April 15, 2005

#178: The proper name for this system is "Scientific Socialism..."

P. Krugman


Paul Krugman seems to have finally tired of flogging Social Security reform (after nearly ten columns) and has turned his attention to issues of U.S. health care in The Medical Money Pit (04/15/05). Again, he is revealing his position on these matters slowly (so as to maximize the number of columns), but his agenda is clear. He wants a classic single-payer system in which the government uses monopsony power to control prices paid to providers.

Monopsony is the opposite of monopoly where the buyer, rather than the seller, holds all the high cards. But to make it work successfully, the monopsonist (the government, in this case) must set prices just high enough to keep providers working, innovating and entering the provider network. That's quite a trick as it turns out. Krugman likes to cite data showing U.S. consumers pay more than the rest of the developed world for health care. But he ignores the fact that most of the medical innovation occurs here also and the rest of the world gets a free ride – just as they free ride our military spending, our protection of world shipping lanes and, in general, our international police work.

Imagine a single-payer system applied to other "necessities of life" such as transportation, housing or clothing. Everyone gets free transport, but the government decides what the cars look like, how much they cost, sets train schedules and routes, locates airports, etc. The proper name for this system is Scientific Socialism and it was tried and failed over a fifty year period from Eastern Europe to China after WW II.

Why anyone would think that health care, of all life's necessities, would respond better to Scientific Socialism is a mystery to us. The only sure thing in such a system is that consumers will over demand, providers will under supply and rationing will occur. When the price system is not allowed to do the rationing, then rationing takes the form of waiting for service or poorer service. Worst of all, innovation may slow because incentives for research are too low. Of course, socialists have an answer to all this, but we say they had their chance in the greatest experimental lab of all – the real world. And they blew it. Think East Germany in the 80s, or Cuba now.

It would be nice if Krugman dealt with some of these issues in the coming weeks, but that's not likely. If he does, we will comment.

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]

Posted by John Weidner at April 15, 2005 8:49 AM
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