Recently, a proposal was made to require North Carolina Medicaid recipients to pay $50 every time they are admitted to a hospital. Currently, Medicaid recipients pay nothing upon going to a hospital. Opponents of the proposal argue it is unfair because Medicaid recipients are typically very low-income households, and even a modest fee of $50 would be a burden on their resources. Supporters say that without a fee, users will place a low value on the medical services and be motivated to overuse hospital facilities.
These kinds of arguments are replayed frequently in discussions over public funding. Recent examples are college tuition, assistance for buying prescription drugs, and public transportation. Battle lines are drawn between those wanting more governmental help and those watching the budgetary bottom line. Arguments between the two sides can often become heated.
In economics, these countering positions are not new; in fact, they are expected. They’re called the conflict between equity and efficiency. In more common terms, I call them the conflict between our heart and our head.
The equity, or heart, position is about compassion. We see a person living in poverty or with very limited financial resources, and our heart says to help them. Many of us help with our time or monetary contributions to charity. Or, we willingly pay taxes to fund government programs, such as Medicaid, Food Stamps, and the earned-income tax credit, to assist these people and households.
The efficiency, or head, position is about possible negative consequences of this compassion. These consequences can come in three forms—to those funding the programs (taxpayers), for those receiving the assistance, and on those providing the assistance.
For taxpayers, the negative consequence of funding public-assistance programs is that taxes reduce the reward earned from working. Studies find that people cut back on their work effort when taxes are taken from their income. This appears to particularly be the case when the tax revenues aren’t used to fund something the taxpayer directly uses, such as a road near their home or a school for their children.
For those receiving the assistance, the concern is what such assistance does to their motivation to self-improve so that further assistance isn’t needed. Of course, for some recipients, especially those who are disabled or elderly, self- sufficiency may not be an option. But for others, assistance that is open-ended or very generous can reduce the incentive to invest in their personal capabilities.
Last, those providing the assistance, such as hospitals and physicians in the case of Medicaid, can suffer the negative consequence of overuse. When a service, such as medical care, is made to be very cheap or perhaps free to recipients of public assistance, a natural reaction is for recipients to use more of the service. This is straightforward economics—the price goes down and use goes up. This may then put a strain on the service providers and increase the need for further public funding and higher taxes.
At times, policy makers have tried to address these consequences by putting time limits on receipt of some public help, or by directing more public funding to programs which promote self-sufficiency. But many public-assistance programs are without limits and have continued to grow in size.
The conflict between the heart and the head in public-assistance programs will likely never be resolved. Some citizens will emphasize one side while others will stress the opposite position, and conflicts will ensue. Perhaps the best outcome is that both sides be recognized and carefully weighed and considered in policy discussions. And let’s also keep the discussions civil!
Michael L. Walden is a William Neal Reynolds distinguished professor in the Department of Agricultural and Resource Economics at North Carolina State University and an adjunct scholar with the John Locke Foundation.