Archive for August, 2009

Universal Health Care: A Near Death Experience for Innovation

Saturday, August 8th, 2009

If economies of scale and a government system to compete with the private system are effective price reducing mechanisms, shouldn’t we have a government restaurant system to drive the cost of a McDonald’s hamburger to twenty cents?  Surely we could squeeze a few billion out of these fat restaurant middle men who stand between us and our food– even from advertising budgets alone.  And if that’ll work, why not have two national restaurant plans, and force Mickey D’s to give us burgers for free?

The national health care government plan conceit isn’t much less silly than this.  It rests on a misapplied enterprise concept of economies of scale, given muddy transference to industries and nations where it has no realistic application (unless the application is the creation of a giant systemic trap).

In itself, additional health insurance doesn’t create any health care.  The added insurance plans will be chasing after the same pool of health goods and services, overwhelming any possible pressure on insurance margins to put upward pressure on health care prices– the opposite of what politicians claim.  Government is disguising a burden as a relief, and can’t possibly have any subsequent choice but to layer mandate after mandate on all parties to try and patch the leaks on the pressure cooker they’re creating.

Which is what economies of scale really are at a government level– they’re really “economies” of force and central planning.  In a single snap shot these may appear effective, but they amount to a one stage cupboard stripping, and the true price will eventually be paid.

The first time that a king may have undertaken a castle improvement project by conscripting five thousand peasants and commanding that carpenters and masons cough up half their stock of wood and stone, he must have felt clever and efficient.  Upon further royal edicts, every peasant who could limp fast and far enough would go into hiding, while tradesmen would retire to subsistence potato farming, or change their business to cut to order (and also hide).

Disguised conscription of health care resources in the deluded pursuit of economies of scale will create shortages and higher prices just on its own non-merits (a la king, so to speak), but even worse is the blocked and severed interaction of the macro mechanisms that actually are critical at that scale– substitution and innovation.

There is some substitution on the demand side in the current system, as for example when someone uses WebMD, or does nothing for a minor or undiagnosed issue because of their value judgements about the cost or convenience.  However, suppliers are forbidden to respond to this the way they would in a normal market.

 A nurse or technician can’t run a checkup kiosk in a high traffic area to substitute convenience for the state of the art.  Nor can an unconventional and driven physician supervise a staff of a hundred technicians and try to bring us a mega-department store model of delivery to offer more or cheaper or both.  (And in case you think that’s the opposite of the direction health care should go, rest easy, since the opposite opposite is also forbidden: recently a physician practice was cut down for using a payment by subscription method to offer more personal service oriented care.)

Since alternatives aren’t allowed (to “compete with nothing”, as Clayton Christensen might put it) the normal market interplay among and between substitutions and innovations is shut down, and health care forced into one single massive channel.  This is the real cause of the rising prices thus far.  Not because the “economies of scale” are missing, but because those methods that are proposed to rescue us have already been here, and already done some of their dirty work.

It would be as if we mandate that no jewelry could be sold unless it contains at least one large top quality precious stone, and at least an ounce of gold, and that it can be manufactured only by a craftsperson with twelve years of top level training in Italy, and distributed only through a licensed and regulated employer paid jewelry policy.  And then we became disquieted when prices went up and many Americans started to go without jewelry.  (One can picture the progression.  After a few years there’d be heart wrenching stories on T.V. about young couples forced to marry without access to wedding rings. Subsequently a universal national jewelry plan would be proposed, to set right the “failure of the private sector”.)

It’s not just about offering cheap low quality stuff.  A free market constantly rips goods and services apart and bundles them back up again from a practical infinity of angles, shapes and sizes, to add quality to the cheap stuff and volume to the expensive stuff (to make it cheap).  Economically, that’s what innovation is– without it, innovation is essentially gone.

This innovation freeze from a single option market means that tomorrow’s improvements will never happen.  Even if we contend (absurdly counter to any reasonable observation) that we’re going to freeze health care at the highest available level, once again we’d be stabbing the future in the back.  We got to have better health care than our grandparents, but are willing to cut off our grandchildren from a near certain repeat of that deal to take pressure off ourselves for a few years– pressure caused in the first place by previous misguided attempts to give our present selves more.

All the evidence from centuries of real economics out in the street is that when goods and services can break into new channels and methods, it soon benefits the consumers of those goods and services. The benefits for those (public and private) who deliver the goods and services are much more uneven.  These people will tend to “talk their books” with a bias to believe that “the issues are too important to leave to chance.”

The issues are important.  But it isn’t leaving it to chance, it’s leaving it to individual decision making.  A little corny sounding, perhaps, but we might even say that it’s leaving it to freedom.

I work in the insurance industry.  The opinions in this column are my own.
 
 
 

 

By Les Lafave
Monetary and Banking Reform – themaestrosrep.org
Originally Published at Strike The Root

Waste and Corruption Out of Thin Air

Friday, August 7th, 2009

If government proposed a “stimulus” program to give each American 50 million dollars, we’d immediately think of inflation.  At that scale, the proposal would meet its deserved ridicule.

However, I’d like to look at how it would work ex-inflation, so let’s pretend there is no inflation problem.  The Federal Reserve’s magic omnipotence determines that there’s “slack” in the economy so that government can create and give everyone 50 million dollars (and Goldman Sachs its commission), with no significant inflation.  We’ll make no assumption about ever repaying the 50 million per capita, which is a realistic expectation in the current real world of money and credit expansion anyway.

So with no inflation, should The Fed get really excited (they must have been at least starting to doubt the magic) and do it again?

No.  Even without inflation, the artificial abundance of credit money will cause plenty of other distortions to economic behavior.

For starters, some people will simply retire to become consumers only.  With their production removed earlier than it otherwise would have been while their consumption is still there (and may increase in early stage “stimulus” euphoria), over all wealth measured in production (rather than money out of thin air) has gone down.

In our decades long credit roller coaster this retirement miscalculation has certainly occurred, with credit expansion giving people false signals that they can retire or semi-retire when actually they still needed the economy and the economy still needed them (provided they could somehow have been directed to real production and not to bubbleland).

The scope of this gift from The Fed and the banking system to our seniors and near seniors is still unknown.  Some people soon to be forced into unretirement now that the credit veil has slipped will have skills they can market at the level they’re used to in the face of impaired economy headwinds, and some won’t.  Since that’s about all we can know for now, we’ll have to leave these folks high and dry where the helpful stewards of the economy have put them, and move on to other expansionary credit “life blood” effects.

With my 50 million, I’ll probably stop everything else to pursue a writing career.  Any other productive possibilities from me will be permanently (or at least until everything blows up even more) lost to society.

In the 50 million for everybody story, plenty of other part-time writers will join me in pursuit of the full-time dream.  Also, actors, film makers, dancers, models, painters, sculptors, chefs, fashion designers, musicians, and of course, singers.  American Idol will need at least a few extra rotations– maybe even its own network.

Something like this happens in real life credit expansion.  It’s not just directly bohemian pursuits, but other apparently more practical endeavors that become over indulged because of false expansionary signals: we get more retailers, restaurateurs, boutiquerateurs, financial and real estate tycoons in training, “internet marketing gurus”, advertisers, public speakers, and miscellaneous experts– every type and stripe of consultant who once did something successfully for a decade (or at least didn’t fail too publicly), and have now risen above doing the expert activity to advise others.

Pursuing the dream, or advising others on dream pursuit, isn’t bad as such (too late, I’ve insulted everyone– no one is reading anymore).  And it’s certainly not that many people in professions this piece may appear to denigrate aren’t exactly in their productive niche and awesome there.  However, regardless of whether we make those judgements that money and credit creation make the economy too fluffy, it clearly does make it too frothy– entrepreneurs get hasty in pulling the trigger, and then hang on waiting for the next boom that credit expansion signals have promised them.  This paper promise must eventually be broken since no amount of paper, nor any book keeping entry of whatever size, is ever going to eat a single restaurant meal, or otherwise consume anything except for a dwindling supply of economic clarity and perspective.

(It isn’t entirely a vacuumful of wishful thinking on the production side of course.  The psychological extremes of overreaching are naturally late stage, while consumers will all along have been helpfully translating their expansionary false signal receptions into “real” but ultimately regretted demand for dreamy non-essentials– the new era feedback loop that the Fed thinks it wants, and doesn’t really even seem to much doubt after it collapses.)

In the 50 million dollar story, Fed magic is still on the job, and there’s no collapse yet.  There are no laborers– everyone is retired, an artist, or an entrepreneur– but we still haven’t got to the true elephant in the central bank.

The “slack” has come out of the economy– at 50 mil per head, probably with a pop.  The artificial boom has ratcheted up the optimism of the players.  Those entrepreneurs with apparently successful businesses will be getting signals to expand them.  The Fed, not wanting to “choke off” the apparently vibrant economy, and getting plenty of cheerful feedback from the banking system that new credit can be “absorbed”, will feed the frenzy, as they were born and structured to do.

Now the future looks so huge that the entrepreneurs believe they can take on bigger and more distant expansionary projects.  Indeed, the situation seems to demand it.  The closer borrowed money gets to being free– a favorite central bank ploy– the more dangerous it seems to decline expansion.  Your competitor may be using the free money to grow to infinity and then smother you.

Because the credit is artificially created, it can signal temporary enthusiasm, but it can’t signal an actual match up to future available resources.  The flashing, screaming pedal to the metal promise of future resources to complete every entrepreneur’s project is a screaming pedal to the metal lie that no actual arriving future can possibly fulfill.  (For one thing there aren’t any laborers, somebody’s bound to notice that eventually.)

This is where the true “confidence” issue shows up.  It doesn’t matter if players are confident that government “will provide liquidity”.  Speeches, guarantees, backstops and loans of last resort don’t help– in fact make it worse, because these are rational doubts about what is and is not being produced from finite resources, how much of the future is being crammed into the present, and when exactly this denuded future will make it’s appearance (or from where we are at the moment, its curtain call).

No Bernanke or Geithner speech can address this, because all they can produce is debt and more speeches, and all that brings is economic and political miscalculation, waste, instability, and possibly on top of that, inflation.

By Les Lafave
Monetary and Banking Reform – themaestrosrep.org
Originally Published at Strike The Root