In a previous post I brought up something that my fellow blogger, Dave Schuler, has pointed to as a problem with health care: Gammon’s Law.
The basic idea of Gammon’s Law is that even though expenditures in a bureaucratic system increase even though output (however you measure it) is decreasing. One thing this immediately brought to mind was William Niskanen’s Theory of Bureaucracy. Niskanen’s theory, in a nutshell, is as follows,
- Bureaucracies (or more accurately those who run a bureaucracy) know their costs.
- The legislators don’t.
- Bureaucracies want bigger budgets (one refinement is for bigger discretionary budgets).
- Since bureaucracies can’t levy taxes directly and legislators can, the bureaucrats lie to legistors to get bigger budgets.
Thus, the trend is for bigger and bigger budgets. Seems to me that this theory of bureaucracy and Gammon’s Law might fit fairly well. The bureaucracy wants a larger budget and how to go about getting it? Decrease output then claim more money is needed since the current budget is not sufficient to meet “demand”.
One problem is that Niskanen’s theory has bureaucracies that are large and over-supplying whatever good they are supposed to supply. However, Migue and Belanger[1] argue that bureaucracies are more interested in increasing their discretionary budgets (defined as any budgeted funds over the minimum necessary to cover the costs of production). Subsequent research looked at the role of oversight committees in a legislature and modeled the interaction between the two (bureaucracies and oversight committees) as a game, and noted that under-production was a definite possibility.
Still, the possibility of under-production doesn’t strike me as particularly strong. Of course, perhaps some bureaucracies are different than others. For example with national defense perhaps over-supply is the problem due to the nature of national defense. With health care we do have limitations on the number of doctors that graduate from medical school Right there, we’d limit output. Add on licensing for nurses and you have additional layer of rent-seeking that limits output.
Further, I think that the biggest problem is going to be the government bureaucracies. While private firms also have bureaucracies as well, there are, in my view, stronger checks on the size of a firm’s bureaucracy. If the firm’s profits start to take too big a hit due to the size of bureaucracy then people might get fired, the firm could shut down and sell of its assets. When was the last time we saw a government bureaucracy shutting down? Never? As such, the best starting place when it comes to addressing the problem of Gammon’s Law is most likely the government bureaucracies. Like Dave, I think this will require a significant re-thinking of how health care works in this country. The idea of having every little medical expenditure covered is one problem. Getting health insurance back to actually being insurance would be one step. And I’m not opposed to the government being involved at some level. I just think that involvement should be extremely limited at least in terms of bureaucracy and regulation. A voucher program could have very limited bureaucracy and yet still help ensure that most if not all people have health insurance of some kind. The idea though of having the government provide health care via a system like we see in countries where health care is socialized is exactly the wrong solution.
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[1]Belanger, G., and Migue, J., 1974. “Toward A General Theory Of Managerial Discretion”, Public Choice, 17, 27-43.
