Posts tagged ‘prices’

Occupational Licensing and Goldilocks

Don Boudreax has a good editorial up on occupational licensing

The first hint that the real goal of occupational licensing isn't to protect consumers' health and welfare is that far too many of the professions that are licensed pose practically zero risks to ordinary people. Among the professions that are licensed in various U.S. states are florists, hair braiders and casket sellers. What are the chances that consumers will be wounded by poorly arranged bouquets of flowers or that corpses will be made more dead by defective caskets?

The real goal of occupational licensing is to protect not consumers, but incumbent suppliers. Most occupational-licensing schemes require entrants into a trade to pass exams — exams designed and graded by representatives of incumbent suppliers....

But what about more “significant” professions, such as doctors and lawyers?

The case for licensing these professions is no stronger than is the case for licensing florists and hair braiders. The reasons are many. Here are just two.

First, precisely because medical care and legal counsel are especially important services, it's especially important that competition to supply these services be as intense as possible. If the price of flowers is unnecessarily high or the quality poor, that's unfortunate but hardly tragic. Not so for the prices and quality of the services of doctors and lawyers.

Too high a price for medical visits will cause too many people to resort to self-diagnosis and self-medication. Too high a price for legal services will cause too many people to write their own wills or negotiate their own divorce settlements. Getting matters wrong on these fronts can be quite serious.

Won't, though, the absence of licensing allow large numbers of unqualified doctors and lawyers to practice? No.

People are not generally stupid when spending their own money on themselves and their loved ones. Without government licensing, people will demand — and other people will supply — information on different physicians and attorneys. Websites and smartphone apps will be created that, for a small fee, collect and distribute unbiased information on doctors and lawyers. People in need of medical care or legal advice will be free to consult this information and to use it as they, rather than some distant bureaucrat, choose

One thing I think sometimes gets lost -- the critique of licensing often focuses on where licensing is too restrictive - e.g. hair braiding or taxis or simple medical procedures.

But it is just as likely to fail because it is insufficiently restrictive. People will always say to me that they certainly want their brain surgeon to be a licensed physician, implying that licensing is appropriate for certain extreme skills. But would you really choose a brain surgeon merely because he or she was licensed? I would do a ton of research in choosing a brain surgeon, research that would go well beyond their having managed to pass some tests 20 years ago.

The same applies for restaurants - my standards go way beyond whether they have a 3 basin cleanup sink and have sufficiently high temperatures in their dishwasher.

The criteria for licensing is never "just right". Either it is too restrictive and eliminates competition that would provide me value; or else it is insufficiently stringent such that I have to perform the same due diligence I would have in the absence of any licensing regime (though perhaps with less robust tools since licensing likely stunts development of such consumer tools). And even if it happened to be well-calibrated for me, it will not be well-calibrated for my neighbor who will have a different set of criteria and preferences.

How Did Obamacare Authors Ever Fool Themselves Into Believing They Were "Bending the Cost Curve" With These Kind of Incentives?

I guess I never really paid much attention to how the Obamacare "risk corridors" work.  These are the reinsurance program that were meant to equalize the risks of various insurers in the exchanges -- but as exchange customers prove to be less healthy than predicted, they are more likely to become a government subsidy program for insurers.

I never knew how they worked.  Check out the incentives here:

According to the text of Obamacare, the health law's risk corridors—the insurance industry backstop that’s been dubbed a bailout—are only supposed to last through 2016. For the first three years of the exchanges, insurers who spend 3 percent more on health costs than expected will be reimbursed by the federal government. It’s symmetrical, so insurers who spend less will pay in, but there’s no requirement that the program be revenue neutral

So what, exactly, are the incentives for cost control?  If you lose control of your costs, the government simply pays for the amount you overspent.  Combine this with the fact that Obamacare puts caps on insurer non-patient-cost overhead spending, and I don't think you are going to see a lot of passion for claims management and reduction.  Note after a point, excess claims do not hurt profits (via the risk corridor) but more money spent on claims reduction and management does reduce profits (due to the overhead caps).

Nice incentives.

Postscript:  There is one flaw with my analysis -- 3% is a LOT of money, at least historically, for health insurers.  Why?  Because their margins are so thin.  I know this will come as a surprise with all the Obama demonization of insurance profits, but health insurers make something like 3-5% of revenues as net income.  My Boston mother-in-law, who is a very reliable gauge of opinion on the Left, thinks I am lying to her when I say this, even when I show her the Google finance pages for insurers, so convinced is she by the NYT and PBS that health insurer profits consume a huge portion of health care spending.

All that being said, I am pretty sure if I were an insurer, I could raise prices slightly, cut back on claims overhead, and make a guaranteed profit all while the government absorbs larger and larger losses.

Why Do We Manage Water Via Command and Control? And Is It Any Surprise We Are Constantly Having Shortages?

In most commodities that we consume,  market price signals serve to match supply and demand. When supplies are short, rising prices send producers looking for new supplies and consumers to considering conservation measures.  All without any top-down intervention by the state.  All without any coercion or tax money.

But for some reason water is managed differently.  Water prices never rise and fall with shortages -- we have been told in Phoenix for years that Lake Powell levels are dropping due to our water use but our water prices never change.  Further, water has become a political football, such that favored uses (farmers historically, but more recently environmental uses such as fish spawning) get deep subsidies.  You should see the water-intensive crops that are grown in the desert around Phoenix, all thanks to subsidized water to a favored constituency.   As a result, consumers use far more water than they might in any given year, and have no natural incentive to conserve when water becomes particularly dear, as it is in California.

So, when water is short, rather than relying on the market, politicians step in with command and control steps.  This is from an email I just received from state senator Fran Pavley in CA:

Senator Pavley said the state should consider measures that automatically take effect when a drought is declared to facilitate a more coordinated statewide response.

“We need a cohesive plan around the state that recognizes the problem,” Pavley said at a committee hearing. “It’s a shared responsibility no matter where you live, whether you are an urban user or an agricultural user.”

Measures could include mandatory conservation, compensation for farmers to fallow land, restrictions on the use of potable water for hydraulic fracturing (“fracking”), coordinated publicity campaigns for conservation, increased groundwater management, and incentives for residents to conserve water. Senator Pavley noted that her hometown Las Virgenes Municipal Water District is offering rebates for customers who remove lawns, install rain barrels or take other actions to conserve water.

Pavley also called for the state to create more reliable, sustainable supplies through strategies such as capturing and re-using stormwater and dry weather runoff, increasing the use of recycled water and cleaning up polluted groundwater basins.

Note the command and control on both sides of the equation, using taxpayer resources for new supply projects and using government coercion to manage demand.  Also, for bonus points, notice the Senator's use of the water shortage as an excuse to single out and punish private activity (fracking) she does not like.

All of this goes to show exactly why the government does not want a free market in water and would like to kill the free market in everything else:  because it gives them so much power.  Look at Ms. Pavley, and how much power she is grabbing for herself with the water shortage as an excuse.  Yesterday she was likely a legislative nobody.  Today she is proposing massive infrastrure spending and taking onto herself the power to pick winners and losers (farmers, I will pay you not to use water; frackers, you just have to shut down).  All the winners will show their gratitude next election cycle.  And all the losers will be encouraged to pay protection money so that next time around, they won't be the chosen victims.

Progressives that Cannot be Satisfied

I believe it was back in 1973, when my dad was an executive with an oil company, he got hauled in front of Congress to testify on the proposed Alaska pipeline.  Senators on the Left accused the industry of threatening the environment in the name of greed, by trying to bring oil to market that was entirely unnecessary.  A few months later, once the Arab oil embargo had begun, he was back in front of Congress answering questions from the same Senators who opposed the Alaska pipeline about whether the rumors were true that oil companies were holding tankers off-shore, purposely making the shortage worse and driving up prices.  It was an early life-lesson in government for me, watching my dad be publicly accused within months of seeking new oil supplies too aggressively and purposely withholding oil supplies from the market.

I am reminded of all this by the Keystone pipeline brouhaha.  One wonders how many of the people opposing the Keystone pipeline will be the first out on the picket line protesting oil prices the next time there is an oil price spike.

Our Business's Response to California $2 Minimum Wage Increase

Well, we have completed our response to minimum wage increases in California.   As a review, California is raising its minimum wage from $8 to $10 (or 25%)  in two steps starting this July 1.  I will confess that in some of these cases the causes are complex, and are not just due to minimum wage changes but also other creeping California regulatory issues (particularly the first two).

  • Suspended operation and closed on large campground in Ventura County that employed about 25 people
  • Suspended investment / expansion plans at two other campgrounds
  • Raised prices everywhere else, on average adding $3 to a $20 camping fee.   (this is inevitable when wages are increased 25% in a business where more than half the costs are tied to wages and margins are around 5%)

The only reason I take the time to write this is that I think this tends to demonstrate that 1) minimum wage increases can have a real economic impact and 2) just looking at job losses after the date the wage takes effect can miss most of this economic impact.

To this latter point, a lot of the impact is not necessarily job losses.  We see lost investment, which perhaps means fewer jobs in the future but there is no way to measure that.  We see price increases, which affects consumers and disposable income.  And we see some job losses, but note that the job losses were 6 months before the law goes into effect.

We are left with a certainty that the minimum wage had a real economic effect but a suspicion that, at least in this case, that effect would not be measured.

By the way, there may also be a lesson here for those who believe that the entire problem in the economy is one of not enough aggregate demand.  In the last month I walked away from a million dollars a year of demand, because it was impossible to serve profitably, in large part due to regulatory issues.

Surprise: Near Bankrupt City Finds that Throwing Good Money After Bad is Not a Good Investment

I have written here any number of times about the crazy ongoing subsidies by Glendale, Arizona (a 250,000 resident suburb of Phoenix) to an NHL franchise.  The city last year was teetering at the edge of bankruptcy from past hockey subsidies, but decided to double down committing to yet more annual payments to the new ownership of the team.

Surprisingly, throwing more money into an entreprise that has run through tens of millions of taxpayer money without any hint of a turnaround turns out to be a bad investment

Revenue from the Phoenix Coyotes is coming up short for Glendale, which approved a $225 million deal to keep the National Hockey League franchise in 2013.

City leaders expected to see at least $6.8 million in revenue annually from the team to help offset the $15 million the city pays each year for team owners to manage Jobing.com Arena. The revenue comes from ticket surcharges, parking fees and a split of naming rights for the arena.

Halfway through the fiscal year, the city has collected $1.9 million from those sources, and nearly $2.3 million when including sales-tax revenue from the arena.

Even including the rent payments on the publicly-funded stadium, Glendale is still losing money each year on the deal.

The source of the error in forecasting is actually pretty funny.  Glendale assumed that it could charge very high monopoly parking fees for the arena spaces ($10-$30 a game).  In some circumstances, such fees would have stuck.  But in this case, two other entities (a mall and another sports stadium) have adjoining lots, and once parking for hockey was no longer free, these other entities started competing parking operations which held down parking rates and volumes (I always find it hilarious when the government attempts to charge exorbitant monopoly prices and the free market undercuts them).

Had the parking rates stuck at the higher level, one can assume they still would have missed their forecast.  The Coyotes hockey team already has among the worst attendance numbers in the league, and hockey ticket buyers are particularly price sensitive, such that a $20 increase in the cost of attending a game likely would have driven attendance, and thus parking fees and city ticket surcharges and sales taxes, down.  Many private companies who are used to market dynamics still fail to forecast competitive and customer reaction to things like price increases well, and the government never does it well.

Wal-Mart and GINI

I am working on some posts on income inequality, especially as compared between nations.  One thing I have been thinking about is whether the US GINI (a measure of income inequality) is overstated because the US has a tiered retail system that gives lower income people access to lower prices (though for sometimes lower quality goods).  We have Wal-Mart and Family Dollar, discount retail concepts that are rare, and often illegal (due to limitations on retail discounting) in European countries.

On a sort of purchasing power parity basis, I wonder if this has any impact in narrowing the US effective GINI.  Of course, this mitigating factor is somewhat mitigated itself by the fact that a number of urban areas with some of the poorest families (e.g. Washington DC) restrict entry of these low-cost retail establishments.

Entirely Predictable Unintended Consequences -- San Francisco Rental Market

There should be a word for "entirely predictable unintended consequences".  The Germans have come up with some good words for complex ideas, like schadenfreude, so maybe we can outsource the task to them.

Anyway, I just finished a book called Season of the Witch, about San Francisco in the 1960's and 1970's.   Churchill once said that “The Balkans produce more history than they can consume” and I am reminded of this quote when reading about San Francisco in these two decades.  Written by a Progressive sympathetic to San Francisco's bleeding leftist edge (the author cannot mention Ronald Reagan without also expressing his disdain), it is never-the-less pretty hard-hitting when things go off the rails (e.g. the enablement of Jim Jones by the entire leftist power structure).

Much of the narrative is about the great influx of lost youth and seekers of alternative lifestyles into the city; the attendant social, crime, and drug issues this created; and a quest for tolerance and social peace.   As such, it is not a book about political or economic policy per se, it's more about the people involved.  But we do get glimpses of the policies that key players like Harvey Milk, Dianne Feinstein, and Willie Brown were advocating.

What struck me most were the policies these folks on the Progressive Left had on housing.  They had three simultaneous policy goals:

  1. Limit San Francisco from building upward (taller).  San Francisco is a bit like Manhattan in that the really desirable part where everyone wants to live is pretty small.  There was (and I suppose still is) a desire by landowners to build taller buildings, to house more people on the same bit of  valuable land.  Progressives (along with many others across the political spectrum) were fighting to have the city prevent this increased density as a threat to San Francisco's "character".
  2. Reduce population density in existing buildings.  Progressive reformers were seeking to get rid of crazy-crowded rooming houses like those in Chinatown
  3. Control and cap rents.  This was the "next thing" that Harvey Milk, for example, was working on just before he was shot -- bringing rent controls to San Francisco.

My first thought was to wonder how a person could hold these three goals in mind without recognizing the inevitable consequences, but I guess it's that cognitive dissonance that keeps socialism alive.   But it should not be hard to figure out what the outcome should be of combining: a) some of the most desirable real estate in the country with b) an effective cap on density and thus capacity and c) caps on rents.  Rental housing is going to be shifted to privately owned units (coops and condos) and prices of those are going to skyrocket.  You are going to end up with real estate only the rich can afford to purchases and a shortage of rental properties at any price.  Those people with grandfathered controlled rents will be stuck there, without any mobility.

So I was reading this the other day.  It turns out there is a severe shortage of affordable rental properties in San Francisco, and lately there have been a record number of conversions of rental properties to private ownership.

With the area economy rebounding, San Francisco is in the midst of a housing crisis as many residents are evicted from their apartments. With rents strictly regulated, an increasing number of San Francisco owners are getting out of the rental business and cashing out their properties to turn them into co-ops. Steven Greenhut argues that rent control actually forces prices upward, especially over the long term, by diminishing the supply of available rental housing.

Update:  One recurring theme through the book is that progressive elements in SF saw their government and particularly their police force as "bullies".  They used this term a lot -- and they were right.  So it is interesting today to see all these progressives and how they act with power.  Turns out, they are all bullies too, just on different issues.

By the way, the Dirty Harry movies are way more interesting after reading this book.  Season of the Witch is what all this looked like to a progressive.  The Dirty Harry movies are what the same events looked like from a different perspective.

Why You Should Be Very Skeptical of Low-Sample-Size Advocacy Group Polling

A while back, I pointed out this poll from some group called the Commonwealth Fund.  In mid-October, on average about 15-18 days into the exchange process, they polled a group of non-corporate-insured adults (e.g. individual market or uninsured) about whether they had visited an exchange and what had been their experience.

The finding that stood out to me was that 21% of the people they interviewed that said they had visited an exchange reported that they had signed up for a policy (from the wording of the question, this probably includes both private policies and Medicaid signups).

I thought this seemed crazy-high.  And now new data from the Administration is confirming it.   The Administration is reporting about 106,000 "selected a plan" in October -- a very generous definition since it includes people who put a plan in their shopping cart but did not purchase it.  Not a definition of a sale that Amazon.com would ever use.    Further, another 400,000 or so were "found eligible" for Medicaid, whatever that means though it sounds well short of "enrolled."  So call it generously 500,000 people by the end of October.  The other key bit we need is that the Administration is reporting about 27 million unique visitors to these sites.  So at best we are looking at 1.9% of exchange visitors kind-of-sort-of-maybe having done something that approaches being enrolled.

This puts the Commonwealth Fund polling an entire order of magnitude off, at 21% vs. 1.9%.  And remember their survey occurred in the middle of the month, when the web site was not even working, and one can assume that successful enrollments were back-end loaded in the month.  The CF was nice enough to respond to my emails but were unable to explain the discrepancy, other than the sample size was low making the results unreliable.  So why the hell do it, and then put out a press release?

One explanation for part of the discrepancy may be in those who have created user accounts (normally a trivial task on a private site but a Herculean accomplishment on Healthcare.gov) but have not actually purchased a plan.  The Obama Administration says that there are about a million of these, so in addition to the 1.9% that put a plan in their shopping cart, there are another 3.7% that created a user account and gave the Feds enough info to assess subsidy eligibility, but who have not selected a plan.  Remember, that this was the minimum hurdle the Obama Administration originally set even to see insurance plan prices, and is still the minimum hurdle to get a subsidy quote.  It will be interesting to see the conversion rate of people once they find they are not getting free stuff from Uncle Sugar.

Even so, this only adds up to 5.6% of people who visited the exchange and had any sort of success (in most cases far short of enrollment) at all.  Way short of 21%.  Remember that we you see "studies" like this in the future.

Good God. Twitter Stock Opens Over $45

Forget the #DIV/0! PE.  That prices the company at over 57 times annual revenues.

Progressives Lamenting the Effects of Progressive Policies

Kevin Drum writes

Via Harrison Jacobs, here's a recent study showing the trend in income segregation in American neighborhoods. Forty years ago, 65 percent of us lived in middle-income neighborhoods. Today, that number is only 42 percent. The rest of us live either in rich neighborhoods or in poor neighborhoods.

This is yet another sign of the collapse of the American middle class, and it's a bad omen for the American political system. We increasingly lack a shared culture or shared experiences, and that makes democracy a tough act to pull off. The well-off have less and less interaction with the poor outside of the market economy, and less and less empathy for how they live their lives. For too many of us, the "general welfare" these days is just an academic abstraction, not a lived experience.

He does not give a reason, and apparently following the links, neither does the study author.  But my guess is that they might well attribute it to 1. effects of racism, 2.  growth of the suburbs, 3. laissez faire capitalism.

I don't think racism can be the driver of this change, given that racism and fear of other cultures is demonstrably better in the last 30 years than at most times in history  (read bout 19th century New York if you are not sure).  The suburbs have been a phenomenon for 100 years or more, and capitalism has been less laissez faire over the last 30 years than at any time in our history.

I actually believe a lot of this income sorting is a direct result of two progressive policies.  I have no data, of course, so I will label these as hypotheses, but I would offer two drivers

  • Strict enforcement of the public school monopoly.  People want good schools for their kids.  Some are wealthy enough to escape to private schools.  But the only way for those who stay in the public school system to get to the best schools is to physically move into their districts.  Over time, home prices in the best districts rise, which gives those schools more money to be even better (since most are property tax funded), and makes them even more attractive.  But as home prices rise, only the most wealthy can afford them.  This is dead easy to model.  Even in a starting state where there are only tiny inhomegeneities between the quality of individual schools, one ends up with a neighborhood sorting by income over time.  Ex post facto attempts to fix this by changing the public school funding model and sending state money to the poorest schools can't reverse it, because at least half of school quality is driven not by money by by the expectations and skills of the parents and children in it.  Thus East St. Louis can have some of the highest per pupil spending in the state but have terrible schools.  A school choice system would not likely end sorting by school, but it would eliminate a huge incentive to sort by neighborhood.
  • Strict zoning.  There has always been a desire among certain people to exclude selected groups from their neighborhoods.  This desire has not changed, or if anything I would argue it has declined somewhat.  What has changed is the increased power that exists to exclude.  Zoning laws give the rich and well-connected the political vehicle to exclude the rabble from their neighborhoods in a way that never would have been possible in a free market.  I live just next to the town of Paradise Valley, which has very strict zoning that is absolutely clearly aimed at keeping everyone but the well-off out.  They will not approve construction of new rental units.  The minimum lot sizes are huge, way beyond the reach of many.

Who the HELL is Jay Carney to Tell Me My Health Insurance Policy is "Sub-Standard"?

Via Bloomberg

The health-care law eliminates “substandard policies that don’t provide minimum services,” said Jay Carney, a White House spokesman, in response to the cancellations. The “80-plus percent” of Americans with employer plans or covered by government programs are unaffected.

I chose my policy very carefully, and don't think it is "sub-standard" because it does not include pediatric dental care for two people in their fifties.  This is the worst consumer dis-empowerment that I can remember in my lifetime.

And I totally agree with this

Now an effective levy of several thousand dollars on the small fraction of middle class Americans who buy on the individual market is not history’s great injustice. But neither does it seem like the soundest or most politically stable public policy arrangement. And to dig back into the position where I do strong disagree with Cohn’s perspective, what makes this setup potentially more perverse is that it raises rates most sharply on precisely those Americans who up until now were doing roughly what we should want more health insurance purchasers to do: Economizing, comparison shopping, avoiding paying for coverage they don’t need, and buying a level of insurance that covers them in the event of a true disaster while giving them a reason not to overspend on everyday health expenses.

If we want health inflation to stay low and health care costs to be less of an anchor on advancement, we should want more Americans making $50,000 or $60,000 or $70,000 to spend less upfront on health insurance, rather than using regulatory pressure to induce them to spend more. And seen in that light, the potential problem with Obamacare’s regulation-driven “rate shock” isn’t that it doesn’t let everyone keep their pre-existing plans. It’s that it cancels plans, and raises rates, for people who were doing their part to keep all of our costs low.

With my high deductibles, I am actually out shopping every day on health care prices and I can tell you from my experience that if everyone did so, we would see a reversal of health care inflation.  More here

What Is Wrong With Health Care, Though My Diagnosis is Opposite of the Left's

Note:  I did not like the way I first wrote this post so I have re-written it extensively.  

Progressives are passing around this chart from Brookings as an indicator of "what is wrong" with the US healthcare system.

blog_proton_beam_facilities

This is how Kevin Drum interprets the chart:

In other words, the supposed advantage of PRT—that it targets cancers more precisely and has fewer toxic side effects—doesn't seem to be true. It might be better in certain very specialized cases, but not for garden variety prostate cancer.

And yet, new facilities are being constructed at a breakneck pace. Why? Because if they build them, patients will come. "They're simply done to generate profits," says health care advisor Ezekiel Emanuel. Roger that.

This is an analysis that may be true, but let's take a moment to consider how strange it is.  Forget health care for a minute.  Think about any other industry.  Here is what they are effectively saying:

  1. Industry competitors are making huge investments in a technology that has no consumer value
  2. The competitors in this industry are all making investments in this technology so rapidly that the industry is exponentially over-saturating with capacity.

And from these two facts they conclude that the profits of industry competitors will increase??

Let's for a moment say this is true -- an enormous investment that has no customer utility and that is made by so many players that the market is quickly over-saturated actually increases industry profits.  Let's take a moment to recognize that this is BIZARRE.  We have to be suspicious of some structural issue for something so bizarre to happen.  As is typical of progressives, their diagnosis seems to be that private actors are somehow at fault for being bad people to make these investments.  But these same private actors, even if they wanted to, could never make this work in any other industry, and besides there is no evidence that hospital managers are any worse people than, say, cookie company managers.  The problem is that we have fashioned a bizarre system through heavy government intervention that apparently makes these pointless investments sensible to otherwise rational actors.

One problem is that in any normal industry, consumers would simply refuse to buy, or at least refuse to pay a very high price, for services that have little or no value.  But in health care, we have completely eliminated any consumer visibility to prices.  Worse, we have eliminated any incentive for them to care about prices or really even the utility of a given procedure.  This proton beam thingie might improve my outcomes 1%?   Why not, it's not costing me anything.  Perhaps the biggest problem in health care is that the consumer has no incentive to shop.  Obamacare does nothing to fix this issue, and in fact if anything is taking us further away from consumer shopping and price transparency by working to kill high deductible health insurance and HSA's.

There is only one other industry I can think of where capital investment, even stupid capital investment, automatically translates to more profits, and that is the regulated utility business.  And that is what hospitals have become -- regulated utilities that get nearly automatic returns on investment.

In a truly free market, if these investments made no sense, one would expect very soon a reckoning as those who made these nutty investments go bankrupt.  But they obviously don't expect this.  They expect that even if it turns out to be a bad investment, they will use their political ties to get these costs built into their rate base (essentially built into reimbursement rates).  If any private or public entity refuses to pay, you just run around screaming to the media that they want to deny old people care and let sick people die.  Further, the government can't let large hospitals go bankrupt because it has already artificially limited their supply through certificate of need processes in most parts of the country.

The Left has proposed to fix this by creating the IPAB, a group so divorced from accountability that it can theoretically make unpopular care rationing decisions and survive the political fallout.  But the cost of this approach is enormous, as it essentially creates an un-elected dictatorship for 1/7 of the economy.  Which tends to be awesome if your interests and preferences line up with those of the dictator, but sucks for everyone else.  Which category do you expect to be in?  (Oh, and let's not forget how many examples we have from history of benevolent technocratic dictatorships - zero.)

The much more reasonable solution, of course, is to handle these issues the same way we do in cookies and virtually every other product -- let consumers make price-value tradeoffs with their own money.

Don't Ever Have an Ear Emergency in Phoenix

A couple of weeks ago, I started losing hearing in one ear.  A bit later, it started to hurt.  Suspecting an infection, I called my ENT's office.  They said they couldn't see me for four weeks, and would not let me switch to see anyone else in their 10-person practice (against their practice rules, which raises the question of, from a customer point of view, why there is any benefit to a large practice at all -- the large pool of doctors provides the illusion of more customer service capability but in fact the sole logic of the practice is cost-sharing of overhead and support staff).  So eventually I just went to one of those walk-in urgent care clinics in a strip mall near me and had the GP there look at it.  I found that I did in fact have an infection and got an antibiotic scrip and some drops and was told if it did not get better in 7 days, go see a specialist.

So it has been a week and the pain is mostly gone but I still have lost most of my hearing in the ear.  So I tried to make an appointment at my ENT again -- 4 weeks.  I described my situation, and said something seemed wrong.  4 weeks.

So I talked to two friends who are both semi-retired ENT's.  They said to get my butt to a doctor ASAP because it could be nothing or it could be something really bad that needs immediate intervention.  But no ENT would see me for weeks.  So one of my friends said they would help me, but they needed audiology tests.  Turns out, those are being scheduled 3 weeks out.  I finally called in a favor with a friend of a friend and found someone to test me next Monday, just four days from now.  Four days seems a long wait for something that could be an emergency, but it beats the hell out of 4 weeks.

This is what we have done to the practice of medicine.  With a myriad of professional licensing requirements and regulatory burdens that raise the fixed cost of opening a practice, we have managed to simultaneously raise prices while limiting supply.

Will Health Insurance on Obamacare Exchanges Cost More Than People Are Paying Today?

I am not going to add to the confusion on this.  For a lot of people who already have health insurance, the answer will be "maybe".  Older folks and folks with health problems may see less expensive policies, and younger people will likely pay more.

I do, however, want to add two observations that are often lost in this discussion:

  • For the millions of people who have chosen not to buy health insurance and now will be forced to do so by law, they will certainly be paying more.  Anything is more than the "zero" which has been these peoples' preference to date.
  • A more interesting question is:  what will happen to premiums in the second year.  Right now, insurance companies are pricing as if all these young people who have not been buying policies will be forced to do so by the law (a key, maybe the key, funding source for Obamacare is forcing young healthy people to buy overpriced policies to subsidize older people).  What if they refuse?  After all, the penalties in the first several years are not very severe, and Obamacare removes any risk from not being covered, because if one gets sick he can just run and sign up then, like getting home insurance once your house is on fire.  The prices on the exchanges in 2014 will be very interesting.

Most Unsurprising Headline of the Year

Via the AZ Republic:

The pay gap between the richest 1 percent and the rest of America widened to a record last year.

...

Last year, the incomes of the top 1 percent rose 19.6 percent compared with a 1 percent increase for the remaining 99 percent.

...

But since the recession officially ended in June 2009, the top 1 percent have enjoyed the benefits of rising corporate profits and stock prices: 95 percent of the income gains reported since 2009 have gone to the top 1 percent.

That compares with a 45 percent share for the top 1 percent in the economic expansion of the 1990s and a 65 percent share from the expansion that followed the 2001 recession.

The Federal Reserve is pumping over a half trillion dollars of printed money into inflating a bubble in financial assets (stocks, bonds, real estate, etc).  It should be zero surprise that the rich, who disproportionately get their income and wealth from such financial assets, should benefit the most.   QE is the greatest bit of cronyism the government has yet to invent.

(yes, I understand that there are many reasons for this one-year result, including tax changes that encouraged income to be moved forward into last year and the fact it was a recovery off of a low base.  Never-the-less, despite decades of Progressive derision for "trickle down" economics, this Administration has pursue the theory that creating an asset bubble that makes the rich much richer will in the long term help the economy via the "wealth effect.")

Changing Consumption of Technology

My kids and I were watching Zoolander the other day, and one joke I don't think they fully "got" was the ongoing gag where many of the characters had really tiny cell phones.  The movie, made in 2001, was mocking a trend at the time where people were paying premium prices to get the smallest phone possible.

zoolander

It is amazing how things change.  If you made that movie today, it would likely be written mocking the opposite effect, with people trying to talk on smart phones the size of salad plates.  Here for example is a new 6.3 inch diagonal phone.  Only NBA players who can palm a basketball need apply.

huawei-ascend-mate(image source)

Not to say there is anything illogical about this.  We now read our phone much more than we listen to it.  I am not sure either of my kids has ever made a phone call on their cell phones except to my wife and me.

Prices and Sustainability

I had a discussion with a locavore-type person in Boulder, Colorado last week at their farmers market.    He told me that while his costs to grow his produce were higher than the stuff I might find in Safeway, his products were more sustainable.

I asked him how that could be.  I observed that in a well functioning market, the costs of his inputs should reflect their relative scarcity and the scarcity of the resources that went into them.   Over time, particularly in a commodity market, prices were a sort of amazing scarcity integral.  If his costs were higher, that should mean he is using more or scarcer resources.  Isn't that the opposite of sustainability?

In fact, prices are such an amazing, almost magical, gauge of an item's resource intensity that it should tell us something that folks who purport to care about sustainability tend to have a disdain and distrust for markets and prices.   Sure, I understand certain externalities (CO2, for example, if you accept it as one) are not necessarily priced in, but the mistrust of prices seems to go beyond this.

In this particular case, his argument was the food was local and so used a lot less resources in transportation, and organic, so used less fertilizer and other chemicals.  But this is simply tipping the scales, trying to apply new weights and priorities to certain inputs that simply don't obtain in the real world.  The locavore focus on transportation costs is amazing, as it focuses on just one narrow cost and energy input for food, ignoring the energy of production and the energy to deliver other inputs to the local farm.  Take our situation in Phoenix -- sure, a local farmer used less energy to truck the finished food to market, but how much energy and other resources were used to move the water to grow it hundreds of miles to our desert here?  Or what about land use -- organic local farming may save trucking and chemicals, but what if the yields per acre are a third of what one might get on the best soils in a another part of the country?  Prices take into account the scarcity of not just tranportation fuel but land and labor as well.  Sustainability advocates often want to put their thumb on the scales and overweight just one resource.  That is why, for example, in the name of CO2 reduction we are clearing tons of virgin land, including land in the Amazon, to farm biofuel products.

Health Care Prices Are Not Actually Real Prices

Good stuff from Peter Suderman at Reason

 In March, journalist Steven Brill published a lengthy piece in Time magazine on high medical bills, comparing hospital “chargemaster” rates—the listed prices—to the rates paid by Medicare. And over the weekend, Elisabeth Rosenthal compared U.S. prices for a variety of health services to the lower prices paid by other countries.

Both pieces offer essentially the same thesis: The U.S. spends too much on health care because the prices Americans pay for health care services are too high. And both implicitly nod toward more aggressive regulation of medical prices as a solution.

Part of the reason these pieces get so much attention is that most Americans don’t actually know much of anything at all about the prices they pay for health services. That’s because Americans don’t pay those prices themselves. Instead, they pay subsidized premiums for insurance provided through their employers, or they pay taxes and get Medicare or Medicaid. Even people who purchase unsubsidized insurance on the individual market don’t know much about the particular prices for specific health services. They may open their wallets for copays to health providers, or cover some expenses up to a certain annual amount, but in many if not most cases they are not paying a full, listed price out of pocket.

What that means is that, in an important sense, the “prices” for health care services in America are not really prices at all. A better way to label them might be reimbursements—planned by Medicare bureaucrats and powerful physician advisory groups, negotiated by insurers who keep a watchful eye on the prices that Medicare charges, and only very occasionally paid by individuals, few of whom are shopping based on price and service quality, and a handful of whom are ultra-wealthy foreigners charged fantastic rates because they can afford it.

This is the real problem with health care pricing in the U.S.: not the lack of sufficiently aggressive price controls, but the lack of meaningful price signals.

Much more at the link.  If they really want an interesting comparison, compare the prices of medical care not covered by insurance (actually pre-paid medical plans) in the US, and those that are -- e.g. for plastic surgery vs. other out-patient surgeries.

Health Care and Prices

Kevin Drum is lauding the transparency an Oregon health insurance exchange which was initiated some apparently welcome price competition into a market for now standardized products.  My response was this:

I applaud any effort by this Administration and others to improve the transparency of pricing in the medical field.  I would have more confidence, though, if all of you folks were not pushing for 100% pre-paid medical plans that will essentially eliminate price-shopping by individuals, and in so doing effectively eliminate the enormous utility of prices.  Prices will soon be meaningful for one thing -- insurance -- in the health care field and absolutely meaningless for everything else in the field.

By the way, at the same time you are improving competition on price, you are eliminating by fiat all competition on features (e.g. what is covered, what deductible I want, etc).  This "success" is like the government mandating one single cell phone design, and then crowing how much easier shopping is for consumers because there is now only one choice.  A simple world for consumers is not necessarily a better world.  I am sure Medieval peasants had a very simple shopping experience as well.

Six Years Later, My Question is Answered

You would have to be a Coyote Blog old-timer to remember back in January of 2007 when I asked

Is there any state where a college men's football or basketball coach is not the highest paid state official?

Robert Fischer-Baum, via Ilya Somin, has the answer.  In forty states, the highest paid state employee is a university football or basketball coach.  In all fifty states, the highest paid public employee works for a state university.   Which brings us back to my post earlier today.   Government student loans are to university payrolls as quantitative easing is to stock prices.

The Plan For Universities to Raise Tuition to Infinity

Via the WSJ, President Obama is proposing debt forgiveness for student borrowers

The White House proposes that the government forgive billions of dollars in student debt over the next decade, a plan that cheers student advocates, but critics say it would expand a program that already encourages students to borrow too much and stick taxpayers with the bill.

The proposal, included in President Barack Obama's budget for next year, would increase the number of borrowers eligible for a program known casually as income-based repayment, which aims to help low-income workers stay current on federal student debt.

Borrowers in the program make monthly payments equivalent to 10% of their income after taxes and basic living expenses, regardless of how much they owe. After 20 years of on-time payments—10 years for those who work in public or nonprofit jobs—the balance is forgiven.

Already, it's pretty clear that many students pay little attention to size of the debt they run up.  Easy loans for students have essentially made them less price sensitive, however irrational this may seem (did you make good short - long term trade-offs at the age of 18?)  As a result, tuition has soared, much like home prices did as a result of easy mortgage credit a decade ago.  The irony is that easier student debt is not increasing access to college for the average kid (since tuition is essentially staying abreast of increases in debt availability), but is shifting student's future dollars to university endowments and bloated administrations.  Take any industry that has in the past been accused of preying on the financially unsophisticated by driving them into debt for profit, and universities are fifty times worse.

So of course, the Progressives in the White House and Congress (unsurprisingly Elizabeth Warren has a debt subsidy plan as well) are set to further enable this predatory behavior by universities.  By effectively capping most students' future financial obligations from student debt, this plan would remove the last vestiges of price sensitivity from the college tuition market.  Colleges can now raise tuition to infinity, knowing that the bulk of it will get paid by the taxpayer some time in the future.  Just as the college price bubble looks ready to burst, this is the one thing that could re-inflate it.

Postscript:  By the way, let's look at the numbers.  Let's suppose Mary went to a top college and ran up $225,000 in debt.  She went to work for the government, averaging $50,000 a year (much of her compensation in government is in various benefits that don't count in this calculation).  She has to live in DC, so that's expensive, and pay taxes.  Let's say that she has numbers to prove she only has $20,000 left after essential living expenses.  10% of that for 10 years is $20,000 (or about $13,500 present value at 8%).  So Mary pays less than $20,000 for her education, and the taxpayer pays $205,000.  The university makes a handsome profit - in fact they might have given her financial aid or a lower tuition, but why bother?  Mary doesn't care what her tuition is any more, because she is capped at around $20,000.  The taxpayer is paying the rest and is not involved in the least in choosing the university or setting prices, so why not charge the taxpayer as much as they can?

Postscript #2:  It is hard to figure out exactly what Elizabeth Warren is proposing, as most of her proposal is worded so as to take a potshot at banks rather than actually lay out a student loan plan.  But it appears that she wants to reduce student loan interest rates for one year.  If so, how is this different from teaser rates on credit cards, where folks -- like Elizabeth Warren -- accuse credit card companies of tricking borrowers into debt with low initial, temporary rates.  I  find it  a simply astounding sign of the bizarre times we live in that a leading anti-bank progressive is working on legislative strategies to get 18-year-olds further into debt.

Incredible Level of Cronyism

I am simply amazed at this level of cronyism enjoyed by the sugar industry -- import restrictions on cheaper world sugar, price supports, and government loans that can be paid back with excess product rather than cash.

The U.S. Department of Agriculture is likely to buy sugar in the domestic market this year in order to drive prices up and prevent defaults on loans made to sugar processors, according to a USDA economist.

The USDA estimates it would need to buy 400,000 tons of sugar to boost prices to an “acceptable level,” said Barbara Fecso, an economist at the department. A purchase of 400,000 tons would amount to about 4.4% of projected U.S. sugar production in the marketing year that ends Sept. 30.

Domestic sugar prices have been trading at about 20 cents a pound, their lowest level in nearly four years, putting companies that make sugar from cane or beets at risk of defaulting on loans they received from the USDA when prices were higher.

People talk about these supposed government subsidies for oil companies, but every time I see a list of them they are dominated by things like depletion allowances, FIFO accounting, and investment tax credits, which are either standard accounting rules that apply to all industries or tax credits that apply to all manufacturers.  But Big Sugar gets real heavy-duty subsidies no one, except maybe ethanol companies and other farmers, get.

:( Google Reader to End

Perhaps I am the last one to get the word on this, but I have happily depended on Google Reader for years for my blog and news reading.   Recommendations for an alternative would be greatly appreciated, but I am not optimistic anything will be a good replacement, particularly since I frequently use the simply link in Reader to Gmail to send stories to friends and family.

reader

I blame Twitter.

Update:  As an aside, Google's behavior here seems to be exactly the opposite of the fears people usually have vis a vis monopolies.  Google gained a dominant market share by leveraging off other strong products and under-cutting prices (ie free).  I would be thrilled if they did what monopoly-phobes fear, which is raise prices.   I would happily pay, say, $10 a month to keep the service.  But in fact, Google, having subsidized its way to market leadership, is simply liquidating.

 Update #2:  Lots of alternatives out there.  In the end, this may be a positive since Google Reader had not really innovated much of late.

Prices in Healthcare

Had an interesting discussion with my favorite New England liberal this weekend about the Time Magazine article on Hospital pricing and charges.  We both found the articles to be excellent.  But drew completely different conclusions.  She saw this all as a failure of capitalism, a sign of the inherent corruption that occurs that demands more goverment intervention.  I saw it as a totally screwed up market, from the dominance of third party payers to government-enforced monopolies (e.g. certificates of need), that killed any incentive of consumers to shop. The entire pricing mechanism is broken, and simply replacing it with a set of fiat prices from the government is not going to make things better.

Megan McArdle has a good interview with Bart Wilson on this very topic.  Here is a small excerpt:

Megan: Okay, so let me ask the obvious question: if a whole lot of health care wonks think that government-rate setting would fix health care costs, why should I be skeptical?

Wilson: Who knows the conditions of who values what and the opportunity costs of supplying health care? What set of minds in the government has the knowledge needed to make tradeoffs, to know who is best to supply this service or that one?

The values and costs of healthcare have to be discovered.

Megan: The wonks who favor rate-setting argue that health care simply isn't like any other market. For one thing, there's an information problem: how do I know if I want a heart bypass or not?

Why not let an expert who has read all the studies on heart bypasses make that decision?

Wilson: Right now, the doctor recommends to the patient what the insurance company will pay for. What incentive does the patient have to find alternatives? (None.)

There is the assumption that an expert knows all the alternatives. Doctors are not interchangeable. They know different things.

The function of a market is let us learn who will serve us sufficiently well.

Megan: So let's step back even farther, to 30,000 feet or so, for a second. What does the price do in a market? Why should I want to put a price on my lung transplant?

Wilson: A price is like a symbol at any moment of what millions of people are willing and able to do. All of the technology and services of the doctors have to be weighed against whatever else they could be applied to.

The prices of alternatives to lung transplants are doing the same thing. The difficulty is assuming that a lung transplant is "inelastic". What a price system does is find what part of say, healthcare, is on the margin.

“Inelastic” means that I’m relatively indifferent to the price. The last glass of water in a desert is the quintessential inelastic good; people will pay all they have to get it. Things can be more or less inelastic, which is to say, that demand can be more or less responsive to changes in price. Health care is often thought to be very inelastic.

Megan: But this is precisely the argument that health care wonks make: when I need a lung transplant, I don't have the time, or the emotional ability, to comparison shop. So there's no price discovery mechanism.

Wilson: Does the government know or have the ability to comparison shop for me? Do they know my circumstances?

Also, for some healthcare services, you do have the ability to comparison shop. Those services will then discipline the healthcare market in general.