Macrocomplaining vs. macrosplaining

I don't blog much about macroeconomics methodology debates that much anymore, but every once in a while it's still fun to wade back in.

Mark Thoma wrote a column in the Fiscal Times in which he explained where he thought macroeconomics went wrong before the 2008 crisis. Some key excerpts:

There are good reasons to be critical of the rational expectations, dynamically optimizing, representative agent approach that underlies modern macroeconomic models. For example, the representative agent approach makes it difficult to study financial markets. At least two agents with different views about the future price of a financial asset are needed before we can even begin to model markets for financial assets, financial intermediation, and other key elements of the financial sector... 

[M]acroeconomists, for the most part, did not think questions about financial meltdowns were worth asking, so why bother with those theoretical complications? The financial collapse problem had been overcome, or so some macroeconomists thought. 

Nobel prize winning economist Robert Lucas, for example, in his 2003 presidential address to the American Economic Association famously claimed that the “central problem of depression-prevention has been solved.”

Josh Hendrickson, whose blog is called "The Everyday Economist" but whose Twitter handle is @RebelEconProf, decided not to be a rebel every day, and came to the defense of pre-crisis macro, Lucas, etc. Josh makes some good points and some unconvincing points.

Here is a really good point:

Suppose there is some exogenous shock to the economy. There are two possible scenarios. In Scenario 1, macroeconomists have models that describe how the shock will affect the economy and the proper policy response. In Scenario 2, macroeconomists have no such models. 

In Scenario 1, we avoid a severe recession. In Scenario 2, we could possibly have a severe recession...Given [macro critics'] logic, the only time that we would have a severe recession is when macroeconomists are ill-prepared to explain what is likely to happen and to provide a policy response.

In other words, our perceptions of the failures of macroeconomics are hugely influenced by selection bias. True! How many more crises would we have had without the models we have developed? Maybe none, or maybe some. How useless macro has or hasn't been depends on the crises we avoided, not just the ones we failed to avoid.

Here is a point that is somewhat less convincing:

Thoma argues that the reason that we lacked a proper policy response to severe recessions was because people like Robert Lucas thought we didn’t need to study such things. However, this is a very uncharitable view of what Lucas stated in his lecture (read it here)...when Lucas says that the depression-preventing policy problem has been solved, he actually provides examples of what he means by depression-prevention policies. According to Lucas preventing severe recessions occurs when policymakers stabilize the monetary aggregates and nominal spending. This is essentially the same depression-prevention policies advocated by Friedman and Schwartz. Given that view, he doesn’t think that trying to mitigate cyclical fluctuations will have as large of an effect on welfare as supply-side policies.

Lucas' speech, in other words, is a sort of old-monetarist variant of the Great Moderation hypothesis, which was very common among macroeconomists at the time. But the Great Moderation turned out to be illusionary, and that's Thoma's whole point. It may be unfair to single out Lucas for an idea that most macroeconomists shared at the time, but he is a very famous and influential guy, after all.

Josh then makes the odd point that since we didn't actually adopt the policy that Lucas claims we did adopt (stabilization of monetary aggregates), Lucas wasn't wrong. That's just too weird of a point, so I'll skip it.

Josh then makes another good point:

Thoma argues...that economists spent far too little time trying to explain the Great Moderation. This simply isn’t true. John Taylor, Richard Clarida, Mark Gertler, Jordi Gali, Ben Bernanke, and myself all argued that it was a change in monetary policy that caused the Great Moderation.

This is true. I think Mark probably misspoke; what he probably meant was not that economists didn't try to explain the Great Moderation, but that they didn't question the Moderation's stability as suspiciously as they might have.

Josh then makes another unconvincing point:

Similarly, his criticism that economists simply didn’t care enough about financial markets is unfounded. Townsend’s work on costly state verification and the follow-up work by Steve Williamson, Tim Fuerst, Charles Carlstrom, Ben Bernanke, Mark Gertler, Simon Gilchrist, and others represents a long line of research on the role of financial markets. Carlstrom and Fuerst and well as Bernanke, Gertler, and Gilchrist found that financial markets can serve as a propagation mechanism for other exogenous shocks. These frameworks were so important in the profession that if you pick up Carl Walsh’s textbook on monetary economics there is an entire chapter dedicated to this sort of thing. It is therefore hard to argue the profession didn’t take financial markets seriously.

This is the idea that "there exist papers on X" means "the profession took X seriously". But that doesn't seem right to me. After all, there is nothing limiting the topics on which macroeconomists write papers, and there is every incentive for them to write papers imagining any and every conceivable phenomenon. So there will, in general, be a macro paper on any topic. But it is impossible for the profession to simultaneously take every topic seriously, so we need a better criterion than the existence of papers.

In particular, the claim that macroeconomists thought enough about financial shocks and frictions before the crisis seems to conflict with the huge outpouring of work on financial shocks and frictions since the crisis. If macroeconomists were clued in to the dangers of financial stuff before the crisis, why all the new models?

Josh then misunderstands one of Thoma's criticisms:

The same thing can be said about representative agent models. Like Thoma, I share the opinion that progress means moving away from representative agents. However, the profession began this process long ago. While the basic real business cycle model and the New Keynesian model still have representative agents, there has been considerable attention paid to heterogeneous agent models.

But Thoma was talking about heterogeneous beliefs. The models Josh is talking about incorporate heterogeneous wealth, productivity, etc., but not heterogeneous beliefs. There are lots of heterogeneous-belief models in the finance literature (see here for some of them). But macro models mostly continue to adhere to the rational-expectations framework advocated by Lucas, or occasionally a representative-agent version of a learning model, neither of which incorporates heterogeneous beliefs. I say "mostly" because I haven't seen any recent macro models that include heterogeneous beliefs, but Rule 1 of macro is "There is a macro paper on any topic."

Anyway, Josh makes some good points, but he also goes pretty soft on the profession and its leading thinkers regarding the pre-crisis consensus, which really did downplay the importance of finance, and really did avoid thinking about heterogeneous beliefs.

Will lack of tax hikes crash the Japanese economy?

Adam Posen thinks that if Abe fails to follow through on his pledge to hike taxes, the Japanese stock market will crash:

Posen’s fear, outlined in an interview in his office last week, is that Abe reneges on a plan to raise Japan’s consumption tax to 10 percent, from the 8 percent level it was boosted to in April. If that happens, prepare for international investors to dump Japanese stocks and the yen, says the former U.K. central banker. 

“If Prime Minister Abe decides to postpone, let alone cancel, he runs a real risk of crashing the stock market,” said Posen... 

To Posen, delaying the tax measure would test the patience of international investors who have backed Abe’s efforts to both propel his economy from 15 years of deflation and restore fiscal order to a nation where government debt now tops 240 percent of gross domestic product.

This is interesting, because most people are saying the exact opposite. Most people are blaming the recent Japanese sales tax hike (from 5% to 8%) for the severe contraction of GDP in the second quarter.

I always thought that was a little weird. Why should a 3% tax hike crush Japanese GDP when a similar-sized tax hike in America a year earlier failed to put much of a dent in growth? Why is the Japanese economy so fragile to tax hikes? Neither Econ 101 theories of deadweight loss nor Econ 102 Keynesian theories have much insight, and the calibrated DSGE models I've seen don't predict an effect nearly so big.

OK, but now let's take Posen's totally opposite contention. Will delays in tax hikes really cause a collapse in investor confidence that crashes the Nikkei? It seems possible, certainly. After all, Japan can get rid of its debt in three ways - default, monetize, or consolidate. The more it starts to appear that consolidation is politically impossible, the more it starts to look like monetization is inevitable.

That could cause the marginal Nikkei investor (who is probably not Japanese) to bolt. But will monetization be bad for stocks? As interest rates go to zero, the present discounted value of stocks explodes. As long as inflation remains subdued, monetization is good for stocks, not bad.

So what Posen is saying is essentially that debt monetization will lead international investors to fear hyperinflation - which really does kill stocks. I'm very, very suspicious of this, because I think it's just a fact that no one really knows why or when hyperinflation happens. It's always possible that investors could get scared of hyperinflation and bolt.

But suppose Japan's debt were half of what it is. Wouldn't it still be the case that investors could get scared of monetization-induced hyperinflation and bolt at any moment? What level of debt and monetization is reassuring to investors, and what level is scary? Posen has no evidence to support his contention that Japan is near a tipping point. But does anyone have evidence? Can anyone?

Thursday Roundup, 9/18/2014

Do a Google Image search for "cowgirl", and you will learn something interesting about American culture. Anyway, here's Thursday Roundup:


Me on BV:

1. Lots of people use the word "Keynesian" as a synonym for "socialist" or "liberal". They should quit.

2. Sometimes you have to be a dick. But if you don't have to, don't.

3. What does "credit-fueled growth" even mean?

4. Government is an indispensable input into innovation.


From Around the Econ Blogosphere:

1. Matt Yglesias discusses Barack Obama's inscrutable, odd ideas about monetary policy. I keep telling people Obama is an Austrian, and no one listens.

2. If, like me, you are a really boring person, you can take a break from work by reading blog debates between New Keynesian mainstream people and Post-Keynesian heterodox people. Like this one. I mean, what else are you going to do with your free time? Tinder?

3. Matt Bruenig responds to my post about capitalist principles. He doesn't seem to quite get the idea of an ex ante reward or state-contingent assets, but overall, he's right - theories about what people "deserve" are utterly arbitrary. I'd like to see Bruenig debate Mankiw.

4. Ryan Avent, who always makes sure to write a post about anything I write a post about, on the exact same day, attempts to rebut Peter Thiel's techno-pessimism. I think Ryan is right.

5. People around the world are apparently much more pro-trade than we usually think.

6. Tim Taylor writes that we should have empathy for the poor, saying:

One could look across swathes of modern America and still write: "Whole sections of the working class who have been plundered of all they really need are being compensated, in part, by cheap luxuries which mitigate the surface of life." It is a failure of basic human empathy to blame the poor for behaviors that offer a way of mitigating the surface of difficult life circumstances.

What a commie. Go back to Cuba, you commie hippie. Greg Mankiw just flicked a gold doubloon into Tim Taylor's ear from the back of the class.

7. Christian Slater David Andolfatto interviews a scientician Mike Woodford about his views on Quantitative Easing.

8. Dean Baker has compressed his entire consciousness into a single blog post. There is no Great Stagnation.

9. In our age there seem to be very few truly original economic thinkers, going off the reservation the way that, say, Minsky did. But there is Michael Pettis.

10. Brad DeLong, Nick Rowe, and David Glasner ask: "What is a recession?"

11. I knew that eventually, someone would perceive a discrepancy between my endorsement of civility and my labeling of Austrian ideas as "brain worms", and would call me out on said discrepancy. I did not, however, expect that it would be Paul Krugman.

12. Speaking of Austrianism, it turns out that the Great Recession did not have a "cleansing" effect on the productivity of American businesses. It's almost as if...it's almost as if...things in the economy happen that are not the simple sum of optimal decisions by far-sighted actors operating in frictionless markets...but no, to quote Henry P., this question would carry us too far away...

13. T.P. Carney, whose name sounds more like a 19th Century circus promoter than any other I have encountered, makes a good point: Inflation allows employers to cut workers' real wages by stealth, simply by letting nominal wages stagnate. Actually, that's one of the reasons economists usually think that 2%, not 0, is the "right" target rate for inflation - in other words, economists like businesses to be able to cut real wages, so to them this is a feature, not a bug.

14. Mark Thoma launches a fusillade of shoulder-mounted heat-seeking missiles at Bob Lucas. Lucas, he says, by telling us to ignore recessions, stopped macroeconomists from thinking about the possibility of another Depression-like event in the years before 2008.

15. Matt Levine, the most entertaining finance journalist of whose existence I am aware, has a good run-down of the case against hedge funds as an asset class. See also Barry Ritholtz, who is the most entertaining-in-person finance journalist of whose existence I am aware.

Is math "falsifiable"?

Ooooh, another chance to babble on about philosophy of science!

Kevin Bryan writes:

Arrow’s (Im)possibility Theorem is, and I think this is universally acknowledged, one of the great social science theorems of all time. I particularly love it because of its value when arguing with Popperians and other anti-theory types: the theorem is “untestable” in that it quite literally does not make any predictions, yet surely all would consider it a valuable scientific insight.

But Arrow's Theorem is a math result. It takes some definitions of mathematical objects as given, and it shows a relationship between those mathematical objects. Of course you can't "falsify" it with empirical observation, any more than you can "falsify" Jensen's Inequality.

I really hope there aren't "Popperians and other anti-theory types" running around out there complaining that math results are useless because they're non-falsifiable. There are at least two reasons that would be silly.

Reason 1: Pure math results tell us about what we can and can't do with math itself. For example, suppose we knew that it was impossible to factor an integer in polynomial time. That would have important implications for cryptography. Math itself is a technology, so math results can give us useful technological advancements.

Reason 2: Pure math results are necessary for math to be useful for engineering. One big reason - the main reason, I'd argue - that we make mathematical theories is because the math seems to correspond to real observable phenomena. As long as that correspondence holds, then we can predict things about the world just by doing math. To "use" a theory means to assume that the correspondence holds - to simply do the math and assume that it's going to give you useful results, without having to go re-test the theory each and every time. If you don't let yourself make that assumption, then all mathematical theories are useless for engineering purposes.

Modern engineers can do a hell of a lot of cool stuff just by doing math using theories from physics and chemistry, without re-testing those theories every time they want to build an airplane or synthesize a polymer. And computer scientists can do a hell of a lot of cool stuff just by telling their computers to do pure math. So if there are "Popperians" going around saying pure math isn't useful, they should think again.

Anyway, the rest of Kevin's post is quite interesting, and the philosophy-of-science literature it links to is even more interesting - here are a couple more papers in that literature: (paper 1, paper 2, paper 3). And here's the paper that started the discussion. Neat stuff. As blog readers must have already guessed, I've actually considered just quitting finance and working on this stuff instead, and maybe someday I will. When I'm old, perhaps...

Arbitrary value systems are arbitrary

Is there an arbitrary system of values that will justify capitalism? Sure. There's an arbitrary system of values that will justify anything. Matt Bruenig is therefore fighting an uphill battle:

There is no general framework of morality or justice that supports laissez-faire capitalism. This is a problem of course for those who wish to argue on behalf of it. When you talk to such people, a familiar argumentative pattern emerges that I have come to call Capitalism Whack-A-Mole.

Them: Capitalism is right because people should get what they earn through their hard work. 

Me: But...one-third of the national income goes to capital owners who have done no work at all for that income. If you really believe the economic system should distribute according to hard work, then you’ve got to at least tax capital income at 100%... 

Them: Capital owners may not produce anything to get that one-third of national income, but they got it through voluntary transactions. I am just against force and for voluntarism. 

Me: Transactions are not voluntary. They are coerced through systems of property ownership. You only trade with someone because there is a gun at your head to keep you from simply grabbing the thing that you trade for. There is nothing voluntary about that... 

Them: Capitalist institutions may require violent coercion to enforce, but they make everyone very rich. We’d be much poorer, even at the bottom of society, if we got rid of them. 

Me: OK. So you support using violent coercion in order to make sure people are well off. But people, especially the poor that you are now concerned with, are better off in Social Democratic systems than they are in laissez-faire capitalism. The diminishing marginal utility of money, by itself, justifies significant tax and transfer schemes under a “making everyone as well off as possible” analysis.

If I were trying to justify capitalism with an arbitrary ("deontological") system of values, I would not stop with the three simple examples Matt gives here. I would just move the goalposts. For example:

1. "Capitalism should reward either hard work or risk-taking. Thus, both labor and capital income are justified."

2. "I support conditional voluntarism, not absolute voluntarism. The government should use violence only to protect property rights, and for nothing else. Property rights are defined as blah blah blah..."

3. "I am a pure Benthamite, I care about the sum of utilities; I do not care about the poor more than the rich."

...and so on. In fact, I've heard people say all of these things in defense of capitalism. Matt might manage to smack these down as well by finding some way in which capitalism does not exactly conform to each. But the defenders of capitalism will simply make a small tweak. Matt will be playing Capitalist Whack-a-Mole for all eternity, because unlike classic Whack-a-Mole, the number of holes from which moles can emerge is not finite.

There is actually a mildly intellectually interesting philosophical question here, which is: "Is there a finite set of ethical principles that will yield a set of rules of capitalism whose cardinality is larger than the cardinality of the set of ethical principles?"

I suspect there is, but I also don't care, because I am a Humean, and I reject all clearly delineated ethical rules in favor of fuzzily defined, intuitive principles.

Thursday Roundup, 9/11/2014

Yee hawg, blawgers. It's time for your weekly-or-possbly-biweekly-(I'm-not-sure-if-"biweekly"-means-once-every-two-weeks-or-twice-a-week-and-I'm-too-lazy-to-look-it-up) roundup of links from around the magical world of the econ blawgosphere!

Me on BV

1. In which I attempt to explain New Keynesian models to BV readers

2. I broke the telepathy story before anyone else, but no one noticed...

3. The "Great Vacation" still has trouble explaining stagnant real wages

4. Olivier Blanchard thinks policymakers pay attention to DSGE models. Ha.

5. Our military spending doesn't outweigh everyone else's as much as people think

6. Perhaps we should consider a strategic partnership with Iran

7. Anti-scientism is bad bad news


From Around the Econ Blogosphere

1. Dan Wang (a welcome new voice in the blogosphere) explains why Peter Thiel believes in technological stagnation. Fortunately, unlike Thiel's earlier National Review article, the case does not rest on the idea that the U.S. government is massively understating the rate of inflation.

2. John Cochrane is going to take people who use sloppy vocabulary when talking about bank capital over his knee and give them a hiding! Go cut Pappy Cochrane a switch!

3. On many measures, Obama outperforms Reagan. Shhhh!!!

4. Steve Williamson, Mage of St. Louis, casts a spell of shadow over the Phillips Curve, money supply targeting, wage-price spirals, and the entire notion that low interest rates cause inflation. If you're sure you know how inflation works, read Williamson and tell me if you're still so sure.

5. David Andolfatto shows that deflation ain't so bad as long as you see it coming, thus refuting an argument that very few people make. Tell that to the HINDENBURG, Andolfatto. In other news, I've decided that David should be a Count, because "Count Andolfatto" just sounds right, doesn't it?

6. Roger Farmer has invented an easier way of estimating DSGE models with multiple equilibria. There's a math error on page 22. Can you spot it?

8. Noah Smith Smackdown Watch: Brad DeLong trolls Yours Truly. But only a little bit.

9. Everyone knows that Minsky saw the 2008 crisis coming, right? Everyone knows that if you just read Minsky, you'd know how financial crises work, and why they happen, right? Well maybe everyone is WRONG. BAM.

10. Kazuma Shuhleezy says that "data scientists" are really just statisticians with a sexier name. He is correct.

11. Narayana Kocherlakota: The 70s are over, people. Does that mean the Franco-Prussian War is over? Oh wait, wrong 70s. Anyway, yes. Everyone who's stuck in the 70s should read Kocherlakota and take his words to heart, but of course won't.

12. Chuckle darkly at the excuses of the manager of a failed hedge fund. Then realize that he's a bazillion times richer than you will ever be, and weep gently onto your keyboard, in the process causing you to accidentally "good" a really lame post on EJMR.

13. Should we use TFP as a measure of welfare? Not if it's mismeasured, say I. There's evidence that labor utilization actually leaks into our TFP measures, so this idea might not be as snazzy as it sounds. Interesting idea, though.

14. Chris House makes a good point, which is that Noah Smith is always right about everything DSGE models are actually a subset of Agent-Based Models.

15. Brad DeLong tells the epic tale of the evolution of the yield curve over the last decade. Or at least, an epic tale that may or may not have anything to do with the evolution of the yield curve over the last decade.

16. Robert Murphy lets loose on Gene Fama's Nobel acceptance speech. Moral of the story: Always account for opportunity costs. (Other moral of the story, which Murphy fails to mention: Inflation, too.)

17. These days it takes longer and longer to pay for a college degree, right? Wrong.

Wages and the Great Vacation, cont.

Casey Mulligan has a response on his blog to a recent Bloomberg View column of mine about wages and the "Great Vacation" hypothesis. In that column, I basically just said that flat real wages are a puzzle for explanations of the post-2009 stagnation that rely on government paying people not to work (the "Great Vacation" idea). Casey doesn't like this. Let's go through his points...

Naturally, a supply-demand decomposition exercise is enhanced by looking at both the quantity and price of labor, also known as the wage rate. That's why my book on the recession starts off with various indicators of wage rates and their dynamics (see chapter 2 beginning on page 9).

Well then I guess my article was not exactly news to Casey.

Three or four decades of labor economics research are of great assistance in this exercise.

Well, I guess they've got to be good for something.

I kid, I kid!

[A] reduction in labor supply could be associated with reduced cash earnings even while it was increasing employer costs: 

1. A reduction in labor supply could reduce the quality of labor, with workers putting in less effort, or doing less to maintain their skills, or become less attached to the labor market.  This tends to reduce cash earnings per hour because each hour is less productive.  These have been major factors in the analysis of women's wages, where most economist believe that women's hourly earnings increased as a consequence of supplying more (see Becker 1985, Goldin and Katz 2002, Mulligan and Rubinstein 2008, and many others). See also some of the literature on unemployment insurance such as Ljungqvist and Sargent's paper on European unemployment.

True, but don't things like unemployment benefits and Social Security Disability only go to the unemployed? Slacking off at your job does not result in the government mailing you a check. Why would a rise in welfare-type benefits cause people to slack more? Are they sitting there at their desks feeling depressed, thinking "Dang, I could be earning almost this much if I quit my job"? I guess it's possible, but unlikely, especially given the decreased rate of quits in recessions.

A reduction in labor supply or demand could increase the average quality of labor through a composition bias.  See p. 17ff of my book and the references cited therein.

Wouldn't this tend to increase wages, or am I being dense? Do I have to go to p. 17ff?

Because of fringe benefits, cash hourly earnings are not the same as employer cost.  As employer health insurance expenditure has been growing over time, the growth of cash hourly earnings has substantially under-estimated the growth of employer cost.

OK, but did these non-cash benefits start to increase more in the years following 2009? Nope. They flattened out just like wages. So the point I made in my article applies to this kind of compensation as well.

Labor economists have also long studied the incidence of supply and demand impulses: that is, the effects of supply and demand factors on both wage rates and the quantity of labor. The consensus is that: (a) labor demand is more wage elastic than labor supply and (b) labor demand is even more wage elastic in the long run than it is in the short run. 

Suppose that the reduction in the quantity of labor were 50% due to demand factors and 50% due to supply factors, and that we had overcome all of the measurement issues cited above. Result (a) means that wages would fall in the short run, because supply shifts translate more into labor quantity than into wage rates while, in comparison, demand shifts translate more into wage rates than labor quantity. In this example, it would be wrong to conclude from reduced wage rates than supply is less important than demand for explaining the change in the quantity of labor. 

To put it another way, if we found that wage rates (properly measured) were constant, but didn't know the relative contribution of demand and supply factors to the quantity change, result (a) tells us that the majority of the labor quantity change was due to supply factors. With a labor supply elasticity of 0.5 and labor demand elasticity of -3 (reasonably conservative short run estimates), the constant wage rate result means that 86 percent of the quantity change was due to supply factors and only 14 percent due to demand factors. In the long run, labor demand is even more wage elastic, and the share attributable to labor supply is even closer to 100%. 

To put it yet another way, if it were true that labor demand explained the majority of the change in labor quantity, then employer costs (properly measured) would have fallen dramatically.

I think it's very important to correct for the trend here. Real wages have been flat since the crisis and recession, it's true, but were growing strongly before that. Also, continued productivity growth since the recession seems to indicate that real wages have fallen substantially relative to the long-term trend.

As for the inelasticity of labor supply, it had always been my understanding that the macro evidence showed a fairly high elasticity of labor supply. You'd certainly expect Mulligan, whose theory of unemployment is based on a rise in implicit taxes arising from benefit phase-outs, to take this view. Without looking at his parametrization, I can't tell if the "inelastic labor supply" story is numerically consistent with the "benefit phase-outs caused the stagnation" story, but the two stories do seem to be somewhat at odds. In other words, if you think unemployment is due mainly to people being paid not to work, then it seems like you have to think that people's work decisions respond a lot to how much you pay them.

As for the long run, the period we're talking about is something like 2009-2012, so it doesn't seem that long to me.

In other words, the flattening of wages since the recession still seems like a puzzle for these theories. And I didn't even mention sticky real or nominal wages...

(Note: I was a little unfair in lumping Mitman's theory in with the "supply shock" stories, because his model uses search frictions to make unemployment insurance reduce labor demand. I still think his model is probably pretty wrong, though!)

Is America's health care underperformance a myth?

Argh. Cliff Asness is a true supervillain - he has succeeded in forcing me to think about health care. On Twitter, I repeated the factoid that America's health care system is worse than that of other advanced nations, and Cliff directed me to this article of his, alleging that this talking point is a myth. The whole article is too big to take on in one post, so I'll stick to looking exclusively at his "Myth #4":

Myth #4: Healthcare costs are very high in the United States compared to socialized countries

This section itself is broken into multiple points, so let's take a look at them.

Many of the surveys of “outcomes” that show other countries spend less for similar or better healthcare than the United States are just intentionally disingenuous (i.e., they lie). The ultimate example is the U.N.’s 2000 World Health Report, which has been extensively cited by progressives and the media...[T]he study included high-speed auto fatalities and murders in their assessment of a country’s life expectancy, and then progressives cited that life expectancy to indict the U.S. healthcare system. Well, Americans drive more often on a more extensive highway system than most others, and we sadly have more crime than many. Reputable studies exclude these fatalities as, while tragic, they are not the fault of the healthcare system and should not be used to judge or modify the healthcare system. With these fatalities excluded, the U.S. ranks 1st in the world on life expectancy. With them included, we rank 19th, as reported in the 2000 study cited so often by ObamaCare advocates.

Actually, with both violent fatalities (which include suicide) and traffic fatalities included, we rank 42nd. But anyway, Cliff's point is an important one. Still, I don't think he makes the case. Here's why.

First of all, this study, by Robert Ohsfeldt and John Schneider, uses data from 1980-1999; hence, it is between 34 and 15 years out of date. There is some evidence that the U.S. has fallen behind a bit since then. One way to see the old-ness of the study is to observe that the gap between the U.S. and the other rich countries was very small, with or without traffic and violent fatalities!

Read this WSJ article for a balanced look at the Ohsfeldt and Schneider study. Also, a quick Google will find some studies that look at more disaggregated metrics - for example, this 2012 study, which gives survival rates for various types of cancer. There are many, many other sources like this out there.

The upshot, though, is that in terms of life expectancy, and most other outcomes, the U.S. and European/Asian systems are doing about equally well. The U.S. simply spends a much much larger portion of its GDP to achieve this performance. Similar results for 1.5 or 2 times the price? That's a crap outcome, as a businessman like Cliff should know!

Cliff also accuses the U.N. of basically lying to make the U.S. health system look bad:

Perhaps even more insidiously, most of the U.N.’s 2000 World Health Report does not really even rank healthcare outcomes. The actual oft-quoted final rankings, with the United States ranking poorly, are an average of many different ratings, many of them explicitly about how “socialized” or “progressive” a healthcare system is. For instance, their rating system gives 25 percent weight to “financial fairness,” and if one goes through their other categories you find they again are not rating who lives or dies or lives better (you know, healthcare outcomes), but how much the healthcare system has such things as “respect for persons” (this is part of the 12.5 percent weight they gave to “responsiveness,” which is separate from the 12.5 percent weight they gave to “responsiveness distribution,” whatever on Earth that is). The report goes further, judging these things with such objective measures as “respect for dignity” and “autonomy.” In total, more than 60 percent of a country’s score in this survey was some measure of progressive desires, not what you or I would call a healthcare outcome. And, as in our auto example above, much of the rest contained expressly anti-American flaws. That we pay for the United Nations to lie about us is a topic for another day.

I don't have anything to say about this, but I never heard about those ratings anyway, and I don't think advocates of U.S. health reform really talk about them much. So I will skip over this part.

Cliff's later points address this somewhat, so let's proceed:

Part of the reason we spend more is other countries have price controls and we don’t. For instance, they restrict the amount drug companies can charge much more than we do. That sounds great; price controls save us money! But if nobody pays for new drugs, they don’t ever get created. Without these controls, our consumers here indeed pay more, but that funds much of the life-saving and life-extending healthcare innovation available for Americans and the rest of the world. It is frankly unfair that the world is free-riding off us. Free-riding means they let us pay for the innovation that benefits them at lower cost. But if nobody pays for the innovation, the innovation just does not happen. If we try to free-ride off ourselves, it doesn’t work—innovation dies for us too. U.S. consumers paying fair prices (not government restricted artificially low prices) does lead to higher U.S. healthcare costs, but the alternative is far worse: Joining the world in severely limiting prices, and not seeing the next generations of new innovations and improvements.

This is another important point, though I wish Cliff had provided some evidence.

The U.S. spends 18% of GDP on health care; Germany spends 11%. Are you telling me that we spend 7% of our GDP - one trillion dollars a year - on health innovation? Actually, since some health innovation is done in other OECD countries, it's an even bolder claim - that $1T should represent the difference between what we spend on health innovation and what we would spend if we were able to "free ride" as much as Germany. That's a lot of health innovation spending. Health research spending is only about a tenth of that, actually. (Research is not the only type of innovation, of course, but it seems like the bulk of it, especially given that many R&D expenses are tax-deductible, so it's in companies' interest to classify as much innovation as "research" as possible.)

So the argument is that our exorbitant health care prices go to fund innovation, which Europe and Japan then get for cheap or free, by free-riding. But how does this free-riding work? How do they just take our technology?? Maybe ideas are just in the air, and technology spreads by casual conversation among doctors at international conferences, by cheap reverse-engineering, by industrial espionage, etc.

But if this is true, then health technology is non-rival and non-excludable - it's a public good! And a public good is a market failure. And if health technology is a giant, $1 trillion market failure, we shouldn't expect a free-market system to work very well. You can try to patch things with a patent system, but that will always be an incomplete solution. So if all this free-riding is going on, it's a powerful argument that much medical innovation should be done by the government, not by private companies.

Cliff continues:

Americans lead less healthy lifestyles than much of the developed world. Americans historically value freedom more than other countries and cultures. We value it for its own sake, even if it sometimes leads to a worse outcome. But we mostly value it because these choices are personal. Frankly, some would sacrifice some health to eat what they want and avoid the StairMaster. Freedom isn’t always sugar-free. Our American choices are costing us more, and raising the healthcare cost figures progressives love to cite. But they are our choices to make, not theirs to gainsay.

I will spare the snarky comments about public health, hand-washing, sewer systems, the CDC, blah blah blah. Those comments write themselves.

What's less clear is that people in Europe and Japan are less free. Getting good health advice from your doctor isn't slavery. Being taught healthy habits in school isn't slavery. If you think either one of those things is slavery, you're a doofus. A doofus who is entitled to his doofus opinion, but a doofus nonetheless. (Note: This is a value judgment!)

(Actually in some ways we live healthier lifestyles than people in other countries. We smoke less, for example. Obesity is the main difference. It's a little amusing how the right has turned to extolling the virtues of land-whale-itude in recent decades...)

Cliff:

We spend more on end-of-life care than more regulated societies with socialized medicine or systems closer to it. That’s our choice.

Is it? A lot of that higher spending is higher prices, which could reflect higher demand, or which could reflect inefficiencies in the system (or paying for innovation, but I covered that above). I'm going to go with "inefficiencies," since Americans usually don't even know the prices of the health care services they buy. How can you make an informed, free consumer choice when you don't even know the price of what you're buying?

Cliff:

The cost of a healthcare system is not just what we spend directly on it, it is also how much the healthcare system helps or hurts the overall economy. If socialized medicine slows economic growth, then this is part of its cost, perhaps a big part, and is left out of the simple analyses (looking at direct expenditure divided by GDP) that are so common.

But if the government forbade us from spending money on health care, we'd just spend it on other stuff we like. In real terms, if government forbade us from using real resources to create health care services, we'd use those resources on something else we want a bit less. Substitution would mitigate the effect of price controls, etc., not exacerbate them.

Cliff:

Lawyers. We got lots, they have far fewer. We can separately debate how to design our legal system (some of my libertarian friends advocate for a large role for lawyers), but the size and scope of legal action here dwarfs most of the world. It leads to doctors practicing tremendous amounts of “defensive medicine.”

This is a sensible point, but as with most of these points, it's not backed up by any numbers or evidence. Tort reform could theoretically be a big money-saver, but in practice it doesn't look like a game-changer.

This brings us to the end of Cliff's so-called "Myth #4". The main take-away is:

1. We pay much much more than other countries for about the same quality of health care.

2. Some part of this may be due to innovation externalities, but these must necessarily represent a market failure.

Anyway, I do think Cliff's points are important. I think medical innovation is very important and under-studied, and I do think it represents some (though not most) of the price difference between America and other countries. I do think that tort reform is a good idea and should be tried. I do think that the difference between America and the rest of the OECD is not in health outcomes, it's in the cost we pay to achieve those outcomes. And I do think that the medical system can't entirely fix the obesity problem.

But these points do not convince me that the American health system is doing better than those of other rich countries. Cliff's main point is that the American quasi-market system, while not perfect, does many things better than the non-market systems of places like Germany, the UK, or Japan. But it seems to me that getting "bang for the buck" for the modal or median person is not one of these things. Cliff's "Myth #4" seems like no myth, but fact.