Sowell Applied Economics Thinking Beyond Stage One (revised and enlarged ed)

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waiting for organ transplants. The Economist magazine estimates that it would take less than one percent of healthy Americans from ages 19 to 65 to part with one kidney to eliminate the waiting list on which thousands of patients die each year.

Currently the rationing of donated organs for transplanting is handled by bureaucracies set up for that purpose, applying such arbitrary rules as they choose, based on whatever notions of “fairness” they happen to have, and dispensing such special favors as they choose to whatever individuals they choose, such as Governor Robert Casey of Pennsylvania, who in 1993 received a heart and liver transplant ahead of others who had been on the waiting list much longer, or former baseball star Mickey Mantle, who received a liver transplant after a relatively brief time on a waiting list. Not surprisingly, these bureaucracies are opposed to free markets that would render them superfluous and deprive them of their power and importance.

Like other bureaucracies, organ transplant organizations tend to create restrictive rules and paperwork burdens in complying with those rules. In 2007, the American Society of Transplant Surgeons responded to proposed new restrictions by one of these bureaucracies, the United Network for Organ Sharing (UNOS) by saying: “Dictating the practice of medicine and surgery is not the role of [UNOS], let alone in the best interests of patients.” A surgeon at the Yale medical school put it more bluntly: “You don’t see my patient, and you don’t see my donor, and you’re going to tell me who I can and can’t use?” But, so long as these organizations control a supply of desperately needed organs, they will have arbitrary powers, whether they have corresponding knowledge or not.

As for the cost of a transplant under legal circumstances and in a free market, a study by economists Gary Becker of the University of Chicago and Julio Jorge Elías of the State University of New York at Buffalo concludes that “monetary incentives could increase the supply of organs for transplant sufficiently to eliminate the large queues in the organ market, and it would do so while increasing the overall cost of transplant surgery by no more than about 12 percent.”

Whether under legal or illegal circumstances, the full cost of an organ transplant includes not only the price paid for the organ itself— which has

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procurement costs, even when the organ is donated without charge— but also the cost of the operation and the subsequent medical costs for both the donor and the recipient after the operation, including continuing costs for medications for the recipient to protect the donated organ from being attacked by the recipient’s immune system. This is a very expensive process but the cost of purchasing the organ itself in a legal transaction— estimated by Professors Becker and Elías at $15,200 for a kidney and $37,600 for a liver— is in the range of what people pay for automobiles, and would add only modestly to the total cost of the organ transplant process. Moreover, the cost of not making the transplant is not cheap: kidney dialysis costs more than $66,000 a year and cannot produce the same benefits as a kidney transplant, besides being an annually repeated cost, as distinguished from a one-time cost for a kidney transplant operation.

Professors Becker and Elías estimate the total cost of the whole organ transplant process at $210,000 for a kidney and $392,000 for a liver. While these are huge sums of money for an individual, they are in the range of what is ordinarily paid for a house in a moderately priced housing market. Since Medicare already covers the annual cost of kidney dialysis and financing can be arranged for buying homes, these are not insurmountable costs for most people and could be covered by insurance if organ purchases were legal. For those too poor to handle such costs through insurance, private or government agencies could take care of such individuals. In any case, the costs of the organ purchases would not be the main costs of the organ transplant process. It has been estimated by an organ transplant specialist that the savings from reductions in the use of kidney dialysis by the use of kidney transplants could on net balance “reduce government expenditures significantly.”

In short, price controls— in this case, making sales of organs illegal at any price— have relatively little effect on the total cost of an organ transplant, but can have serious effects in reducing the number of organs available to be transplanted. Since there has long been a program of legal organ sales in Iran, the effect of legalizing the sale of organs is not just a

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matter of speculation. Eleven years after the legalization of organ sales in Iran, there was no longer a waiting list for kidney transplants.

Objections to the sale of organs center on the fact that poor people are more likely to sell an organ, including people “under desperate and trying circumstances,” as a noted ethicist put it. But are their circumstances any less desperate when they are forbidden to seek one of the very few ways available to them to escape their desperation and better their lives? Since people on waiting lists for organ transplants are also in desperate circumstances, to have the options of both sets of people reduced, and their choices overridden, by people who are healthy and prosperous seems painfully ironic, as if the squeamishness of third parties should be decisive. Sometimes the argument is made that it is wrong to have a human organ reduced to the level of a “commodity,” as if avoiding a word is worth losing a life. Moreover, a purchase from a stranger avoids the documented emotional pressures on both donor and recipient when they know each other.3

SUMMARY AND IMPLICATIONS

A number of confusions plague discussions of the economics of medical care. A confusion between prices and costs has allowed politicians in various countries to be able to claim to be able to bring down the cost of health care, when in fact they only bring down the individual patient’s out-of-pocket costs paid to doctors, hospitals, and pharmacies. The costs themselves are not reduced in the slightest when additional money to pay for these costs is collected in taxes or insurance premiums and routed through either government or private bureaucracies. Since these bureaucracies and the people who work in them are not free, they add to the cost of providing medical treatment. Most proposals to bring down the cost of medical care

3 See Sally Satel, “Desperately Seeking a Kidney,” New York Times Magazine, December 16, 2007, p. 65.

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	pay little or no attention to the actual cost of creating pharmaceutical drugs,
	training medical students, or building and equipping hospitals.
	To the extent that the government imposes some form of price control
	by refusing to pay doctors, hospitals, or pharmaceutical companies as much
	as they would receive through supply and demand in a free market, that does
	not lower the costs either. It simply means that the government refuses to
	pay all those costs— and such refusals to pay costs have a centuries-old track
	record of leading to a reduction in the amount supplied, whether what has
	been subject to price controls has been housing, gasoline, food, or other
	goods and services. Medical treatment has been no exception. The
	reduction in the supply of doctors, hospitals, or pharmaceutical drugs may
	be quantitative, qualitative, or both.
	In Britain, with one of the oldest government-run health systems and
	therefore one which has long since gone past stage one, there have been such
	difficulties in getting enough British doctors that there have been large and
	chronic importations of foreign doctors, many from Third World countries
	whose qualifications standards are not always up to those in more affluent
	countries. British hospitals not only lack technologically advanced medical
	equipment that is more common in the United States, for example, but lack
	even elementary cleanliness, leading to deaths by infection for patients
	whose maladies before entering hospital care were not life-threatening. As
	for pharmaceutical drugs, countries which have succumbed to the politically
	attractive policy of keeping drug prices low by fiat, or by ineffective patent
	protection, have had much lower rates of discovery of major new
	medications than does the United States, which has been left to supply a
	disproportionate share of the world’s major new medications.
	Another confusion in discussions of medical care issues and policies is
	the confusion between medical care and health care. Dr. Dana Goldman,
	director of health economics at the RAND Corporation, has pointed out
	that a patient’s medical care and health care are very different, noting that
	for a patient with diabetes, “the doctor is paid to check his feet, they’re paid

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to check his eyes; they’re not paid to make sure he goes out and exercises and really, that may be the most important thing.”

Much has been made of mortality statistics which suggest that Americans’ health is not as good as in some countries with government-run medical systems, as if medical care determines the state of people’s health. But medical care has little effect on the homicide rate, on obesity or on deaths from drug overdoses that occur before any doctor sees the patient. Yet the identification of health care, as indicated by mortality rates, with medical care has become so automatic that a study which showed higher infant mortality rates among black Americans than among white Americans was instantly taken as showing that less prenatal care among pregnant black women was the reason. But American women of Filipino ancestry, Mexican ancestry, and of Central American and South American ancestries all had less prenatal care than white women— and lower infant mortality rates than white women. Indeed, Mexican Americans had less prenatal care than blacks and lower infant mortality rates than either blacks or whites.

The implicit assumption that mortality rates reflect the amount or quality of medical care is seldom subjected to any empirical test in media or political discussions comparing American medical care with medical care in other countries with more comprehensive government involvement in medical care. But the relevant comparison would be between mortality rates in different countries from health problems in which medical care makes a substantial difference, even if not the only difference. This would still not be a perfect comparison, since even here other differences between the populations in the countries being compared are factors as well. But it would be a much more relevant comparison than those that are usually made by the media and politicians. When the American College of Physicians calculated the death rate for “mortality amenable to health care” the United States was in the top three countries with low death rates of this sort out of 19 countries studied.

Various organized groups in a position to bargain for lower medical charges or lower drug prices— government agencies, health insurance companies, or large health maintenance organizations, for example— may receive preferential prices but the total costs do not go away and have to be

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paid by somebody. One consequence is a multi-tiered set of prices for the same medical treatment or the same medication, with the highest prices of all being paid by patients who do not have health insurance, do not belong to a health maintenance group, and are not covered by any government program. In short, misconceptions of the economic function of prices lead not only to price controls, with all their counterproductive consequences, but also to organized attempts by various institutions, laws, and policies to get most of the costs reflected in prices paid by somebody else. For society as a whole, there is no somebody else.

Chapter 4

The Economics of

Housing

Shelter is one of the most basic requirements of human life and housing costs are a major item in most people’s budgets. For those who own their own homes, the value of the house is often the largest item in their inventory of personal wealth. It is also one of the largest items in the cost of living. Whether housing costs are high or low can greatly affect what kind of standard of living individuals and families can afford with what is

left over after paying for a place to live.

HOUSING PRICES

The old rule of thumb that housing should cost about one-fourth of one’s income has become outdated for 28 million American families, who pay upwards of 30 percent of their incomes for housing. In some places, it is not uncommon for people to pay half their monthly income for the rent on their apartment or for their monthly home mortgage payment. Clearly that restricts what kind of standard of living they can afford with the other half.

The price of housing varies according to many things. One is the quality of the housing itself. Mansions generally cost more than bungalows, though there are places where a bungalow costs more than it would cost to buy a mansion in some other places. When we say that housing prices are higher in one community than in another, we implicitly mean housing of a

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given quality. Prices mean little if we are comparing apples and oranges— say, a villa on the beach versus a cabin in the woods.

Price Disparities

A study by the National Bureau of Economic Research in 2006 referred to “an ever-widening gap in the price of housing between the most expensive metropolitan areas or communities and the average ones.” For example, during the same week, an impressive-looking four-bedroom, sixbath house with 4,370 square feet of space and “a screen-enclosed pool/spa,” located adjacent to a golf course and country club, was advertised in the Wall Street Journal for $550,000, while a rather ordinary-looking house on an ordinary city street, with just 1,300 square feet of space and no pool, was advertised in the Palo Alto Weekly for $1,095,000. The first house was located in Leesburg, Florida, while the house costing nearly twice as much was located in Palo Alto, California, near Stanford University.

Meanwhile, a house with 6,000 square feet of space, including an indoor lap pool, and set on more than an acre of land in Elmira, New York, was advertised for $349,000. A number of less grandiose houses in Elmira were advertised for less than $100,000, even though most were larger and at least as attractive as the house in Palo Alto that was advertised for more than a million dollars. Such disparities were not peculiar to Palo Alto and Elmira. Similarly striking differences were found when comparing home prices in Houston, Texas, and San Jose, California:

According to the real estate company Coldwell Banker, a standard fourbedroom, two-and-one-half bath home in a “typical middle management neighborhood” of relatively unregulated Houston cost $155,000 in 2006. That same home in San Jose cost more than $1.4 million.

Why were houses selling for nearly ten times as much in one community as in another? Clearly, it does not cost ten times as much to

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build a house in one place as in another. Construction costs seldom, if ever, vary by such magnitudes.

Realtors sometimes explain such disparities by saying that the three most important factors in housing prices are “location, location, and location.” In a sense, that is true. But, in another sense, that explanation can be very misleading. The houses in Leesburg and Elmira had more attractive individual locations than the one in Palo Alto, in addition to being more attractive houses in themselves. Nevertheless, location is important in the sense that undoubtedly most houses in Palo Alto cost far more than most houses in Leesburg or Elmira. But that fact is not an explanation. In reality, it calls for an explanation itself.

Housing prices may be higher in one place than in another for any of a wide range of reasons. The growth of industry, income, or population may be greater in one place, leading to more competition for given amounts of housing or for land on which to build housing. In addition to these or other effects on the demand for housing, there are effects on the supply side of the equation. Restrictions on the use of land or on the building of housing can cause rising prices of homes and rising rents for apartments.

In the case of Palo Alto, the prices of homes nearly quadrupled in one decade— the 1970s— while the population actually declined slightly and several schools had to be closed, as the number of children enrolled fell by one-third. For California as a whole, that same decade saw its housing prices rise dramatically above those in the rest of the country, even though the rate of increase in income in California was less than that in the country as a whole. All this strongly suggests that the cause of rising housing prices in California was not from the demand side but from the supply side. The average home price on the San Francisco peninsula— the area including the city and stretching southward to Silicon Valley, 30 miles away— was $651,000 in 2005, more than three times the national average.

By and large, these prices more than three times the national average were not due to grander homes on the San Francisco peninsula, but to grander prices for ordinary homes, many of those in San Francisco itself being on very small lots because of the extremely high land prices there. In adjoining San Mateo County, where average home prices topped one

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million dollars in 2007, the average size of those houses was only 1,760 square feet. The states with the highest percentage of homes with four or more bedrooms— Utah, Maryland, Virginia, Colorado, and Minnesota— are not the states with the highest home prices.

In other words, there is no reason to believe that grander homes are the main reason for higher home prices in some states. In Palo Alto, not a single new house was built during the entire decade when home prices skyrocketed, so this was clearly a case of the very same houses costing some multiple of what they had cost before. Palo Alto was not unique. Moreover, the decade of the 1970s was the crucial time when housing prices skyrocketed in San Jose as well. Before that decade began, in 1969 the median price of a home in San Jose was 2.2 times the median family income in San Jose. Spending one-fourth of the median family income was enough to cover the median monthly mortgage payment and pay off the mortgage in 12 years. A decade later, in 1979, the median family home in San Jose cost 4 times the median family income in San Jose— and now it would take 40 percent of the median family income in San Jose to cover monthly mortgage payments and pay off the mortgage in 30 years. A decade after that, in 1989, the median family home in San Jose cost 5 times the median family income in the same city— and by 2005, it cost 7.5 times the median family income.

Much of California has had similar severe building restrictions and similarly high prices for both homes and apartments. Not surprisingly, rates of home ownership in California have remained significantly below home ownership rates in the country at large. As already noted, there are other parts of the country where housing prices are a fraction of what they are in California. Which of the possible causes of California’s extraordinarily expensive housing are most responsible? And are those same factors at work in other places with skyrocketing housing costs like those in California?

Land Use Restrictions

An empirical study under the auspices of the National Bureau of Economic Research concluded that zoning laws “are highly correlated with