Category Archives: Insurance

Free Market Gun Control?

In the wake of the horrific Oregon shooting a few weeks ago each side in the pro-gun/anti-gun debate engaged in a kind of holiday-esque ritual: unbox one’s standard talking points, adorn social media and the press with said arguments for a week or two, and then when the furor has died down quietly pack them back up for the next gun-related incident. The problem with the standard talking points is that although they may resonate with the owner, they do little to sway the opinion of the opposing side. They have become stale and useless.

Government prohibitions of market transactions do nothing to eliminate those transactions. Prohibition raises their costs and consequently the profit potential. This induces more, not fewer, people to ply that trade. Decentralized markets are the most efficient means of delivering to people the goods and services they want. People do not want themselves or anyone else to die a violent death. Let’s see if the market can provide this good. Since it is the left’s position that our government has been ineffective at stopping gun violence and it is the right’s position that the government has no business stopping gun violence, then let’s just pretend for a moment there is no government at all. How could this problem be solved absent any sort of bully running around threatening and intimidating people? Insurance. Yes, that’s right, insurance. Insurance companies are in the business of providing financial protection for unforeseen events. Consequently insurance companies are in the business of mitigating risk. If someone owns (or rents) a home they will, if they are smart, carry a liability policy. This protects the policy owner from financial ruin if they are found guilty of causing some sort of harm to another. In order to minimize such claims involving guns each insurance agency could impose their own (varying) set of regulations on gun ownership for their policyholders. Depending on the level of policy owner regulation some insurers would see more losses related to gun incidents and some fewer. Those that had fewer would find their policies and regulations being copied. The market would soon converge on the most efficient and set of regulations that allow people to own guns while still preventing gun related incidents.

A decentralized system is superior to any one-size-fits-all top down approach because it is self-regulating through an alignment of incentives. In other words it is a “carrot” and not a “stick” approach. Gun owners don’t want to be sued into poverty if despite their best efforts something unexpected happens. Insurers prefer fewer claims over more, so they will make sure their policy owners do indeed make good on those best efforts.

Would this system have prevented Sandy Hook or the Oregon shooting? Maybe, maybe not. Since both shooters got their guns from relatives perhaps those relatives would not have be able to afford the higher premiums (due to other risk factors), or perhaps they would have been compelled to have kept the guns better secured, or perhaps other policy rules would have given them second thoughts about allowing others to access to their guns. We can’t know for certain what might have happened, but the point is that there are at least several possible barriers under this system. Not a single “sensible” new law would have imposed the tiniest of impediment had they been in place prior to those incidents.

So at this point the obvious question might be, “We have insurance today, why don’t insurance companies enact these sort of regulations today?” That is actually such a good question that rather than speculate I called my insurance agent at State Farm and asked him. The reason is simple: gun related incidents not involving an actual criminal (i.e. criminals shooting other criminals) are so few in number they can’t actuarially determine the risk level for them. It’s like trying to calculate the risk of blindness caused by a snowflake injury.

Despite media hype to the contrary, these events, as horrific as they are, are so few and far between that we each have a better chance of being struck by lightning than becoming a shooting victim. Other inanimate objects controlled or used by humans cause far more harm than guns each year (cars, pools, trampolines, etc.)  and yet there is no call to ban those things. Quite odd. Insurance acts as a guide to mitigating risk. Risky things are expensive to insure (be that poor drivers or unguarded pools) and so that tends to minimize those things.

Rather than lamenting violence in this country we should be astounded that in a country with over 300 million guns the murder rate is a mere 4.7 per 100,000 per year.  That is lower than 110 other countries with more stringent gun control or outright bans. We should always strive to do better but since there seems to be no correlation between murder rates and gun control then perhaps the answer is not more gun control but rather to follow the market’s lead and see what works and copy that. Laws shackle us from trying alternative approaches and limit choice. Only the free choice of millions in the market can guide us to the best solution.

* Answers to some obvious objections:

Question: “Well what if someone just chooses to get a policy that doesn’t cover guns or they just don’t get insurance, i.e. they simply take the risk that all will be fine?”

Answer: They are of course free to do so, however, the complete lack of any protection means those they have harmed (or their agents) as a result of their negligence are without any limitation whatsoever permitted to take all that they possess in the world, up to and including their life. In other words there is no limitation of liability if you don’t have insurance or have insufficient coverage. That is a pretty big motivator for 99.9999% of all people to have the peace of mind of being protected by insurance coverage.

Question: “Well what if it is just some homicidal loner who buys a gun and is planning on dying, so they don’t care about insurance or liability?

Answer: Liability laws would need to be eliminated so that one could sue the person that sold them the gun and likewise the person that sold that person the gun, all the way up to the manufacturer of the gun. This would ensure that each person in the chain has an incentive to exercise some level of due diligence to ensure whoever they are selling the gun to represents little risk and is qualified to operate it.

Question: “But wouldn’t that just put gun manufacturers out of business if they got sued every time someone got shot?”

Answer: No, because gun manufacturers would perform whatever actions their insurer said they must do in order to remain protected under their own insurance. As long as they do what the insurer says (i.e. voluntary regulation), they are protected from any such claims. Likewise each person down the chain of sale then has an incentive to be protected by insurance and thus to have their actions regulated by their own insurer. The end result is the final seller then has the greatest incentive to ask for certification of the buyer from some other independent certifying body that has “okayed” the buyer for the seller. That certifying agency takes on the risk and you can be certain they will investigate the heck of the background of each person applying for certification. The certifying agency has their own insurance and their insurer will drive the level of due diligence they must engage in order to approve or deny gun buying permits.

Question: “So gun buyers would be in some sort of database and if they did not possess the purchasing permit they would not be able to buy a gun?”

Answer: Yes and no. Those that want to prove to the world they are low risk and not crazy would voluntarily do so. Once they have their seal of approval they could purchase whatever firearms they wanted and remain protected by insurance. But, being a free system, if someone does not want insurance they can buy guns from others who also don’t want to be part of the system – and this would all be legal. There would be no “black market” per se of people without permits buying guns. There would simply be a small market of some people doing this but the inherent risk of selling to someone like that would be so great it would make the cost of the guns so high this alone would act as a natural barrier to most. Most crazed loners are not financially well off. But given the enormous downsides very few would engage in this sort of activity. Basically the same people that are criminals today and can’t legally buy guns would remain similarly verboten under this system. But the point of gun control has never been to stop criminals from getting guns – everyone knows mere laws won’t stop that. The point has always been to minimize accidental shootings or the mentally unbalanced from obtaining weapons and this approach would accomplish this in an entirely voluntary approach. It would also foster an environment of fewer accidents since today anyone can buy a gun without any training at all. Under this approach one would have to demonstrate competency. We demonstrate competency to drive a car with a license, so why not demonstrate competency to handle a gun with a license? I’d rather have a private system doing this rather than a one size fits all government approach that is immune to improvements from new information.

Poison Pill

A “poison pill” is a clause added to a contract with the express intent of providing a disincentive for anyone affected by that contract to contest it. It is typically employed when one anticipates animosity or disagreement among the parties (such as a Will where a beneficiary might be dissatisfied with their inheritance). In other words, it’s a legal stick (as opposed to carrot) used to keep otherwise discordant individuals in line. Unsurprisingly the most contentious legal artifact in recent memory, Obamacare, contains just such a legal provision. Naturally political prudence demanded that the punitive measure remain carefully camouflaged. Otherwise the Feds ran the risk of their private beliefs becoming public knowledge, namely that Federal paternalism gives them the right to punish impudent states.

A poison pill provision in Obamacare was recently unearthed in the wake of a ruling early last week by a D.C. Circuit Court (Halbig v. Burwell) which stated that contrary to an IRS rule and the Obama administration’s contention, the plain language of the Obamacare statute says that subsidies for health insurance were limited to STATE-run health exchanges (and therefore subsidies are not possible in exchanges created and run by the Federal government). There was of course an immediate howl of objection by the administration and those on the left. They said that this was silly, clearly that is not what Congress meant – even if they used very simple and unambiguous language to the contrary – of course they meant to include federal exchanges as well, silly rabbit, only some backwards troglodyte would think otherwise. Funny thing how selective memory works; anything that might contradict your current position is conveniently forgotten. So it was rather embarrassing indeed when it was found that in 2012 (long before this suit was initiated), a Jonathan Gruber (an MIT economics professor who played a key role in drafting Obamacare) was recorded (twice) unequivocally endorsing the very core of that ruling – that only state exchanges were eligible for subsidies. But it wasn’t that admission that was the most telling, but rather what followed.

 

“What’s important to remember politically about this is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits—but your citizens still pay the taxes that support this bill. So you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country. I hope that that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges.” Jonathan Gruber, 1/18/2012

 

He clearly admits that this circumstance (no tax credits) is intended to influence state behavior in order to compel them (get their act together) to carry out the demands placed upon them by this legislation. This language was no mistake, no typo, no oversight; it was clearly intended to act as poison pill to keep the contentious “red” states in line. But then something unexpected happened. Overwhelming civil disobedience. A majority of states (34) chose to swallow that politically poisoned pill anyway. Uh-oh, now what to do we do? Establish federal exchanges and pretend that the poison pill language was a typo. Nothing to see here, move along, move along.

Even if one is inclined to believe it’s all just a big misunderstanding and perhaps only Gruber thought it had this purpose, then that still means the law as plainly written diverges from the intentions of Congress. So how do we fix bad law in this country? Apparently now we allow the executive branch (the President) to unilaterally change it to fit his own subjective interpretation. Extend this deadline, remove this penalty, change the rules, all at his whim.

It certainly is much easier to rule and get things done if you don’t have to deal with a pesky Congress that would never permit such a change without also compelling other, less ideologically palatable, changes. Who needs the slow and incremental rule of law when you can have the fast and instantaneous rule of man? As Mel Brooks said, “It’s good to be the King.”

Risky Business

When Nancy Pelosi said “we have to pass the bill so that you can find out what’s in it” she wasn’t kidding! Four years later the adventure into this 906-page behemoth continues. Apparently taxpayer funded bailouts of insurer losses is one little tidbit they tried to sweep under the rug. This provision is part of the innocuous sounding “Section 1342. Risk Adjustment.” This section of the bill is intended to insure the insurers against their own bad decisions. This is achieved by compelling all insurers to participate in the “risk corridor” program. This program requires them to fork over progressively larger portions of what the government deems to be “excess profits” to offset any “excess losses” by their competitors. The idea is that robbing Peter to pay Paul will keep the program revenue neutral. This neutrality rests on the dubious assumption that the distribution of excess funds from company A will always offset the deficit from company B. Even if that assumption were true, the goal here is flawed. This program will engender a government run cartel of insurance carriers with zero incentive to reduce costs. Too efficient? Make too much? Sorry, we’re gonna’ give it to your competitor. The insurance industry essentially becomes a single federalized fascist monopoly; administered by the federal government but held by private entities. The veneer of private ownership in name only is maintained only to fool the “useful idiots” into believing we still have a “free” market.

Even if one is a proponent of Obamacare, it should be recognized that this provision will do more harm than good in terms of reducing cost. In fact it will have the opposite effect: it will drive the best insurers out of business while subsidizing the worst, thus ensuring ever-increasing costs. Only free competition can have the correct effect: drive the worst out while rewarding the best. Any well-run business maintains capital reserves from flush years to offset potential future losses in lean years. In other words a well-run business will take care of itself. Forcing such a business to hand over its reserves to its more profligate competitors and expecting those prodigal siblings to change their ways is naïve at best, willfully ignorant at worst. But wait, there’s more!

As is typical for such bills there is an underlying assumption that nothing could ever go wrong, therefore it lacks any provision to cap how much the feds may have to dole out under this program. In other words the American taxpayer will be obligated to write an unlimited blank check to cover health insurance industry losses (the program is slated to only run from 2014-2016, but you can be certain industry lobbyists will ensure it is renewed in perpetuity). The moral hazard arising from this program will incentivize insurers to steal business away from their competitors by undercutting them on premium. The better-run insurers won’t cut as far and will lose customers; the more poorly run insurers will cut deeper (counting on a bailout if they go too far) and gain customers. Eventually, once the more prudent insurers are all out of business, all that will remain will be the insurers counting on their annual bailout. There is no free lunch. Premiums may decrease on the front end, but when April 15 rolls around or your inflation riddled dollar buys you less, you’ll be paying it on the back end (I leave it to the reader to decide if that metaphor is figurative or literal).

The Rule of Men

This past Thursday regulators overseeing the US school lunch program graciously decided to “permanently” ease restrictions added to the school lunch program only 4 years ago. The changes initiated in 2010 were a part of the Healthy Hunger-Free Kids Act, which was crafted with the laudable goal of solving childhood obesity. Fat and salt were cut, fruits and vegetables increased, portion sizes and overall calories reduced. Clearly this singular approach from a singular agency imposed upon an entire nation was destined to succeed because if history has taught us anything, it is that humans always solve a problem upon the first attempt and that monopolistic one-size-fits-all solutions are an ideal mechanism for societal improvement.

But our wise overlords were thwarted in their attempts at showing us peons how to feed our kids. Rebellious local school systems bristled at the new rules; they were vociferous in their objections but ultimately powerless to ignore the rules. Failure to obey would have resulted in a loss of all of their school lunch funding. Federalization of our local school systems via monetary assistance has transformed these systems into the dependent servants of the federal state we see today. Federalization was meant to help, but just as a young bird who is “helped” in its hatching process will be weaker, so too have the school systems grown weak and dependent. Once one accepts the help of the state it is all too easy to become dependent upon it. Once dependency weakens you, it is difficult to find the strength to object to the hand that feeds you. The lion tamer subdues his charge not with the stick but with the carrot of dependency (notice how quickly the lion is fed after each trick). Fortunately our overlords at the U.S. Department of Agriculture deigned to listen to the peasants and in their sole discretion (which could change at any moment) have decided to let a little slack upon the reigns… for now.

However what is interesting here is not so much this federalized flailing over the school lunch program but rather the fact that the federal government can’t even implement this one simple program (feed children a healthy diet) without controversy.  Yet we are supposed to accept credulously that this same federal government can manage something an order of magnitude more complicated (healthcare) and all will be fine. Move along, nothing to see here.

The failure of these new school lunch mandates is a visceral metaphor for the failure of Obamacare. The pattern is the same. Both Obamacare and the HHFKA are predicated upon a naive understanding of a problem which results in misdiagnosis and an ineffective solution. The putative goal of the changes to the school lunch program was to “cure” childhood obesity.  Because, you know, if kids are known for anything it is for their love of the school lunch! Clearly overeating at schools is the proximate cause for childhood obesity. Likewise those foisting Obamacare upon this country labor under the delusion that health care costs are high not because of decades of government interference in the health care market, but rather because the uninsured are unfairly driving costs up by not paying premiums and then getting “free” care at emergency rooms (which I must point out, this latter scenario has been shown to add only 2% to total health care spending in this country (as reported by the left leaning Urban Institute in a 2008 study)).

 

When the top down approach of these mandates is foisted upon an unwilling public how do those in charge respond when the serfs don’t take too kindly to it? The same in both cases: a temporary and discretionary choice to ignore the law (at least while it is politically expedient to do so). With such actions we slide invariably toward a country run by the rule of men, not the rule of law, where it is the individual in charge that decides upon whim how we may live our lives. If the law is bad then repeal it, but these half-hearted “temporary” suspensions of enforcement are the acts of a cowardly and tyrannical government.

Lost in translation

Like millions of Americans you probably have received a letter like this (see below) from your health insurance provider (for both individual or group plans). As the farmer said to the pigs about to be slaughtered, “We’re going to be transitioning you to an environment free of worldly concerns.” Reading between the lines can often be critical to our own well-being, therefore, in that vein I shall endeavor to offer a translation of the following:

 Dear Subscriber:

The federal Affordable Care Act (“ACA”) has been changing how Americans get their health care coverage. The next big step begins in 2014. For many individuals like you with coverage through their employers, it includes important changes to coverage.

 ACA requires us to make significant changes to our health benefit plan designs. We have redesigned our entire employer portfolio to include new health benefit plans that comply with 2014 ACA requirements.

 There is nothing for you to do at this time. Your employer’s existing policy will continue until your next renewal. We are unable to renew your employer’s existing plan in 2014, but your employer can purchase any of our new plans with the 2014 ACA requirements for your coverage.

 We value you as a member and look forward to a long-standing relationship with you.

Sincerely

Health Insurance Company

 

Dear person-now-required-to-buy-our-product-under-penalty-of-law,

Obamacare has transformed a government manipulated healthcare market into a government controlled healthcare market. Unadulterated fascism rears its ugly head once again in America in 2014 (fascism = state control of a putative private market). For those of you who already get insurance through your employer, the paltry level of choice you used to have will be whittled down to next to nothing.

Obamacare requires us to add on coverage options we formerly begged you to buy but now you are forced to buy, therefore we have the perfect excuse to inflate premiums as high as possible. Apparently Nancy Pelosi thinks you are too stupid to make your own decisions when it comes to buying health insurance, therefore she has empowered bureaucrats to make those decisions for you. Do not fret gentle citizen; you will be well cared for in Obama’s gentle bosom.

You are helpless to avoid this, so sit back and enjoy the ride. You have a few months left to see your doctor before multi-hour waiting room camp-outs and month long waiting lists for medical procedures turn the US into Canada 2.0. We are unable to renew your employer’s existing plan in 2014, but that’s just fine with us because we’re content to get in bed with the government and be more tightly regulated if it means we will be guaranteed a steady stream of customers and profit. Crony capitalism and fascism is what made this country great after all!

We value you as our cash cow and look forward to milking this relationship for all its worth until either the federal government collapses under its own weight or the American public becomes so irate that they finally elect people that will remove all government influences from the medical market so that prices can naturally fall until medical insurance is no more costly than auto-insurance.

Sincerely

Health Insurance Company (a wholly owned subsidiary of the Federal Government, Inc.)

Counting, Government Style

As Obamacare looms nigh small employers such as myself who are near the margins of the 50 employee threshold of being an “applicable large employer for Section 4980H” have found it necessary to waste time and money just trying to figure out if we have reached that threshold or not (and yes, we already provide health insurance). At face value it seems like this should be simple enough: just count. But as with most things generated via government bureaucracy nothing is ever as simple as it seems. The statute is filled with ambiguous and undefined terms such as “stability period”, “measurement period”, “standard measurement period”, “upcoming stability period”, “safe harbor”, and so on. I’m actually trying to comply with this nightmare of a law but even our accountants admit some of the questions simply can’t be answered yet. Typical government: “Here, comply with this” – “Ok, how do I do that?” – “We haven’t decided yet, but don’t worry, if you get it wrong we’ll let you know with a fine.”

For example, there are two calculations that must be done. The first determines how many full time employees there are and the second determines how many “full time equivalent” employees there are. However a full time employee is only eligible to be measured as such if they are considered to be an “ongoing employee” (meaning they are employed for at least one “measurement period”). But… if they become full time during the measurement period or otherwise have a status change then there is a whole different set of rules for counting them – except those rules have not yet been issued (insert picture of chimpanzee with pencil scratching his head).

Assuming we have figured out who the “ongoing employees” are, we are now ready to determine if they are part time or full time. This calculation procedure all too predictably betrays the fact that whoever came up with it clearly has never worked in the private sector. They are laboring under the delusion that employees are paid on a calendar monthly basis as opposed to a weekly or biweekly basis (perhaps because governments reserve to themselves the exclusive right to pay monthly – that practice is illegal for private employers). “Fine”, you may say, there are 4 weeks in a month, what’s the big deal? Well, in fact, no, there are not 4 weeks in a month – there are up to 4.42 weeks in a month. So we cannot simply add up 4 weeks of payroll hours for a part time employee and divide by 120 to see if they exceed an average of 30 hours per week (the newly defined “full time” standard under Obamacare). No, rather than simply using data we already have (weekly or biweekly hours worked) for each employee, instead we must now warehouse up to 7-times more data by saving daily hours details. Although all employers already track daily punches, smaller employers store this massive amount of raw data off-line after getting the totals for payroll. Why waste resources if there is nothing to be gained by storing the number “8” five times vs storing the number “40” one time. The storage space is not the central issue however, it’s that we must incur a cost to reprogram payroll systems – in short wasting money to rebuild something we already had.

With monthly hour data in hand, we can now count up the employees that exceed 130 hours and count them as “full-time”. For all other employees we total up the lesser of actual hours worked or 120 and then divide that sum by 120 to get the “full time equivalents”. This means, in short, that two part time employees working 60 hours in a month will count as one full time employee. This calculation subtly explains the incentive behind large employers (such as Trader Joe’s or Kroger) who already fall under Obamacare but who are nevertheless cutting back their part time employee’s hours to below 30. This allows them to reduce their potential fine exposure. For example, in the case of Kroger, if all of their 340,000 employees work at least 30 hours, then they will be counted 340,000 full-time employees. However, if this same number of employees works only 29 hours per week, then they would be equivalent to 328,666 employees or a net potential savings of $23-34 million in Obamacare fines. That’s nothing to sneeze it at, but if you do at least you’ll be covered under Obamacare.

Smokers in California escape their fair share

I heard a story on NPR this morning about how California is doing something about that evil Obamacare rule that allows insurers to “discriminate” against the most unfortunate of those among us – smokers. Obamacare actually (gasp) allows insurers to charge up to 50% more on premiums to smokers! How unfair, doesn’t Obama understand that these poor smokers have no choice, they are poor helpless victims of the big evil tobacco companies! Apparently smoking is much more prevalent of a lifestyle choice among the “poor” – so where Obamacare provides the “poor” with “affordable” health insurance, the smoking allowance allows insurers to basically add back all the “savings” – yes, that is the world’s smallest violin you hear in the background.

Funny, somehow the “poor” can afford to buy cigarettes (anywhere from $300-$3000/year depending on where they live and how much they smoke), yet they can’t afford the additional premium on their insurance policy attributable solely to something they choose to do. “Affordability” is one of those words thrown around a lot without any thought to what it actually means. Affordable simply means that one prioritizes the expense. Affordability all depends on how you order those things in your life that you value. One could claim a private school education for their child is unaffordable – and that would be true if they choose to spend their money first on a larger fancier house, on fancier cars, on cable TV, on high speed internet, on new clothes every month, then yes, not much is left for a private school education. But, one could pay for the education first, and then with what is left over structure their life around that so that they live in a smaller house, drive older cars and then at that point they would find cable TV and high speed internet become the “unaffordable” goods. To claim that health insurance or any other good is “unaffordable” is to simply be proclaiming it is not the thing you most highly value. Now one might argue that a $10 million mansion is unaffordable to nearly everyone and no amount of prioritization will make it so, true enough. But we are talking about affordability within the context of normal consumer goods and services, not about super luxury goods and services for which their lacking in the market is a concern to anyone. No one is crying about the “unaffordabiilty” of 50 foot yachts among the general public.

Not that I agree with the mandates Obamacare makes upon insurers in terms of what they can charge and how they can determine what they charge but at least I can understand why those who support Obamacare don’t want insurers to discriminate based on characteristics we can not control (i.e. gender, age, health status) – you are who are and there is no choice in the matter. Of course this “equality” mentality just means those who cost insurers less must pay more to subsidize the more costly demographics (witness France, where female drivers must now pay MORE for their auto insurance because in the name of equality it was deemed unfair that safer, more prudent female drivers be charged less than their male counterparts). But come on, cigarettes? Please, this is ENTIRELY the choice of the smoker. Are they addictive? Sure, but it is not IMPOSSIBLE to quit, plenty of people do it all the time. They are treating smokers like they are helpless victims who have no control over themselves. Please, give me a break.

This story highlights all that is wrong with socialized medicine. Those who willfully engage in bad behavior that affects their health must not be made to bear any of the cost of associated with their behavior – that is the job for the rest of society.

Keynesian Coin Toss

Hurricane Sandy wrought not only terrible destruction this past week, it likewise whipped a few economic fallacies to the surface. Chief among these was the unwarranted attacks on the “price gougers” and the stunning ignorance of those pontificating on the “prosperity through destruction” meme. I shall defer my defense of the gougers and turn my attention toward the “destructionists”. What pray tell might be the upside to destruction? Jobs. The same old hackneyed drivel that was laid to rest 160 years ago by Frédéric Bastiat (see “the fallacy of the broken window”) and yet it keeps popping up with every natural disaster like the game of Whack-A-Mole. Even Ph.D. economists (Duncan Black, USA Today) who should know better continue to espouse such drivel. His recent article is illustrative toward this way of thinking insofar as he seems to be suggesting that a storm is primarily beneficial not because of the illusory short term economic benefit, but rather because it is a useful tool to teach the unwashed masses how non-voluntary spending can spur economic expansion and job creation. Such an example can then be used to justify to those obstructionist dimwits in Congress that we need much larger and grander government sponsored non-voluntary (stimulus) spending. The core premise of this argument is akin to a eulogy in which the grieving are instructed to take solace in the fact that the undertaker will benefit financially from the death of their loved one.

To be sure, there will be a localized economic uptick following any rebuilding. That is the “seen” benefit. But as Bastiat taught, one must also consider the “unseen” losses. That is, all the things that could have been done but were not. This is called “opportunity” cost. We experience this every time we buy something insofar as we could have bought something else. There is nothing wrong with that. The problem arises when our will, our desires, are overridden by an outside force that corrals us into choosing something we would not, absent such coercion, freely choose. When that force is Mother Nature we don’t like it, but we accept it and move on. The Keynesian understands that if they can convince us that Mother Nature’s destruction might be positive then we will be that much more willing to accept it when Man (through his proxy the State) imposes his diversionary will upon us. In other words, if I can convince you that getting hit in the face isn’t all that bad, you’ll be much more willing to put up with having your foot stomped on.

The Keynesian tries to rationalize their position by suggesting that funds “tied up” by insurance companies or unpatriotic savers are simply “idle.” * Well, parked cars are “idle” too. Should we melt them down and make a bunch of toasters? That would certainly benefit the toaster makers and their employees, but somehow I don’t think the car owners would appreciate this. This is how the Keynesian’s sell their ideas, by dishonestly pointing at only what we can see and mumbling zombie-like “jobs” while conveniently ignoring those that provided the resources. Money is never idle. If it’s not being spent then it is being saved or invested. Saved money is lent out and spent. Invested money supports new and existing businesses and jobs. Consider what would happen if all of the “idle” stock of a company were converted to cash by a company and paid to shareholders. That company would cease to exist insofar as every asset would have been sold. I’ll say it again: money is never idle. Repairing destroyed property involves removing active resources from the economy. In order for insurance companies to pay claims they need cash, which they either (a) withdraw from a bank, thereby decreasing lendable funds or (b) they sell assets, thereby decreasing the ability of those that buy the assets to further spend. Each dollar devoted to repairs in one area of the economy represents another dollar removed elsewhere. In other words, there is no such thing as a free lunch.

Natural disasters and government stimulus are two sides of the same will-manipulating coin – wealth destruction on one side and wealth diversion on the other.

 

* Because these articles are published in newspapers where I am under a word count constraint sometimes I must leave out some discussions that are entirely germane but simply will not fit. But as this is the online mirror of the article I will include a bit more of the economics discussion here. There is in fact a legitimate route by which disasters and destructions can and do result in increased productive output. I’m not suggesting this is a good thing, but I would be remiss if I did not bring up this point and clarify that however true it can sometimes be there is a cost involved that is always overlooked when brought in the mainstream press. 

Natural disasters can in theory produce enhanced productive output, however whether you view this as good or bad depends on whether you view working 12 hours a day preferable to working 8 hours a day. The basic premise is this: if your house burns down and you have to rebuild it yourself while still carrying on all the other duties you previously had you will indeed be more productive. Not only are you building a house you are still producing enough to continue feeding and sheltering yourself as much as you were before. The obvious tradeoff here is leisure time. Formerly you could work 8 hours a day but now you must work 12 or 14, the excess time being devoted to recreating that which was destroyed. If this is indeed beneficial then perhaps the government should mandate everyone work 12 hours a day and we could grow GDP in this country by 50% in one year!

Leisure time also has value but this value, being subjective, is non-monetary. It is impossible for the state economists to account for the loss of this value when factoring in the apparent expanded productivity following a disaster. Obviously people aren’t rebuilding their own homes but the net aggregate effect is the same. If resources in the economy are devoted to (a) normal home building + (b) home reconstruction then those in the construction industry are either working more than they normally would choose to (with concomitant less leisure time) or if they are not working more then one must bid up the price of getting a home built which has the effect of you having to work more in order to afford what you want OR more people are attracted into construction keeping costs down but the loss of those employment resources from other sectors of the economy results in scarcity in those other sectors which drives wages up and hence prices, and thus we all must work more in order to afford what we used to afford in those other sectors: net result, we’re working and producing more but only obtaining the same amount of goods and services we used to get when we worked less prior to the destructive event.

 If we do not work more but borrow more then increased demand for borrowed funds will drive up interest rates which will still cost us more in the long term requiring us to work more than we otherwise would have or if money lending demand is met and interest rates stay low that means more people are saving and making do with less which is the functional equivalent of working more for the same. We either choose less leisure time and more work to have 100 units of “stuff” or we choose the same amount of leisure time and accept higher costs and therefore accept we can only now get 80 units of “stuff”. Either way the destructive event is a loss, either to goods or to leisure time.

Cutting corners

“And so you’ve got higher administrative costs, plus profit on top of that. And if you are going to save any money through what Governor Romney’s proposing, what has to happen is, is that the money has to come from somewhere.” – President Barack Obama.

President Obama made the above remark in last week’s (10/3/12) presidential “debate” (aka joint press conference) comparing the cost structure of Medicare to that of private insurance. His remarks rely on a grade school understanding of profit that is sadly shared by many.

Let’s dissect the error of his ways. “And so you’ve got higher administrative costs”: The president is being a bit deceptive here. Medicare’s administrative costs are lower because it has virtually no checks against fraud prior to payment. The system is designed purposefully this way in order to entice doctors with an easy claims process. Unfortunately it leaves the system vulnerable to every type of conman and charlatan. Kind of like saying a government-run unmanned honor system bank operates with lower costs than a private bank full of tellers and security guards.

Next he says “plus profit on top of that” in reference to private insurance: Implicit in this statement is the notion that without profit (or perhaps just “excess” profit, “excess” being defined in the liberal dictionary right next to “fair share”) everything would cost proportionately less. If he is going to be intellectually honest then using this logic there is no other conclusion then that government should run everything profit-free. Considering how well that system (communism) has worked, it is unlikely he will be intellectually honest.

However the last statement, “the money has to come from somewhere” reveals his ignorance of business. This ignorance renders him incapable of comprehending how a business could enhance profit by any method other than cutting corners. The method that eludes him is productivity improvements. These are achieved by (a) identifying inefficiencies and removing them and (b) utilizing new or existing tools. With productivity gains the consumer receives the same or a better product for a lower price while the business earns a greater profit. The profit motive encourages good businesses to enhance productivity, which benefits both themselves and their consumers. The profit motive can also encourage some businesses to cut corners on product quality. However these businesses can only cut corners to the extent consumers are willing to accept the tradeoffs. If they go too far they risk going out of business at the hands of more efficient competitors. In the long run the profit motive strengthens good businesses and weakens bad businesses.

If government operates without a profit motive (as the President implies is a superior route for purposes of saving money) it operates in an information vacuum, like a ship adrift beneath a cloudy sky with no stars to guide it. It is not possible to know if one is adding or degrading value if they never ask “what is this worth?” A prime example: baking apple pies adds value, but burning apple pies degrades value. Both involve the same use of resources (apples, labor, oven) however one process is wasteful while the other beneficial. There is no non-arbitrary method to determine which process adds value or degrades value and by how much. The only way to know is to offer each on the market and see which one more people are willing to give more in exchange for. To those that might say healthcare is different, then I ask you this: if the consumer does not directly bear the cost of the healthcare they consume, then on what basis can they draw a line and say “this is too much to spend?” Is there no amount that is too much? There is only one tool government has to maintain product access when it forces prices for scarce goods below their market rate: rationing. Rationing through waiting lists (a common practice in the single-payer no profit systems) gives the false illusion of lower nominal costs by simply ignoring the costs in terms of quality of life for those suffering while they wait or the cost of lives cut short. It may seem like voodoo to President Obama, but the desire for profit is a powerful motivator to increase efficiency and thus lower costs.

Don’t blame people, blame the system Mitt

Poor Mitt Romney – apparently no one ever taught him the first rule of politics: always assume you are being recorded. The issue at hand though is not so much his ham-fisted point making, but rather that he, like so many other politicians, decries the effects of government policies while ignoring the underlying causes.

What government gives in benefits they take away in choice.

Both the left and the right work their constituencies into a lather by heaping denigration upon individuals rather than upon the system that fosters the behavior they impugn. When government intervenes they not only give but take as well. What they give in benefits they take away in choice. Government programs crowd out or eliminate private markets that would permit the individual to take personal responsibility. For example, Social Security participation is mandated by law. We cannot opt out. After being robbed of 12.4% of our income whom but the wealthiest has anything left for private retirement? Social Security offers supplemental income for children with disabilities (to help pay for care). There currently exists no private insurance market for disability/long term care for those under 18. Likewise, there is no private market for unemployment insurance. Is this surprising? Why opt to pay for something that is already “free.” Private disability insurance for adults exists however only a minority of workers have such coverage. It offers little to lower wage workers relative to the “free” offerings of Social Security disability. People are not stupid. You can’t blame them for choosing “free” over “not free” given the choice. And you certainly can’t blame them when there is no choice at all. The solution is to fix the system, not the people. Phasing out government monopolized programs like social security, unemployment insurance, and welfare would give people back their natural incentive to look out for themselves. They would purchase their own individual (a) disability policy, (b) unemployment policy and (c) save for their own retirement. Elimination of the taxes that pay for these programs would permit higher wages thus offsetting or eliminating net costs. These changes alone would mean the private market would cover 99% of what people are currently receiving as government “handouts.” Private charity would easily handle the 1% of cases where extreme bad luck has left some unable to care for themselves. And even if you believe in the government “safety net” concept, surely it should be for the bottom 1%, not the bottom 50%.

The left is no more immune to this chicanery then the right. They decry the evil one-percenters and crony-capitalists without addressing what created them. Their outrage is the moral equivalent of leaving all the windows and doors of your house wide open while on vacation and then being surprised that someone robbed you. Maybe hunting down the robbers and putting them in jail will make you feel better, but wouldn’t it make sense to just lock your house? The solution to combat cronyism and corporate welfare is to simply eliminate government authority in the arenas that the large corporations are controlling. End the bailouts, the money printing, fractional-reserve lending and bogus deposit “insurance”, the tariffs, the competition-eliminating regulations, the subsidies and the mandates. All of these are mechanisms by which government helps big business to the detriment of everyone else. Big banks and big business are big and powerful because of government standing behind them like the kid on the playground who has the big bully backing them up.

The left and the right have something to learn from Mitt’s gaffe: don’t blame people for simply using the bad tools government gives them. Destroy the bad tools.