Marginal Revolution!

Tyler and Alex at Marginal Revolution are on fire this morning! Please do pay them a visit for more discussion of the economics of the new Medicare bill (ugh). I also particularly like Alex’s comments about human psychology and the sunk cost fallacy, although I’m not entirely convinced that overcoming the sunk cost inertia was truly the choice of a rational economic agent. Consider this: Alex goes out to shop without his wallet, goes home to get it, and the traffic and drudgery of northern Virginia is so exhausting that it’s not worth it at the margin any more, given his current state. I’ve just made a totally marginal argument, with no appeal to sunk cost, yet he stays home and bails on the shopping errand.


UPDATE: I like the way Jonathan Wilde at Catallarchy put what I think is the same thing I was saying less eloquently:

All potential states of satisfaction are ranked on an individualís value scale and those actions that are expected to achieve the highest ranked state are pursued. However, the rankings are constantly reshuffled as the environment changes, personal preferences are altered, and time passes.

Alexís second trip to the store was simply a reappraisal of his circumstances at that time, and based on his own subjective preferences, he decided to take action to go back to the store.

Yeah, what he said.

One thought on “Marginal Revolution!

  1. The expression “economics of the new Medicare bill” may well be an oxymoron.

    It is fascinating to recall that the prescription drug benefit discussion began as an expressed “need” to provide prescription drugs for seniors who were so poor that they were forced to choose between buying dog food for their own consumption and buying the medicines necessary to sustain their lives. It has since “morphed” into a massive (already) new welfare program for all seniors, whether they need it / want it or not. I believe we would have risked substantially less, both in terms of money and in terms of detriment to the economy and medical care, had Congress created a program to provide free Alpo and Dog Chow to those extremely poor seniors, so that they would have the funds available to purchase their medicines through normal channels. The resulting damage to the pet food industry would have been far less significant to the national welfare than the anticipated damage to the pharmaceutical industry from the now virtually inevitable price controls on prescription drugs.

    This prescription drug program has frequently and incorrectly been referred to as a “new entitlement”. This program is not now, nor will it ever be, an entitlement. No one has done anything, nor is anyone required to do anything in the future, which would “entitle” them to this prescription drug benefit. The current Medicare tax on employers and employees is inadequate to cover the costs of Medicare Part A in the future; and the tax has not been increased under the current bill to cover the cost of the new benefit.

    Medicare Part A will actually not become a full entitlement until about 2007, when new beneficiaries will have worked under the system and paid its taxes for their entire working lives. (I will be part of that group.) Medicare Part A was a pure welfare program for the initial recipients who began participating in the program in 1965, since they has paid no Medicare tax during their working lives. Medicare Part B is a part welfare, part participant funded program much like the new drug benefit.

    It seems certain that this new welfare benefit under Medicare will soon require either a tax increase, or “means testing” of the entire Medicare benefit structure. Medicare is already progressive, in that the additional taxes paid by high income employees and their employers do not entitle the employees to a greater benefit. Means testing would make it even more progressive; however, it would also break the “implied contract” between Medicare and Medicare beneficiaries. Alternatively, Medicare benefits could be taxed as regular income, as are 80% of Social Security benefits for higher income seniors.

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