Remedial economics: Obamacare as teachable moment

Photo credit: peasap / Foter.com / CC BY

Here’s a good news article–from AFP of all places–that highlights the problem when government negotiates prices.  The headline says it all: “Secret pricing spikes US healthcare costs.”   The unflattering description of price negotiation, which is a favorite tool of economic liberals, is remarkable.  The article quotes European health policy experts, who advise the US to follow their lead by turning pricing over to market mechanisms. What a concept!

Meanwhile, a blogger at Values and Capitalism reminds us of the importance of basic economic literacy.  Her mention of “price signaling” triggers that part of me that must lecture everyone: prices communicate information about scarcity.  When government offers subsidies or fixes prices, it distorts that information.  These interventions produce illusion and falsehood.  It’s quite arguably immoral.

The spectacular implosion of the Affordable Care Act that we are now going through is a teachable moment.  Many fiscal conservatives spend a lot of time snarkily tweaking liberals and the Obama administration.  It would be a serious waste not to turn aside for a moment, and soberly remind our fellow citizens that no one can wish away immutable economic realities.  Central planning will never beat a free market.

Market reform: nothing too sacred

Recent days have seen major policy movements with respect to higher education and health care, two segments of the economy sorely in need of reform.  You probably did not miss last week’s NFIB v. Sebelius decision, better known as the Obamacare ruling.  Its headlines eclipsed the expected and relatively uncontroversial extension of Stafford student loan interest rates.

Unfortunately neither of these recent actions will do much to mitigate the twin crises in higher education and health care.  A reverential aura surrounding these fields blocks what could really help: serious market-based reforms.  While much of the problem is budgetary in nature, respective stakeholders are wary of commoditizing the near-sacred work they do.

Market advocates must deal with some serious objections: How can a price be put on teaching students how to think?  Is it moral to triage life-saving services on ability to pay?  Core values like critical thinking, equality, and compassion are at stake.  To address these challenges, let’s review what it is that makes the free market so great.

The Reality of Scarcity

First, markets operate on the assumption of scarcity, the idea that resources are finite.  This should be fairly uncontroversial, but there’s a powerful tendency in human nature to discount this reality.  Think of how the Federal government is so unpopular on the Right.  This is because it has tools at its disposal to deny fiscal truth.  It can print money or engage in deficit spending–things that state governments cannot do.  Perhaps nothing is more important to determining societal norms than fidelity to reality.  This must include a practical acknowledgement of scarcity.

Delivering Accountability

Second, markets are the best means of achieving accountability.  A market consists of rational agents entering into voluntary transactions under a fixed set of rules.  When it is relatively free of interventions, both consumers and suppliers naturally look to maximize their own self-interest.

It’s a necessary aside to admit that such an idea makes many uneasy.  We recall the simple and sure moral learned in childhood: don’t be selfish, don’t be greedy.  People presume illegality when they think of the market imperative to maximize utility or profit. Crooks like Bernie Madoff and Gordon Gekko commonly come to mind.  But the concern is utterly irrelevant.  Any society worth it’s salt is founded on the effective rule of law.  The free market assumes this, and any alternative system must deal with the same consideration.

Free markets breed accountability because rational actors must seek the most bang for their buck.  But say that a consumer comes to anticipate occasional interventions, like a benefactor dropping a huge cash subsidy in his lap.  He will rationally adjust his expectations, no longer accountable to material reality, but to the sociopolitical reality he reads from a market distortion.

Prices communicate truth, reveal what we value

This takes us to the third virtue of markets, which is the informational role of price.  There are countless examples of governments attempting to control prices in the modern era, just about all of them disastrous.  This is because prices, like language, transmit information about reality.  They inform us whether a good or service is relatively abundant or scarce, easy to produce or exacted only with great effort.  To adjust a price away from its market value is either to lie or to posit that some competing value trumps truth.  Typically, this is something like charity, equality, or decency.  Yes these are worthy ideals, but it’s immoral to superimpose a brute desire for better social conditions over an accurate grasp of economic reality.


Even our most cherished ideals come at a price.  That’s why we call them “values.”  Market prices, subsidies, and taxes all contribute to a picture, a mirror if you will, by which societies can see what they really value.  Diamonds are pricey because of the social significance we assign them.  We see the Federal government values green energy–correctly or not–because of the subsides it gives in its name.  From national security to food stamps to Baby Einstein videos, we can grasp what a society values by how much is produced, consumed, paid, subsidized and taxed toward the respective ends.

Shielded from reality

Medicine and education are very high callings, their integrity guarded at times with something approaching religious zeal.  Last winter, in inveighing against the presence of U.S. Bank, a California Aggie editorial declared the campus a “sacred place” in need of protection from bank profiteering.  By contrast, a recent Wall Street Journal editorial is right to criticize the circled wagons of higher education as a “Green zone” where reality does not apply.

The academic pursuit of truth, and the transmission of the discipline to the next generation, are indispensable to society.  Yet, inasmuch as the academy serves society–and not vice versa–all its constituent enterprises must submit themselves to fiscal accountability.  The self-selecting institution of tenure especially needs to justify to the outside world, in some formal way, its oft-wildly ranging research pursuits.  Let’s allow the market to deliver accountability.

The healthcare industry also needs this help.  Policy has been tied up for so long in questions of access and affordability that the field is virtually disconnected from the salubrious effects of the market.  Things will only improve when consumers, loosed from subsidies, internalize the value of the myriad services they pursue.  I’ve been a fan of high-deductible insurance plans.  And the earthshaking decoupling of insurance from employment benefits is essential.  To have a multitude of companies actually competing for customers will do more to eliminate waste and drive down prices than the amalgam of regulatory magical thinking known as the “Affordable” Care Act ever could.

At what cost?
Is the price of submitting the highly-esteemed callings of medicine and education to market forces too steep?  We can learn a lesson from Christian apologist Ravi Zacharias.  As he writes in Can Man Live Without God, even faith itself is about making a choice and paying a cost:

Oscar Wilde once said that we do not appreciate sunsets because we do not have to pay for them.  Oscar Wilde was wrong.  We can “pay” for sunsets by living in accordance with the purpose of our Creator and of His grand design.

No ideal is too sacred to be untouched by the fact that life is about measuring costs and making choices.  There is nothing profane and everything noble about squaring our actions and aligning our values with reality.  Markets are the best way we can collectively make choices based on knowledge of value, and as such ought to be embraced.

Markets, the Missed Opportunity

As President Obama’s health insurance reform becomes a reality, its clear that what’s missing is the one best opportunity to get things right: the free market.  Although the president dismissed the market in saying  “Well, we’ve tried that,” nothing could be further from the truth.  Throughout the year of debate on the health bill, repeated calls by conservatives to allow for interstate competition of insurance plans were roundly ignored.  But if we were to try this, as well as decouple the plans from employer benefits, we would lower the barrier to market entry.  Then many firms would rush to compete for each state’s population of savvy customers, offering plans at lower prices.  Instead of looking to unsustainable free lunch subsidies and depending on the guesswork of Washington bureaucrats, we could have a dynamic system not unlike our current auto insurance market.  Then even a 25 year-old Starbucks barrista would not need to stay on his parents’ plan,  and maybe would no longer need to shack up in their basement as is the rage in nanny states like Italy.

The twenty-something loafer subsidy is not the only incentive in the current insurance reform working against us.  A redistributive tax-and-subsidy transfer of wealth will now extend the entitlement ethic to families making up to $88,000 a year!  While these perverse incentives further undermine our collective sense of personal responsibility, we also must cope with a general rise in taxes resulting from the legislation’s inevitable cost overruns.  Gird your wallets also as progressive activists file lawsuits to expand the entitlement footholds established by this legislation.  All this trouble heaps on top of Medicare and Medicaid sustainability issues that went unaddressed in the current reform.

As we begin to see the impacts of the reform legislation around us, we will do well to return our attention to the promise of the free market.  Top-down solutions failed the centrally-planned economies of the twentieth century, but the free market brought unprecedented prosperity to people of all stripes in the West.  Even glorious nanny state paradises like Sweden have turned away from big government after a time of accepting high unemployment and economic dysfunction.  Instead of propagating the lie of the free lunch, we should accord respect to individuals and let them make the tough choices only they can make to improve their own lot.  If we let go of the temptation to tax and subsidize beyond the scope of our already-established obligations, we will be able to sustain our collective prosperity.  Real progress for those in need does not come from redistribution but through opportunities afforded only by the free market.

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