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January 23, 2009

Ezra Klein — China Should Replace Personal Savings With Tax Burden

by Brad Warbiany

Okay, that’s not exactly what he said, but that’s what it boils down to:

But it’s worth zooming in on why the Chinese are making this a priority right now: Chinese economists see universal health care as a way to induce consumption and economic dynamism. The Chinese have a high savings rate — indeed, an absurdly high savings rate, between 30 percent and 40 percent of income — and one of the reasons is fear of medical expenses. China lacks a safety net, and so people spend less because they need to plan for catastrophe. And if catastrophe doesn’t befall, then they’ve simply spent less. Which is a problem when you’re facing down a potentially long recession. And so China is trying to make it safe for its citizens to spend, which means making future expenses more predictable, which means offering health care coverage.

Chinese saving rates are extraordinary. While Ezra’s point that one of the reasons is a fear of catastrophic medical expenses, there are certainly other factors at work — cultural, historical, etc. China is a poor country rapidly modernizing, and I would guess that the level of uncertainty for most workers is surprisingly high. Americans who lived under the Great Depression were far more savings-oriented than Baby Boomers or Gen-Xers, and this is probably due in large part to knowing “how bad it can get”.

But look at what Ezra is claiming here. He is essentially claiming that because the Chinese — who have decided their best interests are to save rather than to engage in American-style consumerism — aren’t “spending enough”, that the government should take their money away from them to cause them to spend more. The logic is that government taking away a bunch of money will remove their responsibility to plan for their lives, and allow them to live on the edge.

Doesn’t this remind anyone of the reason we’re in a worldwide deflationary debt spiral bordering on the worst financial crisis in history?

This completely avoids the COST of such a safety net as Ezra is suggesting. For many, it could be between 25 and 45 percent of income. If you look at high-tax European countries, where the social safety net is well-established, citizens need not worry about saving 30 to 40% of their income, because the government has taken it away as taxes.

China would be far better served by private entities (such as insurance companies, etc) helping to allow them to better plan their future expenditures than passing that burden to the government. In order for that to occur, of course, it would require a consistent legal environment based upon the rule of law, much more economic liberalization, and a commitment to property rights. The end result, however, would be to empower the Chinese to have both moderate saving rates, consistent planning of expenditures, and higher consumption. And it would allow them to control the balance of each. Ezra, on the other hand, would rather the government simply take the money away from them and decide how it gets spent.

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4 Comments

  1. Interesting article. I think the argument boils down to this private entities are better at management than government. The premise of the entire argument is government is incompetent. This has historically been true, even though there has been significant progress. I would take the argument further and say governments just like corporations are only as incompetent as their governing boards allow them to be. In the case of companies there is the extra incentive of the market, but that can also be easily done away with barriers to entry into the market. These barriers can be legislative, financial, technical, legal (which is also legislative).

    However, a government run company or institution can be efficient. It is fundamentally the same thing. The real question is whether it is a public priority. So for those of us that inherently distrust government, we will not gamble as to whether it can be efficient and instead pay a premium for the RELATIVE choice provided by private insurance.

    Once you obtain an efficient government it is fundamentally the best way to obtain health care. Or let me say the health care normally provided by a good insurance company. The main reason for the advantage is government is not bound by the onerous burden of making a profit. In some cases 10-15% profit. That is 10-15% savings. Which means the government could be 10% less efficient and still be cheaper. Of course choice will be limited just as a good insurance company limits choice.

    So really the fundamental argument is can government be trusted. In China this may give someone pause. However, in a democratic countries the real question is can democracies be trusted to manage the public good. Or should they be limited to things which private corporations can not do, which by the way is not much.

    Comment by Ciceroji — January 28, 2009 @ 5:15 pm
  2. It’s important to recognize a fundamental difference between governmental and private solutions. Governmental solutions are not funded voluntarily. It’s more than the “overhead” of a profit motive.

    If you opt not to do business with a company, they cannot send officers to place you in jail for refusing to buy their product.

    Comment by Akston — January 28, 2009 @ 7:19 pm
  3. Ciceroji,

    I would say, categorically, that government has structural incentives that do not encourage efficiency, while the market has structural incentives which encourage efficiency.

    Does this mean that government can not do things efficiently? No. But it means that — on balance — government should be expected to be less efficient more often than you’d find in the market.

    While you’re right that barriers to entry (usually government-enforced) remove some structural incentive of corporations to be efficient, and frankly I’d state that those corporations become inefficient bloated failures over time, just like government.

    I would say that in the case of any industry, competition and profit are the most reliable ways to generate an efficient outcome. I think this is especially true in democracy, because the incentives of politicians are skewed towards electoral results, not outcomes.

    In theory, the lack of a profit motive can lead to better efficiency. But the theory doesn’t hold when actual people start running things.

    Comment by Brad Warbiany — January 28, 2009 @ 7:43 pm
  4. Ciceroji –

    Consider also that government, being a monopoly, has no incentive to offer different services to different people with different needs. Looking at the big social safety nets in the US, Medicare, Medicaid, and Social Security, shows us that letting the government take this out of the hands of individuals produces one-size-fits-all solutions that in reality fit none.

    More over, determining needs from the top down ensures inefficiency because top down decisions will affect almost all situations in an inefficient manner. It is fundamentally impossible for a central authority to efficiently make economic decisions for a large population because they cannot comprehend enough about the situation of that population to do so. Letting people choose options based on what they know of their own needs from the bottom up is always far more efficient.

    This information problem is part of our limitations as human beings, and cannot be circumvented in a central control or monopolistic situation. So, when you say this:

    Once you obtain an efficient government it is fundamentally the best way to obtain health care. Or let me say the health care normally provided by a good insurance company. The main reason for the advantage is government is not bound by the onerous burden of making a profit. In some cases 10-15% profit. That is 10-15% savings. Which means the government could be 10% less efficient and still be cheaper. Of course choice will be limited just as a good insurance company limits choice.

    Please realize you’re saying something fundamentally unachievable by humans. The information problem of a monopolistic situation such as this simply cannot be overcome. As an example, you say that choice will be limited in this monopolistic situation. What happens if the choice that is inefficient for most but is the only efficient choice for a particular patient is eliminated? That patient is forced to live with inefficiency just because he dared to be different. If this happens a few times, it wouldn’t be enough to wipe out the efficiency gain you think would occur. But in a sector so massive and diverse as health care it would occur so many times as to significantly increase inefficiency.

    Contrast this with a market situation where a patient can choose between many types of insurance as well as paying his doctor directly. Not all insurance companies limit the same choices, making a much wider array of services available and increasing the odds of people making efficient decisions for themselves.

    Comment by Quincy — January 28, 2009 @ 11:42 pm

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