Posted by: captainfalcon | February 4, 2012

Mild Free Association

This essay nicely arrays the dialectical armamentarium of the right, to a few weapons in which Chris alluded here:

[N]eoliberalism today represents a set of default assumptions in favor of unregulated markets. It does not map on perfectly to the more extreme market libertarian position associated with the early Chicago School. It is instead a more moderate view: the view that government intervention in the economic domain tends to be inefficient and should therefore be avoided. What characterizes this more moderate view is a set of softer a priori assumptions that are reflected, especially, in the rhetoric of economic debate. In contrast to the more extreme rhetoric of the early Chicago School—for instance, the argument that the free market is practically always more efficient—market neoliberals suggest that government intervention tends to be less efficient; that it is generally the case that market mechanisms work better, in part because of lower transaction costs, but also because market participants are better information gatherers and tend to be more invested in the ultimate outcome; and that government agencies suffer from greater principal‐agent problems, are less nimble at adjusting to changing market conditions, and become more entrenched and subject to interest group capture. These are familiar arguments and, together, they tend to promote a loose default position that favors market mechanisms over “regulation”—a tilt in favor of “free markets.”

Its shelf-life has expired, but in the same part of the post where he discusses some rightwing rhetorical moves, Chris characterizes the left as “harping on market failures” in arguing for universal health care. I don’t think that’s entirely correct. One of the left’s arguments — that “A final market failure [is that] because hospitals and other health care providers offer charity care, some people do not purchase insurance . . . [T]he availability of charity care reduces the rate of private insurance coverage, suggesting that there is some “free riding” on the system” — is a confused and possibly disingenuous resort to the rhetoric of market failure. It is confused because the situation described is not a market failure in the sense that there is an alternative to it under which some are better off and none are worse off. It is possibly disingenuous because even if the left’s solution (the ACA) causes overall costs to decline it also redistributes those costs that remain in such a way that some pay more than they would absent the legislation, which is plainly not a Pareto improvement — to the extent that the left characterizes the problem at which the ACA is addressed as a “market failure” in order to purchase market liberal bona fides for that piece of legislation it is being dishonest.

But the left also rests its defense of the ACA on its promotion of a substantively good state of affairs. That is, the left is happy to defend the ACA on the ground not that it costlessly increases preference satisfaction (absurd), but that it secures what is objectively desirable. Consider, for example, the closing passage in the article I linked here:

 The ACA will achieve near universal coverage, something that seemed unimaginable just a short time ago. Health reform envisages a social contract in which everyone shares the cost, recognizing that virtually everyone will become ill one day. The ACA and its individual mandate are not unjustified limits on freedom, but rather are vital to a decent society. If the social contract must be accomplished through the private market, then the simple logic of insurance must prevail, which is to spread the risk among the rich and poor, healthy and sick, young and old alike.

As the slogan has it: this is fairness, not efficiency — albeit it is in tension (though not, needless to say, in direct conflict) with the “loose default position that favors market mechanisms over regulation,” which is where this post began.



  1. CF, I think you might have misunderstood my original point. I was arguing that, at least amongst the popular left-ish economics writers (eg Paul Krugman or the clutch of authors at TNR who write on health policy) as well as others interested in health policy I have encountered in person, there seems to be an assumption that the myriad market failures in the health insurance market ipso facto require some form of nationalized health care. However, I have noticed the informed conservatives I have read on the subject (eg not Mark Levin) acknowledge (some of) said market failures but argue that another solution better resolves them (usually some combination of a subsidized individual market or health savings accounts). Hence there seems to be a disconnect, with everyone impaling strawmen and not really addressing the others’ arguments.

    I myself am fairly agnostic on the subject, in deference to my comparative ignorance, but as far as I understand it, here’s why there are market failures in the health insurance market:

    The argument you describe (on free emergency care) is only the most glaring instance of market failure in the insurance market. The problem rests a little below the level you are operating at. The fact of effectively free health care at the emergency level creates a moral hazard by encouraging people to engage in riskier behavior than otherwise (because people are shielded from the monetary costs of, say, breaking an arm) and to deal with problems when they are most costly to society (eg going to the emergency room with an infected tooth rather than regular dental check-ups).

    Even without guarranteed emergency care, insurance markets in general cause moral hazard problems because they shield people from the risks invovled with bad outcomes, altering the chance of said bad outcomes upward.

    Imagine you have normally a 10% chance of getting in an accident, which would cost you $10,000. This means (being risk adverse) you’d be willing to pay in excess of $1,000 to an insurance company to cover you from having to pay in full for the accident. But now that the premium is paid and a sunk cost, you have no more invenctive not to get in an accident so you drive more recklessly, and the chance of an accident rises, costing the economy more than otherwise. Insurers try to get around this problem with deductibles and co-pays, but they are not necessarily enough.

    Insurance markets also suffer from adverse selection due to asymmetric information. Basically, assuming an insurer knows nothing about you, they will assume you are roughly as risky as the average person to insure. However, if you know you are a very safe driver, for instance, this will imply paying more for insurance than your willingness to pay, and you will drop out of the market, which, if iterated, will shrink the market for insurance down to just the most risky customers paying massive premiums (which is a very inefficient allocation of the good). This is why car insurance companies have these very specific customer profiles (and part of why car insurance in mandatory).

    Finally, insurance markets suffer from negative externalities. Basically, your calculation to buy or not buy insurance (and your subsequent behaviorial changes) necessarily does not price in the consequences of your actions on others, which will ultimately end up costing everyone additional welfare (this is the other part of the reason car insurance is mandatory).

    The above arguments are a little more cursory than I would like (I have SOPs to write), but I hope they gave you a gist of things. My sense is that the above do not necessarily imply nationalized health care (or the ACA for the matter), but that they do require some amount of external intervention to resolve.

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