Why the Poor Need the Marketplace
The political left is convinced that certain goods and services — especially health care and education — should be provided free of charge by the government rather than sold in the marketplace (see Uwe Reinhardt, for example).
The reason: in the marketplace distribution will be determined by ability to pay and poor people, by definition, are least able to pay. Only free provision by the state can result in equal access for all.
The left, by the way, has largely won this debate. About 90% of schoolchildren attend public schools. And most people who are poor or near poor can enroll in Medicaid or the State Children’s Health Insurance Program (SCHIP) or take advantage of free care at community health centers and the emergency rooms of safety net hospitals. On the other hand, most other goods and services have been left to the marketplace.
So what has been the result of this grand experiment? If left wing political theory is true, we should expect to see huge inequalities in the ownership of goods sold in the market, but fairly equal consumption in health care and education. But there’s the irony. The exact opposite of this prediction has been borne out!
Someday we’ll
Find a new way of living
More than 30 million Americans are living in “poverty,” according to the U.S. Census Bureau. That’s one out of every seven people. But what does it really mean to be “poor” in America?
A Heritage Foundation report by Robert Rector and Rachel Sheffield finds there is more here than initially meets the eye. To most Americans, the word “poverty” implies significant material deprivation, including inadequate food, clothing and shelter. The actual living conditions of America’s poor are very different, however. According to the government’s own survey data, in 2005:
- The average household defined as poor lived in a house or apartment equipped with air conditioning and cable TV.
- The family had a car (a third of the poor have two or more cars).
- For entertainment, the household had two color televisions, a DVD player and a VCR.
- If there were children in the home (especially boys), the family had a game system, such as an Xbox or PlayStation.
- In the kitchen, the household had a microwave, refrigerator, and an oven and stove.
- Other household conveniences included a clothes washer, clothes dryer, ceiling fans, a cordless phone and a coffeemaker.
The home of the average poor family was in good repair and not overcrowded. In fact, the typical poor American had more living space than the average (non-poor) European, the Heritage scholars note. When asked, most poor families stated they had had sufficient funds during the past year to meet all essential needs.
Liberal blogger Matt Yglesias says the Heritage report leaves out three things: housing, education and health care.
Over the past 50 years, televisions have gotten a lot cheaper… Consequently, even a low-income person can reliably obtain a level of television-based entertainment that would blow the mind of a millionaire from 1961. At the same time, if you’re looking to live in a safe neighborhood with good public schools in a metropolitan area with decent job opportunities you’re going to find that this is quite expensive. Health care has become incredibly expensive.
But what do these three sectors have in common that’s missing from the market for television sets and video games? Government. I’ll save health care for another occasion, and consider the other two.
Does anyone doubt that government totally dominates education, shaping and molding every facet of it? We are all forced to pay for the public system, even if we don’t use its services. And even though the public schools may work tolerably in well-to-do suburbs, they are generally miserable in neighborhoods where most poor people reside.
That brings us to housing. For one thing, the real estate market is highly regulated. So much so that many poor people have been priced out of the private marketplace and must rely on public housing instead. More importantly, because of the way the government runs the school system, the housing market is really a surrogate market for public education.
A study of north Dallas schools found that housing prices varied in lock step with independent measures of school quality. Another study compared housing prices in Highland Park, a ritzy Dallas enclave with its own school system, except for one tiny area that spills over into the Dallas Independent School District. Along a Highland Park street that divides the two school systems, there is no visible difference in the appearance of the houses. But the average difference in price was $72,000. That’s what it costs to go to a Highland Park school rather than an inner-city school.
Remember this price differential is not created by the real estate market. It reflects the relative value of two government school systems. “Tragically,” Yglesias writes, “many Americans can’t afford a house in a safe neighborhood with a decent school that’s within a convenient commute of the central business district of a major city.”
True enough, but whose fault is that? Don’t blame it on capitalism.
Economists who believe that public provision of private goods is desirable are out of date in their understanding of economics. Intervention theory is quite plain that lack of income calls for an income solution, not a national system of medical clinics, education establishments, etc. The mathematics is the mathematics, regardless of what the thinking is of those whose understanding is back in the middle 20th century.
The overarching question is whether this situation results from a genuine desire to help disadvantaged individuals or from an intentional scheme to enslave as many as possible in a cycle of dependency in return for political support.
I agree, but disagree.
These examples are not a question of government vs no government, it’s to the degree of government involvement and the perception of society. Government is involved in the market place for video games and televisions, but because government involvement is limited it works. Very few people will be up in arms over unequal allocation of video games, except for kids at Christmas and birthdays. There is a difference between the value of education and a video game to society. It is true that individuals below the poverty level have many amenities, but that is because they to some degree they have the ability to pay. Their spending priorities might not be prudent or wise,they might end up bankrupt, but they can spend their money on what is important to them. It should not be up to the government to regulate how people choose to spend their money.
The Highland Park school district is high priced because of the low supply of houses to the relatively high demand of wealthy individuals in Dallas. This happens all across the US, government just reinforces this market.
The crux of this argument is that in societies eyes there may be a market failure in production of education, health, etc. as some are priced out. BUT being a welfare state government production of these goods/services leads to greater government failure. Governments can provided these goods deemed essential to society through limited and wise policies, but not through mandates.
Look forward to see what you say on healthcare
Great post. Great song. You don’t disappoint today.
Question: If the poor didn’t have a microwave, giant TV, and all of the other gadgets of modern life, would they be able to pay for health insurance?
I’ve always amazed by people who say, “I don’t have any money! I can barely afford to make my house payment!” but then pull their iPhone 4 out of their pocket and start downloading ringtones.
However, the cost of an iPhone is a fraction of the cost of health insurance. So, I’m not sure it’s a fair fight.
Good piece. I agree completely.
@Virginia
That’s exactly why the Heritage study is pretty ridiculous, and quite frankly ignorant toward the plight of the poor. Owning a TV (per se) or similar consumer may not be the best proxy of prosperity. Consumer electronics have become more and more affordable, while housing and health care have greatly increased in price.
Instead, a better measure of poverty could have to do with feelings of insecurity, how often one has to make sacrifices in order to afford food/rent, how unsafe do they feel in their neighborhood, or some other way of showing how poverty actually affects the poor. Though I’m sure the majority of readers on this site are more sympathetic to the Heritage viewpoint rather than the Yglesias one, I don’t think it’s particularly uncontroversial to say that owning pretty common consumer goods are a pretty poor predictor of not being poor.
As for health care, it seems to me to be a significantly different type of good than most consumer goods, with more potential for misunderstanding/information asymmetry, and this is where market failures can kick in. Certainly, poorly-conceived government involvement can cause equally or even more problematic distortions, but let’s not pretend that seeking out health care is anywhere close to buying a car, groceries, or a TV (to connect my two points of discussion).
John,
This little blog seems more confused than most.
Good to have you fighting for the rights of the poor and their well being!! Not sure they will appreciate the help.
We have more private solutions in USA than most developed countries and more inequality every year — especially in the last 10 years… under both Republicans and Democrats.
Some days I wonder whether you even think they are radically different.
I see the bankers in WSJ and FT, who we bailed out, are now not sure they like the Tea Party crowd who seem to have a problem with bail outs. Rommey and Perry may find themselves in hot water with them when Tea Party crowd learns that banker, etc have bank rolled their campaigns and learn that banker like the welfare state when their risks are covered.
Keep working for your Utopian Capitalism .. I will continue to push for a utopian social capitalism.
I have been doing some work in Mexico. Besides the drug war and that mess, issues Mexico may save us. The dynamics of enterprise and social intervention both are impressive. National housing program for low income people is moving forward with some help from Feds and loans. Houses are $20,000 and very eco-friendly. Seems to be a sense of hope also in Mexico. Economy is growing at 5-6%.
Eric,
I’m not sure that feelings of insecurity are enough to make one fall above or below the poverty level. That’s a little too subjective for me. But, I see where you are coming from.
For me, it’s a question not so much about the cost of the items but what they indicate about the decision-making skills of the person that has purchased them. The liberal answer is probably that no matter how much these people forego, they still won’t have enough money to make ends meet, so they have no incentive not to buy goodies like microwaves and cordless phones. (I certainly don’t consider my microwave a splurge, but I can see how others would.)
There might be some truth to that, but I haven’t studied the issue enough to say one way or another.
What I find amazing about these studies of the rich and poor is what they indicate about modern life. 100 years ago, no one would have said that all of these gadgets were essential to life, but now a home without a fridge is an anomaly. It says quite a bit about our sensibility that almost everyone in America has a cell phone and the internet and that these things are now considered essential to functioning in the world.
I’ve been rereading Walden this month, and I find the simplicity of Thoreau’s lifestyle to be very interesting. I am fascinated with the contrast between his account of his lifestyle and that provided by studies like Heritage where advanced technologies are ubiquitous, even among those in poverty.
How should we define poor? Is poor defined as lacking adequate resources to survive? Or is it lacking resources comparable to the less-poor among us? Research shows people tend to adapt to whatever their circumstances are. In addition, people have a sense of wellbeing based on their relative standing compared to their neighbors, not the conditions they find themselves in. Conditions that were typical in the United States 70 years ago would be considered pure torture today. Yet people were healthy and well-adjusted back then. The wealthiest Americans had a level of health care that is inferior compared to the care the poor have access to today. The technology simply did not exist. The wealthy could see a doctor all day long — who had no effective treatments for health disease, hypertension or a host of other conditions. Based on this we can assume the poor are much better off than in decades past. Yet we lament their plight mostly because they have less than some of their neighbors.
John,
I agree that education, health care and housing would be much better left to market forces. The problem we have with education is that all students, regardless of ability or personal preference are forced into the same, college prep curriculum. If education were provided via free markets, many students would opt for a different type of education — probably more of a “vocational” education.
I think your critics miss the point — that if left to the markets, education, housing and health care would be in very different condition from where we now find them. Here in Texas, for instance, I believe a great many students opt for non-public school choices, including Christian schools, ordinary private schools, and home schooling. These students get the education they and their parents want, at a price they can afford.
Thanks for your work.
I find it a bit obscene reading articles from professors and politicians who enjoy taxpayer subsidised housing, heathcare and eduction (through tax deductions) telling the poor they are better off without. The real problem in the US is that the rich enjoy most of the federal cash going into education, health and housing. I am glad I grew up in the UK and New Zealand where we focus support on the poor. As a result we enjoy better health outcomes than the US for a fraction of the cost and know that hospitalisation does not mean a plunge into poverty. I have no problem with private provision of health, education and housing, but wish taxpayer support would go to the poor not the rich.