Published in The News Tribune, December 21, 2011
Today’s column concerns “deadweight loss.”
Why anyone would coin a term “deadweight loss” (DWL) is beyond me. But someone did and we’re stuck with it. Of all economic expressions this is the worst, conjuring up images of the Mafia and concrete boots. But DWL is important; in order to have a “healthy” economy we should eliminate it. Read on to see where I’m going.
Christmastime presents a handy way to explain the concept of DWL. Open that closet where past Christmas gifts are stored – if they haven’t already been re-gifted, that is. Or reflect on those forlorn fruitcakes we’re never sure exactly what to do with.
Deadweight loss occurs when you spend a lot without getting much in return. Simply put, when money is used in a way that produces little value, that’s DWL. Christmas gifts entail a lot of DWL because so often the gift-giver spends more than the gift-ee values the gift.
Economists don’t like DWL; and so they also don’t like Christmas – or at least the gift-giving part. (Now you know Santa is in those concrete boots.) We’re best off when resources are used to create things people value. Since Christmas-giving is filled with DWL, we’d be better off being Scrooges during the holidays and not getting too carried away with our gift-giving traditions.
A parallel argument to this one about gift-giving is another that government should be downsized. The public sector is wasteful, spending on things of little social value. In fact, rather than contributing to the social good, it drains away resources that private citizens would have put to better use. The lesson here is to limit government.
Those who make this claim essentially argue that the public sector generates DWL. If you believe economists and conservative pundits, then (and that’s a big if!), Christmas and government have something in common – lots of DWL.
Santa and Uncle Sam are curious bedfellows, though. Gift-giving is done by individuals. Public spending is a collectivist undertaking. How could they wind up with similar wasteful tendencies?
In fact the two share something in common: the person (or people) footing the bill is not the same as those receiving what was purchased. Economists call this “third-party payments.” It’s hard to get it right when your aunt buys you a tie, rather than you taking her money and buying what you’d really like: that cool multi-tool device seen on TV that can unscrew screws, fix flats, and recharge batteries. It’s similarly hard for government to get it right when anonymous taxpayers pay for potholes, a neighbor’s X-ray, and the DMV.
We can and do argue about how much social value private versus public spending generates. But once you know the problem created by third-party payments, you’ll understand that the biggest source of waste (DWL) in our economy is neither Christmas nor government: it’s our health care system.
Most health care services are paid for by third-party payers — insurance companies and taxpayers. This leads to the same problem faced by gift-givers and governments: it’s hard to get it right.
In health care, we haven’t come anywhere near getting it right. Until we do, don’t expect our health care system to be really good at generating social value. Each year we spend the equivalent of half of our nation’s total military bill just meeting its administrative expenses — costs associated with having third-party payers.
Many other costs in our health care system associated with third-party payers help explain why we spend 50 percent more on it than does any other country — with little to show for it. Earlier this month the outgoing head of the federal Centers for Medicare and Medicaid Services office claimed that we spend an astounding $1 trillion each year on unnecessary health-related expenses.
Deadweight loss speaks to the value of using resources wisely. Especially these days when we’re leaving so many social problems for another day, it’s an important one. If we really want to make progress on this front, though, it’s not tacky ties and a slow DMV that deserve our attention and criticism. It’s our health care system.