As a contemporary example, Cato argues Cash for Clunkers is among the dumbest ever:

  • A few billion dollars worth of wealth was destroyed. About 750,000 cars, many of which could have provided consumer value for many years, were thrown in the trash. Suppose each clunker was worth $3,000 at a guess, that would mean that the government destroyed $2.25 billion of value.
  • Low-income families, who tend to buy used cars, were harmed because the clunkers program will push up used car prices.
  • Taxpayers were ripped off $3 billion. The government took my money to give to people who will buy new cars that are much nicer than mine! 
  • The federal bureaucracy has added 1,100 people to handle all the clunker administration. Again, taxpayers are the losers.
  • The environment was not helped. See here and here.
  • The auto industry received a short-term “sugar high” at the expense of lower future sales when the program is over. The program apparently boosted sales by about 750,000 cars this year, but that probably means that sales over the next few years will be about 750,000 lower. The program probably further damaged the longer-term prospects of auto dealers and automakers by diverting their attention from market fundamentals in the scramble for federal cash.   

Sane folks should agree these outcomes are outrageously dumb.  B-b-but, Obama bragged the program was popular!  And truly, it was.

Offering everyone $100 towards burning an old set of ugly clothes and buying a sleek new replacement might also prove popular, both to consumers and the clothing industry.  Huzzah, let’s do it!  Regrettably, such popularity does not make it a good idea nor mean that implementing it would make any kind of economic or environmental sense—which it clearly wouldn’t.

This basic problem of economic inefficiency, generalized, is why the majority of other government programs and economic interventions are also really bad ideas. What is politically popular seldom implies economic efficiency.  Often, quite the contrary. Political popularity foments fiscal insanity.  First you get your Democrats, who want to give every person on Earth a free cake, dog, and pony—plus the choice of a prepaid subscription to either People or The Washington Monthly.  This proves popular.  Then as a reaction you get your Republicans, who don’t want to pay half a cent toward anything.  This also proves popular.  Unsurprisingly, voters want to have their cake and not have to pay for it, too.  Politicians are happy to pander to both sides.  The emerging compromise?  Massive deficits—a.k.a. having our children and grandchildren deal with it somewhere down the line.

Yes, Virginia—I don’t mean to scare you with technical phrasing, but politics and government really do suck.

A sufficiently free market, by contrast, implements a method that almost always results in superior efficiency to either political popularity or technocratic fiat.  It’s called price signals.

Unfortunately, due to a history of misguided (but politically popular!) government interventions and regulation, the U.S. health-care system does not have price signals.  This works out very poorly.

Allow me to paint you an analogy.  It would be as if credit cards were issued by “insurance card” companies who agree to provide their customers with “consumption coverage”.  You would pay them a pre-arranged monthly “consumption premium”, and in exchange they would “cover”—with just a small co-pay!—any shopping you do with their card, provided it was clear that you “needed” it.  Ramen noodles would probably be covered—eat more than you can puke.  So would most canned goods.  Even many of the cheaper fruits and veggies.  But the fine entrée you wanted to serve at your next dinner party?  Sorry, your insurance card company doesn’t think you “need” it.  Oh, and there would also be limits on things like how much gas you can buy per week or how many drinks you’re allowed at the bar per night.  Sound good?  Meanwhile, more and better ways would be developed to game and profit off the convoluted system.  Retailers would overcharge whatever they could get away with making the “insurance card” companies pay, and consumer demand for more and better purchase coverage would rapidly increase. Thus the monthly cost of these “consumption premiums” would also soar.

The above scenario is basically the status quo of U.S. health-care.  Obviously, it sucks.   In lieu of price signals, people always want more and better health-care to be provided, just like in the above they always want more “consumption coverage”.    When the consumer doesn’t pay for services, markets become dysfunctional. (Also true of some marriages >_>)

So how to reform the system?  Apart from those unfortunate Brits—who tragically got the idea during WWII that it would be good for their state to stay in the business of directly providing care—the left’s favored solution tends to be single-payer: a government takeover of health insurance companies, analogous to taking over the odd “insurance card” ones above.

Insurance companies make great villains, but as we saw with Cash for Clunkers and can observe by looking at many other programs—particularly socialized health plans in other countries—they all have their own kinds of problems.   These problems are different from the US status quo: better in some ways, worse in others.

For example, one thing other countries’ socialized systems are better at is cost control (.pdf).  They use their monopsony power to negotiate lower prices, and they can often be better at saying no to consumers.  They say no in more equitable ways, such as long waiting times, and some Canadian towns run regular lotteries to decide which families get a doctor.

Controlling costs would be nice, especially compared to an expensive system like the US status quo.  But one thing centralized bureaucratic cost controls also do is reduce the incentive for future private innovation.  Why spend your time experimenting with and further developing a new health product if you can’t know whether the health bureau will decide it’s a cheap and effective enough treatment to get it off the ground?

In short, the choice between the U.S. status quo and a single-payer system offers trade-offs.  I won’t spill more ink trying to formally pin them all down: it’s a big topic, kind of like going on about the difference between Republicans and Democrats.

At this point someone usually pipes up and wails about the plight of the uninsured poor.  But that is not a health-care system problem, it is an income problem.  And one of the few ways to directly mitigate an income problem is to provide subsidies to low-income families (some ways are more economically sound than others).  Point is, you could implement subsidies and attain universal health insurance coverage in the U.S. without directly changing anything about our health-care delivery system or the insurance companies themselves.  It would just be really expensive and balloon either the deficit or tax rates, which is why it shouldn’t be done in isolation.

Happily there’s a reform that would lower costs for everyone while actually increasing innovation:  bring back the price signals that are so essential to market efficiency.  Here’s how this might be accomplished:

Firstly, repeal any state-level regulation—often called “patients bill of rights”—that require insurance companies to fully cover particular procedures or put an artificial ceiling on deductibles.  This would clear the regulatory barriers for health plans that sport low premiums and high deductibles, suitable for catastrophic coverage only.  This is how real insurance is supposed to work, like the kind we have for our cars and homes.  By contrast, the sort of thing we call “health insurance” today is actually “pre-paid health care”.  Just imagine how high your car insurance payments would be if it were required to cover 80% of the cost of oil changes, tire rotation, wiper blades, new tires, regular service, etc.

Secondly, implement something like Health Savings Accounts (HSAs) for all the routine, preventative, non-catastrophic care.  Apart from trimming administrative jobs in our bloated health insurance industry, this would free consumers to shop for their own health care (Enter price signals, mission accomplished).

Of course, esteemed Nobel laureates like Paul Krugman shall protest:  “Health care is not a bowl of cherries…or a carton of milk, or a loaf of bread.”

Indeed, shopping for health-care probably sounds like an odd idea to most.  But HSAs have been tried right here in America, and the data suggest they work well:

Consumer-driven health (CDH) products [i.e., high-deductible health plans relying on HSAs or Health Reimbursement Arrangements to reimburse for qualified expenses] have been marketed in various forms since the early 2000s. While emerging data is [sic] not entirely conclusive, general directional conclusions can be drawn from the studies published to date. […]

With regard to first-year cost savings, all studies showed a favorable effect on cost in the first year of a CDH plan. CDHplan trends ranged from -4 percent to -15 percent. Coupled with a control population on traditional plans that experienced trends of +8 percent to +9 percent, the total savings generated could be as much as 12 percent to 20 percent in the first year. All studies used some variation of normalization or control groups to account for selection bias.

For savings after the first year, at least two of the studies indicate trend rates lower than traditional PPO plans by approximately 3 percent to 5 percent. If these lower trends can be further validated, it will represent a substantial cost-reduction strategy for employers and employees.

Generally, all of the studies indicated that cost savings did not result from avoidance of appropriate care and that necessary care was received in equal or greater degrees relative to traditional plans. All of the studies reviewed reported a significant increase in preventive services for CDH participants. Three of the studies found that CDH plan participants received recommended care for chronic conditions at the same or higher level than traditional (non-CDH) plan participants. Two studies reported a higher incidence of physicians following evidence-based care protocols.

Bottom lines: the status quo puts health care rationing in the hands of insurance companies.  Single-payer puts rationing in the hands of bureaucrats.  A free, CDH market places it in the hands of consumers.

Which of the three do you prefer?

Contrary to popular belief, those of us on the economic right do not advocate market solutions because we have some arcane faith in mythical powers of the market.  We do so because they actually work better—even when they’re politically unpopular.

(At this point someone usually pipes up to rail about how the financial crisis, like, totally discredits the idea of markets being better. Let’s try not to be distracted by this different, macroeconomic topic that has more to do with a combination of poor regulation and lack of understanding the business cycle.)

The mean socially conservative Republican voter is our useful idiot. They don’t understand free market economics any better than the left does, and are liable to show up at your local town halls spouting all sorts of nonsense about government conspiracies to kill more babies.  But the socons are willing to vote with us, so we often have to hold our nose and work with them.  It’s called fusionism, and it’s been the price to pay for an economic way of doing business that—while superior on the merits—would otherwise be too politically unpopular.  See for example the situation in contemporary Europe, which unlike the US has managed to purge socon fervor the old-fashioned way: through a long, tragic history of disastrous war.

I deplore social conservative attacks on personal freedom as much as the next freethinker, and I aim to counter them.  But I also deplore the left’s attacks on economic freedom.  And I’m aware of the uncomfortable truth: unless I can convince a lot more of my fellow social liberals to cut back on their leftism and support freer markets, a chronic Faustian bargain with socons is necessary to preserve what economic freedoms we have.  Without this bargain, the U.S. economy would become more like Europe’s, with the lower efficiency and lowered growth that over the long term is worse for everyone—rich and poor alike. Unless, of course, one is lucky enough to become a politician, bureaucrat, or have a personal connection to the business. Then the European political-economic landscape looks pretty rosy, and one can seek out all sorts of creative ways to gloss over the underlying economic inefficiency.

(Cross posted)

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