g m g D e s i g n . c o m

I finally got around to reading Superfreakonomics, the economics book for people who never took an econ class in college (the book is equally useful for econ majors, btw). I finished it last night and it was well worth the read; better than the first book, I’d say.

In Freakonomics, the central theme was that people are motivated by incentives. In Superfreakonomics, they also introduced us to the idea that most innovative ideas—ones that actually work well—are relatively simple and cheap. Their examples include hand-washing (in a hospital in the 1800s, before germ theory), seat belts, and, of course, innovative ideas to reverse global warming and actually cause global cooling.

That last point intrigued me. They pointed out that scientists converge their results in order to procure additional funding (they’re capitalists, it seems, and they’re giving their “customers” the results they want). They also compare climate change zealots to religious fanatics, a comparison I’ve made myself (not for moderates, but for people who are truly obsessed and blinded by ideological zeal).

More importantly though, they pointed to some solutions to global warming. On the assumption that (man-made) global warming is indeed as dire as is projected (and I don’t think it is, but who knows?), there are solutions that are… simple and cheap! They cost in the millions rather than the trillions that are often proposed by editorialists when discussing this topic (note that much of that cost is due to externalities of regulation rather than direct).

It seems that, perhaps, human ingenuity and innovation—namely by private individuals—might be the cure for human waste and over-consumption. In fact, that fits neatly with the historical record.

List of econ fallacies by members of both political extremes (from a very good blog site that I’m going to frequent from now on).

Outline here (but click the link to read the paras corresponding to each bullet point).

Fallacies on the Left are:

• Forgetting that things were even worse in the past
• Assuming that Dickensian conditions implies a country must be capitalist
• Assuming that economic reforms failed because real GDP growth didn’t increase after 1980
• Assuming the Soviet Union went into a depression after economic reforms began
• Assuming neoliberal reforms are associated with authoritarian governments
• Capitalism is based on greed
• Assuming increased income inequality negates the gains from freer markets
• European countries have more progressive tax systems than the US

Fallacies on the Right are:

• Countries with big government tend to be poorer
• Denmark and Sweden are socialist countries
• Singapore and Hong Kong are not really capitalist
• Europe/Canada/Australia, etc, are much more socialist than the US
• Capitalism is based on individualism

The French go on massive strikes due to president Sarkozy’s suggestion that the retirement age be raised from 60 to–61 or 62.

This is the kind of spoiled brat mentality that I don’t want to happen to the US. While some believe that capitalism eventually degrades into socialism (to some degree), perhaps Fabian socialism degrades into something like the diseased French economy (or eventually, something far worse).

And what are the negative externalities of a faltering economy? In the case of the French, an inability to absorb millions of immigrants and the car burnings and other crime that results from millions of idle hands.

Was the financial crisis (past ones & recent one) due to moral hazard, encouraged by our central government? Yes, in part, per this fascinating blog entry on a well-known econ site. Moral hazard due to previous bail-outs (which encourage excessive risk) as well as expansion of Fannie/Freddie led to the mortgage-backed meltdown, it seems.

Good summary (from link above):

The increased demand for housing resulting from Fanne and Freddie’s expansion pushed up the price of housing and helped make subprime attractive to banks. But the ultimate driver of destruction was leverage. Either lenders were irrationally exuberant or were lulled into that exuberance by the persistent rescues of the previous three decades.

On the subject of central government-backed screw-ups, I was intrigued to Tom Friedman’s quasi-recent editorial:  Startups, Not Bailouts. The title by itself is pithy enough that you don’t actually have to read the whole editorial. But if you do read the whole thing, you’ll see he also espouses immigration as a growth policy. Check it out:

But you cannot say this often enough: Good-paying jobs don’t come from bailouts. They come from start-ups. And where do start-ups come from? They come from smart, creative, inspired risk-takers. How do we get more of those? There are only two ways: grow more by improving our schools or import more by recruiting talented immigrants. Surely, we need to do both, and we need to start by breaking the deadlock in Congress over immigration, so we can develop a much more strategic approach to attracting more of the world’s creative risk-takers. “Roughly 25 percent of successful high-tech start-ups over the last decade were founded or co-founded by immigrants,” said Litan. Think Sergey Brin, the Russian-born co-founder of Google, or Vinod Khosla, the India-born co-founder of Sun Microsystems.

Immigration isn’t his main point, of course, but amidst the controversy over Arizona’s law, I thought I’d digress.

Implicitly, Friedman’s talking legal immigration, if for no other reason than for the fact that illegal immigrants typically “lay low,” and that means not starting the next Google.

From a purely economic standpoint, our entitlement/welfare programs necessitate bringing in immigrants (esp relatively young/healthy ones). If we’re not going to switch to, like, capitalism with our retirement/medical programs (referring to Social Security and Medicare/Medicaid), then we should be more receptive to a more liberal immigration policy, legal or otherwise.

Politically, it’s neither possible to truly reform the aforementioned Nanny State programs nor is it politically acceptable to legalize millions of people who didn’t wait their turn in the highly bureaucratic line. We’re stuck in between a rock and a hard place, not due to absence of feasible solutions, but in the fact that real long-term solutions aren’t politically feasible.

Reading and listening to the coverage and commentary on healthcare, it’s hard not to become cynical. On the Right, you have repetitive talking heads with no interest in adding depth to the debate, instead arguing bellicosely against what they see as government-run healthcare (a credible threat, I concede), but providing no additional insight beyond that. On the Left, we’re met with the supposed “reality” that the “market has failed”—as though the market is free and unregulated to start with—and that the government must step in and save healthcare as we know it, providing liability coverage (insurance) to millions of Americans.

Yet the truth is in between, and the visions of both the Left and the Right are at best useless and at worst dangerous. There are real consequences to failing to understand economic problems and issuing false solutions to those problems. Using the fiat hand of government to distort markets has led to many severe consequences, and a few catastrophic consequences as well.

Something must be done about healthcare. That much is certain. Idealistic libertarians—and I’m including libertarian-leaning conservatives* in that group—are wrong to discount the need for action—for “change,” if you will—in healthcare. We do need change, and simply blocking that change isn’t enough for conservatives as a political force nor for the country.

Liberals*, for their part, are correct that we need “change,” but they fail to understand the necessary change, instead opting for change that “feels better” and is politically easier to explicate rather than sustainable and fiscally responsible change. They look at the deplorable number of non-insured without ever asking the obvious question:  why is medical treatment so very expensive that even routine procedures are unaffordable without insurance? The issue of cost control is met with an outmoded response: use the coercive power of government to control costs via legislation; furthermore, compete directly with the greedy, heartless private sector via a “public option.” Neither pseudo-solution will lower costs in the aggregate, instead shifting the cost burden and likely increasing aggregate costs.

My own libertarian instincts notwithstanding, I feel like the only practical and politically feasible solution is to mandate that every American have some minimal level of healthcare. Call it catastrophic health insurance, if you will. It would be like a high deductible health plan (HDHP), but primarily intended for ER visits and other major events. Of course, Americans could get beefier or additional insurance as well, though tax incentives toward “premium” (or Cadillac) plans would be removed, as would tax favoritism toward employer-sponsored health insurance. That coupling would be weakened over time. To truly distribute risk—which is the intent of insurance in the first place—non-discriminatory laws would be enacted such that insurance applicants are not rejected for existing medical conditions. More people would have health insurance even as insurance itself was taking a less active role in medical treatment.

In fact, the problem with healthcare is insurance itself. That is not to say that high healthcare costs are primarily due to insurance companies per se, though they do share part of the blame. Government shares a significant portion of the blame, and of course the public and media share the remaining. I’ll leave room for blame toward other sources as well, but that’s beyond the scope of this blog entry.

Healthcare is the only insured activity where typical, quotidian expenses are expected to be paid—at least in part—by insurance. Imagine going to Home Depot, purchasing some new lamps, and then whipping out your home insurance card at the cash register. Or imagine asking the mechanic who just rotated your tires if he will file your auto insurance claim or if you’re expected to do it. What would happen? In either case, the person at the cash register or in the body shop would probably look at you as though you were completely bonkers. And yet, a visit to the doctor necessitates the use of insurance and the negative ramifications that go along with it.

Referring to the examples above, what would happen if oil changes and tire rotations necessitated the use of insurance? Further, suppose due to custom or fiat legislation that auto insurance was required to cover such expenses; what then would happen? I suspect that oil changes and tire rotations would rise in price, perhaps over many years, until they were hundreds of dollars. In fact, you would likely blindly hand your insurance card to the attendant, never knowing before or after what the actual price of the tune-up (except your own co-pay). That is exactly what we do at the doctor’s office; and try polling hospitals in advance of surgery how much the operation will cost—you will likely be met with disbelief and non-committal estimates.

It doesn’t have to cost $2,000 to visit the ER. Routine or even advanced surgery doesn’t need to cost thousands or even hundreds of thousands of dollars. Staying one night in the hospital doesn’t need to cost as much as the accumulated mortgage payments for the entire year. While tort reform would lower some of these costs by lowering risk premiums, it would still not be sufficient to lower aggregate costs of medical care (though it would be a good start). More must be done, the objective being to increase price transparency and competitiveness. Ironically, that involves less insurance involvement, not more. The lofty goal of “insuring millions more Americans” is only a recipe for enslavement to insurance companies or to government itself for medical coverage, and even then it’s dangerously unsustainable.

There are solutions to our sick healthcare system, but time is running out. Solutions must be agreed upon by a majority in both parties, lest it be unwound later on. The solution isn’t a simplistic bullet point but instead a visionary, multi-faceted change; it must be phased in over time, not rammed through over a Christmas holiday. That’s the change I can believe in. Will the political class listen?

* Note that I’m using the modern definitions of conservative and liberal from the American vantage point.

Al is asking for sustainable capitalism. Analysis…

It’s interesting that he seems to go to so much effort to brandish his “science credentials,” whatever those are. He evokes biological evolution as the reason for short-term thinking and also quotes Albert Einstein (note: he quotes non-scientists as well).

Al Gore isn’t completely wrong in his assessment that we need “sustainable capitalism.” My view, however, is that we already have sustainable capitalism (whatever that happens to be), and his true agenda is the usual suspects: a) relevance in a time of decline for him (his worthless Nobel notwithstanding); b) tying his environmental philosophy to economic prosperity (Thomas Friedman, a guy I like even if I don’t always agree with him, has fallen for the same logical fallacy).

As far as Wall Street “fat cats” (not his quote, I just like the term) using short-term thinking, we could go a long way to solving that by real problem by removing absurd restrictions on executive compensation. Those restrictions haven’t reduced CEO pay (CEOs still get huge salaries that they don’t necessarily deserve), but have instead made it more difficult for boards to align incentives such that executives focus on long-term growth and sustainability. Of course, in Gore’s tangential discussion on evolution, he failed to mention something economists are already aware of: incentives matter, and altering those incentives to fit some political agenda has real consequences.

Per the NY Times:

Two years ago, Congress ordered the nation’s gasoline refiners to do something that is turning out to be mathematically impossible.

To please the farm lobby and to help wean the nation off oil, Congress mandated that refiners blend a rising volume of ethanol and other biofuels into gasoline. They are supposed to use at least 15 billion gallons of biofuels by 2012, up from less than seven billion gallons in 2007.

But nobody at the time counted on fuel demand falling in the United States, which is what has happened during the recession. And that decline could well continue, as cars become more efficient under other recent government mandates.

At the maximum allowable blend, in which gasoline at the pump contains 10 percent ethanol, updated projections suggest that the country is unlikely to be able to use all the ethanol that Congress has ordered up. So something has to give.

The state of Florida has a “public option” for home insurance, per the MR blog site (an economic blog). Like the proposed federal “public option” for health care (i.e., medical insurance), the Floridian home insurance option competes directly with private insurance and drove out a major national insurer from the state (for home insurance; that insurer still insures autos).

Bottom line:

In Florida, the public option has meant a substantial socialization of insurance, subsidization of the public option by those who take a private option, and the creation of a fiscally-unsound public insurance company despite the subsidy.

An “economist” at NADA, the National Automobile Dealers Association, suggests that the wealth re-distribution to auto dealers (“cash for clunkers”) was a success, while the Freakonomics blog site scrutinizes the claim.

Per the blog, the “cash for clunkers” scheme cost taxpayers around $24,000 per vehicle sold.

According to some well-known economists, the higher income disparity in this country is not a bad thing. They talk about how in certain emerging markets—China and India—economic growth and the income disparity that has resulted has not been bad for inhabitants of those countries, even for those toward the bottom of the socio-economic ladder.

In this country, they explain the bulk of the wage gap as follows:

The main action came in the earnings of college graduates and those with postgraduate education. They both increased at a rapid pace, with the earnings of persons with MBA’s, law degrees, and other advanced education growing the most rapidly. All these trends produced a widening of earnings inequality by education level, particularly between those with college education and persons with lesser education. I should also note that while an upward trend in the earnings gap by education is found for both men and women, and for African Americans and whites, the earnings of college educated women and African Americans increased more rapidly than did those of white males. As a result, inequality by sex and race, particularly among college educated persons, narrowed by a lot.

[…]

The widening earnings gap is mainly due to a growth in the demand for educated and other skilled persons.

Bottom line is that artificial means at shrinking the wage gap could have unintended consequences (politicians are renowned for their ability to not foresee the consequences of their legislation). Legislation that coercively shrinks the wage gap (stronger unions, higher min wage, punishing “progressive” taxes) could eventually result in market-distorting, state-sponsored ramifications that a) discourage investment in economically productive areas of the market and b) discourage individuals from pursuing higher education. The long-term ramifications of such legislation by our political luminaries would not be immediately obvious, but over time would decrease our competitiveness and productivity and, therefore, our standard of living.

If we all have lower standard of living, do we really benefit from a narrower wage gap?

The irony is that government could declare a sharply lower standard of living as a “market failure” and become more involved in the economy… oh wait, that’s already happened, has it not?

EDIT:

Their concluding para is worth reading:

So instead of lamenting the increased earnings gap by education, attention should focus on how to raise the fraction of American youth who complete high school, and then go on for a college education. These pose tough challenges since the solutions are not cheap or easy. But it would be a disaster if the focus were on the earnings inequality itself. For that would lead to attempts to raise taxes and other penalties on higher earnings due to greater skills, which could greatly reduce the productivity of the world’s leading economy by discouraging investments in human capital.

In a move to prove how economically inept they are, the Times has editorialized their favoritism toward the much-discussed “public option.”

The last para espouses that, eventually, the “public option” be available for everybody.

I’ve written before about why I think the public option is a bad idea (and no, not because some conservative loud-mouth on “talk radio” told me what my opinion should be). The underlying reason is that our medical system as a whole isn’t very good, and additional activism by government will make it worse – in fact, cementing the current system in place for many more years to come.

We need reform, but the “reform” currently being proposed will further lead us astray if it includes the public option. I have a vested interest in cost control (that doesn’t decrease quality). Hence, my bias in this debate is in favor of real and substantial reform (again, something I’ve written about in the past).

The bottom line is this. Although government can make promises, such as liability acceptance for millions of people (via the provision of insurance), that does not mean that the government can guarantee outcomes. The government can promise that people will get insurance (and, by extension, medical care), but that doesn’t make it so. Government can’t guarantee that its own market interventions won’t augment the already-high level of market inefficiencies, leading to higher aggregate costs associated with medical care and treatment. Even if government covered everyone in this country, that does not mean that a) medical coverage would truly be affordable – imagine if income tax rates went up to 60% for most Americans, or that b) quality would be higher or as high as what we have now (imagine waiting months for time-sensitive surgery, or years for “optional” surgery).

Government can’t guarantee outcomes even though government can accept liability with the stroke of a pen. The role of government at various levels has rendered the medical insurance (“healthcare”) market less efficient, with aggregate costs much higher (and far less transparent) than they otherwise would be.

Greater inefficiency and higher aggregate costs (with likely lower quality of service) is a future worth avoiding.

Wow, great editorial. Excerpt (emphasis added), plus some comments…

Yet, one thing we do know: Many Americans now believe many things about their government that are false, and they expect much from the government that the rulers cannot provide. The public at large embraces myths about what the government can do, what it actually does, and how it goes about doing it. Only people enamored of such myths can support, for example, a gigantically expensive health-care “reform” at a time when the present value of the government’s promised future Social Security and Medicare benefits alone amounts to several times the current GDP. (I am disregarding here the interested parties who expect to reap short-run pillage from an intrinsically doomed system.) Until more people come to a more realistic, fact-based understanding of the government and the economy, little hope exists of tearing them away from their quasi-religious attachment to a government they view with misplaced reverence and unrealistic hopes. Lacking a true religious faith yet craving one, many Americans have turned to the state as a substitute god, endowed with the divine omnipotence required to shower the public with something for nothing in every department – free health care, free retirement security, free protection from hazardous consumer products and workplace accidents, free protection from the Islamic maniacs the U.S. government stirs up with its misadventures in the Muslim world, and so forth.

Points made by blog entry (my paraphrasal):

1. therapy and diagnosis are different – if you want a support group for your ideology, consult the relevant right- or left-wing news source (depending on your bias); if you want a diagnosis, don’t be upset when one is given
2. the general public disagrees on “the problem”
3. the general public disagrees on “the solution”
4. the (US) public is increasingly replacing belief in formal religion with the (informal) quasi-religious belief in government as the provider (rather than God)
5. there is no immediate, “magic bullet” solution
6. we should be incredulous of “magic bullet” solutions (flat tax, “public option” in healthcare, etc)

This corresponds with an observation of mine that the US is heading toward Fabian socialism (philosophically): in practice, social democracy. Western Europe is ahead of us in this regard (“ahead of us” is bad, in this case). Think of social democracy as a mix between democracy and socialist ideals. It’s the idea that “communism didn’t work out, but the underlying ideas were valid.”

Of course, that’s false. The irony in all this is that when countries are “converted” into socialist-style democratic systems, the people don’t get to compare such systems with what things would have been like absent those systems. Some people might think of the good ol’ days, but others will naturally prefer the system that “takes care of them” (absent God, someone’s gotta do it!), and while the non-socialist alternative might be substantially better in practice, there’s no way of 1) proving it cogently to the public, or even 2) returning to such a system, since governmental systems win constituencies that prevent such systems from improving over time (Social Security can’t be reformed for this reason).

So we’re left with a deeply flawed system that’s trending worse toward a maddeningly avoidable fate. Well, at least we get eloquent speeches out of all this.

Every time I see a headline like this one I am reminded of the verbal manipulation used by the media. We hear a lot about healthcare reform. Prior to the medical insurance debate, we heard a lot about the economic stimulus package.

Do you see the Orwellian thought manipulation here? It’s not outlandish government spending, it’s a stimulus package. I.e., the government is giving us something for free—like magic!—and it goes without saying that it will have a stimulating effect to the economy, all without any rational justification for this conclusion.

The even thornier subject of “healthcare reform” is fraught with similar manipulation. First, it’s apparently “reform” to introduce yet more government in an already heavily regulated system. Second, apparently, healthcare is synonymous with medical insurance.

Oh, and did I mention that those who rationally oppose the current Big Government effort to overhaul healthcare are extremists?

… at least according to the WSJ. The idiotic wealth re-distribution plan might be running out of monetary backing to go on much longer.

Antitrust is supposed to be about protecting consumers against higher prices and other consequences of monopoly power. Accordingly, the Justice Department’s Antitrust Division, the Federal Trade Commission, and state attorneys general are vested with authority to defend competition and protect the well-being of consumers.

The current spate of heightened antitrust activism seems to suggest that anti-competitive business practices abound. Headline-grabbing cases against Microsoft, Intel, Cisco Systems, Visa and MasterCard, along with a flurry of merger investigations now under way, would appear to demonstrate the need for a vigorously enforced antitrust policy that will create checks and balances to eliminate consumer harm.

However, consumers did not ask for these antitrust actions — rival business firms did.

From here (emphasis added by me), and written during the Clinton years by a list of economists. (HT to this entry on the MarginalRevolution blog site.)

Still relevant? Yes. Just think of the next big target: Google, as it starts treading on Microsoft’s territory.