Friday, June 30, 2017

Pay Your Own Bills


A long time ago, I used to go to lunch periodically with a bunch of coworkers. Some would say “Let’s make it easy and divide up the bill evenly.” That was back in ancient times before restaurant technology could easily split the bill for the table, so it definitely was easier.

From another perspective, though, I was a young guy with a growing family and a sense of frugality. I didn’t need or want a big, expensive lunch every day. I had other, much better uses for my money. Others in the group were not so inclined. I was faced a number of times with a food bill that was much higher than it would have been on my own. After the decision was made to split the bill evenly, some in the group decided they wanted a big lunch with appetizers and drinks. Those people made out pretty well, because the average cost was significantly lower than the cost they actually incurred. I and a few others were paying for their hearty appetites and good times.

People certainly have different interests and priorities, and that is a good thing. That is what makes an advanced society function at a high level. What is bad is the distortion of incentives when people are not held responsible for the costs they incur or the actions they take. When someone else is paying for it, the tendency is for people to want more, to want better, or even the best, especially when there is a sense of entitlement or a presumed “right” to it, whatever “it” is.

Many scenarios come to mind, from school district financing and construction to health-care spending. Over the last decade and a half, many school districts in New York State significantly increased the size of facilities at a time when student enrollment was stagnating or declining. They have periodic massive improvement projects at a time when property taxes are maxed out or close to it. Why would the people in a school district vote for such incredibly expensive projects? Simply because they are not paying for much or most of it. Taxpayers from other school districts pay up to ninety-five percent of the costs. Those other taxpayers also pay for a large portion of the annual operating budget. So it plays out that, if someone else is paying for it, why not get the best and the most you can.

The problem with that thinking is that, if every school district does the same, the overall burden of education costs increases for everyone. In 2016, New York State average education costs per pupil were eighty seven percent higher than the national average. Local voting for local benefits with external funding is the formula for distorted incentives that balloon costs. “A government that robs Peter to pay Paul can always depend on the support of Paul.”

The same holds true for health care, higher education, and in fact, any area of the economy with such distorted incentives. Most of the money paid for health care comes from third-party payers, whether it be insurance companies or from government programs. Because they are part of a program that pays for it, the patients believe that they have a right to first-class care and facilities. Political and social pressure is put on insurers to cover costs that neither they nor the patient would be willing to pay for otherwise.

The answer in all cases is to let the markets actually work by de-socializing these industries, by scrapping burdensome, counterproductive regulations, and by allowing competition to engage on an even playing field, without government giving artificial advantage to any party.

Originally published on Daniel-McLaughlin.

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