John Goodman on Government Failure
By David Henderson
Why is our perspective so different from so many other health policy analysts? I think the answer is: the vast majority of people in health policy do not understand the concept of “government failure.” For example, health economist Austin Frakt, following Nobel Laureate Joe Stiglitz, produced a list of “market failures” in health care and in health insurance at his blog the other day. These include imperfect competition, unequal access to information, external costs and benefits for others generated by private activities, etc. He then offered this observation:
In principle, government intervention can increase that benefit (economic welfare) in such cases. In practice and in some cases, it’s debatable.
How does Austin know that government “in principle” can solve these problems without a model of government decision making? He can’t. Moreover, it turns out that many of the factors alleged to cause “market failure” also contribute to “government failure.” In fact, in the political sphere their impact is much worse. Here is the bottom line: There is no model of government decision making in health care (and in most other areas as well) that shows that government will reliably improve upon the market. (At least a real market.)
This is from “Government Failure” by John Goodman. The whole thing is worth reading. He lays out some reasoning, based on a more-complex model, to show that if government does actual respond to people, you get an inefficient outcome. What he’s saying, in essence, is:
“OK. Let’s say you’ve shown me a market failure and then you propose a government solution. It was your reasoning about the incentives driving market participants that led to your conclusion that the market has failed. So we can’t drop reasoning about incentives in midstream. Let’s look at how government decision makers respond to incentives. And the result isn’t pretty.”
This is what I was saying in this post last summer.
Economist John Seater has an excellent comment also.