(Bloomberg View) — Austin Frakt of the Incidental Economist writes (and tweets!) to ask if I have ever written anything on the externality argument for the Patient Protection and Affordable Care Act (PPACA) individual mandate. Good question, and the answer is that I don’t think I have, though the archives from my first six years of blogging are shot, and the rest are now scattered across three different sites that don’t always turn up on Google searches.
But there’s nothing stopping me from doing so now, and hey, here I am, doing it.
For those who might not know the term, “externality” is economist-speak, and it means about what it sounds like: an effect that your action has on others. An externality can be positive or negative, and obviously, we as a society would like to have as many as possible of the former and as few as possible of the latter. In other words, “Your right to swing your fist stops at the end of my nose.”
I’m a libertarian, and libertarians love talking about externalities. They give us a (relatively) clear way to define what are and are not legitimate scopes of public action. Whatever you’re doing in the privacy of your own bedroom with another consenting adult is really none of my business, even if I think you oughtn’t to be doing it. On the other hand, if you’re breeding rats and cockroaches in there, and they’re coming through the shared wall of our respective row houses, then I have the right to get the law involved.
Framing things as “externalities” is therefore a good way to get a libertarian, or someone who leans that way, on your side. And such frames have come up over and over in the debate over Obamacare, which has been variously justified by the cost to the state of emergency room care; the cost to society of free-riding young folks who don’t buy insurance until they get sick; the public health cost of people who don’t go to the doctor and get really, expensively sick; an unhealthy workforce that is less productive; and the cost to friends and relatives who have to chip in to cover uninsured medical expenses.
I didn’t find any of those arguments particularly convincing. The third can just be dispensed with on the grounds of accuracy: In general, preventive medicine does not save money. Oh, it may save money in the particular case of someone whose diabetes or cancer went long undiagnosed. The problem is, you can’t just look at the cost of sick folks who would have been a lot cheaper to treat if their conditions had been caught earlier. You also have to include the cost of all the healthy people you had to screen in order to catch that one case of disease.
And with limited exceptions, the cost of screening the healthy generally outweighs the cost of treating the chronically ill. Now, you can certainly argue for preventive care on other grounds — for example, that it makes people healthier (though even then you have to add the cost of unnecessary medical procedures, such as biopsies following a false positive on a blood test, which is why we do not, say, give annual mammograms to every American woman). But it’s not generally a money saver, so this particular externality doesn’t exist.
The rest of the arguments have some weight, but in the end, I don’t think they’re weighty enough. Let me explain.
On closer examination, arguments about externalities turn out to be not quite as neat as libertarians, or economists, would like. If you frame it right, almost anything can be an externality, which is useful as a way to tack a thin veneer of economic rationalism onto your political argument but useless as a way to make policy in a pluralistic society. What if knowing that you and your partner are doing naughty things a few feet from my bed causes me severe mental anguish? That’s surely an externality, so why don’t we take notice of it?
The answer is that we don’t simply say “OMG, negative externality! Quick, government, kill it with fire!” Because in that way lies madness. As it’s easy to see, reducing this negative externality itself has a negative externality, which falls on the folks who enjoy doing naughty things a few feet from your head.
So too with the individual mandate. Make people buy insurance because their lack of insurance has negative externalities. But getting cheaper insurance for some now has negative externalities on folks who have to buy pricey insurance that costs them far more than the benefit they get out of it. It’s like sitting between two mirrors: negative externalities stretching away to infinity on both sides.
How do we decide? Not in any very clean way, of course, this being a society filled with imperfectly rational humans rather than a blackboard in an economics class. But society has generally settled on some rough intuitive rules, which I’ll try to make explicit: