Sunday, March 07, 2010

The marketplace relies on profit to reduce costs

Published in The Tennessean, March 7, 2010

The marketplace relies on profit to reduce costs

by Richard J. Grant

There is a moral asymmetry between the two main visions of the role of government in our lives. Those who favor the minimization of the state would not interfere with those who choose voluntarily to join a communal society within the larger society. But those who favor the maximization of the state would not reciprocate: They would not permit a free society within their larger society.

Statists just can't leave people to get on with their lives. They can't imagine civil society existing and prospering without extensive government control. This is what the rhetoric and policy proposals of the Obama administration are clearly telling us.

We learned early that the president does not understand the roles of profit and loss in our economic affairs. He seems to believe that profit is a burden that is best removed so that costs might be lower. He either doesn't understand or doesn't care that the possibility of profit is the best natural motivator toward greater efficiency in the use of resources, toward better stewardship. The profit motive does not increase costs; it reduces them.

The recent release of "The President's Proposal" on health care shows the breadth of the Obama administration’s confusion on economic matters. It speaks of improving individual responsibility, but then proposes an "income assessment" (a weasel word for "tax") on individuals who might choose not to purchase medical insurance.

Similarly, the proposal speaks of strengthening employer responsibility, but then imposes a tax on those employers that do not offer a government-approved form of medical insurance. Apparently, the administration believes that government knows better than the individuals involved when insurance "costs too much and covers too little."

A large part of the problem with medical insurance is that employer-provided plans are subsidized through tax deductibility. This makes medical care seem much less costly to the patient than it really is, and patients become less careful about the quantity and quality of care that they choose to purchase. It increases the demand and pushes up real costs.

But the president's proposal adds to this demand by offering tax credits toward the payment of medical insurance premiums. Increased demand will draw more resources into health care, thereby putting more upward pressure on costs. Although many individuals might see a lower visible price for their premiums, the actual resource cost will be higher. Someone will have to pay: Taxes will be extracted elsewhere.

Another provision would increase government spending on Medicare drug benefits. It would also spend further billions on community health centers in what are deemed to be underserved areas. All this comes with more regulation of rates and health-insurer practices. Who will regulate the regulators?

The administration seems to believe that imposing an excise tax on "high cost" health insurance plans will make the insurers more efficient. But all this interference will take choices away from consumers. If the administration were truly serious about efficiency, it would deregulate the medical and insurance industries. If the administration wonders why "insurers have little incentive to lower their premiums," then it should look at the ridiculously complex and irrational regulatory and tax structure that already exists. Reform should mean "repeal."

The president’s proposal to impose a Medicare tax surcharge on "unearned" income will increase the interest rates and dividends that companies must pay to attract investors. This will burden people of all income levels.

If the administration is serious about promoting competition then, once again, the answer is deregulation. If an industry is heavily regulated, it matters little how many companies are in an industry. Competition can be measured only by freedom of entry into (and exit from) the industry, and by the freedom to serve customers unencumbered by arbitrary, politicized regulators. Nothing works better to improve service than the fear of a competitor taking one's customers away.

The choice is always the same: submit to the statists or stand with the Constitution.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:

Copyright © Richard J Grant 2010