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"Arguing in My Spare Time," No. 3.17

Arnold Kling

June 26, 2000

The other evening, I met Tom Masterson, a very creative entrepreneur who happens to be an M.D. At one point, he mentioned that managed health care companies have a disincentive to treat diabetes effectively. "They don't want to be known as the diabetes experts," he contended, because then they will attract a large population of diabetes patients, who have high treatment costs.

I ran this issue through my head, because I was afraid that it could lead to an argument for some bureaucratic, regulatory solution. Quickly, I came up with the idea of having the government grant generous health care vouchers to people with diabetes or other expensive conditions. This would avoid bureaucratic oversight, preserve the incentive for managed health care companies to be effective at treating patients with expensive conditions, and provide such patients with the insurance that most people would want them to have.

This solution, which Masterson had arrived at himself, is an example of what I call compassionate libertarianism. While it may sound odd or even oxymoronic, it is in fact quite a sensible ideology.

A classic statement of the ideology of a liberal economist is Alan Blinder's "Hard Heads, Soft Hearts." He argues that it is good for the government to try to help the poor, preserve the environment, and pursue other liberal goals. However, he advocates doing so in a way that minimizes economics inefficiency and unintended consequences.

Compassionate libertarianism is in the same spirit. However, our heads have gotten somewhat harder. For example, Blinder would have talked about education in terms of "investments in human capital," which allows for more of the same government programs. Instead, compassionate libertarians insist on vouchers and school choice.

Recently, Robert Reich, a Democrat, writing in The American Prospect, proposed a type of voucher program that I have advocated for years.

Reich wrote, "Consider, say, a bold and original voucher plan, in which everyone were eligible for school vouchers but in varying amounts: Rich kids would get $2,000 vouchers while poor inner-city kids would get giant vouchers of $12,000 a year, which they could cash in at any public or charter school."

Reich then went on to say that he thought that Republican advocates of school choice would oppose this program, and therefore it would expose them as hypocrites. I believe that Democrats beholden to the teachers' unions would oppose this program, and therefore it would expose them as hypocrites. My view is that the reason that voucher opponents will not allow experiments with school choice is that they are afraid that such experiments will succeed.

However, Reich is not a compassionate libertarian. He is not ready to give up on the notion that government needs to be eagerly pro-active. He thinks that the Microsoft case exemplifies good government intervention, while I believe it exemplifies the opposite.

My guess is that Paulina Borsook, author of "Cyberselfish," would attribute Reich's flirtation with compassionate libertarianism as resulting from the fact that he likes to hang out with the high tech crowd. Borsook argues that high tech executives have adopted a libertarian pose as a sort of juvenile response to the fact that their wealth ultimately derives from government research projects (which stimulated many advances in computing, most notably the Internet).

For me, the critical event in my ideological development probably was the energy crisis. In the late 1970's, many economists were willing to work within the prevailing liberal paradigm of price controls, synthetic fuel subsidies, and other tactics of President Carter's "moral equivalent of war." However, standard economics said that a "shortage" was a phenomenon of price controls.

President Reagan tried the "risky scheme" of deregulating oil prices, and the results were spectacularly successful. Another instance in which dire predictions about the libertarian approach have proven to be incorrect has been welfare reform.

Part of the compassionate libertarian philosophy is that you do not always need government to solve a problem. Tom Masterson was aware that people who are on kidney dialysis can never be far from a treatment center. He obtained a list of all treatment centers, and licensed mapping software from Mapquest for $10,000 a year. With that information, he put up a web site that dialysis patients can use to make travel plans.

Masterson does not have a revenue model for the dialysis treatment center locator web site. He just put it up because, to him, it was the right thing to do.