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Rules can also boost liberty

When the Supreme Court ruled recently that the Affordable Care Act is constitutional, the strongest protesters denounced it as an outrageous restriction on freedom.

Sen. Ron Johnson of Wisconsin growled that the "Obamacare decision establishes that there is no area of Americans' private lives that is off limits to federal intrusion and control. Freedom took a real body blow."

The ACA does indeed restrict some freedoms. It establishes insurance exchanges that require health insurers to agree not to deny coverage for pre-existing conditions or to raise premiums to unreasonable levels for sick people. It mandates that everyone purchase approved policies from those exchanges; it provides financial help for the poor to make that purchase. These regulations are designed to improve access to health coverage for most of the currently uninsured. Like all regulations, these new provisions will restrict some freedoms in order to enhance others.

In Adam Smith's view, capitalism is a "system of perfect liberty." Under ideal conditions, markets grow incomes; goods and services flow efficiently from seller to buyer; and competition produces incentives for continuous improvements in quality and price. Following the warnings of Smith himself, however, advanced societies find it necessary to regulate some market forces.

For example, governments regulate banks to prevent financial meltdowns; specify the minimum contents of health insurance policies; and impose the progressive income tax. Based on an incomplete understanding of Smith and the modern economics he founded, and often relying more on Ayn Rand novels than on rigor, many pundits, politicians and self-proclaimed "conservatives" maintain that all government restrictions on markets are inefficient and limit freedom.

In reality, the fundamental constraint on freedom is caused by a scarcity of our economy's resources — land, labor, capital and time. This scarcity inherently limits freedom and requires us to make choices. In many instances, competitive markets help us to overcome some of the limits imposed by scarcity, but often regulations are necessary to improve the efficiency of the market and thereby increase our economic freedom.

Examples include government efforts in fighting the anticompetitive practices of price-fixing cartels and the creation of the Centers for Disease Control, a government lab that researches diseases and provides information on the proper patient response to them (an activity for which profit would be an insufficient motivator).

When the government regulates markets, it imposes costs on some individuals that an unregulated market would not. The objective is to create a benefit for society as a whole. Some examples: food labels enhance informed consumer choice; patents encourage creativity and reward innovation; environmental protections foster cleaner air and purer water; and bank capital requirements demand sufficient cash reserves be held so that depositor withdrawals will have a nearly zero chance of causing the institution to fail.

To understand how the ACA enhances some freedoms while restricting others, consider two examples. First, the ACA restricts the freedom to practice "free-ridership," refusing to buy insurance but showing up at the hospital emergency room when in need of care. To restrict the freedom of the would-be free-rider, the ACA imposes a "free-rider tax." This tax reduces the costs paid by (thereby increasing the freedom of) those who voluntarily and responsibly purchase health insurance.

The ACA also enhances freedom from "job lock," that is, the inability to change jobs because some pre-existing medical condition would disqualify the worker from the health coverage offered by a new employer. Since under the ACA pre-existing conditions may not be used to disallow coverage, a worker's freedom to select among employment options is increased. Regulations that make markets more efficient increase economic freedom and help assure that the market is our servant and not our master.

Charles O. Kroncke is associate dean in the University of South Florida College of Business. William L. Holahan is a professor of economics at the University of Wisconsin at Milwaukee.

Rules can also boost liberty 07/09/12 [Last modified: Monday, July 9, 2012 7:03pm]

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