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Why 95% of Traders Fail

Petty Socialism Compells Governments to Introduce the "Fat Tax"

Politics / US Politics Oct 13, 2010 - 05:35 PM GMT

By: J_M_Finegold_Catalan

Politics

Best Financial Markets Analysis ArticleRising healthcare costs and continuing recession-related fiscal problems have impelled numerous world governments to introduce a "fat tax."[1] Support for a similar policy is growing in the United States, which according to leading intellectuals suffers from a collective "weight problem."[2]


Fast-rising weights and a general deterioration of health have increased the volume of weight-related medical issues. The implications for countries burdened with socialized medicine (including the United States, which suffers from a government-restricted insurance market that provides limited federal healthcare in the form of Medicare and monetary aid to the poor) consist in an increased monetary burden for society as a whole.

Fixed low costs to the consumer, whether free (universal healthcare ) or relatively cheap (limited welfare, like that of the United States), have caused a predictable increase in quantity demanded.[3] While the consumer directly pays a below-market price for the service, the true cost is hidden since the rest of it is subsidized by the government. Therefore, the rising costs that come with a rise in quantity demanded are simply deferred to taxpayers. David Leonhardt, writing for the New York Times, puts it simply,

This extra weight has caused a sharp increase in chronic diseases, like diabetes, that are unusually costly. Other public-health scourges, like lung cancer, have tended to kill their victims quickly, which (in the most tragic possible way) holds down their long-term cost. Obesity is different. A recent article in Health Affairs estimated its annual cost to be $147 billion and growing. That translates into $1,250 per household, mostly in taxes and insurance premiums.[4]

The solution to the problem is a tax on selected foods,[5] based on the idea that a price floor on certain foods will lead to a fall in quantity demanded.[6] However, this solution can be likened to building a barrier to regulate the height of the waterline in a swimming pool, yet leaving the hose on. In other words, a fat tax — of any and all variety — does not address the root problem.

"The root of our current medical problem lies in the collectivization of the consequences of an individual's irresponsible choices."

The root of our current medical problem lies in the collectivization of the consequences of an individual's irresponsible choices. The issue is that the costs of one person's decisions are spread equally throughout society, to the point that that individual hardly feels the penalties of his value judgments — short of illness and death. Indeed, this socialization of responsibility effectively rids the individual from all incentive to reconsider his or her values and desires. The erosion of responsibility, operating with the understanding that the consequences of poor decisions will be mitigated by what is benignly called a "social safety net," is where the viability of socialized medicine falls apart.

Despite all the money and legislation thrown at fixing socialized medicine — including the current crusade to replace the bloated Medicare and Medicaid programs with a universal healthcare system in the United States — the fact is that temporary mends are just that, temporary. The system is bound to collapse given the nature of the problem. Worst of all, while the system is artificially maintained, the consequences — including corroding standards of living — must be borne by society as a whole.

The only solution is the one provided by the free market, where the consequences of one individual's actions are internalized lest he provoke some form of reaction from another individual.[7] We can therefore derive that in a free market the costs of irresponsible choices related to one's health would be shouldered by the individual only.

Negative Externalities of Medicinal Socialism
An economic externality is a cost or benefit of an action that affects an individual unrelated to that action. A common example of a negative, or cost-related, externality is pollution. If a firm dumps its waste into a river, and the current manages to transport the waste onto another individual's property, the cost of the waste is said to be externalized to, or borne by, an individual who had not agreed to the action in the first place. Similarly, the cost of theft is not suffered by the thief but by the victim, and as such the cost of the act of theft has been externalized to the victim.

Socialism causes both benefits and costs to be externalized to the whole community. Much like benefits are distributed to society as a whole, so are costs. Theoretically, of course, socialists aim at limiting costs to just those "justified" — for example, the cost of universal healthcare to taxpayers is justified by the fact that this is the "only" method to extend healthcare to the less wealthy. Socialism falters when it becomes a victim to economic laws, or when it becomes apparent that goods and services cannot be distributed throughout a complex system of division of labor by merely the good intentions of the state.

This is the fate that has befallen socialized medicine. The costs of health-related irresponsibility have been externalized to society through the mechanism of public subsidization of medical costs. The costs of an unhealthy lifestyle, manifested in the free market in the form of expensive hospital bills or rising insurance prices, are borne by the government and distributed among the population as a whole. Therefore, it follows that in a completely socialized market in medicine — a true universal healthcare system — all monetary costs are externalized to those coerced into paying for a system they never agreed upon.

Just as bad, socialism incentivizes irresponsibility. In the case of socialized healthcare, it does so by distorting or completely doing away with the price mechanism. The price mechanism can be seen as the market's process of balancing supply and demand of a certain good or service. It guarantees that generally speaking a particular good and service will never experience a notable shortage or surplus, as far as the entire market goes.

This is because, given the axiom of purposeful human action,[8] people will economize their use of a particular good based on its price. For example, if the price of a short medical checkup is $35, an individual might decide his symptoms aren't worth the cost, whereas he might have gone if the price were $25. Simply put, the price of a good will allow an individual to decide whether or not he can garner the highest utility from a particular action, or whether he can reap greater utility from the alternative.[9]

"Just as bad, socialism incentivizes irresponsibility. In the case of socialized healthcare, it does so by distorting or completely doing away with the price mechanism."

What socialized medicine does is artificially reduce the price of healthcare or do away with it altogether (if universal healthcare is completely subsidized by the state). This leads individuals to acquire the service when they would have otherwise abstained from it. In a situation in which the cost of the service is not subsidized by a third party, such price ceilings usually lead to severe shortages — one needs only to point at the effects of price ceilings in the gasoline market or those imposed on the utilities market. In the case of socialized medicine, since the cost is borne by the whole of society — masquerading as "public funding" or "government funding" — faux price ceilings simply lead to upward spiraling costs.

Government, determined either through power-driven self-interest or a distorted concept of utilitarianism, tends to attempt to solve cost-related problems by plugging holes in their system with ad hoc regulations. Such is the nature of this recent fat tax — and such will be the nature of all future regulations that attempt to control the way man lives his life.

The moral dilemma is clear: Does the provision of universal healthcare justify infringement upon individual liberty? More broadly stated, do the ends justify the means? Morality aside, it is nevertheless clear that, regardless of the means, the outcome of socialism — including socialized healthcare — is the same. One can plug a hole, but doing so will only cause the system to rupture elsewhere.

A fat tax might cause a marginal decrease in consumption of fatty foods; but it has absolutely no bearing on whether or not individuals may decide to cut down on exercise, eat too many calories worth of healthier food, etc. Each of these problems requires their own set of regulations. Not only does the end result of socialized healthcare remain the same, but the state itself slowly transforms into a police state in an attempt to enforce these regulations.

Unfettered Markets and the Internalization of Responsibility

That the United States and other governments are seriously considering implementing — or have already implemented — a fat tax should not be used to illustrate the problems of unhealthy behavior. Rather, it should be a clear sign of the problems that plague socialized healthcare. To the extent that the aforementioned is true, it therefore follows that given these empirical examples of economic theory at work, the correct path to take for the future of healthcare is toward privatization. Only through privatized healthcare, or a free market in medicine, can marginal costs be internalized.[10]

The fact that markets are imperfect should not be a reason to substitute them with socialism. The market is a continuous process of entrepreneurship, driven by the profit motive and guided by the price mechanism. Economic competition and the insatiable desire for profit guarantees rising standards of living, as long as entrepreneurs are allowed complete liberty in exercisable action. Only through the free market can individuals innovate and labor to internalize both benefits and costs, and therefore only through the free market can externalities be resolved.

It is only through the free market that healthcare can ultimately be provided to all those who seek it. Much like automobiles, televisions, foodstuff, water, and countless other goods and services that have been left to the devices of the market, those who produce within the healthcare industry would be forced — by their own self-interest, in conjunction with competition — into providing greater supplies of healthcare along with augmenting quality.

To assume that a free market in healthcare would not provide demanded services to potential customers is to assume that the individuals who compose this market operate irrationally.

Notes
[1] Countries that have introduced or seriously contemplated varying forms of a "fat tax" include Japan (Shirley S. Wang [2008], "Another Big Thing In Japan: Measuring Waistlines," Wall Street Journal), Germany (Hugh Collins [2010], "Germany Weighs Tax on the Obese," Huffington Post), and many other European states ("Europe Fighting to Outlaw Obesity with Fat Tax," ABC News).

[2] David Leonhardt (2009), "Fat Tax," New York Times. According to Leonhardt, "Today, the great American public-health problem is indeed obesity. The statistics have become rote, but consider that people in their 50s are about 20 pounds heavier on average than 50-somethings were in the late 1970s. As a convenient point of reference, a typical car tire weighs 20 pounds." Clearly, the augmenting average American weight can only be considered a collective problem in relation to its impact on public healthcare costs, not on the individuals themselves — only the individuals, by comparing marginal utility versus marginal disutility, can decide whether or not being overweight is truly a problem.

[3] For a complete analysis of the economic problems that permeate universal healthcare, see George Reisman (2009), "The Real Right to Medical Care versus Socialized Medicine." Also, see Jonathan M. Finegold Catalán, "Why Not Universal Car Insurance?"

[4] Leonhardt, "Fat Tax" (2009).

[5] Taxing certain foods that are deemed "fattening" seems asinine when the fact is that all foods are fattening to one degree or another — what matters is the quantity of food consumed.

[6] Simone A. French (2003), "Pricing Effects on Food Choices " (The Journal of Nutrition).

[7] The internalization of costs and benefits of any action may be imperfect — thus, the concept of "market externalities" — but as standards of living rise (as a direct result of unregulated exchange) the occurrence of so-called externalities becomes progressively rarer. The institution that internalizes costs and reduces the opportunity for negative externalizations is the right to property. See Ludwig von Mises, "The Problem of External Costs and External Economies." Mises writes, "Carried through consistently, the right of property would entitle the proprietor to claim all the advantages that the good's employment may generate on the one hand and would burden him with all the disadvantages resulting from its employment on the other hand."

[8] Rationality, or purposeful human action, is the axiom from which Austrian economic theory is derived through a deductive methodology (Praxeology). Ludwig von Mises (1998), Human Action (Auburn, Alabama: Ludwig von Mises Institute), pp. 17–18, 32–36.

[9] This is the concept of opportunity cost, which is the marginal benefit foregone by choosing a certain action. As such, the opportunity cost of choosing to eat a steak over a salad is the marginal utility of the salad.

[10] Regarding healthcare in the United States, which has been erroneously considered to be driven by the free market, see the following: Vijay Boyapati, "What's Really Wrong with the Healthcare Industry," and Hans F. Sennholz, "Why is Medical Care so Expensive?" Noteworthy is that Boyapati considers obesity to be a source of rising healthcare costs. The present essay argues that while obesity may cause an increase in the cost of healthcare for a specific individual, the problem in a public healthcare system is not obesity per se but the system itself.

Jonathan Finegold Catalán is an economics and political science major at San Diego State University. He blogs at economicthought.net. Send him mail. See Jonathan M. Finegold Catalan's article archives.

© 2010 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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