The upshot is that economists hold a lot of views whose justifications they cannot articulate very well. I think you would find the same when it comes to the Ex-Im Bank (are you sure it fits the model of strategic trade theory?), the mortgage agencies (what was that externalities argument for home ownership again?) or all sorts of random regulations. The relatively interventionist economists will pull some justification out of a hat, and the relatively pro-market economists will be pretty skeptical.
In The Book of Arnold, I have a chapter called “Policy and Practice” in which I go to great lengths to emphasize the analytical gap between the theory of market failure and actual policy. My prime example is housing policy. I write,
The policy pattern that consists of subsidizing demand and restricting supply is not limited to the housing market. It pervades government regulation of industry. For example, in education, the government subsidizes demand by helping to pay for education, and it restricts supply by limiting accreditation. In health care, government subsidizes demand through Medicare, Medicaid, and various tax breaks and subsidies for obtaining health insurance. Yet it restricts supply by regulating the practice of medicine, requiring a “certificate of need” before a new hospital may be built, and requiring inventors to undertake extensive studies to demonstrate efficacy of their treatments to the satisfaction of the Food and Drug Administration.
From the standpoint of the theory of market failure, the subsidize-demand, restrict-supply pattern almost never makes sense. If there is a market failure that results in under-production of a good, then it makes sense to subsidize both demand and supply. If the market failure results in over-production, then it makes sense to restrain both demand and supply. Subsidies for demand and restrictions on supply inherently work at cross purposes.
However, from the standpoint of another theory, called Public Choice, in which government policy tends to serve concentrated interests rather than address market failures, it is understandable for government to subsidize demand and restrict supply. In a specialized economy, we know that the market for what you produce affects your well-being much more than the market in any one of the myriad of goods and services you consume. Thus, concentrated interests develop on the supply side, not on the demand side. The pattern of subsidized demand and restricted supply is what you would expect to result from successful political action in a specialized economy.
True, politicians do not balance the equation, instead they introduce new variables effective enough to skew the equation in any direction they would want. Essentially this movement of decision making processes from private sphere to public bids up the value of public positions.
Eventually those who are ever ready to subvert private decision making process will add the most value within public offices. Unfortunately, public decision making process mostly adds value to organized interests.
Great insight, Arnold. Thanks.
Public choice – nothing can be done but learn to love it
This was extremely welll illustrated in the high cognitive dissonance of the Obamacare marketing by the people claiming we would save money providing more access to poor standards of care and thus needed a QALY panel.
Be careful not to fall into the Public Choice trap. Public Choice is like a book whose title promises to tell you all about “The Elephant.”
When you read the book, it turns out to be almost solely about “Elephant Diseases,” some of which being wrongly diagnosed.
In order to take a genuinely fresh and different look at “contingent economics – specialisation, trade, and trust,” it is not advisable to burden your approach with a commitment to Public Choice.
Most of Public Choice (which does include useful findings) is ideologically pre-committed, under the spell of economic reductionism, and more than partial to the idea that government is a hindrance to liberty.
New useful insights I would not expect from coalescing with Public Choice but from analysing it with the utmost scepticism. Commonly, authors bother with Public Choice in order to buttress their ideologically kindred position with the seemingly irrevocable findings of Public Choice. Public Choice tends to be consumed more for ideological reassurance than as an impetus for scientific courage, for a journey into the unknown, the kind of unexpected insights that have an unbearable feel from the point of view of doctrinaire preconceptions.
To get a sense of just how poor and wobbly the positions of some of the great exponents of Public Choice are read the various debates between Warren Samuels and James Buchanan, for instance in Samuels’ “The Legal-Economic Nexus.”
It appears me that in the state of Florida is trying to restrict the supply of nurses even while the Federal Government, seeing a shortage of nurses, is giving nurses special visas to enter the country.
IHMO healthcare reform needs to be done at the state level else the state politicians look at the restricting supply on behalf of their providers as a way to bring more federal money into the state.
Of course a politician would say the restrictions are needed to keep quality up and the subsidy is need for the poor. There is a plausible explanation in the area of healthcare. It is even stronger in the area of education, that is because parents and or students are not able to move their children away from bad teachers, the state must do something to ensure some minimum quality.
Of coarse if one is to believe what is in the podcast below, they are not succeeding in keeping quality above a very low level in some places (the example is near the end of the podcast):
http://www.thisamericanlife.org/radio-archives/episode/562/the-problem-we-all-live-with
I have to say though, that I went to a school that had a reputation for being very bad but it is way better than the example presented in the podcast so I am suspicious of the podcast.