Paul Krugman: government eliminates opportunity cost

Monday, June 13, 2011
Paul Krugman: government eliminates opportunity cost
William Anderson

Ever since the Progressive Era, Americans have been bombarded with the notion that all goods really are collective in nature. Thus, we hear about "our food supply" and "our oil," and "our healthcare."

If goods truly are collective, then it ultimately is up to that most collective entity, government, to "distribute" them. Pay no attention to the real problems that arise out of the notion of collective things, which is nothing but socialism using different terms. And even Paul Krugman cannot "solve" the central problem of socialism: economic calculation.

In his column on Medicare, Krugman manages to wrap a falsehood around a central kernel of truth, that being that on paper, Medicare costs less than private insurance. He writes:

...here's what you need to know: Medicare actually saves money ­ a lot of money ­ compared with relying on private insurance companies. And this in turn means that pushing people out of Medicare, in addition to depriving many Americans of needed care, would almost surely end up increasing total health care costs.

The idea of Medicare as a money-saving program may seem hard to grasp. After all, hasn't Medicare spending risen dramatically over time? Yes, it has: adjusting for overall inflation, Medicare spending per beneficiary rose more than 400 percent from 1969 to 2009.

But inflation-adjusted premiums on private health insurance rose more than 700 percent over the same period. So while it's true that Medicare has done an inadequate job of controlling costs, the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we'll be forcing them to get private insurance ­ if they can ­ that will cost much more than it would have cost to provide the same coverage through Medicare.

And what causes this problem? Private enterprise, of course:

And then there's the international evidence. The United States has the most privatized health care system in the advanced world; it also has, by far, the most expensive care, without gaining any clear advantage in quality for all that spending. Health is one area in which the public sector consistently does a better job than the private sector at controlling costs.

I will give Krugman his argument as far as it goes, but I think that a few points just might be in order, points that Krugman conveniently ignores.

The first is that Medicare is NOT subject to state mandates, and that is a huge factor, as mandates drive up the cost of insurance. (I won't ask why Krugman ignores this point except to say that it does not fit with his narrative that socialism is morally and economically superior to private enterprise.)

Second, Medicare sets the payment schedule and doctors that treat Medicare patients have no other choice. Patients can sue insurance companies and the media generally will side with patients and doctors in having the courts order insurers to spend lots of extra money. However, that does not happen (to my knowledge) with Medicare.

Third, there is no way that the advent of third-party payments will NOT result in higher costs, as decisions for care are made by people who do not have a direct interest in the outcomes. Keep in mind that if we had third-party payments for buying other things, like food, then food prices would be higher than they are now.

Fourth, Krugman falls for the silly doctrine that medical care is "different" and not really subject to the laws of economics. Now, keep in mind that when we say that something is subject to economic laws, what we are saying is that it is a scarce good. If economic laws don't apply, then the good cannot be scarce.

I cannot believe for a second that Krugman would claim that medical care is a non scarce item, yet, he writes about medical care as though it is not scarce. For example, take his long-held view that medical capital drives up costs. If that were true, then it would be the first time in economic history that the presence of capital (at least developed in a free market) forced real costs to be higher than they would be in the absence of capital.

Would Krugman ever write that the development of the assembly line made automobile costs higher? If that were true, then the story of how Henry Ford was able to bring down the price of a new car from about $1,000 to less than $300 simply would be non-existent.

If, indeed, capital were to be responsible for higher real medical costs, then one would have to look at other factors to see why this would be so, for it makes no economic sense by itself. Unfortunately, Krugman is not willing to go outside the narrative that medical care is "different."

Moreover, if government by taking over payments can eliminate opportunity cost (or make it substantially lower), then why does not government involve itself in everything else and lower costs? For that matter, if government by simple fiat can create such miracles, then why has socialism failed in places like Cuba, North Korea and the U.S.S.R.?