Saturday, August 30, 2008

Health care and the unseen

Frederic Bastiat wrote a now-famous essay titled What is Seen and What is Not Seen. In it, Bastiat discusses the principle of economics that inspired Henry Hazlitt's one lesson in economics: "From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." (Economics in One Lesson) These long-range consequences, or the consequences for all groups mostly consist of Bastiat's unseen. Because these consequences are unseen, it is easy to discount them in the public discourse.

There has been a great deal of discussion on the problems of health care and education, among other issues of social concern in the US during this Presidential race. What I wanted to discuss in this post, in terms of the seen and unseen, is the propensity to focus on a single issue and discuss ways that government revenues could be used to thoroughly solve that problem. A kind of tunnel vision sets in with each issue in turn: health care, education, the environment, national defense, and so on.

Let's start with health care. The Federal government collects more than $2 trillion a year in revenues. With $2T/yr. we could provid free, gold plated health care several times over to every citizen. Or could we? Let's consider brain surgeons. If we spent $2T/yr. on health care, would there automatically be enough brain surgeries to go around? Would there be enough of the latest CT scanners to go around? More money - in itself - does not create more health care. Granted, as we poured trillions of dollars into healthcare, new students would flock to the field, new medical schools would open by the bunch and medical technological investment would skyrocket, etc. After some time, there would be a great deal more brain surgeons than there are today, a great deal more CT scanners than there are today and even the poorest person could go in for the kind of health care that a US Senator or billionaire investor gets... every day of the week.
But what of education, or defense, or any of the other things which the government spends money on? Clearly, if we're spending the Federal budget on health care, we can't be spending it also on education and defense.

In the case of health care, the additional health services that could be purchased by the poor with government subsidy are the seen effects. The unseen effects are all the resources which must be diverted to purchase the additional health care resources. Spending the entire Federal budget on health care is an intentional hyperbole to illustrate the point that every increase in spending on one thing is a decrease in spending on something else. Every smart kid that becomes a brain surgeon didn't become a groundbreaking physics researcher. Every hospital that is constructed is some number of corn silos or factories that weren't. Ambulances are built instead of a grain harvester. In other words, the more money the government spends on one thing, the more resources that are diverted from other things.

In general, the government cannot do anything to make more resources. The things that it could do (for example, building factories or subsidizing births), it turns out that governments are extraordinarily bad at (cf the Soviet experiment). It's one thing to wish there were more resources and that there were no human wants. In most parts of the West, this goal has been achieved many times over, depending on when you set your point of reference. If we asked an early 19th century American whether there were any poor people left in America, the answer would likely be "no." But over against wishing is the problem of actually creating more resources.
Economists speak of two problems: how to slice up the pie and how to increase the size of the pie. The problem of taxing and spending is partof the problem of how to slice up the pie. But while slicing up the pie of government revenues (which account for as much as 50% of the nation's entire economic product), we have to be aware of two factors: the more revenues we divert to any one use, the more we are diverting away from other, possibly more important uses and not all uses are equally valuable.

This should be obvious, but people sometimes get confused on this issue when it comes to "make work" projects like those of the New Deal. The Civilian Conservation Corps (CCC) employed people clearing trails through forests and doing other menial tasks. Those people who were employed received a good deal (seen), they were employed. But the monies used to pay them could have, perhaps, paid other workers doing more valuable work than clearing trails in the forest. Many employments can be surmised to have been more valuable than clearing paths through the forest - perhaps baking bread or planting corn during a time when people were literally starving to death. The point is this: when resources are diverted from a more valued to a less valued use, society as a whole is impoverished that much.*

Let me give a specific example of this "tunnel vision" effect whereby we focus in on the seen while ignoring the unseen. I watched a History channel presentation on the Indonesian tsunami some time back. The head of the UN department which is tasked with blowing hot air about natural disasters said something to the effect, "This should have never happened. It could have been prevented and we must make it a priority that such a disaster never occurs again."

Basically, what he's saying is that the US has sonar early warning systems that would likely have prevented many deaths from occurring in Indonesia had similar equipment been installed in that region. His call to "make it a priority that such a disaster never occurs again" (paraphrase) is basically a plea to have international monies used to install such early warning systems throughout the world.

Now, let's go back to the brain surgeon vs. physicist dilemma. You can either install more early warning systems throughout the world, or you can spend more on health care. But you can't do both simultaneously, all things else being equal. Which do you choose? It doesn't matter to me, for the sake of this discussion, which you think is more important, all that matters to me is that you understand that it is a choice.

This brings me to the issue of the good which government spending does. It is often mentioned that when the government builds a road, for example, the road benefits us because we can travel over it and transport goods across it, thereby reducing the costs of doing business, and so on. But no one argues that government spending does no good whatsoever. The money which a purse snatcher spends out of the snatched purse also "does good" in the same sense. Rather, what is at issue is whether the money is being put to its most valued use in building a road.

So, when debating how we could use some number of billions of tax revenues to fix healthcare or some other number of billions to fix education, or some number of billions to build ever more baroque national defense weaponry, keep in mind that spending more on one thing means spending less on another, unless the amount of resources are increased - something which only occurs through capital investment (and new births). What we should be asking is not whether a decent society will stand by while someone dies for lack of money for a life-saving surgery, since it is always possible to divert ever more money away from other uses into medical expenditures. Rather, we should be asking: For each of the $3T the government spends each year, is the thing the government spends it on its most valued use? That is, does society garner the greatest incremental benefit from that dollar being spent on X insteady of Y, Z and W?

Some people protest that such mundane calculations are evidence of a mind which is cold and uncaring, but I say it is exactly the opposite. The one who refuses to face reality and count the costs of his decisions is an ignoble fool, no matter how loudly he protests his desire to "save humanity", "feed the poor", "educate the masses" or "provide universal health care to all." Willful ignorance and waste of much-needed resources** through carelessness are not virtues in my book.

Do not count only the seen, but also the unseen.

*I want to make clear that when I say "society as a whole is impoverished" I am not speaking of some kind of average wealth whereby a few can be super-duper wealthy while the rest live in squalor, balancing out to a decent, "average" wealth. The loss of the production of more valued resources to the production of less valued resources generally hurts the poor the most because each contraction of the resource pie will hurt the poor by proportion more than it hurts the wealthy. The rich capitalist might forego commissioning that yacht he'd been dreaming up, but the poor forego food, water and medical services.

**During the height of the Great Depression, tons of food were destroyed by the government to enforce agricultural price supports while people were dying of starvation. Waste - which so many armchair policy debaters casually dismiss when raised as an objection to government policies - can be a matter of life and death.


Tim said...

You bring up one of the biggest issues people have in dealing with economic realities. Fortunately, we can realize the extent of the unseen effects if we train ourselves to just think it through, even without any economic training. It can be difficult at first, but becomes much easier over time.

Clayton said...

I agree. I think that, politically, those considering the unseen consequences of policies are at a disadvantage in debate because unintended consequences usually don't fit in a sound byte, but the seen effects always do (e.g. "I have created more jobs!")