Externalities, Health Care, and Socialization

Jonathan Catalan has a very thought-provoking post up on socialization of various degrees in health care, which he connects to the idea of externalities. I think there's some to agree with and some to disagree with here.

1. The current state of health care: Jonathan makes two claims about the nature of health care in the United States. First, he says that consumers face fixed low costs becasue of government subsidization, which leads them to demand more health care than is optimal. I agree this is true to a certain extent - the most important subsidization is the government's tax treatment of employer provider benefits, which are not taxed in the same way that income is. Since we have a progressive tax structure, higher-wage workers get a larger subsidy through the tax system for their health insurance than lower-wage workers. The second form of subsidization is Medicaid, which provides subsidized insurance to the poor. I'm not sure how easy it is to over consume medical care on Medicaid, but they obviously consume more than they would be able to with their own purchasing power. Those two subsidies are important, and I've come out against this special tax treatment for employer benefits in the past for the reasons Jonathan is outlining (I haven't come out against Medicaid for humanitarian reasons and because I have a hard time believing Medicaid is driving our medical cost inflation).

The second thing Jonathan says about the state of health care is more complicated. He writes: "The root of our current medical problem lies in the collectivization of the consequences of an individual’s irresponsible choices. The issue is that the costs of one person’s decisions are spread equally amongst society, to the point where that individual hardly feels the penalties of his value judgments — short of illness and death." I have more of a problem with this claim, at least in its current form. We have another word for the collectivization of the consequences of an individual's responsibility: "insurance". Collectivization in this case is usually considered to be a good thing because medical costs can be so discrete and unexpected - so good, in fact, that (before they were forced to buy it), four-fifths of Americans willingly paid monthly premiums for the service of collectivization of consequences, which was provided by private firms. I want to be careful not to get to the point where collectivization is equated with involuntary behavior of health insurance itself is considered the problem.

But I'm not even sure Jonathan is talking about the same thing I am here. He goes on to write: "The erosion of responsibility, operating with the understanding that the consequences of poor decisions will be mitigated by what is benignly called a “social safety net”, is where the viability of socialized medicine falls apart." What social safety net is he talking about here? Medicaid? But that affects only a small portion of the population. I'm not exactly sure what Jonathan is talking about. The most important, biggest, collectivization of consequences in health care is health insurance. But that's not a "social safety net".

2. The market and externalities: Jonathan then connects the current collectivization of consequences to externalities ("while the system is artificially maintained, the consequences — including corroding standards of living — must be borne by society as a whole"). So this is a little confusing to me - what is the artificial maintenance and what are these consequences? I guess I'll assume he means that the "artificial maintenance" is the tax treatment of employer benefits, and now the insurance mandate. It's clear how "society as a whole" bears some of the cost for that - since society is subsidizing the insurance through the tax system. How does "society as a whole" bear the costs of the mandate, though? That's less clear and Jonathan doesn't explain. I would have thought that only the portion of people who did not want insurance and were forced to buy it would bear the costs above their reservation price for that insurance. I suppose the rest of society would bear the costs through higher premiums (although this is tricky too - premiums for a specific class of insurance are projected to be lower). This was a bit more difficult to swallow: "The only solution is that which is provided by the free market, where the consequences of one individual’s actions are internalized less [sic] he provoke some form of reaction by another individual." Why is the market assumed to internalize costs? It's never explained. It's not that I disagree with the proposal - I've come out on this blog against the tax subsidy for employer benefits and against the mandate. We may have lingering disagreements over Medicaid, but those would not be disagreements over the economics of the program. I'm not aware of major externalities in the health care market - I think the biggest problems are information problems, not externality problems. I guess I just feel uneasy that Jonathan associates markets with internalized costs. That's a blatantly misleading association (although it's probably OK in this specific case)*.

3. Externalities and the government. In the next section, Jonathan makes a leap from health care to socialism and provides what I think is a very interesting analysis of the externalities of socialism. Usually when we think about the economic consequences of socialism, we don't think in terms of marginal costs and marginal benefits. Why? Because there is no market exchange so there's no point in setting MC equal to MB! So you don't usually hear talk about externalities with respect to socialism because it's hard to talk about externalities without talking about marginal costs and benefits. Jonathan's point is essentially that under socialism all benefits and costs are externalized. It's just another way of saying that socialism has no rigorous way of optimizing outcomes. Is this strictly true? Probably not strictly. You still pay for things in socialist states, so a portion of the cost is internalized if for no other reason than inertia nad institutional practice. But without the market process, of course, there's no way to guarantee that goods are priced in the right way. I think this is all a very interesting way of talking about socialism.

Jonathan then jumps back from socialism to health care. This gets confusing again, primarily because I'm not exactly sure what Jonathan means by "socialization/collectivization" in health care. He's making reference to welfare programs again, too - which I think are a different question entirely. As I said above, I agree with him on the tax subsidy and the mandates, but I'm concerned he's acting as if "socialization of risk" is the same "socialization" as the involuntary socialization of socialism. That muddies the waters, I think - I don't think they're the same thing. Jonathan writes, for example: "This is because, given the axiom of purposeful human action, people will economize their use of a particular based on its price. For example, if the price of a short medical check is $35, it might lead to an individual abandoning certain reasons he may have to go if the price was $25." It seems to me, though, that the biggest thing reducing what you pay for a proceedure on the day that you get that proceedure is all the insurance premiums you've paid. That's socialization. That's collectivization. But it's voluntary socialization. I'm not sure if Jonathan is arguing that that's bad. I'm just concerned because some people have argued that that's bad. In the end, Jonathan frames it as a moral issue - is it worth it? - and I think that's the right way to frame it. I don't think there's any ethical justification for universal health care, subsidization of employer plans through the tax system, or mandates. I do think there's ethical justification for ample subsidies for low income families, as well as perhaps an unsubsidized public plan (why not?).

At the end, Jonathan introduces this very bad claim that markets internalize costs. They don't, necessarily - but when costs are internalized markets work very well. But there's no guarantee that costs will always be internalized, and Jonathan shouldn't talk as if there is such a guarantee. This, for example, is as bad as Mises's piece: "Only through the free market can individuals innovate and labor to internalize both benefits and costs, and therefore only through the free market can externalities be resolved." And while we're on untrue statements, this is also poorly reasoned: "To assume that a free market in healthcare would not provide demanded services to potential customers is to assume that the individuals who compose this market operate irrationally."

So I think the discussion of socialism here is excellent. The discussion of health care is good, but it's vagueness made it hard to evaluate in detail - if he's talking about subsidization and mandates alone, I would agree - if he's talking about collectivization in health care in general, I think he's slightly off-base.

*In this section, Jonathan cites Mises on externalities. I wrote about this piece by Mises extensively here, and I encourage people to go back and read it. The sections Jonathan quotes about property are fine, but the rest of the piece was quite bad, in my opinion.