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Hullabaloo


Monday, June 29, 2009

 

Just Like Buying Groceries

by digby

Krugman sez:

Both George Will and Greg Mankiw basically argue that we don’t need a government role because we can trust the market to work — hey, we do it for groceries, right?

Um, economists have known for 45 years — ever since Kenneth Arrow’s seminal paper — that the standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.

I haven't read Kenneth Arrow's seminal paper, but my common sense and intuition tell me that free market principles aren't enough. Even if individual economic decisions were entirely rational, which they're obviously not, when it comes to life and death, the only rational decision is to do whatever it takes to live. That's an unusual economic decision.

I realize that Krugman's talking about the insurance market not individual incentives, but I do think that when you drill down to the essence of what the free market conservatives are saying, it's that people who don't have the money to pay for good insurance deserve to die. It's really just an outgrowth of their belief in social Darwinism and Randian exceptionalism --- good people have money, bad people are parasites -- and those who can't afford to keep up are lacking in moral fiber and work ethic. It's how they see the world --- until they too are caught in the web, at which point they blame women and minorities.



Update: Here's a good comment from Adam in the comment section. There are others as well:


My suggestion is that you read that paper, or better yet, just read Akerlof's paper. It's pretty weak tea to just announce without support that your intuition and common sense lead you to believe that the market doesn't provide optimal healthcare. Why not? What common sense principals lead you to believe that the market fails here? What intuition guides you to this conclusion?

Because I think your ignorance (please know that I mean no harm in using that word, I love this blog) does damage to your case. You argue that conservatives feel that anyone without money (to simplify too much) deserves to be without care. I think it is much worse than that.

The two principals Krugman is referring to are adverse selection (what liberals are usually concerned about) and moral hazard (what conservatives are usually concerned about). Adverse selection is, very simply, the condition where because of asymmetric information, even perfectly functioning markets will fail to provide goods efficiently--Akerlof's paper shows an example with used cars. The example with healthcare is easy to visualize. You and I know much more about our health than any insurance company can possibly know (even if we filled out questionnaires truthfully and to the best of our ability). This means that we are more willing to get health insurance (which is basically synonymous with health care in this country) when we know we are sick than when we are healthy. And we are even willing to pay high premiums when we KNOW we will require care, because the cost of care is so large. So the pool of money from premiums doesn't cover the cost of care (those folks who spend years paying into health care while just getting primary care choose to opt out for the same reason), and insurance companies raise the premiums.

But, health insurance companies don't know if a customer willing to pay high premiums is just showing their risk preferences or that they are secretly very sick. So a customer willing to pay higher premiums may just be signaling that they will require more care.

In some sense, this is why we ALREADY have massive government intervention in health care. The benefit tax exemption (originally negotiated in WWII as an agreement between companies, the gov't and unions in exchange for wage freezes and what-not) is a massive subsidy to the health care industry and incents companies to package health care with employment (so the total compensation isn't taxed). This limits consumers' abilities to opt out of health care (say, if they are male, aged 18-25 and think that they are bullet-proof), but plenty still do (deliberately, while many who want health care are forced out due to employment restrictions and the inflated cost of offering health care outside of the workforce).

Once we understand the adverse selection point, this begins to look a LOT like the market for student loans. Same information problems, similar solution (government provides some loans and subsidizes others). SAME conservative response--when Obama pushed to replace subsidies w/ public loans (A good thing), conservatives fought back with the old "gov't is bad" refrain, despite the fact that the entire private student loan industry survives on government loan guarantees.

It isn't so much that they are social darwanists. It is that they have become fixated on a stream of income but are intellectually incapable of seeing it as subsidy. Deficit spending is fiscal expansion without the immediate pain (c.f. Reagen, Bush II). Military spending is closet Keynsianism (Barney Frank had a good comment about this). Hell, agitating for war overseas w/ someone elses' sons is war without the war.


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