It’s always great to hear about American “free market” capitalism when our markets are light years from being free. The United States stands as a beacon for freedom, yet in the Heritage Index of Economic Freedom we barely squeeze into the top 10 at number nine. George W. Bush was supposedly a free market proponent during his time in office, yet he was still able to increase spending on federal regulatory agencies by more than any president since Gerald Ford. (Coincidentally his father came in at a close second, though he managed to rack up his regulatory spree in only one term.) As my colleague Andrew Syrios explains:
In reality, Bush’s presidency has been an eight year long string of red tape. The Bush administration added a staggering average of 76,526 pages to the federal registry each year. In 2002, he signed off on Sarbanes-Oxley, one of the most overbearing regulations since the New Deal. The SEC alone saw it’s budget triple over eight years, which of course wasn’t quite enough to catch a 50 billion dollar, decades long Ponzi scheme. The Bush administration increased federal spending on regulatory agencies by 6.5% per year (adjusted for inflation) and staffing by 6.3%. That’s more [staffing] than any president since Richard Nixon (another president bestowed with the “free market” myth).
And this brings us to the health insurance market; yet another “free market” that has failed us, which is why we need ObamaCare, an individual mandate, and the milk police. Individuals are not allowed to purchase health insurance across state lines, limiting consumer choice and competition. You are also stuck with whatever state-level insurance mandates get forced into your policy, regardless of whether you want or need those services. In fact, state mandates can increase the cost of premiums between 30-50%.
Allowing consumers to go across state lines would allow them to avoid the mandates in their state and seek lower-mandate states which fit their needs best. Further, the state-by-state oligopoly system does nothing but make it more difficult for individuals to obtain health insurance with the adverse selection problem; while an individual mandate will do nothing but further inflate the cost of premiums and increase the moral hazard problem.
Policy makers have long argued that allowing free interstate commerce in the health insurance market would lead to an erosion of consumer protections. That is, insurance companies would base their operations in low-mandate states and sell their products to folks across the country within that regulatory environment. The fear is that certain services, like the requirement to cover adopted children and disabled adult children, for instance, would be abandoned in many states.
The Cato Institute’s Michael Cannon dismissed this complaint rather effectively in Cato’s Handbook for Policymakers:
Opponents will claim that regulatory federalism will lead to a ‘‘race to the bottom,’’ with some states so eager to attract premium tax revenue that they will eliminate all regulatory protections or skimp on enforcement. In reality, both market and political forces would prevent a race to the bottom. As producers of regulatory protections, states are unlikely to attract or retain customers—insurers, employers, or individual purchasers—by offering an inferior product. Purchasers will avoid states whose regulations prove inadequate, and ultimately, so will insurers. Moreover, the first people to be harmed by inadequate regulatory protections will likely be residents of that state, who will demand that their legislators remedy the problem. The resulting level of regulation would not be zero regulation. Rather than a race to the bottom, regulatory federalism would spur a race to equilibrium—or multiple equilibria—between too much and too little regulation. That balance would be struck by consumers’ revealing their preferences.
We have a health insurance market, and a health care industry, which is drowning in regulations. This goes a long way in explaining why national health care expenditures are spiraling out of control. A good place to start would be to not call everything in the US “free market”capitalism, because it isn’t. And that means not blaming everything on free markets, as if that’s what we’ve had all along, to curry favor for more government regulation. This takes both an honest public discourse and an understanding of economics.
Photo Credits: WINONA 360
Text REDCROSS to 90999 to donate $10 to the Japan relief effort, or submit your donations online here.