is a casual way to state that. Now, that’s a hugely powerful idea that I and other people have been working with. …

“Money is memory” is a better idea. It leads you to think about various kinds of payment instruments in terms of the kind of informational structure that supports them. The money that is the best current counterpart to the “money is memory” idea is currency. You don’t need much of an informational network for currency; in fact, you probably don’t need any, except for worrying about counterfeiting. When you use a credit card, you’re issued a loan. Why are you able to receive one? Because there’s an informational network behind your card. Your bank is actually guaranteeing your credit payment up to probably some large amount, as large as you mostly use. And they’re doing that because they know something about you.

Back in the early 1960s, spending on health care in the United States was under 6% of GDP. In the data released for 2012, U.S. health care costs are 17.2% of GDP. As the share of the economy being spent on health care has tripled, arithmetic teaches that the share being spent on everything else must diminish. When I was first studying health economics back in the late 1970s, it was common to hear that rising health care costs were already out of control. But we have now reached the point where many people have been facing the trade-off of more costly health insurance from their employer at the cost of lower take-home pay. The long run budget problems of governments at all levels are largely driven by the prospect of continually rising health care costs.

Thus, the possibility of a slowdown in health care costs is big news, and that is what is reported by
Anne B. Martin, Micah Hartman, Lekha Whittle, Aaron Catlin, and the National Health Expenditure
Accounts Team in an article called \”National Health Spending In 2012: Rate Of Health Spending Growth Remained Low For The Fourth Consecutive Year.\” It\’s in the first issue of Health Affairs for 2014 (pp. 67-77). (The article is not freely available on-line, but many will have access through library subscriptions.) The authors are government actuaries and staff working for the Centers for Medicare and Medicaid Services.

Here\’s a graph in which the blue line shows national health expenditures (NHE) as a share of GDP since 1990, while the red line shows the annual percentage growth rate of health care spending.

The red line makes two obvious points. First, the slowdown in rising health care costs started back around 2002 or 2003. Indeed, health care economists have been writing about it for a couple of years now, and OECD evidence point out that a similar slowdown seems to be occurring across high-income countries. Thus, eager claims by Obama administration officials about how the Affordable Care Act–although still far from fully implemented–is bringing down the rise in health care costs are a prime example of finding a parade, running to the front, and then claiming to lead the parade. As the writers of the Health Affairs article note: \”The Affordable Care Act (ACA), which was enacted in March 2010, had a minimal impact on overall national health spending growth through 2012.\”

Second, a slowdown in health care costs is also apparent back in the 1990s. At that time, the common explanation was that the spread of \”managed care\” plans was holding down costs. For connoisseurs of the embarrassing moments of economists. the Journal of Economic Perspectives (where I\’ve worked as Managing Editor since the first issue 1987) published a paper in the Spring 2003 issue by Sherry Glied called \”Health Care Costs: On the Rise Again.\” Gleid reflected the consensus of the time by pointing out how unexpected the slower rise in health care costs had been in the 1990s, and predicted that such low rates of rising health care costs would not recur. She also pointed out that \”forecasts of health care costs growth are notoriously unreliable.\”

So are we seeing a slowdown in the rise of health care costs that is likely to last? Or a shorter-term swing in health care costs like the 1990s? My crystal ball is cloudy, cracked, and stuck in the back of a closet. The government actuaries note that part of the reason for slower growth in health care expenditures in 2012 were factors like the \”availability of lower-cost generic drugs [as some widely used drugs went off-patent] and changes in Medicare payments for nursing home and physician services.\” Medicaid enrollments slowed down in 2012, as the economic recovery took hold, but as the Affordable Care Act takes effect they seem certain to rise. In general, 2012 was a year when prices for health care rose relatively little, while quantities of health care consumed rose more quickly–a pattern than may not be sustainable, either.

The actuaries write: \”However, this pattern is consistent with historical experience when health spending as a share of GDP often stabilizes approximately two to three years after the end of a recession and then increases when the economy significantly improves. Recently, however, the question has arisen about whether a more fundamental change is occurring within the health sector and whether this stability will endure. From our perspective, more historical evidence is needed before concluding that we have observed a structural break in the historical relationship between the health
sector and the overall economy.\” While it\’s fine to hope that the rise in health costs is slowing, it seems unwise to plan as if it is a sure thing.

If you strongly and thoroughly disagree with someone\’s political beliefs, can you still be best friends? Can you be friends at all?  Robert Dorfman tell the story of two famous economists who disagreed completely while remaining best friends in \”Thomas Robert Malthus and David Ricardo,\” an essay that appeared in the Summer 1989 issue of the Journal of Economic Perspectives. (Full disclosure: I\’ve been Managing Editor of the Journal of Economic Perspectives since the start of the journal in 1987. All articles in JEP from the first issue to the most recent are freely available on-line, courtesy of the American Economic Association.)

Malthus and Ricardo apparently met around 1813 in a dispute over the \”corn laws,\” a protectionist policy of import tariffs and export subsidies that sought to benefit English farmers. Ricardo was opposed; Malthus was in favor. But in arguing it out, they jointly developed a theory of rent; a theory of how national income would be distributed among workers, merchants, and landed gentry; and thus a basis for growth theory. They wrote copious letters to each other and published pamphlets. Dorfman writes: \”They labored together to understand the economic consequences of the Corn Laws. Their discussions led them to a deeper understanding of economics than anyone had attained before. But they could not agree on the substantive matter of policy.\”

The English economy then suffered a postwar depression after the battle of Waterloo, which led Malthus to take the Keynesian position of explaining that if saving was too high and demand too low, the economy might suffer unemployment, while Ricardo argued that overproduction could only be a temporary state of affairs. This was followed by another dispute over the ultimate source of value, in which Malthus argued for a labor-based theory of value and Ricardo argued for a cost-of-production based theory. Many more letters followed, along with copious paragraph-by-paragraph criticisms of each others\’ pamphlets and books. And yet Malthus and Ricardo were best friends. Dorfman writes:

\”They were still at it on August 31, 1823, when Ricardo was beginning to suffer severe headaches from an abscess on his brain. On that day, Ricardo wrote Malthus a long letter, which began, \”I have only a few words more to say on the subject of value, and I have done.\” After about two pages of careful reasoning, he concluded, \”And now, my dear Malthus, I have done. Like other disputants, after much discussion we each retain our own opinions. These discussions, however, never influence our friendship; I could not like you more than I do if you agreed in opinion with me. Pray give Mrs. Ricardo\’s and my kind regards to Mrs. Malthus. Yours truly …\”

\”Two weeks later, Ricardo was dead. At his funeral, Malthus is reported to have said, \”I never loved anybody out of my own family so much. Our interchange of opinions was so unreserved, and the object after which we were both enquiring was so entirely the truth and nothing else, that I cannot but think we sooner or later must have agreed.\”

Malthus and Ricardo laid down some challenges worth considering in one\’s own life. Do you go the extra distance in at least a spirit of collegiality, to explain your views? Do you try just as hard to hear validity in the criticisms of others as you do to explaining your own views? Do you leave open the possibility that your own views are only an imperfect approximation of truth, just as the views of others are an imperfect approximation of truth, so that perhaps you are searching for answers together, rather than opposing each other? Can you completely disagree but still be friends?

Here\’s the last word from Dorfman:

\”It is as though each served as the anvil for the other\’s hammer, and their ideas were hammered out in their efforts to persuade each other. They were two men obsessed by a common enthusiasm, tirelessly pursuing a common goal: to understand the economy. But they did not share a common vision of the good society and thus were condemned to wrestle interminably, though remarkably fruitfully, over the roles of the social classes. Their struggles to convey to each other their views of the forces that drove their economy are an inspiring case study in both the difficulty and the possibility of human  communication. These two friends, sustained by enormous affection and respect for  one another, never could nullify the differences in preconception and mental style that separated them, but still could help each other attain a deeper understanding of their economy than anyone had achieved before. To do this required invincible faith in each other\’s candor and open-mindedness, great patience, inexhaustible good will, and unflagging civility.\”

In the 21st century, it\’s useful to remember that social media snarkiness and flame wars are a choice, and other choices are possible.