Two poor incentive systems

It just occured to me that two of the government-enforced crappy systems that I've noticed lately are due to exactly the same incentive problem.

Case 1: Housing prices. Studies have indicated that high housing prices are mostly due to regulation restricting supply. And it should be no suprise why. If most voters in a region are homeowners, then they will tend to vote for regulations and officials who will make it hard to build new homes, as this will increase the value of their homes. This is especially true if demand in the area is inelastic, perhaps due to unique features - say: LA, Silicon Valley, Manhattan and Hawaii, which means prospective buyers can't just substitute homes in other areas.

Case 2: Health care costs. There are many contributers to this problem (see Arnold Kling's new book to learn more), but one of them is restriction of supply by the AMA. The AMA gets to certify medical schools and decide who gets to be a doctor. The AMA consists of doctors. If the AMA let many people become doctors, they would reduce their own salaries. Hence they make the bar much higher than is necessary simply to ensure competence, restricting supply, and (since demand for many types of health care is inelastic) boosting their own salaries.

The problem is exactly the same in both cases: the providers of an inelastic good have the power to restrict its supply, driving up prices and profiting from their power. Regulation is involved, since to restrict the supply, you must bar competition (there are very rare exceptions). Unlike the competitive gasoline market, this is what I call price gouging!

Can you think of other examples of this? (Besides the obvious generalization of case 2 to licensing requirements for any profession)

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I've never gotten the

I've never gotten the impression that the supply of doctors was restricted by AMA licensing (as far as I know the AMA does not have a fixed number of doctors licenses they give out), but I do get the impression that the supply of doctors is being reduced by malpractice insurance rates, which drive doctors to shut down their practices. Another health care angle is that the costs of drugs are kept artificially high by 1) the FDA controlling which drugs can be sold and 2) drug patents creating temporary monopolies on particular drugs.

The AMA absolutely does

The AMA absolutely does restrict the supply of doctors. Every state, I believe, has delegated its assertion of licensing power to the AMA. They call it "accreditation."

The AMA accredits only a very limited number of medical schools to operate in each state, and thus a limited number nationwide. The State backs this up by only licensing graduates of AMA-approved schools. To qualify for the AMA seal of approval, a school must have a limited number of seats. States allow some foreign school graduates, but states will only allow a finite number of foreign medical gradutes to obtain a license. The AMA will only accredit various post-graduate programs (which are very important in the profession) if they strictly limit the total number of seats, as well as the number of foreign medical graduates who may fill them.

As a result, even if we were top-rated physicians and surgeons with teaching and business experience a mile long, we could not open a new medical school across town.

(Every state except California does the same for law schools. In California, you can sit for the bar exam without attending an ABA-approved school. All other states require an ABA-approved degree to even sit for the test.)

The result is that there are many more qualified applicants for medical school education than there are available seats. That's why it is so competitive. In a free market, schools would expand their classes and new schools would open to meet this unsatisfied demand. Instead, we have a vast protectionist scheme, which drives up the price of their services (which is the point).

In any event, as to both medical services and housing, though, you cannot ignore the demand side of the equation. Both areas are massively subsidized, medical care through direct government payment of doctors' bills, and housing primarily through government-backed loose credit.

Inelasticity of demand is a relatively minor factor, over the long term. Any time you talk about elasticity, you must account for the time span you are talking about. Nothing is perfectly inelastic, and everything is elastic if you consider a sufficiently long time interval.

I think education is a good

I think education is a good example of this. State intervention has not only increased the cost of education through licensing schemes, it has also made education a much less elastic good through other means.

[LEVEL2] Barriers To

[LEVEL2] Barriers To Entry
[From P Friedman at Catallarchy]

Health care Costs...there are many contributors to this problem...but...

Will Wilkinson goes into

Will Wilkinson goes into greater depth on the AMA cartel issue here:

Safety standards for

Safety standards for factories et al. When Rockefeller was having some trouble dealing with competition, he had his Washington boys simply lobbied gov't to put in place safety standards that he could abide by without trouble but that his competitors couldn't deal with, and bang. I'm generally a big fan of Rockefeller but he had his faults.

House prices are also

House prices are also inflated by the fact they are in essence a backdoor voucher system for the public schools. If there's a community with a good public system, the only way to get your kid in is to buy a home there, so the real estate prices in the area will end up much higher than the would be were schooling not tied to geography.

I've sometimes wondered

I've sometimes wondered whether the restrictions on housing actually have the effect people think they do on housing prices. Suppose we got rid of all the restrictions on housing and just allowed people to build what they want where they want. Sure, the first-order effect is that you have more and higher density houses. But more houses mean more people move into the area. More people and a higher density mean the area can support a greater quality and variety of shops, restaurants, schools, and entertainment options, so over time the neighborhood becomes more interesting and convenient. This second-order effect of increased jobs and services should increase the local /demand/ for housing. I don't think we can say a priori whether the eventual equilibrium housing price will be higher or lower than it was with all the restrictions.

My conclusion was that housing restrictions aren't really about preserving property values. They are really about preserving neighborhood "character", ie, stasis. Including the snob appeal of not having poor neighbors. (Or, to the degree that restrictions /are/ about preserving property values, it's a mistaken concern. Much like the notion that minimum wage laws are about helping the poor.)

Aside from the AMA

Aside from the AMA restricting the supply of doctors, it also drives down the quality of those doctors it accredits, by ensuring that the less-than-honest individuals who would cheat on their medical exams, are the ones who are set gain the most from ensuring them limited competition in the field.

In other words, if out of 1,000 potential doctors, we will only accept the top 100, you will only be ensuring that the cheaters will work that much harder to displace an honest and diligent student.

Aside from that, the entire patent system is rigged to award patentees with monopoly profits.

Prices are high for a lot of

Prices are high for a lot of reasons. The rate of change of prices is high for very different reasons.

I have always wondered why

I have always wondered why this myth of the AMA dictating the supply of medical doctors retained its currency for so long. Whether this was true in the past I do not know.
If you read any AMA literature today you will find them the most PC organization around. They are constantly carrying on about racial disparities, poverty and injustice and pushing for statist solutions for these problems.

The fact is today that the number of medical student slots is controlled by the states. Politicians are under constant pressure by constituents to open more medical schools. New medical schools open from time to time and alternative paths to medical care careers via osteopathic, offshore medical schools, importation of non -American born MDs from foreign medical schools training of certification of advanced nurse practitioners and physician assistants fills in the gaps.
Pay for doctors is controlled by insurance companies and the government not the AMA. Sure, the AMA, the states and others who are concerned require you to demonstrate a modicum of training, ability and experience before paying you to care of human beings. Even veterinarians need credentials. A certificate you got by sending in a coupon you tore off a pack of matches won’t do.
Actually the qualifications you earn are for the most part, nongovernmental, though they are quasi- governmental because their deemed status fulfills government regs. I could go on but take it from me; this line of thinking is out of date.

Dave: Whether or not the AMA

Whether or not the AMA is actively trying to impose hard limits on the number of doctors is beside the point. The problem is that the "modicum of training"---a four-year undergraduate program, four years of medical school, and at least a couple more years of residency---is a very real barrier to entry that does sharply limit the supply of doctors.

I suppose it's possible that all that training really is necessary to provide decent medical care, but I doubt it. Why can't the simple, common procedures be done by specialists who learn in 2-4 years how to do one procedure well, instead of spending ten years learning a bit of everything?

Brandon, in fact lesser

Brandon, in fact lesser trained persons are vital to medical care. The gamut runs from technologists who have a high school education and a year of technical training who may draw blood or operate testing to advanced nursing degrees such as physicians’ assistants and nurse practitioners who may do histories and physicals, write orders, prescribe drugs and monitor post operative care under a physician’s supervision.
My opinion is that that these paramedical people give good care when rote memory thinking is all that is needed. Of course many of them develope tremendous skill with practice. A good physician is truly educated on a deep level. Not all people are suitable for this. I would not begrudge a doctor treating patients' serious complex problems a broad education and deep fund of knowledge just to increase the supply. What a doctor doesn’t know can kill you.

Dave: Politicians are under

Dave: Politicians are under constant pressure by constituents to open more medical schools.

This statement belies your attempt to downplay the role of the medical lobby in restricting the supply of doctors.

The fact that the STATE has any influence whatsoever as to how many medical schools are to be opened (or how many seats there are in each school, or how many seats there are in post-graduate training programs, etc.) is an absolute guarantee that the number, whatever it is, is not calculated correctly.

Governments CAN'T calculate the proper number of ANYTHING, let alone something as long-term as the number of highly-trained personnel to be produced. Why? Because governments make such decisions according to political pressures, as you mentioned, not economic ones. Governments, by their nature, cannot have a sense of prices.

The AMA (and other representatives of the medical lobby) certainly contributes to those "pressures" by "constituents." They advertise this fact, openly. It's their raison d'etre. They have competition, of course, from other groups who also want government-backed special privileges. Everyone who contributes to or even tolerates this practice is to blame for the problems that inevitably follow.

The fact that government-sponsored and government-controlled so-called "insurance" programs have ADDED to the economic disaster that US medical services are rapidly becoming does not alter the fact that the artificial restriction on the supply of doctors has inflated doctors' incomes (at everyone else's expense) for, oh, 100 years or so.

The fact that the AMA is a cheerleader for forced racial integration changes nothing. It's the total number of personnel (and the level of their training) that matters, not the racial composition of that group.

George, I agree that the AMA

George, I agree that the AMA and its state offshoots are up to their necks in politics. I just say that it has many interests besides limiting the production of doctors. Opening new medical schools means huge tax payer funding for cushy administrative and teaching jobs for doctors etc., so the situation is complex. Is this the way things should be? All I know is that is the way they are.

Dave: My opinion is that


My opinion is that that these paramedical people give good care when rote memory thinking is all that is needed. Of course many of them develope tremendous skill with practice. A good physician is truly educated on a deep level. Not all people are suitable for this. I would not begrudge a doctor treating patients' serious complex problems a broad education and deep fund of knowledge just to increase the supply. What a doctor doesn't know can kill you.

Do you think "lay people" (to use the popular cant) are too stupid to figure out that complicated and dangerous procedures are best performed by a more thoroughly trained doctor? Too foolish to be able to figure out when it's not really necessary, or not worth it under the circumstances, and when it might be better to see a nurse practitioner, midwife, or some other sort of trained healer who has had training other than the sort you get from a med school? Too childlike to be left alone to make these decisions about risk, cost, and reward for themselves, rather than having the government, at the behest of the Doctors' Guild, force them to pay to see a doctor rather than someone with less medical training, "for their own good"?

The real trick to

The real trick to recognizing more cases like these is to realize that these are just special cases of regulatory capture. For most of this audience, I'd be preaching to the choir just defining the term. However, for those occasions when you need to direct someone to an excellent article explaining it, I recommend this one. I can thank Megan McArdle for pointing it out to her readers a couple of years ago.

Rad Geek: "Do you think that

Rad Geek: "Do you think that people are ------too childlike to make their own decisions? "
Any adult should be able to make his or her own decisions but there has to be some control of the quacks.It is a matter of balance which is,of course, arguable.

I don’t think you are going to get a better bargain than the one you get when you visit old Doc the GP. Family docs only charge a pittance compared to their costs and are overwhelmed by the paperwork, regulatory imperatives, and defensive medicine they have to comply with. You ought to be mad at the bureaucrats and lawyers who impose this on them. At least when you get really sick you won’t get referred to a carrot juice merchant, like the guy who painted my house.

There is an organic food store in town that sends out a newsletter to customers. One article said that an Air Force officer had cured his lymphoma by drinking some of their organic carrot juice made with their juicer. (I have tried drinking it. It is almost a fate worse than death.)
Anyhow, the painter had droopy eyelids and got weak and tired real easy. He had gone to a neurologist and was told he had myasthenia gravis.(Where your immune system attacks your neuromuscular junctions.) He was a former registered nurse. Ignoring his doctor, he decided to take massive doses of carrot juice and said it was working. (That’s what they all say.) Funny, I haven’t seen him lately.
As much as I hate government regulation, we still need it. Otherwise how long will it be before the organic grocery store opens up a surgicenter and a pharmacy behind their carrot garden?

In the wake of patients

In the wake of patients dropping dead from quacksalves, consumers will avoid such establishments. And I submit that it wouldn't take too many deaths to bankrupt a company, either through legal action, or absence of customers. It takes a long time, and great expense to build up a good reputation. This creates an strongly vested interest in keeping that reputation strong, such that cannot be maintained through fraudulent or incompetent service.

Dave - you asked "Otherwise how long will it be before the organic grocery store opens up a surgicenter and a pharmacy behind their carrot garden?"

Allow me to answer with another question, or two: How many lawsuits would they be able to weather? How would they build up the requisite amounts of goodwill necessary to induce people to use their facilities?

Answers: Not many, and a very long time, respectively.

Doinkicarus,I don't know.

Doinkicarus,I don't know. These alternative health people don't seem to get sued much.
Not deep enough pockets? Mostly they are prohibited from really doing any thing. How much harm can carrot juice do?
Also there is a new sucker born every day. People don’t instinctively know that anecdotal reports of cures are unreliable. This was the basis if medieval medicine, so people were treated with leaches and arsenic and got well, so this proved the treatment worked. Most alternative medicine is bases on testimonial and anecdotal evidence which is intuitive but is often erroneous, so the quacks will always have plenty of business. If we could teach good science education in school, maybe you would be right.

Poor Incentive

Poor Incentive Systems