The Myth of ‘Market Failure’ in Health Care
One argument in favor of a government overhaul of the health care system is that the free market had its chance, and failed when it comes to providing the best possible care. But as David Goldhill discovered while researching for the September cover article in The Atlantic, the United States has anything but a free-market health care system.
He explains his findings below:
For real market-based reform, see Cato’s new Policy Analysis, “Yes, Mr. President: A Free Market Can Fix Health Care.“
Ben Chavis to Charles Murray: “Bring it”
In an exchange I had with Charles Murray earlier this month, he complained that there was no bulletproof scientific research documenting miraculous improvement in student achievement attributable to great schools like those of Ben Chavis.
At the time, that objection was beside my point, which is that there is copious evidence that competitive market education systems yield very substantial (if not “miraculuous”) improvements over the status quo government monopoly. We don’t need miracles to prove that there is a much better way of organizing and funding schools.
But that wasn’t enough for Ben Chavis. He called yesterday to pass along a proposition to Charles: come perform the research yourself. In fact, Ben offered to put Charles up in his own house.
I don’t know if Charles will go for this, but I wish he would (or find a grad student who will). And here’s why: I think Charles is so skeptical of the results of great schools and teachers because he has not come across any mechanism in his studies that could adequately explain those results. But I contend that there is such a mechanism: a school culture so strong and conducive to academic effort that it can overcome the absence of an academically supportive culture in the home.
If you read Jay Mathews’ wonderful book Escalante, or Ben’s Crazy Like a Fox, this becomes immediately clear. The school environment in these rare cases becomes a much more powerful influence on students’ willingness to work and expectations of success than is normally the case. These great schools tap into a fundamental human desire to belong to a team that offers them support and to which they feel an obligation to be supportive in return. It’s the same impulse that leads soldiers to put their lives on the line for their buddies in combat, and that sustains the insane work ethic in high tech startups.
This is one reason why free enterprise education systems excel all others: they offer the greatest freedom and most powerful incentives for excellent schools to replicate their cultures on a grand scale.
Wednesday Links
- How Washington’s plans may result in even higher executive pay.
“In 1993, Congress intervened in corporate compensation and messed things up. Now it’s the White House’s turn.”
- The case for allowing insider trading: “Want to keep companies honest, make the markets work more efficiently and encourage investors to diversify? Let insiders buy and sell.”
- Cato v. Heritage on the Patriot Act, Round III: “In hindsight, did Congress and the president react too hastily in 2001 by passing the Patriot Act just weeks after the 9/11 attacks?”
- Instead of fixing the Patriot Act, President Obama is protecting it.
- Twenty years later: Why the Berlin Wall fell.
- Podcast: “Financial Privacy and Freedom” featuring Prince Michael of Liechtenstein.
How Did the FCC Come to Acquire This Power?
Jeff Eisenach and Adam Thierer have a great essay in The American honoring the 50th anniversary of Ronald Coase’s article “The Federal Communications Commission.” It’s timely given the FCC’s proposal to establish public utility-style regulation of the Internet under the banner “net neutrality,” and it’s a good general warning to Neo-Progressives who “see market failure as the source of most problems, and government as the centerpiece of most solutions.”
The Fed and Policy Uncertainty
How and when should the Fed unwind the enormous monetary expansion it undertook in response to the financial crisis and recession? The WSJ reports [$]:
As the Federal Reserve’s next meeting approaches in early November, an internal debate is brewing about how and when to signal the possibility of interest-rate increases.
The Fed has said since March that it will keep rates very low for an “extended period.” Long before it raises rates, however, it will need to change that public signal to financial markets.
Because the recovery is so young and is expected to be so weak, many central bank officials are comfortable, for now, keeping rates very low. But they are beginning to strategize about how to walk away from the “extended period” language.
My suggestion is that the Fed announce a path of gradual increases in the federal funds rate, say beginning next year and lasting for two years, until the rate is at some “normal level.”
This approach is different than what the Fed is likely to undertake; it will probably want to maximize “discretion,” the ability to adjust on the fly as conditions unfold.
My approach maximizes predictability and reassurance: it commits the Fed to shrinking the money supply and heading off future inflation. This reassures markets and takes substantial uncertainty out of the picture.
The problem with my approach is the pre-commitment: everyone knows the Fed could abandon a pre-announced path.
But such an announcement might still give markets useful guidance, and the Fed would know that any deviation would itself upset markets, and this might encourage adherence to the pre-commitment.
Weekend Links
- Cato v. Heritage on the Patriot Act, Round II. Today’s topic: “Where are the demonstrated examples of abuses of liberties because of the Patriot Act? Are there any provisions of the law that civil libertarians would find acceptable?”
- Comparing the Great Depression to the current recession: Did we not learn anything?
- Re-examining the U.S. alliance with Japan: “The current relationship remains trapped in a world that no longer exists.”
- The human cost of delayed economic reform in India: “With earlier reform, 14.5 million more children would have survived, 261 million more Indians would have become literate, and 109 million more people would have risen above the poverty line.”
- Podcast: What we should have learned from our experience in Somalia. Background reading: Somalia, Redux: A More Hands-Off Approach
Understanding the Consequences of Internet Regulation
In an effort to achieve “network neutrality” online, the FCC is starting to write new regulations for Internet providers. Reuters reports:
U.S. communications regulators voted unanimously Thursday to support an open Internet rule that would prevent telecom network operators from barring or blocking content based on the revenue it generates.
The proposed rule now goes to the public for comment until Jan. 14, after which the Federal Communications Commissions will review the feedback and possibly seek more comment. A final rule is not expected until the spring of next year.
Cato Director of Information Policy Studies Jim Harper appeared on Fox News this week to discuss the FCC decision. “This is governmental tinkering with a market place that is working really well and growing right now,” said Harper. “The last thing we need is to cut that off.”
There are ways to achieve net neutrality without regulation, says Timothy B. Lee:
An important reason for the Internet’s remarkable growth over the last quarter century is the “end-to-end” principle that networks should confine themselves to transmitting generic packets without worrying about their contents. Not only has this made deployment of internet infrastructure cheap and efficient, but it has created fertile ground for entrepreneurship. On a network that respects the end-to-end principle, prior approval from network owners is not needed to launch new applications, services, or content.
…Like these older regulatory regimes, network neutrality regulations are likely not to achieve their intended aims. Given the need for more competition in the broadband marketplace, policymakers should be especially wary of enacting regulations that could become a barrier to entry for new broadband firms.
Yes, Mr. President, a Free Market Can Fix Health Care
At his White House forum on health reform back in March, President Barack Obama offered:
If there is a way of getting this done where we’re driving down costs and people are getting health insurance at an affordable rate, and have choice of doctor, have flexibility in terms of their plans, and we could do that entirely through the market, I’d be happy to do it that way.
In a new Cato study titled, “Yes, Mr. President, a Free Market Can Fix Health Care,” I take up the president’s challenge and explain that markets are indeed the only way to achieve those goals. I also explain how Congress can remove the impediments that currently prevent markets from doing so:
- Give Medicare enrollees a voucher (adjusted for their means and health risk) and let them purchase any health plan on the market,
- Reform the tax treatment of health care with “large” health savings accounts, which would give workers a $9.7 trillion tax cut (without increasing the deficit) and free them to purchase secure coverage that meets their needs,
- Free consumers and employers to purchase health insurance across state lines (i.e., licensed by other states), which could cover up to one third of the uninsured,
- Make state-issued clinician licenses portable, which would increase access to care and competition among health plans, and
- Block-grant Medicaid and the State Children’s Health Insurance Program, just as Congress did with welfare.
Unlike the president’s health care proposals (which, as Victor Fuchs explains, would merely shift costs), these reforms would reduce costs, expand coverage, and improve health care quality – without new taxes, government subsidies, or deficit spending.
Would a free market be nirvana? Of course not. But fewer Americans would fall through the cracks than under the status quo or the government takeover advancing through Congress.
There is a better way.
(Cross-posted at Politico‘s Health Care Arena.)
U.S. Cutting Pay for Bailed Out Company Executives
According to reports, executives from bailed out companies Citigroup, Bank of America, GM, Chrysler, GMAC, Chrysler Financial and AIG are going to see major pay cuts this year, which will be enforced by the president’s “pay czar,” Kenneth R. Feinberg. WaPo:
NEW YORK — The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.
The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.
The American people have every right to be upset about generous compensation packages for executives at financial firms that are being kept alive by subsidies and bailouts.
But their ire should be directed at the bailouts, because that is the policy that redistributes money from the average taxpayer and puts it in the pockets of incompetent executives. Unfortunately, rather than deal with the underlying problems of bailouts and intervention, some politicians want to impose controls on salaries. This might be a tolerable second-best (or probably fifth-best) outcome if the compensation limits only applied to companies mooching off the taxpayers, but some politicians want to use the financial crisis as an excuse to regulate compensation at firms that do not have their snouts in the public trough.
This would be a big mistake. So long as rich people make money using non-coercive means, politicians should butt out. It should not matter whether we are talking about Tiger Woods, Brad Pitt, or a corporate CEO. The market should determine compensation, not political deal making. Markets don’t produce perfect outcomes, to be sure, but political intervention invariably produces terrible outcomes.
I debate this further on CNBC:
C/P The Hill
Nice Insurance Company. Shame If Anything Were to Happen to It.
Just days after the health-insurance lobby released a report criticizing the Senate Finance Committee’s health care overhaul (for not expanding government enough!), Democrats and President Barack Obama lashed out at health insurers, threatening to revoke what the Government Accountability Office calls the insurers’ “very limited exemption from the federal antitrust laws.”
Democrats say they’re motivated by the need to increase competition in health insurance markets. Right.
According to Business Week:
David Hyman, a professor of law and medicine at the University of Illinois College of Law and adjunct scholar at the Cato Institute…considers it unlikely that repeal would fundamentally change the nature of the market. While it might increase competition in some markets, he says, it could actually decrease it in others, such as those where small insurers survive because they have access to larger providers’ data. Changes to the act could therefore hurt smaller companies more than larger ones, he says.
Because the act doesn’t outlaw the existence of a dominant provider but simply prohibits collusion, says Hyman, a repeal would fall short of breaking up existing market monopolies that are blamed for artificially inflating prices. The current move against [the] McCarran-Ferguson [Act], he says, “has more to do with the politics of pushing back against the insurance industry’s opposition to health reform than it does with increasing competition in health-insurance markets.”
Combined with what The New York Times described as the Obama administration’s “ham-handed” attempt to censor insurers who communicated with seniors about the effects of the president’s health plan — the Times editorialized: “the government’s Centers for Medicare and Medicaid Services had to stretch facts to the breaking point to make a weak case that the insurers were doing anything improper” — it’s hard to argue that this is anything but Democrats threatening to use the power of the state to punish dissidents.
When Republicans were in power, dissent was the highest form of patriotism. Now that Democrats are in power, obedience is the highest form of patriotism.
What Is Regulation?
The New York Times tries to spin the work of Nobel laureates Elinor Ostrom and Oliver Williamson as not anti-regulation:
Neither Ms. Ostrom nor Mr. Williamson has argued against regulation. Quite the contrary, their work found that people in business adopt for themselves numerous forms of regulation and rules of behavior — called “governance” in economic jargon — doing so independently of government or without being told to do so by corporate bosses.
But none of us “anti-regulation” folks are against “rules of behavior that people in business adopt for themselves independently of government.” The world is full of rules, from wearing clothes in the office to customary trade practices to the rules for managing common-pool resources that Ostrom studied. Anyone who opposed such “forms of regulation” wouldn’t be a libertarian or even an anarchist — he’d be a nihilist. (Of course, one could sensibly oppose particular rules; but no one seriously wants a world without rules of behavior.)
David Henderson analyzes one of the misunderstandings about the laureates’ findings:
Some have summarized their work by saying that institutions other than free markets often work well. But that statement can mislead you to conclude that government solutions are the answer. Free markets are only a subset of free institutions. A better way to sum up their work is that what Ms. Ostrom and Mr. Willamson really show is that voluntary associations work.
The Concise Encyclopedia of Economics defines “regulation” this way: “Regulation consists of requirements the government imposes on private firms and individuals to achieve government’s purposes.” That’s the kind of regulation that is controversial among economists and often criticized by libertarians. It is entirely different from “rules of behavior that people in business adopt for themselves independently of government.” Those sorts of rules — often called “governance,” as the New York Times notes — are private and voluntary, made by the voluntary interactions of a few or many people.
The work of Ostrom and Williamson supports the idea of spontaneous order, an order that emerges as result of the voluntary activities of individuals and not through the commands of government. Spontaneous order can be hard to grasp, though it is the background of our entire world — language, common law, money, and the economy are all spontaneous orders (though government has intruded into some of those orders). It’s misleading to say that work of Ostrom and Williamson is somehow supportive of “regulation,” given the way that word is commonly used.
Sheldon Richman made a similar point back in June and wrote a Facebook note on the same paragraph that caught my eye.
Perpetuating Bad Housing Policy
Perhaps the worst feature of the bailouts and the stimulus has been that, whatever their merits as short terms fixes, they have done nothing to improve economic policy over the long haul; indeed, they compound past mistakes.
Here is a good example:
For months, troubled homeowners seeking to lower their mortgage payments under a federal plan have complained about bureaucratic bungling, ceaseless frustration and confusion. On Thursday, the Obama administration declared that the $75 billion program is finally providing broad relief after it pressured mortgage companies to move faster to modify more loans.
Five hundred thousand troubled homeowners have had their loan payments lowered on a trial basis under the Making Home Affordable Program.
The crucial words in the story are “$75 billion” and “pressured.”
No one should object if a lender, without subsidy and without pressure, renegotiates a mortgage loan. That can make sense for both lender and borrower because the foreclosure process is costly.
But Treasury’s attempt to subsidize and coerce loan modifications is fundamentally misguided. It means many homeowners will stay in homes, for now, that they cannot really afford, merely postponing the day of reckoning.
Treasury’s policy is also misguided because it presumes that everyone who owned a house before the meltdown should remain a homeowner. Likewise, Treasury’s view assumes that all the housing construction over the past decade made good economic sense.
Both presumptions are wrong. U.S. policy exerted enormous pressure for increased mortgage lending in the years leading up to the crisis, thereby generating too much housing construction, too much home ownership and inflated housing prices.
The right policy for the U.S. economy is to stop preventing foreclosures, to stop subsidizing mortgages, and to let the housing market adjust on its own. Otherwise, we will soon see a repeat of the fall of 2008.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
