Does the Placebo Effect Explain Government Intervention?

December 24th, 2009

The news (MSNBC.com) brings word that many doctors occasionally prescribe or recommend substances that have no physical effect on their patients, but that are intended to instill the belief that the patient will improve. This result is called the “placebo effect.” The news report claims that it “accounts for about a third of the benefits of any treatment….”

It seems outrageous that doctors deliberately advise a course of treatment that has no objective basis. Yet they have a justification. Placebos work – or at least they often make the patient feel better.

It is hard to avoid the reaction that the vast bulk of all federal government interventions in our lives have the same motivation – to deceive us into thinking that a therapeutic action is occurring.

The Process of Government Intervention

Consider the process of government intervention. Something goes wrong. Government responds. An agency swings into action. A commission is appointed. Congressional hearings are held. Legislation is passed. A bureau is created. People are hired. Money is spent. Regulations are promulgated.

Is the problem solved? Do we feel better? The questions are far from rhetorical. Anybody of voting age has seen the pattern repeated hundreds of times. By this time, we have a good idea what to expect. What we do not expect is for problems to be solved.

The Lack of Therapeutic Effect

Several articles have been written in the last 20 years or so inquiring into the effects of government macroeconomic policies. The articles find little or no salutary effect of government policies designed to improve macroeconomic performance. One of the articles’ authors is Christina Romer, present Chairman of the President’s Council of Economic Advisors. Presumably, her verdict was not influenced by a bias against government intervention.

In 2001, an economist wrote a book designed to evaluate smaller-scale government interventions. His verdict was that “few of them worked.” It hasn’t been for lack of trying. Government regulation of business goes back to Munn vs. Illinois in 1871 and a Supreme Court decision concerning regulation of grain elevators in Illinois. Federal government regulation began in 1887 with the creation of the Interstate Commerce Commission.

The Airline Security Placebo

We are now living through one of the most massive, intrusive government interventions of all – the airline security measures undertaken since the terrorist attacks of September 11, 2001. No better example can be found of a government intervention undertaken for its placebo effect. In the wake of 9/11, the political protocol of the day dictated that the federal government “do something to prevent future 9/11s.” The measures actually chosen – laborious checking, screening, searching and partial undressing of all airline passengers, coupled with effective expropriation of forbidden items – are staggeringly inefficient. Virtually all of the resources of the system are directed towards innocent bystanders, the people the system is meant to benefit and protect. The original hijackings were carried out against a similar (but less intense) system. The only successful countermeasures in that instance were conducted by passengers, not by security personnel or airline employees. The insistence on depriving passengers of all weapons – however trivial – deprives this last line of defense of any effective tools.

The outstanding feature of the system is its intrusiveness. The traveling public is acutely aware of its presence. The system promotes the idea that government is trying very hard to protect travelers. Government policymakers do not seem to care that they are wasting resources in the process. Indeed, the more wasted resources, the harder government will be perceived as trying to enforce security. The system is not designed to successfully apprehend or deter terrorists. It is designed to obtrusively remind the public of its presence and create the impression that “something is being done.”

The Insider-Trading Placebo

Financial-market regulation is replete with placebo-style regulation. Contrast the relative effort devoted to the Bernard Madoff case with the ongoing emphasis placed on insider trading. Regulators failed to uncover the Madoff fraud, the largest financial fraud ever perpetrated, despite several tips by independent analysts who suspected either questionable practices or outright fraud. In contrast, numerous accusations of insider trading have been pursued or brought against celebrities, and regulators monitor trades for suspicious trading patterns. There is no doubt about the harm created by a Ponzi-style, Madoff type of fraud. In contrast, several legal scholars, notably the great Henry Manne, have protested the classification of insider trading as a crime. (Who is the victim?)

Again, the disproportionate attention devoted to insider trading suggests a placebo motivation, an attempt to justify financial regulation by ostentatiously spending lots of time and money on high-profile prosecutions that have little or no economic rationale.

It is poignant to recall that every dollar spent pursuing a celebrity inside trader is a dollar not spent on pursuing a potential Madoff.

The Indexed-Annuities-Regulation Placebo

Beginning in 2011, indexed annuities will be classified as securities. Heretofore considered insurance products and regulated accordingly, indexed annuities will have to provide prospectuses to customers. The high popularity of indexed annuities among older investors guarantees that this change will generate heavy publicity. It will portray federal regulators as “on the case,” leaving no stone unturned in the crusade to protect naïve, unsophisticated senior citizens from financial slicksters.

Indexed annuities are already regulated everywhere at the state level. The federal position seems to be that requiring the distribution of a prospectus will make a big difference in the attitudes of customers toward indexed annuities. It is not clear whether this is a bigger insult to state-government regulators than it is a compliment to authors of prospectuses.

Medical vs. Government Placebos

Assume, for the sake of discussion, that government intervention is a placebo. If doctors can hand out placebos, why can’t government?

Doctors deliberately select placebos that have the lowest cost and the least possible effect on patients, such as sugar pills. Government placebos are chosen for their high cost, to make an impression on the “patients.” The medical purpose of a placebo is ultimately to improve the welfare of the patient – not directly by acting specifically against the diagnosed pathology, but indirectly by relieving stress and anxiety within the patient. The political purpose of a government placebo is self (government)-serving; any positive effect on the public is strictly coincidental. Doctors only use placebos against pathologies that they diagnose or the patient imagines; they do not, as government does, seek to create or enhance the patient’s perception of pathology through the use of the placebo.

This is not to say that legitimate arguments against medical placebos do not exist. But medical placebos have documented benefits. Government placebos are snake oil dispensed by quacks.

Category: Economic Analysis, Economic News, Fixed Annuities, Indexed Annuities | Tags: , , , ,

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