10 May 2011

(benefit > 0) does not entail (benefit > cost)

David Henderson excerpts the following passage from John Nyman's "Is 'Moral Hazard' Inefficient? The Policy Implications of a New Theory" and argues -- correctly I think -- that it is a non sequitur
The new theory suggests that health insurance generally makes the consumer better off. Therefore, the subsidies that encourage consumers to purchase insurance voluntarily, or a national health insurance program for the entire U.S. population, would improve society's welfare.
That is indeed an error in logic on Nyman's part.  But there is another error that Henderson did not point out, and this one is an economic error. important economic error Henderson did not mention.

Just because something is beneficial does not mean we should spend more money on it. More money spent on health insurance, even taking as a given that that makes consumers better off, means less money spent on other things. I have no reason to believe those other things don't also make consumers better off. More money spent to capture the benefits of health insurance must displace other benefits. Whether the final mix of spending and benefits is better than the status quo ante is an entirely different matter from whether health care spending is itself beneficial.

(Furthermore, if health insurance makes consumers better off, why are greater subsidizes needed to encourage its purchase?  I do not need subsidies to convince me to buy pizzas, or winter coats, or iPods, and all of those things make me better off.  Perhaps this issue is addressed elsewhere in the paper — Henderson mentions some hand-waving about positive externalities — but I have an inkling it is not.)

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See also, this letter form Don Boudreaux:
Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health. Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses. Because he doesn’t even recognize that other valuable uses were sacrificed by this bailout, Mr. Dionne offers no reason to think that the value of saving Detroit automakers exceeds the value of what was sacrificed to do so. No legitimate declaration that the bailout is successful is possible, however, without evidence that the value of what was saved exceeds the value of what was sacrificed.

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