Thursday, September 3, 2009

What economists without MBAs aren't taught

Nicholas Kristoff has an outstanding New York Times Column today, "Health Care That Works":
Health care reform may be defeated this year in part because so many Americans believe the government can’t do anything right...Yet the part of America’s health care system that consumers like best is the government-run part.

Fifty-six to 60 percent of people in government-run Medicare rate it a 9 or 10 on a 10-point scale. In contrast, only 40 percent of those enrolled in private insurance rank their plans that high.

Multiple surveys back that up. For example, 68 percent of those in Medicare feel that their own interests are the priority, compared with only 48 percent of those enrolled in private insurance...
In truth, despite the deeply ingrained American conviction that government is bumbling when it is not evil, government intervention has been a step up in some areas from the private sector.
Until the mid-19th century, firefighting was left mostly to a mishmash of volunteer crews and private fire insurance companies. In New York City, according to accounts in The New York Times in the 1850s and 1860s, firefighting often descended into chaos, with drunkenness and looting.

So almost every country moved to what today’s health insurance lobbyists might label “socialized firefighting.” In effect, we have a single-payer system of public fire departments.
We have the same for policing. If the security guard business were as powerful as the health insurance industry, then it would be denouncing “government takeovers” and “socialized police work.”...

...the government has a particularly good record in medical care.

Take the hospital system run by the Department of Veterans Affairs, the largest integrated health system in the United States. It is fully government run, much more “socialized medicine” than is Canadian health care with its private doctors and hospitals. And the system for veterans is by all accounts one of the best-performing and most cost-effective elements in the American medical establishment.

A study by the Rand Corporation concluded that compared with a national sample, Americans treated in veterans hospitals “received consistently better care across the board, including screening, diagnosis, treatment and follow-up.” The difference was particularly large in preventive medicine: veterans were nearly 50 percent more likely to receive recommended care than Americans as a whole.

“If other health care providers followed the V.A.’s lead, it would be a major step toward improving the quality of care across the U.S. health care system,” Rand reported.

As for the other big government-run health care system in the United States, Medicare spends perhaps one-sixth as much on administration as private health insurers, although the comparison is imperfect and controversial...

On my blog, foreigners regularly express bewilderment that America may reject reform and stick with a system that drives families into bankruptcy when they get sick. That’s what they expect from the Central African Republic, not the United States.

Let’s hope we won’t miss this chance. A public role in health care shouldn’t be any scarier or more repugnant than a public fire department.
I'd like to add to this:

I think what is a significant problem affecting many economists, especially the freshwater (conservative) variety, is that they have little or no real world business experience, and real world experience and MBAs are, on average, of little value in academic economics publishing or advancement. It's complicated and nuanced how and why this is true. It's hard to explain in a few sentences. But basically, advancement is almost all based on publication. And the vast majority of publications are done just by accepting the prevailing assumptions, models, econometric techniques, and framework, and then doing some extensions or probes, data exploring, or new incremental models within that framework or paradigm, or even very new, but still very sterilized models, that focus on mathematical advance and elegance, things that don't require much more, or deeper, real world creativity and intuition. All this can still be very valuable – if interpreted intelligently, but summing up, a masters in mathematics or statistics is usually much more valuable for advancement in academic economics than an MBA, so only a minority of academic economists have MBAs. The same is even true for academic finance professors.

Please don't get me wrong, though, a Ph.D. in economics is immensely more valuable for understanding the economy as a whole, as opposed to just how to make a single business profitable, than an MBA or real world business experience. It's just that those things can add certain insights that aren't explicitly taught in economics Ph.D. programs, although they can clearly still be deduced with high level intelligence and a willingness to use it by a non-MBA, non-business experienced economists.

Anyway, an economist who got an MBA, and I did, The University of Michigan, 1998, especially at a top school, would learn in his classes that subcontracting is not always better just because there may be competition for the work. It's a tradeoff. There are costs as well as benefits, and often the costs swamp the benefits. A big cost is that it can be very hard – and time consuming and expensive – to monitor and quality and otherwise control an outside contractor, especially a giant spiders web of outside contractors for almost everything. And coordination costs can be huge. All this can be far easier and cheaper if done in house. This applies to any organization, government as well as a private company.

Few economists go to MBA school and are taught this, and far too many economists just assume that the extremely simplified and assumed away models are exactly reality, or qualitatively exactly reality, and so turn off their high level intelligence and don't think about this, and things like it, that so often don't exist in models, or are explicitly assumed away.

In addition, as the world has gotten more advanced, economies of scale have gotten to be more and more prominent, and the benefits of economies of scale, as can be had in a government run program, can swamp the benefits of having many small fragmented competitors.

Moreover, there are what I would call economies of simplicity, like when there is just one single payer insurer, medical providers don't have to spend enormous money and time learning the many forms, procedures, rules, and coverages of the many fragmented insurers in our system. And a patients complete medical records, all of it, can be stored in just one easily accessible central location, not just lowering costs, but also improving information available to doctors, and therefore treatment. Complication costs can be enormous. I teach one of the largest university personal finance courses in the country, and am president and co-founder of one of the largest personal finance education companies, so I can tell you, the amount of hours that people have to spend learning personal finance to avoid tricks, traps, and other errors that can be ruinous in our highly complicated system is huge, and largely unnecessary. It's a great deal of time that could have been spent producing, or with one's family.

Thus, it's a tradeoff; the private sector is not always best, as too many economists dogmatically assume. For most things it is, but often it isn't. Often a combination is best, but that best combination may be largely government. And, in fact, a combination of some kind is almost always best in that societal efficiency is almost always improved with at least some government role, like at least antitrust law and basic regulation like truth in advertising.

And, I haven't even, at least explicitly, mentioned that in the presence of great asymmetric information and externalities (as well as many other well established in economics market problems), a profit incentive can actually be very non-invisible hand (as Adam Smith, in fact, understood, despite the popular, and propagandized, misconception). A profit incentive in this case can be a strong incentive to do things that hurt customers and society greatly.