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  • Rationing Versus Allocation

    Posted by Shannon Love on August 12th, 2009 (All posts by )

    Economists commonly talk about the entire economy as a “rationing” system because all resources are finite and human desire is infinite. In terms of standard dictionary terminology, the day-to-day economy does not ration. We use the term rationing only to describe situations when an individual gets a fixed amount of something regardless of price. For example, during a mass evacuation, we stop using a price mechanism to control an individual’s access to gasoline and instead set a fixed limit of gallons per vehicle.

    When opponents of politically-managed health care claim that politically-managed health care will lead to rationing, they use the term in the ordinary sense. Proponents of politically-managed health care have dishonestly tried to obscure the debate by substituting the specialized definition that economists use for the standard definition, so they can claim the current system already “rations” care so nothing will change.

    It’s thinly possible that some proponents of politically-managed health care are honestly confused and aren’t just intentionally employing rhetorical tricks to hide the real consequences of the policies they advocate. For those people, I offer the following explanation that uses the common definition of rationing.

    It involves tires.

    In common usage, the day-to-day economy does not ration, it allocates. What is the difference? Allocation involves individuals deciding what tradeoffs they will make in their own individual budgets. With allocation, an individual makes the choice to get more of something if they wish to get less of something else. With allocation, the individual sets his or her own level of consumption.

    For example, the average American household spends roughly 20% of its budget on transportation. However, some people pay a much higher percentage. Everyone has seen young males aged 16-25 spend up to 80% of their personal budget on cars. They sacrifice every other consumption in order to spend money on their cars. They do things like cramming six guys into a two bedroom apartment in a bad neighborhood so they don’t have to “waste” money on housing that could be spent on their cars.

    Overspending on cars is a folly of youth and mid-life crisis but nothing in the economic or legal system prevents them from doing so. If a 20-year old wants to live on ramen for a month so he can plunk down 500 bucks for special tires for his tricked out subcompact, he has the ability to make that tradeoff. The economy allocates the tires by price. Anyone can buy the tires if they are willing to make the tradeoffs.

    Rationing is much different. In WWII, tires were still made of natural rubber and the Japanese seized 80% of the world’s natural rubber supply when they conquered the Dutch East Indies (modern day Indonesia). To ensure enough rubber for the military and economically vital transportation, the government set a fixed limit on the number of tires that anyone could buy per vehicle and per household. That limit had nothing to do with what tradeoffs individual’s were willing to make in the rest of their budget. A Rockefeller got the same number of tires for his limo as a poor farmer did for his Model T.

    How this applies to health care is obvious. Obama et al have made it clear that controlling cost for the government and ensuring equality of access to care are the primary goals of the current Democratic health care plan. This puts the government in the same position with health care as it faced with rubber in WWII. It has to ensure it has enough health care money to go around just as it had to ensure it had enough rubber to go around. The only realistic means of doing so is to cap the amount of health care that any particular individual can choose to consume regardless of the choices they make.

    When the individual loses the ability to chose their level of consumption, you have a rationing system. Just as with tires in WWII or gasoline in a mass emergency, there is nothing an individual will be able to do under Obama’s plan to get more or different medical care than what the government allots them via the political process. We will take what the politicians decide to give us and that will be that.

    People who don’t like that idea oppose the plan.

    Words mean things. People who claim that health care and all other goods are already rationed are intentionally inflating the definition of rationing so that it covers absolutely every economic transaction. In doing so, they seek to destroy the concept itself. If everything is rationed, then it doesn’t matter what system we use because every system will “ration”.

    Such equivocation is one of the oldest tricks in the book of political deceit. Let us hope it doesn’t work this time.


    One Response to “Rationing Versus Allocation”

    1. Brian R Says:

      While I do not support the current health care plan, I was ignorant of the distinction you’ve drawn between rationing and allocation. So at minimum you’ve enlightened one person. Thanks!