Safnerism

The Economics of the “Public Option”

The current national preoccupation with healthcare has produced a lot of baggage and straw men arguments from both “sides” of the debate.  The discussion of alleged problems of the current healthcare industry has devolved into a shouting match over “death panels,” the “public option,” and “obscene costs.” While there may indeed be concern for these residual issues, neither Republicans nor Democrats are able, or willing, to consider the fundamental economic concerns that are the root of all the industry’s current woes.

The vital assumption that precludes this “debate” is that the State ought to coercively intervene in the production and distribution of medical services. The debate itself is merely one over the fineries of how the State ought to intervene.  Therefore, let us throw out this assumption for a moment and analyze what a truly free market solution for health care might look like, and its implications.

Healthcare is a service that is bought and sold, like any other good or service, on the free market.  Consumers voluntarily exchange their hard-earned money with doctors for their medical services at a price that is mutually agreed upon by both parties.  Both parties clearly benefit by such exchanges by the simple fact that they enacted it.  They otherwise would not have done so if they did not believe it would improve their condition.

Absent government intervention of any kind, the industry would flourish with countless business firms competing against each other for the favor of the consumers.  This competition would incentivize each firm to drive down their costs as much as possible—thus lowering the price for consumers—in order to attract new patients.  Those firms that are not able to lower their costs and operate efficiently are driven out of business, and those that are able to operate efficiently are rewarded with profits.

We do not need to spend much time analyzing how a free market in healthcare would work once we  realize that it would operate just like any other industry—automobiles, personal computers, plumbing services, etc.  This beautiful system, however, is contingent upon a lack of State intervention and regulation of any kind.  The real reason that we have such a terrible current system is due to past and ongoing State interventions in the form of AMA monopoly privileges, licensing procedures, insurance regulations, subsidies to the poor, and so on.  The glorious solution, of course, promoted by both parties is to correct the failures of intervention with more intervention!

Many arguments, both for and against universal healthcare, rest contingently upon either praising or condemning the so-called “Public Option.”   The Democrats and President Obama hail it as a measure to restore competition to an anticompetitive industry.  The fear mongering Republicans claim it will amount to a “government takeover of the healthcare industry.” Ironically, we already see that both parties fail to recognize that the government has already taken over the healthcare industry, and that is what made it anticompetitive. But as always, pragmatic politicians only argue over degree and not over substance.  So which side is “right,” and why?

The public option is the government’s attempt to provide medical services as if it were a business on the market, but as we shall soon see, this is economically impossible.  The government can never run a business because it does not run on the principles that run a business—the profit motive and voluntarism.

The government does not run on a profit.  The bureaucrats (who will inevitably oversee the day to day operations of the “business”) have no interest in earning a profit, because, well, they can’t.  No service provided by government can ever earn a profit.  The reason for this is not the Republican view of government simply being an inefficient, bumbling group of bureaucrats.  A government agency could not turn a profit even if it hypothetically ran on the most impeccably sound business principles.

The real reason is that the bureaucrats do not earn their pay from the revenue of happy consumers minus operational costs.  Nay, they are remunerated from the public Treasury, limitlessly funded by the violent expropriation of private property known as taxation.  This vital disconnect between service and payment absolutely ruins every economic incentive the bureaucrat has for providing efficient services.  The bureaucrat will earn his monthly government-fixed salary no matter how (un)friendly, (in)efficient, or (un)cooperative he is with the consumers.

On the free market, the consumer is king, with each businessman seeking to court their favor.  Consumers have a wide range of businesses to choose from, and able to do it freely and voluntarily. Due to the highly competitive nature of the market, each business will attempt to lower costs and appear helpful and friendly in order to attract customers.

Since all natural resources, time, and labor are scarce means, they must be efficiently utilized by being directed towards only the most valuable ends.  How can we possibly determine what the most valuable ends are?  The profit-and-loss test on the free market is exactly how we answer this question.  When a firm makes a profit, this means that there are consumers that are willing and able to buy it.  They value the product more than the money they will use to purchase it voluntarily.  As a result, the firm has satisfied the consumers and made them better off than they were before, and is thus rewarded monetarily.  This signifies that the firm is efficiently using resources.

On the other hand, if a firm suffers losses, this proves that consumers do not adequately desire their product.  The firm has thus squandered resources and actually made consumers worse off.  Thus, if it does not clean up its act quickly, it will be driven out of business and the resources will be rerouted to another area of the economy where they can be used more efficiently (by a profit-making firm).  In this sense, it is absurd to chant the confused slogan “People, Not Profits!” For, profits mean you are helping other people!

In stark contrast, the government bureaucrat actually curses the consumer, in more ways than one.  Consumers no longer have choice, but are forced to use the government agency if they wish to acquire the service.  The legal powers of State, under threat of violence, prohibit consumers from using any business other than “the government’s” to receive the service they seek.  The government, now having granted itself a legal monopoly, is free to provide the good however it sees fit.  Being an inherently political agency, the service will be distributed in an inequitable way, to the benefit of some and the loss of others.

The lack of the profit-and-loss test of the market also cripples the government agency’s ability to assess its own performance.  This is the by-all, end-all argument against socialism.  Without being able to assess the profits or losses earned by an enterprise, the agency has literally no rational way to allocate its resources.  Every production and distribution decision must necessarily be a purely arbitrary whim.  As a result, since the government officials are not omniscient (despite what they may advertise), the scarce resources will always and everywhere be horribly squandered.   The economic result, without fail, is that the government creates an artificial scarcity of the service that they “providing.”  Costs will skyrocket, and production will diminish.  Those few consumers who are lucky (or arbitrarily and politically chosen) to receive the service will find that its quality is atrocious.

Since the consumer has absolutely no choice in the matter, (except for a new and highly dangerous black market which has emerged due to the government’s intervention) he is forced to accept the government service at any standard.  He becomes dependent upon it, for he has no other option (except prison, or death for resisting).  The consumer, once seen as the keystone of the economy and the superstar, is now dehumanized into a mere liability to the government.  The angry consumer becomes an annoyance to the agency for wasting “the government’s” scarce time and resources.

However, the agency, political as ever, always has one card to play once it receives enough complaints.  Whereas on the market, this inefficient service would have been liquidated long ago, and its resources shifted to more productive uses, the government agency instead says, “What we need is MORE money!” We, the taxpayers, are expected to repeatedly “bail out” this service and throw more money into the ever-widening black hole.

So what about the “Public Option?”  Isn’t it a middle ground scenario, since it is set up to compete with already existing private firms?  The very last point made is critical to understanding why the answer to this question is a resounding no.  Questions of efficiency notwithstanding, because the State health agency will be funded by an endless supply of funds mulcted from the taxpayers, it will outcompete the private businesses.  While efficient and friendly private firms may last for a while in the short-run by cutting costs, they can only cut so much.

The public also demands that this healthcare plan be cheap, if not completely free for citizens.  In order to achieve this goal, the State-run agency will ultimately lower its price (despite colossal costs) to levels impossible for private companies to sustain.  The result of this “price war” will throw every private firm out of business, being unable to compete.  There is no such thing as a free service.  Even if the State provides a service at absolutely no charge, you have already paid for it every April 15.  What you get in exchange for your taxes is the result of whatever the current government sees fit to do with it (based on the interest-groups that are currently in the pockets of the politicians) after of course the State has already paid itself.

Some people demand that healthcare must be free because it is a “right.” The confused definitions of “rights” aside (real rights are negative claims against aggression, whereas the fashionable trend is to consider a right a positive claim to something in society), this “right” violates the condition that all rights must apply equally to everyone under the law.  In practice, since all production comes from the market, the State must aggress against the lives, liberties, and property (real rights) of some (or in practice, all) to acquire the goods to distribute in the first place.

In any event, passing a Public Option is, in effect, an economic coup of the healthcare industry without ever having to pass a second law.  What is needed is for the State to get its nose out of the industry altogether.

Violence or liberty.  Conflict or harmony.  The State or the Market.  There is no third way.  Choose.