Last time I listed attributes of the financial industry that make it markedly dissimilar to something that could be called the free market. Even the financial markets themselves, once the very definition of free market capitalism, have been increasingly subverted by government control and intervention over the past two or three decades. (Another non-free market intervention, interest rate manipulation, also has a substantial impact on the financial industry, which I’ll describe in more detail next time in the final part of this article.)
And as I mentioned last time, although the government – in general, not at all a product of the free market – is said to make up 13% of economic activity in the U.S., total government spending, takes up a much larger share of the economy (approximately 36%). The government’s large share of the economy obviously crowds out the free market, including that part that might natural stabilize the economy during times of economic instability or dislocations. And while Keynesian economists like to point to the ability of government to pick up the slack during times of economic and financial slowdown, the chronic overspending by governments even during times of prosperity means they have little in the way of reserves to pick up the slack when the economy sours. Governments’ extra spending over and above already “normal” overspending levels is just more debt that in turn will have to be borrowed and paid via higher taxes or more money-printing in the future.
The U.S. government alone has racked up more than $10 trillion of debt in the last decade. Surprisingly, even during the economic recovery, the government did not come close to balancing its budget and/or paying down its debts. During good times and bad, government is a chronic overspender. The myth that the government has “dry powder” to spend when the rest of the economy slows is simply not true anymore, if it ever was. The federal government has increasingly taken on the role of running the U.S. economy over the past century, and there is no evidence that its interventions have reduced the extent or number of economic downturns. Conversely, there is strong evidence that without government intervention and its 36% spending share crowding out of the free market, Americans would be enjoying a less distorted economy, lower inflation (thank the Federal Reserve for the inflation Americans have enjoyed for a century) and a significantly higher standard of living.
Last time I also looked at the next two largest contributors to economic activity in the U.S., business services and manufacturing. While those two sectors are more free market or capitalistic than the two largest – finance and government – they are still government controlled and managed industries, with the tens of thousands of pages of regulations, taxes and red tape used to manage them. It’s a free-ish market, but not close to a purely capitalistic one.
The next largest contributors to GDP are education and healthcare. Education in particular has little in common with the free market. At lower levels of education, government schools exists as more or less a monopoly. According to the National Center for Education Statistics, more than $600 billion a year is spent on government elementary and secondary schools, or more than $12,000 per student. Nearly 100% of that school spending comes via local, state or federal taxes and nearly 90% of children will receive schooling in local government schools. As their employers, educators teach to the interests of government bureaucrats, not necessarily to school children or their parents. As mentioned previously, one can educate their children via private school or homeschool, but since one is already paying for government schools with increased taxes, alternative education is a viable option to just a small fraction who have the time and money.
Private schools account for only about 10% of all students (ranging from 6% of those with family incomes under $50,000 to 26% of those with incomes over $200,000. Source: Trulia). Homeschoolers add a few percentage points more of those who educate outside government schools. Especially for the vast majority of lower- to middle-income working families, alternative education is not practical option. If a family is not satisfied with the limited options within their school district, they may move of course, but with the associated disruption to family, finances and friends, and still likely subject to government’s near-monopoly in another school district. Imagine if there was one Wal-Mart store in a given area that 90% of the citizens used exclusively for retail purchases. They were “free” to not use that Wal-Mart, but they would have to double pay for their products – pay a very large tax to the Wal-Mart store and then pay the costs to purchase products at another store. (Comparing the analogy to homeschooling, the shopper could avoid most of the extra costs from a second store, but would still pay in the form of lost time and wages.) That is the business model of government schools.
With higher education, there are lots of colleges and universities to choose from, but more than 70% of students attend government colleges and universities, and rely more on taxes than tuition for their existence. According to Pew Charitable Trusts, federal and state tax spending on universities is more than $150 billion a year in the U.S., which is much higher than revenue from tuition. Where states have cut back on university and college spending somewhat in recent years, federal increases have more than made up the difference, increasing by more than 92% in real terms since the year 2000. Even private universities generally receive substantial tax subsidies, such as Yale and Harvard, with subsidies of more than $13,000 per student per year. In general the education “industry” has little in common with the free market.
The healthcare sector has been a big contributor to stated job growth in the U.S. in the past decade. According to Deloitte Consulting, healthcare employment grew four times faster than overall job growth in the U.S. over the years of 2000-2016 (42% versus 9.8%, respectively). The sector has also had the greatest contribution to economic growth (Gross Domestic Product) during the same time, increasing its share from 13.3% of the economy in 2000 to 17.8% by 2015. However, as I have noted previously (Does Health Spending Equal Economic Growth? – June 9, 2016), we should be careful when we blindly assume that all healthcare spending is economically productive because it leads to job growth or economic activity. If the increased spending reflects the maintenance of a chronically sicker or more disabled population, instead of one of helping people quickly recover from illness or injury, then such healthcare dollars are simply taken away from more productive uses in the economy, including, not least, the productive work of those health patients.
In that article I talked about the growing incidence of diabetes and obesity among Americans. While those increases have undoubtedly led to job growth in the healthcare industry one could hardly look at higher numbers of chronic disabilities as a benefit to the economy. Similarly, in recent years, one can observe the incredible increases in deaths, disease and injury resulting from the growing drug and opioid epidemic: deaths from drug and opioid misuse/overdose more than quadrupling from 1999 to 2016 (see chart below).
In other words, all economic activity is not equal. There’s productive economic activity, there’s unproductive economic activity and there’s destructive economic activity.
As far as the state of free markets in the healthcare field, nearly half of revenue to the industry comes from governments. According to the Centers for Medicare and Medicaid Services, 29% of healthcare spending comes from the federal government, with state and local governments paying another 17%. Households pick up just 28% of the healthcare tab, and most of that is via insurance premiums and co-pays. Medicare and Medicaid is obviously not a part of the free market, and has greatly distorted the healthcare market for half a century. Medicare and Medicaid spending alone, not counting the many other government health programs, now account for more than a third of total health expenditures in the U.S.
Those programs were initially designed to fill a void in the health insurance market, uninsured Americans, but have since then have taken a steadily increasing share of total medical spending, and with increasing government control and regulations. (Medicare now covers nearly all Americans over the age of 65, even the very wealthy.) For decades, governments, by far, have had the greatest heft in dictating how the healthcare industry operates, and have more than crowded out the influence of individual citizens paying for healthcare. Out of pocket healthcare expenses for individuals now accounts for less than 10% of total healthcare spending.
Even private health insurance is not conducive to or even really a part of the free market, because the “coverage” is so vast and extensive, again, thanks to extensive government-mandated regulations and restrictions. Healthcare insurance, private and not, has been extremely regulated for decades, starting with the Social Security Act of 1964, the Medicare and Medicaid Patient Protection Act of 1987, the Omnibus Budget Reconciliation Act of 1989, the Health Insurance Portability and Accountability Act of 1996, the Medicare Modernization Act of 2003, and many others, adding up to tens of thousands of pages of federal regulations as well as state and local ones.
One thing these regulations have generally not done is increase competition, increase overall quality or reduce healthcare and health insurance costs. And of course, as governments have taken an increased role in dictating exactly how healthcare is delivered, healthcare costs have steadily increased, much higher than overall inflation (see chart below), and much higher by far than any other developed nation.
Because of the massive regulations in healthcare, including those that explicitly limit competition among insurance companies across state lines, there are near-monopolies and oligopolies of healthcare and health insurance in many areas of the country and outright monopolies in some areas.
A cornerstone of the free market is transparency with the available products and services in the marketplace. The internet has made that even easier in recent years. But that’s generally not the case in healthcare. The out-of-pocket cost for a given healthcare service is mostly dependent on an American’s particular insurance, and whether the provider is “in-network” or out. And as noted, since individuals have such a small share of total spending on healthcare, their influence is limited, and the end-users of healthcare have become price insensitive. In such industries, price inflation is the norm, as is generally poor performance. Not surprisingly though, we generally see the opposite in certain areas of the healthcare market that generally operate outside of government and insurance. In these areas such as laser eye surgery and cosmetic surgery, the supply of services and providers, quality has improved while inflation-adjusted costs to consumers have generally fallen.
Conversely, the majority of government controlled and regulated healthcare continues to see declines in quality. The private foundation Commonwealth Fund published a study recently listing U.S. healthcare last out of eleven nations in terms of healthcare outcomes, administrative efficiency, and access to care. Healthcare staffing firm MerrittHawkins published a study recently finding that wait times to see a doctor in fifteen large U.S. metro areas had increased to 24 days, a 30% increase from 2014. In most of these cities there was at least one or two providers with stated wait times of six to twelve months. Compare such wait times to those one might find to see a lawyer, accountant, financial consultant, or non-government or insurance affiliated healthcare provider in the marketplace. The wait times alone to find a doctor or specialist tell you that the majority of healthcare in the U.S. is not a free market. If there were shortages of specialists, doctors or services in a free market, you would quickly see competitors coming in to fill that demand. (Ironically, one of the key reason stated for the “shortage” of doctors was because of the 1997 Medicare cap on funding physician residency programs. This is another indicator healthcare is not a free market: there’s no long-term shortage of products or services in a free market)
The rest of the industries contributing to GDP include the retail sector, technology, construction and transportation. These markets operate in the free market to varying degrees, but every industry is affected by the heavy hand of government. Conversely, every company and industry, especially large ones, is a potential contributor to government in the form of taxes, power, and connections. No surprise then that big business and government have joined as partners, in a co-dependent relationship. Big business needs regulations to keep competitors contained, as well as special tax deals and exemptions to lighten their financial load. Politicians need the bribes from industry and big business to maintain and grow their power. That includes payoffs after politicians leave office. Witness the extremely lucrative fees for speaking engagements presidents and politicians “earn” from corporate special interests after they have left politics.
The starting path to this unholy alliance is often lobbying, and its various offshoots of political connection, affecting all manner of business across America. While we might assume that companies in such “free-market” areas as technology operate outside of government influence and corruption, we would be mistaken. Below is a graph showing the amount of lobbying money (bribes) spent by prominent technology companies in 2013.
These companies are not stupid and they are not wasting their money. They know that their lobbying “contributions” are a very good investment. Below is a graph I included in a past article, showing the incredible returns earned by corporate lobbyists.
From the perspective of lobbyists and their recipients, it is a win-win operation. Millions in contributions and gifts wield much influence toward individuals, and in turn, individuals can deliver tax breaks, regulatory changes and other corporate benefits worth dozens or hundreds of times as much. It has been reported that $2 billion was spent by the financial sector on financial contributions (including $1.2 billion on campaign contributions) over the last two years ending 2016. As the “Dodd Frank Act” of 2010 was being written, the six largest U.S. banks used 3,000 lobbyists, spending nearly $30 million, to influence that and other financial legislation.
The resulting 30,000 or so pages of regulations from Dodd-Frank has been a gift to the financial elite, further limiting its competition (see part I of this article on related comments by the CEO of Goldman Sachs). Since 2010 U.S. banking profits have climbed to record levels and as of 2015, had the second highest profit margins of any industry in the U.S, with only health technology exceeding it. Lobbying works. But bribing government for special competitive advantages and fatter profits isn’t a cornerstone of free market principles. And it’s not capitalism. It’s crony capitalism. Commentators should know the difference.
I’ll finish up this topic next time.