Why the ACA is a transfer program

The following entertaining passage by Steve Landsburg is worth a read, as is the entire post from which it is excerpted.

[E]fficiency analysis strikes down political smokescreens. Like this: …

Economist: Your program [to subsidize health care for the poor] costs a billion dollars and delivers half a billion dollars worth of benefits. That’s inefficient. … [Y]ou could take that billion dollars and deliver a full billion dollars worth of benefits instead if you spent it a little differently. Why not just hand the cash out to poor people?

Politician: Because I don’t want to help all poor people. I only want to help sick poor people — and this is the only way I can think of to do that.

Economist: Ah. So your goal here is not to make the health care system work better after all. Instead it’s to transfer resources to sick poor people.

Politician: I guess so.

Economist: That’s fine. Now we can have a healthy debate about whether that’s what we want to do.

And now, you see, thanks to the economist’s insistence on thinking about efficiency, we end up having an honest debate about the politician’s real goal instead of a dishonest debate about the politician’s feigned goal. However the debate turns out, that’s a useful exercise.

I agree that thinking about efficiency is completely worthwhile. I’ve said so in blog posts and done so in my work. Making the not-too-risky inference from the above quote that Landsburg would consider the ACA a transfer program (since it subsidizes health care insurance for lower-income individuals an families), I agree with him on that too.

However, I disagree that the politician’s goal in his hypothetical is necessarily to redistribute wealth. In fact, I think the politician was duped by the economist. This reminds me of Greg Mankiw’s claim that the ACA is an merely an excuse to redistribute income. Here’s what I wrote in response:

There is a perfectly good reason why the ACA must be redistributive. By now we know how avoidance of adverse selection requires that a mandate accompany outlawing pre-existing condition exclusions. And low-income subsidies must accompany a mandate (if necessary, see Krugman for a review of the logic). If an individual can’t afford health insurance without a subsidy, it’s not helpful to provide one and to adjust the tax system to make the overall package distribution neutral. That’s like saying, “Can’t afford insurance? Let me help with the cost. Now pay me back.”

Putting this differently, there are externalities at work that justify redistribution. The goal is to address the externalities. Redistribution is just the necessary means.

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