Imagine if a respected conservative economist, a former adviser to President George Bush, tried to tell us, in the summer of 2009, that the best way to set up a well-functioning mortgage market would be to set up a system "lightly regulated to ensure that the market works well."
My reaction would be that now would not be the best time to try to make that argument. But for conservatives, regardless of what domain one is discussing, that's still the most popular solution to any problem. In Sunday's New York Times, Harvard's Greg Mankiw, former chair of Bush's Council of Economic Advisers, argued that "A competitive system of private insurers, lightly regulated to ensure that the market works well, would offer Americans the best health care at the best prices."
Paul Krugman was quick to cackle.
Um, economists have known for 45 years -- ever since Kenneth Arrow's seminal paper -- that the standard competitive market model just doesn't work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.
"[L]ightly regulated" private health insurance is a fantasy, because the whole point of a for-profit insurer is to charge premiums that expect the expected payout under the policy; as a result, no sick person would be able to afford insurance. You don't need adverse selection or moral hazard to explain this: if I know someone has an expensive form of cancer, I'm going to charge him $100,000 for health insurance, and he won't be able to pay. The free market for health care is one in which sick people die, and smart people who ignore that point are being less than honest.
Greg Mankiw's job security doesn't depend on getting citizens who overwhelmingly support health care reform to vote for him, so he can safely make the same arguments that opponents of an increased government role in providing health care insurance have been making for decades without suffering anything worse than nasty jabs from other economists. But Republican politicians have no such luck. They are converging on a different approach -- the idea that any so-called "public plan" in which the government competes with the private sector is by definition unfair. Rep. Paul Ryan, R-Wis., articulated that party line before some approving SquawkBox anchors on CNBC last week, arguing that since the government didn't have to pay taxes, and could use its fearsome leverage to get lower prices from medical service providers than the private sector was able to do, ultimately, any public plan would mean the doom of the private health care insurance industry.
Some people, of course, would not shed too many tears at that outcome. Others might wonder what could possibly be wrong with the government taking advantage of economies of scale to get prices down. That would seem to be a feature, not a bug. Still others argue that the current negotiations over health care reform are specifically intended to result in a system in which the government does not gain an edge via some form of unfair subsidy.
But it seems here that there is an internal contradiction in the conservative critique. On the one hand, we are told that a government-run health care plan would be a disaster -- it would "ration" care or result in long waits for service or otherwise be some kind of Kafka-esque bureaucratic nightmare. And yet at the same time we are told that the low prices offered by the government will destroy the private sector, where the wait times are short and the service high quality. If private sector health care insurance providers are really so fragile that they can't compete on either price or quality, then they maybe they don't deserve to survive.
UPDATE: Brad DeLong and FreeExcahnge add their own takes on Mankiw.
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