Monday, 30 July 2018

How the War on Drugs disproves socialism

My favourite argument people give for why socialism would work in the US is when they mention Sweden and the Netherlands' socialised healthcare.

Let me explain how small Sweden is. Sweden has roughly half the population of the Netherlands. And both have fewer people than Los Angeles. But why Sweden? Why not copy the Greek healthcare system or Spain's? Oh, right, because those two national healthcare systems are terrible, and everyone knows it. In fact, why not just cherry pick US states? I bet the hospitals in Montana and Wyoming are wonderful.

The problem with socialising or centralising most things is that they don't scale well. In fact, they scale horribly. How many additional levels of middle management will you need to add to the Dutch healthcare system for it to function in the US?

The Veterans Health Administration has almost 300,000 employees. They treat 8.97 million people. The population of the US is 325 million. With the VA's current organisational structure, you would need 16,800,000 employees to care for the US population, assuming no additional layers of management or extra organisational structures to manage the size. If a national health service was run like the VA, it would be the single largest organisational entity in the history of the world. It would employ almost as many people as the entire US government employs today, including the military and post office.

Let's compare the US to other countries of its size, instead of subjectively picking northern European countries that you happen to like to visit on holiday. Here are all the countries with fewer than a billion people and more than 150 million. These countries all have nationalised healthcare systems (except the US):

United States 327,567,000
Indonesia 265,015,300
Pakistan 212,412,000
Brazil 209,381,000
Nigeria 193,392,517
Bangladesh 164,929,000

So there's your comparison. Not Holland. I assume every socialist in the US is clamouring to get an MRI in an Indonesian hospital. There is no "European model." Healthcare is not standardised across Europe. Is the health system in Greece the same as in the Netherlands? Why not? Aren't they both in Europe?

The reality is, there is no country comparable to the US in both size and per capita income. The US system has enabled the country to achieve its dominant position in the world - an extremely large and affluent ethnically diverse and literate population, spread out across a large geographic area, with a high life expectancy and a high standard of living.

The last time American progressives had an idea for this it was a single, government-regulated insurance system for everyone in the country.

But why is one insurance company better than many? The problem in the health insurance industry is that it is not at all competitive. People don't really buy their own health insurance. Their employer picks it, the worker pays for it, and if you switch jobs, they have to get new health insurance. The people who pay for the service aren't the ones choosing the supplier. There is no pressure to reduce insurance costs because the people paying for the insurance aren't negotiating the purchase. The system is completely bizarre.

No one gets car, home or life insurance from their employer and anyway, those insurance rates are tailored to a person's habits. Someone's driving record affects the rates. But with health insurance, a co-workers health problems determine a person's rates. Again, bizarre.

I'd suggest before doing something radical that the US does something simple. Decouple health insurance from employment, and make insurers compete in the market for customers the way auto insurers and life insurers do. If that happens, you'd see two things:

1. Rates for healthy people (most people) would tumble.
2. Rates for unhealthy people would rise, and they would know specifically why they are rising.

Obese? Pay this much more. Smoke? Pay that much more. These people would know that losing a certain amount of weight, for example, would translate to saving money on insurance. People would have to internalise the health insurance cost of their lifestyle. This, in turn, would cause people at the margin to live a healthier lifestyle. There'd be other benefits too. Without employers paying some of the insurance cost, costs per worker would drop, which means it would be easier to hire more people.

In a single payer system like the US has today, the payer has the leverage. Single payer is a monopsony, analogous to a single seller being a monopoly. They are both economically inefficient in the sense that in the long run, they result in a market with fewer services and higher prices. You should assume that in switching to a single payer system, many sellers on the margin would exit the market (assuming the single payer pays less than what is paid today).

The market inefficiency in the healthcare system is in the health insurance industry. The reason for this is because health insurance is not sold in a free market. There is absolutely no reason for health insurance to be tied to a job. The two have nothing to do with one another. It makes as much sense as your employer mandating where you buy groceries. If health insurance were decoupled from employment, it would reduce costs immediately, because all those insurers would have to compete with each other.

The drug war is a great example of how the free (black) market always, always defeats socialised law enforcement. It's the best indictment of socialism I've seen. A socialised government will never defeat drug cartels because both are playing with different rules and assumptions.

In the one corner, we have independent entrepreneurs taking on risk with the opportunity to leverage that risk into a huge reward. In the other corner, we have socialised law enforcement (unless I'm mistaken and the law enforcement in the US is somehow privately funded). If it were to get a report card based on the percentage of drug shipments intercepted since the beginning of the war on drugs, the latter would be a consistent string of Fs.

Sure, it's not representative of the system of economics known as socialism, but it does put in stark contrast the difference between people acting in their own self-interest and those acting on behalf of the state. One group is consistently highly successful, and the other group consistently fails.

Let's look at the history of planned economies versus market economies. Which has been the most successful? The law enforcement side of this equation is a planned economy. The government dispenses a given amount of capital, and the law enforcement bureaucracy decides how to use the money. They have little or no financial incentive to decisively win, in fact, if they were successful they'd be unemployed. If they fail, they will be back at it again next budget cycle. There is little to no demand for their services and a large portion of the population has rejected the drug war outright and called for the legalisation of drugs.

Then there are the drug runners. They are consummate entrepreneurs guided by the invisible hand. There is extremely high demand for their product. They invest their money, put their lives and freedom on the line, and if they succeed they realise a large financial reward. Because of this high demand, if they fail then others will be along behind them immediately to roll the dice again.

Free market versus a planned economy. Which of these has a better track record?

The ban on drugs is at the extreme end of the regulatory/private enterprise spectrum. The government has declared that there will be no economy in drugs like cocaine. But passing a law does not make it so. The drug war illustrates that private enterprise will always undermine socialism - state control over aspects of the economy. This doesn't mean that capitalism is bad because that is placing a moral judgment on something that has no moral dimension. It does mean that socialism is pointless and doomed to failure, whether that's in healthcare, law enforcement or anything else.

Another example: intellectual property. The state declares that only owners of a copyrighted work can control its distribution and sale. Nonetheless, massively complex technologies have emerged to subvert the copyright laws and protect pirates. So copyright owners are forced to alter their businesses in the face of the reality of piracy, i.e. to seek a market-based solution that does not rely on government enforcement. Piracy is a triumph of capitalism. It is the story of how the state seeks to impose its will on an individual, and how the free market grants that individual the freedom the state denies.

In every market plagued with cost excesses or perpetual inefficiency, the state has mucked up that market. Healthcare is a great example of this. The problem with healthcare is not the providers of care, it is the insurance companies. But bizarrely, most people who have private health insurance (as opposed to some government sponsored programme) do not get it on the open market. They are forced to accept the one provided for them by their employer. That isn't a free market. It's the opposite of free.

What is important to understand is that socialism never exists in isolation. It is always accompanied by a complementary free market (either a black market or a private pay-as-you-go market). If you want to impose stricter standards on the kinds of cars people can drive, fine, as long as you understand that rich people will pay the premium to drive whatever they want regardless of the rules, and people with less money will pay to circumvent the restrictions if it's in their economic interests.

There is no socialist paradise. There is only greater control over and further limitations of the rights of the middle class, along with an elite rich enough to ignore the rules and an underclass willing to bear the risk of breaking them to eke out some financial gain.

Socialism isn't about everyone being "equal" or the system being "fair." Socialism is supposed to provide for a higher minimum standard for people while also allowing people to access higher quality services if they can afford them. But what most advocates today describe as socialism is mandatory equality - that everyone should access only the same services as anyone else, and nothing more or less.

The reality is that people aren't equal. They aren't equally strong, fast, funny, smart, attractive, energetic, clever, aggressive, assertive or crazy. And these inequalities are not genetic. There is absolutely no reason why anyone should expect that compensation for their work, which leverages these disparities, should be equal. And no matter what system you create, there will always be poor people. There will always be the starving and the ill. People aren't afraid of socialism, they know that it has never worked and will never work when applied to actual people.

Mind you, these are the same people who say if there was really such a thing as a truly free market with totally open competition, where everyone truly acted in their best economic interest, and everyone truly had equal opportunity, then everyone in the world would be making the exact same amount of money.

But that's wrong too. You may value leisure more than someone else, so you are likely to work less than they do. All things being equal, they will have more money than you, even though you both acted in your economic best interests (economic best interest does not equal financial best interest). (There are other reasons too, for example, comparative advantage).

The most dangerous aspect of this is that people forget the function of government is not to equalise the outcome. It is to equalise the rules and the enforcement of those rules.

No comments: