ROSE: Crowding freedom out of the market

Big government kills consumer choice, then forces compliance

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The hallmark of a free society is that unless specifically prohibited, one can presume to be able to do as one pleases. In free societies, citizens therefore possess discretion except as specifically proscribed by law, while government possesses discretion only where specifically empowered by law. This is why in free societies, most laws are proscriptive rather than prescriptive in nature.

This does not mean that in a free society there should be no prescriptive laws or that government should never tell its citizens what to do. There are civic duties that make a government capable of preserving freedom possible. There are also things government can do to “promote the general welfare” but doing so is possible only through force - by telling citizens what to do (e.g., making citizens pay for national defense).

How does a free society draw a line between activity that government should stay out of and activity over which government can legitimately intervene? Luckily, the economic theory of market failure provides guidance. For goods or activities that can be shown to be subject to a market failure problem, the theory explains how general welfare can be improved through specific forms of government intervention. But equally important is the implication that for those goods or activities that cannot be shown to be subject to market failure, there is little justification for government intervention.

This brings us to the Patient Protection and Affordable Care Act (Obamacare).

To achieve universal coverage, Obamacare mandates that insurance companies accept anyone who wishes to buy a policy (guaranteed issue) and does not allow companies to use underwriting to cover the extra cost of insuring those with pre-existing conditions. This will induce many people who presently have insurance to drop it because they know they won’t be denied coverage or charged extra for having a pre-existing condition when they re-enter the system after becoming sick. This behavior would almost certainly bankrupt any private insurance company.

Those who wrote the bill anticipated this free-rider problem and solved it with yet another mandate - that everyone buy health insurance. This means that government will now compel private citizens to do something that our country has been able to thrive for more than 234 years without government ever having compelled its citizens to do before.

Obamacare effectively creates a new market failure problem (free-riding that bankrupts private insurers due to inability to exclude consumption) that it then solves by forcing all of us to buy health insurance. As Georgetown constitutional scholar Randy Barnett has pointed out, government forcing us to enter into private contracts is unprecedented. Even more disturbing are Obamacare’s implications for how government might erode freedom in the future.

Members of Congress and the Supreme Court need to understand that if Obamacare is not repealed or declared unconstitutional, it will effectively establish a two-step procedure by which government can convert virtually any private good or activity into a public one. To convert a private good activity into a public one, all it will need to do is pass a law or change policy to create a new market failure problem to justify government intervention to address it. Such a precedent opens the door to the government telling us what to do with respect to virtually anything.

For instance, the federal government could impose such onerous safety regulations and legal liability on skateboards that no company would make or sell them anymore in the United States. The failure of the market to provide skateboards for teens could then be used to justify a Skateboard Board to oversee plans for the federal provision of the toys.

A careful reading of American legal history suggests that we have remained free in part because we have been implicitly employing the theory of market failure to distinguish between that which is private and that which is legitimately under government purview. If government begins justifying intervention to solve market failure problems of its own making, this distinction will disappear and it will potentially extend its control over all private activity under cover of its constitutional charge to promote the general welfare. It follows that for a society to remain free while enjoying the benefits of having a government that can also address genuine market failure problems (e.g., pollution), there must be a clear line of demarcation between private and public goods and that line must not be drawn by government itself.

If the government starts justifying further intervention into private society by solving market failure problems of its own making as it plans to do with Obamacare, it won’t have to tell us directly what to do to control us. Over time, it could increase its span of control by rationalizing an ever-growing list of goods and activities that fall under the purview of legitimate government control by inventing market failure problems and then using the power of taxation to provide such goods or regulate such activities as it sees fit. As the line of demarcation between genuine and invented market failure is blurred by more and more government intervention, over time, the line between private and public will become meaningless, as will our freedom to do as we please.

David C. Rose is a professor of economics at the University of Missouri-St. Louis. His book, “The Moral Foundation of Economic Behavior,” is forthcoming from Oxford University Press in 2011.

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