Thursday, October 17, 2013

If you like the what you have.....Efficiency Vs. Pareto Improvement

Both many Republicans and many Democrats agreed the the pre-Obamacare health system in the United States was built around many institutional details that locked economic inefficiencies into the system, primarily the attaching of one's health care to one's job. After all, most of us don't live in mining towns where we get our food from The Company Store, why should we get our health care from The Company Plan? The are numerous historical accidents that led to this problem: World War II wage controls and disastrous post-War tax decisions central among them. That said, the idea of community plans (like among all the workers in a large corporation) makes sense, and was one of the original sources of medical insurance (now less correctly called health insurance).

The problem was, and is, is that somewhere around 70 - 85% of the American people were happy with their pre-Obamacare health insurance plans, economists'objections notwithstanding. That why, when Sen. John McCain proposed some decoupling of the work-health link, candidate Obama skewered him with it. It is also the source of the numerous versions of the "If you like your current coverage...." argument that supporters of Obamacare put forward during that debate. They wanted to make the plan seem what is called by economists "Pareto Improving," meaning that not only does it get rid of inefficiencies, but it does so in a way that no one would be made worse off. What we see everywhere now is that Obamacare is not even close to being Pareto improving. But, then, neither would Sen. McCain's plan have been Pareto improving. Many Americans who supported comprehensive health insurance reform, both those who favored more markets and those who favored more government, probably envisioned a world in which their reforms could have been implemented in a Pareto improving way. In so many ways, that was simply not realistic. Hence our irate Obamacare supporter who didn't realize that her good intentions would make herself worse off. I don't want to pick on her too much. We can easily imagine a McCain supporter being upset that a "market oriented" reform process cost him his well-beloved company health care coverage. This is a fundamental problem in policy reforms, and one that economists would be wise to study more intently, and to make sure that politicians of all political persuasions address more honestly.

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