Archives: 10/2008

Preventing Another Great Depression

Pundits are using the financial markets mess to raise fears of another Great Depression in order to justify large-scale federal intervention. But government interventions, not markets, cause great depressions.

What markets do naturally when left alone is grow. Sure, people in markets make mistakes and markets sometimes experience panics, but if prices are allowed to adjust, recessions are short-lived and stability and growth returns.

Why do markets naturally grow when left alone? Because of people’s “propensity to truck, barter, and exchange one thing for another,” as Adam Smith noted. Since voluntary exchange is mutually beneficial, that propensity gives rise to what can be called a surplus, profits, or economic growth. Growth results from simply allowing individuals to seek their economic advantage within the rule of law.

As I note in this summary of the causes of the Great Depression, the U.S. economy experienced a sharp contraction in 1921 with the unemployment rate rising to 12 percent and output falling 9 percent. But the economy bounced back quickly as the government stood aside and let prices adjust and profits recover.

A decade later, the government adopted vastly different policies, which prevented the economy from adjusting and recovering from the monetary contraction that precipated the Great Depression. As I discuss, there were six key reasons for the severity and duration of the Great Depression:

1) Monetary contraction and bank regulations.

2) Tax increases.

3) International trade restrictions.

4) Mandated high prices.

5) Mandated high wages.

6) Harassment and demonizing of businesses.

This 2004 study by UCLA economists provides recent academic support for a number of these points. The Forgotten Man by Amity Shlaes also provides interesting insights into the depression.

Today, policymakers are starting to make some of these same mistakes again. Will they stop before they turn today’s recession into a full-blown depression?

Universal Coverage Kills

Members of the Anti-Universal Coverage Club will be interested in my article published today at National Review Online:

McCain, Obama, and the voters would do well to keep in mind what this month — October 2008 — has to say about the quality of medical care when government is in charge.

Federal bureaucrats have announced that, as of this month, the Medicare program will no longer provide financial rewards to doctors and hospitals who harm patients.

That is not a typo. For more than 40 years, Medicare has provided financial rewards to providers when a patient requires follow-up care following a medical error…

It doesnt have to be this way. More than 60 years ago, markets devised health plans that discourage medical errors by forcing doctors and hospitals to bear the financial costs of all such errors. You know them as plans like Group Health Cooperative and Kaiser Permanente. Doctors and patients who choose those plans tend to like them, and the plans receive high marks for quality, which suggests the financial incentives they use serve patients better.

Why does it take Medicare more than 40 years to take such baby steps? Especially when the market developed a solution to this problem over 60 years ago?

The answer is that Medicare — like all universal-coverage schemes — is operated by the government, and government resists innovation. In this case, resistance to innovation kills.

As for the Church of Universal Coverage … well, they may catch the vapors.

Deregulation and Inequality

Matt Yglesias has been doing some great blogging lately about the negative effects of certain kinds of government regulation on ordinary consumers:

The fact that Joe is not a licensed plumber would be a great opportunity for an enterprising politician to try to make an issue out of the growth of occupational licensing requirements in the United States and the barriers to economic growth and opportunity they create.

And occupational licensing is hardly the only such example. Lots of America’s land use and business licensing regulations are, likewise, measures that do much more to entrench existing privilege than to promote any kind of public interest…

The original wave of deregulation was promoted by conservatives, but also liberals like Ted Kennedy, Steven Breyer, and Ralph Nader. I think we see now that that wave went too far in some respects, but in other areas it hasn’t gone nearly far enough. This is a good cause for progressives to pick up, but also one that would be completely open for a conservatism that was interested in helping the little guy rather than mocking efforts to help him as the second coming of Josef Stalin.

Matt is getting some criticism from his mostly left-of-center readers for this, but he’s right. Even if you think some recent deregulation went too far (personally I think a lot of what was labeled “deregulation” in recent years wasn’t), the deregulation of the airline, trucking, and telecommunications industries in the 1970s was unambiguously good for consumers and economic growth. Liberals like Ted Kennedy and Stephen Breyer understood this and were key architects of the deregulation effort. A similar wave of deregulation at the local level could do a ton of good, and it would be a lot more likely to succeed if we had the same kind of ideological buy-in from the left-hand side of the spectrum.

I think there’s a related point here for libertarians: we’re often too quick to reject populist rhetoric and concerns about inequality. Certainly there are good reasons to be skeptical of proposals to redistribute income via the tax code. But there are also lots of ways in which government policies widen the gap between rich and poor. So when people express concerns about inequality, the most effective response is not to dismiss those concerns out of hand, but to turn the conversation to the many ways that bad government policies have increased inequality. Liberalization of occupational licensure, business licensing, and land use regulations, restrictions on eminent domain, school choice, and a reduction of corporate welfare are all policies that deregulate and reduce inequality. Libertarians and liberals ought to be natural allies on these populist, deregulatory issues, and such a coalition is more likely to emerge if libertarians take liberals’ concerns about inequality more seriously.

Selling “Security”

Imagine you are an official arriving at a disaster scene. As you approach, to your left is a burning and partially collapsed building. On an upper floor of the standing part of the building, one or two people are waving for help, evidently trapped. In the parking lot on your right are injured people, one or two of them in very dire straights, with a few Samaritans trying to render them aid.

You don’t know what caused this, but there are burned out remnants of a truck at the base of the building. It could have been a truck bomb, or it could have been an innocent crash and explosion.

Arriving behind you are firetrucks and ambulances. From the ambulances are coming people wearing white and carrying medical equipment. The people coming out of the firetrucks are carrying gas masks and wearing heavy boots and flame-retardant clothing.

What do you do? Check their IDs?

Heavens, I hope not.

But the Smart Card Alliance is trying to convince the world that disaster response and recovery scenes require machine-readable ID cards. (Their paper is being release just ahead of their big Washington, D.C. conference. See their membership list in the conference brochure.) Here’s what they say:

For both daily activities and emergency situations for [emergency response officials], it is necessary to quickly and unequivocally establish who is requesting access and what the ERO is allowed to do based on their certified skill set (e.g., medical personnel, law enforcement officer, firefighter). Without the ability to identify and qualify individuals with a high level of assurance, the response and recovery effort can be compromised, affecting the economic and human impact and the ability to return to life as normal.

On the contrary, disaster scenes are places where we rely on easy symbols like uniforms and equipment to judge who people are and what they are there to do. It is possible to contrive a situation where a wrongdoer or incompetent could access a disaster scene and do more harm, but that is precisely what it is: a contrivance. The overwhelming majority of the time, people dressed as firefighters are firefighters, generally qualified to fight fires. People dressed as Emergency Medical Technicians are almost always EMTs, generally qualified to administer emergency medical care.

Emergency scenes have all the credentialing they need. Checking a digital “smart card” at a disaster scene would be a stupid and life-threatening waste of time.

There are a lot of good things to be done with advanced identification cards and credentials. “Securing” disaster response and recovery does not seem to be one of them. The Smart Card Alliance should move along to use cases where there really are benefits rather than trying to sop up government “homeland security” money.

Tomorrow’s Presidential Surrogate Education Debate

The Teachers’ College at Columbia University is hosting an education debate tomorrow between surrogates of the Obama and McCain campaigns. Here are three questions that I would love to see moderator David Hoff put to the participants:

  1. Why do both candidates support NCLB given that 1) The already modest NAEP test score growth rate has been slower since the law passed, and 2) U.S. scores on the international PISA and PIRLS tests have stagnated or declined across grades and subjects since NCLB?
  2. Why does the Obama Campaign tout Eisenhower’s National Defense Education Act as a model of federal education policymaking, given that test scores went down in the eight years following passage of that law (and didn’t return to pre-NDEA levels for decades)?
  3. Does Senator McCain support national school choice programs, and if so, how does that gibe with a federal government of limited, enumerated powers (education not being among said powers)?

Massachusetts’ Health-Insurance-Choice Tax

Massachusetts is the only state in the Union that requires individuals to purchase health insurance. Enforcing that “individual mandate” requires state officials to define what counts as health insurance. And so goes residents’ freedom to choose. 

According to yesterday’s Boston Globe:

Starting Jan. 1, residents who do not have health insurance that meets minimum standards set by state regulators could face a hefty tax penalty….

In general, to meet the test, a plan must offer coverage for prescription drugs, preventive and primary care, hospitalization, mental health and substance abuse services, and emergency services.

Don’t want mental health coverage? Tough. Da gov’ment says you needs to buy it. In a little over a year, the government will add “radiation and chemotherapy; maternity and newborn care; and diagnostic imaging and screening tests” to the list. 

Massachusetts residents might think they are competent to choose their own health plan — but their betters on Beacon Hill think differently.

If you don’t want to pay higher premiums for those services, Beacon Hill has another way to make you pay. Again, the Globe:

All health insurance companies licensed in Massachusetts will be required to notify customers about whether their plans meet state standards. However, the rules put the onus on individuals to make sure their coverage meets the state’s minimum standards, because it will be individuals, and not employers, who are assessed the penalty.

Currently, the state’s universal healthcare law requires most residents to have insurance or face a tax penalty of up to $912 per year. But the rules do not mandate what the coverage must include.

Regulators said yesterday that the penalty in 2009 would probably be higher than $912.

That’s a direct tax on the right to choose one’s health insurance. And it’s only gonna grow.