New Freakonomics Podcast: Does College Still Matter? And Other FREAK-y Questions Answered

Freakonomics Radio

“Does College Still Matter? And Other Freaky Questions Answered”: In our second round of FREAK-quently Asked Questions, Steve Levitt answers some queries from listeners and readers.

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Our latest podcast is another attempt (here’s the first) to answer some of the questions you’ve asked us on the blog. (You can download/subscribe at iTunes, get the RSS feed, listen live via the link in box at right, or read the transcript here.) Here’s how it begins:

 

DUBNER: A reader named Jonathan Bennett asks, “Is it true that college education is no longer a factor, or [is] even a disadvantage, when it comes to employment?” Levitt, what say you?

LEVITT: [laughs] I think that never has anyone made a statement more false than Jonathan Bennett’s statement that education would be no help or a disadvantage in the modern economy. Of all the topics that economists have studied, I would say one we are most certain about are the returns to education. And the numbers that people have come up with over and over are that every extra year of education that you get will translate into an 8 percent increase in earnings over your lifetime. So someone who graduated from college will earn about 30 percent more on average than someone who only graduated from high school. And if anything, the returns to education have gotten larger over time. They’re as big as they have ever been.

Measuring something like gains to education is necessarily tricky: how do you sort out the effect of education itself when the college-going population is likely very different from the non-college-going population? To that end, Levitt describes a clever study that found a way to isolate the impact of education:

LEVITT: So back in Vietnam, men were entered into this draft lottery.  And if you got a very low number, it meant you were likely to go to Vietnam.  If you got a very high number, it meant you were safe. There was a way, however, to avoid service, which was to go to college.  So what happened was, the men who were unlucky and got bad draft numbers, many more of them went to college than did the people who got high draft numbers.  Now they wouldn’t have gone to college otherwise.  They went only to avoid going to Vietnam.  So what the economists have done is they’ve compared the people who got kind of medium draft numbers.  So they weren’t sure if they’d be drafted or not, but in the end they ended up not being drafted.  But many of those men still went to college.  And they compared that group of people, who were identical in principle to the people who were lucky and got really high draft numbers.   And those high-draft-number people — they didn’t have to go to college to avoid Vietnam.  So many fewer went to college.  And consequently, if you follow them through their lives — the people with the medium draft numbers, who didn’t go to Vietnam, but many more went to college — and you compare them to the people with the high draft numbers, who neither went to Vietnam nor went to college, and you see returns to education.

Another reader wanted to know Levitt’s view of healthcare reform:

LEVITT: Well, my friends in the Obama Administration aren’t going to be very happy with me, but I really, I don’t think it solved any of the important problems that we’re facing with healthcare.  So virtually every economist will tell you that there were two things you needed to do to healthcare reform to materially improve the situation.  The first was to break the link between the provision of healthcare and employment.  And that is just an archaic element of our healthcare system, which really makes no sense.  And yet because of tax subsidies, it’s the way most people get their healthcare — through their employer.  It shouldn’t be.  There’s no good economic justification for it.  And yet, if anything, I think this healthcare reform bill actually strengthened that link.  … [Healthcare] is virtually the only part of the economy where I can go out and get any service I want—cancer treatment, open heart surgery, have a wart removed, whatever it is—and I pay $3 for it or $5 for it or nothing, even if it costs $50,000 or $100,000.  I mean, imagine if you had the same situation with automobiles.  Where I could show up at the car dealership and I could say, ‘I want the Mercedes for free.’  Well, people say, ‘You can’t have the Mercedes for free.  You have to pay $50,000 for it.’  You say, ‘Why not, I have an inalienable right to free healthcare.  Right?  Why don’t I have an inalienable right to a free Mercedes?’

Note to Levitt: I don’t think your friends in the Obama Administration are the only ones who won’t like your views. Smiley face.

Finally, Levitt also addresses a listener’s question about how recent drug busts in the slums of Rio de Janeiro will affect crime there. For his take on that — you may be surprised — check out the podcast. Thanks, as always, for your questions. They were excellent, and we’ll keep answering them in future podcasts.

Audio Transcript

Does College Still Matter and Other Freaky Questions Answered

 

Stephen J. DUBNER: What kind of questions do you think we're gonna get here?  Do you think they'll be like life advice, stock advice, or more like you know, boxers-or-briefs kind of questions?

Steven D. LEVITT: Ummm...

ANNOUNCER: Freak-quently Asked Questions from Freakonomics Radio.  Here’s your host, Stephen Dubner.

DUBNER: So, you know, I'm just a writer and a radio host.  But my Freakonomics friend and co-author, Steven Levitt, he's a genuine PhD-holding research economist at the University of Chicago.  So once in a while, I like to drag him in front of my microphone to field some questions from you, our listeners and from readers of the Freakonomics blog.  We call it Freak-quently Asked Questions.  In our previous installment, Levitt talked about, among other things, the value of voting.  The economist's take?  Voting just isn't a rational way to spend your time and  energy.  Not surprisingly, quite a few of you objected pretty strenuously to Levitt's message.  I'm guessing today's program will upset just as many of you, if not more.  If I had to predict which answer is mostly likely to set you off--predicting the future by the way is impossible, but we human beings can't help ourselves.  That's actually the theme of an upcoming radio hour we're making now.  But anyway, if I had to predict which answer from today's episode is most provocative, I'd say it's when Levitt assesses the recent healthcare reform bill.  He also talks about whether college education is as valuable as it's made out to be.  And does increased policing in Brazilian slums actually help stop crime?  We sat down together in my office a couple of weeks ago.  Uh, Levitt, how do you feel about this prospect today?

LEVITT: Never been more ready!

DUBNER: Mmm, I like the confidence.  Confidence bordering on cocky.

LEVITT: You know me.

DUBNER: Alright, we’ll begin.  Levitt, here’s a question for you.  Something I’ve heard you talk about a lot.  Interestingly.  You’ve done some research yourself on gains to education.  So a reader named Jonathan Bennett asks, “Is college education no longer a factor, or even a disadvantage when it comes to employment?”  Levitt, what say you?

LEVITT: I think that never has anyone made a statement more false than Jonathan Bennett’s statement, uh, that education would be no help or a disadvantage in the modern economy.  So of all the topics that economists have studied, I would say one we are most certain about are the returns to education.  And the numbers that people have come up with over and over are that every extra year of education that you get will translate into an 8% increase in earnings over your lifetime.  So someone who graduated from college will earn about 30% more on average than someone who only graduated from high school.  And if anything, the returns to education have gotten larger over time.  They’re as big as they have ever been.  And I think it makes sense that the returns to education now are higher than they’ve ever been because of how the economy has changed.  It used to be that with a low education, you could get a good manufacturing job, lifetime employment.  But now with the Chinese competition for instance, almost all the manufacturing jobs are gone, because there are Chinese workers willing to work, who are able to do these jobs at wages that are one-fifth or one-tenth of what an American worker would demand to do it.  So, I tell you, I was in a taxicab a couple days ago, and this is a story that really exemplifies how the economy is changing.  Over the two-way radio, the dispatcher’s voice comes, and he says, “Gentlemen, I’m looking for someone to pick up one extra shift on the night shift, a new taxicab driver.  If you know someone, they need to have experience.  And I also need a college education.”  And I thought to myself, “If you need a college education to drive a cab in this country, what job don’t you need to have a college education for?”

DUBNER: Well let me ask you this.  How does an economist or anyone go about measuring—so the gains to education that you talked about.  When you talk about a relationship between an extra year of college, or graduating from college and future income, how do you know that you’re not just measuring that people who go to college are more motivated, smarter to start with, and how do you tease that out in the data?

LEVITT: Yeah, that’s a great question.  Because so much of what we do in Freakonomics, SuperFreakonomics, is all about distinguishing correlation from causality.  And what you worry about is the people who would have earned money already are the ones who get more education.  So the trick is finding what I would call an accidental experiment.  So what you need is a way in which two seemingly identical people, because of some quirk of nature or fate, one ends up getting much more education than the other.  So maybe the best example, though somewhat of an old one, comes from the Vietnam draft lottery.  So back in Vietnam, men were entered into this draft lottery.  And if you got a very low number, it meant you were likely to go to Vietnam.  If you got a very high number, it meant you were safe. There was a way however to avoid service, which was to go to college.  So what happened was, the men who were unlucky and got bad draft numbers, many more of them went to college than did the people who got high draft numbers.  Now they wouldn’t have gone to college otherwise.  They went only to avoid going to Vietnam.  So what the economists have done is they’ve compared the people who got kind of medium draft numbers.  So they weren’t sure if they’d be drafted or not, but in the end they ended up not being drafted.  But many of those men still went to college.  And they compared that group of people, who were identical in principle to the people who were lucky and got really high draft numbers.   And those high draft number people, they didn’t have to go to college to avoid Vietnam, so many fewer went to college.  And consequently, if you follow them through their lives, the people with the medium draft numbers, who didn’t go to Vietnam, but many more went to college, and you compare them to the people with the high draft numbers, who neither went to Vietnam nor went to college, and you see returns to education of those kinds of numbers I mentioned before.  About a 30% increase in earnings, by virtue of going to college versus stopping at high school.

DUBNER: So that’s pretty fascinating.  But also what’s interesting to me is that for these guys who got a really bad Vietnam draft number, that actually turned out to be a really good thing for the outcome of their lives, in that a lot of them went to college who might not otherwise have, and therefore resulted in a—I mean, it’s a very strange, unintended consequence of the Vietnam War draft, yeah?

LEVITT: That’s right.  They earned a lot more money.  Now, economists don’t always want to say just because you have more money, you had a better life.  Now these guys had to suffer through college.  These were guys who didn’t want to be in college, and maybe, just possibly, they would have been happier living a life where they earned less money and had those four years to go ride around, you know do hippie stuff or something like that.  So who knows if they’re really better off?   They certainly earned more money.

DUBNER: Coming up, Levitt shares his opinion on healthcare reform.  And it will not make his friends in the Obama administration very happy.  Also, a look at Brazilian policing.

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[UNDERWRITING]

ANNOUNCER: From WNYC and APM, American Public Media, this is Freakonomics Radio.  Here's your host Stephen Dubner.

DUBNER: Let me, let me play you another one here.

LISTENER: Hi, my name is Tabby Lei.  I'm from Denver, Colorado.  I have a question for you.  What do you think of the healthcare reform passed in 2010?  Thank you.

LEVITT: Well, my friends in the Obama administration aren’t going to be very happy with me, but I really, I don’t think it solved any of the important problems that we’re facing with healthcare.  So virtually every economist will tell you that there were two things you needed to do to healthcare reform to materially improve the situation.  The first was to break the link between the provision of healthcare and employment.  And that is just an archaic element of our healthcare system, which really makes no sense, and yet because of tax subsidies, it’s the way most people get their healthcare, is through their employer.  It shouldn’t be.  There’s no good economic justification for it.  And yet, if anything, I think this healthcare reform bill actually strengthened that link.  So I think that’s very disappointing to economists in that regard.

DUBNER: Just explain why that’s a bad idea.

LEVITT: So people say, “Why doesn’t it  make sense to have healthcare tied to employment?”  Well, I think  I actually want to turn the question around and say, “Why in the world, if you’re starting from scratch, would you link it to employment?”  I think there’s no good reason.  I mean, for one thing, many people don’t work.  And so you’re left with this situation where there are people who work who get healthcare through their employer.  And there are people who don’t work, and they don’t have an employer, and so you have to have these dual systems.  There’s no intrinsic reason why your employer should provide your healthcare, other than the fact that we started doing it a long time ago and there are enormous tax subsidies to doing so.  It leads to what’s called job lock.  It’s difficult to change jobs.  And it leads to circumstances where we have to have these overlapping systems which are inefficient.  Why is your auto insurance not tied to your employer?  I mean, no one in their right mind would say, “Well, my automobile insurance should be tied to my employer.”  Well then, why would my healthcare insurance be tied to my employer?  It’s just, there’s no fundamental reason why it should be that way.

DUBNER: And what does it do to employers to make them have to be the people who dish out healthcare?  In other words, there are all these large firms that are supposed to be good at one thing.  Making software, making cars, or whatever.  But then also they need to devote an increasingly large share of their resources and their bandwidth to running an insurance program for their employees as well.

LEVITT: I think that’s exactly right.  That you would think that if you had firms whose specific jobs were to provide healthcare insurance, that they’d be better at it than having Frito-Lay or GM or whoever it is.  I mean, they’re good at making chips, and they’re good at making cars, but why should they be good at making healthcare?

DUBNER: So that’s one piece of why you didn’t like the healthcare reform.  Because it did nothing to weaken the link between employment and healthcare.  What’s the other reason?

LEVITT: An even bigger problem with healthcare today, which was not addressed at all in the reform bill, is that people aren’t paying for the services they get.  It’s virtually the only part of the economy where I can go out and get any service I want—cancer treatment, open heart surgery, have a wart removed, whatever it is—and I pay $3 for it or $5 for it or nothing, even if it costs $50,000, $100,000.  I mean, imagine if you had the same situation with automobiles.  Where I could show up at the car dealership and I could say, “I want the Mercedes for free.”  Well, people say, “You can’t have the Mercedes for free.  You have to pay $50,000 for it.”  You say, “Why not, I have an inalienable right to free healthcare.  Right?  Why don’t I have an inalienable right to a free Mercedes?”  And to me it just makes no sense.  That healthcare is just like any other good in the economy.  And because we aren’t charging people for it, what it costs to produce, people are inefficiently consuming it.  They’re making the wrong choices.  And you can tolerate that if it were a small part of the economy.  But now that healthcare is 15%, 20% of GDP, we have to start treating it like what it is, which is another good.  Now people hate to talk about this trade-off between health and life and money.  But the fact is that, if not today but sometime in the not-too-distant future, we’re going to have to make trade-offs, such as my grandmother is in a vegetative state, being kept alive by machines pumping her heart, and instead of the state paying for that, they’re gonna say, “Well, look.  You gotta pay for some of this.  You can either take the $150,000.  We’ll keep your grandmother alive.   And use it for that.  Or you can put your kids through college.  Your choice.”  And people are going to have to start making those tough choices.  And they won’t be pretty. And they won’t be fun or happy.  But it is just—you know, economics is the study of scarcity.  And in a world where healthcare becomes more and more costly, the scarcity is going to be more and more binding.  We’re going to have to make those tough choices that are imbued with this moral element.  But nonetheless, it’s an economic choice when you get down to it.

LISTENER: Hi, this is Ricardo Castro calling from São Paulo in Brazil.  At the end of 2010, Brazilian army and the Brazilian police went out into the slums to fight drug dealers.  They took a lot of weapons and drugs from them.  Some say they lost millions of dollars over a period of two days.  And what happens?  Should we expect crime to decrease because of all the police repression?  Or should we expect crime to actually increase, because drug lords are trying to refinance--robberies, a lot of crimes?

DUBNER: Best regards, Ricardo.  What do you say?

LEVITT: Actually, Ricardo, I think neither or your predictions will come true.  I think a third prediction will come true.  My perspective is that the drug dealers who are selling drugs in these favelas have a tremendous incentive to keep those areas safe.  Nobody wants to go buy drugs in a place where people are getting shot, or where they’re afraid of getting mugged.  And so far more than the police, who don’t really have that strong an incentive when you think about it to keep crime low, the drug dealers need law and order.  And so I actually think two things will happen when you crack down on the drug dealers.  Well, really three things.  First, sure, you make it a lot harder on the drug dealers to sell drugs.  So you will have that effect of reducing the number drugs that are sold.  My guess is, though, if you go back to these neighborhoods, you will find that the amount of crime will have gone up dramatically after the police come to them than before.  And that’s both because the drug dealers will no longer have the incentive to keep things clean and safe and protect the buyers, because they’ll no longer be selling the drugs there.  Number two, the violence that surrounds drug dealing is all about the property rights.  It’s about the drug dealers fighting with other drug dealers to find a place where they can sell their drugs.  If you make it impossible for these drug dealers to sell drugs in the favelas they’ve already established in, then they’re going to go find some other place to try to sell drugs, and that’s going to lead to conflict between gangs.  And I think there’ll actually be a spike of violence as they sort out trying to figure out who’s going to have the rights to sell drugs in the new place that they’re selling drugs in.  So I think in the short run definitely you’re going to see more crime rather than less crime associated with the police coming into these areas.  Even more so, because these are, remember are Brazilian police and Brazilian police are not well-known for their honesty and dedication to duty.  In fact, I wouldn’t be surprised based on what I know in talking to people who have studied Brazilian police, that indeed many of these police officers who are now guardians of favelas are quite familiar with these areas, because the standard job of many Brazilian police officers when they’re off duty is to work for the drug dealers in the favelas, serving as security guards.

DUBNER: That does it!  Our second installment of Freak-quently Asked Questions.  We'll probably do another one sometime.  Thanks to everyone who sent in questions, and sorry we could only get to a few of them.  Freakonomics Radio is a co-production of WNYC, American Public Media, and Dubner Productions.  Subscribe to this podcast on iTunes and you'll get the next episode in your sleep.  You can find more audio at FreakonomicsRadio.com, and as always, if you want to read more about the hidden side of everything, please visit our new, improved blog at Freakonomics.com.

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Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 46


  1. BackOnEmployersHealthplan says:

    I am guilty. After over 8 years of carrying my own health insurance, I finally jumped back on to my employer’s plan.

    Why now? My personal plan started at $170/mo. in 2002 (single male, non-smoker, age 40). Even though it was being paid after taxes, it was still within a few bucks of my cost for the plan at work, and it was a better plan. That was the pattern for 5 years or so, until I hit an age milestone and my rates jumped from $190 to $270+. By that time my employer had arranged for a much better deal on better coverage.

    For the past two years I have eaten the extra $150/mo cost (excluding tax advantage), thinking for some reason that it was better for me to carry my own insurance. Silly boy. I sat down with the company accountant to discuss going back on, and he said I was a fool to NOT be on the company insurance, even though it will cost my employer over $300 (his share of the monthly rate). So, starting in June, I will be paying under $170 before taxes rather than over $350 after taxes.

    I have to agree with Levitt – that’s screwed up. Everybody should get the tax break on insurance premiums, or nobody should… There is no economic reason to give the employer the economic incentive.

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  2. Danny says:

    I think a good follow up question about the health care thing is what then as a society do we do with the less privileged individuals who end up needing catastrophic care? It makes many feel like good health then becomes a commodity of those who can afford it.

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    • Dave Auerbach says:

      The assumption is that health care makes a difference. It certainly does in specific instances–an individual with some types of cancer, most trauma cases, among others. However, studies have shown that increasing the amount spent on health care does not increase life span, or improve infant mortality. The current American health care system has enormous amounts of waste. I would consider much of the 14% insurance companies report as administrative expenses among this waste. Surely no one should die because of a lack of health insurance, and currently no one in need of medical care can be turned away for lack of money. So exactly who is currently suffering from lack of access to medical care?

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      • Danny says:

        well Dave, I think what you have to figure out is how to tell the country that if without insurance and someone gets cancer or has heart disease, how do they choose between 50,000 in treatment/operations or death?

        Sure there’s waste and there’s unnecessary care going on in many instances, the fact is that people are drawn to the idea that survival from catastrophic illnesses simply depend on how well you save money for the case of emergencies.

        The truth is that health care as an aspect of society has come a long way and can go even further. There has to be a method better than what we got. What I want to hear is what Levitt has to say about choosing between personal treatment and death. Because it’s one thing in his example to say whether or not to spend the money on putting grandma in a situation to prolong her life. It’s another to say, “this underprivileged person has stage 1 cancer of some sorts, and since the person can’t afford it, it’s going to develop into stage 4/5 and then death.” That’s a question that economists have to answer to the greater population in order for the argument to take strength.

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  3. John says:

    The remarks about the value of a college education are quite interesting. This is the first time I’ve every heard of anyone actually taking the question seriously and trying to disentangle causation from correlation.

    Thanks for that, but I’m still very skeptical. A college education is extremely expensive, especially when once takes lost wages into account. It is also very difficult for anyone to reconcile something which is stated as a verified fact when it does not track with day to day experience.

    How can it be true that a college education is a financially profitable endeavor when one, as I certainly am, is surrounded by un- or under-employed college grads on the one hand, and reasonably to very successful non-graduates.

    Some possible reasons:

    Bias defense: Having made very large investments in the degree people feel obligated to defend the sunk cost. Try asking an un-employed college grad about this and you’ll usually hear a defense of the decision even though it has not worked out.

    Changes in the population and business world since the 60s. Perhaps the value of a degree has declined as they have become more common?

    Insufficient specificity: Perhaps some degrees are very profitable and the rest are not. I believe I read that the average salaries of college professors are inflated by a few very highly paid professors and researchers in medicine.

    Another factor which may not be taken into account is that for many of us who have college degrees they are superfluous. How do they account for that in the statistics. I have a college degree, and I probably have slightly higher than average earnings compared to those who do not… but the two facts are, on another level, correlation not causation. My degree has nothing to do with my career and never has. As a matter of fact, I have discovered that most, perhaps all of my hiring managers were not aware that I had a degree. How common is that? Anecdotaly it is very common, but who can say.

    I have not yet read the paper, mea culpa, but do these 8 percent and 30 percent numbers take into account the lost wages and costs of college? I know a young man who earned $0 before the age of 30. Call it 12 years of lost wages, interest on student debt, etc. Sure, he’s now, at about age 35 or so making very good money indeed, but how long does it take someone to dig out from under that kind of deficit?

    Last of all, there’s the question of uncertainty. Even if college does average higher returns, that doesn’t make it a good investment. Some of the winners are very big winners indeed, even within a certain field, how can one be sure to “win” that particular “lottery”?

    In a nutshell, the cost of college is a certainty. The benefit, if not non-existent, is at least uncertain. If nothing else, that’s not an obvious decision to make.

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    • caleb b says:

      As my wife has a law degree from a good Midwestern school, so I know the following very well: A law degree is NOT worth the cost for the majority of students. Having a law degree was actually a detriment when she was trying to find a job. She wasn’t in the top 10 percent of her class so no law firm wanted to hire her, and any job that didn’t require a law degree wouldn’t hire her because she was “overqualified.”

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      • John says:

        Yes, a few years ago my wife and I were on our way to a movie, and stopped in to have dinner at a burrito place nearby. There we ran into the younger brother of one of her friends from high school. We chatted for a while and he told us how he’d finished his law program, passed the bar, and finally gotten a job in his field.

        “But, ” he said, “then I decided I really wanted to be able to afford a car, so I’m working here at night.”

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      • raybansonmyface says:

        Your wife’s situation is due to the extreme surplus in the lawyer labor pool. This problem has been persistent since 2007. There are hundreds of thousands of law graduates released into the labor market every year. This eventually led to a legal labor surplus.

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      • Dave Auerbach` says:

        The wall street journal says 40,000 grads each year. But your point is well taken.

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    • raybansonmyface says:

      You should compare your anecdotal evidence to those unemployed workers without a college degree. Do the research, and you’re going to find some funny results that debunk your argument.

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      • caleb b says:

        Of course someone with a college degree will fair better than someone without. My point is this…..

        High School Degree for most LS grads

        Put it this way, we graduated from college in the same year. She went to law school, I went to work. If you add up the missed 3yrs of work AND the 150k in student loans, that decision will NEVER beat my college degree only. Trust me, I get it, there are too many lawyers out there so no one is crying for me. But if the question is “is college worth it,” the answer is yes. If the question were “is a law degree worth it”, the answer is NO. Most of here 2010 graduating class went on to work for 30k–40k a year. That’s not anecdotal, that’s fact. That’s really like 20-30k after student loans and I made 20k my last year of waiting tables. You tell me if a law degree is worth it.

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  4. Jash says:

    As far as college education is concerned, it really depends on your area. Mine is software engineering, and I realize that I actually probably use an year’s worth of material for work. The other 3 years comprised of stuff that’s under the hood, so to speak. Trouble is that not only is it unnecessary, it actually turned some people away into ‘easier’ majors. The analogy I like to use is that everyone needs to know how to drive. Only the enthusiastic want to know how the internal combustion engine works. Looking back, I’d rather have spent the 3 years actually working on projects and honing my skillset as a programmer, rather than knowing stuff I don’t use, and hence won’t remember.

    While, I don’t have any personal experience, I believe the same can be said about a lot of other majors. Marketing, advertising, business – these are things that come from experience, not from sitting in a classroom.

    In short, college is not about learning stuff. In the age of the internet, learning is quick, easy and accessible. College is about skills, because they take time to develop, and you need constant feedback for improvement. And there are only so many skills you will need at your employment. For most majors, it can be done within 2 years instead of 4.

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    • Pramod says:

      I couldn’t agree more with you. I feel colleges should provide more flexible and customized programs based on the student’s need.

      Most colleges assume that all students wants to be a PhD in the major they’ve opted for instead of finding what every individual student wants to do.

      Your experience reminds me of an article in Freakonomics last year comparing the education provided in a school/college to a public radio.

      We need more Podcasts and less public radio!

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  5. john says:

    OK, so I read the linked article. Unless I’m missing something it doesn’t say what you imply it says. Fearing that I missed something I did searches in the paper for the words: pay,salary,compensation, money, dollar, etc.

    The only substantial hit was this footnote:

    “Angrist, Joshua D. and Alan B. Krueger. “Estimating the Payoff to Schooling Using the Vietnam-Era
    Draft Lottery.” National Bureau of Economic Research Working Paper No. 4067. Cambridge, MA:
    NBER, May 1992.”

    Perhaps you meant to reference that paper?

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  6. Kevin says:

    I agree with the sentiment that the tax breaks should be given to everybody or nobody. There is no reason to justify subsidizing one buyer of health insurance over another. However, employers, particularly large companies, have more bargaining clout with insurers and can negotiate cheaper group rates. Do you think these economies of scale lend some justification to the employer-provided health insurance, at least at bigger companies?

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    • Dave Auerbach says:

      Kevin, your two comments are unrelated. The tax subsidy for health care is only available to employers. That is why so much health care is employer based. It has nothing to do with economies of scale. In fact, a full 60% of employer based health insurance is self-insurance by those companies themselves. The insurance companies only administer the plans, they do not provide the insurance.

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  7. Max says:

    A large employer can negotiate group rates for health insurance, but so can other groups, like unions, alumni, and honor societies.

    Insurance companies offer different insurance plans. Some plans just have fixed copays, but place a lot of restrictions. Other plans have fewer restrictions, but have 10-30% coinsurance, and higher premiums and deductibles. Having to pay 20% of the covered expenses and 100% of the non-covered expenses and deductible does encourage shopping around, but shopping around for healthcare is not like shopping around for a car.
    First, you can usually see the car’s price before you buy it, but you usually do NOT know the price of the test or treatment before you buy it. Just to find out the procedure code (CPT), you have to pay the AMA.
    Second, it’s a lot easier to choose a cheaper and less fancy car than to choose a cheaper and less effective treatment.

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  8. Julie says:

    Regarding “free” health care vs a free Mercedes:

    Before I start, a caveat: I’m Canadian and not completely familiar with the American system. That said, the number of stories I’ve heard about people bankrupting themselves or needing to take out second mortgages due to health reasons lead me to believe that health care in the U.S. is far from free. If you don’t have insurance, as I believe many Americans don’t, health care can be very, very expensive.

    And even if health care *were* free, I don’t see that as a bad thing. A Mercedes is a luxury; I think just about everyone can agree on that. If you don’t have a Mercedes, you’ve still got plenty of options, chief among them being to drive a cheaper car. If you don’t have your health, your options become far more constrained. Moreover, someone with a chronic or acute condition is not in the best bargaining position and could easily be exploited. I’m asthmatic. I don’t want to walk into a hospital only to be told, “Sorry, we don’t care that you can’t breathe. Either pay us or get out.” Ditto if I happen to break my arm. Or get hit by a car.

    There are plenty of chronic conditions out there where cures are available but expensive for the individual who needs them, especially if that individual is unable to work, but could potentially work if they were getting treatment. It’s a vicious cycle then, because without money, they can’t afford treatment, and without treatment, they can’t get money.

    I will grant that there are plenty of elective medical procedures that should be up to the patient to pay for. Plastic surgery for cosmetic reasons. Liposuction. IVF fertilization for women over 40. And, similarly, there are cases where acute care may not be the answer, such as very elderly patients who may be better treated in palliative care than an ICU (so long as palliative care did not mean ceasing other medical options). These are discussions worth having.

    But I think that everyone deserves to have basic access to medical care. I think the idea of leaving health care to only those who can afford it is barbaric in an industrialized country. Health is not a Mercedes.

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    • Dave Auerbach says:

      Julie, you are correct in that, in an ideal society, everyone would have the health care that they need. The problem is, who is going to pay for it. Basically, everyone wants all the health care they desire for free. 50% of americans pay no income tax. What do you think they would say if I went up to them and said: “It is barbaric for you to be denied health care that you require. However, it is totally unreasonable for those who make more than you to pay for your care. Therefore, here is the deal. Pick a name from this list of the wealthy. In order to receive free health care you must provide 10 hours of service to them per week. Mow their lawn, watch their kids, wait for a couple of hours for them to get their tire changed, shovel their walk after it snows, whatever.” For the life of me, I see nothing unreasonable about this. And yet I am sure that almost anyone being offered it would scream SLAVERY.

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  9. Dave Auerbach says:

    Currently, approximately 48% of health care insurance is employment based. Almost of all of the rest is about equal amounts medicaid, medicare, and uninsured. Just a little history about the link between health care insurance and employment. At the end of WWII the government mandated wage freezes to reign in inflation caused by the scarcity of employees and increasing wages. Employers then attempted ways to raise total compensation. One way was adding health insurance. A 1954 IRS ruled that health care was not taxable. It was, and continues to be a way to increase total compensation without increasing wages. Unfortunately, the explosion of health care costs has resulted in relative diminished W-2 wages and increasing employee benefit from employer based insurance.

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  10. Dave Auerbach says:

    And Dr. Levitt correctly points out the main problem in our current health care system, that of moral hazard. Many of the insured do pay next to nothing for the care provided, causing massive overultilization. A high deductible health care plan with an associated health savings account (hsa) is encouraged in Obamacare, and is a step in the right direction.

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    • Chris Sampson says:

      I live in the UK. Health care is free. Moral hazard is not a problem. The reason moral hazard is not a problem is because people do not demand health care. They demand health. People do not like health care, it is usually unpleasant. Moral hazard therefore rarely exists in health care markets. Over-utilisation in the US is physician-led (because there is money to be made), not consumer-led.

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      • Chad says:

        I also question the issue of moral hazard. There are certainly some public goods that we cannot be expected to pay for every time we use.

        Call the police because someone is robbing your house? That will be a $500 deductible!

        Enroll your child in public school? $2000 please!

        I do not see any problem with considering basic health care a public good that should be free of charge. Sure, plenty of procedures are luxuries and should be paid by the patient. Most of these aren’t covered by insurance right now anyway. I even think that experimental procedures should not be covered until they are tested and proven to work. Still, making an analogy between a Mercedes (or any car for that matter) which is a luxury and medical procedures that keep people alive and well is like comparing filet mignon and wine with bread and water.

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  11. Don'tCallMeDoctor says:

    In regard to your answer to Jonathan Bennett’s question, how applicable is data from 50 years ago to today? America has changed in profound ways since the men in that study made their decisions.

    Talk of a “higher education bubble” is now on the national radar; investing in a pre-bubble education seems like a terrible idea. I really wish Steve would have treated the question more seriously.

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  12. mhenner says:

    I thought the segment on college only dealt with benefits, but didn’t discuss costs.

    What if, instead of going to college for 4 years, a young person worked for that period of time, and paid all earnings for that period into a mutual fund account. These are earnings which would not have been received if a full time student. Then added to that the amount that would have been spent on tuition/books/etc.

    Yes, the earnings of a college graduate are greater, but could the compounding of earnings of these initial, early investments actually exceed the value of the higher wages of college grads?

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  13. Enter your name says:

    The college study described tells us whether it was worth going to college 50 years ago. It doesn’t really tell us anything about whether it’s worth going to college today.

    Additionally, I’m not sure that it tells us as much as it claims about the inherent differences between college and non-college bound men. A mid-number draftee who went to college might have been more risk averse than a low-number draftee who also went to college.

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    • Summer says:

      My thoughts exactly. We all know that it WAS beneficial to get a degree, but now??? I was very disappointed by the “study”.

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  14. Michael Parks says:

    I wanted to read the Vietnam paper, but $5 is pretty harsh for a paper that may be educational, or may be a waste of an hour.

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  15. Chris Sampson says:

    I lost a lot of faith in Levitt after listening to this podcast. He clings to his free market economic ideals far too religiously… quite irrationally. Health care is certainly nothing like a normal good, and I’m shocked that he thinks this (surely he has read Kenneth Arrow’s 1963 paper?).

    I’m astonished that he hasn’t realised that the USA, with one of the biggest privately-funded health care systems in the world, is also one of the most inefficient. His suggestion that health care should have a marginal cost that is not zero has no grounding in reality.

    Get with the times, Steve.

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    • Dave Auerbach says:

      Although I have not at all lost faith in Levitt, I do agree with much that Sampson says. The current health care system is wildly inefficient. It is being gamed, and huge amounts of money claimed by hospitals, insurance companies, pharmaceutical companies, and medical suppliers. The physician and the patient are relatively loss in this battle. Sadly, I have no idea how to cure this. Socialization of medicine is not the answer, but I do not know what is.

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  16. Tom Maguire says:

    Colleges With The Lowest Return On Investment

    http://huff.to/hEYXVn

    Sortable list that includes four year tuition costs for (I think) every school in the country.

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  17. P.F. Bruns says:

    I personally hold that health care is a fundamental human right, and that the Mercedes analogy is offensively specious.

    Consider: If I cannot afford a $50,000 Mercedes–which is honestly an entry-level example at that marque once financing and options are factored in–I can get a $20,000 Toyota, a $5-10,000 used car, or a $3-500 bicycle. (I can get even cheaper options than that, but in those price brackets, the prices for maintenance outweigh the price break for entry.) Transportation options abound. If I need a $50,000 heart operation, my ability to shop around, especially without insurance, is limited severely. I can’t just get a $300 bicycle.

    So why is health care a fundamental human right? The UN has basically had to declare it such, because otherwise, we as a species have a disappointingly amoral tendency to let each other die if there’s nothing in it for us. Economically, while I don’t have metrics, I’d be willing to wager that longer-lived healthier people generate more demand for goods and services, create markets by making new things and inventing new services, and therefore benefit society at large.

    The fact that it’s just the right thing to do–to NOT ask “What’s in it for me?” when a life is at stake, is not economically sound on its face, but longer healthier lives do benefit us all in the long run, I believe.

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    • Dave Auerbach says:

      It is easy to say that healthcare is a right. Perhaps it is. But if it is then individuals have an absolute responsibility to maintain their highest health, meaning that no one can be allowed to smoke, overeat, not exercise, drink to excess, use drugs, and in many cases contract aids, among other things. In addition to our current progressive income tax structure, a significant excise tax must be imposed on those who, by their own actions, have potentially increased their health costs to society. If they are willing to pay to sin, then they are doing their fair share.

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  18. P.F. Bruns says:

    The big economic reason to tie health insurance to employment–a practice with which I disagree overall–is that employers have a vested economic interest in keeping their employees healthy. A happy side effect for those employees fortunate enough to work for larger corporations is that those corporations’ buying power helps force health insurance costs down. You or I cannot go to an insurer separate from our employers and get our employers’ price breaks–nor can we get the government subsidies our employers get for paying our health insurance costs. (Well, at least not until the new health care laws kick in around 2014, if they do.)

    However, for me, the practice of tying health insurance to employment is counterproductive because it has the potential to cause employers to make health a condition of employment. Now, for certain physical jobs, employers have a good point–it makes no sense to give roofing work to a person using a wheelchair to get around, for example, to pick a person with a severe heart condition to do heavy lifting, or to hire a blind person to drive a bus–but in general, it tends to marginalize those with disabilities or health problems. Worse, making employment a condition of health insurance tends to make health care harder to obtain for the unemployed, who often need it the most.

    We need to make make health care easily affordable to all Americans regardless of employment status because healthier people buy more stuff. To do this, I believe we must:

    1) Require health care providers disclose all prices up front. I want to know how much I will have to pay for any medications (right down to aspirin or antacids), my hospital stay, the procedure, everything. That way I can price-shop in non-emergency cases.

    2) Raise taxes and cut other government costs. We’re going to have to do that anyway, so we might as well do it to make it easier to provide health care.

    3) Do everything economically feasible to lower health costs for consumers. The goal should be to commoditize health care, and make it as simple and as easy to get as buying a toaster.

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    • Dave Auerbach says:

      Having all costs up front is an excellent idea. And the numbers given MUST be the amount each provider will accept as payment in full, not some specious “master charge” fee that no one expects to receive. This would provide for real competition.

      In a somewhat similar vein, there should be different subsidies based on a number of factors. Highly efficient care should be fully subsidized, low efficiency health care have a much higher co pay. Individuals who have made life choices that have contributed to their illness (smoking, drinking, drug use, many cases of HIV, sedentary life style, over weight, etc.) should pay a much higher co-pay than those blameless.

      Some type of socialized medicine would be acceptable it immediately allows an increase in physician income due to a decrease in overhead expenses such as billing, malpractice, federal regulation,etc. Allow physicians to practice medicine.

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  19. Erin says:

    Your answer on healthcare confuses me. How is it like a car? I caught an infection at a hospital a few years ago, went into toxic shock and ended up losing one of my legs. Must have cost hundreds of thousands to keep me alive. Very expensive and I would never be able to pay that back without bankrupting my family. Thank goodness for insurance. So what’s the answer, let me die? Should medical research just stop because no one can actually afford the advancements that are keeping people alive? Probably you have an economic answer like your one about voting. But imagine your wife was dying in the hospital. Good idea to pullout of the ICU to stop from spending so much money. Or keep her alive to work (and pay taxes) and help raise your children.

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  20. Tev Kaber says:

    I remember one job, I had the same job title as another guy who later became a friend. We compared salaries. I had a college degree, he did not. The difference in salary? I made $1/hour more.

    A couple years later, we had jobs at different places, and he made much more than me. A couple years after that, we again switched jobs, now I was making more than him.

    On getting hired, work experience carried much more weight than a college degree, and negotiation skills can make the difference on salary more that a college degree.

    Currently I am at a Fortune 500 company, and while I do no directly hire people, I do read resumes, do interviews, and make a recommendation on who to hire. I do look to see where they went to school, but that’s more of a curiosity to me, I am much more concerned with skills, work experience, and actual portfolio work .

    If you’re wondering, I am a web developer, I do soup-to-nuts front-end and back-end web work (PHP/MySQL/HTML/CSS/UI Design).

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  21. Paul Hewings says:

    I echo the general dismissal of the Mercedes comment in regards the healthcare reform, but I think it is key to understanding why nearly all the comments have been negative. We all listen to Freakonomics presumably becasue we enjoy it and find ourselves agreeing with many of the conclusions drawn by looking at a thing we thought we understood through the spectrum of an economist; don’t bother voting: BRILLIANT, anti-social social networking: less so-but still engaging.
    The thing with healthcare is that to Levitt it is the same as a Mercedes, to the rest of us, it isn’t.
    He went on to say that if you took your 150k and you either used it to give your grandmother an extra few years of life or you can pay for your college education with it. Why should college require killing grammy for some people and not for others? No one chooses (unlike a Mercedes) to have an expensively ill grandmother, it is luck or the lack of it.
    Apply the same “Someone’s got to pay for it, so the end user should pay for the whole cost themselves.” argument to policing and you end up with a curious thought experiement. How would I pay for the cost of the investigation of my own murder? I hope I can rely on the rest of you to care just about enough to at least try to find out who did it and punish them accordingly. If not then I’m going to have to be a lot more polite.
    He is just an economist and therefore always starts by looking at the money, most of us aren’t and so disagree on this one. Not as much a criticism of the conclusion than of the limitations of the thought process. Unlike the excellent discussion on GDP with Martha Nussbaum.

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  22. Justin Gilbert says:

    Can the positive (or negative) impact of scholastic sports be observed? Another words, does the high school football team ‘bring the school together’ or ‘promote teamwork’ or ‘teach life lessons’? Even at the high school level and below, massive amounts of labor hours and money are devoted to organized sports. It there any data to show if it is worth it (from a freakonomics perspective)?

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  23. Ben says:

    Health Care is just like any other good? Do you really believe that?

    #1 If you don’t buy a Mercedes, you could buy a car for a small fraction of the price that is just as good (for practical purposes anyway, maybe not for “style” or “speed”, but it will get you where you want to go in the same amount of time assuming you are following the traffic laws). There is no such economical alternative for most health care costs. I can’t say give me the economy cancer treatment, it works just as good right?

    #2 Most goods aren’t life or death like health care can be. There are a few goods that are like food, water, shelter, heat, but most of these life and death goods are very cheap (and you can predict how much you’ll need of each very easily) compared to life and death health care costs which can come at any time and simply bury you. Also, if you really can’t afford those life or death goods, the government will generally assist you with them to some degree.

    All other goods are “luxuries”. I guess the few luxury health care costs shouldn’t be covered by insurance (most aren’t right now anyway). The overwhelming majority of health care costs are not something that people partake in “for the joy of it”. They do it becuase they are told to by their doctor. I’m not going out getting surgeries I don’t need because they are free so, why not?

    Health care in my opinion is like NO OTHER good. That doesn’t mean we have to abandon free market principles altogether, but we do need to recognize that we can’t treat it like any other good.

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  24. Miichael says:

    Dr. Levitt clearly has spent very little time in the American health care system. There are no longer 3 or 5 dollar copays for anything. Copays extend into the tens and hundreds of dollars for almost all services and procedures, if they are covered at all.

    To extend your Mercedes analogy, what usually happens is that you are told by your personal Car Expert that you need a Mercedes or you will die. You can’t afford one, and your Car Insurer says they won’t pay for one. So you walk. And you die.

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  25. Dave says:

    I was disappointed with the healthcare section mostly because you were obviously lazy. The healthcare bill is what is it is because of the right wing machine that killed most of the progressive parts. What is left is Romneycare, which is at least a start. A public option, with a national health exchange rather than a state based exchange would have given people the ability to purchase a Medicare type insurance with 4% administrative costs. Both provisions were killed. In terms of the inalienable right to a Mercedes, that moral equivelence is just plain sad. You don’t need any car to be happy, live a full life, and be a productive member of society, but you do need good healthcare. We are giving billions of dollars to insurance companies for no better reason than they have the best lobbyists. While I understand the need for evidence based practice, again look to the “death panel” folks who killed even the most rudimentary attempts to rein in costs. We will need to decide what procedures work, and which should be paid for, but allowing rich folks to get good care and poor folks to get crappy care can not be the solution. Also, I might add that my premiums are going up at about 10-15% per year along with incrases in deductibles and co-pays. I know exactly how much my healthcare costs because I pay thousands of dollars a year to a private company that turns around and gives it to Republicans so that they will vote against my best interest.

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  26. Robert Barrimond says:

    Levitt is wrong that healthcare is a normal good. He admitted as much when he mentioned that there is a moral component to it. If I can’t afford a PS3 at $300, that’s one thing. No one should be shedding a tear for me. If I can’t afford $300 to treat a chronic condition for my child so that he can live a healthy life and dies, it simply is not the same thing. Yes, nothing in life is free and trade-offs have to be made with any limited resource, but this is not something the market does well when decisions have a strong moral component. What’s economically efficient is not necessarily moral or desired. There are limits. We also don’t comparison shop. Imagine what we would say about a parent who would opt for medicine that only treated the symptoms of a malady and refused to purchase a more expensive cure? What would we do to a doctor who would recommend that course of treatment to save a few bucks? It simply flies in the face of who we are as a society. Healthcare is not a normal good.

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  27. Iggy Grey says:

    “So back in Vietnam, men were entered into this draft lottery” is a broad-brush, shallow mostly inaccurate statement about the draftees that did the fighting and dying in Vietnam. The years that draft lottery (`70-`73) selected inductees, covers only 16 percent of the VN war inductions . The VN War lottery occurred during rapid troop withdrawals at the very end of the war. It is unlikely that even half of the 306k lottery losers between `70-`73 ever reached VN as last US combat troop were out in early 1972.

    The 84 percent of VN draftees inducted during the build-up and heaviest commitment of troops to VN (1964-1969) faced the heaviest combat. During VN the US selective service tradition was to call the oldest eligible first (i.e. 24-y.o.’s). However, deferments were given to men. Some common deferments were for college (undergrad and graduate), married with children or men possessing skills “important to society” (e.g. men working in the defense industry). The draft pool was further reduced by men who: could afford a SS lawyer; acquire a “favorable” medically disqualifying, 4F status (Rush Limbaugh got his for persistent hemorrhoids); use political connections to lobby the draft board or secure a slot in the National Guard/Reserves; or, go to Canada.

    It is a popular misconception (or active delusion) with many men who received a VN draft deferment that their deferred status reduced the DOD quota by “one.” Deferments, diversions and defections had no affect on the DOD quota request to the Selective Service. They only reduced the eligibility pool to young men (i.e. 18-y.o.’s) unable or lacking the connections to get deferred. These young draftees ended up doing the bulk of the fighting in VN (`64-`70) and making up over 90 percent of the casualties (i.e. KIA, MIA and WIA).

    The “clever study” quoted assumes VN Selective Service “birth day” lottery meant the draft pool was “unbiased” where men 18-24 had equal certainty of getting called based on their lottery number. Technically there were no college deferments for young men entering college in 1970-73. Still, the lottery draft was as skewed in its three years as the regular draft was in the previous six. Nixon allowed all deferments held by young men as of June of 1969 to stand. For example, a freshman entering 1969 with a 2H status (college deferment) kept his status until he finished a degree or dropped out. Canada was still an option. The Guard and Reserves still had waiting lists with slots “held open” for the well connected. Lastly, the draft lottery’s age call-up order was flipped so that the “first-to-be-called” were the youngest (i.e. 19-y.o.’s). These two actions de facto limited the pool (once again) to the teenager.

    http://www.sss.gov/induct.htm

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  28. Ryan says:

    I don’t think college matters there’s to many successful people who don’t go to college and to many unsuccessful people who do go to college to draw a direct correlation between college and success. It does have a correlation but that doesn’t make it the reason. Just because most people get sunburns when they are wearing sunglasses, doesn’t make the sunglasses the cause of the sunburn. Maybe if we throw out the ridiculous assumption that all people are equal and admit that some people are just better at adapted to different societies, whether they go to college or not. Maybe you didn’t get the promotion or the job you want because you just aren’t good enough not because of college but just you…. you are not great at everything I’m sorry…. As for the population that returned to school mentioned what happened after school? Why was an outcome not posted? Were they successful or did they flop? What if they just went to school because they thought it was what they have to do better themselves because society feeds them that?
    There is a serious problem with the entire education system, sometimes college-bias companies begin to believe that college degrees matter. They hire and promote based on these principles and eventually the company is flooded with unqualified, low intelligence, but highly ‘educated’ persons. They run the company into the ground and instead of having to scrap everything they get a government bail out.

    As for me and my bias that exist in my beliefs:

    I didn’t go to college and don’t have a degree.

    I’m working for a Higher Education Institution.

    When I was hired, my position required a Masters in Psychology.

    I had to fight for my job, because some believed I wouldn’t be successful because I didn’t meet some requirements.

    That was 10 years ago, I just promoted of my peers with Masters and some with Doctorates and I’m making 15% more than them.

    That was the first promotion in our Department in the last 12 years. The next one available will be when I retire.

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  29. Jimbo Jahnz says:

    I respectfully disagree with the statement that health care ‘is like any other good or service’. The comparison of showing up to a hospital and expecting treatment and showing up at a car dealership and expecting to get a Mercedes is really very different in that a person doesn’t die if he/she doesn’t get a Mercedes, and will find a way to live without it. The hypothetical person who shows up at a hospital might die without treatment, or may undergo a worsening of conditions if left untreated, leading to death or disablement in some cases. This is why health care is different from other goods and services with the exception of food and shelter, where government sponsored contingencies exist such as homeless shelters and soup kitchens, neither of which represent a financial burden on those who take advantage of such programs. In the case of health care, if one gets sick without insurance, that person may spend years or decades paying off the hospital bill. That person can’t be expected to turn down care the same way a person can opt not to buy a car.

    I don’t pretend that the health care bill is perfect, but there are certainly reasons to treat goods and services necessary for life differently from other goods and services.

    I realize that this program was a while ago, but I’m a podcast listener and it’s new to me. And to end on a positive note, I really enjoy Freakonomics Radio. Keep up the good work!

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