Thursday, April 13, 2006

Frank on Federalism

In today's NY Times, economist Robert Frank takes note of the new Massaschusetts health plan and then argues that such programs should be taking place at the national, rather than state and local, level:

[P]rograms at the state and local levels create perverse economic incentives. A case in point is a proposal recently discussed in Ithaca, N.Y., where I live. Activists in this progressive upstate community (sometimes called "the People's Republic of Ithaca") called for a local income tax to finance a single-payer health care system for local residents. According to health policy experts, such a system would eliminate the substantial waste associated with attempts by insurance companies to limit authorized services and avoid covering people with chronic medical conditions.

Yet, despite this advantage, a health system operated at the local level could never work. Because people are free to move, such a plan would attract uninsured people with chronic conditions from surrounding cities, substantially raising the program's cost. In turn, the need to raise income tax rates would induce many of the community's more affluent taxpayers to flee to neighboring cities. The resulting death spiral would quickly doom the program.
In essence, Frank argues that the free mobility of people from town to town dooms the welfare state implemented at the local level. The other side of this coin can be seen in the immigration debate. As I noted in a previous post, the welfare state implemented at the national income threatens the free mobility of people from nation to nation.

Questions for ec 10 students: What is the right level of government for making health policy? Should we encourage experimentation by the states, as Massachusetts is now doing, or is that futile, as Frank suggests? What do these arguments say about immigration? Does the logic of Frank's argument suggest that redistributive policy take place at the supranational level, such as the United Nations?