Market Failure

In Economics, “Market Failure” is a term that refers to when the free market isn’t able to provide a proper allocation of resources necessary to resolve a problem. Neoliberal economists say that there’s no such thing, that a proper market, without government interference, can solve any issue of resource allocation. I disagree. Neoliberal economists are great for when there are no disasters, but their models fail the instant the expected rain turns out to be a hurricane. Or a blizzard. Or a tornado spawns. Or an earthquake hits. Or a war is declared. Or a pandemic enters the scene.

I am living through a pandemic right now. I assume that most of my readers are contemporary and are living through it, as well. We are all witness to how governments’ responses to the COVID-19 pandemic have fallen into one of several categories:

  1. Quick response, firm response – nations like South Korea, Japan, Taiwan, and Singapore had experience from SARS and MERS and knew what to do. As soon as the reports started to trickle out of China in January about a possible new coronavirus outbreak, they got their plans together.
  2. Slow response, firm response – Germany did not react as quickly as the nations cited above. As a consequence, the number of per-capita cases in Germany is much higher than in the nations cited above. But because the Germans had a firm response to the pandemic, they have been able to keep the fatality rate remarkably low, relative to other nations that responded late.
  3. Slow response, lax response – Italy was the first, but the USA (so far) is the worst. Both high case numbers as well as high fatality rates, this clearly wasn’t the right way to go.

So, what were factors in the USA’s response being incoherent and uncoordinated? Alas, there are many, including those stemming from a leadership focused more on its own status and media perception than on the actual pandemic, as well as those that originated about that same leadership encouraging talking points that downplayed the severity of the pandemic or which promoted unproven claims of various stripes – all to distract from the failures of that leadership. In a full report on the failure of the USA to deal as appropriately with COVID-19 as did South Korea, Japan, Taiwan, and Singapore – or even Germany – those reasons must be explored in greater detail. For this article, I want to focus on the market failures.

As it became clear that we were entering into a public health emergency, stocks of personal protective equipment (PPE), including masks, gowns, gloves, and eye protection, began to move sharply up in price. In a pure market, this is to be expected. Demand for the widget is higher and supply is at present inelastic, so the price of the widget must go up. Simple exercise, time to move on to the next textbook section… except, in this case, the widget is needed to save lives and the limits on production of said widgets means that the producers can engage in competition against the customers, in this case, the states and their hospitals.

Competition against a customer is when the makers of a product all raise their prices, one after the other. They need not communicate such a plan in so many words. That would be illegal collusion if they did. Rather, all one has to do is raise prices and the others follow that “price leadership” to match. The customer has nowhere else to turn and has to pay a profiteer’s premium in order to purchase that good. Competition against customers also takes the form of a bidding war. In that, a producer doesn’t treat each transaction as contractually binding, but makes a deal with one state that is conditional that no other state offers a higher price. When a higher price is offered, the original deal is off the table. When the federal government shows up to bid, it invariably offers the highest price and the states are left in a quandry. Not only do they not have their desired goods, but the market-clearing price is now magnitudes above what it once was.

So far, the federal government has yet to truly put the provisions of the Defense Provisioning Act (DPA) into motion in order to provide for more PPE at cheaper, fixed prices to the state and federal buyers. The federal government has also not been transparent about how it plans to use its stockpile – but that is for another, more in-depth analysis of the USA’s failures in responding to COVID-19. The DPA exists precisely for conditions such as we are experiencing, where price leadership and bidding wars are driving up prices for scarce goods. We could have a federal response that dictates a fixed price and that also instructs manufacturers of PPE to expand capacity.

Had the DPA been invoked in January – right around the time we could all sense this was going to be a huge thing – capacity would be expanded as of now and we would not be dealing with PPE shortages of the sort we see now. We see far too many cases of medical professionals unable to procure their own PPE, let alone get it issued from their hospital, so they have to make do with second-rate supplies that go against all best practices for proper use and disposal. This places their lives in needless jeopardy and, by extension, the lives of their patients.

The next market failure is the matter of the USA’s health system being dependent upon employer-provided private insurance, with zero transparency or consistency regarding pricing. While the President has declared that certain areas of care will be either covered by insurers or paid for by the federal government, we have only those declarations and no actual, actionable law or executive order to point to as a reference when dealing with insurance companies. Consequently, as a matter of corporate survival in a pandemic, insurance companies are invoking every loophole possible in a rearguard action to avoid breaking themselves over COVID-19 claims.

At which point, we must all ask, why do we have health insurance companies in the first place if they’re unable to properly lay out in times of catastrophe? We’re depending upon them to pay the bills – that’s why we pay our premiums – but if they up sticks and disappear when things are really, REALLY bad, then what use are they?

Given that many insurance companies already have a massive deductible and next to zero coverage only underlines my question – what use are they? The properly-funded public health systems in South Korea, Japan, Taiwan, Singapore, and Germany provided and continue to provide life-saving care for all their citizens. Meanwhile, the morgues and even cemeteries are overwhelmed in New York City, where some of America’s finest hospitals are overwhelmed. And, at those overwhelmed hospitals, there are patients who are going to be told that the care they thought was going to be 100% covered actually won’t be covered to that extent… and they will be looking at bankruptcy-inducing expenses as a consequence.

Maybe a policy here requires two positive test results to confirm COVID-19 and a patient received only one or none and was a presumed COVID-19 patient. Maybe the patient died before being tested and the cause of death was just “pneumonia” and not actually connected to COVID-19. Maybe the treatment specific to COVID-19 is covered, but not the ambulance, anesthesia, X-ray or other imaging analysis, or the final care arrangements. There are all kinds of ways to think of loopholes, and I’m sure the experts have already come up with others.

Back to the employer-provided insurance. What of the mounting wave of unemployed Americans? While possibly a huge save for insurance companies that no longer have to pay out for people they *used* to cover, who pays for the care they receive? Do they even go in to get tested or treated, out of fear over how much it will cost? Maybe something comes along to guarantee the federal payment for COVID-19 treatments other than the words of a pathological liar, but until then, there’s nothing to promise a free treatment for COVID-19 victims that don’t have insurance. And even with that federal guarantee, should it materialize, what happens when a person is brought to the emergency room for trouble breathing, but it’s only common-or-garden emphysema? We’re back to the bankruptcy gamble.

We can’t even post a price list for treatments because such a list does not exist. That’s why it’s a bankruptcy gamble. What if you have COVID-19, your insurer promises to cover it 100%, and you go to an in-network hospital and see an in-network physician? So far, so good. Now enter a specialist who assists that physician who’s not in-network. All bets are off, now, and it’s likely this patient is going to pay dearly for the fact that nobody knows exactly what combination of specialists is going to be in-network or out.

The President and his most ardent supporters have made much noise about “getting America back to work again.” Their fears are real – if Americans can’t pay the rent, then they go bankrupt when they can’t service their loans that depend upon those rent payments. But sick Americans can’t work and dead Americans can’t pay the rent, so they’re really unable to get America back to work again in the midst of a pandemic and come out all right. Without some sort of government fiat ruling, they face the market’s failure to accommodate some slack for times of extreme duress. On a side note, bankrupt Americans also don’t pay the rent and are more likely to try and fight out their squatters’ rights in costly court proceedings, so maybe those ardent supporters might want to take a look at actually fixing the health care system and not breaking out in a rash whenever the topic comes up. But a president empowered with the DPA can also take it upon the nation’s best interests to suspend loans, mortgages, and rents for the duration of the crisis. Other nations have done so, but the USA lacks a leader with the fortitude or foresight to enact such a policy – and the banking system hangs all the more precariously without such a policy to support it.

The markets have failed. PPE, health coverage, and rents/mortgages/loans are all in a quandry in the USA and the President and his most ardent supporters have failed to address these issues in a timely or realistic fashion. There have been multiple calls to address the issues from a very early date, but the President and his most ardent supporters rejected those calls. Because of the failures of the President and his most ardent supporters, the USA faces a disproportionate toll in terms of persons infected with COVID-19, with persons who died because of COVID-19, and with economic impact from the COVID-19 outbreak.

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