Friday, July 31, 2009

Clunkers for Government

Oh, sweet irony. I can't think of one government program with more perfect symbolism to the people behind it than the "Clunkers" program. Now, if only we could trade in our junk government for something else.

Well, it appears that our all-knowing, all-seeing government has slightly miscalculated the take-up rates - and expendiency - of this program.

I know, I know, I was as surprised as you when I heard that people like free money. My natural response was something along the lines of "Get the $%&* outta here!" But alas, I guess it is true.

This marks another regularly scheduled episode of the show "Stupid Government Tricks" in which instead of dogs barking the alphabet, we have politicians robbing us blind and then acting astonished that people were willing to accept the spoils of the crime (I think the acting may be the talent portion).

If unbeknownst to me, a criminal robbed someone down my street and then came to my house donning a ski mask with pistol in hand, offering to hand me a few hundreds, I would slam the door in their face. However, if someone showed up at my door with a suit on and a "Government" lapel pin offering me money, I'd take it in a heartbeat. It's practical human response to incentivization. And there's no fundamental difference in the act that's been committed, just in the window-dressing.

The program lasted 6 days. 6 days. And then it had to be suspended because the $1 billion that had been budgeted for it was looking to be fully allocated based on pipeline transactions.

A few quotes sum it up: "People are loving it...," salesman Andy Beloff said. But when asked if the government was running the program well, Beloff said, "No. No." And "If they can't administer a program like this, I'd be a little concerned about my health insurance," car salesman Rob Bojaryn said.


I enjoyed hearing that auto-shill Phil Lebeau on CN(BS) this morning speaking about the pent-up demand that this evidences.

Phil, you don't appear to have even a basic grasp of economics.

This evidences pent-up demand in the same way that giving away free TVs evidences pent-up demand. Ah, but you say that free is much different than a discount. Not to me, when you're talking absolute dollars that would amount to much less than this subsidy.

Here's why the pent-up demand argument makes ZERO sense. At any point along the supply/demand curve, there is a price that the free market has found appropriate based on experience. If people aren't buying at a certain price, there is NO pent-up demand. Demand is what it is. The only pent-up demand exists when at the current supply/demand equilibrium, people are planning to buy IMMINENTLY AND ARE CAPABLE, but haven't yet. Maybe they haven't had the time.

To change the demand in a meaningful way, price must fluctuate, either as a function of price or supply, or both. At that point, it wasn't an example of any pent-up demand. It was an example of a completely new demand dynamic that created new behavioral responses.

And by meddling in the free market, all the government has done is pull forward future demand (read: lower future GDP) and encouraged even more leverage into a system THAT CANNOT RECOVER UNTIL MASSIVE DEBT IS LIQUIDATED.

What to do?

I guess I'll just wait for my $200,000 Ferrari rebate to release my pent-up demand.

Monday, July 27, 2009

Making Sure the "Not Possible" Stays Not Possible

Nassim Nicholas Taleb authored "The Black Swan" which is a premier literary work on 'tail-event' risk, or the risk which has a low probability but significant consequence. He currently is one of the most educated and brilliant voices identifying what went wrong and how not to let it go wrong again.

Who wants to bet that no one listens?

Ten principles for a Black Swan-proof world
By Nassim Nicholas Taleb

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning. Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

Thursday, July 23, 2009

Public Healthcare? As A New Proposition? We Haven't Had Private Healthcare in AGES.

I have taken quite a considerable hiatus since the short time ago that I started this blog (time is a limited commodity nowadays). So, it may seem a little odd that I return with a topic that seems purely political: Health Care.

Unfortunately for us, it also has exponential economic ramifications, and this is something that is not properly articulated often.

Here's the thing - the primary reason that health care costs are so high, that there are so many uninsured, that the quality of care is incongruent to the prices paid - is that government is already too deeply involved.

Re-read that. It's important to know that the cause of a problem cannot also be the solution. Over many decades, our government has so heinously overstepped their boundaries into the alleged free market system that we have, that they have ruined the healthcare system that could have been. If you think that we have a free market healthcare system, and it was itself to blame, you are seriously mistaken.

Each step along the way, as government escalated the problems with their ineptitude (and attempts to appease their constituency), they have become more deeply engrained, producing a vicious circle.

I cannot say this any more simply: The problems will be solved when government detracts itself from healthcare (like all industries), NOT entrenches further.

Government already severely limits competition in ways that are not discussed, but are ENTIRELY relevant.

Five Steps to Real Health Care Reform

Although the bill currently being considered by Congress is being advertised as health care reform, it actually includes very little in the way of real reform. It is a thousand-page disaster which attempts to address problems which were created by government regulation with more government and more regulation at an enormous cost. There are real problems with high costs and millions of citizens with no health coverage, but raising costs even higher and mandating insurance for those who cannot afford it, enforced with draconian penalties is not a rational solution. It is a crude attempt to address the symptoms without looking at the causes. It's like giving a patient with skin cancer some makeup to cover his unsightly moles instead of removing them and curing his cancer.

The root problem in health care in America today is massive over-regulation, government interference in the marketplace and a lack of essential competition which would keep the costs of care and insurance reasonable. Past attempts to address problems in health care have consistently taken the wrong approach and have built on each other to create a tottering house of cards where everyone pays too much and the quality of service is too low. Real reform cannot be achieved by adding more bad ideas on top of old failures. Real reform requires tearing down all the old, failed measures and starting over again. It requires creative thinking and charting a course which is almost exactly opposite of what Congress and the President are currently considering.

We need to start over from scratch, tear away the mistakes of the past and really rethink how we manage health care in America today. It can't be done overnight, but here are five simple and powerful ideas which would be the beginning of substantial change in the right direction.
  • Insure individuals, not groups. The current system of giving businesses tax credits for contributing to employee insurance takes away free choice and discourages competition which would encourage insurers to provide better service. Plans are picked by company management based on price rather than on benefits and service quality. Employees then have to pick only from the plans their employers offer, which may often be only one plan and is rarely more than three. This eliminates the force of free market competition. If individuals picked and paid for their own insurance, the better plans would get more customers and the insurers with poor service and benefits would either improve or go out of business. Prices would also be lowered as insurers worked to attract more customers, because insurers could no longer count on guaranteed large pools of customers from group plans. Businesses which no longer had to pay for health insurance would increase salaries so that employees could pay for themselves. This would also help with the problem of the uninsured, because many of those currently uninsured are self-employed and cannot find competitive plans, because most insurance is currently marketed to groups rather than individuals. Give individuals a tax credit only if they purchase insurance themselves. Encourage people to self-insure and eliminate regulations like HIPAA which give special protections to group plans. Insurance companies will rise to the challenge by providing better and cheaper coverage and more variety of plans.
  • Eliminate coverage mandates. Currently there are over 1900 regulations requiring health insurance companies to cover specific ailments, most of them ones which are more common among older patients and many of them quite rare. The insurance companies lay off the cost of this coverage on the general customer base which massively raises the price for the young and healthy who make up about 40% of the uninsured. Eliminating these mandates would lower the price of health insurance sufficiently for that group such that they could afford to be insured. Instead of mandating what conditions insurers have to cover, let customers pick plans based on the level of coverage which they feel meets their needs. There will be a market for full-coverage insurance and competition to keep the price of premium plans low. No private or public system of insurance will ever exist without some rationing of care, but in a free market, consumers will be able to decide in advance what areas they are willing to sacrifice and where they want to focus their coverage, rather than having those decisions made by their employer or the government. Consumers could still be protected from abusive practices by a private certification system which would analyze plans and certify the quality of coverage offered, and the market could be made more accessible and competitive through nationwide internet-based insurance shopping.
  • Privatize Medicaid and Medicare. One of the largest factors in the inflation of health care prices is that so much of the money in the industry comes from Medicaid and Medicare and prices are set at the rate which the government is willing to pay rather than by competition in a free market. Private insurers are then expected to pay for services from doctors and hospitals at the same inflated rate. Medicare and Medicaid costs have increased at about twice the rate of general inflation since the programs were started in 1965. The result is that the price of these programs has doubled every 7 years until today they are 50 times as expensive as they were at their inception. For comparison, the cost of most other goods and services has increased by an average of only 8.5 times in that same 44 year period. We have people being billed $25 for an aspirin because the price of that aspirin is not based on the current market price, but on a schedule of Medicare/Medicaid prices which factors in that enormous level of artificial inflation. Hospitals and insurance companies then follow those pricing trends. Elimination of Medicare and Medicaid as they now exist would force hospitals and doctors to price competitively because insurers would refuse to pay for overpriced products and services. Instead, Medicare and Medicaid should exist only as government payment plans which would subsidize the purchase of private health insurance or health services for the poor and the elderly.
  • Free the health insurance marketplace. State and federal laws currently place a huge number of restrictions on the kinds of health insurance available to consumers. One result of this is that regulations make insurance much more expensive in some states than in others. If consumers could shop for insurance in an unrestricted nationwide market then they could spend their money in Wyoming where a good plan costs $1500 instead of New Jersey where an equivalent plan costs $5000, or more likely, expensive plans would go down in price so that people everywhere could afford them. Similarly, eliminating many of the current legal restrictions on insurance companies would encourage the creation of alternatives to traditional insurance, like health care cooperatives and hospital-based medical plans where customers could subscribe to health care services from a specific source instead of having to go through an insurance company at all. Eliminating the regulations which prevent health care providers from marketing their services directly to consumers would lead to substantial reductions in costs from increased competition.
  • Open up free trade in prescription drugs. One of the factors which keeps the price of health care high is the inflated cost of many prescription medicines in the United States. Government regulations protect pharmaceutical companies from having to compete in a free market by prohibiting private or commercial importation of drugs. This lets pharmaceutical companies charge more for their products in the United States to offset the lower costs they charge in other countries. The result is that on average drugs cost 30-40% less outside of the US and the price differences are much larger for the newest and most effective drugs. If consumers could buy their drugs outside of the US or if pharmacies could import their drugs from other countries — many of which have even higher quality standards than we do here — prices would go down substantially for American consumers who are currently paying far too much and subsidizing the low cost of drugs in other countries.

These five steps won't solve every problem in our health care system instantly, but they will eliminate most of the really serious problems, almost all of which originate in over-regulation. Our current system is designed to keep insurers and health providers from having to compete in the free market, a practice which limits consumer choices and keeps prices artificially high. Make them compete and the qualify of their product will become better, at a lower price.

There are a few things which these proposals cannot address directly. Free market changes do not guarantee a solution to the large number of uninsured, most of whom are uninsured by choice. Many of them will take advantage of lower-priced plans aimed at their part of the market, but there will continue to be a problem with those who are difficult to insure because of preexisting conditions and those who just don't want to pay for insurance. Those who cannot qualify for private insurance at a reasonable price would have to be made eligible for some sort of public subsidy under an expansion of Medicaid. The cost of doing this would still be enormously less than the proposed cost of Obamacare. Those who choose not to be insured could be dealt with under a gap insurance system where if they went to an emergency room their treatment would be covered, but they would be required to repay Medicaid for that treatment on an extended payment plan.

Right now no one is considering this sort of real, fundamental reform of the health care and insurance system as a comprehensive plan. However, there are a number of bills, which include many of these ideas, being proposed to essentially reform the health care reform plan before it even passes . Among these is a bill from Senator Ron Wyden (D-OR) called the Healthy Americans Act which would take the idea of Health Exchanges in the current proposal and use them as a way of transitioning from group plans to individual insurance. Another idea is the Pharmaceutical Market Access and Drug Safety Act, which would open up imports of pharmaceuticals to create a competitive market. It was proposed by Senator Byron Dorgan (D-ND) and has 29 bipartisan co-sponsors, but is stuck in committee. There's even a bill to privatize Medicare with a voucher system proposed by Representative Marsha Blackburn (R-TN). These are all good ideas, but they are being left by the wayside as congress looks at the proposed 1000 page plan which meets President Obama's requirements, but offers little real reform and just expands and makes even more expensive and less efficient the current system.

The plan currently being considered is not health care reform. It is more of the same on a larger and more expensive scale. Real reform means going back and starting over and figuring out what we've been doing wrong and then doing it right. That means reintroducing free markets to the health care and insurance industries and putting choice and control back in the hands of the people. Real changes like the five proposed here will reduce consumer costs and improve the quality of care without massively expanding government or increasing taxes. Ideas like these ought to be part of the debate and not shoved aside in the headlong rush to impose more of the same failed ideas on an ever larger and more expensive scale.