The Path to Prosperity, Part 2

The Path to Prosperity, Part 2
Paul Ryan on the inefficiency of hidden costs.
by John Hayward
05/25/2011

Representative Paul Ryan returns with a second video presentation concerning his “Path to Prosperity” budget, this time discussing his Medicare reforms. Please do watch the video click here. It’s a virtuoso performance.

Various commentators, the most recent being Jonah Goldberg of National Review, have urged Ryan to launch a presidential run, because he’s the only one who can properly defend his budget reforms. Is it really that hard? Maybe the current candidates should spend a little more time watching these free video seminars Ryan has been offering.

What Ryan does in this video is a vital piece of “right-wing social engineering,” to borrow a phrase from Newt Gingrich, by sweeping the false choice of leaving Medicare untouched from the table. That’s not “saving” Medicare, it’s dooming it to a collapse that will ruin countless American lives. The people peddling lies about pushing old people off a cliff are the ones trying to “destroy” Medicare. No amount of lowbrow campaign commercials will be able to conceal the wreckage left by their success.

A key concept Ryan presents masterfully in this video is the inefficiency of hidden costs. Understanding this concept is essential to understanding why Big Government “solutions” always turn into bloated disasters, which end up reducing the availability of whatever socially vital resource they were supposed to allocate more “fairly.”

To put it bluntly, the most efficient way to allocate any resource is to make people pay for it. Every measure that obscures the cost of the resource causes its allocation to become less efficient – which ultimately means real people end up with less of it, no matter what the elegant theories of socialists said would happen.

For a simple example, look at cell phone services. Most people buy packages that give them a great deal of phone time, including unlimited calling periods over nights and weekends, which they simply do not use. Many buy unlimited text messaging, even though paying a nickel, dime, or even quarter per message would work out cheaper in the long run. Cheaper plans that require the user to pay for minutes would be more efficient for many of the people who buy these robust plans, but they’re happy to pay a bit extra for the bigger plans.

Why? Because they don’t want to worry about per-minute or per-message charges when the urge to communicate strikes them. They don’t like the sense of momentary hesitation, of restraint, that comes from knowing that a quick text message could cost them a quarter. They would become upset when asked to pay overage charges for extra minutes used at the end of a month, even if they still came out way ahead over time. They don’t want to sit down with a spreadsheet and figure out if a per-minute plan makes more sense for them.

In other words, they are deliberately choosing to avoid efficiency, for the sake of convenience. An accountant might say they’re being foolish, but a good economist should recognize this is simply human nature. The cell phone companies certainly do, since their advertising strongly plays up the sense of “freedom” and “unlimited possibilities” offered by their premium plans.

This is part of the puzzle that must be solved by those who would make meaningful reforms to Medicare. It’s one reason Newt Gingrich’s notion of presenting a cornucopia of reform “choices” to Medicare recipients, instead of “forcing” them into the more limited choices offered by Ryan’s plan, is problematic. The false choice of leaving Medicare as-is has tremendous appeal because it removes confusing choices. Too many Americans see it as a premium paid to avoid the unpleasant requirements of efficiency.

It’s crucial to make them understand that the cost of this premium will soon destroy us. We will soon find the very harsh limits of this, and many other “unlimited service” plans offered by the same government that would prosecute companies making such offers for fraud. Paul Ryan is doing a great job as a one-man bunco squad.