Maxine Udall (girl economist)

Genetic Information, Health Insurance, and "Socialized Medicine"

Brad Delong provides an excellent blog about U Cal's genetic testing of students and the likely ways in which genetic information would be used by private health insurers, not to manage risk better, but to sort on it better, thereby defeating the ostensible purpose of insurance. Disease prevention and health promotion over the life cycle should and would be the objective of any health insurer likely to bear the costs of all your future illnesses and injuries. Of course, our fragmented US system does not provide the incentives to do this. The system most likely to align short and long term health risk management objectives (and (I would add) to reduce health care costs in the long run) is a single-payer system, which the US is not likely to have any time soon.

The problem with the current system is that if my genes predict a hip fracture at 70, the average private or employer-based plan should have little or no interest in incurring costs to prevent it since they are unlikely to bear those future costs. I will age into Medicare several years before age 70 and the costs will fall to the US (payroll-)tax payer. On the other hand, Medicare and US taxpayers have a real interest in preventing disease and promoting health over the life cycle since many of our (bad health) chickens come home to roost after age 65-67. Those of us who are younger and still working are on the hook for at least some of those costs or will face reduced future Medicare benefits because of their increasing share of national output.

As in the financial sector, private health insurers have offloaded much of the high risk (and costs) in health insurance markets onto US (payroll-) taxpayers, who pay for much of Medicare and Medicaid. These are two programs that became necessary because private markets failed to provide insurance for individuals and families characterized by high risk of medical expenditures: the elderly and the poor (who are often poor because acute and chronic health problems prevent them working). Mercifully, our ethics and our values require them to have access to health care. Hence, we have two government run programs: Medicare for those over 65 and Medicaid for those who are poor children, poor chronically ill adults, poor elderly adults in nursing homes, or poor pregnant women (with some variation in eligibility thresholds across states).

Yet the spectre of "socialized medicine" prevents us moving to single payer, where the incentives for prudent life cycle management of risk across all age and income groups would be better aligned. Why, when we already have what is in effect single payer for the elderly and the poor, do some believe that single payer is "socialized medicine" and why do they fear it so?

I gained some insight into this recently when an elderly relative started complaining about "Obamacare" and how it would lead to "socialized medicine." Knowing the person had heart surgery courtesy of Medicare and was receiving ongoing monitoring and care, I said, "I didn't realize you were so unhappy with Medicare." To which I received the reply: "I'm not talking about Medicare, I'm talking about socialized medicine."

"How is Medicare different from socialized medicine?" I asked.

"Medicare isn't socialized," came the reply. "I pay for it. I pay every month and when I've had surgery, I've had to pay some of it. Medicare is like any other insurance."

"Well," I said, "I know you're paying a premium for Part B and I know there are copayments and deductibles, but Medicare is a government run health insurance program."

To which the reply was: "But I'm talking about socialized medicine. You know that whenever the government gets involved in anything, it never does a good job."

"I had no idea you were having problems with Medicare." said I. "I always had the impression you were pretty satisfied with it. And with the VA, too. I know you've used the VA for some care recently. What problems have you had with Medicare or the VA?"

"Well, none with Medicare or the VA, but I'm not talking about Medicare. I'm talking about socialized medicine."

"So you're happy with Medicare?"

"Yes."

"Would you mind if your [adult] children could buy into it? Your son is unemployed. Would it be OK if he could buy into Medicare?"

"Well, sure. As long as he has to pay like I do."

You were all wondering how someone could say, "Keep your government hands off my Medicare?" Well, there you have it. Now that I've told you, I'm still not sure I understand it. It was one of the most frustrating and at the same time enlightening conversations I have had in a long time. The person with whom I was conversing is intelligent, educated, and not senile.

I'm just not sure how to use the above information. I was unable to persuade my elderly relative. I confess that since the conversation, I have despaired that the national conversation will ever be much better.

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I will be taking a much-needed break for 10 days. If I can get access to WiFi from our remote lake location, there may be a post in the interim. If not, look for a new blog shortly after Labor Day. In the meantime, I look forward to all thoughtful comments. Thank you all for visiting, reading, and commenting. And thanks to my friend, Mike Lawlor, for managing the blog in my absence.

We Are What We Read (I Think)

Mark Thoma and rjs sent me to Open Economics, where Kasey Dufresne provides English doctoral students' assessments of economics doctoral students' required reading:

I was talking to some English PhD students today, and when the conversation turned to economics they were dismayed to learn that no one in “top” economics departments ever read Marx, much less understood any of his theories. Then I was caught off-guard when I was asked, “so what thinkers do most students in economics programs read?” The student just assumed that we must read someone. But as far as I can tell, and the answer I gave, was “none.” The training of economists in the “top” programs does not entail any reading of books.

My first reaction was: top economics departments? You think this only applies to "top economics departments?" My second reaction was: you mean English PhD students understand Marx's theories? Could I get one of them to explain coherently the labor theory of value, please? Or if not explain it, point me to a reliable way of identifying the value of labor as opposed to the value of capital across all the production processes that exist today (under my naive assumption that incentives matter so there probably has to be some return to capital if we're hoping to deploy it in a way that serves us all well)? My third reaction was: OK, so how much time have those English PhD candidates spent reading non-Marxist economics?

My guess is very little for all the reasons Dufresne cites, not least that the mathematization of economics has rendered much of what we do incomprehensible to English majors. Dufresne's post reminded me of how I came to read both more on economic theory and the history of economic thought and more on topics traditionally viewed as outside of economics.

As a new Assistant Professor, I had been dutifully traveling across campus once a year to a Divinity School to deliver a single lecture in a course for Masters of Divinity students on work and vocation. The questions I routinely received indicated that the students were very familiar with Marx, at least the class consciousness, class struggle Marx, but completely unfamiliar with, say, Adam Smith or Amartya Sen.

I remember shocking them once by suggesting that Walmart was not all bad. My point was that consumers benefit from lower prices. It frees up money to be spent on other things or saved for children's education (for example). It's true that I then went on to point out that dumping your employee's health insurance costs on taxpayers and local hospitals' charity care as well as any distributional effects should be included in the final calculations of net benefits. But I also pointed out that on the plus side Walmart's $4/month generic drug program has been a boon to the poor and near-poor uninsured and to those who provide care to them. It's not entirely clear that Walmart is irrevocably on a journey to the dark side of the Force.

What was remarkable to me was that they had not considered possible positive aspects of market activity (free or otherwise). Don't get me wrong. I'm no defender of Walmart, but I expect that if someone is going to read Marx, they should also read the other "side." Otherwise, we risk throwing out the baby with the bathwater so to speak. 

As a result of my brief forays to the Div School, I was eventually offered an adjunct appointment and an opportunity to teach a tutorial one summer. In it, I and four very bright, inquisitive, open M.Div. students explored "social justice" aspects of economic thought and theory.

One of the best parts of the course (and one of the major challenges) was figuring out how to relate economic thought to Christian thought in nuanced ways, when I had only a very superficial knowledge of Christian thought (and, at that time and maybe still, a very superficial knowledge of economic thought).

I developed a topic called "Loaves and Fishes" that explored efficiency-equity trade offs (see Uwe Reinhardt's third piece on Arrow's Uncertainty and the Welfare Economics of Medical Care for a sense of that discussion). The topic title reflected what I consider to be one of the most efficient allocations ever reported: five loaves and two fishes used to feed a multitude. We had readings and discussion about the ways that markets, when they work, allow us to feed more people with less.

There was a topic called "Water into Wine" in which we discussed the ways in which commercial exchange using a (money) numeraire allowed anyone to "change" the money-metric equivalent of a case or two of Italian sparking water into a not-too-shabby bottle of wine.

Another topic called "As you do to the least of these..." covered and critiqued economists' conceptualizations of altruism, Smith's concept of sympathy or fellow feeling, and Sen's distinction between deontological commitment to another's well-being and a more egoist conceptualization of altruism derived from interdependent utilities. We also discussed Rawl's difference principle, of which the students were already well aware, because it seemed to fit so well with the topic title (and it gave me an opportunity to discuss some of the economic aspects of it).

We concluded with readings on trade liberalization, globalization, and microfinance, for which I'm still looking for a clever title. If I ever teach the tutorial again, I'm going to add a topic called Moneylenders in the Temple, that deals with finance and uses the "Temple" as a metaphor for the public interest or the social fabric.

It was really striking how little my M.Div. students knew about economics or how economists think about the world or about the potential benefits of efficiency or (and this is most important, I think) about markets and market failure. They had no clue how to have a meaningful discussion with anyone who was wedded to a free market ideology (think members of their future Vestry or Board of Elders on whom they will depend for their salaries and their advancement in the church hierarchy). I don't mean to imply that such discussions can always be meaningful, but my own experience has been that one must be pretty conversant in both the benefits that may accrue from market exchange, the characteristics of markets under which the benefits may be realized, and the ability to recognize a market failure when it occurs (as it frequently does), if one is to have any hope of holding up the other end of that conversation.

It was also surprising how they had all formed opinions about Adam Smith without ever having read him. I suppose this is not so surprising given that many card-carrying economists have done the same (myself included up until about 10 years ago). By the end of the course, I believe I had helped them to develop a more informed view of a man who almost certainly did not believe that self-interest was all that was required for a moral life or a moral society.

A year or two later, I was offered an adjunct appointment at a business school, to teach MBA's about ethical aspects of economic thought and theory. None of the MBA candidates (except for one Eastern Orthodox priest) had heard of John Rawls, but they were all pretty sure they knew everything they needed to know about Adam Smith, self-interest, and (I'm sorry to say) Ayn Rand. You can get a sense of the overarching theme of the course by reading my essay on The Market for Morals. We also read, write, and talk about market failures and how they facilitate the exploitation of the unsuspecting by the less than ethical. (See my essays here  or here, for example.) Or the more mundane problems of monopoly power or private interests not aligning with public interests (here and here, for example). In addition, we cover several case studies. The Ford Pinto case with it's unethical use of cost-benefit analysis is always a shocker for them as is Dennis Gioia's personal account of it. I also present Roy Vagelos' exemplary and successful effort to produce a cure for river blindness for a population that would never be able to justify the costs or investment. Vagelos points to an oft-overlooked positive side-effect of ethical firm behavior: employee morale. Merck also attributed favorable trade relationships with Japan (before 1994) to their ethical decision to help the Japanese manufacture Streptomycin to treat tuberculosis after WWII. (This isn't an unqualified endorsement of Merck, we also cover the Vioxx episode that is so very well described by Steve Ziliak and Deirdre McCloskey in their book, which I use as a basis for a discussion of ethical aspects of statistical inference and uncertainty in decision-making.)

I have since changed institutions and now have a joint appointment at a different b-school. I'm in the process of revising the b-school course syllabus, which I think is why Dufresne's blog post captured my attention. None of us read enough outside of our own field and that includes English PhD candidates who presumably understand Marx better than Econ PhD candidates (or me). It certainly includes me. I'm reminded of this every time I prepare for this course.

What I have found by venturing outside my "comfort zone" is that there is a remarkable wealth of literature within economics, much of it published prior to, say, 1980, along with a lot of more recent work, especially since the financial crisis. One benefit of the financial crisis IMHO is that it has shaken us up and opened us up. That may have very long-lasting positive effects for us all. There is also a rich, rich literature in the history of economic thought and in journals that combine economics with philosophy and/or ethics. And I've discovered books. Books are often where creative, thoughtful people write about stuff that for various reasons won't make it into journals.

This is a very exciting time to be an economist who is interested in ethics and who would like to see markets (when they work) remain the basis of our economy. I only wish I had more time to read or could go back and do it all again, but with more attention to history and economic thought.

Some Thoughts on Pharmaceuticals Prices

Brian Palmer at Slate asks "why are some pharmaceuticals so expensive?" and provides pretty standard answers. One reason, he says, is "unmet need" (i.e., a new drug fills a previously unmet need by providing treatment for something that otherwise is untreatable). Mr. Palmer rightly notes that

The most expensive drugs are those that have no competitors. When a truly novel blockbuster drug hits the market, there is very little to guide manufacturers and insurers in their negotiations. The largest constraint is public perception. Insurers fear that, if they refuse to fork over the dough, their sick customers will be outraged. Manufacturers don't want the public or Congress to view them as price gougers. Negotiators eventually settle on a price between those two poles.

The first thing to note is that price is not being set in a market. This is usually a sign the price will not reflect resource costs although I suppose it might be possible that it could reflect marginal social cost if the "negotiators" were setting price to reflect externalities associated with production or consumption of the drugs. That's not likely to be the case here. "Negotiating" price is also a sign that the market is most likely not a competitive one.

Of course, "novel" and "blockbuster" don't always go together either. Novel treatments may result in blockbusters if they are for conditions that are highly prevalent in a population or if they are for conditions that a population can be persuaded are highly prevalent. (Think over the counter (OTC) Tums and Prilosec and prescription Nexium, all treatments for heartburn, for example). Of course, if a disease is highly prevalent in a population, but the population is poor and uninsured, there won't be much interest in developing a treatment for it. (Think "river blindness," which did eventually have a cure and is one of the true ethical success stories of US drugs manufacturing...ethical, but not supported by shareholders, at least at first). But "novel" can also mean "orphan drug", as in so novel that only 100 people in the entire world need it. I'll bet you can guess how much time drugs manufacturers are spending on those "novel" drugs.

But then Palmer strays a bit into what can only be regarded as wishful thinking.

Few drug makers are lucky enough to face this problem, though. Most debutant drugs find the market already crowded with similar products, and prices are set by the competition.

The use of the word "competition" in the above quote appears to be intended to convey that as the next proton-pump inhibitor is brought to market under patent, it is forced to compete with older PPIs that are now available over the counter or as generics. Unfortunately, whatever competition there is does not result in comparable prices. Given the near identical performance of under-patent, prescription Nexium ($248/month), OTC Prilosec ($24/month) and OTC Prevacid ($23/month), the difference in price is difficult to justify based on performance alone.

Why, you ask, would anyone in their right mind take, say, prescription Nexium, when they can purchase Prilosec or Prevacid without a prescription and get nearly identical relief on average? Well, several reasons. First, we tend to rely on and trust our physicians to prescribe what is best for us. Physicians often get their information about new products from pharmaceutical firm reps who are paid to increase sales of drugs that are under patent. One "solution" in a market characterized by information asymmetry is to distort credibly the information about the value of more expensive, more recently developed, still under patent close substitutes. It's called marketing.

But it isn't just that drug reps do their jobs well, it's also that insured consumers don't face the full price of the drugs still under patent. The monthly Nexium price to a consumer will be the co-payment set by their insurance company, usually on the order of $30-$60 per month, but sometimes as low as $0-$15. That, in combination with absence of information about the relative performance of the three drugs and an "animal spirit" belief that if it's new, it must be better, almost certainly dampens any competitive forces that might drive an under-patent drug price closer to that of a comparable generic or OTC substitute.

Mr. Palmer also rightly cites the high R&D costs of new drugs

You hear a lot about how expensive it is to bring a drug to market. All of that is true, especially for cancer drugs. It costs around $1.75 billion to develop the average cancer medicine. Only drugs for respiratory disorders, at $2 billion, can top that total. (AIDS drugs and anti-parasitics are the real bargains, at between $500 million and $700 million.) But there is no correlation whatsoever between the cost of developing an individual drug and its eventual price. Drug companies have to make a profit over the long term. Most of the chemicals that a company experiments with never make it to market. Of those that do, only 20 percent are ultimately profitable. They cover these losses—and then some—by squeezing as much money out of their few successes as possible.

"Squeezing as much money out of their few successes as possible?" Well, they do a pretty good job of "squeezing." It looks like they are barely eking out a living compared to other Fortune 500 firms, doesn't it?

Click here to see enlarged version.

Where's the R&D induced volatility that justifies the excessive profits? Wouldn't you expect at least one year of profits more in line with other Fortune 500 firms? But leave that aside. Surely the large profits are getting us more R&D and more new molecular entities (NME), yes?

Maybe not. For one thing, it appears that drug makers in the US spend more on advertising than they do on R&D. In 2007, the Economist reported (subscription required) that R&D was running about one fifth of revenues in the US, while marketing was running about one-third. Not really surprising given that (as the article notes) the US is the only country paying full price for pharmaceuticals.

And what about the output of new drugs?

Not looking so good, is it?

It's no surprise really. It's true that developing a NME that fills a void tends to insulate pricing from competitive forces. The problem is that more often than not the voids that remain to be filled are 1) technologically more difficult to fill and therefore incur higher R&D costs and 2) they are often characterized by lower demand because the high demand, more lucrative voids have already been filled with "blockbuster" drugs. It's the beauty of the market and the profit motive at work. Those high prevalence, potentially high profit unmet needs gave us hormone replacement therapy, Viagra, proton pump inhibitors, statins, and a plethora of other useful, but now oft duplicated with little increment in benefit, but large increment in price, under-patent, prescription drugs.

Mr. Palmer's article also describes the rudiments of cost effectiveness analysis as practiced by the British National Health Service's "let's kill granny" National Institute for Clinical Excellence (NICE). The NHS has the quaint idea that, much as we all do when we shop for shoes or coats or beach houses, we might want to ask the question: what exactly am I getting for this expenditure? They also have the radical notion that there are probably some circumstances in which we would opt not to spend money on drugs or procedures where the costs of treatment far exceed any benefit (in terms of a longer life at some minimum of level of quality) that is likely to result.

Now, of course, if we don't actually have to pay for the treatment because our insurer pays all or most of the treatment price, it's likely to alter the trade off between costs and benefits we make when deciding whether or not to purchase treatment. If the costs exceed the expected benefit, we don't buy. If the expected benefits exceed the cost (or at least equal the cost) we do buy. It's one reason co-pays and deductibles are important components of health insurance. They cause us to pause and reflect on the financial hardship we will impose on our survivors when we purchase that extra 4 or 5 months of life at $31,000/month or even as "little" as $8,000/month. If we have to sell the home our loved ones would otherwise reside in after our near certain demise to pay for our extra four months of life, some of us (me included and I say this as a cancer survivor) will opt to preserve the welfare of our surviving loved ones and not sell the house in order to purchase treatment. (Although I might sell the beach house if I owned one.)

I know. I know. Life is priceless, just like taking your dad back to the land of your ancestors using your Mastercard. But it isn't and we all know it. Some of us get to buy more of it and some of us don't. And the more unequal the income distribution and the more uninsured there are, the cheaper life gets for some of us. Those of us with health insurance start looking a little like Wall Street bankers, helping drug makers siphon off dollars that could otherwise be spent on education or infrastructure or R&D on something really useful or anything else we might feel like buying, to buy ourselves the latest, greatest, nearly identical, but far more expensive, newly under patent, copycat drug. And driving up health care costs and our insurance premiums at a faster rate. Heads Pharma wins, tails you lose.

The result is that under-patent pharmaceuticals tend to cost a lot compared to generic and OTC substitutes, even when they're not so "new" or meeting "unmet need." Patents may help us by allowing drug makers to recover some of their R&D costs, a good thing when they're developing new molecular entities, but the value is less clear when they're re-inventing the next proton-pump inhibitor or statin or simply changing an old one enough to extend the patent a few more years.

Manufacturers' profits have been in the double digits for over 10 years with little sign of the volatility that would explain the need for persistently higher margins. In the US, they spend more on marketing than they do on R&D and the US pays more for prescription drugs than any other developed country. Instead of innovation and increased output of new molecular entities, the profit motive has tended to produce "copycat" blockbuster drugs, many of which represent very small or no improvement over already existing drugs. The profit motive also has tended to produce new drugs that fill remaining smaller voids at very high prices. Some of these buy only a few extra months of life for desperate and dying individuals. It is difficult for patients to assess the value of new treatments and they often don't face the full price of those treatments.

Having benefited in the extreme from a relatively new (and expensive) monoclonal antibody and a chemotherapy regimen that has been around for a long time, but is still expensive, I will be the last to argue that innovation should be discouraged or that profits should be eliminated altogether. But I will argue that incentives matter and, in the case of pharmaceuticals, the US would benefit from pricing that was similar to that in other developed countries and from less "patient-centered" demand for still-under-patent, marginally beneficial, copycat drugs. Unfortunately, the incentives in the current system work against this and price does not properly function as a signal of resource costs or value.

I don't have a solution, but I would feel better if we were all on the same page about this. Drug prices are high for reasons that have little to do with value even when they cure cancer.

An Economist Muses about Race

I'm supposed to be on vacation, but my self-employed husband is keeping us at home one more day while he responds to a client's last minute request for changes. A benefit of the delay is that it gave me the chance to read, listen to, and refer you to a recent blog from economist, Rajiv Sethi, about a conversation between economist, Glenn Loury, and linguist, John McWhorter. It is a frank and refreshing discussion about the public non-discourse about race.

I don't write or talk about race much because I have no idea what it is like not to be white. I have always had a firm conviction that anything I could say would be completely irrelevant to those for whom being on the receiving end of racism is a common experience. The closest I may ever have gotten to approximating something that felt like racial discrimination was the time a state policeman in a southern state pulled me over (I was going the speed limit) and proceeded to write me up for driving 14 miles per hour over the speed limit. I was told by my southern friends that he had probably profiled us because of the whitewater boats on our car and that when he realized I was a Yankee to boot, my goose was cooked. And you just try being a Yankee in a southern state...no, amend that to uppity Yankee woman in a southern state (I swear I was polite and pleasant at all times)...trying to find an attorney in a small southern town you happened to be passing through who will take your case. When I complained about the unfairness and the outrage that a law enforcement officer would outright lie and that attorneys would refuse to take my case, one of my friends looked me in the eye and said, "Well, I guess now you know what every black and Latino person in this state lives with, Maxine."

That shut me up and it made me think. I shut up because it was one incident in my life, not something I lived with every day. It made me think because it shook me to the foundations of my white privileged soul, it outraged my sense of fairness, and it made me wonder what this country looks like to people who aren't as lucky as I have been. I mean, I did eventually find a lawyer, and I did have the $400 the lawyer charged me. That's privilege. Yes, I had thought about injustice before. This was the first time I had felt it in my soul. Contrary to all those children's books, the policeman was not my friend and justice was not served. I still think about this incident whenever I read about racial or ethnic profiling and laws aimed at undocumented workers.

Now you think about it, too.

Rajiv's blog and the accompanying video also made me think that maybe it would be OK for a white person to say something about race and it got me thinking about whether or not there is anything useful I could say.

I could probably talk a little bit about the racism of white people because I have seen it from the "white" side. It's subtle and usually masquerades as an obsessive concern with "states rights" or "property rights." It seems to manifest more in the voting booth than in face-to-face encounters, at least when I've been around to observe it. That doesn't mean it doesn't happen one-on-one, it just means it's easier to be mean when no one whose opinion you might value is watching. I have encountered very few frank, outright white racists in my lifetime. Most of them have been older and southern, but even they seem to recognize on some level the unseemliness of their attitudes. I know that is no comfort to people systematically exposed to it.

As an economist (and ignoring the moral aspects of slavery) I have always been puzzled by the willingness of white farmers and tradesmen to fight an entire Civil War to support a borderline feudal system of slavery that can only have harmed them economically and in other ways. It provides a dramatic example of the way that race can be used to drive a wedge between what ought otherwise to be a large group of workers with fairly homogeneous ambitions and who will all lose nearly equally if they can be successfully divided politically, just as they would all gain nearly equally if only they could remain united. Loury says he's tired of the national non-conversation about race. Frankly, I'm tired of watching people who have more in common with each other than they do with the leaders of either political party (or investment bankers or CEO's) so easily divided by race (or gay marriage or abortion or undocumented workers).

As an economist, I also find myself thinking about Schelling's checkerboard model. Given weak individual preferences to live in neighborhoods and to socialize with people who are like us and in the absence of some sort of coordinating or "mixing" force, I suspect that we will not be a racially or ethnically homogeneous society for a very long time, even after most of us have ceased to be even mildly racist. But I don't know this. I base it on a long held suspicion that we underestimate the impact that small, but finite sentiments have on aggregate social outcomes.

As someone who grew up in predominantly white Appalachia and who was relatively privileged in an area where "privilege" is not the first word that comes to mind when contemplating the residents, I was sympathetic to James Webb's recent Wall Street journal editorial. Particularly this

Contrary to assumptions in the law, white America is hardly a monolith. And the journey of white American cultures is so diverse (yes) that one strains to find the logic that could lump them together for the purpose of public policy.

There are poor, white kids in West Virginia who, compared to poor, black kids, have an equally low chance of ever seeing the inside of Widener Library or even the inside of the West Virginia University Library. I would like to see them all have an equally high chance if they're willing to study hard. I'd like them to live in a world where education is valued and rewarded and within their reach if they want it.

I'll close by saying that I feel grateful daily for the advances we have made in this country, especially since 1965. It's not enough even from my "privileged" perspective. The fact that some of us are proposing to rewrite the 14th amendment; that some of us seem hellbent on creating yet another slave class, paid this time, but still outside the law; that we will not provide a road to citizenship or to legal working status seems clear evidence that we have a long way yet to go.

I have two nephews who are of Latino descent and a niece of Nepalese descent. One nephew is at basic training for the National Guard even as I type. All are beautifully brown skinned and would be stopped in any state that passes a law like that in Arizona. I want them to live in a country where race doesn't matter except in the sense that blue eyes or brown eyes matter. A physical trait among many, uncorrelated with work opportunities, income, or health.

The fact that I have so many colleagues, friends, and role-models who are of African or Native American or Indian or Chinese or you-name-it descent is a comfort to me and a source of hope that we are moving in the right direction. I know that I am a better person for it just as this nation is a better nation for it.

Capitalist Myopia

In 1955, the song, Sixteen Tons, written by Merle Travis and sung by Tennessee Ernie Ford, alluded to the down side of company stores. What seems surprising is the popularity of a song about owing one's "soul to the company store" among a  workforce that by 1955 had generally benefited from re-emerging post-war economic growth and heightened union activity. That the workforce had become more "white collar" and  that many employees were not actually members of unions makes it all the more puzzling. 

The company store has been a well-known and near-archetypal feature of Appalachian culture since well before my time. Coal companies built homes for their workers in areas where there was coal, but where there was often no other commercial activity. It was necessary to have a town if one was going to have workers nearby to extract the coal. The houses tended to look the same and were usually built close together. They were rented to workers with leases that enabled companies to quickly terminate and oust troublesome (i.e., union supporting) or unproductive workers.

It was also necessary to have a store where workers could purchase the necessaries of life, so companies often provided a store as well as housing. Sometimes rent payments and purchases were deducted directly from miners' paychecks. You would think the resulting reduction in transaction costs would result in lower prices, but you would be wrong. Rents and company store prices tended to be higher than prices in nearby competitive markets.

Another "innovation" was the use of company scrip instead of US currency to pay wages. Scrip was only good at the company store. This assured that mining companies recaptured through monopoly prices some of the wages they paid. It occasionally allowed them to raise wages without eroding their profits (since they could recover the wage rise through higher store prices and housing rents).

The growth of other sources of jobs and the growth and legal empowerment of unions gradually eroded mining company power. This link from the West Virginia Division of History and Culture provides credible evidence that concentrated mine company economic and political power led to abuses and to violence on both sides of the "dispute."

I think about company towns and company stores whenever someone starts bleating about government power; the sameness that would be induced by government control of the means of production; the two-tiered system that will evolve if government has too much power; the inefficiencies that will result from government regulation. All more or less true. But then I think of the sameness of company town housing, the two-tiered system of worker and management, and I think of the "inefficiencies" of unsafe workplaces and the "race to the bottom" that must necessarily ensue in the absence of a common standard for consumer and worker safety. And I conclude that economic and political power should not be concentrated excessively in anyone's hands, whether public or private, and that a government constituted to be of, by and for the people will almost certainly have to provide some countervailing force against excessive corporate economic and political power.

Finding the balance will always be the problem. Simple answers will almost never be right.

Company stores and company towns were a way for those with economic and political power to extract a few more dollars from the people doing a lot of the work and assuming a lot of the workplace risk. Like investment bankers who apparently couldn't come up with (as Joe Stiglitz put it in Freefall) a good mortgage product with"low transaction costs and low interest rates" that "would have helped people manage the risk of home ownership, including protection in the event their house loses value or borrowers lose their job," so some coal companies could not come up with a means of providing necessary housing and food to employees without also further impoverishing workers and enriching owners. That lack of creative, far-sighted innovation got them (and us) unions and excessive regulation. A communist plot? Hardly. More like capitalist myopia, something that seems to plague certain sectors of our capitalist economy in ways that doom them (and us) to repeat the past.

The socially detrimental effects of capitalist myopia continue today. Yesterday, I learned that Congressman Brad Miller (D-NC) has unearthed yet one more example of the ways in which self-interest unconstrained by ethics or regulation does not yield a socially optimal outcome (if "socially optimal" includes the welfare of people other than bankers):

So where does the conflict of interest lie? Often, the same bank that services a primary mortgage owned by another institution also owns a second mortgage or home equity line of credit on the same property. When that borrower has trouble meeting both payments, the servicer has an interest in making sure that amounts owed on the second lien, which it owns, continue to be paid even if the first loan, which it has no interest in, slides into delinquency. About two-thirds of primary mortgages are serviced by banks who do not own them but hold the accompanying seconds....

The top four banks hold approximately $450 billion in second liens that are supposed to take a backseat to the investors who hold the primary mortgages. But because of the front-seat role big banks play as servicers, they are in a position to put their interests first.

“Unless we can make servicers modify mortgages through bankruptcy or eminent domain, the servicers are not going to reduce principal,” Mr. Miller, 57, said in a recent interview. “Their stance does seem largely driven by accounting concerns — they are trying to maintain the fiction that the mortgages are worth the value they are carrying them at on their books.”

Enter Mr. Miller’s bill, the Mortgage Servicing Conflict of Interest Elimination Act. It bars servicers of first loans they do not own from holding any other mortgages on the same property.

Mr. Miller’s bill has not gained much attention since it was introduced in March. But it ought to, because the Dodd-Frank financial overhaul law is utterly silent on servicer conflicts.

But there's a higher cost to capitalist myopia than what we will (or won't) see on our national and bank balance sheets. Like mine company owners' and mine workers' objectives, bankers' objectives and borrowers' objectives have parted. At present, there appear to be few market or other forces that will reunite them.  I learned last week that borrowers are refusing to repay billions in home equity loans.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. [Emphasis added.]

"People got 90 cents for free...it rewards immorality." What does that remind me of? Oh right, Goldman getting 100 cents on the AIG-owed dollar courtesy of the US taxpayer. Is it too much to hope that Mr. Combs also views Goldman's gains as a(n unfair) reward for ineptness at best, immorality at worst? And why accuse homeowners of immorality rather than ineptness? When I see a banker and a potential homeowner seated at a table about to conclude a real estate sale, I assume the burden of due diligence and ethics is on the person purporting to represent the expertise in this market. Where I come from, that expertise is what would justify someone earning a profit from the transaction. If, in fact, bankers were just betting on rising real estate prices without regard to the buyer's welfare, then they're just another card shark and they deserve to lose if the bad hand they dealt from their cuff comes back to bite them.

"Americans seem to believe that anything they can get away with is OK." Gosh, I wonder where they got that idea? Am I the only one who believes that ethics comprises the weft of our social fabric, but that it is not entirely derived from inner ethical policemen (or women) who reside within our breasts and cause us to behave virtuously, even as the very rich and politically powerful are publicly reaping the spoils of highly unethical behavior? For years now, our norms and beliefs have been shaped by rhetoric in support of unfettered self-interest. They are now being reshaped by highly public and immoral behavior that has so far gone unpunished. Not exactly a blueprint for the virtuous society, is it?

"I'm not going to be a slave to a bank." I will only note that it is very difficult to "sell" indentured servitude, especially servitude derived from self-chosen moral shackles, when the holder of the mortgage one owes has so very publicly evaded those very same bonds.

But there's more.

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.

“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”

People do indeed want to have green pastures in front of them, not a company town, not a company store, not a wholly-owned company nation. They want an economic arrangement that leaves something extra for them and their children. It's an important component of the wealth of nations. In some ways, it doesn't really matter if a private bank siphons off large portions of your disposable income for decades to come or if the guvmint does it. Either way, you're poor and virtue is seldom a sufficient reward.

And, yes, there is strength in numbers, especially in a democracy (unless, of course, one can successfully distract the people with emotionally-laden issues like gay marriage, guns, race, abortion, undocumented workers).

"But wait!" you say, "Strength in numbers? This sounds suspiciously like the beginning of collective action. Egad, what's next? A union or a strike or, worse, class consciousness? Why we have only (gasp!) capitalists to blame for this!"

Ironic, is it not? Socialized investment banking, the result of unfettered self-interest in combination with unregulated conflicts of interest, may accomplish what generations of coal miners, steel and auto workers, teamsters, teachers unions, and union organizers could not. Unfortunately, collective action uninformed by virtue is unlikely to result in anything that is any better than that achieved by investment banking without virtue. It might even be worse.

That will be the true cost of capitalist myopia.

Economic Science Fiction

Uwe Reinhardt, one of my favorite economists, provides part of a conversation between William Shatner (Captain James Tiberius Kirk of Star Trek fame) and Rush Limbaugh on the moral equivalence of a beach house and health care.

Shatner: “Here’s my premise, and you agree with it or not. If you have money, you are going to get health care. If you don’t have money, it’s more difficult.”

Limbaugh: “If you have money you’re going to get a house on the beach. If you don’t have money, you’re going to live in a bungalow somewhere.”

Shatner: “Right, but we’re talking about health care.”

Limbaugh: “What’s the difference?”

Shatner: “The difference is we’re talking about health care, not a house or a bungalow.”

Limbaugh: “No. No. You’re assuming that there is some morally superior aspect to health care than there is to a house. …”

Shatner: “No, I’m not moral at all. I want to keep the subject, for the moment, on the health care thing.”

Is it any wonder his ship was named the Enterprise?

Uwe, being a far better economist and, no doubt, with much more refined taste in his choice of casual entertainment than I, provides us with a really important and insightful beginning of a response to the question: Is health care special? I suggest that you read it and join me in eagerly awaiting the next installment.

Your blogger, however, was struck once more by the ways in which science fiction resembles real life. Confrontation between William Shatner and Rush Limbaugh? What does that remind me of? Of course, Captain Kirk engaging the nasty lizard-like Gorn. 

 

Or maybe Captain Jean-Luc Picard confronting the unbridled, unethical commercial exchange of the Ferengi.

 

But more often than not, at least lately, the SciFi movie that keeps coming to mind is Five Million Years to Earth (released in the UK as Quatermass and the Pit). (Original trailer here.)

The plot in a nutshell: 5 million years ago, evil insect-like Martians, facing their own extinction because of their predilection for staring fights with other Martians, began altering primates on earth that would eventually evolve into humans who would one day be receptive to the Martians' preferences for intra-species conflict. (Think Independence Day, but with some of the human survivors receptive to the invaders and doing their bidding to eliminate other human survivors.) The movie unfolds as the monkeying about with our ancestors is discovered and some humans begin to respond to the Martians' "call" to become more Martian-like. This produces a clash between humans who for some reason are immune to the "call" and humans who heed it. And to assure that viewers don't miss the point that this is a cataclysmic confrontation between good and evil, the original insect-like Martians have horns.

For years this movie has come to mind every time I have a conversation with another human that involves an exchange like that reported above between Shatner and Limbaugh. Naturally, I always imagine that I'm on the side of truth, justice, and the American way, i.e., I'm opposing the Martians. I've no doubt the other "side" sees it much the same way, except that I am cast in the role of the (horned) Martian.

And that's why we make no progress in these types of discourse. I personally don't know what to say to people for whom rationing health care based on price and ability to pay is no different from rationing housing based on price and ability to pay. Aside from all the aspects of health care markets that make them nearly impossible to ration in the same way that we ration cars and shoes and houses (where we have some hope of an approximately efficient and equitable distribution), there are important moral and economic aspects to health care that simplistic, naive ideas about markets and economic principles tend to miss. 

Unfortunately, my own side of the discourse deteriorates, mainly because I inevitably find myself imagining a world that is one possible logical endpoint of the beach house-health care moral equivalence.

In this fictional (I hope) world, the hard-working, justifiably entitled beach house owner departs the beach house, now in a gated community, surrounded by high walls with glass shards embedded in them. She takes her body guard because someone attempted to kidnap the neighbor's kid last week. Fortunately, the neighbor's bodyguard prevented it, but the neighbor's chauffeur was killed. No biggie though. With unemployment at 50%, chauffeurs are a dime a dozen.

As they exit the gated community, they're forced to drive around beggars and the occasional body in the street to get to the polo match on time. Occasionally she wonders why "someone" doesn't do something about the human detritus that seems to be accumulating on the roads and under bridges (at least under the few remaining bridges...many have fallen into disrepair and collapsed since there's no (private) need for all of them now), but that would mean paying higher taxes so she accepts that some people are just less fortunate or less productive than she and her family.

Sure the beach house owner could have paid higher taxes in order to provide health care, a safety net, infrastructure that might have produced higher gains in productivity to the larger society and jobs to those less fortunate. But why should he or she? She may be a turtle on a fencepost, but she knows she got there all by herself and only through her own efforts. And what about her neighbor? He's not at the top because he lucked out in the intelligence lottery or because he lucked out in the my-parents-made-me-do-my-math-homework-before-I-could-watch-TV lottery or because he lucked out in the I-grew-up-in-a-culture-that-taught-me-that-hard-work-would-be-rewarded-and-I-happened-not-to-be-among the-ethnic-minorities-for-whom-no-matter-how-hard-they-work-it-will- seldom-if-ever-be-rewarded. Actually, he's on top because he ran his bank and his country into a ditch and (lucky banker! lucky shareholder!) his fellow Americans bailed him out. And that tax-sheltered trust fund she inherited was of no help whatsoever in her own life struggle. Nosirree. She earned it. She did it all herself. He did it all himself. They added value to the economy and they're going to keep it. All of it.

Of course, they don't actually get to keep all of it. They spend between 35% and 50% of their (now larger) after tax income on private trash removal, a private water supply and sewer system, the 24/7 private guards that patrol the perimeter of their compound, the bodyguards for the times they have to leave the compound. And the private fire department now costs an arm and a leg, as does the kidnapping response team, especially as the kidnappings have increased. And there have been a few recent cases in which it looks like the private security firms have colluded with the kidnappers for a share of the ransom. It's a problem when wealth is very unequally distributed. You end up spending a lot of money just to keep it. And you can't trust anyone.

Needless to say, they're still paying taxes to maintain a legal system and their property rights. Mercifully, legal costs have dropped ever since trespass and property right infringement were made capital crimes. And they save money because they don't go out as much as they used to. It's too dangerous.

It's funny. When you include all of what they pay for private guard labor and the other services that used to be provided publicly, they have less disposable income than when taxes were higher. And now their kids get kidnapped. Talk about infringements on personal liberty. They're afraid to leave the house. They live on a beach, but they're afraid to walk on it without the body guard. No wonder so many second, third, and fourth husbands are former bodyguards.

Of course, there's still a servant class in the beach house-health care equivalent world. They style hair, wait on beach house owners in stores and restaurants, drive cabs, polish silver, cook and clean. But who cares if they can't buy health insurance? So what if they make $15K per year and end up in the hospital from an untreated respiratory infection that turns into pneumonia and runs up a $30K bill. They'll just have to do the right thing and pay it off over time. That's what the beach house owners would do if they ever lost their health insurance and got sick. They'd do the Right Thing. If the poor and uninsured were more like people with beach houses, if they had the same values, they wouldn't be in hock to a hospital and the beach house people would feel a whole lot more sympathy for them. They're so different. It's really proof they're less deserving.

At any rate, that is always the reasoning that I imagine is taking place in (Martian-controlled) minds that think beach houses and health care are morally equivalent. And that is the scenario that I imagine will result if the view that they are equivalent prevails.

To be fair, it's more likely that the reasoning isn't quite as Ferengi-like as my imagination makes it. It's more likely that someone somewhere said that "free markets" make everyone better off, but didn't bother to explain that markets fail for a variety of reasons that are rampant in health care. Believers in beach house-health care equivalence are really just trying to make everyone better off. Someone somewhere said that people at the top are more productive and therefore deserve more. Believers in beach house-health care equivalence are often at the top, they know in their hearts that they are way more productive, so it's obvious that this is true and fair. Someone somewhere told them about moral hazard and unanticipated side-effects. As a result, believers in beach house-health care equivalence have developed a morbid terror that someone somewhere will free ride or, worse, distort resources away from the beach houses that would otherwise be built. This "inefficiency" will make everyone...well, everyone that "counts"...worse off. Or someone told them that guvmint is the problem so even though they would like to help out, they can't allow the government to get involved because...well, you know...it's a problem. Or someone somewhere conflated race with poverty and some of them (and these are Martian-controlled brains) believe that safety net programs benefit only people with brown skin, which causes them to feel distressed. (See here and note the race/ethnicity of the majority of TANF recipients is white in "heartland" or "real American" states like Iowa, Indiana, Kentucky, and West Virginia.)

I grew up in Appalachia, where a lot of people don't have health insurance, at least not private or employer provided health insurance. It's anecdotal, but I have heard every one of the above offered as a reason why health care is like beach houses or cars or any other commercially exchanged good. I've heard it from people who could own a beach house and I've heard it from people who will be lucky to own a double-wide before they die. (Question: why is it not a socialist plot for the federal government to provide flood insurance for beach house owners, but when it's health insurance for the rest of us then we're on the slippery slope to communism/socialism/nazism?)

Most people would give up their beach house in exchange for better health and a longer life. Few people would knowingly give up better health or a longer life for a beach house. That alone tells you they are not equivalent, morally or otherwise.

Health care is special because humans are special. Most humans concede this. (Martians, Ferengi, and Gorn, most likely would not). Health producing goods and services have a special status in their roles as inputs to human health and wealth and human capital that is different from a beach house. Health is different because it enables humans to be productive, which benefits all of us. Health care is different because in some necessary amount and mix it is a necessary prerequisite to human individual flourishing, to the pursuit of life, liberty and some semblance of happiness.

If you don't think humans, all humans, are special and that is what makes health and health care special, then it's going to be hard to have a meaningful discussion about the best way to achieve the greater productivity that benefits us all and the greater individual liberty and flourishing that benefits us as individuals and as a society.

Protecting Our Grandchildren: The High Price of Motherhood

David Leonhardt at the New York Times provides a comprehensive look at the price of motherhood. It appears to be pretty high. Despite advances  over the last several decades in equalizing gender roles and pay, women still make roughly 80 cents to every male dollar. That means that a woman doing the exact same job with the exact same training as a male counterpart will earn, say, $8/hour compared to the man's $10/hour. Much of that difference appears to be the result of women's commitment to child bearing and rearing. Despite large gains in gender equality in the US, the wage gap while somewhat narrowed, still persists and women still spend more time in child care and housework than men (and here). This translates into preferences for more time off from paid employment (what economists call "labor force participation) to bear children and a preference for jobs with shorter or more flexible work hours to accommodate the demands of child rearing. 

"But, wait!" you say. Surely the market has valued women's productivity correctly. Women are less productive because they take time out to bear and raise children. For this reason, their skills and knowledge do not keep pace with someone who is continuously gainfully employed. They show up late and leave early to pick the kids up at day care. Clearly this must lower their workplace productivity. They should receive a lower wage.

To which I reply, "Well....that's one way of looking at it and you'll do very well in your graduate studies in economics."

But let's step back and think about this. The wage rates received by individuals (and many of you will rightly dispute that they provide reliable indicators of either absolute or relative productivity) are taken to approximate the value of the incremental product they add to total output. Our national accounting methods value our national output, often expressed as gross domestic product (GDP), by tabulating through various ways the value of all goods and services produced in markets. GDP has long been used as an indicator of a nation's economic growth and well-being.

But what about all that non-market work women are cranking out? The stuff for which they don't get paid? Child care, child birth (production of the future units of economic production for those of you who like to think of children as durable goods)....how about mother's milk that builds bodies and immune systems 40 different ways? None of that shows up in GDP.  The purchased inputs to it will (for example, the food women eat and  the milk they drink to produce milk), but to take inputs as the sole measure of women's non-market productive activities forces us to assume that women add no value to those inputs, either by virtue of their managerial acumen (which will influence the mix and amounts in which they combine them, i.e., their efficiency) or by virtue of differences in production "technology."

Just pretend for a moment that you are an economist and imagine women as owner-managers of little child production and child rearing factories. Remember, the "output" here is healthy, educated kids who grow up to contribute to society, from which we all benefit. The extent to which they are healthy and educated depends greatly on decisions made by parents, but especially by mothers who spend more time with them and have primary responsibility for their prenatal health and development. Mom's matter. In single parent homes, which tend to be headed by mothers, they may matter even more. Much of what they do to produce healthy, educated kids is not captured in GDP because it isn't traded in a market.

Research by Kathleen Garrett and Nancy Cloud suggest that the contribution of women's nonmarket productive output to total societal output (and therefor to a global measure of societal well-being) is considerable, ranging from 21% to over 50% of GDP across 132 countries. None of it is captured by traditional estimates of GDP.

So far, I've been describing "sins of omission," the omission of a large portion of non-market productive endeavor by a single group from our national accounts. There are further distortions induced by the omission. For example, when women move into the labor force and purchase child care in the market in order to enable the move, both their market output and the purchased child care will be captured by traditional estimates of GDP. It looks like GDP has grown, because now child care is being delivered (and paid for) in a market. But has output really grown? After all, the same work effort and output (and perhaps more) was being produced by the woman without compensation  before she entered the labor market. All that has happened is that it has shifted to someone else and is now captured in our national accounting. Has total output really grown by the amount produced by a paid child care worker? Or has it fallen by the net of the amount that was produced by the mother before she entered the labor force, the amount she now produces in the labor force, and the amount that is now produced by a (paid) child care worker?

And there is another possible distortion from the omission of women's unpaid work from our national accounts. The untallied and unmeasured often becomes the unvalued. When non-market work is undervalued or unvalued, the "stuff" that is counted and valued appears that much more valuable. The result will be to shift national output away from non-market activities and their product and toward market-based activities. This was a point made in the Report by the Commission on the Measurement of Economic Performance and Social Progress, authored by Joe Stiglitz, Amartya Sen, and Jean-Paul Fittousi. The result could be an actual decline in national well-being even as traditional indicators such as GDP are rising.

Leonhardt concludes with the hardly reassuring information that as long as women don't have children, they appear to do just as well as men wage and career-wise (assuming they manage to break through the pesky glass ceiling that still leaves women under-represented in board rooms and executive suites).

The irony here, at least from my perspective, is that we're surrounded by men (and some women) obsessing about the welfare of our grandchildren, especially the possibility that we will saddle them with an unbearable tax burden that can only (apparently) be relieved by increasing income inequality and decreasing taxes on the rich. Yet the people most likely to have a profound and lasting positive effect on the parents of those grandchildren and, by virtue of it, a profound and lasting positive effect on the endangered grandchildren, are forced to accept a 20% reduction in market wages, to struggle to find affordable, high quality child care, to be penalized for requiring flexibility in work hours, to (until 2014) face lack of health insurance if they work part-time.

So next time you hear someone arguing for cutting the safety net to protect our grandchildren from an undue tax burden, ask them what they've done lately for the grandmothers of those grandchildren. Ask them why, if we are so worried about our grandchildren, do we undervalue and penalize their mothers and grandmothers in labor markets? Why is the "price" of motherhood in foregone wages so high?

The Road to Serfdom Isn't Paved

Richard Green sends readers to this article about how China has been expanding its network of paved roads, despite a dearth of cars and car owners at present. They are devoid of traffic now, but ready for the day when growth in China's economy produces millions of car owners.

The US experienced a similar expansion in our national roads system during the post-war years of the Eisenhower administration. As most of my readers know, Ike had a stellar military career followed by a pretty decent political career. This was back in the days when both sides of the congressional aisle still did occasional collaborative work for a common purpose: advancing the good of the people of the United States of America. (Disclaimer: despite this blog showing up on left and progressive websites with some regularity, the author is in many ways conservative and can, if pressed, even find a few good things to say about Richard Nixon).

As a military leader, Ike was keenly aware of the advantages of good highways for troop and supplies movement. If you doubt this, pick up any book about the US civil war and search on the eponymous "plank road," a type of road which was apparently ubiquitous in the 1860's. Then note the frequency with which a combination of "plank road" and "bad weather" determined the movements of troops and supplies and, consequently, the outcomes of battles.

But Ike wasn't just a military leader, he was a leader of a nation; a capitalist nation built on commercial enterprise. He recognized the commercial value of a road system in transporting goods long distances. What he may not quite have anticipated was the extent to which it would foster commercial exchange at the bottom and middle of the economic pyramid. With an expanded road system, small farmers are no longer hindered by distance to market. Manufacturers in remote locations, far from rail terminals, can expand output and reach distant markets with greater ease. It's true that the trucking industry enabled by the new US highways provided new competition to an already heavily regulated and faltering rail system, but the benefits that must be tallied against this harm are improved access for small farmers and businessmen and women to national markets and the easier and expanded commutes of office and factory workers both to grandma's house and to work that resulted from an expanding economy. Carbon footprints were of no concern back then.

Now the Wall Street Journal tells us that the economic downturn is causing some small towns in more rural sections of the US to tear up asphalt roads and return them to gravel.

In Michigan, at least 38 of the 83 counties have converted some asphalt roads to gravel in recent years. Last year, South Dakota turned at least 100 miles of asphalt road surfaces to gravel. Counties in Alabama and Pennsylvania have begun downgrading asphalt roads to cheaper chip-and-seal road, also known as "poor man's pavement." Some counties in Ohio are simply letting roads erode to gravel.

The moves have angered some residents because of the choking dust and windshield-cracking stones that gravel roads can kick up, not to mention the jarring "washboard" effect of driving on rutted gravel.

But higher taxes for road maintenance are equally unpopular. In June, Stutsman County residents rejected a measure that would have generated more money for roads by increasing property and sales taxes.

"I'd rather my kids drive on a gravel road than stick them with a big tax bill," said Bob Baumann, as he sipped a bottle of Coors Light at the Sportsman's Bar Café and Gas in Spiritwood.

Well, there you have it. "I'd rather my kids drive on a gravel road than stick them with a big tax bill." What if the paved road will enable them to make more money? Would that alter Mr. Baumann's benefit-tax analysis? What if an ambulance got someone to hospital in time to save their life? Would that alter a world view in which all taxes are bad?

I read an article in Smithsonian magazine last year about an old Roman highway, the Via Aurelia.

In 12 B.C., Augustus, at the height of his power, commanded his legions to build a highway that would traverse the province of Gallia Narbonensis, or southern Gaul, the last of whose unruly tribes had only recently been subdued. Over the next ten years, surveyors, engineers and construction crews carried off one of antiquity's greatest feats: grading and paving a road from the mountains above the Mediterranean near modern Nice to the Rhone River, 180 miles distant. For nearly four centuries, the Via Aurelia served as the region's principal artery, over which armored legions, charioteers, couriers, traders, government officials and countless others passed. It was the Interstate 95 of its time, complete with rest stops and chariot service stations every 12 to 20 miles—a crucial part of a 62,000-mile road network that extended from the Iberian Peninsula to Asia Minor. Along this paved and finely graded route, Rome maintained its control over far-flung provinces, developed commerce, and disseminated its culture and architecture. But as the empire began its long decline—Rome would fall in the fifth century A.D.—the Via Aurelia began to disintegrate.

I remember thinking at the time: "are our roads the canary in the coal mine?" As they crumble, so do we? How does it happen?

But beginning around A.D. 235, the Via Aurelia fell on hard times. After centuries of political stability, a series of military coups roiled the empire. Roman divisions began turning on one another, the value of currency plummeted, urban renewal ceased and towns and entire districts were abandoned.

Are the number and condition of our roads leading indicators of a lost sense of common cause, lost shared purpose, crumbling political stability? Do we stop investing in and maintaining public goods because we feel no common cause with the other people likely to benefit from them? How do empire's crumble? Surely from within, at least at first. The internal weakening of shared purpose and sympathy, bolstered by mindlessly shrinking tax revenues that  otherwise would have maintained the infrastructure of a complex, advanced capitalist and commercial society, must make it easier for the barbarians to storm the maintenance-deferred, crumbling gate.

At moments like this, I have trouble speaking (or in this case, writing). I'm no historian. I don't know the answers to the above questions. As an economist, I know that some roads probably aren't by any metric worth being maintained or improved or built. Either they lead nowhere or there will be no increased productivity that results or in purely utilitarian terms, the opportunity costs for the rest of us more than offset the small, but possibly significant, individual benefits to the few who use them. In an ideal world, a market would help us make these decisions. By definition, there are no markets for public goods.

The astute among you will point out that even if untraveled rural roads are melting back into the prairie, we still have a substantial network of interstate highways. True. Unfortunately, a GAO report in 2002 anticipated that even in the absence of the recent and then unforeseen economic contraction, highway maintenance would fall behind over the next 10 years, while congestion would continue to impose costs on commuters, long-haulers, and the nation generally. And carbon footprint now matters.

We have to make a collective choice. In effect, we must answer the question: how shall our grandchildren live? It is not helpful either to us or to our grandchildren to view this as Mr. Baumann apparently does as a pure tax minimization problem. It would be analogous to deciding we wanted to minimize health care costs without a quality or outcome constraint. As I have told students repeatedly in the context of health reform: if your only objective is minimizing cost, let everyone die untreated. Costs, like taxes, are only one piece of the decision-making equation.

I have written about this before. There are many things for which I would gladly accept indebtedness passed forward from my ancestors: better health, better education, better roads, better infrastructure, community lighting and safety, sanitation, disease control, higher productivity, better access to information and knowledge, and all the technology that makes cleaning my house easier.

Robert Shiller quotes John Maynard Keynes saying much the same thing:

“Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the ‘financial’ burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment.”

What passes for discussion about social choice and taxation in this country has become the sound of one hand clapping. The divisions in discourse have been strategically engineered by interests whose objectives I do not understand, but that I am sure are not the commonweal. The divisions are fueled by oblique appeals to base sentiments about race, class, and sexual preference that all of us harbor to a greater or lesser extent. They drive wedges on issues on which most would otherwise agree and from which most would benefit near equally from the same solution. While sentiments are used to divide us, a nation founded on the idea of a government of, by and for the people lists dangerously toward income inequality and its bedfellow, concentrated economic and political power, while we bequeath to our grandchildren a world in which they travel a network of gravel roads with barely a high school education, they live in cities and towns with failing sewers and water systems, and risk their and our great grandchildren's lives crossing crumbling bridges and overpasses.

But their taxes will be low. I wonder if they'll thank us?