Friday, March 16, 2012

No Free Lunch ... for Anyone

An informed consumer is the best voter.

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In a recent interview, retired American Express CEO Harvey Golub noted an extension of U.S. Department of Health and Human Services (HHS) guidelines. The extension requires that health insurance plans cover women’s preventative services such as mammograms, screenings for cervical cancer, and prenatal care. Mr. Golub made the point that the government has imposed an unfunded mandate that has a real cost on business.

While there is no question that benefits arise from preventive care for mothers and children, someone has to pay for those services. Through the change, the federal government passed the cost of its decision on to someone else rather than pay the cost of the change.

But Mr. Golub went on to gripe about other government regulations, especially those imposed by the Dodd-Frank financial reform act. For me, his complaints grew stale. In order for consumers to make rational decisions about purchases – whether financial products, investment services, or even milk – they need sufficient information about those goods and services. If I want to open a credit card, what are the associated costs? If I want to buy company stock, is that company financial sound? If I want to buy a gallon of milk, has that dairy passed inspection?

Likewise when a company produces a good or service, all of its production costs and the costs it imposes on others (known as "externalities" among economists) need to be reflected in the price. Pollution is the classic example of a "negative externality", where industrial production results in environmental degradation, property damage, and poor health.

The point? There can be no free lunch for anyone. When government wants to start or expand a program, it needs to pay for that program. When a business produces a good or service, it needs to provide sufficient information so that consumers can make an informed decision and it needs to capture all the costs of production – whether internal or external – in the price it charges.

When your dog leaves a "present" on my lawn or next to my sidewalk, it's not my responsibility to clean it up. That's your job.

Reposted from August 16, 2011