DRI-172 for week of 7-5-15: How and Why Did ObamaCare Become SCOTUSCare?

An Access Advertising EconBrief:

How and Why Did ObamaCare Become SCOTUSCare?

On June 25, 2015, the Supreme Court of the United States delivered its most consequential opinion in recent years in King v. Burwell. King was David King, one of various Plaintiffs opposing Sylvia Burwell, Secretary of Health, Education and Welfare. The case might more colloquially be called “ObamaCare II,” since it dealt with the second major attempt to overturn the Obama administration’s signature legislative achievement.

The Obama administration has been bragging about its success in attracting signups for the program. Not surprisingly, it fails to mention two facts that make this apparent victory Pyrrhic. First, most of the signups are people who lost their previous health insurance due to the law’s provisions, not people who lacked insurance to begin with. Second, a large chunk of enrollees are being subsidized by the federal government in the form of a tax credit for the amount of the insurance.

The point at issue in King v. Burwell is the legality of this subsidy. The original legislation provides for health-care exchanges established by state governments, and proponents have been quick to cite these provisions to pooh-pooh the contention that the Patient Protection and Affordable Care Act (PPACA) ushered in a federally-run, socialist system of health care. The specific language used by PPAACA in Section 1401 is that the IRS can provide tax credits for insurance purchased on “exchanges run by the State.” That phrase appears 14 times in Section 1401 and each time it clearly refers to state governments, not the federal government. But in actual practice, states have found it excruciatingly difficult to establish these exchanges and many states have refused to do so. Thus, people in those states have turned to the federal-government website for health insurance and have nevertheless received a tax credit under the IRS’s interpretation of statute 1401. That interpretation has come to light in various lawsuits heard by lower courts, some of which have ruled for plaintiffs and against attempts by the IRS and the Obama administration to award the tax credits.

Without the tax credits, many people on both sides of the political spectrum agree, PPACA will crash and burn. Not enough healthy people will sign up for the insurance to subsidize those with pre-existing medical conditions for whom PPACA is the only source of external funding for medical treatment.

To a figurative roll of drums, the Supreme Court of the United States (SCOTUS) released its opinion on June 25, 2015. It upheld the legality of the IRS interpretation in a 6-3 decision, finding for the government and the Obama administration for the second time. And for the second time, the opinion for the majority was written by Chief Justice John Roberts.

Roberts’ Rules of Constitutional Disorder

Given that Justice Roberts had previously written the opinion upholding the constitutionality of the law, his vote here cannot be considered a complete shock. As before, the shock was in the reasoning he used to reach his conclusion. In the first case (National Federation of Independent Businesses v. Sebelius, 2012), Roberts interpreted a key provision of the law in a way that its supporters had categorically and angrily rejected during the legislative debate prior to enactment and subsequently. He referred to the “individual mandate” that uninsured citizens must purchase health insurance as a tax. This rescued it from the otherwise untenable status of a coercive consumer directive – something not allowed under the Constitution.

Now Justice Roberts addressed the meaning of the phrase “established by the State.” He did not agree with one interpretation previously made by the government’s Solicitor General, that the term was an undefined term of art. He disdained to apply a precedent established by the Court in a previous case involving interpretation of law by administration agencies, the Chevron case. The precedent said that in cases where a phrase was ambiguous, a reasonable interpretation by the agency charged with administering the law would rule. In this case, though, Roberts claimed that since “the IRS…has no expertise in crafting health-insurance policy of this sort,” Congress could not possibly have intended to grant the agency this kind of discretion.

No, Roberts is prepared to believe that “established by the State” does not mean “established by the federal government,” all right. But he says that the Supreme Court cannot interpret the law this way because it will cause the law to fail to achieve its intended purpose. So, the Court must treat the wording as ambiguous and interpret it in such a way as to advance the goals intended by Congress and the administration. Hence, his decision for defendant and against plaintiffs.

In other words, he rejected the ability of the IRS to interpret the meaning of the phrase “established by the State” because of that agency’s lack of health-care-policy expertise, but is sufficiently confident of his own expertise in that area to interpret its meaning himself; it is his assessment of the market consequences that drives his decision to uphold the tax credits.

Roberts’ opinion prompted one of the most scathing, incredulous dissents in the history of the Court, by Justice Antonin Scalia. “This case requires us to decide whether someone who buys insurance on an exchange established by the Secretary gets tax credits,” begins Scalia. “You would think the answer would be obvious – so obvious that there would hardly be a need for the Supreme Court to hear a case about it… Under all the usual rules of interpretation… the government should lose this case. But normal rules of interpretation seem always to yield to the overriding principle of the present Court – the Affordable Care Act must be saved.”

The reader can sense Scalia’s mounting indignation and disbelief. “The Court interprets [Section 1401] to award tax credits on both federal and state exchanges. It accepts that the most natural sense of the phrase ‘an exchange established by the State’ is an exchange established by a state. (Understatement, thy name is an opinion on the Affordable Care Act!) Yet the opinion continues, with no semblance of shame, that ‘it is also possible that the phrase refers to all exchanges.’ (Impossible possibility, thy name is an opinion on the Affordable Care Act!)”

“Perhaps sensing the dismal failure of its efforts to show that ‘established by the State’ means ‘established by the State and the federal government,’ the Court tries to palm off the pertinent statutory phrase as ‘inartful drafting.’ The Court, however, has no free-floating power to rescue Congress from their drafting errors.” In other words, Justice Roberts has rewritten the law to suit himself.

To reinforce his conclusion, Scalia concludes with “…the Court forgets that ours is a government of laws and not of men. That means we are governed by the terms of our laws and not by the unenacted will of our lawmakers. If Congress enacted into law something different from what it intended, then it should amend to law to conform to its intent. In the meantime, Congress has no roving license …to disregard clear language on the view that … ‘Congress must have intended’ something broader.”

“Rather than rewriting the law under the pretense of interpreting it, the Court should have left it to Congress to decide what to do… [the] Court’s two cases on the law will be remembered through the years. And the cases will publish the discouraging truth that the Supreme Court favors some laws over others and is prepared to do whatever it takes to uphold and assist its favorites… We should start calling this law SCOTUSCare.”

Jonathan Adler of the much-respected and quoted law blog Volokh Conspiracy put it this way: “The umpire has decided that it’s okay to pinch-hit to ensure that the right team wins.”

And indeed, what most stands out about Roberts’ opinion is its contravention of ordinary constitutional thought. It is not the product of a mind that began at square one and worked its way methodically to a logical conclusion. The reader senses a reversal of procedure; the Chief Justice started out with a desired conclusion and worked backwards to figure out how to justify reaching it. Justice Scalia says as much in his dissent. But Scalia does not tell us why Roberts is behaving in this manner.

If we are honest with ourselves, we must admit that we do not know why Roberts is saying what he is saying. Beyond question, it is arbitrary and indefensible. Certainly it is inconsistent with his past decisions. There are various reasons why a man might do this.

One obvious motivation might be that Roberts is being blackmailed by political supporters of the PPACA, within or outside of the Obama administration. Since blackmail is not only a crime but also a distasteful allegation to make, nobody will advance it without concrete supporting evidence – not only evidence against the blackmailer but also an indication of his or her ammunition. The opposite side of the blackmail coin is bribery. Once again, nobody will allege this publicly without concrete evidence, such as letters, tapes, e-mails, bank account or bank-transfer information. These possibilities deserve mention because they lie at the head of a short list of motives for betrayal of deeply held principles.

Since nobody has come forward with evidence of malfeasance – or is likely to – suppose we disregard that category of possibility. What else could explain Roberts’ actions? (Note the plural; this is the second time he has sustained PPACA at the cost of his own integrity.)

Lord Acton Revisited

To explain John Roberts’ actions, we must develop a model of political economy. That requires a short side trip into the realm of political philosophy.

Lord Acton’s famous maxim is: “Power corrupts; absolute power corrupts absolutely.” We are used to thinking of it in the context of a dictatorship or of an individual or institution temporarily or unjustly wielding power. But it is highly applicable within the context of today’s welfare-state democracies.

All of the Western industrialized nations have evolved into what F. A. Hayek called “absolute democracies.” They are democratic because popular vote determines the composition of representative governments. But they are absolute in scope and degree because the administrative agencies staffing those governments are answerable to no voter. And increasingly the executive, legislative and judicial branches of the governments wield powers that are virtually unlimited. In practical effect, voters vote on which party will wield nominal executive control over the agencies and dominate the legislature. Instead of a single dictator, voters elect a government body with revolving and rotating dictatorial powers.

As the power of government has grown, the power at stake in elections has grown commensurately. This explains the burgeoning amounts of money spent on elections. It also explains the growing rancor between opposing parties, since ordinary citizens perceive the loss of electoral dominance to be subjugation akin to living under a dictatorship. But instead of viewing this phenomenon from the perspective of John Q. Public, view it from within the brain of a policymaker or decisionmaker.

For example, suppose you are a completely fictional Chairman of a completely hypothetical Federal Reserve Board. We will call you “Bernanke.” During a long period of absurdly low interest rates, a huge speculative boom has produced unprecedented levels of real-estate investment by banks and near-banks. After stoutly insisting for years on the benign nature of this activity, you suddenly perceive the likelihood that this speculative boom will go bust and some indeterminate number of these financial institutions will become insolvent. What do you do? 

Actually, the question is really more “What do you say?” The actions of the Federal Reserve in regulating banks, including those threatened with or undergoing insolvency, are theoretically set down on paper, not conjured up extemporaneously by the Fed Chairman every time a crisis looms. These days, though, the duties of a Fed Chairman involve verbal reassurance and massage as much as policy implementation. Placing those duties in their proper light requires that our side trip be interrupted with a historical flashback.

Let us cast our minds back to 1929 and the onset of the Great Depression in the United States. At that time, virtually nobody foresaw the coming of the Depression – nobody in authority, that is. For many decades afterwards, the conventional narrative was that President Herbert Hoover adopted a laissez faire economic policy, stubbornly waiting for the economy to recover rather than quickly ramping up government spending in response to the collapse of the private sector. Hoover’s name became synonymous with government passivity in the face of adversity. Makeshift shanties and villages of the homeless and dispossessed became known as “Hoovervilles.”

It took many years to dispel this myth. The first truthteller was economist Murray Rothbard in his 1962 book America’s Great Depression, who pointed out that Hoover had spent his entire term in a frenzy of activism. Far from remaining a pillar of fiscal rectitude, Hoover had presided over federal deficit spending so large that his successor, Democrat Franklin Delano Roosevelt, campaigned on a platform of balancing the federal-government budget. Hoover sternly warned corporate executives not to lower wages and officially adopted an official stance in favor of inflation.

Professional economists ignored Rothbard’s book in droves, as did reviewers throughout the mass media. Apparently the fact that Hoover’s policies failed to achieve their intended effects persuaded everybody that he couldn’t have actually followed the policies he did – since his actual policies were the very policies recommended by mainstream economists to counteract the effects of recession and Depression and were largely indistinguishable in kind, if not in degree, from those followed later by Roosevelt.

The anathematization of Herbert Hoover drover Hoover himself to distraction. The former President lived another thirty years, to age ninety, stoutly maintaining his innocence of the crime of insensitivity to the misery of the poor and unemployed. Prior to his presidency, Hoover had built reputation as one of the great humanitarians of the 20th century by deploying his engineering and organizational skills in the cause of disaster relief across the globe. The trashing of his reputation as President is one of history’s towering ironies. As it happened, his economic policies were disastrous, but not because he didn’t care about the people. His failure was ignorance of economics – the same sin committed by his critics.

Worse than the effects of his policies, though, was the effect his demonization has had on subsequent policymakers. We do not remember the name of the captain of the California, the ship that lay anchored within sight of the Titanic but failed to answer distress calls and go to the rescue. But the name of Hoover is still synonymous with inaction and defeat. In politics, the unforgivable sin became not to act in the face of any crisis, regardless of the consequences.

Today, unlike in Hoover’s day, the Chairman of the Federal Reserve Board is the quarterback of economic policy. This is so despite the Fed’s ambiguous status as a quasi-government body, owned by its member banks with a leader appointed by the President. Returning to our hypothetical, we ponder the dilemma faced by the Chairman, “Bernanke.”

Bernanke only directly controls monetary policy and bank regulation. But he receives information about every aspect of the U.S. economy in order to formulate Fed policy. The Fed also issues forecasts and recommendations for fiscal and regulatory policies. Even though the Federal Reserve is nominally independent of politics and from the Treasury department of the federal government, the Fed’s policies affect and are affected by government policies.

It might be tempting to assume that Fed Chairmen know what is going to happen in the economic future. But there is no reason to believe that is true. All we need do is examine their past statements to disabuse ourselves of that notion. Perhaps the popping of the speculative bubble that Bernanke now anticipates will produce an economic recession. Perhaps it will even topple the U.S. banking system like a row of dominoes and produce another Great Depression, a la 1929. But we cannot assume that either. The fact that we had one (1) Great Depression is no guarantee that we will have another one. After all, we have had 36 other recessions that did not turn into Great Depressions. There is nothing like a general consensus on what caused the Depression of the 1920s and 30s. (The reader is invited to peruse the many volumes written by historians, economic and non-, on the subject.) About the only point of agreement among commentators is that a large number of things went wrong more or less simultaneously and all of them contributed in varying degrees to the magnitude of the Depression.

Of course, a good case might be made that it doesn’t matter whether Fed Chairman can foresee a coming Great Depression or not. Until recently, one of the few things that united contemporary commentators was their conviction that another Great Depression was impossible. The safeguards put in place in response to the first one had foreclosed that possibility. First, “automatic stabilizers” would cause government spending to rise in response to any downturn in private-sector spending, thereby heading off any cumulative downward movement in investment and consumption in response to failures in the banking sector. Second, the Federal Reserve could and would act quickly in response to bank failures to prevent the resulting reverse-multiplier effect on the money supply, thereby heading off that threat at the pass. Third, bank regulations were modified and tightened to prevent failures from occurring or restrict them to isolated cases.

Yet despite everything written above, we can predict confidently that our fictional “Bernanke” would respond to a hypothetical crisis exactly as the real Ben Bernanke did respond to the crisis he faced and later described in the book he wrote about it. The actual and predicted responses are the same: Scare the daylights out of the public by predicting an imminent Depression of cataclysmic proportions and calling for massive government spending and regulation to counteract it. Of course, the real-life Bernanke claimed that he and Treasury Secretary Henry O’Neill correctly foresaw the economic future and were heroically calling for preventive measures before it was too late. But the logic we have carefully developed suggests otherwise.

Nobody – not Federal Reserve Chairmen or Treasury Secretaries or California psychics – can foresee Great Depressions. Predicting a recession is only possible if the cyclical process underlying it is correctly understood, and there is no generally accepted theory of the business cycle. No, Bernanke and O’Neill were not protecting America with their warning; they were protecting themselves. They didn’t know that a Great Depression was in the works – but they did know that they would be blamed for anything bad that did happen to the economy. Their only way of insuring against that outcome – of buying insurance against the loss of their jobs, their professional reputations and the possibility of historical “Hooverization” – was to scream for the biggest possible government action as soon as possible. 

Ben Bernanke had been blasé about the effects of ultra-low interest rates; he had pooh-poohed the possibility that the housing boom was a bubble that would burst like a sonic boom with reverberations that would flatten the economy. Suddenly he was confronted with a possibility that threatened to make him look like a fool. Was he icy cool, detached, above all personal considerations? Thinking only about banking regulations, national-income multipliers and the money supply? Or was he thinking the same thought that would occur to any normal human being in his place: “Oh, my God, my name will go down in history as the Herbert Hoover of Fed chairmen”?

Since the reasoning he claims as his inspiration is so obviously bogus, it is logical to classify his motives as personal rather than professional. He was protecting himself, not saving the country. And that brings us to the case of Chief Justice John Roberts.

Chief Justice John Roberts: Selfless, Self-Interested or Self-Preservationist?

For centuries, economists have identified self-interest as the driving force behind human behavior. This has exasperated and even angered outside observers, who have mistaken self-interest for greed or money-obsession. It is neither. Rather, it merely recognizes that the structure of the human mind gives each of us a comparative advantage in the promotion of our own welfare above that of others. Because I know more about me than you do, I can make myself happier than you can; because you know more about you than I do, you can make yourself happier than I can. And by cooperating to share our knowledge with each other, we can make each other happier through trade than we could be if we acted in isolation – but that cooperation must preserve the principle of self-interest in order to operate efficiently.

Strangely, economists long assumed that the same people who function well under the guidance of self-interest throw that principle to the winds when they take up the mantle of government. Government officials and representatives, according to traditional economics textbooks, become selfless instead of self-interested when they take office. Selflessness demands that they put the public welfare ahead of any personal considerations. And just what is the “public welfare,” exactly? Textbooks avoided grappling with this murky question by hiding behind notions like a “social welfare function” or a “community indifference curve.” These are examples of what the late F. A. Hayek called “the pretense of knowledge.”

Beginning in the 1950s, the “public choice” school of economics and political science was founded by James Buchanan and Gordon Tullock. This school of thought treated people in government just like people outside of government. It assumed that politicians, government bureaucrats and agency employees were trying to maximize their utility and operating under the principle of self-interest. Because the incentives they faced were radically different than those faced by those in the private sector, outcomes within government differed radically from those outside of government – usually for the worse.

If we apply this reasoning to members of the Supreme Court, we are confronted by a special kind of self-interest exercised by people in a unique position of power and authority. Members of the Court have climbed their career ladder to the top; in law, there are no higher rungs. This has special economic significance.

When economists speak of “competition” among input-suppliers, we normally speak of people competing with others doing the same job for promotion, raises and advancement. None of these are possible in this context. What about more elevated kinds of recognition? Well, there is certainly scope for that, but only for the best of the best. On the current court, positive recognition goes to those who write notable opinions. Only Judge Scalia has the special talent necessary to stand out as a legal scholar for the ages. In this sense, Judge Scalia is “competing” with other judges in a self-interested way when he writes his decisions, but he is not competing with his fellow judges. He is competing with the great judges of history – John Marshall, Oliver Wendell Holmes, Louis Brandeis, and Learned Hand – against whom his work is measured. Otherwise, a judge can stand out from the herd by providing the deciding or “swing” vote in close decisions. In other words, he can become politically popular or unpopular with groups that agree or disagree with his vote. Usually, that results in transitory notoriety.

But in historic cases, there is the possibility that it might lead to “Hooverization.”

The bigger government gets, the more power it wields. More government power leads to more disagreement about its role, which leads to more demand to arbitration by the Supreme Court. This puts the Court in the position of deciding the legality of enactments that claim to do great things for people while putting their freedoms and livelihoods in jeopardy. Any judge who casts a deciding vote against such a measure will go down in history as “the man who shot down” the Great Bailout/the Great Health Care/the Great Stimulus/the Great Reproductive Choice, ad infinitum.

Almost all Supreme Court justices have little to gain but a lot to lose from opposing a measure that promotes government power. They have little to gain because they cannot advance further or make more money and they do not compete with J. Marshall, Holmes, Brandeis or Hand. They have a lot to lose because they fear being anathematized by history, snubbed by colleagues, picketed or assassinated in the present day, and seeing their children brutalized by classmates or the news media. True, they might get satisfaction from adhering to the Constitution and their personal conception of justice – if they are sheltered under the umbrella of another justice’s opinion or they can fly under the radar of media scrutiny in a relatively low-profile case.

Let us attach a name to the status occupied by most Supreme Court justices and to the spirit that animates them. It is neither self-interest nor selflessness in their purest forms; we shall call it self-preservation. They want to preserve the exalted status they enjoy and they are not willing to risk it; they are willing to obey the Constitution, observe the law and speak the truth but only if and when they can preserve their position by doing so. When they are threatened, their principles and convictions suddenly go out the window and they will say and do whatever it takes to preserve what they perceive as their “self.” That “self” is the collection of real income, perks, immunities and prestige that go with the status of Supreme Court Justice.

Supreme Court Justice John Roberts is an example of the model of self-preservation. In both of the ObamaCare decisions, his opinions for the majority completely abdicated his previous conservative positions. They plumbed new depths of logical absurdity – legal absurdity in the first decision and semantic absurdity in the second one. Yet one day after the release of King v. Burwell, Justice Roberts dissented in the Obergefell case by chiding the majority for “converting personal preferences into constitutional law” and disregarding clear meaning of language in the laws being considered. In other words, he condemned precisely those sins he had himself committed the previous day in his majority opinion in King v. Burwell.

For decades, conservatives have watched in amazement, scratching their heads and wracking their brains as ostensibly conservative justices appointed by Republican presidents unexpectedly betrayed their principles when the chips were down, in high-profile cases. The economic model developed here lays out a systematic explanation for those previously inexplicable defections. David Souter, Anthony Kennedy, John Paul Stevens and Sandra Day O’Connor were the precursors to John Roberts. These were not random cases. They were the systematic workings of the self-preservationist principle in action.

DRI-410: The Pedigree of Right-Wing Opposition to ObamaCare

The Supreme Court’s recent ruling in National Federation of Independent Business vs. Sebelius; et al decided the constitutionality of the Patient Protection and Affordable Care Act, popularly known as ObamaCare. This is the most anxiously awaited ruling in generations and potentially the most momentous. The legislation will eventually produce a de facto takeover by the federal government of the U.S. health-care sector, amounting to over one-fifth of the U.S. economy. The central focus of the bill and the ruling was the power of the federal government to order the behavior of its citizens and the nature and existence of limits on that power.

As one would expect, economic logic constitutes the heart of that legal debate. It would not astound most people to find that the best treatment of this subject was written by an economist. But it would raise their eyebrows to learn that the economist in question died in 1992 – twenty years before the ObamaCare ruling was handed down – and wrote in 1960, decades before burgeoning health-care costs first grabbed the attention of the American public.

The Mandate to Purchase Health Insurance

The linchpin of ObamaCare is a mandate that uninsured Americans either purchase health insurance or be forced to pay a forfeit. Although the forfeit is denoted a penalty in the language of the bill and by the bill’s prominent supporters – including President Obama himself – the government’s counsel presented an alternative case for the bill as a tax.

Despite the brevity of this argument – it occupied only 21 lines in the brief – it was accepted by Chief Justice John Roberts in his majority opinion. Indeed, Justice Roberts’ obiter dicta rejected the government’s primary contention that the mandate was a penalty, levied under the federal government’s power to regulate interstate commerce.

A four-justice minority consisting of Judges Thomas, Kennedy, Scalia and Alito dissented scathingly. The minority not only rejected the alternative characterization of the mandate as a tax, but also denied the constitutionality of the bill in its entirety. Thus, the dichotomy is one of the sharpest in the history of the Court.

Obama administration supporters were quick to accuse the bill’s opponents of hypocrisy, pointing out that the right-leaning Heritage Foundation had submitted a comprehensive proposal for health-care reform in 1993 in which a purchase mandate had figured prominently. Obviously, Democrats maintained, conservative opposition to a mandate had to be purely political, originating with its submission by the Obama administration.

Not so. The right-wing health-care purchase mandate has an even longer lineage than the left wing contends. Tracing this genealogy to its roots should clarify the issues involved. Our search takes us back to seminal work by the patron saint of right-wing political philosophy, F. A. Hayek.

Hayek on the Purchase-Mandate Concept

In The Constitution of Liberty (1960), Hayek begins by noting that the provision for the future is a general problem faced by members of all societies. His words are so cogent and prescient as to demand direct quotation (all emphasis added by me):

In the Western world some provision for those threatened by the extremes of indigence or starvation due to circumstances beyond their control has long been accepted as a duty of the community…What we now know as public assistance or relief…is merely the old poor law adapted to modern conditions. The necessity of some such arrangement in an industrial society is unquestioned – be it only in the interest of those who require protection against acts of desperation on the part of the needy.

It is probably inevitable that this relief should not long be confined to …the  “deserving poor,” as they used to be called, and that the amount of relief now given in a comparatively wealthy society should be more than it absolutely necessary to keep alive and in health. We must expect that the availability of this assistance will induce some to neglect such provision against emergencies as they would have been able to make on their own. It seems only logical, then, that those who will have a claim to assistance in circumstances for which they could have made provision should be required to make provision themselves. Once it becomes the recognized duty of the public to provide for the extreme needs of old age, unemployment, sickness, etc., irrespective of whether the individuals could and ought to have made provision themselves, and particularly once help is assured to such an extent that it is apt to reduce individuals’ efforts, it seems an obvious corollary to compel them to insure (or otherwise provide) against those common hazards of life. The justification in this case is not that people should be coerced to do what is in their individual interest but that, by neglecting to make provision, they would become a charge to the public. Similarly, we require motorists to insure against third-party risks…in the interest of others who might be harmed by their actions.

Finally, once the state requires everybody to make provisions of a kind which only some had made before, it seems reasonable enough that the state should also assist in the development of appropriate institutions…the cost of experimenting with and developing new institutions may be regarded as [analogous to] the cost of research or the dissemination of knowledge…The aid given out of the public purse for this purpose should be temporary in nature…intended only for a transitional period, terminating when the existing institution has grown and developed to meet the new demand.

Hayek is often cited approvingly by 20th-century liberals for his activist stance toward government welfare programs like social security and unemployment insurance. The above passages lend superficial support to this characterization. But Hayek goes on to make the crucial distinction between government interventions favorable to limited, constitutional government and those destructive to it.

It is only when the proponents of “social security” go a step further that the crucial issues arise. Even at the beginning stage of “social insurance” in German in the 1880s, individuals were not merely required to make provision against those risks which, if they did not, the state would have to provide for, but were compelled to obtain this protection through a unitary organization run by the government…”Social insurance” thus from the beginning meant not merely compulsory insurance but compulsory insurance in a unitary organization controlled by the state. The chief justification for this decision…was the presumed greater efficiency and administrative convenience (i.e., economy) of such a unitary organization. It was often claimed that this was the only way to assure sufficient provision at a single stroke for all those in need.

The Trojan Health-Care System

The appropriate icon for ObamaCare would be a Trojan, for the system parades as a prophylactic against the diseases afflicting health care but its effect on the system will be analogous to that of a computer virus, which burrows deep within it and wreaks progressively greater havoc over time.

The immediate provisions of ObamaCare do not technically require all Americans to buy health insurance. Rather, they demand that any adult who lacks health insurance at the end of the system’s first year of operations must pay a penalty on his or her income-tax return. The penalty is set low enough so as to seem attractive relative to the cost of an individual policy for those who currently lack health insurance. That is, the practical result of this provision will be to induce uninsured Americans to remain uninsured and pay the penalty rather than to buy health insurance.

Ordinarily, an uninsured adult will run certain risks. First, there is the possibility that the uninsured will acquire a condition that will substantially raise the cost of a policy or effectively foreclose the possibility of insurance. Second, there is the possibility that the uninsured will be visited by serious illness while uninsured, thus incurring a major financial setback.

ObamaCare forbids insurance companies from considering pre-existing medical conditions when evaluating the insurance risk of an applicant. The term for this policy is “guaranteed issue.” It also establishes government-run exchanges within which an uninsured will have the option of purchasing health insurance at any time, perhaps with a government subsidy.

The implications of these provisions for the health-insurance market are clear. First, the uninsured will have no incentive to purchase private insurance while in good health. Second, upon becoming sick, an uninsured will simply buy insurance at the government-run exchange. Ordinarily, it would be impractical to purchase insurance after contracting illness, since acquisition of a pre-existing condition would either make the applicant uninsurable or drive the insurance premium prohibitively high. But the provision in ObamaCare forbidding consideration of health status would preclude the former outcome, thus guaranteeing the latter.

The problem of “adverse selection” – only sick people wanting to buy insurance – is that it depletes the pool of premium-paying healthy insureds from which the insurance companies get the money to pay insurance claims. But that is just the beginning of the headaches created for private health insurance by ObamaCare. Its provisions impose a laundry list of mandated benefits insurance companies must pay – a mandate to pay out $.80-.85 worth of claimed benefits for every $1.00 in premiums collected, special benefits paid specifically to women, mandates to pay for various preventive services and more. The companies must keep the children of insured families on the family policy under the children reach age 26. The Secretary of Health and Human Services has the power to disallow premium increases greater than 10% for individual and small-group policies.

This combination of circumstances spells the end of the private market for health insurance. This is not merely the view of right-wing partisans. It is also the view of industry analysts. Secretary Sebelius, whose name is on the ObamaCare lawsuit heard by the Supreme Court, publicly declared before the outcome was known that the private health-insurance industry was “in a death spiral.” President Obama has long been publicly committed to creating a “single-payer,” e.g., government operated national health-care system. He fought doggedly to preserve a “public option” for government-provided health insurance in the ObamaCare legislation before reluctantly accepting the bill in its current form.

In other words, ObamaCare will rapidly produce the same situation created at its outset by Social Security legislation and described by Hayek above – one single, unitary organization operated by the government and subscribed by all. Rather than being reached at a stroke – the path taken by European welfare states – this outcome will be reached in a slower, more roundabout way. The direct route, a straightforward transition to single-payer, socialized medicine, was obviously viewed as politically infeasible. Indeed, ObamaCare itself passed both houses of Congress only thanks to a series of machinations unique in U.S. legislative history. Even now, the measure is wildly unpopular among the general public.

Over time, this sheltered monopoly will become more and more inefficient, less flexible and less tolerant of individual variation. It will become less receptive to innovation and suggestion from outside the ranks of government. In short, it will destroy the quality of health care it was ostensibly intended to save.

We can now appreciate the vital difference between a purchase mandate of the type advocated by Hayek and the Heritage Foundation and the one dictated by ObamaCare. The former allows Americans to choose among various types of insurance in a competitive market populated by different companies. The latter drives this competitive private market out of existence in order to force Americans to purchase the product of a single, unitary government insurance organization and would slowly, but surely degrade the quality of health care over time.

Hayek on Socialized Medicine

We have already seen that Hayek’s analysis of mandatory social insurance, directed at Social Security, accurately predicted the course taken thus far by ObamaCare. In fact, The Constitution of Liberty specifically addressed the issue of mandatory health insurance under a welfare state.

The provision against sickness presents not only most of the problems which we have already considered by peculiar ones of its own. They result from the fact that the problem of “need” cannot be treated as though it were the same for all who satisfy certain objective criteria, such as age; each case of need raises problems of urgency and importance which have to be balanced against the cost of meeting it, problems which must be decided either by the individual or for him by somebody else.

There is little doubt that the growth of health insurance is a desirable development. [Hayek was writing in 1960.] And perhaps there is also a case for making it compulsory since many who could thus provide for themselves might otherwise become a public charge. But there are strong arguments against a single scheme of state insurance; and there seems to be an overwhelming case against a free health service for all… [yet] political circumstances make it unlikely that they can ever be abandoned, now that they have been adopted. One of the strongest arguments against them is, indeed, that their introduction is the kind of politically irrevocable measure that will have to be continued, whether it proves a mistake or not.

The case for a free health service is usually based on two fundamental misconceptions. They are, first, the belief that medical needs are usually of an objectively ascertainable character and such that they can and ought to be fully met in every case without regard to economic considerations and, second, that this is economically possible because an improved medical service normally results in a restoration of economic effectiveness or earning power and so pays for itself. Both contentions mistake the nature of the problem involved…There is no objective standard for judging how much care and effort are required in a particular case; also, as medicine advances, it becomes more and more clear that there is no limit to the amount that might profitably be spent in order to do all that is objectively possible. Moreover, it is also not true that, in our individual valuation, all that might yet be done to secure health and life has an absolute priority over other needs. As in all other decisions in which we have to deal…with probabilities and chances, we constantly take risks and decide on the basis on economic considerations whether a particular precaution is worthwhile; i.e., by balancing the risk against other needs. Even the richest man will normally not do all that medical knowledge makes possible to preserve his health, perhaps because other concerns compete for his time and energy. Somebody must always decide whether an additional effort and additional outlay of resources are called for. The real issue is whether the individual concerned is to have a say and be able, by an additional sacrifice, to get more attention or whether this decision is to be made for him by somebody else. Though we all dislike the fact that we  have to balance immaterial values like health and life against material advantages and wish that the choice were unnecessary, we all do have to make the choice because of facts we cannot alter.

Thus, a half-century before our time, Hayek anticipated the present-day debates over the standard of care and death panels. The left wing and their allies in the bureaucracy and medical establishment claim that a single standard of medical care can be objectively specified and quantified by self-anointed and appointed panels of experts. The government can then enforce this standard as a way of reducing health-care costs – denying forms of treatment that fall outside its boundaries and insisting on adherence to this administratively determined code of treatment. Towards the end of life – when we putatively spend “too much” on preserving life – these same panels of experts will decide how many resources to devote to preserving life and when to pull the plug on the terminally ill. To deny those directly affected the final say in this process is the ultimate triumph of totalitarianism. In his unique style, all the more powerful for its straightforward simplicity and calm, Hayek brings this home.

The problems raised by a free health service are made even more difficult by the fact that the progress of medicine tends to increase its efforts not mainly toward restoring working capacity but toward the alleviation of suffering and the prolongation of life; these, of course, cannot be justified on economic but only on humanitarian grounds …[This] presents a problem which can, under no conceivable condition, be solved by an unlimited provision of medical facilities and which, therefore, must continue to present a painful choice between competing aims. Under a system of state medicine this choice will have to be imposed by authority upon the individuals.

Hayek also realized that health care is an economic good like any other. Individual variations physical makeup and personal preference will cause different people to value life and health differently. The only way to cater to these differences is through the workings of the price system. Although Hayek’s personal experience was primarily with the British National Health Service, he nevertheless anticipated the disastrous American evolution toward third-party payment of health-care costs by insurance providers, which has insulated the beneficiaries and demanders of health care from its costs. Both the British system of “free” health care and the American system of first-dollar insurance coverage have artificially increased the nominal costs of health care by preventing price from exercising its true economic function of regulating demand. What Hayek calls “true insurance” protects against occasional catastrophe without deceiving health-care consumers into thinking that everyday health care can be free.

Hayek on the Physician Shortage

Another iceberg hazarding our passage to socialized medicine is a looming shortage of physicians. One recent estimate cited a figure of 83% as the number of doctors who would renounce the practice of medicine rather then endure the rigors of ObamaCare. It should hardly surprise that Hayek saw this coming as well.

There are so many serious problems raised by the nationalization of medicine that we cannot mention even all the more important ones. But there is one the gravity of which the public has scarcely yet perceived and which is likely to be of the greatest importance. This is the inevitably transformation of doctors, who have been members of a free profession primarily responsible to their patients, into paid servants of the state, officials who are necessarily subject to instruction by authority and who must be released from the duty of secrecy so far as authority is concerned. The most dangerous aspect of the new development may well prove to be that, at a time when the increase in medical knowledge tends to confer more and more power over the minds of men to those who possess it, they should be made dependent on a unified organization under single direction and be guided by the same reasons of state that generally govern policy. A system that gives the indispensable helper of the individual, who is at the same time an agent of the state, an insight into the other’s most intimate concerns and creates conditions in which he must reveal this knowledge to a superior and use it for the purposes determined by authority opens frightening prospects. The manner in which state medicine has been used in Russia as an instrument of  industrial discipline gives us a foretaste of the uses to which such a system can be put.

Hayek lived to age 92, dying in 1992 despite enduring numerous heart attacks and other chronic health problems. He fled Nazi tyranny and was perhaps the world’s leading expert on the evolution of Germany from welfare state into Nazi fascism. The “medical” uses to which doctors like Josef Mengele put government power were undoubtedly in his mind when he wrote The Constitution of Liberty in 1960, so he was understating his case by picking Soviet Russia as his exemplar.

The last fifty years have evolved in certain directions that Hayek probably could not have foreseen. The disgust of many doctors today derives from their subordination to insurance companies in much the same manner as described by Hayek above. Having been forced by HMOs to submerge what they considered the interests of their patients to that of the insurance companies, they can easily foresee a far worse situation ahead – bigger and more intractable bureaucracy mobilized by the federal government and no escape in sight. After all, at least doctors and private individuals can change insurance companies, or the patient can eschew health insurance and pay cash directly for medical services. In contrast, ObamaCare portends a Sartrean environment from which there is, indeed, “no exit.”

Hayek on the Collapse of the Welfare State

Reading Hayek, it becomes clear that the problems raised by ObamaCare and health care are merely a subset of those associated with Social Security, Medicare, Medicaid and the welfare state generally. Long before the welfare state in Europe began to collapse of its own weight, Hayek explained the nature of the dilemma it faced:

The difficulties which social insurance systems are facing everywhere and which have become the cause of recurrent discussion of the “crisis of social security” are the consequences of the fact that an apparatus designed for the relief of  poverty has been turned into an instrument for the redistribution of income, a redistribution supposedly based on some non-existing principle of social justice     but in fact determined by ad hoc decisions. It is true, of course, that even the provision of a uniform minimum for all those who cannot provide for themselves involves some redistribution of income. But there is a great deal of difference between the provision of such a minimum…and a redistribution aiming at a “just” remuneration in all the more important occupations – between a redistribution wherein the great majority earning their living agree to give to those unable to do so, and a redistribution wherein a majority takes from a minority because the latter has more… the latter brings us nearer and nearer to a system under which people will have to be told by authority what to do. It seems to the fate of all unitary, politically directed schemes for the provision of such services to be  turned rapidly into instruments for determining the relative incomes of the great  majority and thus for controlling economic activity generally.

…It must seem doubtful, however, whether there exists such a distinct phase of evolution in which the net effects of those monopolistic institutions are likely to be beneficial, and still more whether, once they have been created, it will ever be politically possible again to get rid of them. In poor countries the burden of the ever growing machinery is likely to slow down considerably the growth of wealth… and thus to postpone indefinitely the time when it will prevent the evolution of alternative institutions that could take over some of its functions.

There perhaps exists no insuperable obstacle to a gradual transformation of the sickness and unemployment allowance systems into systems of true insurance under which the individuals pay for benefits offered by competing institutions [but] it is much more difficult to see how it will ever be possible to abandon a system of provision for the aged under which each generation, by paying for the needs of   the preceding one, acquired a similar claim to support by the next. It would almost seem as if such a system, once introduced, would have to be continued in perpetuity or allowed to collapse entirely. The introduction of such a system therefore puts a straitjacket on evolution and places on society a steadily growing burden from which it will in all probability again and again attempt to extricate itself by inflation. Neither this outlet, however, nor a deliberate default on obligation already incurred can provide the basis for a decent society. Before we can hope to solve these problems sensibly, democracy will have to learn that it must pay for its own follies and that it cannot draw unlimited checks on the future to solve its present problems.

It has been well said that, while we used to suffer from social evils, we now suffer from the remedies for them. The difference is that, while in former times the social evils were gradually disappearing with the growth of wealth, the remedies we have introduced are beginning to threaten the continuance of that growth of   wealth on which all future improvement depends.

Hayek clearly foresaw demands for redistribution and social justice, such as those by the Occupy Wall Street movement. He envisioned the dramatic drop in productivity in countries like Greece, Portugal and Spain and the political difficulties resulting from the decline in wealth to redistribute. Hayek also knew that the entitlement state rode a tiger: any attempt to cope would result in social disintegration. Passive acceptance of the inevitable decline in wealth would produce default and financial chaos; inflating away the value of the debt would bring everyday life to a grinding halt by dumping sand into the machinery of markets.

To a student of economics, this last passage has an effect similar to that produced on the devout by a reading of the Bible’s book of Revelations – a chilling sense of awe and inevitability.

F. A. Hayek, Health-Care Prophet

F. A. Hayek’s words prove that the right-wing stance opposing ObamaCare is not the product of politics but rather of political philosophy and economics. He predicted the essential form ObamaCare would take long before President Obama was even elected. He predicted the end of the private market for health insurance, a denouement that is now impending. He predicted the degradation of quality in health care now seen in countries like England and Canada, thanks to their nationalization of health care. The man who predicted the Great Depression and whose intellectual triumph over socialism won for the 20th century the title of the “Hayek Century” is still leaving his mark on mankind.