Saturday, May 14, 2011

What do Medicare, the Housing Bubble and the Chinese High Speed Rail have in Common?

Megan McArdle, writing about the Chinese high speed rail and its parallel to the 2008 U.S. housing bubble-and-crash had this to say:

Prices are really useful. But in whole large sectors of the Chinese economy, particularly the banking sector, the government sets those prices. This means huge information loss, and the concomitant possibility that there is a vast misallocation of resources.

Don't those things happen in markets? Hell yes: witness the housing bubble. On the other hand, witness East Germany. To get a really catastrophic misallocation of resources, it seems to take a government; corporations can only screw things up on an artisinal scale. For that matter, it's worth noting that our government has spent the last seven decades trying to keep the price of housing low, and that much of that intervention, such as the creation of mortgage securitization, ultimately significantly contributed to the crisis.

It's worth remembering that at the time they were built, all those useless houses looked like prosperity.

The same argument can be made for the current mess we are in with health care prices. With the government as the single largest payer for medical care in the U.S., the administratively-set prices for Medicare and Medicaid wreak havoc with supply, demand and resource allocation.

Also -it's worth remembering that at the time they are consumed, all those unfunded Medicare benefits look like a wonderful health care program--until you pay attention to the effect they have on rising health care costs and government insolvency.


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