I was listening to the news recently when I was struck by a connection between two seemingly unrelated stories. The first one was international: Ecuador’s President Jamil Mahuad was forced from office as a result of a prolonged economic crisis.
The second was regional: Minnesota’s Attorney General Mike Hatch said he’s going to audit some health maintenance organization to determine whether recent price increases were justified.
You don’t see any link? Let me explain.
Hatch’s populist impulse to find out whether private-sector price increases are fair is the sort of thing that happens frequently in Latin America. Compounded over many years, Latin American governments’ arbitrary second-guessing of price decisions creates an economic environment that’s fraught with risk and uncertainty.
Yes, households and businesses all over the world deal with risks every day. Risk is an inherent feature of economic life.
But in Latin America, as in no other region of the globe, governments create risk. They do so because of the same beliefs and impulses that seem to govern the attorney general.Households
Consider this: Ecuador’s economic crisis was a classic Latin American one that has been replayed over and over again in the last 170 years. It was very unlike the problems that beset Asian nations beginning in late 1997 in that it had its roots in government fiscal policy rather than in borrowing by private businesses.
Ecuador, like many other Latin American nations, doesn’t accumulate much capital internally. The bulk of the population is poor, savings rates are low, and the wealthy tend to invest in land or by purchasing stocks and bonds in Miami, New York or Basel.
At the same time, the political culture of the nation leads to chronic government budget deficits. Ecuador’s tax system is inefficient and sometimes corrupt. Tax evasion is common.
Elected officials want to spend money on highly visible public works projects to insure their own re-election. An inability to collect much revenue and a propensity to overspend means that the government usually runs large deficits. It must cover the deficit by borrowing.
If it borrows from the Central Bank, it pumps up the money supply and inflation results. If it borrows from the Ecuadorian private sector, it will soak up all or more of the country’s domestic savings, leaving none for investment in new plants, equipment or infrastructure.
Or it can borrow from abroad. Borrowing from abroad is a time-honored tradition in Latin America because the tendency to run large government deficits has existed for centuries.
Ecuador’s economy has been weak for some time, but really hit the skids last year when it was unable to come up with the money to service its bonds.
Now what does this all have to do with Mike Hatch, Minnesota’s populist champion of truth, justice and the consumer?
Hatch has a fundamental misunderstanding of the role of price in competitive markets, and of the appropriate role of government in a mixed market economy. That same misunderstanding, which dominates Latin American economic and social thought, contributes to the low rates of saving and capital formation that have kept so many countries so poor for so long.
Concerns about just prices dominated Christian thought about economic activity for centuries, and were particularly pronounced four to five centuries ago when Europeans began to conquer the Western Hemisphere.
Theologians and philosophers were quick to condemn as sinful any merchant charging prices above some level that was considered “just.” This concern with price gouging was as common to Protestant theologians as to Catholic ones. But their jeremiads bounced off the shoulders of pragmatic Dutch, German and Scottish merchants who went on making money unperturbed.
More importantly, governments in many countries in northwestern Europe came to heed the warnings of John Locke, Adam Smith and Thomas Jefferson that governments should limit their intervention in economic activity.
That didn’t happen in Catholic Latin America.
The state, however chaotic, retained the right to arbitrarily set prices, redefine the terms of contracts and impose confiscatory taxes. Doing business and making long-term investments is inherently risky under such circumstances. And when the economic powers of government are unlimited, control of government becomes crucial.
The result, after more than four centuries, is a tragic paradox. There are few societies outside of Latin America that espouse similar levels of concern for the poor and for economic and social justice. At the same time, despite this genuine, widespread concern for social justice, there are few societies where the poor are worse off. Economic growth is slow and, compared to Asia, highly dependent on continued inflows of foreign capital.
Now Mike Hatch’s proposed audit of some scapegoat HMO is not going to bring Minnesota to economic crisis. But demagoguery does have its costs.
Government clearly has a role in successful mixed-market economies. One role is to regulate prices in situations, such as electric and gas utilities, where monopoly power is clear. If the Minnesota Legislature decides that competition among HMOs is so limited the industry should be regulated like Minnegasco or NSP, it can pass legislation to do so.
It has not chosen that path.
For the attorney general to step in now to determine after the fact that particular price increases were justified or not is a throwback to 16th century thinking. It introduces further elements of risk and uncertainty into the health care sector.
Rational, well-managed HMOs will take steps to protect themselves from imposing inefficiencies and costs that ultimately will be borne by society as a whole.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.