Posts Tagged ‘Intervention’

RATIONING MEDICAL CARE

July 12, 2010

RATIONING MEDICAL CARE

Our resources are limited. We have to make choices, to get the things we want most with our limited resources. That is rationing. Individually, we must make these choices within our individual resources.

With insurance, we pool our risks with others to provide for occasional extreme expenses. We pay regular premiums, spreading out the cost of major calamities over time and among a group of people within the same insurance program.

Back in the 1930s, medical insurance was rare, if it existed at all. When a medical emergency arose, we went to the County Hospital, supported by local taxes. The quality of care was not the best. I have a stiff elbow to show for it.

I take a dim view of any involvement of government in medical insurance. At the very least, it will add a level of bureaucratic inefficiency to the costs of medical care. At the worst, it will just reduce even more of whatever freedom is left in the medical care market. Say what they may, government involvement means medical care rationing driven by political considerations.

I believe the greatest problem with our medical care is the monopoly (granted by government) which enables the AMA to limit the supply of doctors, and to set rules by which doctors must treat patients. The result is not health care but rather medical care, suppressing symptoms by prescribing drugs. Prevention and cure are not part of the system.

A secondary problem is the close relationship of the AMA, the drug companies, and the FDA, which results in millions of routine prescriptions for expensive, ineffective, unsafe drugs. Prime examples are bisphosphonates, statins, and coumadin.

Providing by law for universal health care insurance will automatically assure that only AMA approved procedures will be covered by insurance. All existing health insurance already does that, but universal health insurance will even eliminate the option to pay as you go for your own health care. Of course, the automatic result of any socialist scheme like universal medical care is to reduce our freedom.

Insurance is an obvious solution to protect yourself from huge occasional unforeseen medical bills. On the other hand, insuring to cover routine office visits and checkups simply adds bookkeeping costs and red tape to your medical expense.

Pay as you go for health care forces you to make economic choices. The result is that you would spend less than you do under full medical insurance. You do your own rationing, according to your own priorities. Doctors and insurance companies prefer the full medical coverage; they earn more that way, and you and I pay for it.

Britain has its own version of universal health care. Through the years the government has tried many ways to limit the ballooning cost. Ultimately, as in Canada, the most effective rationing is the waiting list. When I lived in Britain, in 1999, I needed a knee replacement. The waiting list for that was 20 months. Fortunately, I had private health insurance and had it done immediately.

I feel that total medical insurance coverage, plus the conviction that “doctor knows best”, plus the conviction that the USA has the best health care system in the world, relieves us of responsibility for our own health. We fall in with the medical notion that sickness just happens, regardless of nutrition and lifestyle, and only an M.D. can fix it.

Take charge of your health. Invest some time and effort to learn about, and get, good nutrition. Get up from your couch and TV long enough to get some healthy exercise. Find one of those rare doctors who offer real health care and can see beyond their prescription pad. If you take out medical insurance, take the plan with the maximum deductible and co-pay to keep the incentive to look after your own health.

Advertisements

INTERVENTION

June 24, 2010

INTERVENTION

Why does our Government insist on tinkering with the free market economy? Don’t they trust us to handle our own affairs? Or is it just lust for power and wealth? Politicians have certainly increased their power through the years, ignoring all the limitations on Government power written into the U.S. Constitution. Politicians are also under pressure from lobbyists, pressure groups, and campaign contributors to intervene in the economy in their favor, or to support their pet projects.

But Government has really botched all interventions intended to improve our economic affairs. First, what they do to the economy violates our freedoms. Moreover, they never succeed in achieving their stated purpose. And, worse yet, they cause disastrous, unforeseen problems. But worst of all, with each failure, and each resulting problem, instead of backing off, Government blames the free market, and adds more interventions in a vain attempt to fix the problems that the earlier interventions have caused.

The free market gives each person the opportunity to achieve the maximum satisfaction with the means at his disposal. In the free market, every exchange involves two people, and each of them profits by the exchange. Each one has acquired something he wants more than what he gave up.

Any interference with the free market can only inflict a loss on one or both people, either by preventing the exchange, or by forcing it to be made on terms that harm one or both people involved in the trade. Government intervention can only reduce the satisfaction of the people affected.

When intervention blocks people from their own priorities, they will seek other ways to achieve their goals. People are ingenious at solving problems, and many will find unforeseen ways to get around these interventions, or to use the interventions in unforeseen ways to their own advantage. Many others will soon follow suit. Unfortunately, those who try to control the destiny of others always fail to foresee this. They always underestimate the ingenuity of man.

RENT CONTROL

June 14, 2010

RENT CONTROL

Rent control is just one example of price controls. My experience with rent control in Chicago, after World War 2, amply demonstrated the results: the resulting shortage and the makeshift adaptations of the market which provided housing of sorts. That’s economics; people act to provide their wants within their means.

During WW2 housing shortages developed in Chicago. Rent controls, installed during the war, remained in force for years after the war. My wife and I, newlyweds, spent 5 months trying to find a rental within our budget. Rents were frozen on existing housing. New apartments were being built out in the suburbs, but charging much higher rents. With inflation, and frozen rent, existing apartments became relatively cheap, if you could find a vacant one. The only one we found was teeming with cockroaches. We passed that by.

Furnished apartments were not rent controlled. What qualified as a furnished apartment was pretty bad. The furniture was mostly cast-off junk. The “apartment” was usually 1 room with a hot plate for a stove, share the bathroom. One “furnished apartment” had its own bathroom because it was a bathroom, with bunk beds and a tiny table built in.

One “apartment” was a corner of a basement partitioned off by hanging bed sheets. When we arrived, there were 50 couples waiting to be interviewed by the owner. To qualify for that, you had to own a car and provide the owner 24/7 taxi service. We didn’t have a car.

What we finally took was one room with a couch which folded down to a bed. We had our own sink, a tiny gas stove, a small table and chairs, and a small closet, share the bathroom. When the bed was open, there was no room to walk around it.

We lived in 3 more furnished rooms in the next few years until we finally got lucky. A waitress in a café took pity on us, phoned a friend who had a friend who knew of an available place: a vacant, unfurnished apartment with a controlled rent.. We snapped it up.

The apartment, a third floor walk-up, was scorching hot in summer and freezing cold in winter. The steam heat would rattle in the pipes, and then shut down just as it reached our radiators. I went down to the owner’s apartment to explain this to him. Then I found out: he and his wife were freezing too; the rent they collected was barely enough to pay for the oil for heating the building. It left absolutely nothing for maintenance. Rent controls and inflation had destroyed the economic viability of the apartment building, which was to be their retirement pension plan.

Moving with my job, we moved to a far-out suburb, and found an apartment with uncontrolled rent, at more than twice the rent we’d been paying.

My next job took us to Los Angeles. There were no rent controls, and plenty of available apartments. We took a nice one bedroom apartment at half the rent of our last one, and little more than what we had paid for any of those makeshift furnished rooms.

My conclusion from those 6 years of house hunting; a rent freeze, rather than making cheaper rentals available, simply produce a shortage of rentals. Like all price controls, and all government interventions, it solves no problems but instead creates more problems. But makeshift though it was, the market, not the government, at least gave us somewhere to sleep and eat. When government creates problems, the market provides solutions.

PATENTS

June 4, 2010

PATENTS
In a brief economics course many years ago, I learned that monopolies are bad, with one exception. A patent is a grant of monopoly by government to encourage invention and technical progress. That sounded good to me.

In my work designing electronics, I occasionally came up with a design idea which I thought might be patentable. I tried doing my own searches to see if the idea was already patented.

I soon got lost in a maze of legal and technical language and unfamiliar technologies and gave up. What I learned from that was that patents made such broad claims that it would be easy to infringe on a patent without knowing it, and I couldn’t guess whether my idea had already been patented.

I consulted my company’s legal department. The answer shocked me. If I file a patent, my idea becomes public and anyone can steal it and beat my employer to the market. The cost of a lawsuit to defend my patent would be more than it would be worth.

On the other hand, if we use the idea without patenting it, we could have a competitive advantage at least for a few years, until somebody else managed to steal the idea. Even then, they could not patent the idea and block our competition, if we could simply show that we had put the idea to practical use before their patent application.

In time I learned the other costs of obtaining the patent. To prove first conception, trial, and confirmation of the idea required detailed records of progress in development, dated and witnessed daily. The keeping of such records can slow development to a snail’s pace. Then, writing up a proper patent application is a major chore. A patent search to see if the idea is already patented is another major chore for a specialist.

I also learned that some inventors collected patents like trophies to display, rather than to produce a product.

There are companies that don’t invent or patent or produce anything, but buy up patents simply to collect royalties from companies that infringe their patents.

I have already described the effects of the patent system on the Drug industry in an earlier post, “Incentives and Bureaucracy” posted April 11, 2010. The effects of drug patents in our health system have probably caused hundreds of thousands of deaths and untold misery.

All in all, my conclusion is that patents impede progress more than they encourage it, and like all government grants of monopoly, impede our economic progress in order to transfer wealth to a favored few. In practice, patents are not a good thing.

Problem solving is necessary to progress and prosperity. There are millions like me who enjoy solving problems and will go on doing it regardless of monetary reward or special recognition. Business success will favor the most innovative producers, and technology will improve rapidly, unimpeded by the burden of qualifying for patents.

BUBBLES Forever Blowing

May 23, 2010

BUBBLES
Government policy is the fundamental cause of asset bubbles, such as the recent housing bubble, and the 1929 stock market crash. The basic driving force is price inflation caused by the ever-increasing money supply. The Federal Reserve System provides the increasing money supply but in the long run, government policy drives the Fed. (The independence of the Fed is a convenient myth).
The consequence of inflation is a draining away of the value of each dollar. If you have cash in your wallet, under your mattress, or in a savings account in the bank, it is losing value every day.
What to do? The solution is to buy some asset which will grow in value to compensate for price inflation. Better yet, borrow money to invest in some asset. Live your life on credit. Your cash balance will be negative, so in reality you can’t lose anything to the depreciation of the value of cash.
In fact, you will gain by inflation if your loan (mortgage) is on a fixed interest basis. In time, inflation will affect your dollar income. You’ll get more dollars (of less value per dollar) to pay off your mortgage. You pay your mortgage with cheaper money.
Government policy gave us further motivation to buy homes. The Fed influences all interest rates by setting the interest rates at which it lends to banks. When this rate is low, mortgage rates are low. Currently, the Fed rate of interest to banks is essentially 0%. You can’t go much lower than that.
The Federal agencies, Freddie Mae and Freddy Mac were created in the 1930s to encourage home buying, by guaranteeing home loans. This reduced risk to lending agencies, so they charged lower interest rates. Freddie Mae and Freddy Mac didn’t have a fraction of the reserves that would be needed if there were a spate of mortgage defaults.
Income tax encourages debt. With a tax deduction on interest paid, the effective interest you pay on a mortgage is much reduced.
Finally, in recent years, the government has actively “encouraged” lending institutions to relax qualifications for home loans. Many people ended up buying homes that they couldn’t really afford.
When many of these people defaulted, the system collapsed. The government bailout of some major banks, and Fannie Mae and Freddie Mac, saved them at a cost of trillions of (counterfeit) dollars, but the housing bubble was burst.
PSYCHOLOGY
There is a big psychological factor in any bubble. With all the encouragement by government, it seemed like a “can’t lose” opportunity. And there were enough winners to make it look tempting to take out a mortgage. I was a winner in the mortgage game, many years ago at a time and place where home prices were rising rapidly.
Inflation alone gives us an incentive to spend dollars of diminishing value to buy assets which will retain value. Easy credit makes it possible to do this with borrowed money. The Stock Market Crash of 1929 was caused by this same combination: inflation and easy credit.
Stock prices were climbing rapidly. People were making fortunes, if they pulled out in time. People who had never bought stocks plunged hysterically into the market with all they had, and more. The stock market is always speculative. In the short term, it’s very risky. When the bubble burst, many people lost a fortune – of borrowed money.
The crash in the housing market was really less painful than the Stock Market crash. As long as homeowners had the income to pay their mortgage, their “losses” weren’t really losses. They saw house prices rise and then fall, but they still had the same house with the same mortgage payments to meet. Only if they sold the house did they sustain a real loss.
When a bubble bursts, the government points an accusing finger at supposed culprits. The finger is pointing the wrong way. Government policy builds bubbles. Any random event can burst the bubble.

PRICE “GOUGING”

May 21, 2010

PRICE “GOUGING”.
We depend on, and take for granted, the supply chain which brings us goods from all over the world. In an emergency, like a hurricane, flood, earthquake, or war, the supplies of various items are interrupted. What to do?
The free market has the answer. Supply and demand directs products and services to the people who want them most, as measured by their willingness to pay. Price is the signal which controls supply and demand to keep them in balance.
The market does this quickly and efficiently, directed by prices. Yes, prices may rise dramatically, for a time. And yes, somebody will make profits, for a time. It is the prospect of those profits that will impel producers, and all the people in the supply chain, to the extraordinary efforts needed to get the most essential items to the people who want them most, as quickly as possible.
It is the suddenly higher prices that impel consumers to reassess their priorities and limit their consumption to whatever they see as most essential.
You may feel that poor people may die for lack of cash. In an emergency, government always fails. Nobody yet has found a way to eliminate poverty. As always, charity does the best possible job of relieving the effects of poverty.
In an emergency, people show their best qualities. Those who share the emergency share what they have, and rescue others if they can. Outsiders come to help and bring supplies. People far away send supplies.
Do you think the government should step in to prevent price gouging? All that government has to offer is to freeze prices, which will simply extend the shortages.

MONETARY REFORM

April 30, 2010

Monetary Reform
Gold was long ago chosen by the free market, by the people, as the best money. The gold standard is a convenient way to use gold as money. This means honest banknotes (no counterfeits) and token coins in circulation, redeemable at any time in gold at face value. Face value should be stated not in discredited units like dollars, pounds sterling, francs or yen, but in ounces or grams of gold.
Banking adds convenience to the gold standard, with checks and electronic transfers for convenient payment. Honest banking would mean simply enabling easy transfer of ownership of gold from one person to another, and acting as go-between for loans of gold.
How do we get from here to there?
Many economists have proposed assorted schemes to return to the gold standard. Most of them require either the co-operation or overthrow of the government. I see no chance of any government depriving itself of the power to use us with fiat currency. Therefore, I propose a free market re-creation of a gold standard, in free competition with government currency. Here’s how I see this happening.
First, get the message to the people- they are being cheated and manipulated through the stealth tax and the government control of the money supply. Their votes are needed to force the government to give up the monopoly in the money business. This would not force the government to quit the money business; it would simply require them to compete.
Next, repeal any laws that prohibit trade and contracts in other currencies. This would make it legal to buy, sell, lend, and make contracts (loans, insurance, annuities, mortgages, etc) in any currency, including, of course, gold.
Make it legal and easy to buy back our gold from the government at the free market price.
With this freedom, the market could provide us with an honest currency, with private banks and private mints dealing in gold coins, subsidiary token coins and bills.
Can we trust these private individuals to deal honestly with us? Not entirely. However, we won’t do business with private, competing banks and mints unless they give ironclad guarantees, and develop a reputation for honesty. They have to earn our trust, as any business operating in the free market has to earn our trust. An easy route to trust would be Insurance contracts that guarantee the safety of our deposits. The insurance company would have an excellent motive to detect and eliminate any cheating.
If banks don’t abide by their contractual obligations, we, or the insurance company, can bring them to justice and try them for fraud. That’s just what we can’t do to government, and that’s why we can’t trust government with our money.
There is no telling just how such a system might evolve. The free market is forever surprising us with new ideas. It could well give us an honest currency and an end to the boom and bust cycle. I would expect banks to evolve explicit contracts on the terms for withdrawing funds, such as advance notification for larger withdrawals, and deposit insurance (but not by government) as a guarantee against fraud or failure.

Monopoly

April 28, 2010

MONOPOLY IN THE FREE MARKET
Monopoly is an absence of competition. When I first studied Economics, I got a strong impression that monopoly was the big, bad, wolf in the free market, an example of failure of the free market to provide the best possible deal for the consumer. Not So. Not in a free Market.
How do you achieve a monopoly? By being the first to produce a new product that people will buy. By serving the consumers. So far, everybody is a winner. The producer makes a profit, and the consumer gets a marvellous new gadget.
How do you maintain your monopoly position? Your profits attract competition which can soon eliminate the monopoly. To avoid this, the monopolist must act as though he already has competition. He must continue to improve his product, reduce his costs and his prices, and keep coming up with new products that people will want. Everybody is still a winner. Potential competition is all it takes to make the monopolist provide the best deal for the consumer.
Each worker has a degree of monopoly, because each worker is a unique person with unique attitudes, aptitudes, skills and experience. I have had the happy experience of getting an immediate job offer more than once because of particular experience in my past employment.
MONOPOLY IN THE UNFREE MARKET
If I could somehow eliminate competition, I could relax and make profit without the insecurity that comes with competition. How? I might use coercion, but that would be illegal unless I could get permission from the government, which holds a monopoly on coercion. This is how the Guilds operated in the middle ages; they were granted a monopoly by the monarch.
In the late 19th and early 20th centuries, labor unions used coercion with the tacit approval of governments. This was an era when Unions could control millions of votes to influence politicians. Later they managed to get laws passed to give them power: to exclude non-members from jobs, to strike without fear of being fired, to picket while on strike.
The 20th century produced dozens of government agencies to regulate commerce. In many cases, commercial interests took control of these regulators to shut out newcomers to an industry, creating cartels of the companies that got there first.
All of these monopolistic arrangements are empowered by Government and give profit to the monopolists at a cost to the consumers. Consumers pay higher prices, often for products of diminishing quality.
Union monopolies often prove self defeating. Increased wages to union workers increase production costs so that their employers can no longer compete, unless the employers also enjoy the advantage of a monopoly, or unless the unions can achieve a monopoly control of labor throughout the industry. In this case the increased cost of production, passed on to the consumer, reduces demand. This means reduced production and layoffs in the industry. In a unionized industry, this meant layoffs among those with the least seniority.
Even unionization of an entire industry can be self defeating if the industry has significant competition from abroad in countries with less union power. For this reason, early efforts to unionize tried to build international unions.
None of these monopolies could exist in a free market, which is driven entirely by the wants of the consumers (That’s you and me). These monopolies are the product of government intervention or collusion. There is, however, a legitimate way to achieve a monopolistic advantage. That way is to excel at competition, to “build a better mousetrap”, and keep doing so.
This is the realm of the entrepreneur (which is simply French for “enterpriser”). If you can find a way to greatly improve on an existing product, or better yet, dream up an entirely new and different product, get the capital and the people to design and produce it, you have a monopoly, for a time, on that product.
This has been an increasingly important way for a company to grow and profit, especially since the mid-20th century. Imitators will spring up, in time, to compete in producing this new product. The secret of success is to keep ahead of the imitators by forever developing newer, better products. In this situation, everyone is a winner, especially the consumer.

The Wage Freeze

April 28, 2010

World War 2, like all modern wars, was financed by monetary inflation, essentially printing lots of legal counterfeit money. The result, in time, was increasing price inflation, including wage inflation. In a vain attempt to curb price inflation, our government set price caps (and eventually rationing) and a wage freeze.
With 10 million Americans away at war, there was a severe labor shortage. With employers struggling to get the best workers, (mostly producing war goods), and a wage freeze, employers started adding “fringe Benefits”, a package of company-paid pension plans, medical insurance, and expanded paid vacations. Comparisons between job offers became more complex, but essentially they all offered more than the frozen wage as an inducement.
This defeated the wage freeze, but when the freeze ended after the war. Employers were saddled with the added overhead of managing these fringe benefits. Fringe benefits have now come back to haunt employers, as government keeps adding mandated fringe benefits to our employment.
Like all price controls, the wage freeze solves no problems and causes many more problems. People usually manage to minimize the problems by finding “loopholes” in the law, but always with a cost. The black market is the closest thing to a free market we can achieve but has an extra burden of overhead cost to evade the law.
Price and wage controls are a simple minded effort to avoid the unavoidable consequence of counterfeiting. It’s a case of one intervention causing problems which are used to justify one more intervention and so on and on and on. And with each intervention government increases in size, cost, and power, as we become less and less free. As Mises said, “Government is the negation of liberty”

IF ONLY THE MARKET WERE FREE

March 30, 2010

IF ONLY THE MARKET WERE FREE

Critics of the free market like to point to “market failures” to prove that the freedom of the market must be limited by government intervention. There’s one enormous flaw in this argument; the market is not free. Since government was invented, there has always been economic intervention. Examining each and every so-called failure, it soon becomes obvious that it was caused by the intervention of the powers that be. However, at this point, I will try to show first what a truly free market would be like, and the many benefits it could bring us.

In a free market there would be no interference with our personal choices, or our voluntary economic exchanges, trades, or agreements with other people. There would be no price controls, wage controls, interest controls, rationing, protective tariffs, or taxes designed to influence our economic choices. There would be no involuntary transfers of wealth from taxpayers to politically favored groups or causes.

And above all, in a free market, there would be no interference in our choice of what to use as money and there would be no government control of the money supply. Money is indispensible for the functioning of the specialization and trade of our complex economy, which is the only way that billions of people can survive in this world. Since the dawn of civilization, governments have taken control of the definition and supply of money in order to tax us by stealth.

The only involvement of government in a free market would be to protect us from robbery, theft, embezzlement and fraud. The government control of the money enables government to engage in all of these, and influences every economic choice we make.

SO HOW WOULD THE FREE MARKET WORK?

The fundamental rule in a free market is that every exchange is voluntary for each party to the exchange, with no coercion by either party or any third party.

Since each party makes the exchange voluntarily, there is one unavoidable conclusion; each party wants what he gets more than what he gives. That means that each party to the trade profits by the exchange.

This brings up a second unavoidable conclusion; any outside intervention in this exchange can only reduce the satisfaction of one or both parties to the exchange. The free market gives each of us free choice to get the most of what we want within our means.

WITH WHAT RESULTS?

The Free market directs every aspect of production to give consumers what they want most, within their means. Ever changing prices direct the constantly changing allocation of materials, capital and labor; industries and methods and products and services keep changing to adapt to the changing wants of consumers. Each worker adapts, learns new skills, changes jobs, and increases his income by adapting to consumers’ wants.

WHAT ABOUT MONEY?

From the dawn of history, people have selected the stuff they use as money for convenience and reliability. The end of the free selection process has everywhere brought us to the selection of precious metals, usually gold, silver, and copper. These metals were usually formed into coins to assure a uniform weight of metal.

Metal coins worked reliably in the market until governments took over the business of minting coins, and then found ways (clipping and debasing) to tax their citizens by stealth, by reducing the value of each coin. Money became even less reliable when Banks substituted banknotes for coins and then proceeded to issue extra (counterfeit) banknotes. Since then, the amount of money in circulation has always varied unpredictably, making the value of the money unreliable.

But in the free market, counterfeiting or debasing money would be considered theft and not tolerated. The money would be reliably stable, unadulterated at the whim of governments or bankers.

This would drastically change the business of banking. Banks, unable to earn money by collecting interest on counterfeit money, would simply be in the business of transferring ownership of the money stored in their vaults. They would have to earn a living by charging fees for the safe storage of coins and fees for the bookkeeping chore of recording the transfers. And you and I would no longer share in the loot from fractional reserve banking. We would instead pay for the safe storage of our money and for the convenience of paying by check, banknote, debit or credit card, or electronic transfer, rather than carry coins for all transactions.

The financing of business and personal loans would also be very different in a free market. Money for loans would come from savings built up by people living well within their means. Borrowers would have to pay sufficient interest on the loan to induce people to put off consumption in order to save. Money could no longer be created out of thin air for a loan, and thus loaned at an artificially low interest rate.

In the free market, loans would not affect the amount of money in circulation, as the lending of counterfeit money would. The lender abstains from buying now so that the borrower can spend now. Thus the value of money would be much more stable and reliable than in the counterfeit economy.