Impact on Market Dynamics

To grasp the implications of welfare programs, it’s crucial to understand how market-driven systems establish equilibrium prices. This balance occurs at the point where the demand curve meets the supply curve.

At this intersection, the quantity that consumers wish to purchase aligns perfectly with what producers are willing to provide. When prices exceed this equilibrium, surpluses arise, as elevated costs deter buyers and incentivize sellers to produce more than is consumed. Conversely, prices below equilibrium lead to shortages, as low prices attract buyers while discouraging suppliers, resulting in an inadequacy of goods.

Any intervention that alters market prices away from equilibrium will inevitably lead to either surpluses or shortages. Thus, setting desired prices without acknowledging potential repercussions is unrealistic.

For a quick overview of this concept, check out the following video:

The equilibrium price mechanism ensures that the most efficient suppliers dominate the market, while those who value goods the most are the ones who acquire them. However, welfare proponents often highlight the plight of individuals who may highly value services like healthcare yet lack the financial means to access them. The proposed solution often involves taxing some individuals to provide services to others.

Medicaid, for instance, offers low-cost or free healthcare based on income. When we consider a scenario where healthcare costs are set to $0, it is evident that this price is significantly lower than the market equilibrium, leading to a shortage of available services.

With the pricing mechanism rendered ineffective, alternative methods must be employed to allocate limited healthcare resources. These can include:

1. First-Come, First-Served: This method often results in long wait times, either in person or on waiting lists.
2. Lottery Systems: Random selection can determine who receives services, similar to how some magnet schools admit students.
3. Criteria-Based Selection: This approach evaluates candidates based on specific metrics, akin to how prestigious universities admit students based on test scores.
4. Review Panels: In the UK, a panel assesses who receives limited life-saving care within the National Health Service.

However, such allocation methods raise the concern of potential corruption, as they create opportunities for bribery and favoritism.

You may wonder why simply increasing supply to meet heightened demand isn't a straightforward solution. While suppliers might be willing to respond to increased demand at a price of $0, they must cover their costs. Thus, to amplify supply, higher-cost providers must be included, which in turn raises overall costs.

Even if the goal is to keep costs low by maintaining payments to existing suppliers while incentivizing new ones, it’s challenging to differentiate compensation based on supplier experience. This demonstrates the truth behind the adage that there is no such thing as a free lunch.

As costs rise, governments often attempt to curtail payments to providers, leading to a scarcity of healthcare professionals willing to accept Medicaid. Simpson highlights that approximately half of urban physicians opt out of the program.

If the government mandates that healthcare providers accept Medicaid patients at set rates, many practitioners may exit the field, deterring new entrants and ultimately reducing the availability of resources in healthcare.

Before endorsing universal healthcare initiatives, consider the experiences of those reliant on Medicaid or the Veterans Affairs system.

Universal Basic Income: A New Approach?

What if we shifted focus from market interventions like healthcare and housing to simply providing everyone with a basic income? This idea, known as Universal Basic Income (UBI), typically involves replacing existing targeted assistance programs with a monthly stipend for all individuals, irrespective of their income level.

Proponents argue that UBI could streamline administrative costs associated with various welfare programs. However, the increased number of beneficiaries may negate these potential savings. Trials in countries like Indonesia and Peru revealed that UBI performed worse than targeted anti-poverty initiatives.

A 2017 study in the U.S. proposed nearly $14,000 for each adult and around $7,000 for children under 18, but found that both higher-income individuals and seniors would fare worse under UBI. Consequently, any initiative that negatively impacts those over 65 is politically unlikely to succeed.

Historical Context of Welfare States

Simpson concludes this chapter by examining Greece and the Nordic countries, both of which maintain large welfare states within market economies. Greece's welfare state became unsustainable, leading to severe economic challenges. The country offered early retirement options and generous vacation time, but such benefits ultimately hampered economic competitiveness and resulted in substantial borrowing.

In contrast, the Nordic nations proactively adapted their welfare programs before facing dire circumstances. Their relatively homogenous populations and cultural values surrounding interdependence have allowed for extensive welfare systems. However, these nations also faced economic strains and had to implement reforms to ensure sustainability.

In conclusion, both Greece and the Nordic countries illustrate the necessity of balancing welfare benefits with economic realities. It remains to be seen whether American leaders will come to a similar understanding, echoing economist Herb Stein's assertion that unsustainable practices cannot persist indefinitely.

Reference: Simpson, Thomas D. (2020). "The Welfare State," Chapter 5 of Capitalism versus Socialism.