Government Spending on Health Care is Industrial Policy
By Bryan Caplan
Strange as it may seem, Scandinavia now has free-market admirers, most notably Will Wilkinson and especially Scott Sumner. The heart of their case: If you ignore their welfare states, Denmark has one of the freest economies in the world, and even Sweden doesn’t look too bad. As Sumner writes:
Can “socialist” Denmark really be the most “capitalist” society on earth?… A lot rides on just how one defines the terms ‘socialism’ and ‘capitalism’. Fans of free markets, such as the Heritage Institute, see capitalism as a system where the government refrains from doing many things, and primarily focuses on protecting property rights (which requires an important role for the “rule of law”.) For these people, capitalism is a system where taxes and subsidies are low, firms are free to enter or exit markets, hire or fire workers, move goods and capital across national boundaries, etc. In contrast, socialism is a system that restricts all sorts of economic “freedoms.” By this definition, Denmark is indeed very capitalist, except for its high taxes.
Friends of Scandinavia often go on to suggest that perhaps libertarians should ignore welfare states. If they’re economists, they’ll emphasize that industrial policy and state-owned enterprises create large deadweight costs, while redistribution is a mere transfer. If they’re philosophers, they’ll praise John Rawls.
As a staunch opponent of the welfare state, I’m tempted to argue first principles. But that would be premature, because the simple fact is that a huge fraction of welfare states’ “redistribution” is health sector industrial policy, not cash transfers. The U.S. government, for example, spends more on (Medicare + Medicaid) than on Social Security. It doesn’t give cash to the poor and tell them to spend it as they will. It looks out at the economy, picks a winner – the health care sector – gives it special tax status, and and showers hundreds of billions of dollars on it year after year. And as Robin Hanson has made many prominent people admit, there’s every reason to think that health care industrial policy is as wasteful as anything the Soviets cooked up.
Now the defenders of Denmark might reply that as far as health industrial policy is concerned, the U.S. economy is especially unfree. They might be right. I’m not trying to raise the status of the U.S. My goal, rather, is to make sure that that moderate libertarians don’t make peace with the welfare state for the wrong reasons.