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A Taste of Economic Ridicule

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Don Boudreaux is continuing Bastiat's noble tradition of teaching economics with ridicule:

As my friend George Leef points out in an e-mail to me, if government can lower firms' costs by paying workers' health-insurance premiums, why stop there? Why not have government also pay all expenses involved in hiring workers, including all wages? -- and pay for all property, casualty, and liability insurance? -- and pay for all raw-materials? -- and pay for all capital equipment? -- and pay for all R&D? -- and pay for all advertising? -- and pay for all production facilities and other real-estate used by firms? If government picks up the bill for all that firms produce, firms' private costs can be pushed down close to zero!

Imagine, then, how "competitive" -- how very efficient -- American industry will become!

To resolve the paradox, you just have to remember that subsidies require taxes, and taxes are paid by people.


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COMMENTS (28 to date)
Barkley Rosser writes:

Because health insurance is not like all these other activities. Certainly there is plenty of evidence that government tends to do most things at higher cost and lower quality than the private sector. However, there are simply bucketloads of empirical evidence pointing in the opposite direction regarding health insurance.

The evidence is international. We are back to the old chestnut of US health care being so much more expensive than that found in any other country, while the bottom line of output, things like life expectancy and infant mortality, are at pathetic, nearly third world levels. There are a lot of factors in this, including exorbitant malpractice insurance costs and the fact that the US provides (and pays for) much of the pharmaceutical R&D for the rest of the world.

But there is also evidence that the private insurers generate substantial extra costs relative to the publicly provided medical insurance one finds in virtually all of the rest of the high income world. Why? Because these insurers are spending lots of time and effort to find that people are not eligible to get paid for their illnesses. This may puff their profits, but it generates both higher costs and lower medical care quality.

quadrupole writes:

Imagine how much cheaper we could make the US food industry if we moved to government provided nutrition. Seriously, a lot of countries feed their citizens at a much lower cost than the US per capita food expenditures by just rationing out a couple of cups a day of rice. No one goes hungry. You could feed all American's for pennies a day... I'm sure you could produce a bunch of studies showing better health for citizens fed exclusively on government provided rice, what with the lower rates of obesity etc.

Chris writes:

I would love to hear what this bucket of evidence is that points to the US life expectancy and infant mortality being near 3rd world levels.

As for costs, that is irrelevant when the price of goods is set by government it can be anything that the government is willing to pay. As evidence I would point to the widely used practice of rationing in single-payer systems.

Randy writes:

Barkley,

Re; "...health insurance is not like all these other activities."

You're right. Health insurance is something that people feel entitled to whether they earn it or not. The reason to nationalize health insurance is to provide it to people who don't earn it - something which private plans will never do. Nationalized health insurance isn't really about health insurance at all. Its just welfare. And we can do welfare without destroying the private healthcare system which does a fine job of taking care of the people who have earned it.

Barkley Rosser writes:

chris,

Well, I just googled this matter. Got numbers for this year. CIA Fact Book, clearly an unrealiable source, puts the US at 48th in the world in life expectancy. Some ahead of it include Bermuda, Guadeloupe, Jordan, Montserrat, Martinique, Aruba, and the Cayman Islands (this list does include a lot of mini-states, such as Andorra, which is at the top of the list).

On infant mortality I got "Geography IQ," not sure who they are, and not covering as many mini-states, but 2006 numbers. US is 36th, with Cuba and Aruba better than it, among others.

Given that we spend at least 60% more per capita than any other country in the world (Norway, Switzerland, and Luxembourg are our closest competitors), this is pathetic.

randy,

Of course. Those people who do not "earn" health care should just suck it up and die.

More generally, I will grant that if one has a high income or an excellent health insurance plan, and one has an obscure non-fatal illness (the sort of thing for which care is rationed in those nasty places like Canada and Sweden), then one will get the best medical care in the world.

Mr. Econotarian writes:

U.S. infant mortality is lower than other Western countries which are no so pro-life as to try to keep the youngest premature babies alive.

I'm not making a value judgement here, just it isn't apples-to-apples.

I'm sure those Cuban numbers are correct. After all, Fidel loves to hear bad news, right?

Also keep in mind that over 50% of US health dollars come from government already. So if the system is broken, half of the blame goes to the government.

Billy Shears writes:

"remember that subsidies require taxes, and taxes are paid by people"
Sure. But since people will be buying things at a near zero cost, they will have plenty of money to pay higher taxes...

Arxland writes:

Does the numbers on infant mortality include the vast number of illegal aliens with their third world health problems?

Dezakin writes:

Healthcare is just one of those topics that economists often seem to just rationalize around their favorite ideology; If only everyone followed ideology X (socialism/anarchism or whatnot) then costs would automatically drop.

Whats clear to me is that the US system is one of the less efficient allocation of healthcare resources, but that doesn't mean any of the forces of the state run by the current politicians can make it better.

Barkley Rosser writes:

Mr. Econotarian,

Of course Communist dictatorships like Cuba tend to have unreliable statistics, especially those that are politically sensitive. So you may well be correct that the numbers we see reported exaggerate how well health is in Cuba. However, one should be careful about assuming that the actual figures are drastically worse than reported. Many observers over many years have reported that the two areas where Cuba has played above its income level have been health care and literacy, where there is little disagreement that it has performed better than most Latin American countries, even if health performance has probably deteriorated in recent years with the ongoing economic stagnation.

In any case, the fact that it could even be taken seriously that poverty-stricken Cuba might actually do better than the US on infant mortality, and many other not-so-well-off countries clearly are doing better, can only be seen as an enormous shame and embarrassment, especially given how much people in the US are paying for what they get (or don't get).

Tom West writes:

A clever article that is sadly, completely wrong.

National health insurance *can* save money over direct purchase by, of course, rationing. quadrupole is indeed correct in that by rationing health care you can trade some small drop in health-care outcomes for an immense drop in costs. (My guess based on the Canadian health care model is 90% of the health outcomes for 50% of the cost.) The American system provides outstanding health care (for the covered), but if your metric is health-outcome per dollar rather than simply health-outcome, the American system spends *well* past the point of diminishing returns.

If the government bought cars for everyone, they'd buy small economy models instead of SUVs. That too would save a lot of spending on cars while only slightly reducing driving outcomes.

As for large amounts of government spending on medical care already, part of the difficulty is that the American system must contend with direct comparison with high-spending individuals in the next bed. You can't really be expected to believe that there's nothing that one can do to save Grandpa, when someone next door is spending $100,000 for a 10% chance of an extra year of life. That drives demand for expensive health-care services.

In the Canadian system, comparisons have to be done out of country and thus are a lot less relevant to most citizens. When the doctors tell someone "they've done all they can to save Grandpa", people can more easily accept it without guilt (that they wouldn't spend the money) or anger (that the insurance/government won't spend the money).

quadrupole writes:

Tom West,

My point was not just that nationalized health care leads to rationing, but rather that when folks compare the cost of our health care to nationalized health care systems they are making a comparison roughly on a par with comparing our food system to one that provides everyone with a baseline of nutrition (rice) in other countries. What is left out completely is preferences. I have no doubt that government provided food could feed us all on less than a dollar a day, and if you were to measure malnutrition rates it would compare favorably to what we have now. I, for one, would not prefer it. I'm perfectly happy to spend more of *my* money for my preferences in food. I suspect most other folks would to.

The big push for nationalized health care comes from the idea that each individual feels they will be able to 'eat' what they want for free, because they think of their wants and desires as being part of the reasonable and ordinary the nationalized health care system will provide.

The Engineer writes:

What's the quickest way to start a new American Revolution? Ration MRIs.

Seriously, Americans have gotten used to a certain level of health care. It isn't cheap. And now, if you go to a system that rations care, you are going to have rioting in the emergency rooms. If people go to the ER and don't get an immediate MRI or Cat scan or whatever, interns are going to get assaulted.

You people pushing for socialized medicine need to go back and re-examine the HMO years. HMOs worked great, at least from a cost perspecitve. But Americans hated them, and for all intents and purposes HMOs no longer ration care. How is socialized medicine going to work any better than HMOs did?

Randy writes:

Barkley,

Re; "Those people who do not "earn" health care should just suck it up and die..."

Perhaps, but that's not really my point. All I'm saying is that we don't have to involve the private healthcare system to provide welfare - and to repeat, the purpose of nationalized healthcare is to provide welfare. When we provide welfare, the amount is based on a certain bundle of goods. So just add health insurance to the bundle, and leave the private health care system out of it.

TGGP writes:

Wasn't Cuba already mostly literate before the revolution? That's one thing I don't like about comparing countries policies and outcomes. A lot of comparisons don't look at time to show where divergence and change occurred.

Matt writes:

"...remember that subsidies require taxes, and taxes are paid by people.."

Prices for government services bear some resemblence to demand. Payroll taxes, for example, provide a retirement bond service at a fixed rate that is fairly close to what the private retirement bond sector provided before the New Deal.

You have to look closely for the connection sometimes. How many of us really believe that "No Child Left behind" would have become law if progressive marginal rates were 60% at the top? How many of us believe that Clinton's welfare reform would have happened if Clinton had not raised progressive tax rates?

Consider "No Child Left Behind". Who was making the argument that the federal government should step into the education business in a more massive fashion? Business executives who constantly complained that American workers were not competetively educated. Business executives who, by the way, just got a large reduction in the prices they pay for government services.

Economists fail to compare the marginal return on government services with the marginal cost of these services. It is tricky. The Wal Mart store clerk pays a much lower marginal tax rate, but she also gets a much lower return on investment for government services. The Wal Mart business executive who might be earning 40% return on his total investment in WalMart (his education, his stock, his hours, his expertise, his stock options) is maybe paying 30% for government services. If No Child left behind provides his workers with all of the computer training Wal Mart needs to run the system, then Wal Mart executives will be supporting "No Child Left Behind". The executive has to compare the cost of providing this training as a business expense, having the government do it, or doing without.

Go up the heirarchy of General Motors and create a measure called total return on investment. This measure represents the amount of return a worker at that level obtains from his direct and indirect investment in his job. This return on investment rises as you go up the hierarchy, in true Marxist fashion. At any given level of ROI, the workers of that level obtain some marginal gain or loss by shifting private sector expenses to government, but this return from government services rises up the heirarchy if the total ROI rises.

In other words, the arguement for tax progressivity might just be based on sound economic law. Why does government grow when taxes are flattened? What is the differential gain for various income classes when the U.S. Military is used to protect world trade?

quadrupole writes:

Matt,

You said:
Prices for government services bear some resemblence to demand. Payroll taxes, for example, provide a retirement bond service at a fixed rate that is fairly close to what the private retirement bond sector provided before the New Deal.

I have to call bullshit here... my personal rate of social security return is projected to be negative. I've not seen anyone 30 or under projected to have a social security rate of return higher than about 1.5%, when exactly have retirement bond rates been that low?

As to marginal rates of return on government services... what you and almost everyone else seem to leave out is the incredibly low cost of the services you claim the Wal Mart executive enjoys and where they are paid for. For example, the Wal Mart executive paying 40% federal taxes may find No Child Left behind to be a good program, a program that benefits him greatly. It should be noted however that the 2007 budget request for the entire Department of Education is just $25 billion, or less than 1% of the federal budget. Almost ALL education dollars do not come from the federal government, and so to point to the schools and an educated work force when advocating for federal taxation is disingenuous. Likewise pointing to road construction (which is, by statute, paid for by gas taxes in a multiyear smoothed manner, not by income, payroll, capital gains, etc taxes).

The truth is, your Wal Mart executive gets a very poor return on investment for his federal taxes. Yes, it buys a few things he does want, but the portion of the budget that supports things that even vaguely benefit him is a small fraction of the total. I once sat down and tried to figure up what percentage of the federal budget went to anything that could vaguely be construed as benefiting me. I included such things as the defense budget, the whole homeland security budget, etc... I still came up with less than 30% of the federal budget paying for anything that vaguely was to my benefit.

Barkley Rosser writes:

Randy,

Well, we already have medical welfare for poor people, medicaid. The people in the worst shape in our system are the working poor, those too well off to qualify for medicaid but not in a job that provides health insurance and too poor to afford to buy decent private coverage.

TGGP,

No.

quadropole,

Something important to keep in mind about social security is that it is actually social insurance. You do not expect to get a "positive rate of return" on life insurance or fire insurance either.

Mcwop writes:

Since people like to make hard to prove causality arguments, let me join in. People in Cuba are more literate because they have less TV's per capita than the US, fewer television stations etc... So they must have more time to read. In fact they may have more time to exercise too, meaning they live longer.

Wouldn't it be funny if the U.S. instituted Canada's health system, saved no money, our life expectancy, and infant mortality stayed the same - only to find out that the true link to life expectancy and health all came down to television?

Randy writes:

Barkley,

Medicare does work. It just doesn't work as well as some people think it should. Likewise, some people don't have as good a health care plan as some people think they should. But "should" is the key word. Those rich folks who get the very best medical care get it because they paid for it. Welfare health care is never going to be as good as paid for health care - regardless of what some people think "should" be. But if we understand that this is really a welfare issue, and that it has nothing to do with the existing private health care system, then we can begin to discuss how much welfare we are willing to provide. We can stop debating the relative merits of private vs public, and start discussing how best to provide a minimum level of healthcare for those who can't get anything on their own.

Blake J writes:

Regarding the infant mortality comparisions between Cuba and USA:

In this country the cutoff for viability is 23 weeks. In fact, some hospitals are attempting to save babies that were born after only 22 weeks of gestation. If you went down to Cuba I'd bet you any amount of money they aren't trying to save 23 weekers...or 24 weekers. If I had to guess I would say that they don't even attempt to resuscitate any babies less than 26 weeks. If you look at the number the survival to dischage for a 26 weeker versus a 23, 25, or 25 weeker you'll find a huge difference. In addition they have a nuch less incidence of co-morbitity related to prematurity. You you have to look at what we're calling a live birth and they are calling a stillbirth.

In addition in the US there is a huge market for fertility treatment. Take a look at the studies done linking IVF to prematurity, birth defects, and consequently infant mortality. Taking this into account you'd have to agree, as another posted aptly stated, you're comparing apples to oranges.

David N. Welton writes:

I take a passing interest in economics, but what I'd expect from the professionals is not simple blanket statements about "the market", but in trickier cases like this one with many issues involved, clever ideas on designing that market to maximize competition, and still achieve some other things that many wealthy societies value. For instance, not having people die of preventable diseases because they don't have the money, or simply not being able to participate in the market because you have a "preexisting condition" and therefore the health insurance companies (logically) don't want to cover you.

Where I live, in Italy, job mobility isn't very good, but one slight advantage that there is over the US is that jobs are not attached to health care. For instance, your wife is pregnant, you don't have to worry about changing jobs and being between health care providers.

Barkley Rosser writes:

Blake J,

Well, gosh, I have already agreed that those nasty Commie Cubans might be just plain lying about their numbers. I see you making statements like "I bet..." and "If I had to
guess..." which suggest that in fact you do
not really know what you are talking about but
are just engaging in wishful thinking. Or
maybe you are a doctor in Miami, and you hear
all about what goes on in Cuba medically.

I am perfectly willing to accept that Cuban
health care is not what it is often claimed
to be. However, it is a fact that their
doctors have innovated some medical techniques,
and it remains unquestioned that they do a
whole lot better than the overwhelming majority
of other Latin American countries, even if a
proper comparison with the US shows them behind
us. After all, they are behind us on life
expectancy, even officially, although not by
much.

Again, the real issue here is simply how far
behind the rest of the world the US is, especially for what we pay, which is off the
wall (and I agree that it may be hard to cut
it, under any sort of reformation of the system).
All those other third world countries may also
not do as well, but we are simply way behind
almost all of the other high income countries.
All this talk of how people are being rationed,
well, they are living longer and have fewer kids
dying early, folks.

Blake J writes:

Barkley,

No, I'm not a doctor in Miami. If you'd like to know my qualifications, my knowledge on the subject comes from the fact that my wife is a NICU nurse. Perhaps she should be the one participating in this discussion, but she's currently at work, keeping premies alive, so our national health outcome statistics don't get any worse.

We can put Cuba aside for now, because you've agreed that perhaps they aren't the best comparision. However you should realize that the same problems I've brought up with Cuba arise when looking at other advanced nations. For instance, Switzerland requires that a baby be 30cm at birth to be considered living. That definition would rule out all 23-24 weekers and some 25 weekers too. In the USA, if these babies were born with a heartbeat, they would be counted as a livebirth. In fact a 20 weeker born here with a heartbeat would be counted as a livebirth, even though, sadly, there would be no attempt to resusitate him/her.

To be fair, in my line of work, I have seen how the insurance industry operates, and because of that I don't have much faith that our system of third party payment is the most efficient way to go. I'm not sure what the answer is really.

Barkley Rosser writes:

Blake J,

So, you may be right that the definitional
problems go beyond Cuba to the high income
countries as well. Do such problems show
up in defining a dead person or their age?
The US stats on life expectancy are also
a pathetic embarrassment, even if the infant
mortality ones might not be quite as bad as
they look.

I must also admit that I am not sure why
it is that the private health insurance
industry in the US is apparently so inefficient
compared to the national ones in other
countries. Is it monopoly power? I don't
know. The claims by other posters here
that these other places are doing some kind
of terrible rationing certainly do not show
up in the stats, although I agree that people
with weird and non-fatal illnesses get
better treatment in the US, assuming they
are well off or have good insurance.

Blake J writes:

Barkley,

You are correct that the measurement problems associate with infant mortality comparisons aren't an issue when comparing life expectancy. I think here your argument has more weight.

Still life expectancy is a pretty crude measure in assessing health care quality and efficiency. Many deaths occur without any intersection with the health care system. For instance, the homicide rate per capita in the US is 2-3 times that of your average EU nation. Obviously you can't blame those deaths on inadequate health care. While homicide victims may only represent a small percentage of deaths, they would have a larger effect on life expectancy than their numbers would suggest. That's because most murder victims are young.

It's also true that if you look at ethnic segments of our population, you will find that the life expectancy correlates better with the life expectancy of their home country. For instance, life expectancy of Japanese Americans is almost exactly the same as the life expectancy published in Japan. Whether this is due to genetics or diet, I don't know, but it does suggest that the health care system isn't the prime determinate.

Since this is an economics blog, let me suggest an economic explanation. Perhaps we are not buying life expectancy with our health care dollars. What we are buying is the ability to eat fatty, sugar loaded foods and not worry about the consequences.

Matt writes:

quadrupole:


Anyway, back to the point of benefits from government services. I appreciate that you calculated up the benefits of govenrment services to yourself. How much of the Cold War costs paid for the free trade agreements that Wal Mart uses to import goods? How much did Wal Mart investors gain from the new automobile economic model paid for with flat gas taxes?


I speculate the economists will soon conclude that flat taxes to indeed result in the disproportionate use of government by high ROI individuals.


Economist are raised on the Milton Freeman model. Treat the private sector as ammendable to science and treat the government sector as ammendable to jaw jaw jaw. It won't last. I am seeing, finally, economists looking for the science in government service provision.

quadrupole writes:

Matt,

Please note, when I made my calculation I included the *entire* cost of the defense budget. Gas taxes more or less tax road usage. The point is that for the most part, the happy things people point to that they claim the government does that the rich benefit from are a small part of government spending. *Most* government spending is transfer payments, plain and simple, and those almost never benefit the rich.

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