Modern nations have two economies, which exist side by side. Economy I is the tradable sector. This includes companies that make goods like planes, steel and pharmaceuticals. These companies face intense global competition and are compelled to constantly innovate and streamline. They’ve spent the last few decades figuring out ways to make more products with fewer workers.
Economy II is made up of organizations that do not face such intense global competition. They often fall into government-dominated sectors like health care, education, prisons and homeland security. People in this economy believe in innovation, but they don’t have the sword of Damocles hanging over them so they don’t pursue unpleasant streamlining as rigorously. As a result, Economy II institutions tend to get bloated and inefficient as time goes by.
The piece then goes on to warn of stagnation in Economy II and the risk that it will undermine the growth and dynamism of Economy I. The heroes in Brooks story are those who want to experiment with ways to introduce the dynamism of Economy I to Economy II. In health care these would be folks like Representative Ryan and Governor Romney. In education, the heroes are the school reformers, most notably at the moment, Chicago Mayor Rahm Emanuel.
Okay, let’s look at Brooks’ world more closely. Note that the third example in Brooks’ Economy I is pharmaceuticals. Many of us know pharmaceuticals as the most rapidly growing cost in Brooks’ Economy II. The reason that drugs were not covered by Medicare when it was created in the mid-1960s, was that they didn’t cost anything. It would have been like including band aids. For all but the very poor, expenditures on prescription drugs were not a big deal.
That is obviously not the case today, when the country spends $300 billion a year (2 percent of GDP or 5 Bush tax cuts for the wealthy) on prescription drugs. There is probably no sector of the economy where corruption is more deeply seated than in the pharmaceutical industry. Pharmaceutical companies routinely lie about the safety and effectiveness of their drugs and find ways to bribe doctors and other providers to increase sales.
Of course the reason for the corruption is that the industry does not face “intense global competition” but instead enjoys patent monopolies and increasingly monopolies gained through data exclusivity, both of which exclude competitors from the market for long periods of time. The industry has used its political muscle to continually extend the length and breadth of this protection, most notably by having stronger intellectual property protections included in every trade agreement for the last two decades.
Okay, now let’s move on to the sectors that Brooks has actually placed in Economy II. Clearly costs have risen rapidly in this sector in the United States, but there is no comparable dynamic elsewhere in the world, especially in health care. In 1970 the United States did not even place at the top in terms of spending per capita. Currently we spend more than 50 percent more than our nearest competitor and more than twice the OECD average.
And, if anything the higher costs are due to the greater involvement of the private sector in the United States. All other countries have a much greater role for the government, in some cases like the United Kingdom and Denmark, the government actually provides care directly. In the U.S., the administrative costs of private insurers are 400 to 500 percent of the administrative costs of Medicare.
Brooks is also wrong to imagine that including private insurers in Medicare is an innovation. We tried this in 90s with Medicare Plus Choice from the Gingrich Congress and in the 00s with Medicare Advantage from the Bush administration. This is in addition to our long experience with private insurers in the non-Medicare market. Brooks’ innovators are in fact people who hoping to try what we have tried many many times before and somehow expecting a different result.
This is pretty much the same story with education reform. By this point, the education reform movement is pretty much old hat. The “reformers” have been calling the shots to a greater or lesser extent for more than two decades. Folks who honestly look at the data, like Diane Ravitch, who was an early reformer who served as an assistant secretary of education in the Bush I administration, recognize the movement has little to show for its efforts.
But Brooks can’t be bothered with evidence. He is eager to tout the education reform movement and its latest hero Rahm Emanuel. His article claims that his sources report that the Chicago teachers’ strike is about to be settled along lines that largely meet Emanuel’s demands. It’s probably best to wait to see the agreement rather than rely on Brooks’ sources (Brooks’ sources are almost certainly Emanuel’s staff, who are paid to spin gullible columnists), but Brooks tells readers that with the settlement his sources report:
Chicago will move toward the forefront of the reform movement.
I suppose that is in contrast to where Chicago stood for the years 2001-2009, when the educational reformer Arne Duncan, who is currently the Secretary of Education, ran Chicago’s schools. One thing is for sure, David Brooks has no problem with affirmative action for school reformers.
Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared