Chad Perrin: SOB

7 March 2008

the unintended consequences of “public services”

Filed under: Cognition,Liberty — apotheon @ 11:35

Here is a typical case of someone who doesn’t “get” the concept of unintended consequences:

People DIE because they can’t afford to go to the doctor. Should we let people DIE because we dont’ want to “skew the markets?”.

When you hose up market forces on a broad scale, you affect the productivity of millions — even billions (especially considering the worldwide influence of the US economy). A single minor little market downturn, a “hiccup” like a three year recession, can have far-reaching effects that can lead to entire industries in danger of insolvency. This sort of far-reaching effect can mean the difference between life and death for millions of people whose circumstances turn on the fine line between fed and not-fed, between medicated and not-medicated, because their particular corners of the world depend on a worldwide economy to determine the timing of their own local economy’s growth, to determine whether it will grow from third-world pesthole to sustainable growth today or three years from today.

A strong economy generates a lot of wealth. A weak economy destroys it. I’m talking about “wealth” in the economic sense of the term, derived from an older term for “well-being” — “wealth” meaning the resources for maintaining and improving quality of life. Because wealth deteriorates over time (shoes get old, food goes bad or gets eaten, et cetera), it must be renewed. A strong economy, by generating a lot of wealth, renews existing wealth and creates new wealth. The “velocity of capital” (another economics term) is a component of a strong economy — as money moves around, it serves as an economic resource used to provide incentive for the generation of wealth. I bring it up here to demonstrate the distinction between generation of wealth and “making money”, and that one person having more money than another on average (and even increasing the gap between the two, on average) doesn’t mean that there are not improvements in the quality of life for both — even if the average economic value of the liquid assets of one individual remains constant over time, money flowing through that person’s ownership can contribute to the generation of wealth in that person’s life, improving that person’s quality of life.

Manipulations of the market such as ham-handed redistribution of capital and confiscation of resources to prop up poorly conceived “universal” services has several major negative consequences. These are the two biggies that immediately occur to me (and should occur to anyone with even the most rudimentary understanding of economics):

  1. It destroys many economic incentives to generate wealth. This leads to drops in the velocity of capital, which further damages the economic incentives to generate wealth. The people most affected, statistically, are those in the “middle class” range of the economy, though those who feel the most painful effects are those on the very bottom rungs of the economy, as the bare minimum wealth they may have been able to maintain to stay above the line between subsistence and death is eroded.

  2. An authoritarian centralization of a service industry, such as healthcare, directly damages the private sector in that same industry, dragging it substantially away from a growth industry toward a “zero sum game” condition where in order to provide that service to one person it must be taken away from another. This becomes particularly devastating to quality of life as the number of people in the world in need of that service grows (thank you, breeders).

Thus, people on the bottom end of the economy get screwed from both sides by the “benevolent” policies of “universal healthcare”.

In order to grasp these problems, of course, you need at least three things:

  1. some minimal familiarity with the concept of unintended consequences of an action within a complex system, and how they might come to pass

  2. some minimal facility with basic arithmetic

  3. imagination greater than that of the average dung beetle

See number 2 in there? That’s why it is just incredible to me that so many people who advocate a strong math background seem incapable of doing the math to understand the negatives of “universal healthcare”.

9 Comments

  1. […] the unintended consequences of “public services” […]

    Pingback by Chad Perrin: SOB » confusing correlations — 7 March 2008 @ 11:46

  2. I think it’s a bit unfair to bash others for not understanding math or imply their understanding is flawed because it’s insufficiently quantitative when you don’t provide any numbers or calculations to back up your conclusions. Of course universal health service has some costs, every government program (or private for that matter) has costs and harms. The question that matters is whether the benefits overwhelm the costs. Universal health care could potentially provide the following benefits over the private system.

    1) Decrease the incentive for the poor or uninsured to avoid preventative care yielding decreased costs when more extreme outcomes are averted.

    2) Contributing to the common health by encouraging the poor or uninsured to get their communicable diseases treated.

    3) Eliminating the cost to the market imposed by the uneven subsidization of health care, e.g., by letting corporations deduct health care you encourage compensation to be delivered inefficiently in health care beyond the optimal level and discourage individuals from taking time off or working part time.

    4) Create a (perhaps irrational) feeling of safety and security in people and alleviate people’s worries about finding themselves without health insurance.

    5) Increase overall utility by transfering resources to those they will make a larger difference too.

    6) Merely by decreasing the number of choices people have you often reduce stress and worry. Furthermore you may reduce the costs and waste of irrational health care choices (either too much or too little risk)

    7) Cost savings from eliminating multiple health aid programs for the poor and potential benefits of standardization.

    Of course the harms you cite are certainly a serious concern and they may or may not outweigh the benefits. Indeed you will be able to cite many ways it will make things less efficent or hurt people but I think your argument about reduced incentive for people to work harder is overblown.

    Even if people were economically rational the strength of your argument would depend largely on rate at which extra monetary incentive encouraged greater work. If most people have a certain amount of work below which working less isn’t valued that highly while working more than that would require significantly increased wages (as most people probably do feel) then the effect of increased taxation would be relatively small. On the other hand different shaped curves might make it huge.

    However, I suspect the assumption of economic rationality isn’t that good here because most people work/strive as much for the social respect that comes from “being a success” as a desire for the actual cash (even if they wouldn’t say this). Thus I’m skeptical that higher tax rates are that huge a net loss.

    I don’t know whether on net a national health system is a good idea but it can’t be shown to be a bad one without going into the details and adding up harms and benefits.

    Comment by TruePath — 7 March 2008 @ 12:55

  3. I think it’s a bit unfair to bash others for not understanding math or imply their understanding is flawed because it’s insufficiently quantitative when you don’t provide any numbers or calculations to back up your conclusions.

    I don’t fault anyone for coming to unsound conclusions based on faulty or lacking data. I fault people for coming to unsound conclusions because they don’t care enough to seek out relevant data.

    Decrease the incentive for the poor or uninsured to avoid preventative care yielding decreased costs when more extreme outcomes are averted.

    That assumes “universal healthcare” (in the political sense of the term) ever actually works in some way, and that those are the only cost effects.

    Contributing to the common health by encouraging the poor or uninsured to get their communicable diseases treated.

    That assumes there’s not a significant drop in the efficacy of the healthcare system compared with the conditions of a sane privatized system.

    Eliminating the cost to the market imposed by the uneven subsidization of health care, e.g., by letting corporations deduct health care you encourage compensation to be delivered inefficiently in health care beyond the optimal level and discourage individuals from taking time off or working part time.

    That’s so full of unsupport(ed|able) assumptions it’s not even worth responding without further elaboration on your part.

    Create a (perhaps irrational) feeling of safety and security in people and alleviate people’s worries about finding themselves without health insurance.

    . . . because warm fuzzy ignorance is always an improvement.

    Increase overall utility by transfering resources to those they will make a larger difference too.

    . . . and decrease overall utility by transferring resources away from those who would use it efficiently, not only reducing their ability to generate wealth, but also reducing their incentive to do so. I direct you back to the essay to which you’re responding, since you seem intent on offering counterarguments that ignore the original argument.

    Merely by decreasing the number of choices people have you often reduce stress and worry.

    By decreasing the availability of options, you eliminate many of the economic forces that contribute to greater value in the available options. In other words, eliminating market competition destroys quality of service. Good job — a few people get that ignorant warm and fuzzy feeling, and thus we get an improvement over service that actually works.

    Furthermore you may reduce the costs and waste of irrational health care choices (either too much or too little risk)

    . . . by imposing the costs of having only one bad choice — a choice that is only “rational” when the alternative is nothing at all.

    Cost savings from eliminating multiple health aid programs for the poor and potential benefits of standardization.

    . . . which are actually part of the very same problem you propose as their solution.

    Of course the harms you cite are certainly a serious concern and they may or may not outweigh the benefits.

    Trying to weigh the harm of such a system against a bunch of imaginary, generally unrealizable benefits seems kind of silly to me.

    Indeed you will be able to cite many ways it will make things less efficent or hurt people but I think your argument about reduced incentive for people to work harder is overblown.

    I think you’ve just admitted you don’t know a whole hell of a lot about economics.

    For a simple hint, consider the fact that one of the effects of stripping resources away from those who would otherwise have been able to use those resources for good effect is to discourage them from pursuing similar avenues of wealth generation. Reducing incentives for efficient effort pushes people into inefficient effort that eliminates the total effort involved. Damaging the chances for success in risky activities damages the motivation to engage in those activities, thus reducing the overall benefits gained from success in individual endeavors.

    Please, think about an idea before declaring your skepticism of it.

    Even if people were economically rational the strength of your argument would depend largely on rate at which extra monetary incentive encouraged greater work.

    You miss the point — that the effort that provides the greatest (overall and long-term, as opposed to individual and short-term) economic benefits is also most often risky. Undercutting the personal rewards also increases the risk. The end result is that undercutting personal incentives damages the most valuable efforts first, thus significantly damaging the overall health of an economy. In other words, it’s not about people being solely (or even primarily) motivated by money, so much as it’s about how much you make it cost people to engage in valuable, efficient economic activity.

    Thus I’m skeptical that higher tax rates are that huge a net loss.

    . . . and taxation is only one factor in many that reduces economic incentives for wealth generation.

    I don’t know whether on net a national health system is a good idea but it can’t be shown to be a bad one without going into the details and adding up harms and benefits.

    Much of the harm (discarding the matter of ethics for the moment) of “public services” is in the long-term depression of the efficiency of the economy. Let’s take five years as a period for measurement:

    1. In the first five years, economic incentives are reduced and private industry in that sector is undercut. The economy, and thus overall improvement of quality of life, is set back.

    2. In the next five years, the same thing continues to happen, in addition to which what little progress is made builds upon previous successes that have already been set back by the previous five year period’s effects.

    3. In the third five years, the same effects as in the first five years continue. In addition to that, the setbacks of both the previous five year periods’ effects are compounded by continuing setbacks.

    4. . . . and so on.

    Given fifty years, the losses are incalculable. The main danger of something like a “universal healthcare” policy is not that the system would become insolvent and collapse under its own weight — it’s that the system might ultimate achieve a sustainable equilibrium, and thus impose incredible long-term costs that grow along an accelerating curve.

    Even if you only admit to a minimal level of initial harm to a “universal healthcare” system, the compounding nature of the harm would quickly overwhelm the static nature of the benefit — benefit, that is, that is highly suspect itself.

    Comment by apotheon — 7 March 2008 @ 02:13

  4. A universal healthcare system only has to provide coverage to those not able to achieve it otherwise, e.g. through employment or private coverage, so at its basis it’s just a form of subside. So I’m only look at this as a form of subside.

    Governments more often than not do subsidies poorly, and subsidies always skew markets. For example the US food industry skewed by agricultural subsidies, coincidentally to the detriment of our health. But it’s a big part of the US economy and culture.

    Subsidies cost money, which comes from taxes, which affects economic growth. On the other hand, taxes are a means to inject economic growth (stimulus package anyone?)

    Health always benefits from economic growth (just look at developing countries). But the reverse is also true, economies benefit from healthy populace, increase life expectancy and you increase GDP.

    It’s very important to separate unintended consequences from the fallacy of slippery slope, which has a tendency to overweight some factors and overall discount the effects of market correction.

    Comment by Assaf — 7 March 2008 @ 04:08

  5. A universal healthcare system only has to provide coverage to those not able to achieve it otherwise

    . . . and those who choose to game the system — and, ultimately, for just about everyone, since the immediate effect of subsidized healthcare on a private healthcare system is to drive the price of unsubsidized healthcare upward.

    Governments more often than not do subsidies poorly, and subsidies always skew markets. For example the US food industry skewed by agricultural subsidies, coincidentally to the detriment of our health. But it’s a big part of the US economy and culture.

    I wouldn’t call it “coincidental”, considering subsidies favor those with power (creating a power aggregation feedback loop) and create inherent conflicts of interest. The fact “it’s a big part of the US economy and culture” is a bad thing.

    On the other hand, taxes are a means to inject economic growth (stimulus package anyone?)

    If you think that’s an efficient way to “stimulate” the economy — well, I really don’t even know where to start.

    Health always benefits from economic growth (just look at developing countries). But the reverse is also true, economies benefit from healthy populace, increase life expectancy and you increase GDP.

    . . . which fails as an argument for the efficacy of a “universal healthcare” system. The name of that logical fallacy is “affirming the consequent”, if you want to look it up.

    It’s very important to separate unintended consequences from the fallacy of slippery slope, which has a tendency to overweight some factors and overall discount the effects of market correction.

    I agree. I also have no idea why you brought it up, since nobody here proposed a “slippery slope” argument.

    Comment by apotheon — 7 March 2008 @ 05:02

  6. “and those who choose to game the system”. It would be foolish not to factor for those.

    “the immediate effect … is to drive the price of unsubsidized healthcare upward.” Which some people are willing to accept.

    “I wouldn’t call it ‘coincidental'”. It wasn’t designed to promote heart attack and obesity, but simply to create self-sufficiency in certain agricultural products. That affected price and availability of certain products, but that skew took years to unravel.

    “If you think that’s an efficient way to “stimulate” the economy” Not something I said. I’m pointing out that taxation is not loss of money, the majority does return back to the economy, although it’s never as efficient as free markets, and rarely has the same growth potential (exceptions that prove the rule as just that).

    Comment by Assaf — 7 March 2008 @ 05:30

  7. “the immediate effect … is to drive the price of unsubsidized healthcare upward.” Which some people are willing to accept.

    That acceptance doesn’t change the economic consequences of that. See the essay at the top of the page for more details.

    “I wouldn’t call it ‘coincidental'”. It wasn’t designed to promote heart attack and obesity, but simply to create self-sufficiency in certain agricultural products. That affected price and availability of certain products, but that skew took years to unravel.

    There’s direct, active malfeasance, and there’s depraved indifference. Look into a little company called Monsanto for details on how your health is essentially under assault by the most-subsidized agricultural entity in the world.

    . . . which, oddly enough, has close ties with the Clintons. That’s another story, though.

    I’m pointing out that taxation is not loss of money

    I don’t think I ever phrased it as “loss of money”. Even if I did, it would have been in an informal sense of the immediate deprivation of some part of an individual’s personal resources, and an effective price floor influence on labor without any attendant improvement of compensation for that labor. It is, however, a causative factor in a loss of wealth — which should be obvious from my mention of price floors and compensation, not even counting the broader implications of temporarily removing capital from circulation.

    Comment by apotheon — 7 March 2008 @ 05:38

  8. Look at the Agricultural Adjustment Act of 1933. Those were the economic roots for deep fried junk food and carbonated sodas.

    “It is, however, a causative factor in a loss of wealth” Yes, but you don’t have to convince me of that, I subscribe to the same economic theories that you do. We just disagree on the numbers. And I don’t want to discuss the numbers, just point out that we’re running them through the same formula, and we’re still able to reach different conclusions.

    Comment by Assaf — 7 March 2008 @ 06:13

  9. If your reasoning is good, I’m happy to consider it. “Sam” in the other discussion, however, certainly does not fit that description — and is all too representative of the “opinions” of supposedly intelligent people with a lot of math and other formal education behind ’em.

    Comment by apotheon — 7 March 2008 @ 11:58

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