Reforming Previous Reforms, ad Infinitum

In the forthcoming issue of Cato Policy Report, Jeffrey Friedman describes the cumulative effects of regulations that led to the 2008 financial collapse:

So deposit insurance begat bank-capital regulations. Initially these were blunderbuss rules that required banks to spend the same levels of capital on all their investments and loans, regardless of risk. In 1988 the Basel accords took a more discriminating approach, distinguishing among different categories of asset according to their riskiness — riskiness as perceived by the regulators. The American regulators decided in 2001 that mortgage-backed bonds were among the least risky assets, so they required much lower levels of capital for these securities than for every alternative investment but Treasurys. And in 2006, Basel II applied that erroneous judgment to the capital regulations governing most of the rest of the world’s banks. The whole sequence leading to the financial crisis began, in 1933, with deposit insurance…

Deposit insurance, hence capital minima, hence the Basel rules, might all have been a mistake founded on the New Deal legislators’ and regulators’ ignorance of the fact that panics like the ones that had just gripped America were the unintended effects of previous regulations.

Friedman is talking about financial and housing regulation. But I was reminded of them when I heard President Obama tell congressional Democrats, “Today we are on the doorstep of accomplishing something that Washington has been talking about since Teddy Roosevelt was President, and that is reforming health care and health insurance here in America.” And his formal speech to Congress in September: “I am not the first President to take up this cause, but I am determined to be the last.”

But of course we’ve been “reforming” health care ever since Teddy Roosevelt, and those reforms have brought us to our present difficulties. The Flexner Report 100 years ago reduced the supply of doctors and drove up the price. Wage and price controls during another Roosevelt era led to the system of employer-provided insurance, again driving up costs. Medicare and Medicaid poured more third-party payments into the system and added layers of government bureaucracy. HMOs and other cost-containment measures were a response to a problem created by the absence of normal consumer pressure. Then we got HIPAA, Kennedy-Kassebaum, the Mental Health Parity Act, state mandated-coverage laws, and the Medicare Prescription Drug Benefit.

And here we are today, with a health care system that everyone agrees needs reform. Maybe it’s time to recognize that we’re just piling new regulations on top of old regulations, like some compulsory Rube Goldberg device, and to try instead free markets, in which consumers pay for what they want from providers, insurance companies, managed care organizations, and other entities that compete for their business by seeking to provide better care at lower prices. Otherwise, we can be sure that Barack Obama won’t be the last president to stand before Congress and declare that our health insurance system needs reform. Indeed, we can bet that if he signs the current bill, he himself will be back before Congress in a year or two asking for reforms to reform the reforms that were intended to reform the previous reforms.