Market mechanisms for regulation: Cap-and-trade and Obamacare

Jeffrey Frankel, 27 February 2014



Markets can fail. But market mechanisms are often the best way for governments to address such failures. This has been demonstrated in areas from air pollution, to traffic congestion, to spectrum allocation, to cigarette consumption.

Topics: Environment, Politics and economics
Tags: Cap-and-trade, environment, EU ETS, global warming, healthcare, market-based mechanisms, Obamacare, pollution, regulation

Healthcare: The US presidential policy debate

Zack Cooper, 30 October 2012



Healthcare reform sharply divides US voters. But what cannot be disputed is that the US spends more on healthcare than any other country without getting uniformly better health outcomes.

Topics: Health economics, Politics and economics
Tags: healthcare, presidential race, US

Healthcare decentralisation improves satisfaction and equity at no additional cost

Joan Costa-i-Font, 22 August 2012



Healthcare is one of the most costly welfare services governments deliver, and very often economies of scale are not large enough to justify centralised control. Hence regions are provided with healthcare governance autonomy as a mechanism to introduce some competition into monolithic systems in need of modernisation.

Topics: Health economics
Tags: decentralisation, healthcare, public service reform

School Meals as a Safety Net: An Evaluation of the Midday Meal Scheme in India

Stefan Dercon, Albert Park, Abhijeet Singh, 25 June 2012

Vox readers can download CEPR Discussion Paper 9031 for free here

Journalists are entitled to free DP downloads on request; please contact To learn more about subscribing to CEPR's Discussion Paper Series, please visit the CEPR website.

Topics: Development, Education, Health economics
Tags: healthcare, India, nutrition, school meals

Demographic change, retirement and healthcare

Peter Diamond interviewed by Romesh Vaitilingam, 2 Sep 2011

Nobel laureate Peter Diamond of MIT talks to Romesh Vaitilingam about of the impact of improved longevity and the resulting demographic change on the retirement and healthcare systems of the advanced economies. The interview was recorded in August 2011 at the Fourth Lindau Meeting on Economic Sciences, which brought together 17 of the 38 living economics laureates with nearly 400 top young economists from around the world. [Also read the transcript]


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Romesh Vaitilingam:  Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam and today's interview is with Professor Peter Diamond from MIT, co‑recipient of the 2010 Nobel Prize in economics. We met in Lindau, Germany in late August 2011 at the Fourth Lindau Meeting on Economic Sciences, an event which brought together 17 of the 38 living economics Nobels with nearly 400 top young economists from around the world. Peter had just spoken at the panel discussion on the impact of demographic change on our retirement and healthcare systems and he began by explaining why the good news of rising human longevity has raised such big long-term issues for the advanced economies.

Peter Diamond:  We have seen in the advanced countries a steady trend of longer lives. What has made adjusting to that such a big deal right now? I think there are two answers to that that come together. One is that the baby boomers and particularly the drop in the fertility rate after the baby boomers is a relatively rapid move in the demographic structure compared to the way the trend looked otherwise. Of course, not all the countries experienced the baby boom ‑ that is not a worldwide phenomenon ‑ but many did. And so, the process of adapting slowly to change in demography is not such an option when the demography is changing more rapidly. The second element is, the US has no automatic adjustments relative to demography. We have adjustments relative to wage growth and price growth. We don't have any adjustments for demography and this was the way the systems were set up when they were started at different times in different countries.

It was probably not a good idea. The systems were much smaller. So, the extent to which they weren't such a good idea wasn't a big deal. They're all so big now, they’re expensive and in terms of the impact on economy, obviously, a problem in a big programme is a bigger deal than a problem in a small programme. And so, what we have seen ‑ Sweden and Germany are two examples ‑ is building demographic developments into the automatic structure of the response to what's going on. And that's one of the things I urge for the US. I did that in my book with Peter Orszag back in 2005 Saving Social Security.

Romesh: Can we talk about the issue of retirement if that's the big question with the ageing of our society, people living longer and an increasing slice of the population being of the older generation. How do you think about it? Do you think that is a relatively easy thing to solve compared to the healthcare, which we’ll come to in a moment?

Peter:  First, let's note that we had two things going on simultaneously. People were living longer but secondly, men were retiring younger and younger. If you look at the 20th century, the work day has shrunk, the work week has shrunk, the work year has shrunk and the work lifetime has shrunk, not in percentage term, but in absolute terms, they were shrinking, at the same time as people were living longer. In the US that shrinking stopped in the mid-80s and has reversed already. People work longer. The pension system doesn't control when people retire. What a pension systems, if it's well designed, does is to set up a menu of alternatives of: You can retire on this age and you get this pension. You can work a little longer and get a bigger pension! Here's how much bigger it would be. And for some people, it will make sense to retire early.

Increasingly, I would expect people wil respond to this by working longer. I talked about men here ‑ not because only men are important in the labour market ‑ just to be clear; but because the combination of factors about women had led to a much more complex picture. But the growing importance of genuine careers for women has meant that there are more things going on there. So, the point is that the system will work well if, to a significant extent, it succeeds in inducing people to retire later.

And it will do that by doing, in the US context, one thing, which is lowering benefits as a function of age in the way that can be offset by working longer. And in some other countries where the increase in benefits, when working longer, is not large enough, they also need not just to change the level but to change the tilt so that working longer does more for you to encourage an appropriate but diverse pattern of when people retire.

In the US context, where the replacement rates are quite low by international standards, where the tax rate is low by international standards, we do not want to do the entire adjustment on the benefit side. It is totally appropriate in the US that the tax rates go up as part of the solution.

Romesh:  If we could turn to healthcare, I’d be interested to get your perspective on that, thinking about how that relates to demographic change. In your talk, you said, basically, demand for healthcare is unlimited. It could be all if us wanted to get a doctor to check in on us once a day to see how we are doing.

Peter:  That’s is such a wonderful example.

Romesh:  Why don't you recount that example again?

Peter:  This actually came from Eliot Freidson. I believe, it was his PhD dissertation written in the 50s. He's interviewing somebody in the Bronx which is where I started growing up before my parents moved out to the suburbs, part way in my elementary school education. And he says to this man, "If price were no object, what would you like for medical care?" And he says, "It would be nice each morning as I have breakfast, if the doctor stopped by and asking, ‘How are you feeling today?’ and I could say, ‘Fine, thank you.’" And the point is that, there are a huge number of things where some value can come from more tests, from procedures. There are many, many ways to spend money. So, we have to find methods of deciding what you do and what you don't. For many factors, we do that by saying, "You want it, you buy it." Healthcare is – and ought to be – a heavily insured activity because it is such a major risk for people.

And the insurance will of course have a moral-hazard dimension, which insurance almost inevitably does. But that doesn't mean you don't want the insurance. It just means you want to work on the design. You want to work on the scale. The insurance will recognise that and so you need to design a mechanism for limiting demand. We can do it in part through prices, in part integrated with insurance. We do it in part by relying on the professionalism of doctors to say, “That's not worth doing.”

We do it in part by having systems where you don't see the doctor everyday and so there are delays. There are lags. You have to wait for things to come. So there are multiple ways of doing – to use the abominable word – ‘rationing.’ Rationing to an economist is something that is inevitable as a function of limited resources. And so, the key question is how to do it and as part of that, in the current US context, we need to recognise we have a budget problem for the federal government associated with healthcare.

It is the elephant in the room. But we have a budget problem for state and local governments relative to healthcare and it’s the elephant in their room. And we have a healthcare problem for businesses for their employees. It may not be quite as large a problem but it's still pretty big. And we have a problem for lots of individuals to the extent that they are paying for healthcare.

So, what is important here is not to focus on how do we shift the cost from this level of government to somebody else. That may work for the budget, but it doesn't work for the American people. We have to say, how do we get better value out of the healthcare in a way that will limit the cost growth and hopefully, at the same time, improve care. And it seems to me there are some things right now we know that, say, Medicare can change and make things better.

But to a large extent, the medical care is a very complex animal and we need to do experiments, evaluations, a further round of attempting to do things, in order to figure out what to do. This is very much a process. To say we know now exactly how much we should spend on Medicare eight year from now is silly. It doesn't mean it's silly that the legislative process has a default which is different from not having a default. But it seems to me it's a default. It's something that ought to be changed as we see what evolves in our ability to learn about how to do a better job of healthcare.

So I think, while it's appropriate to be working on some of the healthcare issues, I think it's also important to recognise that there are other elements in the pension systems that I talked about, and where our ability to do things that work for the long run is greater than our ability in medical care. And we need to be doing more than just looking at the elephant in the room. We need to do more than thinking in terms of the spending limit rather than thinking about how do we get it better. And once we are getting it better, how much do we then want to spend?

And it will also depend on things we can't predict. The appearance of new diseases, continuing problems from existing diseases that could get worse... There are all sorts of things that make that much more uncertain than the pension area and therefore, a genuinely hard problem that needs to be approached with attention to detail rather than a blunderbuss.

Romesh:  You're done. Thank you very much.

Romesh Vaitilingam interviews Peter Diamond for Vox

August 2011

Transcription of a VoxEU audio interview [] 

Topics: Health economics
Tags: demographic change, healthcare, longevity

How have Europeans grown so tall?

Timothy J Hatton, 5 August 2011



With so much of the focus in healthcare research on ageing populations (see for example Breyer et al. 2011 on this site), we might be forgiven for taking our eyes off the younger generations. But a glance in their direction can reveal some striking trends.

Topics: Health economics
Tags: disease, health economics, healthcare, Height

Slashing "killer tariffs": An easy step towards greater trade and development policy coherence in Africa

Lucian Cernat, 24 July 2011



"Sleeping with the enemy" is not just an adrenaline-raising movie starring Julia Roberts. In malaria-endemic countries, it is literally the challenge tens of millions of people have to deal with every day when they go to bed, particularly young children. According to the World Health Organisation (WHO), over 3 billion people are at risk of malaria.

Topics: Development, Health economics, International trade
Tags: healthcare, killer tariffs, malaria

Physician-leaders and hospital performance: Is there an association?

Amanda Goodall, 21 July 2011



In the past, hospitals were routinely led by doctors. That has changed. In the UK and the US, most hospital chief executive officers (CEOs) are non-physician managers rather than physicians (Falcone and Satiani 2008). Of the 6,500 hospitals in the US, only 235 are led by physicians (Gunderman and Kanter 2009).

Topics: Health economics
Tags: healthcare, healthcare management, Hospitals, UK, US

Do differences in childhood circumstances explain US-England health differences at older ages?

James Banks, Zoë Oldfield, James P Smith, 21 July 2011



Considerable empirical research is now underway looking at how people’s health, social status, and economic fortunes develop over the course of their lives. As examples, early work suggested that health outcomes at adult ages may be traced in part to health and other conditions during childhood (e.g. Barker 1997, Case et al. 2002).

Topics: Health economics
Tags: cohort studies, England, health economics, healthcare, US

Does price regulation affect the adoption of new pharmaceuticals?

Joan Costa-i-Font, Nebibe Varol, Alistair McGuire, 8 July 2011



Pharmaceutical price regulation has been used in major pharmaceutical markets to correct market imperfections and contain rising healthcare costs. But regulations can affect the adoption of innovations, especially in highly regulated industries such as the pharmaceutical industry where products and processes are protected by intellectual property rights.

Topics: Competition policy, Health economics
Tags: healthcare, pharmaceuticals, regulation

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