Bryan Caplan  

Government Spending on Health Care is Industrial Policy

Bizarre Monetary Theory, Once ... Attention, Twits...
Strange as it may seem, Scandinavia now has free-market admirers, most notably Will Wilkinson and especially Scott Sumner.  The heart of their case: If you ignore their welfare states, Denmark has one of the freest economies in the world, and even Sweden doesn't look too bad.  As Sumner writes:
Can "socialist" Denmark really be the most "capitalist" society on earth?... A lot rides on just how one defines the terms 'socialism' and 'capitalism'. Fans of free markets, such as the Heritage Institute, see capitalism as a system where the government refrains from doing many things, and primarily focuses on protecting property rights (which requires an important role for the "rule of law".) For these people, capitalism is a system where taxes and subsidies are low, firms are free to enter or exit markets, hire or fire workers, move goods and capital across national boundaries, etc. In contrast, socialism is a system that restricts all sorts of economic "freedoms." By this definition, Denmark is indeed very capitalist, except for its high taxes.
Friends of Scandinavia often go on to suggest that perhaps libertarians should ignore welfare states.  If they're economists, they'll emphasize that industrial policy and state-owned enterprises create large deadweight costs, while redistribution is a mere transfer.  If they're philosophers, they'll praise John Rawls.

As a staunch opponent of the welfare state, I'm tempted to argue first principles.  But that would be premature, because the simple fact is that a huge fraction of welfare states' "redistribution" is health sector industrial policy, not cash transfers.  The U.S. government, for example, spends more on (Medicare + Medicaid) than on Social Security.  It doesn't give cash to the poor and tell them to spend it as they will.  It looks out at the economy, picks a winner - the health care sector - gives it special tax status, and and showers hundreds of billions of dollars on it year after year.  And as Robin Hanson has made many prominent people admit, there's every reason to think that health care industrial policy is as wasteful as anything the Soviets cooked up.

Now the defenders of Denmark might reply that as far as health industrial policy is concerned, the U.S. economy is especially unfree.  They might be right.  I'm not trying to raise the status of the U.S.  My goal, rather, is to make sure that that moderate libertarians don't make peace with the welfare state for the wrong reasons.

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COMMENTS (11 to date)
Tim Worstall writes:

Something that needs to be remembered about the health system in both Sweden and Denmark.

It is based upon the county. Taxes are raised in a county and spent in a county. (There are indeed national structures above this for rarer illnesses and treatments.) This is obviously different to taxes which are raised nationally in a nation of 300 million and then allocated nationally.

It is at least possible for consumers to have some pressure in a system that taxes and then spends upon a few tens of thousands of people (Denmark in some places) or hundreds of thousands of people (Sweden say). It's likely that you'll know which cafe the head of the system has his evening snifter in, if nothing else.

Another way of putting this is that small scale collectivism is a very different thing from large scale collectivism.

Robert Bell writes:

Nice catch on the industrial policy front. I had noticed some opponents of single payer in the U.S. had lamented how the U.S. would lose their technology leadership in such an important industry, and it sort of stuck in my craw.

US (A Dane) writes:

@Tim Worstall:

You write that: "Something that needs to be remembered about the health system in both Sweden and Denmark.

It is based upon the county. Taxes are raised in a county and spent in a county."


What you write was true until a few years ago, yet today it is simply not correct, at least not when it comes to Denmark.

In Denmark we had a major reform of this (among other things) in 2007 (the reform was called "kommunalreformen"). As a consequense of this reform, most health care is now provided by regions, of which there are 5, appr. 1 per million inhabitants. Before the reform health care was provided by smaller regions, which were called "amt" ("amter" in plural), of which there were 13. The reform has replaced all "amter" with bigger regions, so the "amter" no longer exist.

Today, most public health care expenses, which amount to ~85 % of all health care expenses in Denmark, are paid for by the Danish government and provided by the regions. Before the reform, the "amter" paid for treatments ect. themselves, through taxes on a local level levied by the "amter" themselves. The taxes were usually in the 10-12 % range. The reform in -07 meant that the health care providing government entities (regions) no longer had the ability to levy taxes. This feature of the reform has been heavily critizised, but it has not been given up. Today, people in Denmark pay a fee (sundhedsbidrag) to the Danish government, ~ 8% of income, which the government then channels on to the regions through a set of different criterias. Most of the remaining part of the previous 10-12% tax to the "amter", which mostly covered things not related to health care (the "amter" did not only provide health care, they also handled ie. public transportation, education and environmental planning), have been pushed on to the municipalities ("kommuner"), the 3rd of 3 administrative level in Denmark.

You're right that there are relatively large differences in the taxation levels locally in Denmark, but these differences stems largely from differences in spending and taxation between municipalities, and that difference in taxation has little to do with health care provision/spending.

The regions own control over their budget is limited to a "local basic contribution" in the neighborhood of 10 % of their budget. 80 % of the regions health care expenses are paid for by the Danish government. The municipalities pay the rest.

You can find out more here:

Bob writes:


With regards to the paragraph where you say you are staunchly against the welfare state, isn't any assistance in paying a person's bills, regardless of whether it is a cash outlay or not, subject to the concept of fungibility? And don't all workers pay into the Medicare fund? Does this combination equate to redistribution?

Note that this is not retorical. I am a neophyte and would *truly* appreciate clarification.


Burk writes:

What is going on in Denmark is that the welfare state is enabling the free enterprise system. People are not tied to their jobs by health insurance, so they can more freely join, leave, get fired, etc. Unemployed people get good training opportunities to change skills and careers. This freedom of movement, all supported by a safety net, helps both business and the greater good. It is especially good for entrepreneurialism.

Carl Edman writes:


As a fellow "staunch opponent" and a Swede-in-exile, I think that most of your points are well-taken. That Sweden and Denmark are surprisingly capitalist in most regards except level of taxation and welfare spending, is no reason to embrace the taxes and welfare.

(It is perhaps a reason to question the belief I used to express that sufficiently high levels of taxes and welfare will be enough to so degrade all other cultural and social institutions as to bring down an entire society within a generation or two. Maybe it just takes longer.)

It also is probably one of the principal factors to explain why much of Scandinavia has even today, even to the most-free market oriented visitors, remained one of the more pleasant places on earth. Perhaps Sweden and Denmark have not turned into Zimbabwe because it has maintained so many heavily capitalist features.

This should also be a caution to American progressives. Arguably, Sweden and Denmark demonstrate that high taxes and welfare, however undesirable, are not always and everywhere irreconcilable with remaining fairly civilized otherwise. But to maintain these conflicting aspects requires the state to forgo most of the other economic micromanagement and political interference with economic decision-making. In other words, a welfare state and economic democracy--maybe you can have one of them.

Carl Edman writes:


I do not see why an extensive welfare state is a precondition for health insurance that is portable and not tied to any employer.

The United States, it is true, by historical accident has an employer-tied system of health insurance. However, notwithstanding the assumptions of, particularly foreign, progressives, this does not mean that U.S. market-oriented economists and policy makers and enamored of this tie.

To the contrary, free-marketers have for decades called for a severing of this tie and a vigorous and open market place for individual insurance. But all their efforts of floundered on the relentless opposition of Democratic politicians and other progressives who generally prefer the heavily regulated and heavily redistributive employer-based system to almost any alternative short of single payer.

Stephen Smith writes:

I know that you're very attached to the idea that we cannot know if we are above or below the market equilibrium in density (and I'm pretty sure that deep down you think we're about at the equilibrium), but if you believe that America is more interventionist in its transportation and land use policies than the average Western European country, then there's another reason to believe that Scandinavia is, on net, more libertarian than the US.

And then there's the fact that a lot of Europe's versions of America's interventions just seem a little more benign. For example, from what I understand, European farm subsidies are targeted towards artisinal foods, so they don't create the huge negative environmental, land use, and nutritional distortions than America's farm subsidies case. America's corn subsidies make McDonald's and lots of processed foods cheaper than the equilibrium, whereas France's make stinky cheese and raw bread cheaper than the equilibrium.

Stephen Smith writes:

BTW, I didn't mean to imply that there was anything libertarian about high taxes (although I'm open to the idea that bribing people with monetary transfers is the most effective way to liberalize an economy)...I was more addressing the issue (which I suppose you didn't explicitly raise) of whether, even keeping the welfare state in mind, Scandinavia doesn't have, on net, more libertarian policies than the US.

Burk writes:

Carl, it is great that we agree on portability. I believe the problem with individual insurance has revolved around the concept of "insurance". My idea of insurance would be to have rules for charging uniform rates- no hunting up what a customer's health risks are, everyone is charged the same rate with no difference with regard to age, status, or anything else. Nor could they refuse customers. They would be selling insurance like widgets- no choosing their customers. Then companies would only compete on price and service, and perhaps levels of extra features beyond a mandated basic plan. At that point, whether insurers were private or public might not make so much difference.

Conversely, conservative proposals for individual insurance as far as I hear would resemble the current system for individual policies, which is a mess and getting worse as companies shop around for healthy customers and leave sick customers to so-called "high-risk" pools which are off-loaded the the state. This is not functional "insurance", for the fundamental reason that risks are not properly (broadly) pooled, which is the ultimate point.

Carl Edman writes:


I think we agree on another point--your proposed "private" system appears to be for all practical purposes a less-efficient form of single payer. If your mandatory, price-regulated plan, as the current proposed Democratic plans in Congress do, covers as many or more of the costs as private plans do today, and allows for low or no co-payments or deductibles, the vast majority of medical payments would be controlled by it.(*)

In that case, why bother? Insurance executives would just be government bureaucrats with nicer offices and prettier secretaries, but without any decision making authority--all important decisions would be made by the politicians. Competition between insurance companies could not be on price, on features, or on customers and would be purely nominal.

The only thing such a cargo cult "market" would offer is deceptive political rhetoric about how the U.S. is not nationalizing health care and retains a private system. But as you recognize, in all practical aspect that would be a lie, and the potential capacity for duping the fools should not count as an advantage in a discussion here.

As for your criticism of conservative proposals for individual insurance, however, I believe you are mistaken. The dysfunction of the current individual insurance market, to which you rightly point, is a feature of current (mostly state-level) insurance regulation, rather than inherent to free-market insurance. Free-market reform proposals, such as permitting purchase of insurance from out of state or expanding the coverage of ERISA (don't laugh, in our current circumstance, this actually does count as a liberalization) would alleviate and, if aggressively pursued, eventually eliminate these dysfunctions.

For example, nothing in free-market insurance economics suggests that companies would refuse to offer health insurance to high-risk individuals. In fact, in private markets, high risk insurance are bought and sold all the time. If you want to buy life insurance at 101, you can do it. If you want to insure your collection of Monets stored in your cinder block cottage in the Southern California mountainside forests, you can do it. In fact, in so far as insurer's profits on a policy are positively correlated with premium volume, as one would expect to be the case, the insurer would *rather* have a high-risk than a low-risk customer.

But this, you'll object, is just the problem! It is so unfair that people who are likely to cost the insurance company a lot of money should have to pay the insurance company more! That is why compassionate and wise politicians have passed such wonderful laws as community rating and the like. Long may they spread!

Well, yes, you may feel that way, but I'd note that (1) a contract which is not directly or indirectly priced on risk is not insurance in any meaningful sense, (2) your compassionate regulations have brought about exactly the evils you now say only even more regulation can cure, and (3) your new regulations are only going to bring about more evils which will only result in calls for even more regulation. If community-rating has brought us the demand for must-cover regulations, must-cover regulations will induce low-risk individuals (probably more than half the population) to either seek out insurance companies which evade the must-cover regulations or decide to go without coverage completely. And thus must-cover leads to the individual mandate and the total government control of health care.

Still, to gently steer back to the original subject of this thread, even if you believe that the horrors of paying extra for having a preexisting condition are intolerable, the problem can be relieved without monkeying with health care and insurance markets until they just fall apart, as most U.S. politicians seem hell-bent upon.

You could repeal community rating, must-cover, the individual mandate and all the rest and just replace them with a welfare program to pay every person with a preexisting condition an annual subsidy equal to the expected annual cost of the condition. With that subsidy, those with preexisting conditions could fend for themselves in a pretty undisturbed free-market for health care and insurance. As welfare programs go, this one, having presumably low moral hazard and limited cost, would be quite defensible. I'd certainly be in favor of it as part of the package.

The only down-side is that the cost of preexisting conditions would show up in the federal budget and federal taxes and/or deficits, which would cause ill-will to politicians. Under the currently proposed plans, these costs would show up in insurance premiums, which will cause ill-will to insurance companies and wonderful opportunities for demagoguery by politicians. It is unsurprising in which direction the politicians are herding their sheep.

(*) If, as you suggest, plans might be able to offer some additional service for additional premiums, this seems unlikely to be a significant factor. Such supplementary service would, if significant to any interest group, be made part of the mandatory plan. Moreover, such supplementary cost as remained in the supplementary plans (private hospital rooms?) tend not to be of the catastrophic variety and rational health consumers would quickly realize that cycling their dollars for such services through an insurance company, rather than paying out of pocket, is not efficient.

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