Belmont Club

Counterfactuals

The American Medical Association has come out against the government insurance plan proposed by President Obama, according to the New York Times.

As the health care debate heats up, the American Medical Association is letting Congress know that it will oppose creation of a government-sponsored insurance plan, which President Obama and many other Democrats see as an essential element of legislation to remake the health care system. …

While committed to the goal of affordable health insurance for all, the association had said in a general statement of principles that health services should be “provided through private markets, as they are currently.” It is now reacting, for the first time, to specific legislative proposals being drafted by Congress.

The ostensible AMA message is that resource allocation should be done via the market, not the state. Critics of the AMA who may fault it for its monopoly power may critique it from that vantage, but it would be inconsistent for them to turn around and claim that replacing one monopoly by a government monopoly is a logical improvement.  What is being debated here goes beyond the specifics of a government plan. At issue is the principle of how resources should be allocated.  President Obama has recently proposed controls on executive compensation, not just for TARP related firms, but more broadly across the economy. The Washington Post writes:

But with the spotlight now on executive pay practices, senior administration officials are moving to address concerns at firms well beyond those implicated in the crisis. Yesterday, officials proposed two pieces of legislation that separately empower shareholders and the Securities and Exchange Commission to exercise more oversight over executive compensation at all publicly traded firms.

The first measure would give shareholders more say on what companies pay executives. Traditionally, stockholders have had limited influence and the authority only to elect a small number of members who sit on a company’s board of directors. The second measure would expand the SEC’s power to ensure that the corporate committees responsible for deciding compensation act independently of the top executives whose pay they set. Most large corporations have such committees, and their record in rewarding risky management has at times been troubling. Conflicts of interest between committee members and executives are common.

(Plus, watch Barney Frank  illustrate my point without conceding it after the Read More)

Should he be given the authority to do it? The devil in these proposals will be in the details, but it’s not obvious that the government can do a better job at supervising resource allocation than the private sector.  The debate doesn’t focus on this, however, because the Obama administration very cleverly assumes that it’s true and simply challenges his Republican opponents to come up with another government plan. He’s says ‘I’ve got a plan for change, what’s your plan for change?’  Yet it is not necessarily the case that either plan is better than the status quo. One example of how President Obama does this is the following:

President Barack Obama challenged Republican critics Thursday to offer alternative plans for overhauling U.S. health care, declaring he’s “happy to steal people’s ideas” but that doing nothing about out-of-reach costs and uninsured Americans is not an option.

“What else do we say to all those families who spend more on health care than on housing or on food?” Obama said at a town hall-style meeting, surrounded by supportive citizens in the nation’s heartland. “What do we tell those businesses that are choosing between closing their doors and letting their workers go?”

Now it may be the case that major improvements are possible in employment compensation. But it is not necessarily the case that the improved or optimal solution is a member of the universe of solutions proposed. In a set consisting of a current compensation system and the Obama compensation system the Obama system is not ipso facto better. That has to be demonstrated and very often it is not.  It is simply assumed. Similarly, the existing US health care system may not be the best, but it is not necessarily inferior to Obama Health care. Most consumers know that there has to be a reason to change products. You don’t change simply because someone comes along to sell you something. Sometimes the consumer even tries something and decides he was better off with his former product. For President Obama to say that in the absence of another proposal that his system is necessarily better is a logical fallacy.

Each alternative in the tree must be evaluated according to its own expected value. In creating solutions the trick is to find a direction of improvement and most people understand that movement across the solution space is not always, nor even commonly in the direction of improvement. ‘Do nothing’ or ‘do nothing until you know more’ is very often the best strategy. Many a man has walked into a car lot and looked around without buying anything. The problem with walking into the Hope and Change car lot is the assumption that you always have to walk out with something; and you only have two choices at that.

But that brings us right back to market principles. The reason browsing through a shop is so beneficial to consumers is that have a choice. In the case of government-mandated compensation and government-run health insurance, the underlying organizing principle is that you are too stupid to make your own choice, and therefore it must be made for you through some kind of compensation czar or health czar. Now it may be true that choice can be misused, but it is not obviously true, nor is it even generally true. Which is why the former adage was that government should stay out of things unless there was a compelling public interest to intervene. There was a time when the default setting was for the government to do nothing unless it was obvious that they should. Today, things have been reversed. The default argument is for the President to challenge his political critics to do something or let him do it.

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