Corporate Average Fuel Economy Standards
Corporate Average Fuel Economy (CAFE) standards are politically imposed mandates on the average gas mileage that different categories of vehicles sold in the United States have to meet. In December 2007, Congress passed and President Bush signed legislation with the comforting title, the Energy Independence and Security Act of 2007, which increased CAFE standards to 35 mpg for cars and light trucks by 2020 from the previous requirement of 27.5 mpg or cars and 22.2 mpg for light trucks. The stated justification for CAFE standards is that they are necessary to force consumers to drive vehicles that reduce our dependence on foreign petroleum by getting better gas mileage. Unfortunately, these standards suppress information essential to making sensible transportation decisions.
Market prices and profit margins have until recently been higher on SUVs and trucks than on smaller vehicles because CAFE prevented car companies from increasing the supply of the larger vehicles. This hampered the ability of consumers to communicate information on how much they valued the tradeoffs between safety, comfort, convenience, and better gas mileage and the ability of automobile suppliers to communicate information on the cost of responding to consumer preferences with different types of vehicles. The result is that resources have been used to produce products that were less valuable than the larger vehicles that could have been produced, and no one knows how large this waste of resources has been.
CAFE standards have further distorted the two-way communication of information between consumers and automobile manufacturers with special-interest legislation that has nothing to do with saving petroleum. For example, the American Jobs Creation Act of 2004 created a large tax break on SUVs if they were used in small business (see Power 2003). This break was then eliminated in 2007 with the passage of the Energy Independence and Security Act, but we can expect Congress to come up with creative new ways to soften the effects of CAFE standards on selected special interests as the new standards make exemptions and loopholes even more valuable.
Consumer choice and producer innovation informed and motivated by higher gas prices will do more than arbitrary CAFE standards to reduce gas consumption in the most appropriate ways. In response to higher gas prices and information from automobile suppliers unrestricted by CAFE standards, people can use information on their individual circumstances to reduce gasoline consumption at far less cost than can be achieved with orders issued by politicians making decisions in an almost complete informational vacuum. Yet politicians are far more likely to increase censorship by restricting increases in gas prices with price controls, or threats against the petroleum industry, than they are to eliminate CAFE standards.
Health Care Insurance
Politicians have complained for decades that privately provided health care in America is excessively costly with too many people unable to afford health care insurance, and they have promised to do something about this problem. Yet the political approach to reforming the private provision of health care has consistently distorted and suppressed the communication of information needed to inform and motivate better health care at lower cost and to make health insurance available at reasonable cost.
First, by not taxing the value of employer-provided health insurance, but generally requiring direct payments for medical care to be paid with after-tax income, the federal tax code informs employees that low-deductible, low-co-pay health insurance is cheaper than it really is.8
And by distorting the information consumers need to make sensible decisions on health insurance—information on relative costs of health insurance with different deductibles and co-payments—we also distort decisions on the use of health care. Second, state governments have responded to the political influence of various providers of medical care by requiring that employer-provided health insurance cover a large number of services that many employees do not want or need (see Cogan, Hubbard, and Kessler 2005: 41–46). This excess coverage increases the price of health insurance, telling consumers that it is more costly than it needs to be, which results in fewer people buying health insurance.
When people have low deductible-low co-pay health insurance, the direct prices paid for medical care communicate to consumers that the cost of that care, once they pay the deductible, is only a fraction of the real cost. This distorted information results in consumers demanding care well beyond the point where its marginal value equals its marginal social cost. The result is waste of the resources used to supply medical care that would create more value in alternative uses. As this underpricing drives up the social cost of medical care, the private, but indirect, cost of medical care soon escalates as well through higher insurance premiums. The information necessary to reduce the waste of medical resources is further suppressed by the public financing of medical care through Medicare and Medicaid, which increases the amount people pay for medical care indirectly (in this case through taxes) instead of directly. This mispricing also increases the amount of health care demanded and drives up other indirect costs, with yet higher insurance payments, higher taxes, additional paperwork, and other nonprice rationing of health care.
Instead of these problems being seen as an argument for restoring the information provided through market prices, they motivate a public demand for government to further suppress market information with more controls over our medical decisions in the attempt to disguise the rising real cost of medical care.
A common argument for maintaining and, indeed, expanding our current system of third-party payment for financing medical care is that it is a justifiable form of insurance needed to guarantee that this care is adequately available to all. When the problems discussed above are acknowledged, the response is that such problems are the necessary consequence of the moral hazard associated with insurance. But real insurance covers the cost (or much of the cost) of highly unlikely catastrophic events like your house burning down, or a serious illness requiring expensive medical attention. The moral hazard associated with this insurance has to be considered, but is not nearly as great as that associated with what now passes for medical insurance. Most medical insurance today, because of its lowdeductibility, is primarily prepayment for routine medical services, analogous to hunger insurance. Once the premiums or taxes are paid, the dominant response (consider the benefit and largely ignore the cost) reflects a serious moral hazard, one that is far greater than would exist if government policies did not censor and distort information on the cost of health care and health insurance.
Politicians and the press routinely discuss the importance of funding scientific research to discover better ways to treat diseases and improve health care. Few people would deny the importance of the information such research can provide. Yet few people seem to recognize that improving the communication of the information of time and place by eliminating a host of politically imposed restrictions on health care markets would result in far better use of the medical knowledge that already exists, and increase the information and motivation to expand that knowledge.
Conclusion
Discussions of the harmful effects of much government policy explain the harm in terms of such things as unemployment caused by increasing the costs of hiring workers; penalizing success from greater productivity with high taxation; rewarding unproductive activities with transfers; distorting investment decisions with tax loopholes and subsidies; protecting producers against competition with regulations; providing goods and services through government that would be provided better and more cheaply by private firms; and imposing one-size-fits-all mandates when diverse conditions call for a variety of approaches. All of these explanations are accurate, but they fail to highlight the fundamental problem common to all harmful government policies—they censor the most effective way of communicating information that is essential for people to coordinate their decisions in ways that make the best use of their talents and resources for serving the interests of themselves and others. Unfortunately, very few see market prices that result from private property and voluntary exchange as the source of the most impressive communication network in the history of mankind—a communication network that predates the information age by centuries and is more essential to human prosperity than all the modern technological marvels of communication that have given rise to the term information age. With essentially no public understanding of the importance of the market as a communication network, politicians and their special-interest supplicants routinely capture wealth at the expense of the public by censoring the communication of information that would reduce waste and increase general prosperity. Any government attempt to censor written or verbal communication of information on how to reduce resource waste and better serve others, or on almost anything else, would rightly be seen as an intolerable outrage by those who routinely advocate and applaud government censorship of market communication.
In this article, we have explained how government policies on the financing and provision of public schools, agricultural subsidies, fuel economy standards, and health care insurance are hampering the achievement of important objectives by outlawing and distorting the communication of vital information through markets. Unfortunately, our examples of government censorship make up a very small tip of a very large iceberg of harmful government censorship of market information. Other examples that we could have discussed include restrictions on international trade, antitrust policy, legislative support of labor unions, occupational licensing, regulations on business, inflationary monetary policy, pork-barrel politics, the command-and-control approach to environmental protection, takings of private property, and restrictions on the sale of bodily organs.
Assignments
1. What is the reason for government censorship?
2. Do you agree with the statement that the real information age began long before?
3. Does government censorship distort and destroy information? Why?
Picture 5.1 Government Censorship
4. What is the best way to improve education according to the author?
5. How does the federal government distort and destroy information in agricultural sphere?
6. What does the distorted information in healthcare result in?
7. Comment the following statement:
· “Improving the communication of the information of time and place by eliminating a host of politically imposed restrictions on health care markets would result in far better use of the medical knowledge that already exists, and increase the information and motivation to expand that knowledge.”
8. What are the harmful effects of government censoring?
9. Give your examples of government censoring.
10. Summarize the text.
Text 3