Eve Gerber: Let’s turn to Losing Ground by Charles Murray. Please tell us about it.
Jon Gruber: Charles Murray took the economic concept of moral hazard – the concept that if you reward people for bad behaviour then they behave badly – and turned it into prose. Reading the book moved me a notch to the right. It posed a challenge to liberals – to get more rigorous in our analysis. It showed the simple facts didn’t look so good for us and that we needed to address questions like, “Is welfare causing women to become single mothers?” Murray really challenged the way I thought.
It turned out his facts were largely wrong, so it’s really more a book to read for an example of how someone can shift the debate with potent use of clear arguments.
Eve Gerber: When it was written, liberals were very resistant to the idea that social programmes discourage work or have bad side effects. Has this shifted? How much of Losing Ground actually became embodied in reforms or proposals that many liberals would now support?
Jon Gruber: Losing Ground was the intellectual basis of the push to reform welfare in the United States, not in terms of the actual ideas but just in terms of challenging the orthodoxy. And, of course, welfare was reformed in 1996.
Eve Gerber: Next, Free For All? It certainly sounds good. Please tell us about it.
Jon Gruber: Health is the single most important topic in public finance today and this is the single most important book written about health – that’s why I chose it. The book is by Joseph Newhouse, who led the group that designed the RAND Health Insurance Experiment. In the 1970s people tried to figure out how much of the cost of healthcare consumers should bear and how much insurance should pay…. Joe Newhouse and his colleagues put together this incredible social experiment… randomly assigned individuals to plans with a variety of cost-sharing provisions, to determine how health was affected when people paid more for healthcare. This was the premier use of a social experiment of this magnitude and quality.
The results were profound because, not only did the study show that people are price sensitive in their health decisions and if you charge more for healthcare they’ll use less but it also showed that, at least back then, higher deductibles didn’t matter much for health. People in the study used less healthcare but weren’t less healthy…. Subsequent studies, including a number of mine, have generally found similar conclusions, but no study has ever been as good as this one….
Eve Gerber: Have we seen other large-scale economic experiments like this in the United States or around the world? If you could design just one new experiment, what would it be?
Jon Gruber: There haven’t been that many. There’s another famous one called the Negative Income Tax Experiment – it’s also very old [from 1968 to 1979]. In that experiment they changed people’s tax rate and saw how hard they worked. That one has been influential…. There were two things about RAND that made it so influential. The first was it was truly a randomised trial – the kind that’s done in medicine – so it’s very convincing. Second, they got detailed data on individuals – not just how subjects felt but their actual blood pressure and other objective measures of health. I was fortunate enough to be part of the closest thing we’ve seen to RAND – a study we just did in the state of Oregon, with my colleague Amy Finkelstein at MIT and Katherine Baicker and Joe Newhouse at Harvard…. The Oregon study is about what happens when you’re insured vs uninsured…. The first finding, which just came out and got a lot of attention, is that people who won the lottery and got the health insurance were hugely better off. Their utilisation went up but, more importantly, their health went up, their wellbeing improved and their odds of financial distress were reduced. This was a neat initial finding and now we’re gathering data from people in household surveys on objective measures of health like their blood pressure and blood glucose and things like that. This is, in my mind, the biggest study since RAND.
Eve Gerber: You were an architect of Mitt Romney’s Massachusetts health programme and an instrumental adviser in the design of the Obama administration’s health reforms. So please settle the question of the year: How similar are they?
Jon Gruber: They are very, very similar. You can think of the Affordable Care Act as a more ambitious version of the Massachusetts reform. Both reforms have the same core principles: Non-discrimination in insurance markets, health insurance mandates and subsidies so insurance is affordable. In Massachusetts, we stopped there. The national bill – the Affordable Care Act – has two additional features. One is it’s paid for and two, it takes on cost controls. Romney’s reform was paid for with funding from the federal treasury. The Affordable Care Act is paid for through offsets in the federal budget. And the Affordable Care Act tackles the increase in costs in a serious way, which the Massachusetts bill didn’t do. So you can think of the Affordable Care Act as the Massachusetts bill-plus.
Eve Gerber: Where did the idea for a mandate come from?
Jon Gruber: I associate it with Stuart Butler from the Heritage Foundation and Mark Pauly, an academic at Wharton. I first heard about it as the conservative alternative to the Clinton healthcare reform of the early 1990s….
The biggest issue in dollar terms is just how to control healthcare costs. The Affordable Care Act makes a start but more must be done. I like to say there are only two problems we have to worry about in America – healthcare spending and global warming…. How we control healthcare costs is probably the number one problem public finance economists and everyone in the world has to grapple with…
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