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The Wall Street Journal Defends the Predator State

Mises Daily: Wednesday, October 21, 2009 by

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In my last article on these pages, I offered criticism of a New York Times article that had praised the Lincoln administration's property violations in pursuit of military objectives. Today I want to focus on a regular Wall Street Journal columnist who praises the Obama administration's plans to violate property rights in pursuit of socializing medical care. The conventional dichotomy between "liberal" and "conservative" newspapers is spurious: all major news organizations support the welfare-warfare state.

Who's the Predator — the Government or Corporations?

Wall Street Journal columnist Thomas Frank starts his piece with the angle that everyone on Capitol Hill took his advice to read James K. Galbraith's book The Predator State, which concerns the capture of government agencies by corporate special interests. Frank then expresses dismay that many Republican politicians have apparently misunderstood his advice:

During a debate last week over two Democratic proposals for a healthcare bill featuring a "public option" — a government-run alternative to private health insurance — [Iowa Republican Sen. Charles Grassley] announced he opposed the idea because, as he put it, "Government is not a fair competitor.… It's a predator."

The word "predator" seems to have become something of a Republican talking point. Mr. Grassley's colleague from South Dakota, John Thune, went on the record in July to warn that, when government goes into business, it "becomes not a competitor but a predator."

Have these two august men of the right secretly become fans of Mr. Galbraith, one of our leading liberal economists?

If so, they need to go back over "The Predator State" a second time. Although they have snapped up Mr. Galbraith's catchy title, they have misunderstood his message.

Hmm, that's interesting. Even hardcore-progressive activists smell a rat in the emerging healthcare "reform" bills, and accuse Obama of being a "charming liar" by selling out to "Big Pharma" and other villains.

What we have in Washington is the worst of both worlds: the government is greatly expanding its role in healthcare, and is at the same time redistributing billions from regular Americans into the pockets of politically connected corporations.[1] (The same thing is playing out with cap-and-trade legislation, as I explained recently on Fox Business.)

Granted, Republican congressmen — with one notable exception — aren't actually proponents of a truly free market. They typically oppose only certain types of corporate welfare, while generously supporting other types (such as military contracts). Even so, Senators Grassley and Thune are perfectly correct when they claim that a "government option" in health insurance would not be true competition, but instead act as a predator on the market. Unfortunately, Thomas Frank has no grasp of even basic economics and ends up writing sentences that would embarrass USA Today, let alone the Wall Street Journal:

What makes government predatory, Mr. Grassley seems to believe, is its public-mindedness. Were government to offer health insurance to everybody without the industry's many devices for excluding risky individuals, some seem to fear, it might be able to offer consumers a price too fair for the profit-minded sector to match.

This is a curious reversal for a movement that ordinarily celebrates Darwinian struggle and the destruction of the weak by the strong. Just think of the conservative caricatures that must be inverted for this argument to work: All those soft liberal bureaucrats? Ferocious man-eaters. The welfare state? Law of the jungle.

No, Mr. Frank, what makes government predatory is that it steals its resources from unwilling taxpayers. In contrast, insurance companies (at least until Obama's mandate goes through) can't force people to send them checks. A government enterprise can put any private analog out of business if the politicians are willing to throw enough money into it.

I am not necessarily predicting that this will happen — after all, well-heeled corporations are writing the legislation behind the scenes — but the very legitimate fear is that the government will get its foot in the door with a "public option." Precisely because the bureaucrats running the plan will have no need to turn a profit, they will be able to "afford" to insure anybody, regardless of preexisting conditions, at a price that doesn't cover expected payouts. When the shortfall occurs, they will simply ask the politicians for another injection of a few billion dollars.

"The conventional dichotomy between 'liberal' and 'conservative' newspapers is spurious: all major news organizations support the welfare-warfare State."

The private competitors won't have such recourse to free taxpayer money, of course. Normally they would respond simply by insuring only people with no history of disease, in order to keep premiums low and compete with the price the government charges its customers. But alas, the legislation would make such exclusions illegal — insurance companies wouldn't be able to accept only healthy people as customers.

Hence, the fear is that the government could "innocently" offer a simple competing plan, and then — oops! — all the private insurers go out of business. I guess we need universal government coverage after all.

Think of it this way: in principle, GM (now government owned) could sell brand-new sedans at $2,500 each, with infusions of taxpayer money. That would obviously destroy the car market for private-sector manufacturers. The same principle applies to health insurance.

The Current System Is Awful

Whenever writing a column such as this, I leave myself open to the accusation that I "just don't get it." Let me be clear: the current health insurance system is awful.

My young son had a minor condition that required no treatment of any kind, and yet no matter how high a premium I offered to pay — even with a rider saying the policy wouldn't cover anything related to the condition — my insurance agent said nobody would give us coverage. I eventually had to incorporate my consulting business in order to buy a family policy (with a very high deductible) through that route.

So believe me, I understand why people think, "The government needs to do something!" Those people are right, the government does need to do something. Specifically, it needs to get out of healthcare.

How Government Screws Up Health Insurance

It's not an accident that health insurance tends to be tied to employment. During the wage-and-price controls of World War II and the Nixon era, companies competed for employees not by offering higher salaries (which was illegal) but by offering perks such as health insurance.

Currently, one of the major reasons companies offer insurance as part of compensation packages is that it is tax deductible. In other words, if a corporation pays $10,000 a year to insure you and your family, they can write it off as a business expense, and you won't pay taxes on it. But if the corporation increased your salary by $10,000 and told you to buy your own insurance, you would get taxed on that money.

Another major distortion is that there are barriers to interstate competition among health insurers. If all the Obama administration wants to do is promote options for consumers, this seems like low-hanging fruit.[2] But as this hilarious video shows, Wolf Blitzer can't get David Axelrod to comprehend the point.

Conclusion

"The predator state cannot be tamed."

I am not a medical doctor, and I don't even play one on TV. However, I am an economist, and an amateur student of history. How anyone can think that greater government involvement will reduce costs and corruption in the health insurance market is beyond me. That belief flies in the face of basic economics, and all of human history.

Galbraith was right: there is indeed a "predator state" — just ask villagers in Pakistan. And so long as a powerful state able to transfer trillions of dollars to its friends exists, the shareholders of large corporations will jockey for their cut of its loot. The solution is not to lecture politicians, as Mr. Frank does at the end of his column. The predator state cannot be tamed. Only when the public withdraws its consent will the predations come to an end.

Notes

[1] Update: Since this article was originally written, the political landscape has changed. The insurance industry apparently decided that they had signed a deal with the devil, and suddenly decided they were opposed to the "reform" they had earlier supported. Whether Obama double-crossed them, or vice versa, is a matter of debate. (Here is a left-liberal columnist arguing for the latter explanation.) But even if the industry now would prefer the status quo, it is still the case that the most connected corporations will ensure that the legislation benefits them at the expense of their smaller competitors and the general public.

[2] Note that I am not saying the federal government should interfere with individual state laws regulating insurance companies. My point is simply that the Obama administration isn't really concerned with providing choice to consumers; their reluctance to break down interstate barriers isn't due to their respect of states' rights.