October 02, 2013
Macroeconomists knew too little about the macroeconomy to recognize the $8 trillion housing bubble whose collapse gave us the Great Recession. Trade and labor economists show little more understanding of their fields. This is why we routinely hear stories about how trade causes us to lose less-skilled manufacturing jobs to the developing world or that technology is leading to a hollowing out of the distribution of occupations, with middle wage jobs disappearing.
The logic behind these views is nicely challenged by this story about medical travel. Our health care system is incredibly inefficient. If the medical industry were subjected to international competition our doctors would have far less chance of holding their jobs than textile workers or steelworkers. Doctors in the United States can pocket a median wage of well over $200,000 a year not because they are smart and hardworking (which they might be), but because they have the government protect them from foreign competition, unlike textile workers and steelworkers.
In addition to directly providing savings to patients, as illustrated in this piece (the savings will be considerably larger for even more expensive procedures than the ones discussed here), medical travel also has important indirect effects. Insofar as more patients get care elsewhere it reduces demand for medical services in the United States, putting downward pressure on prices here. Also, by allowing people to see other countries that provide health care at a fraction of the cost in the United States, there will be a greater recognition of the inefficiency and corruption of the U.S. health care system, which could lead to more political pressure for reform.
The need to travel obviously limits the extent to which people can take advantage of other countries health care system (although protectionist restrictions on foreign doctors working in the United States are another barrier), but in the case of expensive medical procedures, the potential savings dwarf the cost of travel. If anyone in a policy-making position supported free trade then medical travel would be at the center of trade negotiations, since there are no other areas that offer such large potential gains. The negotiations would focus on setting up international standards and licensing rules to assure quality, liability rules to ensure compensation in the event of medical errors, and ideally a system of taxation to ensure that poorer countries redistribute some of the gain to building up their domestic health care system.
Unfortunately medical travel is likely to be left out of the so-called free trade agreements currently being negotiated. Doctors and other actors in the health care sector are powerful enough to sustain their protection. However anyone who knows more about trade and labor markets than trade and labor economists should be able to recognize that the reason doctors are not subject to international competition and are able to sustain their high pay has little to do with the market and everything to do with their political power. The same is true of most other highly paid professionals in the United States. Only an economist can be sufficiently confused to believe that high wages for such people are natural outcomes of the market.
Addendum:
Trade agreements over the last two decades have been primarily about writing rules and adjudication procedures that make U.S. firms comfortable shipping their operations overseas. That is exactly what is needed for insurers or medical providers who want to take advantage of medical trade in a big way. Our trade negotiators refuse to do this because they don’t want to lower the income of doctors and other powerful actors in the health care industry.
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