A Grand Bargain?

While many Americans filled their stomachs and then emptied their wallets last week, the economic blogosphere was buzzing with the possibility that the newly elected Democratic Congress might strike a "grand bargain" with the Bush administration over the issue of Social Security reform.

The Economist suggests that an option for such a bargain would be to combine two bipartisan proposals: one by William Gale, Jonathan Gruber, and Peter Orszag that would subsidize retirement saving for low- and middle-income households, and another by Jeffrey Liebman, Maya MacGuineas, and Andrew Samwick that would reform Social Security through benefit cuts, an increase in the payroll tax cap, mandatory personal retirement accounts, and more. Mark Thoma, Andrew Samwick, and Brad DeLong, among others, have interesting comments on the matter.

Why would a Democratic takeover of Congress make such a "grand bargain" more likely? After all, President Bush's Social Security reform package flopped, even when he had a solid Republican majority in Congress.

One possible answer is that hashing out a solution to a major problem like Social Security requires that all relevant stakeholders have strong enough bargaining positions to ensure that everyone comes out of the negotiations better off than when they went in. Other successful large-scale policy changes, like welfare reform under Bill Clinton and a Republican-led Congress, have followed this pattern. By contrast, when negotiations are held between parties who do not adequately represent larger groups, agreements can break down. For example, the various conflicts in the Middle East present a number of cases in which groups that are left out of negotiations attempt to subvert the agreements that come out of those negotiations. If the Republicans had tried last year to push through Social Security reforms that were unacceptable to Democrats, such a plan would have had difficulty withstanding the test of time, as the Democrats would have tried to implement a plan of their own.

Discussion Questions

1. What kinds of transactions involve bargaining rather than market mechanisms? What principles of economics are applicable in a bargaining situation? What elements of economic theory are not?

2. Social Security reform is often called the "third rail" of American politics. (The third rail is the electrified rail of a train track, which gives anyone who touches it a nasty shock.) Why is it such a difficult problem to solve through the political process? In other words, what economic or political forces are aligned against a "grand bargain" to solve this problem?

3. Why might politicians be more willing to tackle a difficult issue when both major political parties have significant power?

4. Suppose no bargain is reached in the next few years. As the years go on, and as the Baby Boomers start to retire, do you think the likelihood of reaching a bargain in the future will increase or decrease? Why?

One of the most exciting areas of economic research in recent years has been on the subject of bargaining. If you're interested in this kind of thing, a good place to start is Al Roth's page on bargaining at Harvard.

Labor Negotiations: The Non-Medical Incentives of Childbirth

6-6-06 passed recently with nary an episode of satanic import. Nonetheless, some mothers-to-be, late in the third trimester, did not like the idea of delivering on the Day of the Beast--lest their newborn be mistaken for the spawn of Satan. According to a new research paper by Joshua Gans and Andrew Leigh, physicians were probably open to helping parents avoid the inauspicious date. It's not that physicians feared the delivery of the anti-Christ. Rather, June 6, 2006 fell on a Tuesday--so inducing labor in an expectant mother a day earlier or later wouldn't cut into the doctor's weekend tee-time.

Parents often hope to induce or postpone labor for all sorts of non-medical reasons, ranging from tax purposes (parents in many countries stand to capture a sizable tax credit should their babies pop out before January 1) to cultural reasons (choosing the year of the dog over the year of the pig, or Sagittarius over Capricorn). One particularly inauspicious day to be born on is February 29, since that date occurs only once every four years.

On the other hand, physicians have their own preferences over birth dates. In particular, there is a well-documented "weekend effect" in the timing of births. It's safe to assume that neither babies nor women's bodies know the day of the week; yet according to Gans and Leigh, "nearly 29% fewer births occurred on weekends than an even distribution [over days of the week] would predict." Several recent papers have suggested that the reason for this is that it is more expensive to perform medical procedures on weekends, and also that physicians would prefer not to work on weekends.

Think of what happens, then, when an inauspicious day--like, for example, February 29--occurs on a Monday. In such cases, doctors and patients face potentially conflicting incentives. Expectant parents want to induce labor to avoid leap-year babies and physicians want to avoid working on the weekend. Who wins out?

Read the abstract, introduction, and conclusion of the research paper to find out how the conflict of incentives typically sorts itself out. Follow this link and scroll toward the bottom of the page (under the "SSRN Electronic Paper Collection" heading) to download a pdf of the paper.

1. According to Gans and Leigh, how often do physicians accommodate expectant parents who want to induce weekend labor for non-medical reasons?

2. What do the paper's results suggest about the balance of bargaining power between patients and doctors (or other labor resources at hospitals, such as nurses)? Is the medical services consumer always sovereign?

3. Do expectant parents incur more expenses if they give birth on a weekend, or less? What about doctors and hospitals? How might a pricing scheme that allows hospitals to charge different prices for weekend and weekday births improve the welfare of doctors and patients?

4. Think about the statistical methods Gans and Leigh use to make their point. One might think that for tax reasons, January 1 would be a good date to examine for this effect. Why is February 29 a better date study than January 1 for the purposes of this? (Hint: If you were trying to examine the point Gans and Leigh are looking at, you would need to make sure that only the patients cared about the "inauspicious" day, and that only the doctors cared about the weekend…)

Thanks to Chris Makler for valuable additions to this post.