In a previous post, I suggested public sentiment that government does too much but not enough is not contradictory. It reflects a recognition that government does too little of what it should do, too much of what it shouldn’t. Today’s news that retails sales were dragged down by a drop in auto purchases, a deflation after the ‘cash for clunkers’ program ended supports that point (”Retail Sales Drop on Fall in Autos” Wall Street Journal, Jeff Bater, October 14, 2009).
There is a wealth of evidence and theory that markets work best in directing resources to their most productive use. The general consensus is that government’s role is appropriate to counteract market failure–unavailability of reliable information for markets to work, absence of decision rights to act on information even if it were reliable, or decisions that have consequences external to the decision maker.
Our financial market meltdown was triggered particularly by the first and third forms of market failure: Regulators allowed less and less transparency about transactions and credit risk and people were able to make transactions where they enjoyed the upside but dumped catastrophic costs on the rest of us.
The right response then is to fix the markets.
Pretty well accepted is that government is lousy, absolutely lousy at intervening in markets to pick winners and losers. If government does so, it is a likely as as not to pick wrong, diverting resources from better to worse purposes.
The cash for clunkers was a case study in such wrong headed policy. It pulled forward purchases that would have been made anyway, so net sales were likely flat, were an exceptionally expensive way to protect a relatively few number of jobs (albeit in politically influential districts), and probably was bad for the environment in the end, given the enormous energy required to make a new car relative to the energy required to propel an existing one
Excerpt: The Obama administration proposes $10 billion/year for five years to encourage electronic medical record adoption. Can money be the main obstacle? The health care sector is $2.2 trillion, 1/2 of which is spent on hospital, clinic, and practices services. $10B is a drop in that bucket. The IT industry runs into the $100s of billions too. There must be some other obstacle for which money is not the solution. What do you think?
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Gina Kolata’s article about sketchy medical imaging (”Good or Useless, Medical Scans Cost the Same“ NY Times March 1, 2009) is an eloquent specific example of why we have such high health care costs and such poor performance–compromised access, often terrible quality, and tremendous risk of otherwise avoidable harm. The problem? We pay providers based on the time and resources they consume providing care, instead of measuring the value they create in delivering care. Without reliable measures of provider quality, patients and payers are handicapped when picking whom to trust their bodies and bullion, relying instead on self-referrals and on institutional reputations based on factors tangentially related to efficacy. This makes no more sense than buying cars based on material and labor costs, regardless of scrap rates and idle time. Read the rest of this entry »
It is natural to think that effort determines outcome: Try harder, invest more, and get better results. However this is not entirely true.
An important qualifier is that the structure and dynamics of systems can greatly magnify or dampen the impact of investments made in and through them. Some simple examples. If we see an engine over-heating, adding more coolant may provide a temporary salve, but only until the blockage or leakage is found will the problem’s recurrence be avoided. The lights may blow in a building. Using good bulbs to back fill for bad ones will offer temporary illumination, but not like checking the wiring and surge protection.
So too with the economic crisis we are now experiencing. Read the rest of this entry »