Arnold Kling  

Milton Friedman on health, education

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In an interview, Milton Friedman explains why shifting education and health care from the market to the government is inefficient.


There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.

Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch!

Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government. And that's close to 40% of our national income.

For Discussion. Suppose that you were about to debate Friedman. What arguments would you prepare in favor of government provision of education or health care?


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The author at Houston's Clear Thinkers in a related article titled Milton Friedman interview writes:
    This Fox News interview with Milton Friedman provides the usual dose of Professor Friedman's provocative thoughts about economic freedom and the costs of governmental interference in markets, but also provides the following common sense analysis on why... [Tracked on June 8, 2004 8:32 AM]
COMMENTS (19 to date)
David Thomson writes:

“Suppose that you were about to debate Friedman.”

I can’t even begin to think of a counter argument. Milton Friedman is a god of the universe and I’m just a low life second-rater. How can I top this?: “You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money.” I agree completely. This is why I strongly argue that health costs will not begin dropping until people cease pretending that somebody else is paying their bills. Someone who is faced with modestly large medical bills immediately seeks ways to lower the costs. The same holds true for education. Arnold Kling has mentioned the unbelievable amount of money spent building his local school. Such extravagance would not occur if the tax payers felt the financial impact more directly.

Mcwop writes:

Here is what I would come with for the health portion - these are simply soundbites, but are likely arguments:

1. We have a moral obligation to provide healthcare

2. Costs to administer the plan will be less

3. We will gain advantages from the law of large numbers

4. The world will be better without big insurance and big drug companies

5. It will be free because the wealthiest Americans will pay for it

6. Universal health care will decrease insurance premiums on non health care insurance that have health care benefits attached to them (automobile insurance, work-man's compensation insurance, malpractice insurance)

7. The Bill would create a democratic system for determining benefits

8. It is the will of the people

9. It will provide health security for millions of people

Boonton writes:
Arnold Kling has mentioned the unbelievable amount of money spent building his local school. Such extravagance would not occur if the tax payers felt the financial impact more directly.

How much more directly could taxpayers feel that impact and still remain tax payers? Local schools are usually funded by local property taxes. That's about as close to the taxpayer as you can get. If anything we should expect to see much smaller waste and extravagance in local gov't when compared to state gov't and then to the Federal gov't.

What's going on here is that only half the story is told by the simplistic formulation of 'spending someone else's money on someone else'. Such a model often fails to explain what we see. For example, one conclusion of this model would be that gov't spending should go up when tax receipts go up. After all, if there's MORE of other people's money in the gov't bank account, it should be all the more tempting to write MORE checks. Yet we saw a reluctance to do this during the 90's boom but as the money going to the Treasury dried up Federal spending exploded...with a conservative Republican Congress and President!

Robert Schwartz writes:

When I was a young pup, back in the last millennium, I attended the University of Chicago. Milton Friedman was a Faculty member at the time. He did not teach undergraduate courses. Occasionally he would give open lectures. If you saw him walking across campus, you could go up to him and ask him questions. No matter how absurd or hostile your question was he would always give it a perfect answer. I never heard anybody trip him up.

He is over 90 now, I have seen him interviewed on television and he seems to be just as sharp as ever. Debate him? not likely, I would fall down and worship him: "I am not worthy."

Beyond that, he would cut me to ribbons. Let some of the young wippersnappers take a try, I will just watch and laguh as the Master destroys them without effort.

Lee A. writes:

The two big arguments for government health care remain:

(1) The information-asymmetry of adverse selection.

(2) The Coasian argument that institutions like firms, including that "big super-firm" the government, reduce transactions costs.

Doing things yourself, you do not always get the most for your money. Otherwise, firms would not exist.

Andy writes:
Here is what I would come with for the health portion - these are simply soundbites, but are likely arguments:

1. We have a moral obligation to provide healthcare
2. Costs to administer the plan will be less
3. We will gain advantages from the law of large numbers
4. The world will be better without big insurance and big drug companies
5. It will be free because the wealthiest Americans will pay for it
6. Universal health care will decrease insurance premiums on non health care insurance that have health care benefits attached to them (automobile insurance, work-man's compensation insurance, malpractice insurance)
7. The Bill would create a democratic system for determining benefits
8. It is the will of the people
9. It will provide health security for millions of people
Posted by Mcwop on June 7, 2004 09:26 PM

1. We do? According to who?
2. When has the government done anything more efficiently and cheaper than the private market?
3. We already gain advantage, that is why insurance companies exist.
4. Will it? One could argue that big drug companies are largely responsible for the increase in life expectancy we have witnessed over the last 100 years.
5. If someone pays for it, it is not free. Ask "the wealthiest" if they would consider it free. And if they are going to pay for my healthcare, can they also pay my bar tab, my car payment and my rent while they are at it? Then those things will be "free" also.
6. Not likely.
7. Sure if you consider rationing to be a "democratic system".
8. Are you sure? The majority of people would get worse care and rationing to help a small minority.
9. Maybe, but it will cause millions of people to worry about dying from preventable ailments while they wait in government imposed lines to get treatment that they would have previously recieved immediately.

Boonton writes:
9. Maybe, but it will cause millions of people to worry about dying from preventable ailments while they wait in government imposed lines to get treatment that they would have previously recieved immediately.

You're assuming only one type of 'gov't provision for healthcare'. Take a peek at my voucher proposal, why would that cause people to die waiting in line to get treatment?

7. Sure if you consider rationing to be a "democratic system".

Everything is rationed. The market is simply another method of rationing (a highly efficient one I agree but that doesn't change anything.

2. When has the government done anything more efficiently and cheaper than the private market?

National defense, law enforcement, dispute resolution (aka the court system), protecting the legal force of contracts etc. This is stuff gov't has 'done'. A huge portion of gov't is gov't simply paying for things that others do. Social Security, for example, is only 'done by gov't' to the extent that they have administrators keeping track of the checks coming in and out and issuing SSI numbers and cards. This is highly efficient in the sense that only a tiny fraction of each dollar that moves thru the system is paying for this administration. Much smaller than what financial institutions have to charge for their administration fees (here is where economies of scale really kick in).

Lawrance George Lux writes:

The Heretic rides again! There is no moral obligation to provide health care, this came in 1966, and has been the bane of American society since. American society would be better off with less Senior citizens (i.e., if they would die off earlier), with the encouragement of suicide. We already have an oversupply of College-educated labor, but an undersupply of Trade skills. Lower Education facilities are woefully below standard, when considered against foreign educational systems.

Solution:
Tax health care and education as the same rate as Corporation's fictional tax rate, and then let them find their own suppport??///Cut that: it is Uncle Milton's argument. lgl

Mcwop writes:

Andy,
Just to be clear these are not my positions. I only meant to highlight what arguments might be brought to a debate that Arnold suggests for discussion.
Mcwop

Sandy P writes:

But, but, but if the gov is more efficient, how come Tony and Jacko are throwing more money into their bankrupt systems?

The Fraser Institute just came out w/a paper on Canada, they have no private health companies, IIRC, and one of their native tribes is about to go off the reservation and build a private MRI(?) clinic.

Ozzie's got problems, and I think the Kiwis do, too. Especially that poor sap a couple of years ago who cut off his gangrened finger w/scissors because he got a letter stating it'll be another 6 months before treatment. Then they said he got the wrong letter.

All the arguments against NHC are there for the pickings. That and the boomers being told no, you can't have it. That'll go over well.

Andy writes:
My proposal: 1. A universal tax to fund a basic health care entitlement. 2. The funds are divided evenly into individual vouchers.

a. The vouchers can be used to purchase healthcare or insurance by individuals or can be cashed in against employer provided insurance.
b. In order for insurance companies to cash in vouchers, they must agree to limit variation in premiums. In other words, they can't charge someone with a high risk with a premium that prices them out of the market.

3. Individuals are free to supplement the vouchers with their own funds if they wish to purchase fancier plans or if they wish to opt out of the system entirely.

Advantages of this proposal:

a. It is voluntary in nature. Insurance companies don't have to accept the vouchers nor do people have to use them.
b. It is not an entitlement. The voucher is set by the revenue raised by the tax. If people want better coverage they must accept higher taxes or vice versa.
c. Insurance companies will pool the risk by agreeing not to charge sick people with excessive premiums. This is what happens with employer provided health insurance. Blue Cross agrees to charge a flat rate per person to cover Microsoft employees, for example. The 60 year old worker with cancer is not charged 200 times more than the healthy 20 year old in the mail room.
Posted by Boonton on June 2, 2004 12:20 PM

First all of all to resond to your voucher idea. You state it is voluntary in nature. Would the "universal tax" be voluntary? If so who in their right mind would participate? If the tax isn't voluntary then neither is your proposal. You also state in item #1 that it would be to fund a "healthcare entitlement" but then in the advantages you state "It is not an entitlement". Which is it? It cannot be both. Why would the 20 year old in the mail room participate if they are basically financing their 60 year old co-worker? I don't subsidize his rent or food bills, why should healthcare be different?

Now to your response:

Everything is rationed. The market is simply another method of rationing (a highly efficient one I agree but that doesn't change anything.

The difference is that I have a choice. If the government is the only provider and they decide to ration, I am screwed. If my HMO tries to ration, I switch plans.

National defense, law enforcement, dispute resolution (aka the court system), protecting the legal force of contracts etc. This is stuff gov't has 'done'. A huge portion of gov't is gov't simply paying for things that others do. Social Security, for example, is only 'done by gov't' to the extent that they have administrators keeping track of the checks coming in and out and issuing SSI numbers and cards. This is highly efficient in the sense that only a tiny fraction of each dollar that moves thru the system is paying for this administration. Much smaller than what financial institutions have to charge for their administration fees (here is where economies of scale really kick in).

I cannot argue with national defense and law enforcement. Those are legitimate activities of government, healthcare isn't. As for dispute resolution, who really wins? (Hint: think lawyers). That is why so many companies use private arbitration to solve disputes....the courts are slow, expensive, and inefficient. Social Security proves my point. If it is so efficient, why is it gowing broke and why are the returns on money I pay in probably going to be less than inflation? Efficient is the last word I would use for Social Security.

The Heretic rides again! There is no moral obligation to provide health care, this came in 1966, and has been the bane of American society since. American society would be better off with less Senior citizens (i.e., if they would die off earlier), with the encouragement of suicide. We already have an oversupply of College-educated labor, but an undersupply of Trade skills. Lower Education facilities are woefully below standard, when considered against foreign educational systems.

There is no more of an obligation to provide health insurance than there is to provide everyone with car insurance. (Maybe that will be next!) What the government should do is make it easier for people to purchase insurance and then get out of the way. It isn't a secret that people age. They need to plan ahead and save while they are working. It is that simple.

nelziq writes:

Just to be clear, vouchers are not the same as government provision. Vouchers would fit the third catagory (spending someoneelses money on yourself) which is way more efficient than catagory four of government provision (someone elses money spent on a third party)

Boonton writes:
First all of all to resond to your voucher idea. You state it is voluntary in nature. Would the "universal tax" be voluntary? If so who in their right mind would participate? If the tax isn't voluntary then neither is your proposal.

Let me clear two issues up:

1. An entitlement is defined by those who meet a certain criteria. For example, if you turn 65 and have paid SSI taxes you are entitled to SSI checks. Such programs are said to be on 'auto-pilot'. The voucher would be an entitlement only in the sense that everyone is entitled to it, it's actual worth, though, would be set by the revenue generated by the tax. If broader coverage was desired the public would have to couple that with accepting a higher tax. If the public wanted lower taxes they would have to also accept a cut in the benefit (spending).

2. The tax, of course, wouldn't be voluntary. What is voluntary is participation in the voucher. No doctor wouold have to accept it and no patient would have to use it. Unlike 'socialized medicine', medical care is paid for and provided by the private sector. A good doctor will attract paying patients (using vouchers or their own cash) while a bad doctor will drive them away.

The difference is that I have a choice. If the government is the only provider and they decide to ration, I am screwed. If my HMO tries to ration, I switch plans.

'If my HMO tries to ration'? Unless your insurance company has infinite resources, they will ration. Deductibles are a form of rationing, even with catastrophic plans they will refuse to cover things that appear extravagant or seriously unnecessary. What you really mean to say is 'If my HMO rations in a way I don't like, I will seek an alternative'. Of course, there is no law of economics that says an alternative will exist that you will be happy with. My point was simply that gov't could provide a universal benefit in such a way as to not have healthcare rationed by the gov't. In my voucher plan you would be free to take your voucher anywhere you wanted plus you would be free to supplement your own money (or your employers if they were willing).

I cannot argue with national defense and law enforcement. Those are legitimate activities of government, healthcare isn't. As for dispute resolution, who really wins? (Hint: think lawyers). That is why so many companies use private arbitration to solve disputes....the courts are slow, expensive, and inefficient. Social Security proves my point. If it is so efficient, why is it gowing broke and why are the returns on money I pay in probably going to be less than inflation? Efficient is the last word I would use for Social Security.

Private arbitration is only effective because a gov't court system stands behind it. If a dispute is setteled in binding arbitration but the loser refuses to comply the winner has the recourse of taking him to civil court to enforce the decision. If this didn't exist then the effectiveness of 'private arbitration' would be much less.

You're right about lawyers usually winning but so what? If my car is stolen and the police find it ruined I will be unhappy. Nevertheless, I'm better off having a police dept. that will try to find my car and catch the criminal than I would have been without one. Nearly everyone, including lawyers, DON'T want to end up in a court room. Nevertheless, the fact that the court exists means 90% of the people will play by the rules.

Social Security is a different issue, but fair is fair since I raised it. As a gov't problem SSI is efficient in that it's job is to collect SSI taxes and cut SSI checks (plus other things like replace lost Social Security cards, issue numbers etc.) SSI benefits from very good economies of scale. Compare it's administrative expenses per dollar that flows thru it with other financial institutions like banks, mutual funds, brokerages etc. The question was for an example of a gov't program that was more efficient than the private sector. In this limited sense, SSI certainly is.

Now whether collecting those taxes and cutting those checks is the best policy is another question. The people who run social security, though, do not have the authority to make that call. Their job is to follow the law as it is now and they are able to do it quite well.

Boonton writes:
Just to be clear, vouchers are not the same as government provision. Vouchers would fit the third catagory (spending someoneelses money on yourself) which is way more efficient than catagory four of government provision (someone elses money spent on a third party)

True but even this simplifies the issue. Is it really someone else's money? For many voters the voucher will be very close to what they pay in tax to fund it so it will be more like spending their own money on themselves. Other voters will face more in taxes than their own voucher is worth, so it will be like spending their money on someone else for them. Yet other voters will find the opposite.

This depends on how the voucher will be funded, such as a national sales tax, additional income tax surcharge, wealth tax or whatnot. One advantage is that at least voters can match the tax to the benefit.

Dez Akin writes:

I don't know what argument I'd make for health care, except that people aren't as rational as economic models make them out to be; So universal funding of inexpensive preventative maintenance might very well have a case, as the average person is likely to forgo preventative maintenance that has any cost if the benifit isn't seen immediately. The problem is preventing such a program from growing as all entitelment programs do, so I'm dead set against it.

I'm suprised that no one has mentioned the primary argument that hasn't been made yet for education; Technology is a growth multiplier and technological advancement is very closely corolated to education. I'm very skeptical about the assertion that the US economy would be as competitive without the public finance of education, especially when the cost of educating children rests rather heavily on the parents alone while the benifits are felt by the rest of us freeloaders.

Boonton writes:

How are the costs of educating kids falling mostly on parents when every kid gets free schooling from grade 1-12 plus numerous tax incentives, scholarships and student loans for college?

Chui writes:

If I don't know enough about healthcare, but I want to share some of my income so that more people can afford it, I need to assign the money to someone whom I trust can spend it more wisely than I can.

Since I'm not up-to-date with what's the most efficient allocation of medical resources (and I dont have the time to learn it), the next best thing is to assign it to a Government, who then picks the best people to allocate it (hopefully these people will have some economic training).

Of course I can donate some money to a charity which buys health insurance. But since a Government has better negotiating power with the health insurers, I might as well assign the money to the Government.

J Lonsdale writes:
2. When has the government done anything more efficiently and cheaper than the private market?

National defense, law enforcement, dispute resolution (aka the court system), protecting the legal force of contracts etc. This is stuff gov't has 'done'. A huge portion of gov't is gov't simply paying for things that others do. Social Security, for example, is only 'done by gov't' to the extent that they have administrators keeping track of the checks coming in and out and issuing SSI numbers and cards. This is highly efficient in the sense that only a tiny fraction of each dollar that moves thru the system is paying for this administration. Much smaller than what financial institutions have to charge for their administration fees (here is where economies of scale really kick in).

Even assuming your arguments about government being more efficient in those areas is correct, you are ignoring the key factor that unites them. The government is good at each of these things because it has a monopoly on the use of force in this area, and any competition would create a society where one organization didn't have a monopoly on the legal use of force. It has nothing to do with government being efficient in any other way.

Saying that because the governement can do national defense, law enforcement and the court system and therefore it can do health care is a rather large leap.
As for social security, you'd have a hard time proving this to be a successful government program. Even if it isn't costing too much to administer, it certainly isn't helping to create any wealth.

If I don't know enough about healthcare, but I want to share some of my income so that more people can afford it, I need to assign the money to someone whom I trust can spend it more wisely than I can.

Since I'm not up-to-date with what's the most efficient allocation of medical resources (and I dont have the time to learn it), the next best thing is to assign it to a Government, who then picks the best people to allocate it (hopefully these people will have some economic training).

Of course I can donate some money to a charity which buys health insurance. But since a Government has better negotiating power with the health insurers, I might as well assign the money to the Government.


If you want to give your money to the government, go ahead. (Though thinking htem to be the most efficient However, by advocating these programs that isn't all that you are doing. You are trying to force other people to spend their money as you would want to.
Besides, if you really wanted to help someone you would give your money to a charity that helped people in third world countries. They need much more help than anyone in america, and our government focusses more on the relatively well off people in the US than the people in the third world.

Chaerul Salleh writes:

Milton Friedman is a great man, but do all governments are inefficient?

To Lonsdale: If the governnment is so inefficient, then why have governments at all?

And what is the difference between providing national defence and social security? I suppose if there is no national defence, then individuals can have their own private militias!

This is anologous when there is no social security, then the unlucky poor have to do their own begging!

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