The Right Prescription

Pelosicare’s Broken Window

Nancy, it won't cost you anything to read up on Frédéric Bastiat.

By 1.8.10

In his 1850 essay, "That Which Is Seen, and That Which Is Not Seen," French economist Frédéric Bastiat wrote his famous Parable of the Broken Window in which he explained that the economic benefit to the glazier hired to replace an accidentally broken window is offset by the economic loss to the shopkeeper whose window was broken. In other words, what is seen is the cash paid to the window-maker and his ability to hire an employee or buy products from others with that cash. What is unseen is that the shopkeeper no longer has the use of his cash, with which he could have done any of the same things or simply used the cash for his family's benefit or his own enjoyment.

We frequently hear a version of the Broken Window fallacy during natural disasters, such as people crowing about the boom in sales of wood and the increased hiring of repair crews and construction workers after a major hurricane. Bastiat posed a similar point, reduction ad absurdum, by asking the rhetorical question, "How much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?"

While the issue raised by Bastiat is most clearly seen through an example of a broken window or burning house, the principle of needing to consider That Which Is Not Seen is critical during any analysis of the behavior of government, not least during the current health care "reform" debate. Between the typical Chicago thug political style of Barack Obama and his henchman, Rahm Emanuel, and the shell-game CBO manipulations of Harry Reid, far more is unseen than seen in the proposed legislation. As if to make that point even more obvious, the Administration is rebuffing C-Span's request that it live up to Barack Obama's often-repeated promise to have these specific negotiations take place in public view, indeed specifically on C-Span. Health care reform is now literally unseen.

The relevance of Bastiat to the health care debate struck me when reading a quote from Nancy Pelosi in which she said that she wants whatever compromise health care bill emerges from their closed-door negotiations to "lower costs at every stage" of our health care system.

As someone who thinks carefully about word choices, I found her statement troubling not only because I know she's lying about what she wants. It took me a few minutes, but then it hit me. The Bastiat fallacy lies in the word "costs."

What Pelosi really means is that she wants to lower prices paid by end-user consumers of health care.

She wants it to appear that costs have gone down, but in fact the bill will exacerbate the single greatest existing flaw in our health care system: the insulation of consumers of health care from the costs of what they consume. The majority of Americans, when they go to the doctor, feel as if they're spending someone else's money -- a situation which both Milton Friedman and common sense tell us cannot lead to disciplined spending.

All credible evidence and opinion points toward the current "reform" plans increasing the cost of insurance and medical care. Health insurance companies have said that premiums for almost everyone will rise, with prices doubling or tripling for many, particularly in the individual/family rather than employer group market.

When Democrats' plans to give everything to everyone for free or near-free and their intent to allow people to wait until they're sick before buying insurance (which would seem to defy the very definition of insurance, i.e. insuring against an unknown future event), take effect, costs will skyrocket.

The only way, then, for Pelosi to make prices for consumers decline in an environment of actually increasing costs is through massive government subsidies. This is the direction in which Bastiat's ghost is pointing -- while jumping up and down and screaming (in French), "Don't let them get away with such a transparent lie!" (The lie being the only thing about the situation that is transparent.)

"Subsidies" is simply another way to say "redistribution of wealth." The proposed Senate bill offers "assistance", meaning your money, to families of four making up to $88,200 (or individuals making $43,320). The House bill's numbers are similar. Under each bill, such a family of four's price to buy health insurance would be limited to about $2,500 and their out-of-pocket expenses capped somewhere between $4,000 and just over $6,000 per year. These numbers will massively increase the costs within the health care system as the subsidized insured over-consume health care and pay for less than the cost of services they use. This means that all Americans who aren't subsidized will see their prices go up to cover the unreimbursed costs.

In a way, what the Democrats want to do is to cause millions of Americans to have the same impact on our health care system that illegal aliens currently do: using health care services while paying much less than the costs they impose on the system, thus raising prices for everyone else.

The way in which politicians want to mask higher costs with lower prices is to increase taxes. Some suggest taxing "Cadillac" health insurance plans. Some suggest taxing upper-income earners, either through an income tax surcharge or lifting the cap on Medicare payroll taxes.

Should this "reform" pass, we will be living in Bastiat's nightmare -- in terms of the scale of what is seen and what is unseen -- when you go to the doctor's office or hospital. What will be seen, at least for many, is a low price. Reality, however, will be a health care system with costs exploding in a way that will make recent medical price inflation look tame. Some day, when the Democrats' intentional Broken Window fallacy is bankrupting the nation, reality and their schemes will have a violent collision. Even Pelosi won't be able to keep the cost of that collision hidden…and we'll all be paying the price.

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About the Author
Ross Kaminsky is a mostly-libertarian self-employed trader and investor and is a senior fellow of the Heartland Institute. He is the host of “The Ross Kaminsky Show” on Denver's NewsRadio 850 KOA on Saturday mornings from 6 AM to 9 AM. You can reach Ross by e-mail at rossputin(at)rossputin(dot)com.