Competition Deniers

In this post at The Incidental Economist, Aaron Carroll agrees that Obamacare may cause hospital layoffs, but tells us that’s to be expected because, after all, if we contain costs, there will be less money for wages and profits. And Carroll further concludes that the result would be the same, even if the health sector were organized more toward markets and competition:

So if we manage to spend less on health care, it doesn’t matter if we do it by the most free market method, or by the most price-setting regulated method.

In making a point about hospital layoffs, Carroll misstates what we might see from a market approach, implies that centralization is essentially equivalent to markets, and seems confident that price controls and central planning will reduce healthcare spending. All of his assertions are questionable.

In a competitive market, cost reductions would shift the market supply curve down, resulting in lower prices and higher output. But higher output, even with efficiencies, could lead to more hiring, not layoffs – it all depends on the shape of the various curves. So Carroll is jumping to conclusions with respect to how a market would operate.

If total spending declined in a competitive market scenario, even with higher output, resources might indeed flow out of the healthcare sector. But it’s not unreasonable to believe that such flows to other areas of the economy would be smoother than what we would see with the “brute force” actions of central planners. So Carroll’s attempt to equate competition with central planning doesn’t succeed.

Carroll is assuming that a centrally planned healthcare economy would actually contain costs. Any government theoretically can contain costs simply by instituting price controls and limiting access to care (to handle the excess demand that a price decrease would create). But when we reject markets, all that’s left is politics and containing costs under a political scenario (replete with the usual favoritism, protests, bribery, corruption, etc.) is another matter entirely. Carroll’s assumption is a little too heroic.

Even if a central authority succeeded in containing costs through price controls and limited access, it would most likely be at the expense of quality. Big government advocates like Carroll pin their hopes on centrally directed incentives and strategies involving evidence-based medicine, ACOs, IPAB, electronic medical records, and so on, but in so doing they ignore the most fundamental fact of social life.

This is the fact that centrally planned economies are decidedly inferior to economies that rely on markets and competition. The 20th century experience in many European and other countries clarified that for us, yet we ignore the history:  it’s as if we’re back in the 1930s when economists argued that central planners could perform just as well as markets. Subsequent decades of the century proved them wrong and should have settled the matter once and for all.

Some healthcare markets may be natural monopolies (e.g., hospitals located in sparsely populated areas) for which regulation may be appropriate, but there’s no reason to believe the healthcare sector is generally exempt from the benefits of competition. So it’s unlikely that centrally directed healthcare will surpass what we could expect from an approach based on genuine competition.

But these facts don’t seem to matter to Carroll and other liberals – evidently, now that such liberals are on the scene, things will be different. And so we have the liberals’ version of “American exceptionalism,” which holds that nothing about America is exceptional other than our emerging central planners.

P.S.:  Of course, even if a centrally directed economy and its central planners could match the results of a competitive market, we should still prefer markets over central planning because a market-based society would mean greater freedom.

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