The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
January 05, 2006
It Costs Less, Therefore We Spend
Several blogs -- EconLog, Prestopundit, and Club for Growth among them -- give us the heads up on Robert Kuttner's interview with Milton Friedman in the online edition of the American Prospect. It is indeed a joy to read, but this passage -- also noticed at Mediated -- caught my attention:
RK: Another question: In my own work I have argued that in most sectors of the economy markets work as advertised, but there are some sectors such as healthcare where for a variety of structural reasons, if you let the free market operate you will have socially unpleasant consequences and maybe even inefficient consequences...
MF: Wherever government is largely involved, inefficiencies result. Now let me ask you a question. Dentistry does not come under Medicare. Dentistry is operating well. You never had any of the problems in dentistry that you have in medicine. If markets work in dentistry why wouldn’t they work in medicine? They did work in medicine for many years. In 1945-46, total spending on medical care was about four of five percent. Now it’s gone up to 13 or 14. Something happened.
RK: Well, but part of that surely is because medicine has figured out more ways to treat people.
MF: Every other technological improvement lowers costs. What technological improvement raises costs? Government is now paying at least half the costs of medical care. Obviously, that’s why, whatever the technological improvement, it’s generating higher and higher costs.
Gee. It seems to me that Professor Friedman has it -- gulp! -- not quite right. It is certainly my impression that technological progress in medical care has lowered costs. My favorite example is the repair of torn knee cartilage. When my brother was a high school football player in the 1970s, he had the unfortunate need for such a procedure. It cost him several days in the hospital, and several weeks in a cast. A few years back, I had a similar need (occasioned by my demonstration that overweight, out-of-shape guys in their forties really shouldn't be playing basketball.) It cost me a morning in an outpatient clinic, and a couple of days on my couch.
The problem with the statement above is that is confounds cost -- the resources expended in delivering a product like "fixing a knee" -- with expenditure -- how many knees we choose to fix. One of the lessons many of you may remember from microeconomics is that total expenditure on a good can rise even as the price falls, if the demand for the product in question is "price-elastic". (For those who may be a little rusty, total expenditure equals price times quantity sold. If lowering the price of a good by 1% increases the demand for that good by more than 1%, total spending rises.) There is no inherent contradiction between falling costs of production and increasing expenditure.
It may indeed be the case, as Professor Friedman suggests, that government involvement in health care has resulted in inefficiencies that shouldn't be. And it may be that third-party payer systems have lowered the incremental price of health care services to levels that result in socially suboptimal levels of spending. But I don't think we have a case where technological improvement raises costs.
TrackBack URL for this entry:
Listed below are links to blogs that reference It Costs Less, Therefore We Spend:
- What’s Moving the Market’s Views on the Path of Short-Term Rates?
- Lockhart Casts a Line into the Murky Waters of Uncertainty
- How Will Employers Respond to New Overtime Regulations?
- How Good Is The Employment Trend? Decide for Yourself
- Is the Labor Market Tossing a Fair Coin?
- When It Rains, It Pours
- Pay As You Go: Yes or No?
- Was May's Drop in Labor Force Participation All Bad News?
- Wage Growth for Job Stayers and Switchers Added to the Atlanta Fed's Wage Growth Tracker
- Experts Debate Policy Options for China's Transition
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- November 2015
- October 2015
- September 2015
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth