Free Markets, Free People

cognative dissonance

Cognative dissonance: If the private sector can’t afford it, how can the public sector?

E21 points out the innate ignorance, or if you prefer, cognative dissonance, in the belief that government is the answer when private sector outlays get smaller in the areas of health care and pensions.  Their example is a recent column by EJ Dionne:

In a recent essay in the Washington Post, EJ Dionne argued that we had no choice but to accept that government would grow larger in the future “because the private economy will not offer the same security it once did through employer-provided health and pension plans.” It’s a viewpoint that is often repeated by others on the left of the political spectrum, who complain about corporations curtailing the benefits on which households had come to rely. Without businesses financing health care and retirement, Dionne believes the choice is between a larger government to fill that role or widespread illness and poverty.

The interesting aspect of this theory – which is hardly unique to Dionne – is the view that the government is some entirely disconnected entity that is able to finance obligations too weighty for households. If one assumes that government’s budget capacity comes entirely from the taxes it imposes on households – Dionne’s framework is unintelligible. If outlays are too great for the household sector to bear, how could these outlays be any more affordable for an entity entirely financed by the same households? The cash flow out to support households’ pension and health care expenditures has to be matched with an equal and opposite cash flow in from household taxes (including corporate taxes, which reduce the cash flow of households that are shareholders, employees, and consumers).

Where does this belief come from that government has the means to finance what the private sector can’t and that it must step up and do so when it comes to health and financial security? 

Government revenue, as I noted once before, is about 14% of the national income.  Government spending is about 25% (and rising).  How is government the answer then?  And if it were to raise taxes the commensurate 11% to equal spending, wouldn’t it be impoverishing the very households it plans on helping?  All the money we’re talking about government spending comes from the same place.  The other alternative involving government is massive borrowing which, at some point, has to be repaid.  By whom?  Well the same entity borrowing the money.  And from where does that entity’s money come?  The same place it always does – from the taxes it collects from its citizens.

Let’s get specific:

The idea of government as an entity entirely separate from the households that fund it is not only silly, but also exceedingly harmful, because it distracts from the serious business of confronting trade-offs and establishing realistic expectations. President Obama’s health care reform initiative depends, in part, on this fallacy. It expects people to believe that the interposition of government will allow for the same quality of care to be provided to a much expanded universe of beneficiaries at lower average cost for households. The problem is that households will end up paying for health care irrespective of the intermediary; the only way the government could reduce costs is if it does a better job rationing households’ access to care than private insurers and their anemic profit margins (The Obama Administration actually takes this fallacy a step further by claiming that it would “shrink the deficit by providing the world’s most expensive health care to 31 million additional people”).

What you’re seeing in the public opposition to this monstrosity of a health care bill is a realization and rejection of the counter-intuitive claims made by politicians (and not just the Obama administration) that there is such a thing as a free lunch.  The public recognizes the fallacy being presented as fact and is rejecting it outright.  That’s because unlike EJ Dionne and his ilk, they recognize a basic truth:

If something is too expensive for American households, it is too expensive for the government whose budget is financed by those same households.

It’s not rocket science.  However it is “smoke and mirrors” the way the administration is presenting it, and the public recognizes it as such.  The relatively simple concept above contained in that single sentence is reality.  The public lives in that world.  It’s time the politicians joined us.