Protecting Ourselves From Our Masters

December 11, 2009

by Mario Rizzo

I have previously blogged about healthcare “reform.” (One example is here.) Both the House and Senate bill attacked the tax-advantaged flexible spending account for healthcare expenses. Now there seems to be a move to reinstate it with a maximum of only $2,500.

I understand why the first instinct of economists is to oppose to such accounts. They enable people to put aside money from their salaries before taxes and use it to pay for deductibles, copayments and uncovered medical or dental expenses (for which most people’s insurance is terrible).

Flex Spending Accounts tend to lead to overutilization of healthcare because it changes the terms of the tradeoff between medical and other expenditures. A dollar spent on healthcare costs a person, say, $0.60 (The other $0.40 would have gone to Federal, NY State and City income taxes). A dollar spent on clothing costs him or her a dollar.

However, look at the world in which we live. We have a Congress and a president who wish to impose a complex healthcare reform which will be altered up to the very moment of passage, and then unleashed on a largely ignorant public —  as well as those of us who struggle to stay informed.

No doubt there will be many unintended negative consequences as well as intended negative consequences for many people. I look at the Flex Spending Accounts as a kind of exit option. If they screw with my healthcare financing I can use this money to get perhaps better care than the new system would normally allow.

In other words, Flex Spending is imperfect insurance against the consequences of bad policies.

I implore my fellow economists not to be myopic but to see policies in their second and third best context.

5 Responses to “Protecting Ourselves From Our Masters”


  1. I agree. To paraphrase Mises, such “loopholes” are what we call freedom.

    It is the complex web of taxes that causes “distortions.” Any untaxed area is an island of freedom in a sea of intervention.

  2. Glen Says:

    Flex Spending Accounts also remove, to some extent, the tax incentive to get all healthcare in the form of health insurance. That, in my mind, is the best argument for such accounts — one that outweighs the problem of extending the tax preference for health spending over non-health spending. The way I figure it, the status quo tax preference *nearly* covers all health expenditures anyway, because people (through their employers) buy such comprehensive insurance policies.

  3. Richard Ebeling Says:

    I completely sympathize with Mario’s frustrations and search for the policy proposal that is the lesser of a variety of evils — and health care is not the only policy dilemma confronting us under the present administration, unfortunately.

    It is a sad situation that is becoming even worse that even the idea of getting government out of the health care business (in any form) is not considered a thought to consider anywhere along the political spectrum of policy proposals.

    The current times make me understand more than ever before in my life time the despair and pessimism the classical liberals (and Austrians) of the 1930s must have experienced.

    But let us not forget that trends can change. We must not allow ourselves to feel that fate has kindly given us the privilege of watching the end to capitalism.

    In 1936, Wilhelm Ropke wrote:

    “Let us not be too hasty in expressing the opinion that Providence is doing us a special favor by allowing us to witness (or even to be instrumental in introducing) a new epoch of world history, and let us remember that world history is no ephemeral growth. We must have enough historical sense to know that nothing is the world lasts forever . . .

    “In a word, let us not be affected by the prevailing nervousness which in certain individuals borders already on hysteria.”

    We’ve lived through two World War, a Great Depression, the New Deal, Fair Deal, the New Frontier, the Great Society in the 20th century, and And George Bush already in the 21st century. We will live through Obama and his collectivist craziness, too.

    The institutions of the free society, after all, are rather resilient, even under the a large degree of state mischief.

    Richard Ebeling


  4. This, too, shall pass.

  5. Leona Drake Says:

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