Tyler Cowen at Marginal Revolution points out that “Americans pay more [per capita] but get better health care in return. We die sooner because we eat too much and exercise too little, among other facts.” As he says, “National health insurance is unlikely to save on medical costs, unless it cuts back on treatment drastically.”
You get what you pay for and you are what you eat.
If it’s unnecessary to regulate health care — as I’ve argued in Part I (April 8) and Part II (April 11) of this series — can we take the next step and denationalize it? Can we forgo other forms of nationalization (particularly Social Security) and the regulation of other industries (e.g., telecommunications, banking, and securities)?
The prospect of deregulating health care; giving up Medicare, Medicaid, or Social Security; and leaving consumers generally “at the mercy of the market” may seem unthinkable. So let us think about it.
Regulation and nationalization (an extreme form of regulation) restrict competition and therefore reduce the supply and quality of regulated products and services. Many have argued, rather persuasively, that individuals would be far better off with the privatization of Social Security. (See, for example, my posts of March 5.) Moreover, there is ample evidence that proper deregulation leads to higher quality and lower prices. Phone service, for example, is not only cheaper (in real terms) but indisputably better, given the range of options available to consumers. Air travel, to take another example, is also cheaper (in real terms) and certainly better for the great majority of travelers who prefer more legroom to the so-called meals that airlines used to serve in coach class.
Why, despite sound arguments and concrete evidence, do most Americans tend to resist denationalization and deregulation? Their resistance arises from two things: risk aversion (both personal and paternalistic) and economic illiteracy.
Risk aversion is revealed in questions like these: Will I choose the right doctor? Will he choose the right medicine? Will that over-the-counter drug poison me? Will I save enough for retirement? What about my parents, my children, my friends, and the elderly poor? The answers are:
• Licensing of doctors doesn’t ensure your doctor’s competence or help you choose the right doctor.
• The FDA’s approval of drugs doesn’t ensure that your doctor will choose the right drug for you or a drug that’s safe for you.
• That over-the-counter drug is unlikely to poison you, especially if the one you choose has been on the market for at least a few years.
• Your parents, children, and all the rest (even you) would have plenty of money for retirement living (including private medical insurance) if the government didn’t collect taxes for Social Security, Medicare, and other welfare programs. The elderly poor would be taken care of by greater charitable donations (afforded by lower taxes) and relatively small, strictly means-tested, welfare programs.
I could go on and on about other components of our over-regulated economy, but I think you get the idea. There is little risk of coming to harm in a free-market economy, where individuals learn to look out for themselves, especially if they are backed by strict enforcement of tough laws against deception and fraud. Conversely, the rewards of a free-market economy are great: more competition, higher quality, lower prices, greater output, higher employment, and higher incomes (from which to fund minimal welfare programs for those who are truly dependent on society because no one else can meet their needs).
Economic illiteracy blinds people to the benefits that flow from a truly free-market economy. The illiterates (that’s most of us) therefore become easy prey for the real beneficiaries of nationalization and regulation, what Bruce Yandle aptly calls “Bootleggers and Baptists”:
• The “bootleggers” are market incumbents (as represented by the American Medical Association and the American Bar Association, for example) who benefit from the suppression of competition (as bootleggers did during Prohibition).
• The “Baptists” are self-appointed guardians of our health and well-being (the sum of all our risk-averse fears, you might say).
Economics can be as abstruse as the physics of special relativity. But it rests on two things that are easily remembered:
• Incentives matter.
• There’s no such thing as a free lunch.
Nationalization and regulation suppress incentives and therefore weaken the economy. The benefits of nationalization and regulation come at a high cost, but we tend to focus on our own benefits (the “free lunch”) and forget the cost (the taxes we pay for benefits that go to others).
Poll: Balanced Budget Beats Tax Cuts
By WILL LESTER, Associated Press WriterWASHINGTON – By almost a 2-1 margin, Americans prefer balancing the nation’s budget to cutting taxes, according to an Associated Press poll, even though many believe their overall tax burden has risen despite tax cuts over the past three years.
About six in 10, 61 percent, chose balancing the budget while 36 percent chose tax cuts when they were asked which was more important, according to a poll conducted for the AP by Ipsos Public Affairs.
If you want a balanced budget, hold spending steady or cut it gradually. If you want a recession and slow economic growth, raise tax rates.
In Part I of this series (second post under April 8, 2004), I pointed out that
[i]t is easier to list those markets in which the government doesn’t intervene (namely, “black markets”) than it is to list those markets in which the government does intervene. There simply isn’t a lawful business activity that isn’t affected by government regulation….[G]overnment intervention in the market for any product or service tends to reduce the supply of that product or service.
Health care, being something almost everyone needs (like electricity and phone service), has been regulated to the point of being nationalized (see Part I). Yet it is unclear that the regulation of health care does anything but restrict our access to doctors and drugs. Licensing exams have no meaningful effect on our ability to choose competent doctors (see Part I).
What about FDA approval of drugs? The FDA doesn’t test drugs, it prescribes testing procedures for drugs. The responsibility for testing falls to the maker of the drug. According to a statistics published on the FDA web site, The FDA ultimately approves about 20% of applications for new drugs. The three phases of the FDA’s prescribed testing process last at least one year and sometimes six years and longer. What does the FDA hope to accomplish through its approval process? Here’s some of what the FDA’s Ken Flieger has to say:
Most of us understand that drugs intended to treat people have to be tested in people. These tests, called clinical trials, determine if a drug is safe and effective, at what doses it works best, and what side effects it causes–information that guides health professionals and, for nonprescription drugs, consumers in the proper use of medicines.
Clinical testing isn’t the only way to discover what effects drugs have on people. Unplanned but alert observation and careful scrutiny of experience can often suggest drug effects and lead to more formal study. But such observations are usually not reliable enough to serve as the basis for important, scientifically valid conclusions. Controlled clinical trials, in which results observed in patients getting the drug are compared to the results in similar patients receiving a different treatment, are the best way science has come up with to determine what a new drug really does. That’s why controlled clinical trials are the only legal basis for FDA to conclude that a new drug has shown “substantial evidence of effectiveness.”
It boils down to safety and effectiveness. But safety and effectiveness are also your doctor’s concern. Do you suppose that your doctor would prescribe a drug that its manufacturer hadn’t thoroughly tested for safety and effectiveness? Of course, your doctor might well flub his diagnosis (something that happens a lot, despite the medical licensing exam) and prescribe the wrong medication. Or your doctor might diagnose you correctly but prescribe a medication that produces an unpleasant side effect. In summary, the safety and effectiveness of the drugs your doctor prescribes depends mainly on your doctor’s competence.
Misadventure is more likely with non-prescription (over-the-counter) drugs. As the FDA acknowledges, “Most OTC drug products have been marketed for many years, prior to the laws that require proof of safety and effectiveness before marketing.” Very interesting. As with prescription drugs, OTC drugs, used to be available without the FDA’s imprimatur. That is, individuals used to be trusted to buy and use OTC drugs wisely, but then the FDA got into the act. Why? According to the FDA:
Languishing in Congress for five years, the bill that would replace the 1906 [Food and Drugs Act] was ultimately enhanced and passed in the wake of a therapeutic disaster in 1937. A Tennessee drug company marketed a form of the new sulfa wonder drug that would appeal to pediatric patients, Elixir Sulfanilamide. However, the solvent in this untested product was a highly toxic chemical analogue of antifreeze; over 100 people died, many of whom were children. The public outcry not only reshaped the drug provisions of the new law to prevent such an event from happening again, it propelled the bill itself through Congress. This was neither the first nor the last time Congress presented a public health bill to a president only after a therapeutic disaster. FDR (pictured at left) signed the Food, Drug, and Cosmetic Act on 25 June 1938.
The new law brought cosmetics and medical devices under control, and it required that drugs be labeled with adequate directions for safe use. Moreover, it mandated pre-market approval of all new drugs, such that a manufacturer would have to prove to FDA that a drug were safe before it could be sold. It irrefutably prohibited false therapeutic claims for drugs, although a separate law granted the Federal Trade Commission jurisdiction over drug advertising. The act also corrected abuses in food packaging and quality, and it mandated legally enforceable food standards. Tolerances for certain poisonous substances were addressed. The law formally authorized factory inspections, and it added injunctions to the enforcement tools at the agency’s disposal.
And on it went:
Enforcement of the new law came swiftly. Within two months of the passage of the act, the FDA began to identify drugs such as the sulfas that simply could not be labeled for safe use directly by the patient–they would require a prescription from a physician. The ensuing debate by the FDA, industry, and health practitioners over what constituted a prescription and an over-the-counter drug was resolved in the Durham-Humphrey Amendment of 1951. From the 1940s to the 1960s, the abuse of amphetamines and barbiturates required more regulatory effort by FDA than all other drug problems combined.
Notice that the focus is always on abuses and never on successes. Here’s what The Cato Institute’s Handbook for Congress has to say about the FDA::
As an agency, the FDA has a strong incentive to delay allowing products to reach the market. After all, if a product that helps millions of individuals causes adverse reactions or even death for a few, the FDA will be subject to adverse publicity with critics asking why more tests were not conducted. Certainly, it is desirable to make all pharmaceutical products as safe as possible. But every day that the FDA delays approving a product for market, many patients who might be helped suffer or die needlessly.
For example, Dr. Louis Lasagna, director of Tufts University’s Center for the Study of Drug Development, estimates that the seven-year delay in the approval of beta-blockers as heart medication cost the lives of as many as 119,000 Americans. During the three and half years it took the FDA to approve the drug Interleukin-2, 25,000 Americans died of kidney cancer even though the drug had already been approved for use in nine other countries. Eugene Schoenfeld, a cancer survivor and president of the National Kidney Cancer Association, maintains that ‘‘IL-2 is one of the worst examples of FDA regulation known to man.’’
In the past two decades patients’ groups have become more vocal in demanding timely access to new medication. AIDS sufferers led the way. After all, if an individual is expected to live for only two more years, three more years spent testing the efficacy of a prospective treatment does that person no good. The advent of the Internet has allowed individuals suffering from specific ailments and patient groups to use websites and chat rooms to exchange information and to give them an opportunity to take more control of their own treatment. They now can track the progress of possible treatments as they are tested for safety and efficacy and are quite conscious of how FDA-imposed delays can stand in the way of their good health and even their lives….
[I]n a free society individuals should be free to take care of their physical well-being as they see fit. The advent of the Internet gives individuals even more access to information about medical products and treatments. Individuals should be allowed to choose the treatments they think best. Such liberty does not open the door for fraud or abuse any more than does a free market in other products. In fact, informed consent by patients probably will become more sophisticated as the market for information about medical treatments becomes more free and open.
Government regulation of health-care products and services makes them harder to get and more expensive than the products and services that would be delivered in the absence of regulation. Would quality suffer in a free-market health-care system? It might in some cases, but competition among producers and providers would lead to an overall increase in quality, in response to consumers’ demands for competent medical practitioners and effective drugs.
If it’s unnecessary to regulate health care, can we take the next step and de-nationalize it? What about other industries and types of economic activity? Stay tuned for Part III of this series.
In So When Are We Going to Get That Free-Market Health Care Everyone’s Complaining About?, Trent McBride guesstimates that with the addition of the prescription drug benefit to Medicare “our health care system will be paid for by explicit or implicit public funds at a rate of 65-70%.” By “explicit or implicit public funds” he means direct payments (e.g., Medicare, Medicaid, and the VA) plus the sundry regulatory activities (e.g., FDA approval of new drugs) that are funded by taxes. McBride therefore characterizes the health-care system as “marginally nationalized.” He asks, “if we have a nationalized health-care system now, and that system is [considered] broken, is more nationalization the way to go?”
Sasha Volokh objects to McBride’s characterization of the health-care system as “nationalized” because what matters is not only “who pays but also…who controls.” Apparently, in Sasha Volokh’s view, Medicare doesn’t count as a form of nationalization because beneficiaries get to choose their doctors. In this regard, it’s important to recall the old variation on the Golden Rule: “Them what has the gold makes the rules.” I might get to choose my doctor from a government-approved list, but all good doctors won’t be on that list, nor will all the treatments I might like to have. It would cost me more to go to doctors who aren’t on the list and to receive non-approved treatments, but I may not be able to afford either because my wealth has been depleted by many years of paying into Medicare. Bottom line: Medicare is most certainly a form of nationalization.
Government’s effective control of the health-care system is only a notorious example of government’s distortion of free-market mechanisms. It is easier to list those markets in which the government doesn’t intervene (namely, “black markets”) than it is to list those markets in which the government does intervene. There simply isn’t a lawful business activity that isn’t affected by government regulation.
If, for example, I wished to turn this blog into a business by selling advertising space on it, I would (or should) get a business license from the city, pay property tax on my computer (as a piece of business equipment), keep a set of business books for tax purposes, file a special income tax return (Schedule C, at a minimum), and pay additional Social Security taxes at the rate for self-employed persons. If business thrived and I hired someone to help me produce the blog (or handle the paperwork), that would compound my compliance problem and the cost of dealing with it.
Alternatively, I could ignore the law and run the risk of being caught and fined or even imprisoned. That’s a risk that I might take for the sake of a low-profile blog. It’s not a risk that I would take for the sake of making big bucks as an untrained, unlicensed M.D., though it is a risk that others (sometimes trained but unlicensed doctors) have been willing to take.
In summary, government intervention in the market for any product or service tends to reduce the supply of that product or service.
But, but, but…the proponents of regulation say…if government didn’t require doctors to pass licensing exams people wouldn’t know if they were being served by “good” or “bad” docs (not to mention lawyers, electricians, plumbers, and beauticians). Similarly, if the FDA didn’t approve drugs, people wouldn’t know if they were buying efficacious drugs or snake oil. And so on and so forth.
Are all medical school graduates equally competent? Are all medical school graduates who pass licensing exams equally competent? Is the doctor who barely passes the exam significantly better than the doctor who barely flunks it? The correct answer in every instance is “no.”
Do medical licensing exams weed out a large percentage of incompetent doctors? It’s not obvious that they do. Statistics for takers of the <a href="
http:// http://www.usmle.org/news/2002perf.htm”>U.S. Medical Licensing Examination in 2002 indicate that about 85% of first-time takers of the exam from allopathic (conventional) medical schools in the U.S. and Canada successfully complete all three steps of the exam. With re-takes, the percentage successfully completing all three steps is expected to be 97%. Osteopaths have a lower success rate — 60% for first-takers — but they represent only 2% of the first-takers from U.S. and Canadian medical schools.
The only real weeding-out takes place among graduates of medical schools outside the U.S. and Canada. First-takers from those medical schools have only a 34% success rate. This weeding-out may reflect incompetence in English — even though applicants had to pass an English-language proficiency exam — as much as it does incompetence in medicine. These results suggest a simple strategy of avoiding doctors who weren’t trained in the U.S. or Canada — a strategy that many Americans follow instinctively.
As for graduates of medical schools in the U.S. and Canada, you’re on your own. When you go to a licensed doctor for the first time you will probably have no clue about that doctor’s competence. You can avoid the relatively few doctors who have been disciplined because most States now make such information available online. You can get recommendations from family, friends, and acquaintances, but those recommendations may tell you more about a doctor’s “bedside manner” than about his or her competence. And in some large cities you can find lists in local magazines for the “best” doctors, by specialty, though you will have no idea of the criteria underlying such lists. In the end, you’ll simply hope that your doctor is competent, if not warm and fuzzy.
You’ll learn from experience whether your doctor seems competent, just as you’ll learn from experience whether your auto mechanic is competent (and honest) or merely a smiling face. So much for licensing as a boon to consumer choice.
You work in Manhattan, at the headquarters of a company whose product is sold throughout the U.S. and overseas. You live in Connecticut and commute to Manhattan by train. You drive to and from the train station in an SUV that was assembled in Tennessee.
Shazam! Outsourcing is outlawed. You can’t buy a new SUV unless it’s assembled in Connecticut and all its parts are made in Connecticut of raw materials that are native to Connecticut.
Wait, it gets worse. You can’t work for a Manhattan-based firm if you live in Connecticut. Only Manhattanites need apply. The good news is that you won’t need an SUV if you live in Manhattan. The bad news is that you can’t afford to live in Manhattan. The good news is that you wouldn’t want to live there anyway, because the only raw materials native to Manhattan are smog and smut.
Labor unions are “legal monopolies in restraint of trade.” (Students of anti-trust law will recognize the allusion to the Sherman Anti-Trust Act of 1890.) The acts of Congress that enabled labor unions were intended to improve the lot of laboring people. The result — owing to the inviolable law of unintended consequences — has been the opposite: Laboring people who belong to unions have steadily lost employment over the decades. Their jobs have been “taken” by other laboring people who are willing to work at the prevailing wage. Only one group has benefited from the legalization of labor unions: union bosses who thrive on the mandatory dues paid by union members.
Today, on a different topic, ProfessorBainbridge.com quoted Berle and Means (The Modern Corporation and Private Property, 1933): “The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge….” Well, that reminded me of tax-exempt organizations.
Taxpayers effectively “own” tax-exempt organizations. Every dollar a tax-exempt organization avoids paying in taxes adds a dollar to the collective tax bill of all taxpayers. So where do our tax dollars go, aside from subsidizing tax-exempts’ often useless and self-aggrandizing activities?
Well, the truth about tax-exempt organizations is that they earn a profit, but it’s not called profit. The managers of tax-exempt organizations — in particular, major foundations, associations (lobbying groups), “public” radio and TV stations, large charities, and government-sponsored think-tanks — take their profit in the form of six- and seven-figure compensation packages. That’s quite a haul for fairly risk-free work in typically sumptuous surroundings. You have to screw up badly to lose a major contributor or long-standing government sponsor.
You’d think that tax-exempts’ audit committees and boards would keep the lid on compensation. Ha! If it doesn’t work in the private sector, where there’s a profit motive, why would you expect it to work in the “quasi-public” sector where there isn’t a profit motive? Tax-exempts typically justify their large compensation packages by reference to the large compensation packages of other tax-exempts. Well, you can see how that works; it doesn’t even require overt collusion.
The solution isn’t wholesale revocation of tax-exempt status or even repeal of the portions of the tax code dealing with tax-exempt status. It’s simpler and more effective: Require tax-exempts to pay income tax at the prevailing corporate rate on all compensation (including typically tax-exempt benefits). Let the tax-exempts choose between funding compensation and funding those activities for which they purportedly exist. Let the tax-exempts incur the wrath of their contributors and government sponsors if they make the wrong choice.
The plan I outlined in the previous post assumes that the government will force people to save for their retirement. Why should the government do that? Any forced savings plan, be it traditional Social Security or private accounts, implies a governmental obligation to bail out those who make imprudent investment decisions. If very many private accounts go sour because of imprudent decisions, there will be a hue and cry to bail out the holders of those accounts. (If it was done for Chrysler it will certainly be done for a bloc of voters.)
When individuals are confronted with the consequences of their actions — as they still are to some extent under criminal law — they tend to make better decisions. A case in point: I took my private retirement savings out of the stock market before the bubble burst in 2000. I, like many contemporary observers, could see that there was a bubble. If more investors had been like me, the bubble wouldn’t have been as large and there would have been less damage when it burst.
Government guarantees — implicit or explicit — have perverse results. They foster imprudent decisions and transfer the cost of those decisions to the taxpaying public.
1. The Social Security system will begin running a deficit in 2018, a deficit that will grow ever larger unless Congress enacts a combination of benefit cuts and tax increases. Retirees will be “taxed” by benefit cuts; workers will be taxed at higher rates to sustain those reduced benefits.
2. Why is there a looming crisis in Social Security? Social security taxes yield an effective return of about 3%, and that return will diminish as the ratio of workers paying taxes to workers receiving benefits declines.
3. A worker who makes $40,000 a year (in 2004 dollars), for example, will receive about $15,000 a year in Social Security benefits if he retires in 2018 at age 66. Workers who make the same amount but retire later will receive less than $15,000 a year (unless those then working pay higher taxes).
4. If a worker making $40,000 a year had been allowed to invest his taxes (including the so-called employer’s share) in a strong instrument (e.g., AAA corporate bonds) he would receive an income of more than $30,000 a year beginning in 2018, even if he had paid income taxes on the interest he earned. Moreover, he would be able to draw a larger income every year as a hedge against inflation.
5. What about the transition from the present system to a private system? Who will pay current retirees and those who retire having worked under both systems. Simple: Guarantee that every worker will receive at least as much as he would have under the present system, then collect just enough Social Security tax to meet that guarantee. That tax would diminish over time until all retirees are covered by private accounts. (Those who can’t afford to pay the residual Social Security tax in addition to investing in their private accounts would be allowed to tap their private accounts to pay the tax.)
6. At the end of the transition, the government will no longer have a liability on its hands and every worker will be far better off than under the present system.
The examples in the previous post illustrate an important truth about economics: It may be dismal but it’s not science.
The old saying has it that if all the economists in the world were laid end to end they wouldn’t reach a conclusion. Economists can’t agree on the past, let alone the future. Who needs them?
There are, for example, economists who say that Clinton’s 1993 tax increase caused the subsequent economic boom by (a) reducing the deficit, which (b) resulted in lower interest rates, which (c) stimulated consumer and business spending. There are, on the other hand, economists who say that (a) deficits have no discernible effect on interest rates and, therefore, (b) the boom of the ’90s was a normal post-recession recovery pumped up by rapid gains in productivity — phenomena beyond the influence of presidential power.
The Bush tax cuts have economists equally divided, pro and con. Some economists argue that reversing the cuts in higher tax brackets wouldn’t harm economic recovery but would reduce the deficit, which would in turn…blah, blah, blah. Other economists say that reversing any of the Bush cuts would put the economy into a nosedive by discouraging investments in new technology and business ventures.
Switching from macroeconomics (the study of aggregate economic activity) to microeconomics (the study of, what else, disaggregate economic activity), we find opposing camps on such issues as the minimum wage. Some economists say that raising the minimum wage has little effect on the employment of minimum-wage earners. Others argue the opposite. Both sides have data to support their conclusions — of course.
Then there’s Social Security — the economic issue of the Twenty-first Century. Some economists argue that Social Security can be “saved” by “tweaking” the system, namely, by increasing Social Security taxes (oops–“contributions”) and/or cutting Social Security benefits. Others argue that the system is moribund and the only way to save it is to kill it and replace it with private retirement accounts.
Now, if you’ve been reading carefully you’ll have noticed a trend. There are those economists who think the federal government should intervene in the economy (unless there’s a Republican president), and there are the others who believe we’d all be better off if the federal government didn’t try to fine-tune the economy, kept its hands out of taxpayers’ wallets, didn’t interfere with businesses’ (legal) operations, and didn’t run (badly) the world’s largest ponzi scheme (oops — pension program).
Can you guess which side I’m on?
Next post: why Social Security should be privatized, in one easy lesson.
Politics and Prosperity 