Perversity of preferences

10/04/2014 § 2 Comments

I’ve been watching the roll-out of the Affordable Care Act (ACA) in the US. I understand why the Rube Goldberg apparatus was set up the way it was. Doesn’t make me happy about it, but it does mean that more people are better insured.

The Supreme Court ruling that cleared the final roadblock was exactly the sort of split-the-baby decision we should have expected. As sometimes happens with rulings, the implications weren’t immediately clear. In particular, the provision that states could opt out of the Medicare expansion turned out to be more important than was first thought. The implications were recently discussed in an interview with Prof Jonathan Gruber, MIT, Director of the health care program at NBER:

[T]he single thing we probably need to keep the most focus on is the tragedy of the lack of Medicaid expansions. I know you’ve written about this. … I think we cannot talk enough about the absolute tragedy that’s taken place. Really, a life-costing tragedy has taken place in America as a result of that Supreme Court decision. You know, half the states in America are denying their poorest citizens health insurance paid for by the federal government.

(N.B.: ‘half the states’ does not mean half the people — the states in question are less populous than the ones that expanded Medicare.)

Why do I point this out? Because the economist Gruber was surprised by the politics:

if you’d told me, when the Supreme Court decision came down, I said, “It’s not a big deal. What state would turn down free money from the federal government to cover their poorest citizens?” The fact that half the states are is such a massive rejection of any sensible model of political economy, it’s sort of offensive to me as an academic. And I think it’s nothing short of political malpractice that we are seeing in these states and we’ve got to emphasize that.

‘What state’ is an incorrect way to think about the issue. It wasn’t ‘states’ that decided. It was people, specifically politicians and the voters who support them. What politicians-and-the-voters-who-support-them would turn down free money? People who believe — who prefer, let us say — that poor people should not be helped. That poverty is just desserts. That poverty is just the flip side of positive incentives for hard work and sober decisions. These people prefer a certain set of incentives aligned with a specific view of how the world works (Weltanschauung, if you don’t mind me saying).

This ACA situation is the Ultimatum Game writ large. We just played the game in class. When the offer was 50:50 or 60:40, it was accepted. When it was 90:10, it was rejected. Person A turned down free money because Person B else wasn’t ‘playing fair’, wasn’t acting according to Person A’s preferences.

Politics is a way for people to express their preferences and try to foist them on other people. It is also a bloodsport, as Dr Thompson would remind his readers. That’s my way of saying, of course these people rejected Medicare for the poor, even at a cost to themselves. They are using the issue to Make A Statement about how the world should be, and if people get hurt, well, omelettes and eggs.

It’s an important lesson for economists working in policy. People’s preferences are wild and woolly, and when expressed through political process can lead to seemingly perverse results.

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§ 2 Responses to Perversity of preferences

  • Grant Taylor says:

    these people rejected Medicare for the poor, even at a cost to themselves

    Assuming that the decision-makers are relatively affluent people, I expect that they would experience the cost:benefit ratio of their decision as something like “a small price to pay”.And the greatest cost of their decision, all things considered, is being borne by someone else – someone they specifically disidentify with. I see this is as a fundamental failure of empathy, which libertarian economic policies seem to require.

    • I think it’s good to remember that the decision-makers — the politicians and top bureaucrats — are in positions of power only because enough people support them. Those supporters aren’t all rich or comfortable. Many of them could really use the economic growth that federal money would bring. But, they are willing to forego those benefits so that the world is shaped according to their preferences — specifically, that poor people suffer.

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