A Response to David Rose

David Rose, professor of economics at the University of Missouri, writing in today’s Christian Science Monitor, wants to chuck the entire health care system as we know it or have proposed it to be. He would replace it with a simple system in which every citizen would receive a health care voucher which would be used to buy what? He doesn’t say. It’s what I call a cute idea. It’s cute because it is both attractive and naïve.

I agree that the current non-system is needlessly complex and inefficient, and that the bills currently before congress offer only marginal improvement. But his proposal is a little like the various tax simplification schemes that come up now and then. The legislative process, by its very nature, is incapable of producing a simple product. That’s not because legislators are incompetent. It’s because public and private interest groups will always lobby to tweak a simple idea to provide for some special advantage of value to them. It’s crazy to rail against the “special interests” because you and I are part of those interests in one way or another by virtue of our age, sex, occupation, location, or particular interests. That’s life in a democracy. If you want simplicity move to a dictatorship.

Rose’s objection to the current legislation is based on his understanding of the fallacy of composition in which an advantageous change in one part of a system does not equate to an equal advantageous change in the whole system. He gives two examples, one good and one bad. The good one has to do with baseball team batting averages. If one team improves its overall average it will likely win more games, but if every team does likewise there is no advantage and any change in winning will have to be due to something else. The bad one has to do with a pencil manufacturer, and it is this example he uses with regard to the health care debate. He writes:

Suppose, for example, that a pencilmaker sells one pencil per month to 10 separate buyers. Each pencil costs $1 to make and overhead is $10. The pencilmaker needs at least $20 in revenue per month to stay in business, so the average price per pencil must be at least $2.

Now suppose some buyers form a cooperative and use their newfound market power to negotiate a price below $2. To continue generating $20 in revenue, the pencilmaker must now charge the remaining buyers more than $2 because overhead has to be paid by someone.

If the remaining buyers also form a cooperative they may to able to negotiate the pencil price back down to $2, but only if pencil buyers in the first cooperative experience a price increase. Once everyone is large, the advantage of being large disappears.

That, he says, is why the co-op and public option health care schemes will not work. The problem is that his example assumes that the pencil company is both efficient and honest, and that there are no other pencil companies. My take is that the current non-system is neither efficient nor honest, and that a “robust” public option, or perhaps co-ops, would go a long way toward changing that. Detractors assume that nothing the government does or sponsors can be efficient or honest, and, therefore, why go down that road. It’s the old Peggy Noonan line that government is not part of the solution, it is part of the problem. My logical and fact based response: Fiddlesticks!