Green Room

Government and “Costs”: A Simple but Significant Truth

posted at 4:01 pm on March 16, 2010 by

Doctor Zero’s latest, excellent as always, reminded me of something I haven’t declaimed on for a while.

It’s this:  government cannot bend a cost curve down.  Government cannot “control costs” or “contain costs.”  Government can do one of the following, and only one of the following:

1.  Leave the market alone and let it set prices.  Under these conditions, inherent costs will be unaffected, except when technology changes how things are done in a given business.  But costs will be undertaken voluntarily, by both buyer and seller, based on the incentive or disincentive of price.

2.  Regulate the business and drive prices up (trade policy and tariffs fit here, although we mainly think of things like environmental and employment regulations, and taxes).  Regulation drives prices up.  It has no other effect.  Regulation increases costs.  It therefore drives prices up.  It does this no matter how much we favor the regulation in question or consider it necessary.  Regulation makes goods and services cost more.  If we’re lucky, this upward pressure on prices is offset by the downward pressure of technological advances and economies of scale.  If we’re not, we pay more.

3.  Set artificial price caps by law, and create shortages.  It is literally impossible to make more of something available while decreeing that its price must be capped.  Neither private enterprise nor government can achieve this imaginary feat.  Nothing government can do gets around the iron law that a capped price reduces the incentive to produce something.  Production is usually reduced below the level of what people would be willing to buy.  This happens very, very quickly if a business or product is both regulated and price-capped.  All businesses are regulated in the US today; price-capping their products would work very fast to induce shortages (and kill businesses and jobs in the process).

4.  Set artificial price floors by law, and discourage buying.  We haven’t tried that in the US since the first years of the New Deal, but it did the same thing then that it would do now:  force manufacturers and retailers with unsellable inventory out of business.

5.  Subsidize the industry to mask its true costs on the accounting ledger, as government does with commercially non-viable enterprises like “alternative energy” and embryonic (as opposed to adult) stem-cell research.  The result here is invariably a subsidized dependency that becomes a political constituency.

If the object of our desire is a decline in costs, government has two options.  It can take action 1 and let market forces drive costs, and prices, down over time.  If government has already taken action 2, it can back off from some or all elements of the regulation, and release its upward pressure on cost and prices.  There is, however, no option for government to “bend the cost curve down.”  This is a lie we need to stop telling ourselves.

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You forgot #6, which involves prices being set, and purchases being made, at the barrel of a gun.

joe_doufu on March 16, 2010 at 4:13 PM

Not to quibble, but you can have both 4 & 5 at the same time, and the result in either case is a surplus, since the supply-demand relationship is shifted artificially…and usually indelibly…by law or regulation.

Sugar is a good example, and a BIG reason why corn sweeteners are so much used in the US.

Ragspierre on March 16, 2010 at 4:37 PM

How do anti-trust regulations play into this? Aren’t they examples of government regulation that can “bend the cost curve down” over the long run – by preventing monopolies from cornering the market and gaining total pricing power? What about limitations on “tragedy of the commons” type actions – over-fishing, for example, or other practices that may be profitable in the short term for a privileged mover, but ruinous to the resource in question (again driving the price up in the long run)? Ditto for actions (toxic waste disposal, say) that impose costs directly on others, often at a relatively great remove in time and space.

You could urge solutions via lawsuit, but, even then, you’d need legislation and government participation of some kind, wouldn’t you? Is litigation always more economically efficient than regulation?

CK MacLeod on March 16, 2010 at 5:06 PM

Sugar is a good example, and a BIG reason why corn sweeteners are so much used in the US.

Ragspierre on March 16, 2010 at 4:37 PM

Excellent point and here are some numbers: current world sugar prices are around 18 cents/lb while the price for sugar imported into the US is 35 cents/lb. This ‘double price’ ratio has been in effect for at least 25 years in the US.

CK, anti-trust regulations are seldom used and are probably needed only when an underlying government condition makes them possible. Windows is a dominant OS, but you can delete it right now and install Ubuntu for free or buy a Mac. Railroads could monopolize due to eminent domain; same with wired services through right of way laws.

Some regulation is necessary, but it is rarely weighted for cost/benefits. Entire industries have left the US because of excessive onerous regulations and these manufacturing jobs are not coming back.

GnuBreed on March 17, 2010 at 2:24 AM

CKM — first of all, in any discussion of monopoly, it’s essential to define terms. This being a freedom-of-speech republic, I’m under no obligation to accept the definition that would say, for example, that Microsoft has a “monopoly” or near-monopoly merely because it has a dominant industry position. It’s too easy to find competitive alternatives to Windows, as GnuBreed points out.

In a separate but related vein, the LA Times is the only local daily newspaper in LA with any semblance of respectable readership. That certainly doesn’t mean LAT has a monopoly on the dissemination of either news or advertising.

Moreover, the “trust-busters'” narrative isn’t the only one, and it’s largely historically inaccurate anyway.

Monopolies can’t be created without government. It’s a long-term, long-fostered misapprehension that “monopoly” is something that can develop without the encouragement of government, whether it’s de jure or de facto.

No near-monopoly or absolute monopoly (like that of the local power company; very few such monopolies exist in any industry) arises without the action of the government. It takes government to deter the rise of competitors in most industries. Neither business nor organized labor could bring that feat off alone. Both need government to, at the very least, erect cost obstacles to the entry of new competitors into their markets. Heavy regulation and capital gains taxes (which gut the profits used to grow businesses) favor established businesses over new ones.

If business and labor can get other, more direct restraints of competition — tariffs, state closed-shop laws — so much the better.

The railroad barons gained what monopolies they had through the actions of government. It’s impossible to get a monopoly position in public transportation without government creating it for you. The desires of labor have been far more instrumental than those of business “management” in fostering the conditions for monopoly in the US steel and auto industries. It’s basically because of the unions and their involvement in politics that the auto industry has become one in which new US-based entries are impossible.

Government is behind monopolies in the first place. It’s a political action when government undoes its own work and breaks them up. The results are mixed: the trust-busting of the TR era didn’t cause prices to go down. (Milton Friedman and others have collated extensive academic documentation of this.) When Ma Bell was broken up in the early ’80s, service prices went up for everyone. Deregulating the airlines in the ’80s was a slightly different matter, but it was effectively a break-up of an oligopoly situation mandated by government regulation. In that case, service prices went down.

When government releases the controls it exerts, prices can and often do go down. But government has no record of “breaking up monopolies” that either fits the narrative of the Progressives, or stands up to scrutiny in terms of the promised result as opposed to the actual one.

J.E. Dyer on March 17, 2010 at 12:01 PM

Ragspierre on March 16, 2010 at 4:37 PM

Actually, I don’t take this as a quibble at all, since it illustrates my point. Government intervention in the sugar industry has guaranteed for years that the American consumer pays way more than the world price of sugar, as CKM points out.

J.E. Dyer on March 17, 2010 at 12:04 PM

No near-monopoly or absolute monopoly (like that of the local power company; very few such monopolies exist in any industry) arises without the action of the government.

That actually approaches the classic progressive critique – that actions against trusts are in the highest sense conservative because they remove what would later be called the corporatist subversion of democracy and the free market. Thus, Woodrow Wilson, rejecting the charge that he was anti-business, could ask whether farmers and smaller merchants – anyone who employed anyone in productive labor or sought supplies on the market in competition with trusts and powerful, government-entangled corporations – weren’t equally “business men.”

In contemporary politics, the Tea Party in its criticism of financial industry, auto, and other bailouts is echoing this element of progressivism, and today’s nominal progressives under Obama-Pelosi-Geithner are betraying it, a problem not lost on the Obamaist’s far left critics.

Under your view as well as under the classic progressive view, history suggests that it’s in the nature of economic power, on the way to becoming corporate power, to establish and exploit political power.

You say that no monopoly could arise without government action, but a) infrastructure projects of any kind have required government action, so the observation approaches the status of truism and b) even if, e.g., a railroad monopoly, a dam, a nuclear power plant, or a corner on the gold market could not exist without government permission and action, we’re still still left with a situation in which a monopoly or other concentration of economic power (or power pure and simple) cannot be dealt with except by assertion of a countervailing (democratic, political) power.

Whether we call the removal of the corrupting and distortive government involvement “progressive” or “conservative” is immaterial except as a matter of convenience or tactics. As you know, I believe it’s conceptually valid, and would potentially be politically effective, to accept both characterizations.

The theoretical impact on price of the dismantlement of corporatism, under whatever name, might be disruptive compared to the status quo ante – in some cases raising prices, in others lowering them. Over the long term, the benefit of a competitive and prudently regulated market goes well beyond price – not just, for instance, in relation to the baby bells, on the narrow issue of phone rates, but in the transformation of telecommunications and the creation of services that couldn’t be purchased at any price. Similarly, in the area of some environmental and resource regulation, the impact on particular prices might be to cause them to rise, and stay higher than they would have been otherwise indefinitely, but prevent scarcity situations (leading eventually to “not available at any price,” in other words “pricelessness”) or imposition of hidden costs on others.

CK MacLeod on March 17, 2010 at 2:53 PM

CKM — the “classic progressive” view you refer to had no mouthpiece or exemplar that I know of. You’re arguing this from a separate perspective anyway; we’re not using the same meanings for all the terminology.

The original point was that government can’t make costs go down. Nothing you’ve said, even if it were all valid in the context of meanings shared between us, demonstrates that it can.

You do, I note, proceed by what we can accurately call a classic Big-P Progressive method, which is to assume “costs not in evidence” — theoretical costs theoretically imposed on people by human life not conforming to a theoretical vision.

If we wanted to, we could say that government bends cost curves down by providing national defense and police. The people still have to pay for that out of their earnings, but doing so probably is a lower-cost proposition than having to fight bandits as they forage for resources, or post guards on the roof 24/7 to protect inventory and make customers feel safe.

What government can’t do is what the left is always proposing that it can do: force the aggregate assessment of what things are worth to us — the basis of calculating “cost” — into a theoretical mold. The cost of something is what people are willing to forego to have it, whether that amounts to their time, or the other material resources they may exchange for it. Government can distort this calculation in various ways, but government can’t change the fact that cost is a measure of voluntary desire or effort.

Cost is a factor that shifts over time as technology advances and people live and work in different ways. The cost of raising an acre of wheat has been transformed in the last 150 years from the human perspective. It still takes good soil, planting, and the right amount of water, but we’ve figured out how to get better and more regular results using less direct human labor and more chemicals and strategy. On the other hand, since we now use the chemicals and strategy, greater cooperation from other industries that carry their own costs — manufacturing, transportation, education — is required today than was 150 years ago.

In all of this, the “cost” of the inputs comes from what we are willing to exchange for the benefit of growing wheat. For government to think it can intervene and artificially manipulate those costs to somehow make them lower is a pipedream. At any given level of technology and social cooperation, production and consumption settle out at the costs voluntarily undertaken by the humans in question.

If the “voluntarily” is removed from that equation — as it is, period, if to a greater or lesser degree, when government intervenes — then we’re no longer even talking about “what something costs.” What it costs is what all the people in the equation are willing to forego for it. The end-consumer is just one of those people, and his decision based on price at the point of sale is only one of the relevant decisions.

Government can add to the costs in the economic cycle, but it can’t subtract from them any cost that it didn’t originally add. This doesn’t mean government isn’t involved in any element of our economic life, or that there’s some realistic condition in which it might not be. Government has always been involved in various ways, across peoples and times. But the nature of government is to increase the cost of anything it interests itself in, except for the use of corporate armed force for defense and order. In those latter cases, we have few examples of non-governmental practice anyway.

J.E. Dyer on March 17, 2010 at 4:05 PM

So I take your answer to mean that all you’re really talking about is a very narrow issue – the one defined by the administration’s incoherent arguments on bending the cost curve – while excluding any form of externality from the overall economic calculus. It’s not entirely clear to me how on that level what you’re arguing goes beyond being a truism, according to the law of conservation of energy: Every government decision or action entails a cost.

As for the rest:

[T]he “classic progressive” view you refer to had no mouthpiece or exemplar that I know of.

I gave the example of Wilson. He made numerous statements along those lines, as did many progressives more radical than he was, who felt that the political system and values bequeathed to the people of their time required refurbishment and improvement in order to withstand rising corporate/industrial power – that the forms, customs, traditions, etc., mostly adequate to protect the rights and freedoms of an agrarian/mercantile nation were insufficient under massively altered conditions.

If we wanted to, we could say that government bends cost curves down by providing national defense and police. The people still have to pay for that out of their earnings, but doing so probably is a lower-cost proposition than having to fight bandits as they forage for resources, or post guards on the roof 24/7 to protect inventory and make customers feel safe.

Why wouldn’t the defense exception that you imagine apply to defense against “white collar crime” and corporate negligence?

You do, I note, proceed by what we can accurately call a classic Big-P Progressive method, which is to assume “costs not in evidence” — theoretical costs theoretically imposed on people by human life not conforming to a theoretical vision.

I don’t see anything particularly big or little P progressive about understanding that it’s sometimes to an individual’s or business’s short term profit to behave in one way, but to other individuals’, businesses’, or the community’s longer term profit for that individual or business to behave in a different way, and that government action is preferable to other alternatives for settling disputes and preventing irrevocable damage.

If you’re going to define all defense against costs not immediately in evidence to or directly economizable for, say, a producer of toxic wastes or the operator of a hazardous factory workshop, as merely “theoretical,” part of an attempt to force conformity to a “theory,” then I think you’re going to confine your radically non-progressive version of conservatism to a very small segment of the political community.

CK MacLeod on March 17, 2010 at 8:37 PM

We’re probably beating a dead horse at this point, but perhaps you’ll indulge me in an example that may clarify some concepts.

Suppose the left proposes to “bend the cost curve of health care downward” by, to take one of your examples, eliminating the “white collar crime” of Medicare fraud.

Before proceeding, we can first inspect this proposition for its applicability to private medical transactions, to see if it might bend down the cost curve of medical care, period. That, after all, is the basic, general proposition: that action by the government can lower cost. In this specific case, the theoretical argument would be that there is fraud in private transactions that makes medical care more expensive in general.

By definition, fraud in commercial transactions is already illegal, and can be prosecuted and punished where it is found. If it weren’t, the very definition “fraud” wouldn’t exist.

So the first question in this theoretical detour into the private sector is what government might do, beyond what it already does, to “eliminate fraud.” This is a very serious question, and it gets at the heart of what we think law is supposed to be and do. What else can government do that will actually “eliminate fraud”? If we say, “step up enforcement,” that’s one obvious, logical suggestion, but (a) it doesn’t require government controlling or making new laws about the transactions in question, and (b) it does cost more money to engage in more vigilant enforcement. We either take it from other program expenses, tax the people more, or go into greater debt to fund it.

What I have just outlined here is the classical Western liberal view of the proper use of law and its accountable execution.

Will doing this literally lower the cost of health care? Hard to say. It adds a resource cost to government, for a purpose that might or might not lower the cost of health care overall.

What we haven’t really looked at is how much — or how — private-sector fraud adds to the cost of health care. If it’s going on, that may increase the price of services for the patients of specifically fraudulent medical businesses, but what evidence is there of an enterprise across the industry to bilk patients through fraud?

And if there were such an enterprise, is it the case that patients would have no choice, or no recourse? If they have no choice, the reason for that is government constraints on their options. If they have no recourse, it’s because government isn’t enforcing existing laws against fraud.

The going-in position of the Progressive left, however, is that it is somehow possible to use government force to deal the possibility of undesirable behavior out of the equation. The Progressive view of law is that it should be hortatory and prescriptive rather than punitive and deterrent.

The classical liberal says, “We will punish fraud in the private sector, because we want less of it.” The Progressive says, “No one should be injured by fraud in the private sector, and to preclude that outcome, government will intervene whenever and however we deem it necessary.” There are two anti-liberal theses in this approach: first, that there’s any way to preclude all bad outcomes, and second, that government’s charter to preclude them should be indefinite and open-ended.

Where is “cost” in all this? I hope it’s obvious that government can’t preclude all fraud forever and ever by taking a stand against it, in the forms favored by Progressives (e.g., chartering agencies, hiring bureaucrats, regularly suspecting fraud and making veiled accusations about it that never quite make it to actual indictments or court proceedings). Are government agencies making more headway against fraud than we would be making if we just left it to the courts and law enforcement? Is the “cost” of fraud to society — let alone to the customers of one particular industry — being driven down by this approach?

(Keep in mind, if Bernie Madoff is leaping to your mind, that we not only have laws against what he did, we have federal agencies and bureaucrats dedicated to preventing what he did. To assume that there would have been a thousand more Madoffs without the agencies and bureaucrats, but that the law-enforcement aspect has no influence on the prevalence of securities fraud, is to take a position for which there is no support from evidence.)

So: maybe government enforcement has a significant effect on the cost of fraud to the private sector in the health industry — but that’s hard to quantify. There’s certainly no alternative historical reality to judge it by. It’s not like there was some period before fraud enforcement in which people were staggering under the cost burden of fraud on what they paid for medical care.

If we turn to the original proposition — eliminate fraud in Medicare claims — the first thing we have to notice is that Medicare is a government program. If we didn’t have Medicare, we wouldn’t have Medicare fraud. Government reducing the fraud incident to its own programs shouldn’t impress us as a cost-reduction measure.

How much cheaper would life in general be for everyone, if we didn’t have the Medicare program, as it operates today, at all? Its cost burden hits everything. Through its impact on individual salaries and the cost of employing people, it affects everything else in the economy, from the prices poor people pay for groceries to the amount of disposable income available to anyone with a salary. Through its impact on the national debt, it affects our currency and our future economic prospects.

This is an artificially imposed cost. It’s not a cost inherent in the economic cycle of “health care.” Reducing this cost, through changing the program’s practices, isn’t a case of lowering the overall cost of health care, either individually or to society. The cost of the actual health care — the attentions of doctors and nurses, stays in the hospital, evaluation with machines that use electricity — remains what it is.

None of this means we shouldn’t have a program of some kind to help the elderly out with medical expenses. None of it even means there shouldn’t be a government program. It does, however, mean that the prophylactic approach of the Progressives is, in this case as in so many others, based on a false premise. People aren’t sitting around thinking, Gee, I’ll commit fraud today because government has failed to take a noble stand against it. Government has already done that, with the prosaic list of laws on the books. There is precious little evidence that enlarging government to prophylatically supervise more and more of our lives somehow “lowers costs.” Look at each theoretically lowered cost in turn, and you find that either nothing was lowered, or that what was lowered was an artificial cost imposed by government anyway.

J.E. Dyer on March 18, 2010 at 3:26 PM

Might as well beat the horse. If it’s dead, it won’t mind.

It’s my impression that the “bend the cost curve down” stuff was based on DLC-ish, market-like reforms and marginal incentives. Lotso libs tried to sell the public option BCCD, on the theory that the generic public health insurance brand would compete with private insurance. More conventional BCCD would be measures encouraging collaboration for quality of care rather than quantity of care payment, taxing Cadillac plans, efficiency research, measures, and incentives, etc. BHO loved data-sharing and paperwork reduction, but stopped talking about it because I don’t think anyone took it seriously and because there is no dependable way to “score” it against the sticker-shock inducing bottom line.

Attacking fraud might have BCCD effects, especially in the ideal case of actual major reductions in fraud and establishment of effective disincentives. It would yield most of its savings to the government where at the public-private nexus – Medicare and Medicaid fraud by doctors, labs, etc., which is said to be rampant. I think it’s mostly sold as flat out, direct cost-cutting, though, not BCCD.

As you say, it’s a saving within an already established government program – the elimination of waste that wouldn’t exist if the government wasn’t there to cause it. However, once we agree that some bottom-line commitment to the care of the poor and vulnerable is an appropriate role for government (OMG – social justice!), as I think you do and as almost all conservatives other than radical libertarians do, then you’ve got a pretty expensive proposition, and a set of cost and other challenges. (BTW, please be careful with phrases like “How much cheaper would life in general be…” – some ornery lefty might someday turn that back at you for debating points: There you have it, JE wants a world in which “life is cheap” – typical heartless conservative…)

I don’t accept your characterization of the typical progressive approach to a question like fraud – “chartering agencies, hiring bureaucrats, regularly suspecting fraud and making veiled accusations about it that never quite make it to actual indictments or court proceedings.” There were and remain significant differences among progressives over whether a mainly legal/deterrent approach to fraud or other ills or a regulatory/administrative one was better. It was the crux of the difference between Wilson and Roosevelt on trusts, for example, or, 80 years later, between Clinton and the hardcore libs on Welfare. Obamacare is such a grotesquerie that one hesitates to use it as an example for anything, but the differences between single payer and public option, and public option versus mandated purchase illustrates the range of differences even among the current, decadent breed of neo-liberal corporatist prog.

It’s my position, as I’ve stated before, that, by the definitions of the radical constitutionalists, we’re almost all progressives: We almost all accept and approve of something more from government – such as a social safety net – than the absolute minimum this side of anarchy. So even for conservatives the public policy question turns on making a mixed economy in something like health care work better.

CK MacLeod on March 18, 2010 at 8:49 PM

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