Government, Third-Party Payers, and Inflation

If I was an economics grad student, here is a study I would love to do.  Identify products or industries for which third-party payers, and particularly the government, contribute a substantial amount of the purchase volume, either from outright payments or loan guarantees.  Here are three biggies I can think of:

  • Health care
  • Houses
  • College

Then look at the differing inflation rates over the last 20 years for these vs. a basket of other goods purchased the traditional way (ie with your own damn money).  I think you can see just from visual inspection where the answer is going to go.


  1. Doug Murray:

    This is what I've always called "making things more affordable by throwing money at them." Increasing demand makes things cost less, right?

  2. Ted Rado:

    Government should not intervene in economic decisions, but let natural economic forces prevail. The market economy will steer money to its most useful place. The government distorts the process, with money going to suboptimal uses.

    The taxpayer suffers twice: first, by paying for government subsidies with higher taxes, and second, paying higher prices for goods and services produced in less efficient ways.

    One of the beautiful things about the market economy is that it automatically steers money to where it is needed most. If there is a shortage, prices goes up and more producers come into the market, driving prices back down. The idea that a bunch of idiots in Washington know better is a joke. The USSR tried having the government rather than natural economic forces make production decisions with catastrophic results.

    My father used to say (in reference to evolution) that the smart monkeys stayed in the trees. Our heros in Washington are certainly proving him right!

  3. dovh49:

    It's already been done. I thought I first saw this on Cato but couldn't find it but the second graph is the one I remember but both are good.

  4. je:

    Add corn (ethanol) to the list.

  5. David Zetland:

    The term of art is "Other People's Money," which I need to say with tragic frequency.

  6. joshv:

    You can look at medical costs which are not covered by insurance - for example laser eye surgery, and face-lifts, and see that cut-throat competition has resulted in prices actually falling and improved quality.

    But god forbid we subject mainstream medical procedures where somebody's life is in the balance to such market pressures, because even if they cost less and are higher quality, the first time somebody dies, the fault will be laid squarely at the feat of free market capitalism.

  7. Peter:

    You can add windmills and solar panels to the list

  8. Les:

    A common argument I've heard for why the market cannot be trusted with regulating the price of healthcare to reasonable levels and government-sponsored 'Universal Health Care' is a necessity is that for Healthcare there is finite supply but infinite demand.

    But the same is true of Food, and food is so cheep we have to pay farmers NOT to grow crops one year so they'll be in business to grow crops next year.