Benjamin Studebaker

There are two parts of the US economy that have spiraling out of control costs–the health and higher education systems. I propose that these systems experience runaway costs for the same fundamental reason, that they are “high demand markets”. High demand markets differ from other kinds of markets in an important way, and once we understand that health and education are markets of this variety, it becomes much easier to devise and understand the potential efficacy of policy solutions in both areas.

First, it’s necessary to establish that yes indeed, costs in both these areas are increasing rapidly. First, healthcare:

Of note is the fact that healthcare costs as a percent of GDP have risen throughout this period (except in the 90’s, perhaps because healthcare costs could not keep up with the sheer rate at which the stock bubble was growing during that period–when the 2001 recession hits, the figure jumps up). The increases do not appear to be driven primarily by ageing boomers–the figures were rising even when the boomers were young and vital. Here’s education:

Interestingly, rising inflation-adjusted college costs do not seem in any way to have deterred young people from going to college in increasing numbers, and given that the figure is a percentage, we know that population growth does not account for the change. So what’s up?

I theorize that both healthcare and education are what I call “high demand markets”. They differ from ordinary markets in precisely the way you might expect–demand for these services is much higher than it is in most other markets. Why might demand be so high? In both cases, consumers are faced with severe penalties for failure to purchase these services:

1. Healthcare–buy healthcare or face death.
2. Education–buy education or face poverty.

The limits on demand for health and education are few and far between. Healthcare can cost so much that it impoverishes a person, and education can cost one’s parents so much money that they run out of funds to cover future health expenditures.  Education can also put a student in a student loan hole so deep that a superior job doesn’t quite make up the difference. However, the government has gone to considerable effort to get rid of these limits. Health insurance, both public and private, is meant to ensure that healthcare costs never become so burdensome as to drive a person into poverty. Medicare stands ready and willing to rescue those Americans who spent the money they find themselves needing for healthcare on their children’s education. Congress routinely artificially depresses the interest rate on student loans to keep students going to college no matter how far up the price of tuition goes. Anything that might constrain our demand for healthcare or education is avoided, and so our demand remains very high. Consider, for instance, the 90-day delinquent debt figures:

Here we see that in the years after the recession, Americans have tried very hard to reduce their private debt loads, either by default or by saving for repayment. Credit card and mortgage debt in particular fell precipitously after 2009. But what kind of debt is spiking up anyway, seemingly immune to the effects of the global economic crisis? Student loan debt. People will give up their homes, their cars, their big screen TVs, any number of things before they give up going to college for two reasons:

1. Not going to college in America is generally equivalent to a life sentence to poverty.
2. The government will throw grants and cheap loans at them until they believe they can afford college even if they can’t.

Why does the government try so hard to prevent the market from imposing limits on the amount of healthcare and education citizens buy? Because we widely regard these things as entitlements–every person is said to be entitled to the means to continued life (healthcare) and to the opportunity to develop employable skills and chase the American dream (education). The idea that some of us would be denied these things due to insufficient funds is morally horrifying to us, and understandably so.

That said, while demand for health and education rise inexorably, there are severe constraints on the supply of these things. There are only so many hospital beds, so many university places, so many professors, and so many doctors. We have tried to control costs by making quality reductions. Many substandard universities exist to give places to those who can’t get in elsewhere, many hospitals use medical interns in lieu of full doctors, many college courses are taught by TA’s to avoid hiring additional academics. These method of cost control even extends to the wider public education systems, which often replace old teachers with younger ones, or use trainees from programs like Teach for America. The thought behind these moves is that some healthcare, some education, is better than none at all.

Inevitably, some of us aren’t going to get all the healthcare and education we would like. Finite supply dictates this. However, we do have some choice as a society as to who we give priority to. By trying to give the poor and the old state money with which to buy these things, we are inflating their cost.

This is not to say that we should stop subsidizing costs for the poor–far from it. It is monstrously unfair for a poor person to receive an inferior college education exclusively due to his parents’ wealth background, or for a kid to die of cancer because his parents don’t have the dough to cough up. The trouble is that these programs don’t work in the long-run, that they create obscene amounts of household debt. If I give every person in America who can’t quite afford to go to a good college the money to do so, the number of places at those universities doesn’t change. Some number of people are going to be shut out, and the university is going to take advantage of the increased demand by raising its tuition until those poor people are once again priced out of the market. No matter how we slice it, some of us are going to lose, and meanwhile the hospitals and universities will hike their prices and suck us collectively dry. Healthcare has jumped from being 5% of the economy to 16%, and given the chance this figure will only increase further.

We can, however, choose who those losers are going to be by rationing. Rather than deny education to the poor, we ought to deny it to those who are least capable of using the educational resources available to them to better society–the dumb. Rather than deny healthcare to the poor, we ought to deny it those who will get the fewest additional high-quality years from that healthcare–the old. Opponents of rationing talk about it as if there is some wonderful alternative in which everyone gets all the healthcare or education desired, but such a world is not possible, at the very least, not without a considerable increase in state investment in educating and training MDs and PhDs. And since costs are the very thing the state is attempting to control, such a policy outcome is likely not in the offing. If the state regulates and/or operates high demand markets such that those who benefit most receive the most and those who benefit least receive the least, we can get the most bang for our buck and put a stop to upward price spirals.

Many countries already have healthcare systems that use this kind of rationing. Indeed, most of the cost difference between the American healthcare system and its European counterparts comes from Europeans’ refusal to spend exorbitant amounts on extending their elderly’s lives by a handful of poor-quality years:

Yet, despite this, life expectancy for all four European nations in that graph exceeds the American figure, in the Swedish case by a full 3 years. How can the elderly live longer in Europe despite being denied treatments they would receive in the United States? European states have taken the money they have saved through rationing and reinvested it back into preventative care, to tremendous effect. As Ben Franklin famously put it:

An ounce of prevention is worth a pound of cure.

We might also be able to take some of the money saved with healthcare rationing and use it to hire more professors and increase the number of high-quality university places rather than continue to cheap out with substandard colleges and TA’s. In any case, it is inexcusable that Ben Franklin, an American patriot of the highest order, is more listened to across the Atlantic than he is at home.