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In general, it appears to me that unless various types of market failures are explicitly considered, the 'Pareto-optimal' (and in the case of commonly assumed welfare functions, the 'socially optimal') outcome occurs when there is minimal government.

That is why I worry about common economics curricula that ignore or downplay market failures. Students who like small government gravitate towards economics (as they find validation) while students who have a more positive view of the government (perhaps due to an instinctive but incomplete understanding of market failures) are confused and regard the entire discipline with suspicion.

Um Frances,
this isn't argument about government or not government - it is an argument about direct provision, or voucher or cash subsidy. It may be quite valid that based on pure micro-economics a cash subsidy is always the best choice. A voucher is something intermediate that implies you don't trust the consumer to make a responsible decision. (i.e. You want to subsidies the consumer but avoid the moral hazard that he might just drink the subsidy. This sort of implies that the consumption in question has positive external effects.)

I forgot to point out that comparing a voucher to direct provision is a supply side argument - it lets the market choose the best supplier. (I think this argument is sometimes correct - but note that we are giving a voucher because we don't trust the consumer. This might give you a hint about how this might go wrong.)

The distinctive behavior of vouchers vs. cash subsidies only really comes out when it interacts with market failures or other second-best situations. This is common in constrained optimization in general - theory of the second best and all - hence microeconomics pedagogy that analyses failures one-by-one is going to be persistently libertarian.

Externalities is the only issue that moves in favour of the policy at an EC10 level, but then the text casually describes Coasean bargaining without going into associated issues, and uses the model to instead bridge to cap-and-trade... Can't remember the name of that text, sadly.

Also, the part of standard micro which is most amenable to the liberalism of academic economists (the notion that endowments, i.e. pure transfers, are entirely arbitrary with regards to efficiency concerns) is not generally emphasized at all, much less illustrated using prevailing political debates. It's really counter-intuitive though, to be fair.

"hence microeconomics pedagogy that analyses failures one-by-one is going to be persistently libertarian."

Excellent point, David. Why has the second best theory disappeared from economics?

reason: "based on pure micro-economics a cash subsidy is always the best choice"

There is another argument in favour of vouchers or direct provision other than the ones you mention.

It is true that cash transfers distort consumption decisions less than subsidies of particular goods. However consumption decisions are not the only decisions people make. They also make labour supply decisions. Precisely *because* cash transfers don't distort consumption decisions, they are more valuable to people than in-kind provision or subsidies of particular goods, thus have a potentially greater impact on labour supply decisions. A person might not turn down overtime in order to keep a $1000 per year dental benefit (unless they have really bad teeth) but they might well turn down overtime in order to keep a $1000 cash transfer.

david: "hence microeconomics pedagogy that analyses failures one-by-one is going to be persistently libertarian."

In economics there seems to be an ideology/complexity trade-off - that is, the more complex economic analyses tend to be less obviously ideological. Now that may be a false impression - I might just not being seeing the ideology behind the technically complex arguments - but your comment gives a reason why it might be true.

reason: "I forgot to point out that comparing a voucher to direct provision is a supply side argument - it lets the market choose the best supplier."

Fair enough, but then why is this point never ever made in the analysis of food stamps, which are trashed in every single economics text I've ever read?

Frances - I think I might be missing your point. Are you suggesting that the above analysis is incorrect in some way, or are you suggesting that somebody out there is being inconsistent?

In fairness, Frances, the assessment of vouchers as a policy really depends on the plausible alternative policies. In the food stamp discussion, the options really are between vouchers and cash transfers - no one seriously suggests that the government should provide food (been tried, nobody much liked it). In the health care discussion, government provision (broadly defined, strictly speaking many countries have private provision with public financing) is considered an option alongside vouchers (heck, in Canada it is considered the only option), but I don't recall ever seeing a suggestion that we just give people more money. In the food discussion, relative to cash transfers, vouchers are a decidely second-best alternative (defensible, if at all, either on the basis of some sort of paternalistic concern for the inability of the poor to make good choices or on political realist grounds that that's the only way voters will support aid for the poor). In the health care discussion, relative to government provision, maybe vouchers don't look so bad (I'm agnostic on the point, since I can see practical problems with both policies). I hear where you're coming from, but I can understand the different assessments in the context of actual policy discussions (though it might be fair to ask, why don't economists try to shift those policy discussions).

The other consideration is that there is a widespread perception that health care is not normal good, that health care is "different", that it is something we consume only if we "need" it, so traditional market analysis doesn't apply (certainly that is the argument repeated ad nauseum in opposition to the introduction of market forces in the provision of health care). That perception may not be right (yes, no one gets unneccesary surgeries, but they, or their doctors, might choose more expensive surgeries to less expensive ones, or treatments which may be beneficial, but only marginally so, so that the cost outweighs the benefit- the absence of both market forces for insured health care consumers coupled with the absence of government imposed rationing in the US almost certainly contributes to their high health care spending). However, it's a perception that shapes the debate over health care, so it might not be surprising if economists (especially if health care isn't their area of expertise) implictly adopt it.

Ryan - the later.

Bob - I agree, the assessment of the policy depends upon the alternatives. When government finance or provision is the alternative, vouchers are proposed. But if vouchers were in place, cash transfers become a plausible alternative. And when health care vouchers are compared to cash transfers, don't all of the standard arguments used in the food stamp case apply? Food is a special good, too - like health care, people die without it.

Actually, my own view is that there are critical differences between health care and food stamps because of adverse selection and moral hazard. However these market failures are precisely the reason why health care vouchers are likely to run into problems - the supply side arguments Reason alludes to above have little force when consumers are not in a position to make informed consumption choices.

Ahhh, when will those economics textbooks stop being so damn conservative...

"Food is a special good, too - like health care, people die without it"

Well, I agree that food is akin to health care, but I don't think it's "special" in the sense that it isn't a normal good. Lots of items are essential, in the sense that we couldn't live without them (food, water, clothing, shelter), but they're still normal goods. To that extent, I think the health care is "different" argument is bunk, it's an argument used by ideologues to avoid having rational dicussions of health care provision.

I share your view, though, that the markets for health care is critically different from that for food, as you say, for reasons of adverse selection and moral hazard (education lies in the middle, there are concerns with adverse selection, but on the other hand, I can think of practical ways of designing voucher systems which address them, so the case for vouchers vs. government provision in that context is quite strong). For that reason I have my doubts about vouchers in the health care debate (well, that and it's never going to happen). Mind you, I wouldn't go so far as to discount the impact of market forces entirely in the health care system, and I think (though it's been years since I looked at it) that different countries have experimented with ways of introducing market forces into the health care system (often by incentivizing doctors/providers to keep their patients healthy at the lowest cost), but I agree that it's a more complex discussion than you have to have for, say, food.

Frances - I agree, it's somewhat inconsistent under the assumption that those making a Medicare voucher argument are doing so under the belief that the alternative is a cash transfer. But I don't think that's what they believe. I think they're suggesting vouchers as an alternative to bureaucracy.

There is no public health care infrastructure in the USA (excepting the VA hospital system, which is only available to military personnel). So the alternative is "single payer" versus "vouchers." In that case, vouchers seem to provide less deadweight loss than bureaucracy. (I'm not sure anyone would disagree with me there, right?)

But where I do agree is that a direct cash transfer would be even better than that. Something like Milton Friedman's "negative income tax" would be a far preferable way to address poverty and need than any level of bureaucracy. I don't think most advocates of vouchers would necessarily disagree with me there, either.

I know I am getting away from the micro aspect of this, but it is worth noting that employee health benefits are effectively vouchers: $400 per year for massage, psychotherapy, podiatry, etc., $2000 for braces, and so on. Intriguingly, employee health benefits deal almost exclusively with the politically weaker health care labor groups (i.e., everyone who isn't a doctor or nurse). The question then is, are people spending their employee benefits funds optimally? As you (FW) once noted, the outcome of such "rationing" is that the maximum becomes the minimum: people see the voucher as free money rather than foregone wages, so they see the dentist every six months, get 10 massages per year.

Ryan: the VA offers its clientele two options: one, as you point out, is to use the VA's in-house system of hospitals and clinics. But they also pay for privately-provided health care.

The example--like the current debate in the US, or the "debate" in Canada--is noteworthy in that it exemplifies what we prefer to focus on in health policy debates: who should pay for what. And yet the drivers of inefficiency and rising costs are primarily other things that are politically more touchy, like occupational licensing and technology overuse. The problem is that the health care system/industry/sector is a large machine with many different switches, and the payment methods are a relatively small part of what makes it the thing it is.

"In that case, vouchers seem to provide less deadweight loss than bureaucracy. (I'm not sure anyone would disagree with me there, right)"

Actually, I'm not sure about that. Part of the problem with the existing US health care system is its sheer bureaucratic complexity, because doctors/hospitals seeking to get paid for their services have to deal with, quite literally, hundreds (if not thousands) of different payors, each of whom may have different reporting/filing obligations, reimbursement criteria, etc. Vouchers to obtain private insurance don't really deal with that. As a consequence, the US spends vast sums of money on the administration of its health care services A single payor system may (will) have its own inefficiencies, but it (ironically) cuts down on the paperwork.

"Something like Milton Friedman's "negative income tax" would be a far preferable way to address poverty and need than any level of bureaucracy. I don't think most advocates of vouchers would necessarily disagree with me there, either."

No doubt that a negative income tax would be a better way to address poverty, but not neccesarily to provide health care, in part because of the adverse selection issue that Frances identifies. No insurer in their right mind will ever insure the sick. Of course, you could couple a negative income tax with other regulatory remedies (mandatory acceptance of insurance applications at a fixed cost, for example), though that would seem to take away the purported market efficiencies. Moreover, for that to work, you also have to regulate the content of the insurance contract (to prevent insurers from tailoring their coverage to deter the sick). In effect you end up with a government health care system funelled through thousands of insurers, which strikes me as a rather inefficient way of going about it.

Plus, I think a lot of supporters of vouchers would oppose a negative income tax on the paternalistic grounds that the poor will blow it on crack (In fairness, the minority of the poor who smoke crack probably will. Then again that subset currently sells their food stamps (at a discount) to the same effect, so it's not a particular compelling argument).


One of the issues with invoking consumer choice in medical care is whether an informed choice can be provided by the information available from the suppliers. More importantly, there is the issue of whether there is any choice available to the consumer. There is also the issue whether the preferences of the consumer for more income might conflict with society's requirement for the consumer to stay healthy to avoid externalities.

Ryan,
I don't understand this sentence "In that case, vouchers seem to provide less deadweight loss than bureaucracy." - why is bureaucracy an alternative here. Vouchers to buy private insurance, don't avoid bureaucracy, they multiply it. Am I missing something here?

"the payment methods are a relatively small part of what makes it the thing it is."

Agreed. It's Canada's great misfortune that we're located next to the US (at least in this singular respect - in most other respects we are quite lucky in our neighbour) because, when it comes to health care, our policy universe consists of them and us, notwithstanding that in many respects both Canada and the US are outliers globally. If you step back and look at the global policy universe, the truth of your statement becomes apparent. Dozens of civilized countries have publicly financed health care systems, but their delivery mechanisms vary dramatically (often in ways that are preferable, or potentially preferable, to our own).

Bob - To your first point, I oppose bureaucracy. Yes, the current US system is heavily bureaucratic, but in response I have two remarks:

(1) There is always a big difference between a public-sector bureaucracy and a private-sector one. The proof of this remark I leave to the reader as an exercise. ;)

(2) I was using the word "bureaucracy" as a euphemism for "all-encompassing single-payer monstrosity." I was trying to be nice about it, but I'm afraid in doing so I have miscommunicated what I meant. Government bureaucracy is always deadweight loss - that is precisely what the cash-versus-food-stamps analysis is all about. Private-sector bureaucracy is only a deadweight loss when barriers to market entry prevent competitors from streamlining production.

To your second point, prior to ObamaCare, the US system was fixing itself. Doctors were refusing to accept health insurance. That was Step One. Step Two was real price competition, but we never got that far because the central planners stepped in to save us from ourselves.

We agree on the negative income tax, and for the record, I am perfectly okay with crackheads spending their money unwisely on crack, because I'd rather have the freedom to kill myself than an enforced mandate to obey the Surgeon General. I readily concede that most other people disagree with me there. ;)

Ryan,
this doesn't make sense. I've worked in both the private and public sectors. Bureaucracy is bureaucracy. The market isn't a magic wand, and in health the problem is not so much that there is a multitude of private sector bureaucracies, it is that doctors have to deal with a multitude of private sector bureaucracies (so the cost is external to the bureaucracies themselves). But this is common knowledge. Why don't you know it?

"(1) There is always a big difference between a public-sector bureaucracy and a private-sector one. The proof of this remark I leave to the reader as an exercise."

I.e., you don't have any. It's a bald assertion and a silly one at that (akin, I might note, to the equally ridiculous "government good/market bad" type arguments made by the professional fools in the occupy movement).

"I was using the word "bureaucracy" as a euphemism for "all-encompassing single-payer monstrosity."

Well, gee, as between a voucher system and a monstrocity, it's no comparison. Of course, your argument might be more compelling if you were comparing voucher system to an actual description of an alternative.

In any event, as I noted earlier, the cash vs. food stamps debate offers little insight into the health care debate, because the health care market is signficantly more complicated than the market for food (arising from issues of moral hazard, adverse selection, externalities, consumer information). Trying to extent the analysis from one market to the other isn't particular useful.

JCI: re choice and externalities. The only way to really understand this is to stop talking about health care monolithically. Regarding measurable outcomes, efficient technological change, and cost assessment, cataract surgery is about as far from, say, a breastfeeding clinic or an emergency department as you can get. We don't lump highway maintenance and the auto industry together. In health care we do. So should payment systems vary according to the efficiency of the delivery system?

Agreed that people may make choices that impose future costs on others. The best example is chronic disease, where the burden is created primarily by low treatment compliance rather than overall morbidity (e.g., convincing 10 current diabetics to monitor their lifestyles more responsibly will offset the cost of 20 new diabetics). But this is complicated: a lot of "personal" health externalities are also created by the health care system--polypharmacy caused by poor case management, etc. But that has nothing to do with vouchers.

Bob - I take your complete dismissal of what I just said for what it is.

Reason - What I said to Bob was Private-sector bureaucracy is only a deadweight loss when barriers to market entry prevent competitors from streamlining production. In other words, so long as a private firm can cost-minimize, then there is all the difference in the world between a public and private bureaucracy. When the firm is no longer a cost-minimizer, then and only then do we see deadweight loss. This is not a controversial point of view.

"Bob - I take your complete dismissal of what I just said for what it is"

Yes, a complete dismissal of what you said. That was intended.

"This is not a controversial point of view."

And it completely misses reason's point. The issue is not that insurance companies aren't cost minimizing. It's that complying with their paperwork imposes significant costs on doctors and other health providers - which insurers have little incentive to minimize As reason noted, the problem is that the cost is external to the insurers. I'm happy to concede that insurance bureaucracies may be more internally efficient than a government bureaucracy, but that only looks at bureaucracy on the financing side, not the provision side. In any event, it's an empirical fact that health administration costs account in the US are much higher than in Canada (and I wouldn't hold Canada out as a model of efficiency), both in relative and absolute terms (by way of example: http://www.nejm.org/doi/full/10.1056/NEJMsa022033)

A single payor system may (will) have its own inefficiencies, but it (ironically) cuts down on the paperwork.

Why is this ironic?

(1) There is always a big difference between a public-sector bureaucracy and a private-sector one. The proof of this remark I leave to the reader as an exercise. ;)

Firmly and vehemently disagree that there is a "proof" here.

Bob, Bob... Relax. You and I agree on the largest aspects of this issue. There is no sense being so acrimonious about the rest of it. I am trying to avoid hijacking this blog post with a useless, off-topic discussion about the differences between private and public bureaucracies. It is enough that such differences exist. The particulars don't really matter with respect to Prof. Woolley's blog post, do they?

Anyway, I'm not going to argue with you about it. If what I said was so off-putting to you, then I apologize and yield to your impressive analytical superiority.

Mandos, Reason, Everyone - It was a figure of speech. I was trying to phrase things with a little humorous flair. As aforementioned, I was trying to avoid hijacking the post. Let's all have a coffee and keep our senses of humor intact.

Ryan: "(1) There is always a big difference between a public-sector bureaucracy and a private-sector one."

As I've argued before, competition matters, not whether something is publicly or privately owned. But as you've said, Ryan, this argument is (mostly) beside the point - let's just drop it.

Bob: " Trying to extent the analysis from one market to the other isn't particular useful. "

The point of this post was to say "o.k., there are all of these arguments that are used to argue that food stamps are bad policy. Why aren't they being used to argue that medicare vouchers are bad policy?" Another way of putting this: if we have a well-functioning market for health care - the kind of market that would allow a voucher system to work effectively - why do we need vouchers at all? Why don't we just have cash transfers? But if there are arguments against cash transfers, don't these same considerations argue against vouchers?

Shangwen: "The only way to really understand this is to stop talking about health care monolithically" I see the argument that different types of health care require different types of policy responses, but am not sure precisely how to incorporate this into the analysis here.

"Why don't we just have cash transfers? But if there are arguments against cash transfers, don't these same considerations argue against vouchers?"

Agreed, it's a good point.

I suppose one good argument for vouchers over cash in the context of education (and maybe children's health care) is that the intended beneficiaries of those services (children) are not the same as the persons who would receive cash (their parents/guardians) or that the receipt of those services represents a sociatal good (citizenship, in the context of education, or maybe health externalities in the health care context). In that context I can see a basis for saying "we don't care what you're [parent] preferences are, we are concerned about the well-being of your children/society". Mind you, I don't think that's what's driving the voucher discussion in the health care context in the US, so it doesn't take away from the main thrust of your argument.

Browning & Zupan. Spoonerism aside, interesting article.

"In economics there seems to be an ideology/complexity trade-off"

Isn´t this a truism? The world is always less complex seen through a ism, and walrasianism might just be the most simplistic ism out there (and it certainly does not have anything to do with reality))

Ryan:

So the alternative is "single payer" versus "vouchers." In that case, vouchers seem to provide less deadweight loss than bureaucracy. (I'm not sure anyone would disagree with me there, right?)

I disagree, in fact I'll go further and say you're flat wrong. Let us take voucher proponents at their word and say that people would and should purchase private medical insurance instead of Medicare.

It is an empirical fact that Medicare has the lowest administrative costs, broadly defined as costs less direct expenditures on patient services, than any private medical insurer in the United States. It achieves this through massive scale and aggressive use of its market power to cut supplier costs (doctors fees). In fact every medical system that has more public and single-payer features has lower administrative costs across the OECD. I will provide figures if you wish.

The NHS in the UK consumes the lowest proportion of GDP and is the most public of all system, with hospitals being owned and operated by the NHS.

Second, there is the huge, enormous assumption that Medicare recipients can purchase private health insurance that is a Medicare equivalent. Aside from individual illess rates increasing with age, Medicare was brought in in the 1960's because private insurers would not insure the elderly, there was a large-scale observed market failure in this area. The supply side is not guaranteed.

I used to sell travel insurance. Travel insurers in Canada are much more strict in underwriting on the over 55 set because they are far more likely to get sick. Insuring the elderly is a problem.

The implicit assumptions of the voucher argument makes me cringe.

PS:
If you think the market for health care is comparable to the market for food you must have missed this thing called asymmetric (or incomplete) information and you certainly missed adverse selection (a cash transfer have to be much bigger than the average cost of healthcare under e.g. vouchers).

Also, numerous studies has shown that people are really bad at evaluating probabilities, not to mention how bad they are at basing decisions upon them even if they are known. And if there ever were a case where the pool player analogy certainly did not fit, it is within healthcare where your first faulty decision might be your last.

Vouchers also have the side effect of creating another special interest lobbying for their own benefit. Competition is often used as a synonym for lowering costs, but it only lowers costs if someone knows, cares, and is in control of costs. It has not lowered costs in healthcare but supported the proliferation of care and services, often more towards comfort and convenience than capable and compelling.

There is another alternative to cash or subsidies - lower premiums due to increased deductibles.
3 people and I have been working with Mlliman, an actarial firm, for several months.
Next week, we should be receiving materials we will show to interested life insurers, who will consider forming a 501(C)(4) health insurance subsidiary.
With the premium savings on health insurance, the opportunity is available for more discretionary income spent on their life insurance products.
How much savings is available off of low deductible plans?
A $25,000 deductible reduces premiums by 60%.
A $50,000 deductible reduces premiums by 80%.
Yes, but how does a family come up with $25,000-$50,000 in savings?
For $300 a month, $25,000 in medical benefits can build over 36 months - and these benefits are paid-up. Like receiving a subsidy or voucher for 60% of the cost, the low claims participant has accrued his own subsidy with his own dollars - at an affordable cost of $300 per month.
Don Levit

I will be the first to line up and say that useless procedures happen. I'm a Type I Diabetic, I've been around the system often enough to see it happen. Vigilance and skepticism in micro-level medical choices does not equal dismantling an efficient macro-level provision system.

Frances:
"In economics there seems to be an ideology/complexity trade-off - that is, the more complex economic analyses tend to be less obviously ideological."
Not only in economics. Idealogues, by definition, can't handle complexity.
That's why they are ideologues. They obey Mencken's Principle that"to every problem there is a solution that is simple,obvious and compltely wrong."
It is not for nothing that in most dictatorships,
dissidents came from the technical classes (and artists who need freedom). You can't decree that pi=3 because it is simpler. (Indiana once tried to do that...).

Ryan,
" In other words, so long as a private firm can cost-minimize, then there is all the difference in the world between a public and private bureaucracy."
So you think it is a good idea to have health insurance firms go bankrupt and have patients suddenly thrown out of hospital because they can't pay anymore?

Besides which this is just dumb. Managers all cook with water. What can a private sector agent manager magically do that a public sector one (who also is under cost pressure) can't? Bureaucracy isn't a dead weight loss per se. It is there for a reason. It is always there when there are command and control systems. I spend a significant amount of my time at work dealing with internal bureaucracy. And the evidence just isn't on your side in this case. You are essentially arguing that things must happen, that empirically don't happen. You have a reality problem.

Why should I not regard you now as an idealogical fool? I thought you were a serious commenter.

Just as an aside here, the argument that private firms will be more efficient because of competition, is a dynamic argument, not a static one. Competition has its costs (for instance advertising, duplication of roles, excess capacity because of uncertainty about market share etc, etc). To be more statically efficiently than a government monopoly, it also has to potentially overcome economies of scale, higher cost of capital (including the need to make a profit) and perhaps higher labour costs. That doesn't mean it might not manage that, particularly if over time it is more innovative. But blindly arguing that private competition will always be more efficient that a government monopoly, seems to me just a fallacy. It is not at all obvious that it is. But there may be other reasons (e.g. greater choice) to choose to go that path.

reason - it's also important not to assume that government=monopoly and private=competition. For really bad service/high prices, it's hard to beat a private monopoly.

Why should I not regard you now as an idealogical fool? I thought you were a serious commenter.

Oh, please, reason, please! Please like me! I beg you...

The difference between me and a lot of other commenters out there is that I am open and honest about my biases. I don't hide from them, and I don't dress them up in a veil of feigned objectivity. I try to use humor and self-awareness to make my point as though to say, "My perspective is X, but of course one will probably only arrive at X if one follows my kooky quirks."

That's for your benefit, not mine. I could easily take your approach - and Bob's approach - pretentiously dismissing anything I disagree with as "wrong economics," but what good is a "conversation" like that?

Under a set of assumptions I don't always feel like laying out one-by-one, my logic here is valid. I say "valid" not "true," because in the world of logic there is a difference. You are entitled to disagree, and you are entitled to say stuff like, "Without knowing what your underlying assumptions are, I do not agree."

But this silly business where we all condescend to and dismiss one another is, in my opinion, contrary to the whole purpose of posting comments on academic blogs.

One last thing - Just because you're not open about your biases doesn't mean you don't have them and that they aren't impeding the credibility of your own argument. You could at least be forthcoming about them.

To sum up: I'm not saying I'm right, I'm just saying that's how I see it. If you're interested in debating the particulars, I can do that. If you're interested in scoring points and insulting each other, I just don't have any interest in that. I doubt Prof. Woolley wants a blog like that, either.

What an excellent discussion on public finance this has been! No wonder Arnold Kling quit.

Looking back on the post and some of the less excitable comments, it's worth addressing the assumption that various forms of provision will create different information-seeking incentives. The standard argument for vouchers over public provision (for example, schools) is that with the option to make the funds portable and discretionary, consumers (parents) will locate the better school and the inferior ones will get the signal. Yet school vouchers largely seem to have failed. Is this because parents need to be even further incentivized to get information? Or do schools, knowing that parents cannot flex the portable funds and distribute them incrementally (we'll sign him up for your math program, but not your crappy history classes) then become focused on locking parents in rather than promoting what is offered? (I'm speaking abstractly here, not trying to start a series of rants about schools.)

The assumption about the relative superiority of one scheme over another assumes that the consumer has latent information-consumption needs that can be liberated with the right policy. This is a fine assumption, but I don't think it's consistenly accurate across goods. The question of alternatives is relevant not just to alternative policies and markets, but also to realistic alternative consumer behavior.

And, the excellent Austin Frakt on vouchers.

reason:

Ryan has stated that he is an adherent of Austrian Economics. There are a multitude of websites which contain critiques of that school's methods and its preference for deduction over induction, its use of Rationalism and arguments of why conversations with Austrian adherent and others involve a lot of talking past one another.

Long story short: I am an empiricist, I have no problem with induction and I personally believe that Austrian methods are erroneous and fallacious.

That said, I like Ryan, I just wish to make clear our differences (probably typical for others) so we don't derail this excellent thread with a tangent about Austrian epistemology.

Shangwen - "The assumption about the relative superiority of one scheme over another assumes that the consumer has latent information-consumption needs that can be liberated with the right policy. This is a fine assumption, but I don't think it's consistenly accurate across goods."

Spot on - that's absolutely right.

This gets us to one of the points I wanted to make with this post: typically economists figure that cash transfers are better than vouchers. If vouchers are superior to cash transfers for health care, there must be a reason. It can't be that health care is a necessity, because food is a necessity, and economists dump all over food stamps. So what is it that makes health care special? And if there is something that makes health care different - e.g. adverse selection, moral hazard, etc - maybe vouchers won't work well, for the same reason that cash transfers won't work well.

Empirical evidence, and my own experience, would say that the voucherization simply drives consumption but does not improve decision-making. For example, in a typical employee benefits package, you have high consumption of dental care, and low consumption of psychotherapy, because they have respectively high and low levels of voucher support. In those public-sector packages that have high levels of voucher support across the board you get higher consumption. But my experience from working in both types of clinics is that patients are poor or inconsistent evaluators of service.

One reason why {provision > voucher > cash} may be the case is that, because few people are good evaluators of their health care needs, there are fewer externalities if we lower the cost of search behaviors. Since people have the highest level of information aversion at Time=0 (argued here, for example), we may as well make it easy to get in. Increasing the need for search behavior will increase intial access (also, empirically speaking, ease of access is not what drives excess consumption).

I'm speaking in the abstract here...please no anecdotes about your experiences with the Canadian health care system....

Shangwen: I'm interested in what sense you regard dental insurance as being equivalent to a voucher? Presumably it's because my dental insurance package allows me 1 check-up every X months, Y units of cleaning per year, etc., so it is essentially a voucher for check-ups and cleaning?

In which case it's pretty trivial to use a standard food-stamp type argument to show that people would be better off with their basic dental insurance cashed out.

We were talking on twitter about the higher % of Canadians with private health insurance - part of that is presumably because Canadians buy these voucher-type health insurance schemes, which are advantageous for providers of insurance and of medical care?

"Employee benefits" constitutes a spectrum. Dental coverage is very voucher-like; it does have a small portion of true insurance, I used such a plan to cover the fillings I needed on my teeth due to wear. I won't have that cost for another decade at least.

Disability insurance is much more insurance-like and geared to cover catastrophic loss of income due to accident or illness with a much more random distribution. It is a low-frequency, high risk of loss (to the insured holder) product.

Though dental and drug coverage come under a category called "Community Rating", risk is assessed only at the pool level and the pool takes all comers. It resembles a voluntary tax to cover dentistry or drugs, from the outside. Community rating is very prone to selection against the insurer and thus most community-rated plans have some sort of provision to ensure a broad and balanced pool, like mandating that an employer cover all its employees.

Community-rated personal health plans (*cough* some Manulife CoverMe plans *cough*) have very low claims limits, which is another strategy to reduce selection against the insurer.

A bit late, but can I say how much I appreciate this post?

From outside the discipline the idea that "cash transfers are better than X", where X = vouchers, gifts, subsidies, and pretty much any other intervention or transfer mechanism you can think of, comes across as a key insight that economists own and love. I've been catching up on the CBC Invisible Hand podcasts, for example, and just rereading Schelling's "Choice and Consequence" and it is front and centre in both. But then, once you've discarded all those other inefficient ways of intervening or transferring, you often get (and I know that Stephen Gordon of this parish is innocent of this) the one-two that you point to here: you don't want to transfer because you lose incentives, or an aggressively progressive tax system can't be made to work anyway. That one-two leads many to suspect that the game is rigged, and that the cash transfer argument is a bit of trickery carried out with a flourish of one hand, designed to focus attention while the other (invisible) hand reaches into my pocket.

So it is always great to see an ill-informed view voiced by someone who knows the landscape better. I hope those economists who understand the limits of markets and the limits of cash transfers can gain a stronger footing and make the presentation of the discipline to those of us in the outside world a little more convincing.

Frances, I was assuming that a voucher was essentially a certificate of payment, i.e., "pay unto the bearer one hip replacement", or some package of insured care that can be shopped to various vendors. I believe this what they're discussing in the US. Or is there another meaning of the term?

Frances,
"For really bad service/high prices, it's hard to beat a private monopoly."

I don't think I was denying that. Of course the big difference here is that the managers or/and owners of a private monopoly will try to grab all the consumer surplus they can. The employees of a public monopoly may try to do the same, but then at least politics, and institutional structures (e.g. ombudsman) may counteract them.

Haven't gone through all the comments, but isn't it a bit unrealistic to assume that there is a choice in how much medicine one consumes.
I thought one has to buy the medicine doctor's prescribes (I am talking in terms of quantities without additional complications of price of medicine in terms of other good).
Two pointes:
1. I would assume that the elasticity with respect to medicine is 0 (perfectly inelastic).
2. The comparison should be modeled based more on Leontiff type of diagram in one good (medicine). A person enjoys other goods only if he has minimum health (i.e. at least a minimum amount of medicine).

reason - you've identified a key reason why private monopolies can be worse than public monopolies.

Abhay - the movie Sicko contains many inaccuracies, but if you have a chance, watch the first ten minutes of it. There's a very nice example that shows that the demand for medicine is not perfectly elastic - a person who was told "you can save your 4th finger for $20,000 and your middle finger for $60,000". He chose to save his fourth, but not his middle finger.

Determinant,
"Ryan has stated that he is an adherent of Austrian Economics." ah I see, so I was correct. It's just he didn't like the technical term I used to describe him.

Oops - I forgot the smiley with that. --)

"The employees of a public monopoly may try to do the same, but then at least politics, and institutional structures (e.g. ombudsman) may counteract them"

Although the same could be said of private monopolies being controlled by politics and institutional structures (think regulation in the telecomunications industry or of utilities). IThe difficulty in both cases is the (in)ability is that the monopolists generally have better information about costs than the regulators.

As an aside, why don't we consider the employees of a public monopoly to be private monopolists. Generally their union, a private organziation whose sole purpose (and raison d'etre) is the advancement of its members interests, has a monopoly on the provision of those public services. It ties in nicely with Frances' other post on framing. Generally, providing a private entity with a monopoly on the provision of public services would be abhorent, but call it a union, and people will go to the barricades to defend it. In that light, maybe McGuinty should have spun the wage freeze he's imposing on teachers as price regulation of a monopolist.

Bob Smith: A a labor organizer ( one component of my Ken Kesey whole), we try to instill professionalism and sense of duty to the public amongst our public service members. A private monopolist would not do that.
Public service ethos exist. Private ethos is the one Adam Smith tried to counteract.

Bob Smith
"Although the same could be said of private monopolies being controlled by politics and institutional structures" ..

well yes that is an alternative. But are all private monopolies regulated? And yes there are difficulties in differences in information about costs - but they can also be exaggerated. What was that line about the price of liberty and vigilance?

P.S. In case anybody is interested, I thought of a good way of explaining the various schools of economic thought in charicactures involving maps and territories:

A saltwater economist will often confuse the map with the territory.
A freshwater economist will insist that his map IS the territory.
A post-keynesian will question whether maps contain any useful information about the territory.
An austrian will insist that the territory can only be known by interpreting the cryptic writings of their holy prophets.

"we try to instill professionalism and sense of duty to the public amongst our public service members"

Keep trying. Look, there's no doubt that there is a a "public service ethos" (part of which is "That's not my job"). But the notion that members of the public service don't act in a manner to maximize their private interest is both illusory and a recipe for lousy public policy (every time I hear a teacher's union explain that they're going on strike or working to rule for the sake of the children I want to barf).

I'm a big fan of Julian Legrand's work challenging the assumptions behind the motivations of public servants (no knucle dragging neo-con he, he was an advisor to the "new" labour government in the UK). His point was that the traditional assumptions, that public servants are motivated by a "public sector ethos", by a form of altruism, leads to exploitation of the public by those same workers. No doubt public servants (or at least some of them) may have altruistic motives, but they're not saints, they have self-interest like everyone else (to deny that is to deny their humanity). In Legrand's words, they're not knights, but knaves (or, at least, have knavish-qualities).

"But are all private monopolies regulated?"

Generally, yes. And to the extent they're not reguled explicitly, they're subject to the application of the Competition Act. More to the point, the same people who are enraged by the Ontario governments regulation of private monopolies in the public sector - i.e., imposing contracts on teacher's unions - (and , let's be clear, that is a private monopoly enforced by public policy) are the ones who are the most zealous about regulating private monopolies. That's the disconnect that I can't wrap my mind around.

Bob: Public sector workers are no saintlier than those who, by pure randomness, work in the private one. But ideological training may convince you that your ethos is part of your compensation. Soldiers don't kill for money ( only criminals and mercenaries do and everybody knows the distinction) and they don't die for money (criminals never do and mercenary do it only by accident).

New Labour might not be neocons but their contempt for people at large may have been even worse. That Tony Blair was a sanctimonious nominalist may be part of the explanation.

"Public sector workers are no saintlier than those who, by pure randomness, work in the private one."

My point exactly. So why are private monopolies bad, while private monopolies in the public sector are good?

Public sectors workers are the same as private one, including the deputy minister who long for a bigger limousine. But, unlike, those in the private sector, especially managers, they are not taught that their prime duty is to steal everything in sight.
A doctor who performs an unnecessary procedure will be shamed by(ok a dwindling as we have put the market values in service professions)) number of his colleagues. A bank president will get a bonus and be named Man of the year. As well as "doing the work of God" and be a job creator...

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