The Four Presents of Christmas

The story of four Christmas presents is an economics primer. It also applies to government health care and indeed to government spending in general. 
The Four Presents of Christmas
By: George Noga – December 3, 2017
     The process of shopping for Christmas presents contains valuable lessons about economics and government. The four presents fall into three economic categories.
        Present #1  The most felicitous gift is the one you buy for yourself with your own money. Clearly, you know better than anyone precisely what you want as well as how much you will spend. Your priorities are both price and quality; you want the highest possible quality for the lowest possible price. There are numerous trade offs between product features, quality and cost and many places to shop. You are uniquely qualified to evaluate all the permutations and to make the correct choice. Gifts like this are never returned. This is a first party purchase; the person paying is the person using.
       Present #2  Your Great Uncle Warbucks sends you a generous check with the proviso you buy a gift for yourself. Although you remain the best judge about what to buy for yourself, you now are tempted to purchase something you would not have bought with your own money. You still want high quality because you are consuming the product, but now you are not quite as concerned about the price. When someone is buying your dinner, you order the lobster rather than the brisket. When using OPM (other people’s money) the temptation is great to splurge. This is a one example of a second party purchase; the person using is not the person paying.
       Present #3  This is the arch-typical Christmas present – you buy a gift for someone else with your own money. However, you often are reduced to guesses about the needs and wants of others – even those close to you. Because you are spending your own money, you care about cost but are less concerned with quality as you are not using the product. You are not very interested in investing much time comparison shopping. Frequently, you buy something that the recipient would not have bought for him/her self and your gift is very likely to be returned. This is a slightly different example of a second party purchase; the person paying is not the person using.
       Present #4  Now we have the situation where you buy a present for someone else with money supplied by a third party. Say your boss asks you to buy a present for a customer. You buy the present with money that is not your own; therefore, you do not care about the cost. You are not going to consume the present; therefore, you don’t care about the quality – or even the appropriateness of the gift. In any event, you have absolutely no idea about what the person may want or like. Therefore, you don’t waste any time shopping and promptly buy a ten-foot rubber elephant at the store next door. This is by far the worst of all scenarios; it is called a third party purchase.
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        All government spending consists of third party purchases. The government takes money from you and distributes it to others based on what government considers best. They are not concerned with either cost or quality. It is even worse; they have priorities of their own that often are directly opposed to the needs or wants of the recipients. Government employees respond to their own personal incentives and disincentives.
     The lessons of the four gifts of Christmas apply with a vengeance to health care. The cost of government funded health care continues to skyrocket while at the same time, the service and quality deteriorate. Compare this to private health care as is the norm in dentistry, ophthalmology and cosmetic surgery. The inflation adjusted cost of all of these is either stable or decreasing while quality and service are good. The difference is easy to explain. Government health care consists entirely of third party transactions while dentistry, plastic surgery and eye surgery are first party transactions.

Our next post previews MLLG’s plans for 2018