Rationing II: The Definition and Application of Rationing

This is the second of a four-part series on rationing.
Rationing I: Price Distribution Is Not Rationing
Rationing II: The Definition and Application of Rationing
Rationing III: The Harm of Conflating Price Distribution with Rationing
Rationing IV: Politically-Controlled Insurance and Rationing

Rationing is defined by three essential characteristics. First, rationing means that some central authority distributes goods or services. Second, the property rights to the goods or services are usurped or not clearly defined. Third, under rationing recipients have some recognized claim to a portion of the goods or services. (Note: Diana Hsieh, Paul Hsieh, and Brian Scwhartz helped me to clarify my understanding of rationing.) A closer look at each condition clarifies the meaning of the term and its application to various examples.

Rationing involves some central authority. Price distribution does not. In the usual cases this is unambiguous.

What about a more complicated example of distribution under price ceilings that cause shortages? Under such circumstances, generally two outcomes follow. First, the quality of the price-controlled goods declines. Oxford’s dictionary includes an example from 1892: “The most inferior goods in the market are called ration-tea and ration-sugar.” Second, sellers who cannot sell goods or services at market rates must sell according to other criteria, and often this takes the form of personal favors or prejudices.

Ayn Rand discusses this example in her 1946 letter on rationing (see pages 320 to 327 of Letters of Ayn Rand). Rand argues that it is “counterfeiting” to claim that “apartments are not rented by harassed, hogtied landlords — but are ‘rationed by favoritism.’ Implication: a landlord has no right to choose the tenants of his own property, if there are more than one applicant.”

The essential difference between such non-price distribution under price controls and rationing is that no central authority is involved in the distribution. An authority is involved in setting the price controls, and that is what unjustly disrupts market prices, but price controls in themselves are not an example of rationing.

The second characteristic of rationing is that property rights to the goods or services are usurped or not clearly defined. Under price distribution of gasoline, the gas is owned by its producer (or, later, the retailer), and a consumer’s money is owned by that consumer. The two parties may voluntarily agree to a mutually beneficial exchange. Under rationing, the gasoline is treated in part as the property of the government, which replaces voluntarily exchange with authoritarian distribution.

This point has important implications for health insurance. Insurance is a contract; its buyers agree to pay a regular premium in exchange for coverage under certain conditions. No insurance policy promises to pay for any conceivable health expense. For example, under my high-deductible policy, my insurance company is not “rationing” care by declining to pay expenses under my deductible.

A car insurance company might not cover damage caused to a policy holder’s car if the damage was caused by his drunk driving. A home insurance company will not cover damage caused by the policy-holder’s arson. None of this is rationing.

An insurance company, for instance, may decide in advance to cover established cancer treatments but not expensive, untried new therapies. A consumer who agrees to this policy may not properly complain about “rationing” when the insurance company declines to finance the sort of therapy that is explicitly not covered.

The problem arises when insurance contracts are vague and subject to arbitrary case-by-case evaluations, a problem that I’ll return to in Part IV of this series.

Under political rationing, some authority must make ad hoc decisions about the distribution of goods or services. The rationed goods may be distributed equally among the population or according to individual cases. Yet even “equal distribution” requires considerable refinement by the authority. Does every citizen get the same number of gallons of gas? Every family (and what is the definition of a “family”)? Every vehicle?

In the case of health care, obviously an equal distribution of resources would be senseless. Some people never get seriously sick, others incur modest health expenses, and others need (or want) extensive and expensive health services. Thus, simple ration cards for health care wouldn’t work. Instead, some authority must decide who gets what care, based on criteria established by the authority. For example, health care might be rationed according to what is deemed medically essential or necessary. When the rationing authority fails to ration with sufficient stridency, waiting lines serve the function.

In her 1946 letter, Rand defines rationing as “to distribute… by the decision of an absolute authority, with the recipients having no choice whatever about what they receive; it also means that all the recipients involved have an equal claim to that which is being rationed, and are entitled to an equal share.”

Rand’s definition entails the three characteristics discussed above; however, her point about “an equal claim” needs refinement. With food or gasoline, each person might be rationed the exact same amount. However, the example of food illustrates the problem with assigning an “equal share.” Should a three year old infant get the same food rations as a 250 pound, hard-working man? That would be ludicrous. Rationing, then, involves not literally equal shares, but shares considered equitable according to some criteria. A grown man gets more food than a small child. A sick person gets more health care than a healthy person.

In her novel Atlas Shrugged, Rand describes the collectivized distribution of the Twentieth Century Motor Company, which institutes the Marxist doctrine, “From each according to his ability, to each according to his need” (see page 661 of the hardback novel). One of the company’s owners becomes its “Director of Distribution,” who decides what everybody “needs,” and whose “gauge was bootlicking.” (page 667). However, insofar as the Director of Distribution attempts to distribute supplies according to need, she is rationing, though primarily on a case-by-case approach. Rand compares this system to the rationing of a global egalitarian system (page 669).

Nobably, employees of the company voluntarily remain in this system (though the best employees quickly leave). Thus, the rationing at Twentieth Century is crucially different from political rationing. Under political rationing, exit from the system is forbidden or forcibly restricted. One may join a commune that rations goods according to need, but so long as one joins voluntarily and remains free to leave, that is a fundamentally different situation than political rationing, which one is not free to exit. Political rationing is the major form and most important type of rationing.

While rationing involves an authority’s ad hoc decisions, rationing does recognize that recipients have some recognized claim to a portion of the goods or services, the third characteristic of rationing. A king who arbitrarily hands out loot to his favorites acts too capriciously for his actions to be considered rationing, and at her worst the Twentieth Century’s Director of Distribution resembled such a king.

The requirement of a recognized claim shows that charity does not count as rationing. A food bank that restricts recipients to a certain amount of food is not “rationing,” for the recipient has no inherent claim to the food.

Food stamps (which are actually debit cards now) forcibly redistribute wealth. However, if its recipients are otherwise considered akin to the recipients of charity, then food stamps do not “ration” food by limiting the amount of handout that recipients get or the type of food that recipients may buy through the program.

Does rationing apply to a recent case from Oregon? ABC News reported last year:

The news from Barbara Wagner’s doctor was bad, but the rejection letter from her insurance company was crushing.

The 64-year-old Oregon woman, whose lung cancer had been in remission, learned the disease had returned and would likely kill her. Her last hope was a $4,000-a-month drug that her doctor prescribed for her, but the insurance company refused to pay.

What the Oregon Health Plan did agree to cover, however, were drugs for a physician-assisted death. Those drugs would cost about $50.

Jon Caldara characterized this as an example not only of rationing but of a “death panel.”

The problem with ABC’s account is that it counts the Oregon Health Plan as just another “insurance company.” It is not:

The Oregon Health Plan (OHP) is a state program of health care for people with low incomes. This health care includes services for medical care, dental care, mental health and substance abuse treatment. Depending on which benefit package you are found eligible for, OHP benefits may… [r]equire you to pay a monthly premium for your OHP coverage… Some adult clients are required to make a monthly payment for health coverage. (pages 1 and 9)

So did Wagner pay anything for her insurance premium? That is unclear. If she did, then she had some claim to the benefits. If not, then she was like a recipient of food stamps.

If, in a free market, Wagner had sought out voluntary charity, we would not call it “rationing” if the charity did not fund every conceivable treatment for her. No charity can afford to fund every conceivable request of every possible recipient. The difference between a charity and political rationing is that the charity has rightful control over its resources, whereas under political rationing the recipients have some sort of claim to an equitable portion of the goods or services in question.

Notably, if people are forced to pay tax dollars to support a program that provides benefits, then any government restriction of those benefits with respect to those paying the taxes counts as political rationing.

Read Rationing III: The Harm of Conflating Price Distribution with Rationing