Kulick contra Krugman

by robekulick

On July 24, 2011, Paul Krugman wrote the following article entitled “Messing with Medicare” where he argues for:

(1) increasing the age of eligibility for Medicare. And

(2) means-testing Medicare (in other words, taking elderly people who can afford healthcare otherwise off of Medicare)


When I first read this, I was shocked because these are usually the policies advocated by political moderates like the editors of the Economist and post- recession Richard Posner. (Actually whether Posner’s move to the center was a dramatic shift following the crisis or a slow progression since the 1980s is an interesting subject for another post, but I digress). Of course, you might say Paul Krugman isn’t a moderate by any means and you would be right to say that, but I had that these particular policy suggestions weren’t controversial among economists. Clearly, I was wrong.

I hesitated in writing this blog post at first because it’s an interesting situation for me. Paul Krugman was my first Professor of macroeconomics at Princeton and for at least the first two years of my undergraduate education I believed very strongly in his old fashioned Keynesian approach to macroeconomics. Admittedly, at this point, my macroeconomic views are different, but he’s still a brilliant economist, so it feels a bit strange for my first really polemical blog entry to be contra-Krugman, but so it goes!

Essentially my understanding of Krugman’s argument as to (1) is that since he believes that a socialized system would be better, any extension of Medicare coverage is a good extension of Medicare coverage. For (2) he argues that since Medicare is more efficient than private insurance (in his view) it would be better to raise taxes, and keep Medicare as is. He points out that means-testing is effectively a tax increase in and of itself and in that he is correct. Indeed, it is also reasonable to view increasing the age of Medicare eligibility as a tax increase of sorts and since he acknowledges that fully socialized medicine is politically infeasible at the moment, I’ll start by considering these measures in terms of the economics of tax-increases.

One could imagine an idealized world where it doesn’t really matter how you pay for your goods and services, ie you could pay for them directly or you could give your money to the government which would buy what you wanted for you. In the real world, introducing government into the equation produces two economic costs. The more obvious cost is that the government will have to employ resources (public servants, etc.) to collect the taxes and make the purchases. The less obvious, put equally if not more important cost, is that the government does not actually know what you want to do with your money and so it does not buy you what you actually would prefer to do with that money. Back to the world of healthcare, what Krugman is effectively arguing here is that because Medicare pays less than private insurance for medical care, the government is clearly more efficient and unlike in the traditional scenario described above, it’s better to pay higher taxes and let the government take care of medicine for the wealthy and for all people above a certain age.

My main problem with this line of argument is that Medicare, when it suppresses health care costs, does so by law and thus pays below market prices. Basic economics tells us though when we make the price of a good artificially cheap the supply of the good in question will decrease and the demand for it will increase. The outcome is a shortage. It is of course, easy to imagine why in such a situation the result of increased use of Medicare would be a decrease in the number of doctors and nurses available to treat patients. After all medical school is a lengthy and expensive endeavor, and in my personal experience that incentive really does matter. Furthermore, Medicare also mandates what it will pay pharmaceutical companies for their drugs, so another problem with Medicare is that it reduces incentives to innovate. So the apparent price of Medicare is not the full price that society pays for Medicare. Now, as you might suspect, the issue is more complicated than this and there are economic theories that Krugman could rely on to support the proposition that Medicare could be sufficiently efficient that it still outweighs these costs. However, these theories deal with exceptions to the normal economic rules, and as Scott Sumner argued in a recent post http://www.themoneyillusion.com/, if you’re going to make arguments that fly in the face of time-tested, traditional economic theory, you certainly should bear the burden of proof and Krugman has not carried that burden in my view. In the mean time, means-testing and increasing the age of eligibility are sure ways to reduce our impending debt problems and the economic benefits of that are clear. So count me with the moderates on this one!

Of course, there is a lot more to say about healthcare, but since this debate will remain with us for the next 30 or so years at least, I think I can call it quits for today.