Posts tagged ‘prices’

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.


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.

Let's Ban Exports of Dow Chemical Products

I have written before that trade policy is generally ALL corporate cronyism -- tariffs or restrictions that benefit a narrow set of producers at the expense of 300 million US consumers.

Mark Perry has yet another example, though with a small twist.  Most corporations are looking for limits on imports of competing products and/or subsidies for their own products exports.  In the case of Dow Chemical, they are looking for limits on exports of key inputs to their plants, specifically oil and natural gas.  CEO Andrew Liveris wants to force an artificial supply glut to drive down his input prices by banning the export (or continuing to ban the export) of natural gas.  If gas producers can't sell their product?  Tough -- let them try to out-crony a massive company like Dow in Washington.

But here is the irony -- there is absolutely nothing in his logic for banning natural gas exports that would not apply equally well to banning the export of his own products.   Like natural gas, his products are all inputs into many other products and manufacturing processes that would all likely benefit from lower prices of Dow's products as Dow would benefit from lower natural gas prices.

So here is my proposal -- any company that publicly advocates for banning exports for its purchases must first have exports of its own products banned.

Where Did the Last Batch Go?

Obama and the Left want a big new infrastructure spending bill, based on twin theories that it would be a) stimulative and b) a bargain, as needed infrastructure could be built more cheaply with construction industry over-capacity.

Since this is exactly the same theory of the stimulus four years ago, it seems a reasonable question to ask:  What happened to the damn money we spent last time?  We were sold a 3/4 of a trillion dollar stimulus on it being mostly infrastructure.  So where is it?  Show us pictures, success stories.  Show us how the cost of construction of these projects were so much lower than expected because of construction industry over-capacity.  Show us the projects selected, to demonstrate how well thought-out the investment prioritization was.  If their arguments today have merit, all these things must be demonstrable from the last infrastructure bill.  So where is the evidence?

Of course, absolutely no one who wants to sell stimulus 2 (or 3?) wants to go down the path of investigating how well stimulus 1 was spent.  Instead, here is the argument presented:

Much of the Republican opposition to infrastructure spending has been rooted in a conviction that all government spending is a boondoggle, taxing hard-working Americans to give benefits to a favored few, and exceeding any reasonable cost estimate in the process. That's always a risk with new spending on infrastructure: that instead of the Hoover Dam and the interstate highway system, you end up with the Bridge to Nowhere and the Big Dig.

In that sense, this is a great test of whether divided democracy can work, and whether Republicans can come to the table to govern. One can easily imagine a deal: Democrats get their new infrastructure spending, and Republicans insist on a structure that requires private sector lenders to be co-investors in any projects, deploying money based on its potential return rather than where the political winds are tilting.

This is bizarre for a number of reasons.  First, he implies the problem is that Republicans are not "coming to the table to govern"  In essence  then, it is up to those who criticize government incremental infrastructure spending (with a lot of good evidence for believing so) as wasteful to come up with a solution.  Huh?

Second, he talks about requiring private lenders to be co-investors in the project.  This is a Trojan horse.   Absurd projects like California High Speed Rail are sold based on the myth that private investors will step in along side the government.  When they don't, because the project is stupid, the government claims to be in too deep already and that it must complete it with all public funds.

Third, to the extent that the government can sweeten the deal sufficiently to make private investors happy, the danger of Cronyism looms large.  You get the government pouring money into windmills, for example, that benefits private investors with a sliver of equity and large manufacturers like GE, who practically have a hotline to the folks who run programs like this.

Fourth, almost all of these projects are sure to be local in impact - ie a bridge that helps New Orleans or a street paving project that aids Los Angeles.  So why are the Feds doing this at all?  If the prices are so cheap out there, and the need for these improvements so pressing, then surely it makes more sense to do them locally.  After all, the need for them, the cost they impose, and the condition of the local construction market are all more obvious locally than back in DC.  Further, the accountability for money spent at the Federal level is terrible.  There are probably countless projects I should be pissed off about having my tax money fund, but since I don't see them every day, I don't scream.  The most accountability exists for local money spent on local projects.

Obamacare Lowest Cost Health Plan at $20,000 per Year?

CNS News reported, and no one in the Obama Administration seems to be denying, that the IRS is assuming the cheapest conforming health insurance policy for a family of four under Obamacare will cost $20,000 per year

The IRS's assumption that the cheapest plan for a family will cost $20,000 per year is found in examples the IRS gives to help people understand how to calculate the penalty they will need to pay the government if they do not buy a mandated health plan.

The examples point to families of four and families of five, both of which the IRS expects in its assumptions to pay a minimum of $20,000 per year for a bronze plan.

“The annual national average bronze plan premium for a family of 5 (2 adults, 3 children) is $20,000,” the regulation says.

Bronze will be the lowest tier health-insurance plan available under Obamacare--after Silver, Gold, and Platinum.

Kevin Drum shot back, saying that Conservatives were essentially out of touch for thinking that health insurance currently, or could ever conceivably, cost much less

So is this unusual? Not really. The average cost of healthcare coverage for a family is currently about $16,000,and by 2015 (the base year for the IRS examples) that will probably be around $18,000 or so. And that's for employer-sponsored plans. Individual plans are generally steeper, so $20,000 isn't a bad guess. It might be a little high, but not by much. And the family in question will, of course, be eligible for generous subsidies that bring this cost down substantially, thanks to the Affordable Care Act. They won't actually pay $20,000 per year.

(We'll ignore that last part as typical Progressive double think -- as long as the government is paying, the costs don't count.  It's like being free!)

I can't believe that Drum has actually shopped for health insurance of late.  The link he relies on for his data is for employer plans only, and Drum makes the unproven assumption that these are somehow less costly than individual plans people have to actually shop for. This is false.  Employer plan averages include a lot of gold-plated policies in the mix driven by noncompetitive union contracts and executives wanting gold-plated plans for themselves at the expense of shareholders.   I would argue that Drum is comparing "platinum" plans today to "bronze" plans under Obamacare, and it should be disturbing that even with this bit of judo, bronze Obamacare plans come out 20%+ more expensive than gold-plated current corporate plans.

But there is an even easier way to solve this, one Drum (who is nominally a "journalist") could solve with a few phone calls or clicks on Internet sites:  we can get some quotes.  Being a blogger with a real job, I do not have time to do this, but fortunately I don't have to because I just did this a few months ago for my family.  Here are a few quotes for a family of four with two 50+ old adults in pretty good health and two teenage kids from Blue Cross - Blue Shield of Arizona:

BlueOptimum- Plus $5000 deductible - $615.45 per mo., 7,385.40 per year>

BluePortfolio-Plus $3000 deductible - $703.80 per mo., 8,445.60 per year  (HSA eligeable)

BluePorfolio-Plus $5500 deductible - $499.75 per mo., 5,997.00 per year  (HSA eligeable)

Note first that these high deductible and HSA policies are ILLEGAL under Obamacare, in large part because they are actual insurance and Progressives don't mean "insurance" when they say "health insurance", they mean fully pre-paid all-encompassing medical care.  I consider the purpose of insurance to be to protect from catastrophes that you can't afford (e.g. your house burns down).  In the case of medical care, I thought about from my financial position, and determined what the largest financial setback I could bear in a year if someone really had a medical problem.  So I set my deductible at that number, and made sure I bought a policy that paid everything else above that reliably, without any low lifetime or maximum payment numbers.

The Blue Optimum above is a fairly standard co-pay plan that covers most doctor visits and drugs with only a copay.  The Blue Portfolio are HSA plans that are pure insurance.  I pay everything (except certain preventative care costs) up to the deductible, and they pay everything else above that.  In this case, note that the deductible is per person but there is a total family/policy deductible of twice that.  In other words, with the second policy, even if everyone in my family gets cancer in the same year, we aren't out of pocket more than $6,000.  So, for this middle policy, in typical years we spend $8,445.60 plus, say, another $1000 on miscellaneous stuff for a total health cost of $9,445.60.  Or half the Obamacare "bronze" or cheapest possible plan.  In the worst possible year, if two family members get very sick in the same year (not a hugely likely event) we are out $14,445.60 per year.  This is the worst case.  Still 28% lower than the cheapest Obamacare option.

In this plan, I am allowed under the HSA provision to bank about $5,000 a year in a pre-tax account.  I can use this money to pay medical bills up to the deductible, or save it.  If money is left over some day, it becomes a retirement account and I can use the money for retirement.  So I have the financial incentive to shop around for best prices, because the residual in the HSA is mine to spend on .... whatever.   I have told the stories a number of times here about my medical shopping experience.  X-rays that were charged to insurance companies for $250 suddenly cost $45 when I said I was paying cash.  My wife got a 70% cost reduction the other day on orthodic shoes when she offered to pay cash rather than put her insurance in play.  So, not only will Obamacare raise the prices of my insurance substantially, it will also raise medical costs in general by stripping away the last incentives for anyone to price-shop for health care.

When I read my Bastiat, I am always reminded how humans tend to insist on adopting the same myths and fallacies about the economy.  The myths he busts in the 19th century can be seen on the pages of our newspapers every day of the 21st century.   But one unique idea we have spawned since Bastiat is this bizarre notion that somehow it is wrong to pay for ones own medical expenses out of pocket.  It took forever to convince even my very smart HBS-educated wife that it was a much better deal to go to a high-deductible health plan.  Since we did so, we have saved a ton of money, and by the way done our small bit to keep prices down for the rest of you by actually shopping for things like x-rays (you can thank me later).  I don't know why this fallacy is so entrenched and hard to change, but we have built the entire edifice of Obamacare on top of it.

Anti-Trust Law and the Corporate State

Kevin Drum is uncomfortable that Google got off the hook on anti-trust charges merely because it was not harming consumers

Google made a number of arguments in its own defense, and consumer welfare was only one of them. Still, it was almost certainly the main reason they won, and it's still not clear to me that this is really what's best for consumers in the long run. Did Google users click on the products they highlighted? Sure. Did they buy some of the stuff? Sure. Were they happy with their purchases? Sure. Is that, ipso facto, evidence that there's no long-run harm from a single company dominating the entire search space? I doubt it. After all, John D. Rockefeller could have argued that consumers bought his oil and were pretty happy with it, so what was the harm in his controlling the entire market?

The tech industry moves fast enough that antitrust might genuinely not be a big issue there. In the end, it wasn't antitrust that hurt IBM and Microsoft. It was the fact that the industry moved rapidly toward smaller computers and then the internet, and neither company was really able to react fast enough to dominate these new spaces. Nonetheless, I'm skeptical of the tautology at the heart of the consumer welfare argument. If a company is successful, then by definition people must be buying its stuff. On this basis, bigness is simply unassailable anymore. That has broad societal implications that I suspect we're not taking seriously enough.

He seems to be arguing that we consider returning to a pure bigness standard without reference to consumer harm.  I am not sure that we ever followed such a standard, but certainly today the alternative to a consumer harm standard is not a bigness standard but a competitor harm standard.  Whether he knows it or now, this is essentially what Drum is advocating.  We see this in the article he quotes:

But while the F.T.C. said that Google’s actions might have hurt individual competitors, over all it found that the search engine helped consumers, as evidenced by Google users’ clicking on the products that Google highlighted and competing search engines’ adopting similar approaches.

I am not sure what Drum really wants, but the result of eliminating the consumer-harm standard would be an environment where every failed company can haul its more successful competitors in front of the government and then duke it out based on relative political pull rather than product quality.  It is pretty well understood out there that this anti-Google FTC claim was initiated and championed by Microsoft, certainly not among the powerless typically championed by progressives, and a company well known to have missed the boat on Internet search and which is apparently trying to do now through government fiat what it has not been able to do in the marketplace.  Microsoft learned this technique from Sun and Oracle, which took Microsoft to the FTC in the famous browser case where Microsoft faced years of anti-trust scrutiny for the crime of giving the public a free product.

Already, anti-trust law is an important tool of the corporate state, to allow politically powerful companies to squash competition from those who invested less money in their Washington office.  I am not a legal expert at all, but this consumer standard in anti-trust strikes me as a critical shield stopping a hell of a lot more abuse of anti-trust law.

By the way, there is a modern bigness problem with corporations that is very troubling -- we have made government tremendously powerful, giving it many tools to arbitrarily choose winners and losers without any reference to justice or rights.  As private entities get larger and richer, they are better able to access and wield this power in their own favor.  The libertarian solution is to reduce the government's power to pick winners and losers.  The progressive answer is to regulate business more with tools like anti-trust.

But the progressive solution has a built-in contradiction, which why Drum probably does not suggest a solution.  Because the very tools progressives suggest to regulate business typically become the tools with which politically connected corporations further tilt the game in their own favor.  Anti-trust is a great example.  We want to reduce the number of large companies with an eye to reducing corporatism and cronyism, but the very tool to do so -- anti-trust law -- has become one the corporate crony's best tools for stepping on competitors and insulating their own market positions.

And by the way, Rockefeller's Standard Oil did a HELL of a job for consumers.  It was nominally punished for what it might some day hypothetically do to consumers.

Here are the facts, via Reason

Standard Oil began in 1870, when kerosene cost 30 cents a gallon. By 1897, Rockefeller's scientists and managers had driven the price to under 6 cents per gallon, and many of his less-efficient competitors were out of business--including companies whose inferior grades of kerosene were prone to explosion and whose dangerous wares had depressed the demand for the product. Standard Oil did the same for petroleum: In a single decade, from 1880 to 1890, Rockefeller's consolidations helped drive petroleum prices down 61 percent while increasing output 393 percent.

By the way, Greenpeace should have a picture of John D. Rockefeller on the wall of every office.  Rockefeller, by driving down the cost of kerosene as an illuminant, did more than any other person in the history to save the whales.  By making kerosene cheap, people were willing to give up whale oil, dealing a mortal blow to the whaling industry (perhaps just in time for the Sperm Whale).

So Rockefeller grew because he had the lowest cost position in the industry, and was able to offer the lowest prices, and the country was hurt, how?  Sure, he drove competitors out of business at times through harsh tactics, but most of these folks were big boys who knew the rules and engaged in most of the same practices.  In fact, Rockefeller seldom ran competitors entirely out of business but rather put pressure on them until they sold out, usually on very fair terms.

From "Money, Greed, and Risk," author Charles Morris

An extraordinary combination of piratical entrepreneur and steady-handed corporate administrator, he achieved dominance primarily by being more farsighted, more technologically advanced, more ruthlessly focused on costs and efficiency than anyone else. When Rockefeller was consolidating the refining industry in the 1870s, for example, he simply invited competitors to his office and showed them his books. One refiner - who quickly sold out on favorable terms - was 'astounded' that Rockefeller could profitably sell kerosene at a price far below his own cost of production.

Corporate DNA

Almost exactly seven years ago (amazing how long I have been blogging) I wrote an extended piece about how hard it is to change corporate DNA.  I was writing about GM but also used Wal-Mart as an example.  Part of this piece read:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart.  Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

Megan McArdle makes some very similar points as I about Wal-Mart and how hard it is to change corporate DNA.  I recommend you read the whole thing.

CFL Bulbs Suck. However, I Like LED's

A number of years ago, there was a push by many Leftish technocrats for the government to mandate a standardized cell phone power cord.  Beyond demonstrating that there is no personal irritation too trivial for some to demand government action, this would have been an awful idea.  Why?  Because when these demands for action came, cell phone power cords were just that, power.  If a standard cord had been mandated, then current designs that use a USB connection for both data and power would have been illegal, at least without the vendor also putting in a connection for the government standard connector as well.  There is always danger to the government setting arbitrary standards, but these dangers are an order of magnitude higher when the technology is still in flux.

So enter light bulbs.  The government has decided to ban incandescent light bulbs and while not mandating them, it has actively encouraged people to purchase expensive CFL bulbs.  The only problem is that CFL bulbs suck.  The light from them has bad color qualities, many take a long time to warm up, they are hard to dim, and they contain toxic substances.  They also have nothing like the multi-year life we are promised.  I have tried CFL bulbs of many, many brands and none have consistently achieved their promised life.

But as much as I hate CFL's, I am coming to love LED-based lights.  LED lights use even less energy than CFL's and last a really long time.  The technology allows for color tweaking better than CFL's, and already the warm white LED's I am buying (color temperatures around 2900K) are better to my eye than CFL's, and there is no fast-flicker problem that gives some people headaches.  Dimable versions are coming out, and prices are dropping but they are still expensive.   About half my house is LED now, and I am told that landscape lighting is quickly going all LED.

The main cost to LED's is that they all have to have a transformer.  LED's run at low voltages, like 5v, so house current has to be stepped down at every bulb.  LED's in theory should run cool and be cheap, but they are expensive and run hot because of the transformers.

Which leads me to wonder whether we may start wiring houses for 12v in parallel to 110v.  When I grew up, nearly everything I plugged into the wall -- lights, motors, appliances -- ran on 110V.  Now, most everything (other than appliances) that I plug in the wall actually needs 5-12v  (computers, cell phones, all my audio equipment except big amps).  I don't know enough about power lines to know if this is feasible.  I am pretty sure the resistance losses for 12V DC would be too high, so it would have to be 12V AC, but a diode bridge and some capacitors is a hell of a lot smaller and cheaper than a full blown transformer.  I know my landscape lighting has long runs of 12V, that seems to work OK.  It is also a hell of a lot safer to work with.

Cronyism and Corporate Welfare, in Hawaii

I don't know if its the distance from the Mainland or something about its history, but Hawaii often appears to be among the worst states for regulatory capture by local businesses.  This example was brought to me by a co-worker, who lives in AZ but wants to buy a condo in Hawaii.  They want the condo for their own use, but also hope to rent it out.  This kind of model is more appealing nowadays given the ease (and low cost) with which one can advertise rentals on various Internet sites.

But not so fast, not in Hawaii.  In legislation that reminds be of stuff from the 1990's when businesses tried to fight Internet-driven disintermediation, Hawaii is proposing to force non-Hawaiians to use a local broker to list their rental properties.  Apparently local residents can still list their properties on low-cost Internet sites, but folks on the mainland (also known as "the United States") must use a high-cost locally licensed broker, who typically charge 50% of rental fees as a commission.  These type of commission rates are farcical - they imply that fully half the value of a one-week condominium stay is due to the broker, not the condo itself, its location, etc.  The only way brokers can charge these fees is by maintaining a tight cartel enforced by government licensing laws.

Any reasonable person will look at this law and immediately know it is about crony protection of local real estate brokers.  Of course, that is not what the law says.  It is all about "consumer protection"

The legislature also finds that requiring nonresident owners to employ a licensed professional such as a real estate broker or salesperson or a condominium hotel operator is an important consumer protection measure. Consumers who use real estate companies, real estate brokers, real estate salespersons, or condominium hotel operators for their transient accommodation rental needs can do so with the knowledge that all money generated will flow through a client trust account, the appropriate federal tax form 990s will be generated, and accurate transient accommodations taxes and general excise taxes will be paid. Real estate companies, real estate brokers, real estate salespersons, and condominium hotel operators must comply with specific licensing and bonding requirements, thus offering additional protections for consumers.

So consumer protection is defined as making sure taxes get paid and the government forms get filled out.  Because God knows my entire vacation would be ruined if Federal tax form 990 was not filled out properly.

This is total BS, and Milton Friedman called it years ago when he wrote on licensing:

The justification offered is always the same: to protect the consumer. However, the reason is demonstrated by observing who lobbies at the state legislature for the imposition or strengthening of licensure. The lobbyists are invariably representatives of the occupation in question rather than of the customers. True enough, plumbers presumably know better than anyone else what their customers need to be protected against. However, it is hard to regard altruistic concern for their customers as the primary motive behind their determined efforts to get legal power to decide who may be a plumber.

This is also a great example of voters agreeing to add costs on everyone but themselves.  If the almost inevitable Constitutional concerns with this law forced in-state and out-of-state condo owners to be treated equally, local owners would immediately push back, hard, against the costs this law would impose.  Only  by structuring this law to apply to those annoying out-of-staters could it ever be passed.

I have been considering taking advantage of low prices in Hawaii to buy a condo, but I may rethink that plan given this pending legislation.

Why Re-importation Won't Lower Prices

Just the other day I was making the point that reimporting pharmaceuticals from other countries where they are sold cheaper is not any sort of long-term solution to bringing down US drug costs.  Sure, it's frustrating that the US pays almost all of the fixed cost of drug development while other countries get these drugs closer to marginal cost.  But there is no solution to this that has everyone paying marginal cost -- unless, that is, we are willing to give up on all future drug development by sending the signal that these costs can no longer be recovered in market pricing.   All drug reimportation will do is raise the overseas cost of pharmaceuticals and hurt millions of poorer people.

I always find it ironic that drug reimportation is a favorite solution of many liberals, who are absolutely offended at paying higher costs in the US than what is paid in other countries.  Well, welcome to being rich.  You may think you are safely not-rich when you are advocating various soak-the-rich tax policies, but on an international scale, even many of America's bottom quartile would be considered well-off in poorer nations.  Compared to the US, even countries like France are substantially less wealthy.

Anyway, this was all brought to mind by this useful analysis of re-importation by Megan McArdle, though in this case it is in the context of textbook prices.

How Government Interventions Affect Health Care Supply and Demand

My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples.  Here is one for health care.  The question at hand:  Does government regulation including Obamacare increase access to health care?  Certainly it increases access to health care insurance, but does it increase access to actual doctors?   We will look at three major interventions.

The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors.  At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.

I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.

The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance.  These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go.  The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).

The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation

As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls.  Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more.  This leads to huge doctor shortages, queues, waiting lists, etc.  Exactly what we see in other state-run health care systems,  The graph below posits a price cap that forces prices back to the free market rate.

So, is this better access to health care?

I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right.  Since this has pretty much never happened in the whole history of government operations, I discount the claim.  When pressed for specifics, the ideas typically boil down to price or demand controls.  Price controls we discussed.  Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."

Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs.  But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions.  The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups.  In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.

My longer series of three Forbes articles on this and other economic issues with Obamacare begin here:  Part 1 Information, Part 2 Incentives, Part 3 Rent-Seeking

Update:  Pondering on this, it may be that professional licensing also makes the supply curve steeper.  It depends on how doctors think about sunk cost.

2012 Drought in Perspective

I don't know if this is a result of the severity of the drought being overblown or of the continued improvement of farming technology, or a bit of both.   Here is the recent data on 2012:

"As anticipated, lower projected production for both corn and soybeans was reported this month," said AFBF economist Todd Davis. "It will be some time before the long-term effects of the 2012 drought are fully played out. But it appears likely that continued strong worldwide demand for corn and soybeans will lead to higher projected prices."

USDA forecast corn production at 10.7 billion bushels. The average yield for corn was forecast at 122.8 bushels per acre this year, down slightly from the August prediction. Once harvest is complete, if the average corn yield comes in at 122.8 bushels per acre, it would be the smallest average yield since 2003.

I am glad I don't deal day to day with grain yield numbers, because every source I checked seems to be 3-5% off the other sources for historic numbers.  There must be some definitional issues I don't understand with acres vs. net acres.  But taking 2012 equal to to 2003, which is the worst-case way to interpret the above statement, we get this chart:

So, down 15-20% from the last several years, which is not good, but a number that still would be nearly an all-time high until about 2000.  Even at this lower number, US yields will be more than twice the corn yield per acre in the rest of the world.   Disasters are relative, I suppose, but this is a long way from the 1930's.

The Medicare Problem -- A Reminder

There is no free lunch.

As I have written before, the problem with Social Security is not a mismatch of taxes and benefits - it's simply that 40 years of Congresses have spent the premiums, and now they no longer exist to pay benefits.

The problem with Medicare is actually more difficult.  By these numbers, Medicare taxes are not even a third of what they need to be to pay for actual benefits.  There are only two solutions that don't involve running up Federal debt:  1)  Triple Medicare taxes.  or 2) Cut back benefits and/or eligibility by 2/3.

Interestingly, neither party is suggesting either of these solutions, which makes all the light and noise from the Conventions totally meaningless on this issue.  The Left's notion that cost control will close the gap is sheer fantasy -- already Medicare is getting an effective cross-subsidy from non-Medicare customers and price controls have gone about as far as they can.  In fact, the cost mismatch above is understated as many Medicare costs (e.g. buildings, revenue collection) are actually not charged to the program but to other agencies.  The Right's pitch that small cuts around the edges that Grandma won't notice at all will balance the budget are equally a fantasy.

Believe it or not, I have come around to the solution that we need to raise the Medicare tax.  I would like to privatize the whole thing, and in particular see a reintroduction of individual shopping and out-of-pocket expenditure to the system.  But in the interim we have to acknowledge that there is no way substantial changes to Medicare benefits or delivery is going to happen.  The program remains incredibly popular, though one reason for this is that it is priced wrong.  I am sure Aston-Martin sports cars would be staggeringly popular if sold for a third of their true cost.  In my mind, there is nothing more dangerous to an economy than an artificially incorrect price, and Medicare prices are WAY off.  We need to raise taxes to match the current benefits package, and THEN let's talk about reforming the program.

Rising Health Care Costs are No Mystery

Over the last 50 years, real per capital health care spending has increased substantially.   Certainly there are multiple reasons for this, but the most obvious one is seldom ever mentioned -- that the US has seen huge increases in personal wealth over this period, and unsurprisingly people choose to spend a lot of this extra wealth on their own health and life expectancy.  In an age where consumerism is often derided as shallow and trivial, what could be more sensible than spending money on more and better life?

Many have pointed to the increased technological intensity of health care to explain rising costs.  I suppose this could be true, though in almost every other industry in modern times, increased technological intensity has reduced rather than increased costs.

One issue that does not get enough attention is the prosaic act of shopping.   I spend my own money, and I care about price.  I spend someone else's money, I don't give a rip.  Josh Cothran did a visualization of who is spending health care money.  Just look at the 1960 and 2012 charts, and pay particular attention to the orange "out-of-pocket" number.  Another way to rewrite these charts is to say consumers care about prices for spending in the orange band only.

Update:  Health care cost inflation.  Note cosmetic surgery, a field with significant increases in technological intensity over the last few decades, but for which almost all costs are out-of-pocket



Striking a Blow Against the State

Fortunately I am not vain, so that I can still post this terrible picture of myself.  I am proudly holding the government-mandated flow restrictor I just removed from my most recent shower head purchase.  I don't buy any shower head until I make sure it has a removable restrictor.


The Federal laws restricting shower head flows have got to be among the dumbest on the books.  Some thoughts:

  • Water is not equally scarce everywhere.  So why is everyone required to conserve?  Why is the ideal flow rate the same in Seattle as in Phoenix?
  • Government policy for over a century has been to promote subsidized water prices that don't reflect its true scarcity (particularly to farmers).  Then, having guaranteed overuse via its pricing actions, the government then implements silly laws like this to try to offset the harm from its meddling in prices.
  • We have a lawn in Phoenix that needs constant watering and a pool that evaporates so fast in the summer one can almost see the water level dropping.  But the state's priority is to knock of a few gallons of water use from my shower.
  • With the low flow shower heads, it takes me three times longer to get the soap and shampoo off of me than with a full-flow head.  So we cut the water rate by half, but extend shower times by three.  And this helps, how?  And don't even get me started on low-flow toilets
  • The last three hotel rooms I have stayed in have had double shower heads, to make up the lost flow from wimpy government-approved single heads.  This process of cutting back on how much a single head can flow and then adding extra heads is incredibly dumb and wasteful.
  • I suspect this is all secret revenge from some English expat that wanted US showers to be as bad as those in Britain.

A Sure Sign A Country Is Headed for a Crash

...when they ban short-selling.  As a response to economic problems, banning short selling is roughly equivalent to banning criticism of the government during a political crisis.  Or perhaps more accurately, its like trying to improve poll results by not polling people with negative opinions.   Short-selling has utility for the actual traders involved because it helps them achieve whatever financial or risk-management goals they might have.  Short-selling has utility for the rest of us because it allows the full range of opinions to be expressed about the value of a particular company or asset.  Nothing in a market economy is worse than having prices that have no meaning.

What is a Green Job?

Turns out the guy who gasses up a school bus has a green job.

When Bureau of Labor Statistics Acting Commissioner John Galvin balked on what qualifies as a green job under the agency definition, Issa responded, “Just answer the question.”

“Does someone who sweeps the floor at a company that makes solar panels -- is that a green job?” Issa asked.

“Yes,” replied Galvin, who also acknowledged that a bike-repair shop clerk, a hybrid-bus driver, any school bus driver and “the guy who puts gas in a school bus” are all defined as green jobs.

He also acknowledged that an oil lobbyist, if his work is related to environmental issues, would also have a green job.

It gets better.  Apparently, when I worked at the Exxon refinery in Baytown, TX, I had a green job:

The Bureau of Labor Statistics states a green job is either: a business that produces goods or provide services that benefit the environment or conserve natural resources, or a job in which a worker's duties involve making their establishment's production processes more environmentally friendly or use fewer natural resources

I have never encountered an industrial engineering job anywhere that was not concerned with having their processes use fewer natural resources.

I would argue the greenest of jobs are held by oil and other commodity speculators and traders.  They ensure that prices at all times accurately match our current understanding of the scarcity of each resource.  Without these accurate pricing signals, all efforts to properly invest to use more or fewer of these materials would be impossible.  Just look at the "success" of investments like Solyndra that were made irregardless of these market pricing signals.

Current Oil Boom Only A Surprise to Those Who Don't Understand Markets

There is nothing surprising or unpredictable about the current oil boom, except perhaps how far it has gotten in the face of an Administration that has done virtually everything it can to stop it  (thank god there is oil and gas under private land).  Your humble scribe, neither an economist nor an expert in oil markets, wrote way back in 2005:

Everything old is new again.  Back in the late 70′s, all the talk was about the world running out of oil.  Everywhere you looked, "experts" were predicting that we would run out of oil.  Many had us running out of oil in 1985, while the most optimistic didn’t have us running out of oil until the turn of the century.  Prices at the time had spiked to about $65 a barrel (in 2004 dollars), about where they are today.  Of course, it turned out that the laws of supply and demand had not been repealed, and after Reagan removed oil price controls and goofy laws like the windfall profits tax, demand and supply came back in balance, and prices actually returned to their historical norms....

 Supply and demand work to close resource gaps.  In fact, it has never not worked.  The Cassandras of the world have predicted over the centuries that we would run out of thousands of different things.  Everything from farmland to wood to tungsten have at one time or another been close to exhaustion.  And you know what, these soothsayers of doom are 0-for-4153 in their predictions. ...

The vagaries of reserve accounting are very difficult for outsiders to understand.  I am not an expert, but one thing I have come to understand is that reserve numbers are not like measuring the water level in a tank.  There is a lot more oil in the ground than can ever be recovered, and just what percentage can be recovered depends on how much you are willing to do (and spend) to get it out.  Some oil will come out under its own pressure.  The next bit has to be pumped out.  The next bit has to be forced out with water injection.  The next bit may come out with steam or CO2 flooding.  In other words, how much oil you think will be recoverable from a field, ie the reserves, depends on how much you are willing to invest, which in turn depends on prices.  Over time, you will find that certain fields will have very different reserves numbers at $70 barrel oil than at $25....

All the oil doomsayers tend to define the problem as follows:  Oil production from current fields using current methods and technologies will peak soon.  Well, OK, but that sure defines the problem kind of narrowly.  The last time oil prices were at this level ($65 in 2004 dollars), most of the oil companies and any number of startups were gearing up to start production in a variety of new technologies.  I know that when I was working for Exxon in the early 80′s, they had a huge project in the works for recovering oil from oil shales and sands.  Once prices when back in the tank, these projects were mothballed, but there is no reason why they won’t get restarted if oil prices stay high.

Postscript:  I really need to find new topics to blog about.  The adjacent article in 2005 included this, a frequent topic on this site.  I had not idea I was writing about this so long ago:

When health care is paid for by public funds, politicians only need to argue that some behavior affects health, and therefore increases the state’s health care costs, to justify regulating the crap out of that behavior.  Already, states have essentially nationalized the cigarette industry based on this argument.

Only One Reason To Do This

There is only one reason to be concerned that fundraiser attendees might record the session -- because one knows the candidate is giving tailored and mutually contradictory messages to different groups.   Obama has a different speech, I suppose, for the 1% than he does for the 99%.   Which is no big surprise, since it is a practice as old as modern campaigning* and one I am sure both parties engage in.  But it is probably a larger issue for Obama -- when so much of a politician's campaign style rests on demonizing certain groups, groups that are also large campaign contributors, it must be a tricky business tailoring his message.


* footnote:  I leave this in a footnote because I don't want to be seen as breaking Godwin's law by bringing up the Nazis, but its almost impossible to talk about modern campaigning techniques in the age of mass media without mentioning them.  They pioneered many of the techniques used by about everyone nowadays.  One thing they did was to create focused messages for different groups -- tailors or farmers or city people or industrial workers or Catholics or whoever.  They were incredibly cynical in how they did this, even by modern standards, and didn't really care what the message was, and so ended up with wildly contradictory promises, e.g. promising farmers higher prices for their produce and promising urban laborers lower food prices.

We Changed Our Mind. Please Go Smoke

Most of you likely remember the state settlements with tobacco companies.  The settlements were set up to pay states a percentage of future tobacco company earnings and sales.  But just like a profligate homeowner borrowing against his paper equity in his home after housing prices increased, governments wanted to spend the money NOW, not over 20 years.  So they borrowed against future settlement payments.  Except that now, given lower smoking rates (incentives work) the settlement payments are less than they were forecast, and states must find a way to make up the difference and pay their creditors.

The tobacco settlement has created funky incentives for state governments form the very beginning.  Formerly adversaries, the settlement effectively made large tobacco companies partners with state governments, and states have had substantial incentives to promote the business of large tobacco companies and sit on their rivals

Big tobacco was supposed to come under harsh punishment for decades of deception when it acceded to a tort settlement seven years ago. Philip Morris, R.J.Reynolds, Lorillard and Brown & Williamson agreed to pay 46 states $206 billion over 25 years. This was their punishment for burying evidence of cigarettes' health risks.

But the much-maligned tobacco giants have subtly and shrewdly turned their penance into a windfall. Using that tort settlement, the big brands have hampered tiny cut-rate rivals and raised prices with near impunity. Since the case was settled, the big four have nearly doubled wholesale cigarette prices from a national average of $1.25 a pack (not counting excise taxes) in 1998 to $2.10 now. And they have a potent partner in this scheme: state governments, which have become addicted to tort-settlement payments, now running at $6 billion a year. A key feature of the Big Tobacco-and-state-government cartel: rules that levy tort-settlement costs on upstart cigarette companies, companies that were not even in existence when the tort was being committed.

I commented here:

The government has found over time that it is able to sell higher taxes to the voters on certain items if they can portray those items as representing some socially unwanted behavior. These are often called "sin" taxes. The justification for the tax in its beginning is as much about behavior control as revenue generation.  Taxes on cigarettes, alcoholic beverages and even gasoline and plastic grocery bags have all been justified in part by the logic that higher taxes will reduce consumption.

However, a funny thing happens on the way to the treasury.  Over time, government becomes dependent on the revenue from these taxes.  The government begins to suffer when the taxes have their original effect — ie reducing consumption — because then tax revenues drop.  The government ultimately finds itself in the odd position of resisting consumption drops or restructuring the tax so it no longer incentivizes reduced consumption so that it can protect its tax revenue collections.

Oh My God, It's The Speculators

Hey, Obama Administration!  The evil speculators are moving oil prices again.  Time to get after them.  Hello?  Anyone there?  Where did everyone go?