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Friday, March 13, 2009

Crisis and Opportunity

“You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.” –Rahm Emanuel

Has President Obama’s chief of staff read Robert Higgs’s Crisis and Leviathan? Probably not, and he wouldn’t have had to. Higgs’s classic is a history of political opportunism during crises. Throughout American history, economic and foreign upheaval has been used to justify expansion of government power. When the crisis subsided, government never shrunk back to its pre-crisis dimensions. Some “emergency” powers were retained, while others were shelved but nevertheless available for quick retrieval thanks to precedent and the public’s reinforced belief that only government can manage a crisis. Moreover, the rate of government growth was faster after the crisis than before.

What’s noteworthy about Emanuel’s statement is its candor. A crisis without an expansion of government would be a tragic waste in his view. It presumably is Obama’s view also. (Secretary of State Hillary Clinton made a similar remark.)

The new administration is certainly living up to the sentiment. The economy is in bad shape primarily because of some combination of housing and monetary policy over the last two decades. Government intervention created incentives for behavior that misallocated scarce capital and distorted the structure of production relative to how things would have been had politicians and bureaucrats not tampered with prices and interest rates. The only real path to sustainable recovery, therefore, is the painful one of market-driven reallocation and restructuring so that the economy can be aligned with the true preferences of consumer-savers.

But that is not the path the policymakers are taking. Instead, they are intent on not wasting the crisis. That is, they are using the economic disarray as an excuse to expand government power and further limit freedom in a host of areas unrelated to the recession. The misnamed “stimulus” bill is the most obvious example. Any government spending can be touted as economic stimulus via an increase in “aggregate demand.” If all the bureaucracies doubled their purchases of paperclips, that would put (borrowed and printed) money in the hands of paperclip makers. Paperclip factories might add a shift and hire workers. This activity would be shown on the evening news, and optimism would spread. Of course, as Bastiat might be saying, the news channel can’t show the jobs that won’t be created because the government has commandeered purchasing power from the private sphere. That capital would have been devoted to consumer-driven projects as soon as entrepreneurs were relatively confident the government wouldn’t launch some absurd scheme that would undermine their prospects or confiscate their profits. It’s so like government to chill the economic environment and then claim it must step in to make up for the lack of activity in the private sector.

Larger Agenda

But seizing advantage during the current crisis goes beyond monstrous spending. Obama is also moving on medical care and education in the name of fixing the economy. To justify this, he must convince us that the economic crisis is partly caused by the current medical and educational systems. These government-dominated sectors do need changing, but Obama’s case is a stretch. What do they have to do with the housing bubble, the result of deliberate social policy?

I sense an opportunistic wish not to waste a good crisis.

The Obama line on the medical system is that if health care didn’t cost so much, American companies would be more competitive with their foreign rivals. But expensive health care didn’t cause the recession, which began in late 2007. Recessions are the price of artificial booms induced by government policy. So justifying healthcare reform as a way to end the recession is disingenuous.

For one thing, employer-provided health insurance is a form of compensation, not an addition to compensation. Bosses don’t give their employees gifts. If we assume that wages are roughly set by supply and demand (hampered as the market is), cheaper insurance may not reduce the total cost of employing workers because they would tend to acquire the premium savings in cash. (At least to some extent. This would certainly be the case in a fully free and competitive economy.)

So even if Obama could lower the cost of medical care and hence insurance, it would not lower companies’ costs overall and make them more competitive. (Government could transfer the cost of medical care for their pre-65 retirees to the taxpayers, but while that may help the firms in one respect, the required higher taxes, borrowing, and/or inflation would harm them in other respects.)

Government Can Lower Costs?

But who believes Obama’s bureaucracy can really lower those costs?

Bureaucrats have only one thing the rest of us don’t have: the legal power to coerce and plunder. How can that power lower the real costs of a service like medical care?

Illusions abound. The Obama plan promises to save $80 billion a year by designing and compelling use of electronic medical records. Whatever the benefits of a computerized network—why wouldn’t the private economy create it?—the promise has met with skepticism. (See this by two physicians and Harvard medical professors.) Moreover, as the Institute for Health Freedom points out, as long as the government legally ignores patients’ privacy rights, electronic records will be a threat not a boon.

In truth, lower costs come from innovation, capital investment (saving), and entrepreneurial risk-taking. And one more thing: competition, that is, freedom on the supply and demand sides. The only relationship government has to those things is its propensity to suppress them. Suffice it to say that government and efficiency are not commonly found in the same place. Government-run medical care would be as efficient as the post office or Pentagon (which routinely misplaces millions of dollars every year.)

This is not to say that government can’t make costs appear lower. It can do this in two ways. First, it can shift and disguise costs. It’s been doing that with medical care for generations. Something like 75 cents out of every dollar spent is paid by either government or insurance companies. Most people do not pay the full price of even predictable, routine checkups. (Tax advantages make paying even small amounts through an employer-provided insurance policy preferable to paying out of pocket, although this adds astronomically and unnecessarily to administrative costs. Policies that cover predictable events subvert the very idea of insurance) The link between service and price has long been broken. That’s a major part of the problem with the system because artificially low prices inflate demand. This drives up real costs, but the burden is hidden and diffused among the larger population.

The other way government can control medical costs is to limit and ration services. Countries with even more regulation of health care than we have achieve this through global budgeting. So much is budgeted for service X, and that is it—even if the money runs out before the year does. Too bad if you need the care.

This may reduce the amount a society spends on medical care, but why is that in itself desirable? If we spend less because fewer services are available, that would only be trading one kind of cost for another (pain, for example). One reason Americans spend more than other people is that, thanks to innovation, there is more care to buy than previously and we can afford it. Not long ago, no money was spent on knee or hip replacements because there were no such things. Their availability strikes me as good even if it means our overall bill is higher. The issue shouldn’t be how much “we” spend altogether but whether costs are imposed on others against their will. As the proverb has it, “Take what you want and pay for it.” (Or  find willing a donor to help you out.)

Government can’t directly reduce costs, but it can stop making medical care more expensive than it needs to be. As public policy inflates demand, it simultaneously suppresses supply—through occupational licensing, regulation, the FDA, patents, medical-school accreditation, certificate-of-need laws, and myriad other ways of centrally planning healthcare.

As in so many other things, if the politicians really want to help people and not just augment their own power, they will get out of the way. That will be a good thing. But don’t expect it to end the business cycle. That will require laissez faire across the board, starting with abolition of the central bank.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.