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The latest episode of EconTalk stars Jim Manzi discussing the Oregon Medicaid experiment. Without getting too much into their (very interesting) discussion of the econometrics of the experiement – or into my substantial and growing skepticism of econometric methodology writ large – I want to take their jumping-off point and go in a totally different direction.
Manzi’s jumping-off point is noting that, of the ~35,000 individuals offered free or dirt-cheap health insurance through Medicaid, only about 60% of them actually took up the state’s offer. In other words, its only somewhat more likely than a coin toss that any given poor person, handed free or nearly-free health insurance on a platter, would submit the paperwork to procure it.
Forget about the econometric implications of that – from an individual standpoint, that’s nuts. Say what you will about health insurance, but ceteris paribus it’s a hell of a lot better to have it than not, and when the cost of getting it is an hour or so filling out forms plus a Forever Stamp® we would have to at the very least seriously puzzle over why someone wouldn’t do it.
Russ Roberts calls the active ingredient here "prudence" ("because it’s an Adam Smith word," and I swear if I hear him mention Smith or Hayek on his damn show one more time…) but I’m going to go ahead and say that’s probably not the deciding factor. Instead, I’m going to go with "life is complicated and people are busy."
Let’s take the following as axioms: 1) each individual has only so much time in a day; 2) everything takes some time; 3) individual computation power is limited and exhaustable within certain temporal boundaries. While behvaioral economics certainly has grappled with the third proposition, I’m not really sure economics as a field has dealt well with the first two, especially in conjunction with the third. But I would argue that they’re really, really important, and even more important in light of the broad political movement over the past few decades to shift from state provision or command-oriented economies to market mechanisms and consumer sovereignty. Because, while you can make a lot of compelling arguments in a set of cases considered in isolation for "more market," if you look at the aggregate impact of vastly increasing both the number and complexity of choices/time-unit average individuals need to make you might be looking at a recipe for disaster.
Now, the libertarian-inclined might say "I consider that on some fundamental level irrelevant, individual freedom of choice is a first principle." And while I am not particular inclined to guide public policy on an a-consequentalist political philosophy that doesn’t distinguish humans from computers, let’s stow the philosophical argument for now – certainly most libertarians are not anarchists so even that principle has its bending point – and arbitrarily accept that some individual decisions should/must be made collectively by agents of the group, and say, "well, what should they be?"
I’m going to go ahead and say "access to medical care" (as opposed to all medical decisions) should be way, way, way up near the top of that list. Medicine is complicated. Really, really complicated. Medical decisions are loaded with moral and personal and interpersonal signficance about the value of life. So why should we a) complicate medical decision-making with the notoriously Byzantine private health insurance industry or b) complicate critical non-medical life decisions (like labor market decisions) with medical implications. It’s hard enough to decide whether to move your family to take a job; it’s hard enough to decide the best way to care for a dying loved one; and everything else in life – balancing checkbooks, balancing schedules, balancing obligations to friends and family and coworkers and community and the self, balancing pleasure and work – is hard and complicated enough without having to constantly worry about the status of your health insurance or whether your health problems will bankrupt you or which doctor or clinic or specialist takes which insurance and which jobs offer which kinds of insurance. Life is hard and complicated enough. Hard and complicated enough that you might not even notice if the state sends you an envelope with a too-good-to-be-true offer of free health care, or that you might not have the time, ability, or wherewithal to verify the offer or submit the paperwork if you did.
So Ashok and I sparred a bit on Twitter re: the meaning and effect of taxation and spending (and probably pestered the heck out of James Pethokoukis and Joe Weisenthal in the process). I’m not sure how to embed Twitter conversations (if anyone knows how, I’m all ears), but the long-and-short of it is that the actualities of taxes and spending are weirdly different from the optics.
The trick is to remember that every policy change is a change from some baseline. So, from whatever the baseline currently is, there is no fundamental or economic difference between:
1) Cutting taxes by X on some activity, and
2) Spending X subsidizing that activity
assuming that they are both funded identically (though identical tax hikes, spending cuts, or debt incursions).
Now, in practice, there will be differences. Scott Sumner’s thought experiment about the society that taxes 100% of GDP by taxing 100% of income then writing welfare checks equal to taxed income demonstrates that, since we would expect that society really would look different than the one that taxed nothing at all (if only because such a program would have some overhead). But those differences would be based in behavioral economics, not classical or neoclassical economics.
And the same in real-world examples. There would definitely be differences between these two alternative scenarios:
1) A 2% payroll tax cut (debt-funded).
2) A check mailed to every American for the exact same amount (debt-funded).
But those differences would be instutional, not economics (the check-cashing industry, for example, would obviously prefer the second policy to the first). But there’s no reaosn to think they would "crowd out" (or for that matter, "crowd in") different activities.
The real point is, as Matt Yglesias says, the tax share of GDP is a very poor to think about the “size of government.”