Federal Mandates Are Almost Always a Bad Idea

June 27 (Bloomberg) -- Three questions are bundled together in the great debate over the health-insurance mandate.

Does the U.S. Constitution give the federal government the power to require individuals to buy health insurance? Should the government force them to buy this coverage? Should it have the power to make people buy such services?

The second and third questions are distinct, because even if some individual policy, such as mandating health insurance, seems reasonable, similar policies could be quite harmful, and society would be better off if all such policies were off-limits to the federal government.

I am no lawyer and have no opinion on the first, legal question. As a microeconomist, I accept that there are cases where mandating health-insurance coverage is reasonable policy. But as a student of the history of federal market regulation, I wish that the government had generally exercised less control over markets, which leaves me hoping that the Supreme Court, in its imminent decision on the individual mandate, curtails federal power.

The second question falls squarely within the domain of microeconomics, which provides two arguments that support some mandate. The first is that people without health insurance impose costs on others through their use of emergency rooms or other free medical facilities. Economists call these third-party costs “externalities,” and there is a broad consensus that these costs, such as those for pollution or congestion, can justify public intervention.

Reasonable Tax

The most standard response to the emergency-room externality would be a tax, not a mandate, roughly equal to the expected costs that uninsured people impose on others through their use of emergency rooms. The American College of Emergency Physicians puts the total cost of emergency rooms at about $50 billion annually. The uninsured are responsible for 17 percent of these visits, at a cost of about $8.5 billion, if their trips are neither unusually cheap nor expensive. With about 50 million uninsured Americans, the average uninsured person imposed $170 annually in emergency-room costs, and that would be a reasonable tax to charge people who don’t otherwise have health insurance.

There are other reasons for mandating health-care coverage. Under the new health-care law, insurance providers can’t charge higher-risk patients significantly higher rates and they can’t deny insurance based on pre-existing conditions. These limitations create the possibility of a “lemons market breakdown,” where healthier people flee the market, leaving only sicker people to get insured. This leads to higher premiums and the continuing exodus of the healthy from the market.

Fifteen years ago, my colleague and co-author David Cutler, who was an adviser to Barack Obama in the 2008 campaign, wrote an article illustrating just how easily this breakdown can occur.

There is also a more paternalistic argument for mandating health insurance. If people are prone to procrastinate, or undervalue their health, then mandating insurance is a means of forcing them to take better care of their future welfare. I am sufficiently libertarian to believe that society generally works best when people take responsibility for their own future, but given the importance of health care, a little paternalism is hardly a grave sin.

For these reasons, I am quite comfortable with the health-insurance mandate in my state of Massachusetts. We haven’t yet faced the financial consequences of the law, but both the Massachusetts House and Senate have passed bills to control costs, and I am cautiously optimistic. States are forced to have some fiscal discipline, because they have to balance their budgets.

Controlling Behavior

Although I am open to having state governments require more health coverage, I fear a federal government with too much power to control individual behavior. The track record of federal interventions in managing markets suggests a strong case for limiting that power.

The question of bestowing appropriate power on the federal government depends not on the health-care issue alone, but on whether you think -- on the whole -- that the U.S. government does good things when it heavily regulates behavior. The 1942 case that is often cited as a precedent for health care, Wickard v. Filburn, provides the perfect example of why I fear this control.

The Agricultural Adjustment Act of 1938 established wheat quotas for farmers to drive up prices in the Great Depression. Roscoe Filburn was an Ohio farmer who had been allotted 11.1 acres of wheat. When he grew 239 more bushels than his quota allowed, the government wanted to fine him 49 cents a bushel. The government won the case. The Supreme Court noted, correctly, that even if Filburn was going to feed his wheat to his own animals, his extra crop would still affect the national price for the commodity.

But even if the court was legally right to let the law stand, wheat quotas are terrible policy that transforms a competitive market into a cartel. Economists have often supported trust-busting to eliminate the monopoly power that raises prices and harms consumers. In the case of wheat quotas, the government went in exactly the opposite direction, making sure that ordinary Americans paid more for bread to favor the powerful farmers’ voting bloc.

The history of federal intervention in agricultural markets is a succession of politically motivated errors. Sometimes, quotas have led to mountains of wasted wheat and unnecessarily high prices. In other cases, tax dollars have been used to subsidize commodities, such as corn syrup, that have created health hazards.

Wickard v. Filburn should not be a precedent for federal control of health markets. It should be a cautionary tale of the perils of such powers. It is not the only one. The Interstate Commerce Commission provides a classic case of regulatory “capture,” where regulators served the interests of companies more than consumers.

States’ Responsibility

There are many reasons to leave control over markets, such as health care, to state governments. States have tougher budget constraints, which discipline spending. States can adapt to local tastes, so Massachusetts can have more intervention than Texas. If people don’t like a state’s rules, they can always move elsewhere. Local experiments provide the evidence that can lead to real progress.

I’m not against all health-care mandates, but the history of federal overreach is worrisome, and I’d be happier if the Supreme Court decides that the law limits this ability to manage markets.

(Edward Glaeser, an economics professor at Harvard University, is a Bloomberg View columnist. He is the author of “Triumph of the City.” The opinions expressed are his own.)

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