Wednesday, August 28, 2013

When We Love Market-Based Capitalism...

Megan McCardle posted a piece yesterday discussing the inelastic demand that acts in the education and health care markets.

"Demand doesn't decrease very much when the price rises."

How can we test the education market for price elasticity when so much of the funding for all levels of education comes from the federal government?  Just focusing in on higher education, consider how much money is arriving at our colleges and universities on an annual basis through the discounted and easy-to-access federal school loan and grant programs?  This money is pain free... or rather pain-deferred... as the persons providing the funds (the tax-payers) are very distant from the decisions on where and how to spend the money.  Universities can raise their prices and still receive payment... the funding source (the government) will never respond to the increases by saying "No, thank you," and spending other people's tax money in a different direction.

The same goes with health care.  Federal money arriving after changing hands numerous times encourages the provision of much more health care than would likely be chosen if the only transactions were occurring in the private market, directly between the consumer and the provider.  The same thought applies with the insurance companies, which are now extremely regulated into permanent intermediary status by both state and federal governments.

The point: The left demands that we spend government money on education and health care, which entirely disrupts the natural function of the markets involved, and then claims a market-based justification for why the education and health care do not behave as all private industries.

Solution: Eliminate the federal expenditures on the provision of education and health care.  There is a place for government monies in research and facilities development... but not in the purchase of the service itself.

Once that is done, then let's execute a study on the elasticity of demand in these two very important markets.  Betcha there will be a different result...