Sunday, June 07, 2009

The Microeconomic Foundations of Macroeconomic Policy

My preference has always been to have students take micro prior to macro. The reason is that I find most macro issues to be rooted in the microeconomics. The recent activity around health care reform is an example.

On June 2nd, the CEA released their report on The Economic Case for Health Care Reform. Economic bloggers and others actually read the report and commented on it. Virginia Postrel at the Dynamist blog has several posts related to the report.

In one she notes that the CEA assumes a reduction in health care expenditures without showing how this would come about. Indeed in an interview with Ezra Klein, CEA Chair Dr. Christina Romer says that she is coming at this from a macroeconomic standpoint - but BTW there are lots of things we could do to lower health care costs, without talking about or advocating any of them specifically.

Ms. Postrel opined that we ought to try all of this with Medicare first which apparently got a response from Peter Orszag at OMB. A couple of his points were:

1) The administration does have big Medicare changes planned, both immediate cuts in reimbursements and "game changers" to impose more scientific management, potentially realizing savings down the road.

2) "I hope I’m not making anything sound like they’re painless." There are going to be "hard, CBO-scored cuts" in Medicare, "mostly involving provider payments." The administration is proposing cutbacks in home-health care and Medicare Advantage payments, for instance. It isn't expecting to get its initial savings from better management.

What this tells me is that the wonderful macro stuff that may happen if we slow the growth in health care spending is dependent upon the micro stuff like lowering individual prices (reducing reimbursements) and rationing care (scientific management.)

Said another way, you can't do the macro stuff without first doing the micro stuff.

(Summer I Macro Students - as they say, read the whole thing. There will be a quiz on where the phrase "assume a can opener" comes from.)

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