Government Dominates New “Commanding Heights”

Arnold Kling and Nick Schulz, in the latest National Affairs, discuss how government intervention has excluded market mechanisms from regulating the operations of health care and education, the two most rapidly growing and influential sectors of the current American economy.

The commanding heights of our economy today are not heavy manufacturing, energy, and transportation. They are, rather, education and health care. These are our foremost growth sectors — the ones most central to employment and consumption; the ones that, increasingly, drive our economy. And it is in precisely these two sectors that the case for extensive government intervention and planning, if not outright control, is dominant — and becoming ever more so. …

If it were true only that health care and education are increasingly important sectors of our economy, there would be little cause for concern. Indeed, societies ought to desire economies that are strong and flexible enough to hum along as new technologies and other developments cause industries within them to rise and fall. The problem, rather, is that both health care and education are increasingly government-dominated industries. And this domination produces two ill effects that exacerbate the changes these sectors are already undergoing: Government’s influence artificially increases the demand for health care and education (by significantly subsidizing both), and it makes both sectors even less efficient than they would be otherwise (by heavily regulating them and shielding them from market forces). …

[I]n the cases of health care and education — in large part because of the dominance of government in these sectors — the prices of various “features” are often barely related to consumer preferences. With much of health-care and education spending paid for by third parties (and ultimately subsidized by government), consumers generally do not make decisions based on perceived relative value. The medical patient, instead of asking which medical procedure offers the greatest value, asks only whether the recommended procedure will be covered by insurance — a decision made by insurance-company or government bureaucrats, who have little sense of what is most important to the patient. The parents of a student in an elementary school are not responsible for choosing the school’s teaching methods; as “consumers,” they have no say in — and indeed, no way of knowing — whether the costly programs they pay for with their tax dollars are in fact producing good “value” in the form of their child’s education.

The result is that, in the sectors of education and health care, the preferences of policymakers — not of consumers — become the driving economic forces. And as these sectors become the new commanding heights, policymakers — rather than consumers and producers — will come to dominate more and more of our nation’s economic life.

Under these circumstances, the supposed inadequacy of market economics will become a self-fulfilling prophecy. Markets can work in education and health care, but only if governments allow them to. This means that, for the champions of free enterprise, introducing market principles and mechanisms into health care and education must become a top priority in the years ahead.

Read the whole thing.

Hat tip to John C. Meyer.