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Thursday, December 5, 2013

Obamacare and Unintended Consequences

Trying to clean up a mess with a dirty mop

One of the features distinguishing the Austrian approach to political economy from other market-friendly approaches, such as Public Choice, is its focus on explaining exactly how and why one government intervention is linked to still further government interventions. (You can read about the differences between these two approaches here.) 
Austrian political economy not only looks at purely economic factors—such as how relative price changes affect incentives—it also stresses the role of ideology, or what F. A. Hayek has referred to as “a psychological change, an alteration in the character of the people.” I think the problems we are currently witnessing with the Affordable Care Act, or “Obamacare,” offer a good illustration of this ideological aspect of interventionism.

The Essence of the Interventionist Dynamic

The classic statement of the core concern of Austrian political economy comes from Ludwig von Mises, who often used price control to illustrate the “interventionist dynamic.”
Mises explains that governments cannot ignore the laws of economics. In a free market, entrepreneurs use money prices to seek profit and avoid losses. Interfering with those prices tends to generate problems, such as surpluses or shortages, in the relevant markets. Think of minimum-wage laws that result over time in a surplus of labor—that is, unemployment.
But then Austrian political economy goes further. It recognizes that government authorities, or the “public choosers” who support them, can decide to address the problems created by that intervention either by removing the minimum-wage law or by intervening still further, perhaps by providing unemployment insurance. That intervention, however, will in turn generate unintended consequences of its own. 
Good intentions aren’t enough. Government cannot simply pass a law and expect economic forces to accommodate its intentions. As Mises explains
Government is unable to achieve the desired result, and therefore finds it necessary to proceed step by step from the isolated pricing order to comprehensive control over labor, the means of production, what is produced, how it is produced, and how it is distributed. Isolated intervention in the market operation merely disrupts the service to consumers, and forces them to seek substitutes for those items they deem most important; it thus fails to achieve the very result government meant to achieve.
Unchecked, this sequence of intervention, unintended consequences, further intervention, and so on results in the progressive regulation of the economy, eventually leaving little if any of the free-market, private-property order in its wake.

Ignorance and Unintended Consequences

The key to understanding the dynamic that connects one intervention to another is the concept of “unintended consequences.” A consequence that is truly unintended must in some way be unexpected or unanticipated, at least by the person advocating the intervention. (Let us for the moment assume that public choosers are not in thrall of special interests and actually want to promote the general welfare.)
Unintended consequences thus presume some form of “genuine ignorance” in which the public chooser not only doesn’t know the consequence of her action, but is not even aware that she doesn’t know. The unemployment or other bad (from her point of view) consequence comes as a surprise to her. How does she respond?

The Dynamic Trade-Off Thesis

In my own work I have identified three parts to the ideological dynamic that influences her response to the negative unintended consequences of interventionism. One of these I’ve called the “dynamic trade-off thesis,” which I’ve gleaned from many scholars but especially from Hayek.
In brief, the dynamic trade-off thesis states that “an intervention intended to reduce insecurity may produce greater insecurity among some or all public choosers, which in turn stimulates a further demand for government to reduce the added insecurity.”  
Obamacare offers several examples of this thesis, but I’ll focus on the effect it appears to be having on the insurance premiums people between the ages of 18 and 34 evidently will have to pay.
First of all, according to Business Week:  
The White House has said it needs 2.7 million young adults to buy insurance through the government-run marketplaces that open on Oct. 1. Without this group, premiums for seniors with costlier health problems will rise, and the health-care reform may falter.
That’s because in order for older, uninsured, and presumably less healthy Americans to get subsidized insurance, younger and healthier (and often poorer) Americans need to pay more. (The same thing, of course, has been happening for decades under Social Security, and to ill effect.) Indeed, according to U.S. News & World Report, younger Americans stand to pay substantially more under Obamacare than under the previous system.
And according to the previous Business Week article, Americans aged 18 to 34 have in recent years made up the largest cross-section of uninsured people: over 25 percent. Now, those folks can opt out of Obamacare by paying $95 for the first year or 1 percent of their annual income, whichever is greater. So the new insurance regime would seem to only make things worse.

To What End?

So here is one phase of the dynamic trade-off:  In order to putatively provide greater security to one part of the population, another part, young people, suffers from even greater insecurity as a result, which induces many of them to opt out of the new system, threatening its solvency. If public choosers insist on further intervention to address those problems, what will they demand? What will be the next phase of the dynamic?
Unless there is a dramatic ideological turn-around, which of course could happen, the next phase will undoubtedly involve some form of intervention: perhaps protection for that now-less-secure demographic and even higher taxes and penalties. But who will bear the cost of those interventions and what will the economic and policy consequencesbe  for that group’s security?
Politically unintended consequences, economically predictable outcomes.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.