Saturday, August 13, 2011

On Government and the Free Market (part 1: Healthcare)

Generally, I'm a huge fan of the free market.  I think competition is a powerful force for good, and I'd like to see less government intervention in a wide variety of market activities.  However, whenever I talk about healthcare, I'm basically totally socialist.  Many people might see these views as inherently contradictory, but I'm not sold and this post is about why.

My views are held together by an understanding of the theoretical basis for the modern fondness for free-markets.  It's called Pareto Optimality, and basically what it means is that a Perfect Market  will (provably) reach an equilibrium where no one can possibly get any better off without someone else having things worse.  Zero-sum doesn't immediately sound exciting, but consider the alternative scenario in which many people are unnecessarily worse off and you might get a sense of why this result is a Good Thing.  I think (though I'm not sure), that this proof is part of the reason Austrians (EDIT: Austrians do not hold this belief.  For a fairly thorough primer click here) and other Libertarians are so fond of unfettered capitalism.  It is, however, worth noting that where that equilibrium is (in terms of final distribution of goods) depends on initial distribution of wealth, so even if we did have a perfect market we might have to think about setting up initial conditions properly so everyone was alive and moderately well at the end.

Now, before you get all worried about proper wealth distribution, please recall that our markets aren't perfect (obviously).  The question of why they aren't naturally leads to my beliefs regarding the role of government in the market.  A lot of the time, as libertarians are eager to point out, the government is the force moving markets away from their ideal.  They do this primarily by increasing the barrier to entry into various businesses.  Common tactics include patent law, licensing restrictions (especially zoning ordinances), quality controls, subsidies, tax codes, loopholes, and all sorts of other things.  When I get angry and yell about plutocracy in government, that's usually what I'm on about - wealthy corporations and individuals buying themselves special treatment... Unions and other powerful groups lobbying to entrench their interests (like cab medallions &c).  That stuff is bad news; we shouldn't put up with it.  It distorts outcomes, hides costs, and generally creates long term structural problems in the economy.  If you think I sound like a libertarian right now, it's because I agree with them totally on these points.

However, some markets aren't perfect for reasons completely separate from government.  Health Care appears to be one of those markets.  There are a lot of reasons for this, but the basic issue is that people can't really tell good care from bad.  This is particularly true of the very ill.  Sick people given the right treatment often die anyway, and sometimes very ill people get better despite bad treatment or no real treatment at all.  There's no clear signal of quality, and if consumers can't tell what's good, they very clearly can't effectively choose the proper treatment.  Patients can pick their doctors by bedside manner, but not by efficacy.  Furthermore (and this is vital), patients who need care most can't really make ANY choices about their care.  They may be unconscious, rushed to the nearest care provider, and subjected to whatever life-saving treatment the doctor on call deems necessary.  And then there's the problem of infinite demand.  Most people (rightly) value their lives over just about anything else.  Combine that with the fact that people are terrible judges of quality of medical care, and you can see why such giant amounts of money go into bad treatments.  How can a proper market operate under those sorts of constraints?  My answer, and Kenneth Arrow's (a Nobel Laureate economist who worked out some of the perfect market stuff I mentioned earlier) is that it can't.

But don't take the theorist's word, look at the facts.  The U.S. spends hilariously more money on health care than any other country -- with the most private system (though the U.S. health care market is also horribly burdened by government interventions... in particular drug patents).

 Our government, insuring just our elderly and very poor, manages to spend a larger share of GDP on healthcare than the Canadian government spends on every. single. Canadian.

This is insanity. You don't even have to look abroad to notice that the socialist way is better... take the VHA.  So when markets can't work like they're supposed to, I'm okay with government stepping in to do the job.

(If you're about to make claims about health outcomes in other countries, I suggest you read the linked articles first... U.S. health outcomes are generally similar to or worse than our socialist peers')

Next up: macroeconomic interventions

1 comment:

  1. Yes, we're spending lots of money on healthcare, but it's important to note what kind of quality we're getting in return for our moneys.

    The fact is, the quality of our healthcare system is extremely... average. At least among developed nations. So, yeah, we definitely need a better way of delivering and paying for our healthcare.