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Monday, August 25, 2008

Lemieux: I love you, neither do I

In this week's column, Pierre Lemieux addresses the state's ambivalent attitude toward the private sphere. What he finds is that, more often than not, "public-private partnerships" are not a real alternative to privatization. Instead, they're attempts by the government bureaucracy to have its cake and eat it, too.

As Lemieux points out, one reason the market is usually more efficient than the government is that the former imposes genuine penalties on those who fail to meet the preferences of those they are trying to serve. A business that fails its customers will so go out of business (unless the government bails it out!)

In contrast, government bureaucrats are often insulated from the effects of their failures. For example, if the Canadian health care system fails you, there is no way for you -- as an individual -- to hold the system and its agents accountable for that failure. There are no private hospitals to which you can turn; and, even if there were, there is no way for you to divert the money you would spend on the public health care system to them, as the public health care system is funded by mandatory taxation. The public system gets funded no matter how inferior it is to potential or actual private alternatives.

Insulating a system from the cost of failure is a guaranteed recipe for inefficiency.

Finally, it seems that even the government is recognizing this, at least to a modest degree. The government will now sometimes contract out its services to private organizations that have superior incentives to their own bureaucrats. This is the kind of public-private partnership to which Lemieux refers.

However, he is quick to note that this is only a second-best measure to full out privatization of government services. In public-private partnerships, the "private" part of the equation is treated as a "junior partner" at best. Private entities are told they must shoulder all the risks of entrepreneurship, but government always reserves the "right" to tell its "partner" what to do, or when its services are no longer required.

In other words, the one who calls all the shots in the end is still a government bureaucrat, and there is no guarantee that his incentives will be as pure as those that drive private entities.

You can see some of this in the American health care system, which is often taken as the example par excellence of a private system. But insurance companies -- the boogy men of the modern American left -- are heavily regulated by the state. As a matter of fact, it can be said that the American health care system is not really that "private" at all.

For example, legislatively-set health insurance mandates require insurance companies to cover everything from hairpieces to marriage counselling. These mandates drive up the cost of insurance so that many Americans can no longer afford the basic care they really need.

No one calls insurance mandates a form of public-private partnership, but in essence that is exactly what they are. Insurance companies shoulder the risk of doing business, but government is really in control, and it has its own incentives that are not always compatible for providing efficient, low-cost coverage of basic medical expenses for most Americans. Insurance companies are told they can only do business if they do so in a more costly way than they would have to otherwise.

And when the cost of health insurance goes up, it is the insurance companies that take the blame, not the government bureaucracy. Again, government is insulated from the effects of its own poor decision-making.

Some excerpts from Lemieux's column:

"The bureaucrats’ trade unions are only one aspect of the state’s inefficiency. The state is inefficient in the deep sense that it cannot generally satisfy and reconcile the diverse preferences of multiple individuals. Markets — that is, decentralized exchanges by individuals on the basis of private property rights — are much more efficient."

"The bloated state under which we now labour cannot be efficient in most of what it does. It is geared to redistribution, that is, stealing from Paul to give to Peter."

"Real reform must be considered. What the public health system needs is real competition from a variety of private organizations, not from tightly regulated private subcontractors as junior partners. Let private initiatives free to compete with the public system. It is because defenders of the status quo know that the bureaucrats couldn’t win that they want so much to preserve the public sector monopoly."


Posted by Terrence Watson on August 25, 2008 | Permalink


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True that even the American health care system is far from a free market one. It is burdened with all kinds of useless government regulations and interference. Perhaps there is no country with a truly free market health care system, but our Canadian system is definitely at the bottom of the worst. The continued refusal to do any real reform is unacceptable.

The Fraser Institute did a study and report a few years back which remains the best yet. They found the combinations used in Australia, Japan and Switzerland among the best, but government after government refuse to listen.

Posted by: Alain | 2008-08-25 12:45:42 PM

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