Saturday, February 26, 2005

The Brads Break Windows

The Broken Window Fallacy is a harsh mistress. She slithers in countless forms and wraps her tentacles around even the sharpest of minds. After each conquest she hungers for more, urging the bearer of her bad news to infect others.

So it’s not surprising that Brad DeLong agreed with Brad Plummer when he said that it doesn’t matter if Americans spend 40% of their income on health care via the private industry or the government. Alex Tabarrok challenged their conclusion saying,

To make the problem with Brad P.'s thought experiment clear suppose that we documented exactly how everyone spent their yearly income. Now we tax everyone 100 percent and provide them with exactly what they were buying before. Nothing changes, right? Wrong. At 100 percent tax there is no longer any incentive to work - thus no one works and nothing is provided. Everything changes.

Alex is absolutely right. Even if we assume that the government could collect such a daunting level of information and even if we assume that people are so bland they want exactly the same things at exactly the same times year after year and even if we assume that the government could peacefully enforce this exchange of work for things, Alex would still be absolutely right.

There’s a lot of tacit satisfaction that comes into play when people do the shopping themselves. For a lot of people shopping is socially stimulating, acts as leisure time and embodies a certain kind of discovery process that a state government could not replicate. On the supply side, manufacturers have a reason to make the things people need and they have an incentive to improve their product.

But if the government pays for your medical costs you have fewer choices and you loose some or all of the interpersonal relationship with your doctor. Doctors have little reason to exceed expectations. The incentive structure has fundamentally changed.

And because all those earlier ifs are big IFs, the problems multiply and the incentives change even more. The Brads are breaking classic windows: option A is no different than option B because we get the same thing either way. They don’t pay attention to what’s done with the money, and why people use it that way. Ultimately, society gets very different things.

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