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America’s Competitive Powers — At Long Last

How realistic is the hope to reform the U.S. healthcare and education sectors?

March 3, 2005

How realistic is the hope to reform the U.S. healthcare and education sectors?

In the 1970s, competition was weak in a number of U.S. industries. Prices were rising inexorably — and quality was spotty. Status quo interests seemed unassailable.

To see how bleak the picture was — and how America eventually got on the road of meaningful and effective reform — just look at the story of Paul MacAvoy.

In 1978, Mr. MacAvoy, a former member of President Ford's Council of Economic Advisors and in 1978 a professor at the School of Management at Yale, looked at a host of U.S. industries — and was pessimistic.

He saw government-sanctioned price fixing arrangements almost everywhere — in railroads, trucking, airlines, natural gas, oil and cable television.

Despairing, in an article entitled "The Existing Condition of Regulation and Regulatory Reform," he lamented that years of studies done by experts who favored an end to these monopolies had done nothing to bring competition to these sick industries.

Mr. MacAvoy feared that competition might never come to the industries with sanctioned price-fixing no matter what arguments were made, even though America prided itself internationally as being the mother lode of competition.

Yet in 1978, the very year of MacAvoy's lament, political decisions were made that would gradually open airlines and natural gas to competition.

In the same gradual manner, finance and telecommunications were being opened as he wrote — and trucking, railroads and other industries followed.

The amazing thing is that the interests that opposed competition and seemed so powerful ended up on the losing side of a dozen political fights. Indeed, they lost bigger than MacAvoy dreamed they could.

Decisions by presidents, regulators, Congress and the courts between the 1970s and the end of the 90s increased competition in sectors like manufacturing, finance and retailing — as well as in the "regulated" industries that were MacAvoy's focus.

What was the result? By the 1990s, competition had ended inflation in all these areas, prices were falling in them and they had become drivers of investment and productivity.

What does this mean for today's run-away costs in U.S. healthcare and education? First, make no mistake. These are two industries dominated by local monopolies.

Unfortunately, in the U.S. only the rich and fortunate can shop widely for healthcare and education.

For most Americans, the choice is between a limited number of local doctors and hospitals. And even these aren't real choices — because patients rarely know who treats diabetes, asthma, obesity and other conditions the best and for the lowest cost.

A similar primitive local market exists for elementary and secondary education. 30,000 local monopolies — a.k.a. school districts — control it and the only choices are where to live to get the best of these monopolies, or to pay for private schooling, which is out of reach for most families.

The good news, however, is that there are cracks in the status quo in healthcare and education — just as there were cracks in the other inflation-prone industries in the 1970s.

Rising costs in them are impinging on American competitiveness and holding back investment in other industries.

A tipping point may be near, especially in healthcare. A bipartisan consensus — including President Bush, John Kerry, Hillary Clinton, Majority Leader and medical doctor Bill Frist and Newt Gingrich — is evolving, calling for computerized medical records.

Why is this significant? When doctors and hospitals finally join the information revolution it will become possible to know who gives the best care at the best price.

Consumers will finally be able to take advantage of a real market and demand real service the way they do in other areas.

Sure, it will take decades to bring competition to these markets. Adam Smith said that such changes should be made gradually, and that is unavoidable.

In America, "the mills of the gods grind slowly, but they grind exceedingly fine." Thirty years after the first hearings on airline competition in the United States that reformed industry is still taking shape, but prices are down because competition is rampant.

Wal-Mart was only a $40 million a year company in 1970. Despite its incredible rise, the competitive revolution it represents in retailing is still going on, still driving change and still giving consumers power they never had before.

AT&T began to face serious competition from MCI in the early 1970s and competition is still driving change. What is clear, however, is that consumers and business customers have lower cost choices that were hardly imagined when Ma Bell seemed unassailable.

New financial institutions — junk bonds, the NASDAQ and regional banks — sprang up despite opposition from status quo interests.

In every case, competition lowered costs, meant better service for low-income people and smaller businesses — and encouraged investment and renewal.

Right now, the U.S. spends 15% of GDP on healthcare, while the Europeans spend 8-10% and cover everybody. Americans are usually significantly more efficient than those "Euro socialists," so this is "unnatural."

Even the Germans and French — not exactly models for most Americans today — are doing a better job in healthcare than we do.

Imagine a more "natural" world in 30 years. Competition will mean that Americans will spend less than Europeans on healthcare, perhaps only 8-9% of GDP.

Today that would mean spending $800-900 billion annually on healthcare — instead of $1.5 trillion. Care will be better and more responsive, as service has become in other competitive areas of the economy.

It is a tremendous waste that it will take us 30 years to get where we should be, but the American political system does work. Over time there will be the political support needed to overcome the status quo interests.

Americans do usually make the right pro-reform decisions on a bipartisan basis and get to the finish line, a finding that will surprise most people looking at the games being played in Washington today.

For more on these and other issues, read Paul London’s “The Competition Solution” (American Enterprise Institute Press, 2005).