A follow-up post to the one on Bryan Caplan's assault on government: I think I may have confused what normal people mean by efficiency with what economists mean by efficiency- that is, an efficient decision is one whose benefits exceed both the opportunity and out-of-pocket costs. Caplan, I presume, means that government services let people consume irrationally. People don't have to pay for the service, so they consume more than they would otherwise. This is irrational, I guess.

The Kevin Drum point, which is a good one, is that irrational consumption isn't necessarily bad. People should get some extra stuff, because we should all want the same if we were in that position and the richest country in the world can and should be a decent one.

I'm still struggling to push this debate further- that government services aren't necessarily "overconsumed" because people don't pay for them.

This is the anti-government, pro-market ideology in a nutshell- government is inefficient but nice, the market is cruel but builds character and is good for you. It's the Daddy market and the Mommy state, if you will.

The problem is it doesn't square with reality. It's false. Government services can be much more efficient than the market. Our health care system is the case in point. Nearly every other system in the world is cheaper and more effective, and nearly every other system has more government involvement. Pretty significant correlation, don't you think?

But it's also that the dreaded "moral hazard" factor is not decisive in driving up health care costs. Moral hazard the term economists use for when people do risky things, or overconsume, because they don't have to pay for it. Economists think that health insurance encourages this kind of behavior.

This great article takes down this argument better than I can. The point is that health care is different- people inefficiently consume because they're following medical establishment's advice, not just because they have insurance.

Health care doesn't lend itself to efficient provision in decentralized markets, because markets give too much power and bad incentives to medical professionals. Government could do it better.

Chris Hayes has an interesting article out that got me thinking about the problems with free-market primacy.

Hayes reviews a provacative book by economist Bryan Caplan that proposes that voters are irrational, and hence choose irrational economic policy that generate inefficient market outcomes. Here's the summary of the argument:

The idea is this: People are rational when they pay for the consequences of their decisions. But in elections, the odds of your vote determining a given election are so slim that the price of voting your irrational whims is nil. This gives people the freedom to indulge delusional notions about the economy. And that results in a populace who are capitalists in the market place and socialists in the voting booth.

The review goes on to play up the arrogance, amorality, and wrong-headedness of the thesis; Kevin Drum also makes the point that not at all economic policy is meant to promote efficiency.

I'd push it a little further- in many of the subjects I've been trying to bring to light on the blog lately, market incentives are not only insufficient to promote efficiency- they would seem to work against efficient outcomes.

Market values- profit-seeking, single-minded concern for the bottom line, ruthlessness- are at the root of problems regarding privatization and health care costs. Doctors and drug companies being paid on commission, hospitals that cut corners to raise profits, insurers that weed out the sick, military contractors that take on impossible projects- all are examples of the market rewarding behavior that does not generate efficient outcomes. People are not "paying for the consequences of their decisions."

Indeed, a more public-centered model could promote greater efficiency, with fewer losers and more winners. For instance, government could punish doctors when they administer wasteful procedures. It could reward hospitals for offering preventative care. It could maintain databases of patient information that private health care providers can't. It could ensure that government work is transparent and accountable. The private sector has none of these tools.

Caplan might not disagree about the possibility of government doing these things, but rather the probability of it occurring, voters and politicians being irrational and all that. He doubts the capacity of the state to make decisions benefiting as many people as possible- arguably a fundamental purpose of government. But Medicare and Social Security -the two largest government programs- are some of the most efficient forms of insurance available. Even Veterans Administration has mastered efficient health care provision. Our military is probably the most advanced in the world.

What Caplan probably doesn't understand about government (he's an economist, after all) is that public servants of all types do pay for the "consequences of their decisions," and that voters do care about whether government is efficient. What's needed is the proper level of transparency, accountability, as well as institutional recourses and an empowered civil society, etc.- no easy task, but it happens all the time.

So, to sum up, Drum and Hayes make valid and necessary points, but they fail to undercut the central premise of free-market primacy- that government is touchy-feely but inefficient and the private sector is cold-hearted but efficient and good for everyone. Rather, it is a virtue that government is not guided by market values and forces, and not just because it can set limits on the market. Voters can motivate it to act in the public interest, where the private sector has failed to promote efficiency.

Ezra Klein has an excellent post on the nature of long term fiscal health. Given this chart from a Center on Budget and Policy Priorities report, Klein wonders why Social Security get so much attention. Or, as he puts it:

Look at that gentle slope for Social Security! You could do that in Rockports! Mt. Medicare and Medicaid, by contrast, require climbing gear.

If you've got 45 minutes, take a look at this article in the New York Review of Books. It's an analysis of how doctor's think, and how bad habits of mind promote inefficiency and bad outcomes in the health care system.

Few can doubt that Western medicine has been a phenomenal success. Heart disease kills two-thirds fewer people now than it did fifty years ago. The frequency of conditions as diverse as stroke and trauma is being gradually checked. Mortality from breast cancer has fallen by a quarter in less than two decades. Doctors would dearly like to attribute these impressive results in Western countries to their accumulated expertise and the advances of science. But as Atul Gawande points out in Better: A Surgeon's Notes on Performance, his latest collection of lucid essays,[1] the residual contradiction is that while medicine succeeds, it never seems to succeed well enough. A doctor's report card might look creditable today. Yet it nevertheless conceals serious unresolved and unacknowledged weaknesses.

Doing a bit of research into mandatory spending, I came across this GAO document, which contains this bit:

Among mandatory spending programs...the health area is especially important because the long-term fiscal challenge is largely a health care challenge. Contrary to public perceptions, health care is the biggest driver of the long-term fiscal challenge.

This cannot be said enough: health care is the biggest driver of the long-term fiscal challenge.

While the GAO report makes the point that if the government continues to pay for the health care of seniors, the tax burden will be absolutely crushing, it will degrade our standard of living and put national security at risk. This all might be true, but consider the dynamic that is causing this rapidly increasing rate of Medicare spending.

As Americans retire, they switch from using private health insurance to using government health insurance. Whether its the government or individuals, someone will be picking up the tab for senior health care. Either way, health care spending is going to consume a lot of national income. And rather than shifting this crushing burden on to seniors, we should fix the Medicare imbalance by fixing skyrocketing health care costs.

Kevin Drum, commenting on a New York Times story about a Medicare program that pays private insurers more per patient than they pay directly to doctors:

Private insurance carriers charge more than Medicare to provide medical services because, duh, they're a middleman and they have to make a profit. But private carriers, by movement conservative definition, must be better than any government program, so we have to find a way to get them involved. How? By paying them 19% more! So they can provide poorer service! And rip off vulnerable elderly patients (read the story for details)! And deplete the Medicare trust fund even faster than before!

Read the whole New York Times story here.

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Chris Hayes of The Nation writes that state politicians are "taxing and spending," and being rewarded for it. Will their success encourage Washington to do likewise?

People seem ready to accept higher taxes, but only if those taxes are sold to them as paying for services they want the government to provide. "The notion that [social programs] are what Democrats want and what Republicans abhor may have been true thirty years ago," Carona told me. "But I feel like there's been a shift. Now everybody wants the programs, but one group is unwilling to pay for them and the other group is unable to pay for them."

Over the past six years, Republicans have succeeded in de-linking taxes from the public services and social programs they pay for. It is the job of Democrats, particularly the presidential candidates who will have the largest platform, to re-establish that connection in voters' minds. John Edwards has the right idea on this score. He has proposed a fairly ambitious universal healthcare plan and says he'll push to raise taxes in order to help pay for it. "We're asking everybody to share in the responsibility of making healthcare work in this country," he says.

Hayes doesn't mention PAYGO in this piece, and I'd imagine that's because most people think that PAYGO rules are either the conceptual opposite of or a procedural obstacle to "tax and spend" policies. I don't think that's true. PAYGO and deficit reduction are not synonymous. In fact, Hayes is suggesting that new spending proposals abide by the PAYGO principle- that is, you have to increase taxes when you create large mandatory spending programs.

PAYGO also makes the connection between taxes and services- that taxes do indeed pay for something that people want. I sometimes wonder if this really is a problem. I mean, where's the evidence that people don't understand what taxes do? But it seems beyond question that raising taxes to pay for programs that make a visible difference in ordinary people's lives could very well be a political winner. It's also responsible policymaking.

Medicaid cuts in Michigan...

Paulette Howell's son receives treatment for cerebral palsy through Medicaid.

Gov. Jennifer Granholm's proposed 6 percent cut across the board in state Medicaid funding has created a wave of fear among the disabled and family members like Howell that it'll be harder to get treatment.

"It's a dangerous situation for people who are disabled," said Howell, 58, of Waterford Township. Medicaid pays for the treatments for her 35-year-old son, Joe.

I've been wondering for some time who had a plan to reduce the costs but not the quality of health care. Of course somebody does- it's such a big issue that everyone can't be ignoring it- but who? Well, it turns out that MedPAC, a government advisory board on Medicare, and probably the first place I should have looked, already has a plan. Check out this article for a quick summary of MedPAC's latest report.