Sep 24

Perhaps you’ve caught’s recent satirical ad that goes after the health care insurance companies, staring none other than Will Ferrell.   I’ve loved Mr. Ferrell’s movies, but man, as Laura Inghram might say, “Shut Up & Sing!” Let’s examine a few quotes…

“So why is Obama trying to reform health care when insurance companies are doing just fine making billions of dollars of profit?”

I’d like to know exactly how would like to see the health insurance industry operate in the absence of profits.   Of course, this is not a theme unique to and their (sadly) many supporters.    The briefest time spent with Google will reveal numerous people and organizations decrying “profit-driven health care”.

The most elementary Economics 101 (albeit, not of the Karl Marx variety) stresses that profits provide the all important signaling mechanism to potential suppliers as to where the demand is, or equally importantly, where it is not. Without the profit mechanism, some other telegraphing mechanism would have to be substituted instead.’s implied solution is that that mechanism should be politically rooted.   It’s back to the question of “who decides?”   Should individuals decide what product/price offering works best for them, or should a bunch of government bureaucrats do it for them?

But if feels so confident that the profits within the health care industry are too large, it’s a glaring admission that they could either provide a similar service for a lower price and are choosing not to do so, or that competition within the industry is lacking.  Again, Economics 101 says that in the presence of a robust free market, no competitor will sit back and watch other market participants enjoy outsized profits.

Don’t we already have a robust free market in health care?   A simple example will prove the negative:  In search of a good deal, I am free to cross my state border and purchase a car, no small purchase at that, and then drive the car back to my home and register it.   No one cares, and similar transactions happen across the country every day.   One could even say, to use a frequently used phrase in the health care space, that the cheaper out-of-state dealers help keep other dealers in my state “honest”.

Will someone in the camp tell me why I can’t do this with health insurance, and what the rationale is behind that policy?

Yes, I know that each state has its own laws mandating the particulars of policies sold in their state, so each state couldn’t possibly regulate the offerings of the companies serving all of the other states according to their own mandates.   But who asked for this mess?   Why shouldn’t I just go shopping for a policy that fits my needs, as dictated by me, from whoever wants to sell it to me, wherever they exist?   Isn’t that exactly how we buy every other product?

Making just this one change would unleash a torrent of price and product competition that would vaporize the supposed outsized profits almost overnight.  I’d also welcome the education as to why this wouldn’t cost almost nothing, in stark contrast to the other wildly expensive plans out there.   Furthermore, any group of people from would always be free to join into that market competition with their own lower-cost/lower-profit company.

If anyone’s angry with insurance companies, letting them truly compete with each other would seem to be a great way to vent that anger.    Let them beat each other up as you watch!   Great theater!    America’s a country that hasn’t yet outlawed boxing (where the stated goal is to render your opponent unconscious — talk about a need for medical care), so why not let the companies really duke it out?

“Eighty percent of the American public support the public plan…”

Wow.   If that were true, wouldn’t that overwhelming majority have forced its will on the other twenty percent of us by now?    Wouldn’t all these crazy town hall meetings and such indicate that statement’s a little off?   Last I checked, big government had only a 60 seat majority in the Senate, not 80.

But this is the crux of’s ad.   They want viewers to lobby congress for a strong public insurance option.    So where are their ads decrying the profits of internet service providers, or railroads, or software companies, or household and personal products, which on average make higher rates of return than insurance companies?   Should Congress authorize the creation of public companies to keep Cablevision or Procter & Gamble honest?   Just who does Amtrak keep honest?

“What’s so American about competition?”

Exactly.  Anyone can play this game.  Go for it   Forget the public option.    There’s a huge hole in the marketplace right now that you can fill.    Between George and your 5 million members, you should have a lot of resources at your disposal to create a great company that by your figuring would attract a ton of customers.    And it would be free to ignore typos.

Sep 20

On September 15th, like many Americans, I made my third-quarter estimated state and federal income tax payments.   I spent about an hour figuring out how much money I needed to send in, and about another hour driving to and from, and dealing with, the post office.    I can’t get those two hours back.   But it wasn’t the large checks that really got me steamed, as much as the thought of how the money would be spent.

Imagine a scenario where a genuine solution to a long-time affliction against humanity could be reached simply by raising a large sum of money, but at the same time, there were no income taxes.   Say it was going to cost, in the form of a one-time payment, 10% of your annual income, to cure cancer.   To truly cure it.  To be able to relegate it to the proverbial dustbins of history.   Who wouldn’t gladly write the check?

By tremendous contrast, what form of government spending produces such a feeling?    I believe it is exactly this contrast that gets to the root of the anger we see today about a government running itself seemingly out of control.   There is a gut-feeling that much of our tax money, much of the costs of government, much of the regulatory barriers to whatever, much of the debt we’re incurring, just amounts to so much waste.

September 12, 2009 Washington DC protests

Try to think for a moment of the specific things that you think the government should be charged with doing.    Beyond the important but abstract things like enforcing the rule of law, most of us would consent to pay for some specific services, such as a national defense or even a public highway system.   But it’s tough for any one person to come up with a long list of things.     The framers of the US Constitution thought about such things and came up with their own list.   It’s very short, and it’s spelled out largely in Article I, section 8 This, of course only deals with the federal level, and notably, the tenth Amendment ascribes all other powers to the states.   Almost none of the issues that occupy today’s headlines remotely fit the list, and as of 2004 the Federal Register had nearly 80,000 pages. It’s safe to say there are more today.

So have we cured cancer?  Or hunger?   Or homelessness?  Is there a chicken in every pot?  How about an iPod? Can government succeed in such efforts?

To suggest that it can not is not to be pessimistic, or unpatriotic, or even anarchistic.    To suggest that it can not does not mean that individuals should not try on their own, or even in groups both big and small, to do what they can.  It boils down to a question of who decides. Who decides what problems should be tackled?   Who decides what should be spent on them?  Who decides what level of service or result is appropriate, and at what cost?

Are there incentives in place for government to succeed?   What happens when it fails?   In the private sector, capital is raised through voluntary means based on a  service provider’s potential to meet some need.   Often, but not always, there is a rate of return for the capital provider.   When the service provider succeeds it is rewarded with more capital.  If it should fail, capital providers look elsewhere.    No such feedback mechanism exists with government.  It’s worse than that, because with government, the capital raising process is involuntary.

Getting back to writing that one-time check,  I believe most of us would write it because most of us have a sense of genuine charity.  Faced with a genuine need and the distinct possibility of making a difference, we rally to the cause. Indeed, all of the major religions call upon us to be charitable.  And there’s the rub:  taxation, directed by politics, even when the proceeds are to be used for supposedly noble goals, is not charity.

Sep 13

From his soapbox at the NY Times, Paul Krugman delivers a lengthy and entertaining history of the views of “saltwater” and “freshwater” economists, and laments how neither side really saw our recent financial debacles coming.  Most troubling for this writer, he describes how Keynesiansim, rightly or wrongly interpreted but in either case a theory custom-made for big government, seems to be falling back into favor, although (encouraging to this writer), he surmises that the fields surrounding behavioral economics may hold better promise.

But nowhere in the article is the school of thought that did largely see this financial tsunami coming, but whose repeated warnings were largely ignored — the entire school of Austrian economics.   It’s too bad, because we have a lot to learn from Ludwig von Mises, Frederick Hayek and others.

Krugman describes the gigantic mind struggle of the Keynesian and Monetarist camps, as he says “clad in impressive-looking mathematics”, each trying to out-gun each other with explanations of which levers in the economy the government should be pulling and pushing on to smooth out the business cycle.  Meanwhile, the Austrians make the compelling case that it is exactly the government, mostly now via the Federal Reserve’s attempts at controlling the price of money, that causes the business cycle in the first place. There are doctoral-level tombs that get into this in great detail, such as von Mises’ “Human Action”. For an entirely more accessible version, complete with its application to recent events, check out Thomas Wood’s recent bestseller, “Meltdown”.   Acknowledging the Austrian’s perspective on things would have changed the article considerably.

Years ago I spent time developing software in the fixed income departments of several major investment banks.   Occasionally, the trading floor would explode in a sudden commotion like of a bunch of panicked extras in some cheesy disaster movie, with bond traders and salespeople yelling and screaming frantically.   The Fed had unexpectedly cut the discount rate! (or had taken some equally earthquake-like action).    Like seismologists, many players in the market would try to anticipate when these events would occur, but with some regularity, “big ones” would hit with little notice.   If you happened to be positioned incorrectly, property damage (to a trader’s book) could be severe.

Since blogs are such a great place for thought experiments, why not ponder the repercussions of not having a Federal Reserve at all, as Jim Rogers, Thomas Woods and others have at one time or another?    Imagine that those bond traders, salespeople and their managers were collectively the bottom line of our interest rate structures, and that were was no big Federal daddy to run home to for whatever reason.   My guess is that they’d be at least a little (if not a lot) more careful with what price they put on capital, and the manner in which it was transacted.

Which brings me to another great omission in Professor Krugman’s article, that being the role of failure.   Continuing the same thought experiment, if every bank knew it was NOT too big to fail, that there was no backstop for their potential mismanagement and recklessness, that would necessarily introduce an additional heap of caution into their lending practices.    When your trading counterparty is deemed “too big to fail”, it sets off an entire chain of relaxation in information gathering.   The mutual knowledge of needs and equally shared costs and benefits between trading partners that is required by free trade is rendered increasingly phony and precarious.  Would some borrowers, who under the recent overly-lax regimes got loans (what the Austrians might refer to as “malinvestments”), no longer get them?   Absolutely.     But we now see that perhaps that would have been a good thing, and there is no reason to extrapolate into a scenario where lending stops entirely.    Would some customers fear doing business with a bank that could fail?   Absolutely.   Therefore, a bank would have every reason to conduct themselves in a way that would assure their customers that they could not.   This could even spawn a market for private banking insurance, the price of which would be determined by the insurance companies’ assessment of the likelihood of failure.

In 2005, WalMart scared many potential competitors and special interest groups by drafting plans to enter the banking industry.   Suffice it to say, they eventually withdrew their plans.   The point is, in a truly free market, driven by the profit motive, firms will always arise to meet the unmet wants of potential customers.    At the same time, excess profits will always be kept in check by enabling and encouraging complete competition.  “Excess profits” simply open the doors for a hungrier competitor to steal customers through better pricing.

At the height of the recent banking crisis, nearly one year ago, there were cries of bank lending potentially shutting down completely.   But just because some lenders might be having trouble does not mean the need for borrowing permanently disappears.     Might the extra cross-industry diversification of a “WalMart in the banking business” have influenced “banking” for the better at the margin?   Would the Citibanks and Bank of Americas of the world have been forced to tweak their business models for the better?    We’ll never know.

Sep 10

Long before he walked on water, Steve Jobs’ comments and musings about Apple’s products resulted in the not-necessarily-flattering phrase, “The Reality Distortion Field”.   As President Obama is no longer walking on water, he seems to have been pulled into that same tractor beam in trying to pitch his health care plans to the country.   All subsequent quotes are his…

For those who already have health insurance”, the President assured that “what this plan will do is to make the insurance you have work better”, by making it “against the law” for insurance companies to:

  1. Deny coverage to those with pre-existing conditions
  2. Drop coverage due to changes in health
  3. Put “arbitrary some cap” on total lifetime payments

Likewise, he said there would be limits on the total out-of-pocket expenses, and that companies “will be required to cover, with no extra charge, routine checkups and preventive care, like mammograms and colonoscopies.”

Only a Reality Distortion Field would suggest that it is economically possible for a company to be forced to incur (perhaps dramatically) higher expenses and not attempt to recover those costs through some combination of higher product prices and/or reduced availability of the product itself.   But let’s move on.

The President wants to create an “insurance exchange”.   Hello — this is commonly called a market, something we do not have in health insurance right now.   Of course, the kids that want to play in that sandbox will have a strict list of rules to abide by as to what they can sell.   And of course, the neighborhood bully, the allegedly self-funding, non-profit, “public option”, will be in the sandbox from the start, welcoming all newcomers.     I suppose logic and reason should result in similar non-profit entities being created in other industries as well, just to “keep them honest”,  such as those that provide us with food, clothing and shelter, three things that are at least as important as health care, but that’s another story.

And yes, technically, nothing in the plan will require anyone to choose the public option.  But here again the central planners assume that we live in a static world.  If, all other things being equal, a “public option” was not burdened with the pesky issue of profits, and enjoyed structural cost advantages, wouldn’t that necessary result in a lower-cost product?   Wouldn’t many individuals and/or companies flock to it?  Isn’t this exactly how organizations like Fannie Mae, Freddie Mac and Sallie Mae eventually took over their marketplaces, all the while under political influence?   We’ve seen that movie before.  You know the ending.

He continued:  “So let me set the record straight. My guiding principle is, and always has been, that consumers do better when there is choice and competition.” Great.   Calling you to the carpet Mr. President:   allow the insurance companies to truly compete. Let the best ones win and the worst ones fail.    This is how markets work and when left alone, they do it better than any other system.    The many Republicans waving their plans and reports in the air seemed to want to have a chat with you as well.

But lastly, there was the tortuous reasoning that we will somehow fund this more-perfect system largely with savings from cleaning up the old one.   Somehow, the very same government forces that resulted in “hundreds of billions of dollars in waste and fraud” will by way of the Reality Distortion Field now waste nothing.

The President cited two moments in history where government stepped in and supposedly acted bravely against calls of overreaching.  “In 1933… there were those who argued that Social Security would lead to socialism. But the men and women of Congress stood fast, and we are all the better for it.   In 1965, when some argued that Medicare represented a government takeover of healthcare, members of Congress, Democrats and Republicans, did not back down.”

Are we better for it Mr. President?   I would suggest that those two acts, along with numerous others, planted and fed the seeds of an insidious moral hazard, leading too many to look to government for their long-term well being, rather than to themselves and their private relationships with their fellow man.   Socialism requires exactly that mentality.   As for Medicare, it represents nearly 50% of total healthcare spending, which sounds like great progress towards a “government takeover of healthcare” to me.    This goes a long way towards explaining the disconnect between what things cost and the monitoring of those costs by consumers, the exact kind of monitoring that in a normal market would keep price inflation in check.    Most importantly, Social Security and Medicare will soon be broke.  They simply can not be held up as role models.

Will a majority of voters succumb to the Reality Distortion Field?  Or will their representatives ignore them and enact Obama’s plan anyway, seeking to build a monument for themselves?   I think Obama showed his cards:  “I am not the first President to take up this cause, but I am determined to be the last.”

Sep 07

I attended a fascinating and boisterous town hall meeting last Wednesday night, run by Democratic congressman John Hall.   I give him credit for holding the event, albeit one announced with almost no advanced notice.   Word got out anyway, and the auditorium was truly SRO (even the aisles were filled with sitting attendees).

This meeting was much like the many other reported meetings from around the country, with emotions running high on all parts of the ideological continuum.   To be clear, the tone in the room was clearly stacked against a government takeover of health care and insurance.  I’ve personally never witnessed anything like this — thinly veiled anger at the potential power-grab of government in a way not seen for generations.     It was the democratic process in its purest form:  live, raw and messy.

But it struck me that one common theme was this:  health insurance companies are the villain to almost everyone.   Rep. Hall, who would ideally see a single-payer system, wondered aloud about why the insurance companies have not already “fixed the problems”, and because of that, declared that dramatic government action was needed instead.   It was a brilliant demonstration of just how misunderstood the current market for health insurance is, namely that there is almost no market at all.   Everything insurance companies do, right down to which ones will sell a product in a state, is heavily regulated by government.

So I left the meeting with the following thought:   Why not direct all the collective anger at the insurance companies back at them directly, by in a sense, throwing them to the lions of each other?   Remove all barriers to their free and total competition.   Let them sell any product they want, to whoever they want, at any price, anywhere in the world.   Let them beat each other up in the public arena, and may the best companies win.

Note that the companies that make the most people the happiest will do very well, and the ones that do not will go bankrupt.   However, with no governmental crutch, it will be individuals who decide what makes them happiest, whether that’s a particular kind of coverage, a particular cost structure, lifetime payment ceilings or whatever.    If at any time a company is found to be making “obscene profits”, it will attract the attention of others who will seek to steal customers by offering an equivalent product at a lower price.   In this way, health insurance inflation will be kept in check by market forces, as dictated by us, not government.

This is how nearly every other sector of our economy works.  The people dictate to companies what products they will buy and at what price.  They tell their friends about good products and service providers.   And they steer their friends away from bad ones.    It works well, and can work for health insurance, too.

Sep 03

In 2002, McCain/Feingold was passed with the noble-sounding goal of limiting the influence of  money on our legislative and election processes.  Less than two years later, the statute survived a challenge at the Supreme Court level, to the complete shock of anyone with a traditional definition of “free speech”.   In addition,  there is plenty of evidence that it was political speech, and in particular, the right to speak out against the policies and members of the government that The Framers sought to protect.  And in today’s day and age, “speaking out” can take many forms, including television, print, radio and the Internet.  Money, sometimes a lot of money, is required to participate in these mediums (although the Internet is changing this game entirely).   To now have strict limits on such expenditures, has the unintended (or perhaps entirely intended) consequence of limiting the amount and/or effectiveness of a single individual or organization’s ability to “speak out” and most troubling, to challenge our elected officials and their policies.

Why people would want to speak out?  In the same First Amendment, it states (in part) that “Congress shall make no law…abridging …the right… to petition the Government for a redress of grievances”  — in other words, to communicate to the government one’s thoughts or desires on how the government should or should not act.  Today, this activity is often referred to as lobbying.  As the number of issues that the government gets involved with grows, the incentive or requirement to lobby the government, to “speak out” in one way or another in an effort to affect the outcome, increases as well.

Originally, the number of issues that the government got involved with was very small, because the Constitution dictated as such.  So to petition the government, possibly spending money to do so, about an issue that the government was not going to address because it was legally bound not to would be an irrational act.  Then around the time of FDR, through a variety of new interpretations of the Constitution, suddenly many more issues were fair game for petitioning, that is, lobbying.  That trend has only accelerated to the present day.

So lobbying, therefore, is more important than ever before, and for entirely understandable reasons.  Politicians listen to the lobbying, because they feel they are in a position to do something about it, with “it” nowadays being just about anything.   With the stakes so high, the contributions to politicians’ campaigns soar proportionally.

Which brings us back to McCain/Feingold and the limiting of expenditures.  If there is greater-than-ever-before incentive to lobby, and yet the mechanisms to undertake that lobby are restricted, there is tension in the system.   Like excess pressure in any system, the pressure will seek to relieve itself any way it can, and again, government can not successfully figure out those ways in advance.   The collective will of the people is simply too complex.  Therefore, efforts to regulate or manage this pressure will certainly fail, which renders efforts to do so a waste of resources, and worse, a needless stimulation of civil discord.   With McCain/Feingold, Congress attacked the symptom and not the disease.

What would work instead?   Going back to root cause of the problem, namely, that government is now entangled with every aspect of our lives, in ways far more numerous than The Framers sought.   If we instead seek to strictly limit the role of government, we will necessarily limit the need to lobby.   The money spent doing so will drop as an uninteresting byproduct.

preload preload preload