Friday, April 16, 2004

Fear of the Free Market -- Part III

If it's unnecessary to regulate health care -- as I've argued in Part I (April 8) and Part II (April 11) of this series -- can we take the next step and denationalize it? Can we forgo other forms of nationalization (particularly Social Security) and the regulation of other industries (e.g., telecommunications, banking, and securities)?

The prospect of deregulating health care; giving up Medicare, Medicaid, or Social Security; and leaving consumers generally "at the mercy of the market" may seem unthinkable. So let us think about it.

Regulation and nationalization (an extreme form of regulation) restrict competition and therefore reduce the supply and quality of regulated products and services. Many have argued, rather persuasively, that individuals would be far better off with the privatization of Social Security. (See, for example, my posts of March 5.) Moreover, there is ample evidence that proper deregulation leads to higher quality and lower prices. Phone service, for example, is not only cheaper (in real terms) but indisputably better, given the range of options available to consumers. Air travel, to take another example, is also cheaper (in real terms) and certainly better for the great majority of travelers who prefer more legroom to the so-called meals that airlines used to serve in coach class.

Why, despite sound arguments and concrete evidence, do most Americans tend to resist denationalization and deregulation? Their resistance arises from two things: risk aversion (both personal and paternalistic) and economic illiteracy.

Risk aversion is revealed in questions like these: Will I choose the right doctor? Will he choose the right medicine? Will that over-the-counter drug poison me? Will I save enough for retirement? What about my parents, my children, my friends, and the elderly poor? The answers are:
• Licensing of doctors doesn't ensure your doctor's competence or help you choose the right doctor.

• The FDA's approval of drugs doesn't ensure that your doctor will choose the right drug for you or a drug that's safe for you.

• That over-the-counter drug is unlikely to poison you, especially if the one you choose has been on the market for at least a few years.

• Your parents, children, and all the rest (even you) would have plenty of money for retirement living (including private medical insurance) if the government didn't collect taxes for Social Security, Medicare, and other welfare programs. The elderly poor would be taken care of by greater charitable donations (afforded by lower taxes) and relatively small, strictly means-tested, welfare programs.
I could go on and on about other components of our over-regulated economy, but I think you get the idea. There is little risk of coming to harm in a free-market economy, where individuals learn to look out for themselves, especially if they are backed by strict enforcement of tough laws against deception and fraud. Conversely, the rewards of a free-market economy are great: more competition, higher quality, lower prices, greater output, higher employment, and higher incomes (from which to fund minimal welfare programs for those who are truly dependent on society because no one else can meet their needs).

Economic illiteracy blinds people to the benefits that flow from a truly free-market economy. The illiterates (that's most of us) therefore become easy prey for the real beneficiaries of nationalization and regulation, what Bruce Yandle aptly calls "Bootleggers and Baptists":
• The "bootleggers" are market incumbents (as represented by the American Medical Association and the American Bar Association, for example) who benefit from the suppression of competition (as bootleggers did during Prohibition).

• The "Baptists" are self-appointed guardians of our health and well-being (the sum of all our risk-averse fears, you might say).
Economics can be as abstruse as the physics of special relativity. But it rests on two things that are easily remembered:
• Incentives matter.

• There’s no such thing as a free lunch.
Nationalization and regulation suppress incentives and therefore weaken the economy. The benefits of nationalization and regulation come at a high cost, but we tend to focus on our own benefits (the "free lunch") and forget the cost (the taxes we pay for benefits that go to others).