SMALL GOVERNMENT VS STINGY GOVERNMENT

Please consider this excerpt from The Road to Serfdom, by Friedrich Hayek, the legendary free-market economist, appearing at page 87 of the Bruce Caldwell “Definitive Version” of the work:

“There are, finally, undoubted fields where no legal arrangements can create the main condition on which the usefulness of the system of competition and private property depends: namely, that the owner benefits from all the useful services rendered by his property and suffers for all the damages caused to others by its use. Where, for example, it is impracticable to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property . . .  Thus neither the provision of signposts on the roads nor, in most circumstances, that of the roads themselves can be paid for by every individual user . . .   In such instances we must find some substitute for the regulation by the price mechanism.  . . . “

English translation:  Free-market competition yields better outcomes than governmental action (“central planning,” in Hayek’s lexicon), with only one exception:  where too many of the people who would benefit from a project or enterprise would be unwilling or unable to pay for it.  Everyone uses the roads, but not enough people could afford to pay their usage-based share of the price for the building and maintaining of them, so the roads would not get built without governmental action.

A suggested corollary to the Hayek proposition:  Just as government should do what only it can do, government should not do what the private sector can do better or at lower cost. Government should outsource everything but its core competencies, which are few.

Hayek would have been fine with President Eisenhower’s decision to fund and manage improvements to the nation’s infrastructure, such our interstate highway system, built during the 1950s.  (See William J. Bennett for corroboration of  this inference:

https://books.google.com/books?id=X4c5YV7XNdAC&pg=PT708&lpg=PT708&dq=william+bennett+on+hayek+on+interstate+highway+system&source=bl&ots=huaoCuzapi&sig=LBuTsiDa4NkEja0gZjjvfK1alPk&hl=en&sa=X&ved=0ahUKEwj59LqqnazWAhXGYiYKHbrkAOkQ6AEIJjAA#v=onepage&q=william%20bennett%20on%20hayek%20on%20interstate%20highway%20system&f=false

We already had toll roads by the ‘50s, and many more have been built since them, and some can be maintained primarily through toll revenues, but it has always been unrealistic to assume that tolls would pay for the original construction of a toll road.

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President Trump is a Hayekian (even if not a conventional “conservative”), in that he would build infrastructure but avoid regulating it.   He believes improved infrastructure would contribute mightily to the nation’s economic growth, but excessive regulation would impede growth.

Republican opposition to Mr. Trump’s economic policies is curious.  The ideological Right, while continuing to belittle him for tastes and manners that might be OK at Wharton but not at Yale, senses the president is not one of their own; they are scandalized not only by his manner but by his apostasies involving increased federal-spending and modified  trade-relationships.  The moderate Right is even-less reasonable: they claim to seek healthcare reform and tax reform but find excuses to oppose initiatives to achieve them; they are stunned when the president takes seriously his pledge to restore free-market pricing to healthcare and economic sense to our tax structure.  Neither the ideologues nor the moderates seem won-over by the president’s nomination of an original-meaning jurist to the Supreme Court, his revocation of Obama’s DACA executive “memorandum,” or his massive reductions in federal regulations.  They seem frightened by his switch to a “big stick” posture on national security.

The suggestion here is that the president is essentially a conservative, and that he is misunderstood because few people are willing and able to distinguish between reducing government regulations (the “size of government”) and reducing government expenditures.  The president wants to reduce regulations; red tape drives him wild.  He hates it when meritorious business ventures, like the Keystone Pipeline, are held back by regulators with political agendas.  But he supports federal assistance for recovery from major disasters (viz, Hurricane Harvey) and resists cutting Social Security and Medicare. (He does not seem to share Hayek’s ambivalence about whether entitlements are re-distributive steps down the road to serfdom.) The president’s main priority is economic growth, which is needed if we are to pay for entitlements.

The president is more of a conservative than many of his detractors, even though his conservatism is based upon his business experiences and instincts.  He is anti-regulation but not anti-government.  He is pro-markets but willing to provide governmental assistance.  Do his critics miss the point because they, too, are distracted by matters of taste and manners?

Leadership For Healthcare Reform

To everyone who mocks the Republican Party leadership for breaking their promise that they would repeal and replace Obamacare as soon as the Republicans achieved a majority in the House, or as soon as the Republicans also achieved a majority in the Senate, or as soon as the Republicans also captured the White House:

The Senate is not controlled by Republicans.  John McCain, Susan Collins, and Lisa Murkowski are not Republicans in any meaningful sense of the term, certainly not when it comes to important legislation. The three, like too many of the other 49 nominal Republicans, are fine for the occasional show-vote, where they get to propound Republican values (pro-life, make America great again, etc.), but when it comes to the hardcore stuff of Republican principles, like free markets and limited government, they are not Republican or conservative at all.

One could blame the healthcare debacle on insincerity and ignorance, but that is only part of the story.  The missing Republicans are not the root cause of our failure on healthcare-reform, just as they will not be the cause when tax-reform suffers a similar fate.  The root cause is a failure of leadership.  We already knew that Majority Leader McConnell is a parliamentarian but neither a conservative nor a leader, and we already knew that Speaker Ryan, who could not explain the meaning of “good morning” in fewer than 100 pages, is certainly not a leader.  What we did not know was whether our president, despite his crudeness, vulgarity, and other shortcomings, could translate his unquestioned skills as a communicator into a functional form of leadership.  Short answer:  so far, not so good.

Possible cause: the president has neither the patience nor the skill-set to study-up on the healthcare problem and master it sufficiently to “sell” a conservative/Republican solution to the American public and the Congress.  It is not as though the solution were a mystery:  free-market pricing of healthcare and insurance (to satisfy the Republicans), coupled with financial assistance to the needy and the people with pre-existing conditions (to satisfy the Democrats).  Democratic generosity, Republican competitiveness, combined in one easy package.  That is the bi-partisan solution, the one that would satisfy both parties if they were in fact really looking for a solution.  But are they?

 

EPITAPH FOR HEALTHCARE REFORM

Where did it all go wrong for repeal-and-replacement of the Affordable Care Act?

Short answer:  pre-existing conditions (PECs).  The PEC solution in the ACA is the one part of the law that most people want to rescue, the one that represents financial protection of people who are unable to obtain healthcare insurance because their health issues make insurance unavailable or prohibitively expensive.  But the Republican Congress was unable to agree on a PEC fix.

Longer answer:  the conservative mantra, a big factor in the Republican wins last November, was that healthcare insurance (and healthcare itself) should be offered and purchased in a free market, where the competitive forces of supply and demand would drive down the prices of insurance and care.  But after the dog chased the car for 7 years and finally caught up with it, the dog had no idea what to do with it.  Republicans seemed stunned to learn that the public cared more about taking care of people with PECs than it did about free-market competition for the pricing of healthcare and insurance..

The problem:  after 85 years of living with ever-increasing governmental regulation and price controls, America no longer remembers how markets work.  The ACA solution fixed prices and had people with PECs paying the same prices for insurance as everyone else, which amounted to a cross-subsidy – people without PECs would pay more than they should, in order to allow people with PECs to pay less.

Conservative Republicans in Congress were put-off by the price-fixing/cross-subsidy apostasies.  Recalling the 1970s oil-price debacle, they knew that price-fixing never yields sustainably-lower prices.  Recalling Economics 101, they regarded cross-subsidies as “re-distribution of income,” a sad relic of communism.  But only Sen. Ted Cruz seemed to consider that there might be a way to avoid price-fixing and automatic re-distributions while still taking care of people with PECs.  The Cruz amendment would have been the gateway to a format that Nobel economist Milton Friedman had discussed decades earlier,  vouchers:  first you free up the markets for healthcare and insurance, which drives down prices, and then you give money (or vouchers) directly to people who cannot afford to pay market prices – whether because they are broke or because their PECs put the cost of insurance beyond their means.

It is clear that Americans want to help those in need.  The stumbling block is not a flaw in our moral character, it is a flaw in our governmental approach.  The Cruz approach was to separate the pricing of healthcare and insurance from the granting of assistance to people with PECs.  To those who might ask whether this would induce everyone to put off buying insurance until he or she developed a condition that required healthcare services, the answer is simple:  put the feds in charge of deciding who is entitled to assistance, when, how much, and for how long, and make sure no one gets any money without first having substantially exhausted his or her financial resources. Gaming the system, as people have been gaming the ACA, would be minimized.

A pair of concise summations of this approach:  “If we’re going to subsidize Americans who can’t afford health insurance, do it directly. Don’t do it through the premiums of others,” said Sen. Jeff Flake (R., Ariz.).  “The obvious compromise, the only good solution, is to do both: free-market pricing of healthcare and insurance in order to drive down prices, coupled with government subsidies for the needy to enable them to buy care and insurance at market prices,” said your humble scribe in an earlier blog post.

So, why was the Cruz model rejected?  Were the Republican resisters just under-informed, or should we be more cynical about their motives?  Did the insurance industry or anyone in the “swamp” really want a free-market solution? Why didn’t the Trump administration endorse and sell the Cruz draft proposal?  Does anyone believe that repealing ACA or letting it die on its own would be anything but a meaningless stunt, possibly an invitation to financial or civic chaos, with no way to sustain American healthcare without massive infusions of new money our government does not have?

 

TRUMP IS TWO STEPS AHEAD OF US ON HEALTHCARE

The GOP’s healthcare gambit is an elaborate parliamentarian ploy, designed for winning rather than going down in high-principled flames in a Senate filibuster. Phase I is a head fake, a means of exploiting the reconciliation rules that allow you to dodge the filibuster so long as your bill meets the revenue-related standards.  Here is the play:  You go into reconciliation with a filibuster-proof Phase I bill, in which you give the left most of the goodies that are all they really care about (the stuff the conservatives refer to derisively as “entitlements”), and you give the right just enough from their wish-list to make them shut up for a little while and go along with the plan. The Rand Paul contingent makes enough noise (all of it innocent and principled) to make it seem that the left is dodging a bullet, has won a great victory, that the whole thing represents a capitulation by Trump, who turns out to be just another whore – one of the left’s own.  Then, after a few months of the left’s luxuriating in the sense that their achievement was real, you drop the hammer.  Phase II, which Trump has lacked the self-discipline to abstain from delicately telegraphing, is when you get to the heart of the reform, which is to remove all the Obamacare crap that effectively precluded a free market in healthcare and insurance – and to remove the ban on interstate offerings of insurance.  For all we know, the Republicans might even throw in tort reform.  The goal is that by the time we get to Phase II, which requires 60 votes in the Senate, the Democrats will have been sufficiently sated and sedated that the Republicans will have a reasonable chance of stealing the requisite 10 Democrat votes.

Not saying it would work, just that it is the only plan that has a chance of working.

FREE TRADE AS AN INDULGENCE

In attempting to reconcile Trumpism with American conservatism, and upon discovering that our new president seems to favor a set of policies that look a lot like those of the party he chose to represent, one inevitably confronts the outlier: trade.  The president seems on board with the Republican mainstream on reducing deficits, lowering tax rates, taking cronyism out of the tax code, reducing government-regulation of the private sector, etc.  But international trade is the great divider:  Trumponomic trade policy appears to represent heresy against the church of Adam Smith.  With his disdain for NAFTA and TPP and his interest in a border-adjusted trade tax, the president gives the impression that he does not appreciate the benefits of free trade.  Why do you suppose that is?

A refresher:  free trade is a sacred Republican cow.  Conservatives think trade wars are the worst thing you can do to an economy short of centrally-planning it.  An irony:  free trade is a key component of globalism, and globalism (open borders and all) is quintessential Obamaism, which is what the president has railed against and the nation voted against. (Note: before jumping to associate nationalism with Nazi or Italian fascism, you should remember that for nearly a century globalism has been associated with Soviet communism and socialism.)   A theory:  the president understands Milton Friedman, he is aware of the Smoot-Hawley debacle, and he gets it that free trade is the rising tide that normally lifts all national boats, but he is not satisfied with the vision of an America that no longer owns the biggest boat.  The president understands the theory of comparative advantage, he knows that displaced steel workers and auto workers might eventually find higher-level/higher-income work instead of wasting their talents on lower-level jobs that could be performed in Asia for lower salaries, and he knows that free trade should enable the average American to continue to buy more and more stuff.  What’s not to like?

The argument here is that the president’s America-First nationalism relates more to culture and patriotism  than to trade, and that the president does not want trade wars, that he generally favors free trade, albeit subject to two major exceptions:  (i) he is not interested in free-trade deals with nations that are dedicated to surpassing us as an industrial and military power through domestic subsidies, theft of intellectual property, dumping, currency manipulation, tariffs, over-regulation of US products and services, and other means of advancing their domestic industries and inhibiting American industries (e.g., China); and (ii) he is not interested in free-trade deals that are too fair, that leave money on the table – either deals with a peer nation that favor that nation, or deals with a weaker nation that fail to exploit that nation’s inferiority. To him, re-doing NAFTA means obtaining concessions from Mexico.

Trump surely understands that it is possible to maintain economic growth despite running trade deficits, that global free trade should increase the world’s aggregate economic growth and prosperity. But he recognizes that economic growth, while enabling Americans to buy more stuff and better healthcare, can still leave us with lots of unemployment and under-employment, as machine continues to replace man – and as America increases its production of replaceable men (and women). It might also leave us with diminished industrial and military power. The imbalance between the employed and the unemployed can be modulated by expanding the levels of direct-welfare (money) and de facto welfare (government jobs), though those actions might be socially unwise.  But the reduction in our industrial and military strength could be a major mistake. The president may well be thinking, what is the point of globalistic free trade if the consequences are an increased level of unemployed or underemployed citizens and a decreased level of national security, in return for our being able to buy more stuff?

Few doubt that the American economy of the future should be built around our world-leadership in information technology, but what if our displaced auto workers and our new college-graduates were not sufficiently educated and trained to enable us to maintain our leadership in IT, either because of the failures of our educational system and our culture or because everything we invent or create is eventually stolen or reverse-engineered by others?  What if one day we woke up and realized that we could not produce a car or an electronic device without outsourcing the production to an unfriendly nation, maybe an uncooperative one?  What if we could not maintain our military superiority because China or Iran or Russia, by legal or illegal means, had become our technological peer?

Free trade might be a good thing in a utopian global-economy, at least for a while, but maybe not so good when we are no longer a benevolent World Number One, no longer able to keep the South China Sea shipping lanes open for the purpose of accommodating that free trade, and there are no other qualified and willing volunteers to take on that responsibility.  America, most of the European Union and NATO, and most of the other alumni of the old British Empire are pretty much all that is left of the “free world,” and we are surrounded by Russia, Turkey, Iran, most of the rest of the Middle East (other than Israel), China, North Korea, etc., most of whom are openly striving to overtake us and perhaps kill us.  Few of these hostile players want to play by Marquess of Queensberry rules, such as free trade, except when they think it suits their purposes.

Joseph Kennedy is reported to have said, “I would be willing to part with half of what I had if I could be sure of keeping, under law and order, the other half.”  In the same spirit, your humble scribe would rather be a prosperous and free American than a super-rich Iranian and would be satisfied, even delighted, to leave some consumer goods on the table in order to have an American government that was willing to engage in a little economic nationalism in order to be able to defend the country against predators determined to dominate us.