The Fundamental Divide Revealed in the Democrats’ Debates

Democrats vote health care DNCOne exchange from the first debate in Detroit this week between Democratic Party presidential candidates has already received substantial airplay. Its deeper significance warrants further exploration. The exchange was this one between former Congressman John Delaney and Senator Elizabeth Warren:

Delaney: I think Democrats win when we run on real solutions, not impossible promises, when we run on things that are workable, not fairytale economics. Look at the story of Detroit, this amazing city that we’re in. This city is turning around because the government and the private sector are working well together. That has to be our model going forward. We need to encourage collaboration between the government, the private sector, and the nonprofit sector, and focus on those kitchen-table, pocketbook issues that matter to hard-working Americans: building infrastructure, creating jobs, improving their pay, creating universal health care, and lowering drug prices. We can do it.

Warren: You know, I don’t understand why anybody goes to all the trouble of running for president of the United States just to talk about what we really can’t do and shouldn’t fight for. I don’t get it. Our biggest problem in Washington is corruption. It is giant corporations that have taken our government and that are holding it by the throat. And we need to have the courage to fight back against that. And until we’re ready to do that, it’s just more of the same. Well, I’m ready to get in this fight. I’m ready to win this fight.

Delaney: When we created Social Security, we didn’t say pensions were illegal, right? We can have big ideas to transform the lives. I mean, I started two companies and took them public before I was 40. I’m as big of a dreamer and an entrepreneur as anyone. But I also believe we need to have solutions that are workable. Can you imagine if we tried to start Social Security now but said private pensions are illegal? That’s the equivalent of what Senator Sanders and Senator Warren are proposing with health care. That’s not a big idea. That’s an idea that’s dead on arrival. That will never happen. So why don’t we actually talk about things, big ideas that we can get done? The stakes are too high.

The italicized portion of Senator Warren’s response is the part that has received frequent replays and is indeed the most telling aspect of the exchange. Implicit in her response is a rejection of Delaney’s argument, based on her assumption that unless government takes direct control of an economic sector from the private market, real progress cannot be made. Delaney’s remarks didn’t actually focus on “what we really can’t do.” He was instead advocating for his own approach to achieving universal health coverage, though he argued that a federally run, single-payer health-care system specifically would be bad policy. Warren equated his disinclination to dramatically expand government’s role with a failure to fight for Americans’ interests.

Warren’s answer assumes that bigger government would mean better outcomes for the average American. This notion is worth exploring because it lies at the heart of so many political pitches. Anywhere that Americans are struggling with high costs or unresponsive businesses, you can find a politician promising to solve the problem by expanding government’s involvement. But a reflexive assumption that an expanded government role automatically means better outcomes is unjustified. In fact, one is hard-pressed to survey the American economic landscape without quickly seeing how and why the assumption is faulty.

Consider first some sectors of the American economy that are dynamic and clearly working, if not perfectly, nevertheless impressively. Perhaps the greatest positive transformation of our economic lives over the past few decades has been wrought by the revolution in computing power. Americans, and indeed people the world over, can thank our lucky stars that the job of designing faster and better computers was not left to the U.S. federal government. We see a dizzying array of new personal devices constantly churned out by an ever-changing set of companies of all sizes with the result that, as my colleague Robert Graboyes has observed, “Third World village children now carry smartphones whose power is beyond the world’s supercomputers from a generation ago.”

There are, of course, multiple reasons why information technology can advance at a pace no government’s productivity gains can match. The potential productivity gains of technology-based economic sectors exceed those wherein human labor must play the central role. But at the same time, it should be noted that technological advances have reduced prices in the computer market in a way we haven’t seen in the health-care market. It also bears observation that the technological nature of the computer industry helps enable that part of the free economy to remain several steps ahead of federal government planners and regulators. In the end, it is difficult to avoid the dual observations that our information technology market is productive, efficient and consumer-serving to a degree that our health-care market is not, and also that the tech sector is (not coincidentally) less captive to elected officials’ political agendas.

Lest one be tempted to explain away the computing industry as uniquely favorable terrain for the private market, consider another sector: America’s restaurants. Food is no less a necessity than health care, and is every bit as much a “right,” but no one yet suggests that its necessity implies that the federal government should provide everyone’s food for free. Running a restaurant is inherently a labor-intensive enterprise, wherein technology alone cannot deliver the productivity gains that it does for personal computers. And yet America’s restaurant industry still manages to be incredibly dynamic, delivering an astonishing diversity of dining experiences. The sector is fiercely competitive, with individual restaurants constantly going in and out of business. It delivers eating options for Americans at all price points, from the finest dining to the cheapest fast food. Innovation is constant, with examples including distinct cuisines deriving from different origins around the world, niche dining options to meet specific dietary restrictions, and low-cost food trucks that compete with sit-down restaurants.

The restaurant market thrives because we allow it to. We accept that some specific eating options will disappear because we are confident others will arise in their place. Government imposes rules of the road, such as labor compensation and sanitary requirements, with which restaurants must comply. But otherwise we generally step back and allow their innovations to enrich our lives. Notably, government provides low-income Americans with assistance in acquiring the food they need, and there is a constant reassessment of how much and what sort of assistance to provide, and who should be eligible to receive it. But we do not make the fundamental mistake of believing that the needs of vulnerable Americans are best met by having the federal government take over the industry and provide free food to everyone. Informed by experience, we know better.

Now consider an opposing example: the U.S. health-care market, which many experts across the spectrum believe is dysfunctional. This critical sector is beset by high prices, much wasteful spending and quality control failures. It is no coincidence that these dysfunctions occur in a sector where government intervention has been heavy and highly distorting.

One remarkable aspect of our health-care debate is that there is actually very little disagreement among experts over the ways government policy has undermined health market functioning and sent costs soaring. Costs and prices rise whenever demand is artificially stimulated, supply is artificially constrained, and whenever payments are made by third parties through insurance instead of by consumers directly out of pocket. Current government policy exacerbates all of these cost-increasing forces. There is virtual unanimity among health economists that the federal tax preference for compensating workers with health benefits has driven cost growth. It is similarly well established that health cost growth has been further fueled by federal programs that subsidize health service demand. People spend more on both necessary and unnecessary health care when these services are financed by insurance, and yet we continue to reduce the share of health care financed out of pocket (from 33% in 1970 to 11% today), and mandate that insurance cover more services. Robert Graboyes has also catalogued a multitude of ways that government policies restrict the supply of health-care services as well. There are rationales underlying all of these policy choices, but given the simultaneous operation of these forces, no one should be surprised that U.S. health-care prices are rising to widely unaffordable levels. Cost growth is a predictable result of our current health-care policy morass.

In a previous piece I described a well-established dynamic by which government has a historical tendency to double down on policy mistakes. The essence of the dynamic is that government interventions create predictable adverse effects, which produce public hardship, which in turn foster demands for still more government intervention, which then worsens the distortions and adverse effects, and so on. The cycle can’t be broken unless we take a clear and unflinching look at the causes of current problems and fix them rather than doubling down on further measures to disguise and disperse their costs. We have long been trapped in this dynamic with respect to health-care policy. Bad outcomes driven largely by government policy have produced intensifying calls to involve the government even more completely. Another example is higher education, where a number of reports and studies have shown that government subsidies fuel tuition increases, in turn producing calls for more government-financed relief.

Particularly ironic about the calls for single-payer health care is that it would accelerate virtually every dynamic currently fueling excess health cost growth. For example, providing first-dollar coverage of every health service would artificially stimulate additional demand even more than is already being done, thereby causing some necessary treatments to be crowded out by unnecessary ones. The result would be a further acceleration of national health cost growth, unless payments to health providers were dramatically reduced as some Medicare for All advocates have proposed. One need not be an economist to understand that such payment cuts must ultimately reduce the supply of providers, and that inflating demand while restricting supply is a recipe for higher prices and longer wait-times.

Calls for single-payer health care also implicitly reflect an enormous conceptual leap: from the assertion that “health care is a right” all the way to “the federal government should be the provider of health care to everyone, rich or poor.” The latter statement, however, does not follow from the former. Food and shelter are likewise necessities, but we do not provide free food and housing for everyone at all income levels, nor does anyone suggest that we should. We should encourage a more vigorous debate between the Delaneys and the Warrens as to whether and when the provision of expensive benefits to everyone regardless of need makes policy sense.

Much of the 20th century was an international contest between competing visions of the role of government: specifically, whether market economies could successfully compete with those of nations where the state commanded and allocated economic resources. Through World War II as well as the subsequent Cold War, the world learned forcefully that market economies generally allocate resources more efficiently and fairly, and produce greater and more widely shared prosperity, than governments do. As we grow more distant in time from the firmest applications of these historical lessons, the fundamental divide exposed at the Democrats’ early primary debates—over whether government should nurture the free economy or displace it altogether—is a debate we need to have.

Reprinted with permission from - Economics21.org - by Charles Blahous

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