A quick recap
I believe that conservative healthcare proposals are going to involve some type of “vouchers.” For instance, we might end Medicare as a direct payment from the government to your doctor. Instead, we give everyone 65 and older a voucher to purchase health insurance. The theory is that when ordinary people, acting as healthcare “consumers,” buy health insurance, they will negotiate the best deal possible, which will reduce the costs of healthcare and increase its quality. In order to argue against this approach, you have to first understand why it might work.
So, in Part 1, we looked at a market for hats, and we found that each individual trade results in more net happiness, because the win/win trades that happen in markets make each trader happier, without increasing the goods needed to trade, the hats. Our measure of success comes from adding up the individual happiness for each individual. When the change in the sum of individual utility is positive, then you have a morally good thing. Your people, at the level of the individual, are happier.
In Part 2, we looked at the dark side of this result. Poor Ed, with his head condition, is going to die because no one will trade with him for a protective hat, no matter how much we want this to happen. That is because there is no “we” in the marketplace.
And when someone gets dealt an untradeable hat, of solid lead, there is nothing they can do to trade their way out of their poverty. That is because markets overweight the prevailing distribution of resources.
In Part 3, we identified the third fundamental flaw of markets – they turn the intrinsic into the instrumental. There is a difference between driving a friend to the airport or being a taxi driver and doing the same thing. In other words, motive counts. For instance, in healthcare, there is a difference between taking care of people in order to make money, as do for profit hospitals, or making money in order to take care of people, as do mission driven not for profit hospitals.
We are getting closer to our conclusions, but we still need to understand something important about how markets work. For that, we propose a market for bicycles.
Two bicycle producers
Assume we live in a marketplace that has exactly two bicycle producers, Afshan and Gabby. Afshan produces a very good bicycle, and sells them for $800. Gabby produces an absolutely wonderful bicycle for the same $800. Afshan is a good producer, but Gabby is more efficient, because she produces a great bicycle for the same amount of money.
Which bicycle would you buy, the good one or the great one?
Right, even Afshan would probably buy a bicycle from Gabby. So, very quickly, Afshan is removed from the market, as everyone buys their bikes from Gabby. Now, what does Gabby do? Well, she has control over price, which is the technical definition of “monopoly.” There is no price pressure on her anymore. As would anyone, Gabby raises her prices.
In fact, since she is now making so much money from each bicycle, she decides to open up other factories, because it is worth her investment to double or triple her production.
This is a good thing, because it increases production by the high efficiency, high quality bicycle producer. Gabby hires lots of people to work in these new factories, and we all benefit from having better bicycles available. Ii is a good thing for the society as a whole when efficiency and quality are rewarded.
If you follow the story so far, you now have gotten to the point of understanding the underlying theory of “trickle down” economics. When we reward the productive people at the top, the benefits accrue to us all as they trickle down.
Of course, the story might have ended there if we were talking about America in the Fifties. Rewarding the “job creators”of the 1950's with special deals and tax cuts made work in manufacturing for many, many people, and the middle class (thanks, in part, to unionizing) grew in size and wealth. This is what Obama means when he says we grew the country outwards from the middle, rather than from the top down.
It’s not the Fifties anymore
But this isn’t the Fifties. At some point, Gabby’s brother-in-law comes to her and says “Why are you doing your manufacturing in Chicago? The union wages are killing you. You should move to Tennessee.” A couple of years later, the brother-in-law talks Gabby into moving again, this time oversees. The wealth might be trickling down, but it is doing so in sweat shops in China or Viet Nam, not in Illinois or anywhere in America. The people at the top continue to make millions, but the benefits are no longer “on shore.”
It doesn’t stop there. A couple of years ago, Gabby’s brother-in-law tells her that she is a fool for trying to make money in manufacturing. The big money, he tells her, is in derivatives. He convinces her to sell her bicycle factories to a foreign entity and put her money into the financial market.
So, now the riches made from bicycles accrues to the foreign owners, and the jobs go to poor Chinese. And Gabby is now making more and more money trading paper fantasies, which make her richer and richer, and provide no benefits for the rest of us.
Three concepts
This story illustrates three important concepts: “the invisible hand,” “consumer sovereignty,” and “voodoo economics.”
Note that we didn’t need a study or a committee or a bicycle commissar to decide who to reward with our bicycle purchasing. The free market allowed everyone to make their own choices, and we rewarded the high efficiency, high quality bicycle producer, “as if by an invisible hand.”
When people say that we should empower the marketplace in healthcare, this is what they intend. If patients purchased their care from the high efficiency, high quality medical providers, healthcare costs would go down, and healthcare quality would go up. No need for government intervention; the “invisible hand” takes care of this.
However, that only works if the patients are the ones paying for the care. “Consumer sovereignty” is the notion that the quality, price and quantity of a good or service in a market is determined by the demand for those services. In a well-functioning market, with consumer sovereignty, the consumer will purchase the goods they want from whom they want, and that will set the price for the goods, as well as the quality that the consumer demands. And smart providers will manufacturer enough goods to meet demand, but no more than that. In our bicycle market, we all exercised our consumer sovereignty, and we drove the low efficiency, low quality producer out of the market, and rewarded the high efficiency, high quality producer.
But who actually buys healthcare? Do you or I? Nope.
About 60% of the people with insurance in the US get their insurance from their employer. Almost all the rest get their coverage through government (e.g., Medicare, Medicaid, the VHA, or the Children’s Health Insurance Program). Almost no patients actually buy their healthcare directly. (Millions of people have purchased insurance on the ACA’s exchanges. But they represent only two or three percent of the entire population.) So, patients are not the “consumers” in the marketplace. The healthcare “consumer” is actually our employers and the federal government, because they buy the healthcare.
And from whom do they buy healthcare? Mostly from insurance companies (although some government programs, like Medicare not run through a Medicare Advantage program, make payments directly to the healthcare providers). So, the healthcare “providers” are actually the insurance companies. Then, they sub-contract out this demand by contracting with healthcare professionals and hospitals and the pharmaceuticals.
You and me? We are merely wards of this system.
And the promise of all of that “trickling down?” Well, that is the “voodoo economics” that George H. W. Bush warned us about before he tossed his lot with Reagan in 1980. Now that we are no longer in the Fifties, there is no evidence that cutting taxes and making sweetheart deals for the rich benefit us all. It benefits the rich. And it encourages them to play fantasy economics in the financial sector, which makes them richer, and then causes millions of us to lose our homes and jobs when the unintended but completely foreseeable consequences of their games are realized.
Markets work, but only for some things
Markets do work, and they work well. . . for some goods and services. Would I want a government sponsored distribution of hamburgers? No, that is perfect for the marketplace. Probably bicycles as well. But should we treat healthcare as a market commodity?
Well, 32 of the 33 industrialized countries have asked that very question. And they answered “No, healthcare is a right, not a commodity or a privilege. Therefore, we can’t use markets to allocate it.”
Rights only exist at the level of “the community.” We talk of “individual rights,” but these are a function of what rights are recognized by the community. And they are only guaranteed by concerted action on the part of the community. Therefore, they must be allocated by the community. And the standard agent of the community is government.
Therefore, healthcare, these 32 developed democracies decided, should be allocated by government.
But that turns out not to end the analysis. Because there are problems with government systems, too. In fact, just as there are three fundamental flaws of every market, there are three fundamental flaws for every government allocation system. We need to look at those before we are able to finally examine the promise of healthcare vouchers.
That is our next topic.
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