Health Care ‘Reform:’ $500 Hammers and the Reverse Economies of Bureaucratic Scales

At the center of the health care debate is the simple – but profound – question of whether government can deliver services, in this case health care services, better than private enterprise sensibly regulated.   President Obama clearly believes that the ‘public option will not only be more equitable but more efficient as well – a claim he made when he spoke to the Joint Session of Congress earlier this year.  Of course, nothing could be further from the truth.

The reason Obama is wrong, and the Left in general on issues of public options versus private enterprise, is simple human nature.  When it comes to such matters, it was never so well explained as by the legendary Milton Friedman:

“There are four ways in which you can spend money.  You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else.  For example, I buy a birthday present for someone.  Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.  Then, I can spend somebody else’s money on myself.  And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!  Finally, I can spend somebody else’s money on somebody else.  And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get.  And that’s government.”

If you extrapolate that logic, you come to understand why the US Defense Department paid $500 for hammers during the 1990’s – an occurrence which infuriated the Left largely because they were anti-military and the rest of us because of the sheer waste.  The reason for such waste was rather simple:  a government bureaucrat was not spending his own money on himself – but other’s money on goods and services for others.  But it wasn’t only that – there also is the issue of what I call the reverse economies of bureaucratic scales.

Realize that if you are a one-man shop selling lemonade – you know quite well the costs of your goods, your selling price and ultimately the bottom line.  You have every incentive to be vigilant on all counts so as to achieve a profit.  As any person in business will tell you though, the more employees you hire, the harder it is to keep a close eye on them and therefore a close eye on costs.  For huge corporations, with what amounts to their own private bureaucracies, the problem is not one of simple arithmetic – but of geometric proportions because there are so many more potential opportunities for waste.  That is a simple fact of doing business because the greater the number of employees – the more distant they are from the bottom line.

It is such a major concern that larger companies hire whole divisions of people dedicated to analyzing and streamlining costs.  In doing so, they can strive to keep production costs low and they can achieve or maintain economies of scale, i.e. the ability to produce more units at a lower cost per unit as the number of units sold goes up.  Even though that is hard, it occurs because the profit motive keeps private business owners more than concerned that they are not buying $500 lemons.

Governments, however, simply do not have the same motive.  First, unlike business, a government bureaucrat knows that an unspent allocation may not be reallocated in the future thereby resulting in a loss of power and prestige.  Literally.  Thus, reducing budgets for efficiency purposes is simply not a priority – especially since they cannot benefit from the cost reduction.

Beyond that, governments simply do not dedicate nearly the amount of time and energy to costs/benefits analysis or costs oversight as does private enterprise – because they are spending somebody else’s money on somebody else on a grand scale.

Finally, and this point cannot be hammered home enough, the Obama plan will create, over time, the largest single bureaucracy in world history – over 110 new agencies/departments in all.  In other words, the geometric potential for waste will be beyond any prior experience we have seen.

All combined, that results in reverse economies of bureaucratic scales, i.e. bigger systems result in geometrically larger waste, fraud and abuse – or, as you know it, the Department of Defense paying $500 a piece for hammers.

That is why comparisons to smaller public health care systems around the world, such as Canada, are false comparisons.  Canadians spend just under $200 billion on health care a year.  The US, on the other hand,  spends well over $2 trillion dollars a year and those reverse economies of bureaucratic scales produce over $47 billion waste in just Medicare – over $1 in every $10 spent by the program.

You shouldn’t have to be hit over the head to know how many more $500 hammers can be hidden in $2 trillion system than one less than 1/10 that size – unless, of course, the cost of buying the hammer isn’t nearly as important to you as being in charge of wielding it.

Email this to a friend | Print | Share on Facebook | Tweet this |

Tags: Barack Obama, bureaucracy, federal spending, government health care, Government spending, health bureaucracy, health care spending, job creation, Medicare, medicare waste, Milton Friedman, pentagon overspending, private enterprise, profit motive, public option, small business
Posted Nov 17th 2009 at 10:21 am in Healthcare, News, Obama, Politics | 3211034 Commentshttp://biggovernment.com/tdelbeccaro/2009/11/17/health-care-reform-500-hammers-and-the-reverse-economies-of-bureaucratic-scales/Health+Care+%27Reform%3A%27+%24500+Hammers+and+the+Reverse+Economies+of+Bureaucratic+Scales2009-11-17+17%3A21%3A26Thomas+Del+Beccaro