Friday, August 29, 2014

Casey Mulligan's New Book "Side Effects" is Published

The University of Chicago's Professor Casey Mulligan has published a new $3 e-book titled "Side Effects".  He provides an in depth examination of the future of health care in the United States.    Building on some of the ideas discussed in his WSJ profile,  the book provides a nitty gritty analysis of the unintended consequences of the new health care law.  It offers a number of predictions about the medium term future that can be compared to data to see if his theory is correct.   At its core, this book focuses on incentives both of workers in terms of hours worked and on the demand side focusing on the incentives of firms to bundle how many hours into how many jobs. Intuitively, under the new law,  will firms seek to hire many part time workers or fewer full time workers?

I am not a health care expert but as I read Mulligan's book, I was reminded that there are many behavioral elasticities that health economists designing the law are assuming equal zero.  Mulligan questions this optimistic (and lazy) assumption.  Put simply, if the NFL adopted Canadian Football rules, more teams would punt on 3rd down!    As I understand Casey's argument, many Obama health economists are implicitly ignoring the Lucas Critique.

A critic might say that this is a "fancy" way to defend denying health care to poor people.  That would be a "low blow".   Instead,  Professor Mulligan is demonstrating how a "public intellectual" who is a Ph.D. economist goes about using his skills to hone the public dialogue.  We economists believe that incentives matter.  Mulligan is investigating what are the incentive effects embedded in President Obama's new health care law.  From an intermediate micro economics perspective, he is studying how the new law leads to kinked budget constraints and induces optimizing households and firms to move to corners and kinks.  Such individually rational choices have social consequences.  At a time when our economy features "secular stagnation", we need to be smarter about what tradeoffs we are making in the name of achieving a worthy goal such as an expansion of health care for the poor.

Today, economists are really interested in salient effects.  Raj Chetty has written several papers on tax salience.   To understand what is "salient", let me define the converse.  If you pay for your electricity bill using automatic credit card billing then this isn't salient. You never see the bill and "out of sight is out of mind".  Without being confronted with such price information , you are less likely to invest in energy efficiency.  Mulligan is arguing that there are several new taxes embedded in the new Obama Health care law that are not salient. This may be intentional by the White House to reduce political opposition but to economists it is crucial that we foresee the full price tag and potentially distorting effects of a major piece of new legislation.  At a time when our economy isn't creating many "good jobs", could this law further slow this process?  Shouldn't economists be studying this?

One feature that I really like in Mulligan's book is taking the theory of compensating differentials seriously.  Adam Smith would respect this and my mentor Sherwin Rosen would also salute this.   If jobs offer greater benefits then workers will accept a lower wage.  If firms must pay out greater benefits then they will only hire workers at a lower wage.