Tuesday, March 23, 2010

10 Things You Should REALLY Know About Health Care

MoveOn.Org has a wonderful list of "10 Things Every American Should Know About Health Care Reform"... I say "wonderful", not because it's a legitimate or good list, but because they've kindly taken the time to put everything in one convenient location, making my job easier right now.

Upon reading these 10 things, I feel compelled to discuss them just a little bit.  Ready?  Ok!
1. Once reform is fully implemented, over 95% of Americans will have health insurance coverage, including 32 million who are currently uninsured.
Let's assume this is true even though my guess is that - due to laziness or error, non-compliance or even protestation - it won't be.  Even if it is true, it rests on the single greatest fallacy that has framed the health care "debate" from start to finish:

Insurance ≠ Health Care!!!

I don't know how to stress this point enough, especially since it's going to become a crucial distinction progressing through the end of this list, but insurance is merely one of several different means to pay for health care.  It is NOT the doctors, hospitals, drugs, machinery, beds, linens, nurses, ambulances and asprin bottles which actually constitute health care itself.

So what, right?  If insurance is a means to pay for health care, then aren't all these new entitlements good because they allocate more money to increase the supply of those things?

I suppose if the source of government funding was capturing magic leprechauns at the end of the rainbow, sure...  But in reality... No, supply is definitely going to be declining...
2. Health insurance companies will no longer be allowed to deny people coverage because of preexisting conditions—or to drop coverage when people become sick.
This is the single biggest reason why supply will remain low, and thus why medical costs are sure to go up and real access to health care in the United States is about to plummet miserably.

I've explained all this on this blog before in an essay last year titled "Leeching the System: The false heroics of guaranteed insurance".  Here's what I said then, and what is absolutely just as true today:
"The result of such a foolish policy would be completely catastrophic as more people pass up paying the monthly fees of a health insurance plan when they are well, and instead only jump into the risk-pool when they experience the very type of emergency that we're all trying to hedge against. And because it would be illegal for an insurer to prevent them from doing this, there would be really no way to prevent such folks from draining the entire pool of money such that if and when some of us who've actually paid in got into trouble, there would be less money left to cover our needs, or perhaps none at all!"
Something that people who struggle to grasp the economic realities involved with this legislation still have yet to understand is that radically altering the policy in this way will also radically alter the behavior of ordinary people.  When governments reward certain courses of action and ply citizens with incentives to act irresponsibly, they usually do so.

Not to beat a dead horse, but in the late 1990s and officially by 1999, the U.S. government had created a housing policy that strongly encouraged new building of homes as well as bank loans - backed by Fannie Mae & Freddie Mac, as well as through the FDIC - to low-income, high-risk buyers.  As if that weren't enough, in 2002 the Federal Reserve led by Alan Greenspan pushed interest rates to as low as had ever been done in the history of the country, and the money supply - and thus the ease with which consumers could get loans & credit cards - ballooned.

So what happened?  Government officials got their wish: People built tons of houses!


Of course, we are now living with the consequences of our government's artificially created demand for housing as investors & business owners who radically misallocated their resources over the past decade now must go out of business, fire all their employees and find new lines of work.

The point is, people respond to incentives.  And the incentives in play in post-"reform" America are heavily weighted towards people paying absolutely nothing (or as little as is legally allowed) for health care until they get sick, and then to pass the vast majority of their costs onto someone else.  So that is one gigantic reason why, in fact, supply of health care resources will not be improving as a result of this bill - and an even bigger reason to fear for your health over the coming decades as a new generation grows up with this entitlement and the full behavior shift takes effect.
3. Just like members of Congress, individuals and small businesses who can't afford to purchase insurance on their own will be able to pool together and choose from a variety of competing plans with lower premiums.
Oh my, if only this were going to be true!  If we were going to get health care "just like" members of congress, we would have probably gone with a plan more similar to Rep. Paul Ryan's.  That's absolutely not what we've done here though in any meaningful way.

But this fanciful bit of fiction this is about the mythical "health care exchanges" that the government is now going to provide by 2014 which are somehow going to improve competition. Government mandates never improve competition though... That's as contradictory an idea as I've ever heard!  You can't increase competition by burdening businesses with more regulatory weights which keep out competitors and discourage anyone from ever trying to become one.

It's also amazingly naive to believe that the government is going to be able to successfully implement this kind of exchange no matter what the time frame.  In the meantime, www.ehealthinsurance.com does exactly the same thing and will always do it better than whatever the Federal government eventually comes up with.  I'm still waiting for www.recovery.gov to live up to Obama's promises, and www.recovery.org already figured out how to do their job a thousand times better in half the time.

There is no incentive for government to properly administer such an "exchange", and without market signals, no way it will be able to do so effectively regardless of how hard they might try.

What there are incentives for, on the other hand, will be the heavily politicized representation of health insurance plans where the government officials running the exchange will be essentially shilling for the most powerful insurance companies such as Blue Cross & Blue Shield (which already get special legal exemptions from the government) or Aetna.

In any case, because the health care bill doesn't allow for inter-state or international competition among health insurance companies or even prescription drugs (which is something most other countries do, by the way), the options for competition are exceedingly limited from the outset.

The lack of competition among insurers and health care providers is yet another reason supply and quality of health care will not be going up anytime soon.  And having the government run something that the market is actually already providing today is an asinine waste of resources which will, in my estimation, only ensconce the power of the existing major players in the insurance industry and further prevent smaller competitors from ever gaining traction in this sector.
4. Reform will cut the federal budget deficit by $138 billion over the next ten years, and a whopping $1.2 trillion in the following ten years.
This statement is SO absurd, I'm not even sure where to begin.

The figures in play here are based solely on the Congressional Budget Office's latest estimates which were created as a result of politicians working on the bill using their knowledge of the process to game the system.  They did this by front-loading all of the revenue streams and back-loading all the spending - so taxation begins today, but the parts of the bill that require large expenditures don't get implemented for another 4 years.  They also accomplished this by omitting other massive pieces of spending, such as the $200 Billion "Doctor Fix" to Medicare in order for it not to be reflected in the CBO's cost estimates.

The fact that $200 Billion of spending which was in the first several rounds of health care legislation but is now in a separate bill should tell you that what we're looking at is a shell game, and not a financially solvent bill.  It also wipes out the full amount of presumed deficit reduction, and tacks on $67 Billion more in deficits just for fun.

Even the New York Times noted that politicians spent the better part of a year with consultants trying to figure out exactly how best to game the CBO process:
"Congressional Democrats have spent more than a year working with the nonpartisan budget office on the health care legislation, and as they fine-tuned many of the bill’s various provisions in recent weeks, they consulted repeatedly with its number-crunchers and the bipartisan staff of the Joint Committee on Taxation."
Regardless, as I wrote about just a few days ago, the CBO is incapable of taking into account the behavioral shift that this legislation will undoubtedly cause, as Congress has just passed a bill which promises something-for-nothing to tens of millions of people.  As a result, many millions of people will be all to happy to use up limited health care resources while contributing nothing in return, all the while punishing everyone who wishes to join the market and supply more of those resources.

I couldn't think of a better way to make health care costs explode if I tried, and those costs aren't reflected in the CBO process - which is precisely why the CBO estimates on virtually every other entitlement bill over the last several decades have been way off, just as they will be on this one.

And for that matter - the CBO itself already knows this!  They have repeatedly issued statements to this effect, cautioning people to be mindful of these omissions.  Of course, as they say, it's amazing how easy it is for people to remain ignorant of some fact when their livelihood depends on it...

It is unsurprising, to say the least, that MoveOn.org seems to be unable to grasp the ridiculousness of their various claims.
5. Health care will be more affordable for families and small businesses thanks to new tax credits, subsidies, and other assistance—paid for largely by taxing insurance companies, drug companies, and the very wealthiest Americans.

According to the Wall Street Journal, the taxes & fees are as follows:
  • $2.5  Billion (and more in subsequent years) in fees to the pharmaceutical industry.
  • $8 Billion (and more) in fees to the insurance industry.
  • New Medicare taxes on single income earners of $200,000 or higher and couples earning over $250,000.
  • Increase in wage taxes from 1.45% to 2.35%.
  • New, 2.8% tax on unearned income such as dividends.
  • Excise tax imposed on the sale of "medical devices".
  • $3,000 per employee "fine" on employers of 60 people or more if they don't provide health insurance coverage to their workers.
  • $695 minimum, up to 2.5% of income fine on individuals for not purchasing insurance themselves.
  • And eventually... By 2018, an excise tax of 40% on health plans valued at more than $10,200 for individual coverage and $27,500 for family coverage.
Soooo... Unlike the folks at MoveOn, let's actually think about these funding sources for a second.

The $2.5 Billion for pharmaceuticals and the $8 Billion for insurance companies are absolutely coming out of the consumer's pocket. Contrary to popular belief, insurance industry profit margins are in general pretty low - between 2-4% typically.  So, the idea that they're going to take $8 Billion out of their profits when they could simply raise premium prices is absurd to begin with, but all the more when you consider that they've just gotten the government to give them 32,000,000 new customers who are now required to buy their products by law!  

There is absolutely NO competitive pressure to drive insurance prices down and a dozen reasons to increase prices. Do you really think that this won't apply to middle class and poor people?

What's a bit more hilarious to me personally is the fact that investors, speculators & market analysts have already figured out that insurance companies are going to be the big winners... Every time these health care "reform" bills have gotten any headway, insurance stocks have shot up.  

What's that you say?  That can't be!  This legislation is going to help the consumers of insurance, not the companies!

Oh?  Check this out:

If it were true - as so many people have told me - that health care reform will limit the power and profits of insurance companies, then why exactly are investors & speculators who stake their own money on their predictions betting otherwise?

Now.. The pharmaceutical industry has much, much higher profits (upwards of 25% in some cases), which also only stands to improve with this bill, but c'mon... They can slip a $2.5 Billion price increase into their drugs and no one would even know.  And again, even if people did realize that the price of drugs was higher because they are now also paying for new government fees, what are they going to to about it?  It's illegal to buy drugs from international companies and within the US, Merck, Pfizer and others hold extremely tight patents on most of their products so there's barely any competition for them to contend with anyway.

So yeah, all of those fees are getting passed directly onto you, me, and everyone else who will need drugs and who will buy insurance in the future - which of course, is everyone now, thanks to government.

Same deal with the excise tax on the sale of medical technology, which will be reflected throughout the health care system, starting with doctor's bills & hospital fees and ending (yet again) with an increase in insurance premiums.

Now, while all that will be passed on to consumers eventually, the rest of the funding comes immediately & directly from the American taxpayer!  There's no way anyone can look at taxes on dividends and fines for individuals not buying their own insurance plans as taxes just on the rich, unless we redefine the "rich" as anyone with a 401k or even a rental property.  I even personally think that given the state of inflation and the cost of living in many areas (such as Los Angeles), a household earning $250,000 isn't really in the rich category either...  But I suppose that's a matter of opinion.

The main point here is that everything about this bill pushes higher costs onto individual health care consumers - whether that's through fines & fees or through the increased premiums and health care costs that will be the inevitable consequence of this legislation.  And all of this means that we're  forging ahead full-throttle towards fiscal catastrophe in the United States, and making life harder on hundreds of millions of people through higher costs and taxation.

The only way anyone could think this bill is going to be paid for by "insurance companies, drug companies and the very wealthiest Americans" is by being willfully incapable of seeing any economic exchange beyond its first transaction...

Trust me, you'll be paying for all of this just as sure as you pay for the tires on the trucks bringing produce to your local supermarket.
6. Seniors on Medicare will pay less for their prescription drugs because the legislation closes the "donut hole" gap in existing coverage.
I have no way of knowing whether or not it is in fact true that seniors will pay less.  I suspect that of all the things on this list, this is the most accurate prediction... If only because seniors have what is arguably the best lobby of all time, and are an extremely powerful & wealthy interest group.

But so what?  Medicare was going to go broke by 2019 before this monstrous increase in spending was passed... Seniors today may very well get cheaper prescription drugs, but such entitlements certainly won't be around by the time I'm 65.

The fact that some people are going to benefit today is unsurprising, these things don't happen without certain interests benefiting.  In this case I have no doubt that the AARP is one of them, but the question that needs to be asked is: At what cost to our future and that of our children?
7. By reducing health care costs for employers, reform will create or save more than 2.5 million jobs over the next decade.
Great. A completely and utterly unfalsifiable piece of nonsense.  How again are we measuring jobs "created of saved"?  Oh right... We can't!

Furthermore, even if it were true (which it isn't) that this bill will be reducing health care costs for employers - which would only be possible if businesses reduce coverage for their employees but, of course, that's now illegal - then it absolutely doesn't follow logically that they would use the monetary savings to hire more people.  They might provide bonuses, raises or benefits to existing employees (perhaps they would give them some pay to make up for the widespread salary cuts of the last 2 years?).  They might renovate their offices or improve their facilities.  They might simply take in more profits and pass that along to stockholders... Perhaps, the more responsible companies might even put the money into savings accounts so that the company has more available cash in the event of future economic collapse.

There are plenty of options here that don't involve automatically hiring millions of people... And of course, since the legislation requires that employers either pay hefty fines or pay for health insurance for their employees - and because the rest of it provides huge incentives for costs to increase... This cost savings is entirely fictional and kind of silly to be talking about.

I guess you could consider the bill a "creator" of jobs because of the thousands of IRS workers & other government officials needed to administer the plan... Of course, you'd be discounting the 5,000,000 jobs estimated to be destroyed in the private sector as well.  Never forget that government spending creates nothing - it only takes from some people, wastes a huge chunk of money and then gives the remainder to someone else.
8. Medicaid will be expanded to offer health insurance coverage to an additional 16 million low-income people.
How exactly will this happen?

The Peter G. Peterson Foundation estimates that the actual national debt including all the unfunded liabilities we face in entitlement spending is $56.4 Trillion.  That's $184,000 per citizen.  We are headed for a severe fiscal disaster, and increasing entitlement programs like this only make the day or reckoning closer... When Medicare goes broke, Medicaid isn't that far behind - so how is this a solution, and how long will it last?  My guess is not long.

Of course it's important to help the poor and low-income families who need health care just like anybody else, but this method is completely unsustainable...  And what I don't really understand is that this kind of approach is combating the wrong problem.  As Thomas Sowell once noted, there's no predestined level of poverty.  Sure there's always going to be a bottom 20% - but that doesn't mean that the bottom 20% can't have a standard of living that includes regular access to health care.

But the problem isn't that they're statistically poor - the problem is that health care is too costly.  This seems like a small distinction, but it's an important one... There may always be a bottom 20%, but in America today even that bottom 20% own Televisions and have shelter, yet many don't get health care.  This is a function of high prices, and that - as I've pointed out countless times - is an issue of limited supply caused primarily by government intervention in the market!

So there are legitimately ways to help the poor, and I've written about them dozens of times on this blog.  I won't repeat myself at length here, but the only thing that is going to make health care more affordable & higher quality is if we take away the mandates and government as primary payer and we return the position of the patient as the actual consumer of health care - thus reconnecting price signals and the information provided by profits & losses to real supply and demand.

Once barriers to market entry are removed, and the consumer is actually the one paying the bill - we can watch as competitive market forces push prices down and drive quality and supply up towards equilibrium.  We see it today in Lasik and other elective surgeries not covered by insurance of Medicare and we see it in literally every area of the economy not overrun with legislated mandates and government involvement.

The point though, is that as supply of the real health care resources (not insurance) is increased, costs will come down and direct payments for service and/or insurance premiums will become immensely more easy to afford... Much like the cost of food, personal computers, televisions, cell phones or anything else that the Federal government doesn't throttle to death or pay for.  This will actually help the poor, and it's sustainable!

Anyone left who truly can't afford health care or insurance will very likely be able to either find free clinics or private charities.  But if you are still hell-bent on a government "safety net" for the cases that absolutely can't afford it, then the way to do that most effectively would be through vouchers for insurance and health savings accounts which keep the individual in charge of their own health care decisions.

This would be analogous to food stamps...  The government doesn't force people into a one-size fits all package of food, they merely supply the resources for individuals to make their own choices.  As a result, with food stamps, government involvement hasn't caused huge increases in the price of food since price signals still apply - even for low income people.

That would work... Expanding entitlements won't.
9. Instead of losing coverage after they leave home or graduate from college, young adults will be able to remain on their families' insurance plans until age 26.

I'm tempted to point out that 26 is a little old to be still considered a child and a dependent... But this really isn't the point.

There is absolutely no reason that insurance providers shouldn't be legally allowed this privately and no reason for them not to do it on their own - except that they don't. That said, I suspect (though I have no way of knowing since the insurance market is barely competitive and is mired by mandates & regulation) that they wouldn't allow this even in a legitimately free market.  This suggests to me that there is something extremely cost-ineffective about this idea.  But without an even reasonably free market for insurance - I really have no clue if this is good or bad... And more importantly... Neither do politicians.

Yet politicians are mandating something here which is very likely a losing proposition... Not surprising, considering they wouldn't have to mandate it if it was beneficial overall, but also not an example of something that's going to drive costs down - but entirely the opposite.

I don't really have a major complaint with this as it's kind of a throw-away issue in any case, but it seems a little silly to me overall, and hardly a major selling point.  In reality it seems much more like a handout to college students... I just really struggle to see the overall benefit, except to promise more free stuff to a potential constituency and buy some more votes next election.
10. Community health centers would receive an additional $11 billion, doubling the number of patients who can be treated regardless of their insurance or ability to pay.
This is really an issue of the seen and the unseen, like most of these points...

To acquire that $11 Billion, the government has to drain it from some other part of the economy.  So by doing this, they are killing opportunity in other sectors.  And in some cases, the money they are taking from the private sector may very well have been used to privately fund exactly those kinds of operations!

Unfortunately, we'll never know about that because while it's extremely easy to see 11 billion dollars worth of new free clinics, it's impossible to see precisely what the uses for that money would have been.  That's what's always going to be unseen, and the inability of many people to realize the unseen consequences of policy - even when the policy is created with good intentions (aren't they all?) - is one of the banes of my existence ...

There used to be numerous community health centers & free clinics all over the United States which were run privately by charities, religious organizations and for-profit hospitals.  Additionally, most doctors were - and probably many still are - more than happy to work with their patients on sliding fee scales where the poor would pay little or nothing and wealthier patients would have higher fees.

The trouble is, when the government drains money from the private sector to give to things like this - it's not only that they are destroying other parts of the economy to do so, but without market signals to guide it's decision making process, it has no way of knowing how to efficiently allocate resources.  On top of that, there's a huge amount of administrative loss as the revenue being collected by force has to be processed by the IRS, congressmen and whoever runs the program setting up these new community health centers.

So it's not enough merely to allocate $11 Billion to new hospitals - which is just about the only thing in this bill that will increase any aspect of the supply of medical resources - but they also have to be built in the right places... And that can't be determined by political favors & special interests, but by real demand as determined by actual health care consumers.

But that's just not possible for government to accomplish.

Even if these clinics manage to get built, which seems unlikely within the next 10 years or so, given the high level of restrictions and red tape involved in such a thing, and even if they are actually placed in areas where real people need them - as opposed to the districts of some politicians who really want their name on a hospital - they still have to manage to be run in a sustainable manner and not just become dilapidated money pits, draining local treasuries until they finally have to be shut down.

That is one of the crucial differences between charitable organizations, and government mandated entitlements... The private charity must be sustainable in order to keep functioning in accordance with it's mission.  This means there is pressure to keep service & quality high, and to run their organizations in ways that are friendly to their neighbors, and which succeed in garnering actual donations.  Government running businesses quickly devolves into the conditions most people find at their local DMV or Post Office.

So it's not that I'm against free clinics and help to the poor, I'm a big fan of both things actually, but it's that I realize that to be really successful, such things need to be privately funded. But the really important question no one at MoveOn.org has asked here is: "What will not be built or funded with that $11 Billion?"

What jobs have been lost? What companies and individuals bankrupted?  What buildings have gone unbuilt? What families were unable to afford a better school, a better house, a better life?  What kids were unable to go to college?

In economics, what is unseen is far more important and far more difficult to recognize than the surface level transaction - but throughout the entire list presented above by MoveOn.org, they consistently neglect to consider anything that happens before - or after - the one change they can see directly. They ignore where the money is going to come from, they ignore the behavioral shifts that new incentives will encourage, and they ignore the massive amount of resources that are being sucked away from people who are already overburdened with regulation & taxes.

* * * * *
I know this has been very long, so if you made it all the way through, congratulations...  But the point here is that the cheering in some circles about the passage of this health care bill is based largely on complete ignorance of economics and of the long-term effects of policy.

There is simply no way that this legislation doesn't directly result in higher costs of medical care precisely because (apart from, apparently, a few dozen free clinics paid for by magic), it drastically expands the demand for health care while crushing most of the elements of the economy that would actually improve supply.

So what if everyone is "insured", if there aren't any hospitals or doctors to go see, and no MRI machines to use when you need a test?

America is currently the world leader - by far - in innovation, and we're the world leader on treating serious illnesses and problems that most of the world simply isn't equipped to handle.  We've accomplished that via the tiny slivers of remaining freedom & competition that remain in what 60 years ago was a fairly healthy market-based health care system.  

All of that has been destroyed this week... and with it, any hope of better quality or more affordable health care in the future.

Good luck, America.

Saturday, March 20, 2010

A Smattering of Health Care Thoughts

Regarding the pending health care legislation, here's a string of comments at Reason's Hit & Run blog:

ola|3.20.10 @ 3:32PM|

All bills for raising Revenue shall originate in the House of Representatives.
Does this bill "raise revenue"?

John Thacker|3.20.10 @ 3:38PM|

There's a stupid loophole around this, but, yes, Congress has thought of this problem.
Technically, the Senate bill is actually a House bill. It's an unrelated House taxation bill (probably technical) that the House passed much earlier in the session. Senate Majority Leader Reid held the bill in reserve to use as a shell for things like this.
The bill was then completely replaced with an amendment in substitute of its entire text; the amendment being the Senate health care bill. This was then passed. Thus, technically the Senate health care bill is a House tax bill that's been radically amended, and the House can agree to the Senate changes.
It's pretty absurd, but the Senate has used this workaround before, and the parliamentarian is okay with it.

Prolefeed|3.20.10 @ 5:35PM|

The short version: it's called "gut and replace". Happens all the time -- the majority party introduces some innocuous bills that do very little, but have a very broad title, and then shovel in whatever language they want when the occasion arises.

zoltan|3.20.10 @ 6:15PM|

What makes this legal?

Ska|3.20.10 @ 6:46PM|

Lawyers, duh.

I can't tell if it's funny, or just down right depressing.  It's definitely true, but I really can't make up my mind as to whether or not it's worth laughing at, worth crying about or worth breaking out the tar and the feathers.

Also from this comments thread was a link to Rep. Paul Ryan talking about his plan for Medicaid.

There are three things about this video that strike me on first viewing, especially not really knowing too much about Paul Ryan to begin with...
  1. He's created what seems to be a good idea addressing a very serious problem in an intelligent way, and he's extremely well prepared in defending said idea.
  2. House Rules Committee Chairman, Louis Slaughter is either willfully ignorant, unimaginably stupid, downright evil, or some combination of the three.  Note that she was also the one who suggested that instead of actually voting on the health care bill, the house just "deems" it to be good to go...  Cause, you know, something that's already hated by a majority of the American people shouldn't even really be subject to a full vote anyway...  Ugh.  And...
  3. Take careful stock of the other people in the room besides Paul Ryan.  That, my unaware American friends, is what socialists sound like.

I know the word socialism gets thrown around a lot as a perjorative.  But the fact of the matter is that it is actually a defined political philosophy, although there is some debate on the specifics.  The point of it, however, is that resources are centrally controlled and distributed based not on voluntary, private exchange (as no one gets to own any private property in such a system), but on centralized, government mandates.

Here we have Paul Ryan suggesting that instead of operating in a situation where people get taxed heavily and then the government decides what benefits they shall receive, we should provide people with the freedom to choose what they want for themselves - not only cutting out the middleman and depoliticizing health care decisions for the elderly, but also reconnecting price signals between producers & consumers in the medical sector.  In essence, Paul Ryan is proposing a version of Medicaid that looks more like the Food Stamp program, which (shock!) actually works fairly well precisely because it keeps price signals intact and lets individuals make their own choices based on their own tastes & needs.

What none of the other idiots in the room seem to grasp is that if individuals were actually in charge of paying for their own care directly (even with government assistance in the form of vouchers) then there would actually be competition among producers - in this case insurance companies, drug manufacturers and doctors/hospitals - for consumers' business. JUST doing that - even if we made absolutely no other changes at all - would result in a world where health care prices actually go down!

Yet all anyone behind Rep. Ryan can say is that his plan won't keep up with "health care inflation" - which is something that's 100% caused by government involvement (as it is in every other area they dominate, such as education and housing) and under his plan, the way he described it, would probably be much less of an issue... There's that Parmenides' Fallacy again slapping me in the face with its stupidity.  I wish it were slapping our congressmen & women in the face instead, but alas, their stupidity seems always to go unpunished.

And by the by... Check out Reason.TV on this issue, as they have a great explanation on why it's imperative that we reconnect price signals in health care:

Sadly though, every other person in the room with Ryan obviously cannot even imagine a world in which the power-brokers don't get a say in other people's health care decisions.  And that, my dear friends, is why they have earned the label "socialist".

It's positively disgusting to me... I hope it is to you.

I cannot stress enough that the essence of socialism - in all it's various forms from the U.S.S.R., to Nazi Germany, to fascist Italy, France & Spain, to right here in the good old U.S. of A. - is central control.  A few hard core Marxists hold out on the idea that for someone to "be" a socialist, they have to advocate the total abolition of private property, but why do that when the fascist strain clearly proved that you can control the resources of the world and still pretend to leave ownership in the hands of individuals?  

There is no need to nationalize everything when you can write laws which force individuals to do exactly what you want them to do anyway.

And that's what it's all about... Freedom vs. Control.  There is, as Ludwig von Mises said, no third way.

"Capitalism and socialism are two distinct patterns of social organization. Private control of the means of production and public control are contradictory notions and not merely contrary notions. There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism."
Paul Ryan here is coming down on the side of liberty, and for that he gets my thanks... However... All the other socialist asshats in the room can kindly die in a fire.  Surely that would be preferable to a world where each of these fools gets to wrap their grubby little fingers around the neck of the American economy and continue to throttle it to death with their idiocy.

The Parmenides' Fallacy in Health Care

A couple days ago, my beautiful, and extremely brilliant girlfriend was talking to me about a somewhat rarely considered logical fallacy called the Parmenides' Fallacy...

As I discovered, there is actually a blog (sort of) devoted to this particular fallacy, and the authors of that blog reference Prof. Philip Bobbitt, who coined the term.  Bobbitt's explanation is as follows:
"The Parmenides' Fallacy occurs when one tries to assess a future state of affairs by measuring it against the present, as opposed to comparing it to other possible futures.”
Elegantly said, I think.

The fallacy is probably one of the most widely employed by people in all walks of life, and one of the least discussed or known (perhaps because it was so recently coined).  It is also a bit hard to wrap one's head around, so let me provide an example of how this logical problem plays out in the real world.

...And for that there is no better example than the government's own financial prediction organization, the Congressional Budget Office.

Greek Philosopher, Parmenides
The Congressional Budget Office unfortunately (and somewhat by design) winds up employing this fallacy constantly in its cost estimates of new programs.  Take, for instance their recent cost estimates of the latest iteration of the "Health Care Reform" bill up for a vote this week.  The CBO's estimates were somewhat positive for the supporting politicians because they tentatively said that - if there were additional scheduled cuts that actually happen the way the sponsors claim - the bill will reduce deficits by hundreds of billions of dollars over ten years.  Great news right?

Well... No, actually.

One of the problems with the CBO is that they are extrapolating the future demand on the nation's health care resources based on today's demand.  But as Dan Mitchell of the Cato Institute points out, this is a very bad plan indeed:
"The CBO has a very dismal track record of getting the numbers wrong, in part because there is no attempt to measure how a bigger burden of government has negative macroeconomic effects, but also because the number crunchers do a poor job of measuring the degree to which people (recipients, health care providers, state and local politicians, etc.) will modify their behavior to become eligible for other people’s money. The problem is compounded by similar mistakes for revenue estimates from the Joint Committee on Taxation, which (like CBO) makes no attempt to capture macroeconomic effects and has a less-than-stellar history of predicting behavioral responses."
And thus, we have the Parmenides' Fallacy working right before our eyes.

The Congressional Budget Office is looking at the current state of affairs (the amount of health care resources used per person when individuals still - even to a comparatively small degree from what would exist in an actual market-based health care system - are responsible for paying for their own treatment), and assuming future conditions based on the present.

The trouble is, when health care is believed to be "free", the behavior of the average health care consumer will drastically change.

It's a fundamental principle of economics, and easily observable reality in human nature, that when something is free people consume more of it.  Now, there are often arguments made that "Well, no one plans to get sick, so the idea that they're going to just break their own legs or injure themselves so they can go to the doctor more is absurd".

True enough.  But those arguments miss the point.

What will go up, as has done already with increasing government involvement in health care over the last 50 years, is the frequency with which people go to the doctor even for unnecessary problems, the level of drugs (prescription vs. generic, for instance) they purchase, the number of tests run per visit and other activities that propel costs higher & higher each year.  When the "someone else" is paying for their health care, people - both doctors & patients - on average are much less discriminating on what they actually need to spend their money on and rather go for basically everything possible.  Someone else is footing the bill, so why not?

The problem is that this mentality puts an enormous strain on the finite medical resources of the nation, and as a result, prices rise and access becomes more and more limited.  Of course, by setting terms carefully, insurance companies can limit this behavior to a degree currently, though not that much unfortunately, as there are a lot of restrictions already on those companies divorcing price from the end consumer.  Plus, about 50% of all health care is paid by the government already, further compounding the problem...  But the new health care legislation will change that situation entirely, warping the incentive structure even further towards a disconnect between price of goods & available supply - and the CBO doesn't really take that into account.

The CBO is making a crucial error in the way they calculate costs, and to a large extent, we can't even blame them for it! The system itself leads to this very problem... Politicians don't offer a dozen different bills for the CBO to compare & contrast, they offer them one bill at a time, and deliberately ask them to compare the future with that legislation to the present... The system promotes the fallacy.

And that's not the only problem, by the way!

Politicians are doing everything they can to game the system and use accounting tricks to skew the numbers.  It's no surprise that people who have vested interests in getting bills passed will manipulate the numbers a much as possible to make the bills more tenable.  This is especially true when we're talking about legislation that adds $1 Trillion in new government spending (from what source this magical trillion dollars comes from I still haven't the slightest clue!) in the middle of a severe global economic recession.

The Congressional Budget Office has no choice but to calculate future costs based on the data presented to them by politicians writing new legislation.  And like the rest of us, the folks who make up the CBO aren't psychic and can't predict the future.  When a politician says that in the future, other programs will be cut & salaries reduced, etc. to pay for this massive new entitlement expenditure, the CBO has to take that politician at his word and include that in their analysis...  Even when the entirety of human history shows that governments the world over never makes good on such promises.

As Michael Cannon (also at Cato) discussed recently as well, there are a ton of completely obvious problems with the political math already anyway simply due to politicians using their knowledge of how the CBO process works to game the system itself.  For example:
"As former Congressional Budget Office director Donald Marron has explained over and over, the figure that Democrats consistently cite for the cost of their bills is only the CBO’s estimate of the cost of federal spending related to the expansion of health insurance coverage.  It is not the full cost to the federal government, because each bill also spends taxpayer dollars on other items.
Moreover, the on-budget costs of the legislation probably account for only 40 percent of the total costs.  The other 60 percent come from the private-sector mandates.  But Democrats have systematically suppressed any estimates of those hidden taxes, probably because such an estimate would reveal the full cost of the legislation to be closer to $2.5 trillion over the next 10 years."
So in truth, while it seems like I'm railing against the Congressional Budget Office, I'm really not...

I think they're doing the best they can, and probably the best job any country could hope for in the field of analyzing the future costs of government... But their job is, at root, completely impossible.  Even at their absolute best, their numbers will still always be wrong... And I think this all goes into why there can be no rational economic calculation with government.

It's not the CBO's fault, but with politicians busy playing fast & loose with the numbers and using tricks to hide the truth of how much the American citizens are going to be on the hook for in the coming years, the very nature of how our cost-estimating agency operates pushes it into accepting a pretty serious logical fallacy as the basis for it's predictions.

The thing the CBO really needs to be doing primarily is reviewing multiple courses of action and assessing their relative merits in the future against other possible futures.

What will health care cost if we do nothing based on current estimates?  What will happen to that number if so-called "Health Care Reform" is passed?  What will happen to that number if real reform happened instead?  It's useless to view the future and say it's better or worse than today - of course it will be, one way or another.  What isn't useless is trying to determine which of many possible futures are going to bring about the best results and then using that knowledge to pursue intelligent courses of action.

Of course, this actually requires people at the CBO and within the government in general think more like decent economists and weigh options - but this isn't really a possibility.  They are charged only with reviewing legislation as it comes to them, not with producing alternatives... And the political process would never give them the time or latitude they'd need to accept 100 different plans (which aren't designed simply to game their review process) and then analyze each plan and legitimately compare one future to other possible future alternatives.

The asinine thing about the current health care legislation is that even if it were true that this particular iteration would reduce budget deficits over 10 years (and believe me, it isn't), it's *not* true in any case that the bill as it is is the best possible way of accomplishing that.  Comparing a future where we reduce some deficits to the present or the results of the present course we're on may show improvement, but assessing the future based on what is currently happening is a fallacy precisely because it precludes the possibility that there are other possible futures which would be even better.

This is a common theme with government, and a huge point of contention with free market economists and myself.  Politicians claim, for instance, that bailouts have saved millions of jobs and that we should be thankful because we would have lost more than we have if we had "done nothing".  However, I would contend that had we followed the prescription set out by folks like Ron Paul, and let the artificial bubble collapse quickly and help adjustments in the market with streamlined bankruptcy proceedings, and clear processes and even-handed application of the law to prevent theft & fraud... Not only would we have even more jobs today than we do, the correction would be over by now and the country wouldn't be in the grips of a depression, and businesses wouldn't be constantly leaving the US for more easily navigable climates - such as Singapore.

But that possible future was ignored two years ago, and we are now stuck hearing the President tell us how bad things would be today if they had "done nothing" - which is a conveniently unfalsifiable statement, since we can't just travel to another universe where the government actually embraced liberty in a time of crisis - but he doesn't bother to point out how much better things would be had they done the right things...

(I feel compelled to note here that the same Parmenides' Fallacy applies to proposed climate change legislation too, by the way... But you can ponder that one on your own.)

But back to the topic at hand... One way or another, the cost savings are a lie, but politicians can point to the present state of affairs and say that in 10 years with health care, they're going to "save" $100 Billion (after spending $2.5 Trillion, of course).  Sounds great, until you realize that if they actually took a market based approach they would not only not have to spend $2.5 Trillion in the first place, but would actually wind up reducing the cost of health care around the United States significantly and save many hundreds of billions of dollars, or even trillions, for real.

However, because they employ the Parmenides Fallacy - we don't actually get presented with that option.

The way it is all presented to the public is that there is essentially only one alternative, and our choice is stay with things exactly as they are or agree to a plan that politicians would have us believe will be marginally better than the present condition.  And we're supposed to cheer our great leaders for their bravery.

It's kind of an insidious fallacy in a way simply because it's very subtle and requires a depth of thought that a lot of people don't really have to get around.  It's just not enough to be able to think "If I do X, will that make me better off than I am today in 10 years?". We must also, and more importantly think, "If I do X, Y, or Z - which of these will make me best off compared to each other in the long run?"

The CBO, and more importantly our Congress, never do this... And even if that task were remotely easy to do, the system is designed so that they can't.

Wednesday, March 17, 2010

Peter Schiff on Krugman

Good lord, Paul Krugman is a moron... Here Peter Schiff explains to Paul Krugman, that in fact... No... We can't print money indefinitely or buy our own bonds.  It's flat out impossible how ridiculously bad an economist Krugman is.

What am I doing wrong?

Yesterday, I was passed over for a position that I strongly believe I was absolutely, 100% right for.

This isn't the first time this has happened to me, not even the first time this year, in fact.  But it still perplexes me a little bit.

Since graduating from New York University, I have to be honest... It's been an immense struggle finding appropriate work of any kind. A great deal of this problem has been purely an issue of dumb luck and an accident of timing. I graduated with my Masters in May of 2007, right at the tipping point of the economic bubble.  Just a few months later, and the recession had officially started.

There had been ruminations earlier in the year, even by the very architects of our economic destruction such as "The Maestro" himself, Alan Greenspan, who said in February of 2007:

"When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign..."

Greenspan's commentary, while at least miles ahead of the idiotic schlock being pedaled by his replacement, was still shockingly vague and obviously lacked much in the way of any robust explanation or evidence.  For Greenspan, it was just a hunch - possibly left over from the days where he actually had any valuable understanding of economics.

For the fine economists of the Austrian School however, the predictions were already piling up... They had been warning of the coming catastrophe since Greenspan started rapidly expanding the money supply in 2002 causing the initial boom and subsequent period of malinvestment.

After warning of the unsustainable boom in housing in 2004, by April of 2007, Swedish economist Stefan Karlsson wrote:

"However, barring such an unexpected positive shock, it seems increasingly clear that we will see a US recession this year. The main reason for this is that the housing bubble that fueled the recovery of the last few years has essentially burst."

And by October of 2007 - when Federal Reserve Chairman, Ben Bernanke, was still busy telling everyone that the economy was just super-peachy and there was nothing to worry about - one of my favorite economists, Robert P. Murphy was busy warning that we were on the precipice of what he believed would be a tremendously severe recession.  He wrote:

"For those versed in the Austrian theory of the business cycle, as developed by Ludwig von Mises and elaborated by Friedrich Hayek, the aggressive Fed "stimulus" is ominous indeed. Not only will it pave the way for much higher price inflation than Americans have seen in decades, but it will also exacerbate what could be the worst recession in twenty-five years.
From 2001–2004, the Fed kept (real) rates at the lowest they've been since the late 1970s. One of the consequences that has already manifested itself is the housing bubble. But a more severe liquidation seems unavoidable. The recent Fed cut may postpone the day of reckoning, but it will only make the adjustment that much harsher."

It's now quite clear who was correct.  Yet the Austrian School is still ignored, in favor of the vagueries of Monetarists like Greenspan and the complete, and utter failures that are the Keynesians...

All the more annoying to see Bernanke get reconfirmed and praised for all of his "excellent" work, isn't it?

All that said, I actually didn't set out here to write a blog about economics today (for once!).  I am just supporting the point that by graduating with my Masters in mid-2007, I entered the job market at the absolute worst possible time in a generation... Debatably in the worst possible time for 80 years, in fact.  So, yeah... That's the definition of horrendous luck, as far as I'm concerned.

So it hasn't been very fun...  Jobs have been few & far between, and the ones that have come with much difficulty have disappeared in an instant.  It took me 4 months to land my first job in Los Angeles overseeing the live instrumental music productions on four of Holland America's cruise ships...  That job lasted only 8 months before the whole program was basically dismantled.  Then it took me another five months or so before I finally started working as a music editor for a music software company.

While I'm actually still great friends with some of the people from that company, the job itself was in a constant state of deterioration from the moment I did my first interview.  What started out as a full time job paid at $60k a year dropped down to a 30 hour a week job at $40k a year, and within 6 months, it was downgraded again to a "less than 30 hour a week" job paying $35k a year...  Eventually, the predictable trajectory of that position played itself out and I found myself out of work yet again.

For the record, there was nothing to be done about that - it was just a consequence of a declining economy - and I walked away on really good terms with everyone and with one of the best letters of recommendation I've ever gotten.

Now... Fortunately, I seem to be good enough at what I do that I am still employable in a freelance capacity - but with a sizable graduate school debt, car loans and other payments, freelancing isn't really an awesome long-term solution unless the projects coming in were consistently high-budget.  Of course, anyone who's ever worked freelance should know how much of a fantasy it is to expect consistency of any kind - much less to expect to be consistently paid well for your work.  Hell, it's often too much to expect that you would even get paid on time!

So, unfortunately, really steady work and massive budgets is just not the situation I find myself in most of the time and it's a gigantic struggle to stay afloat in this environment.  Sure, there are rewards in the form of time, personal pride and the freedom to set my own schedule (which seems to strangely involve me working from 10pm - 4am more often than not), but the harsh reality is that I already know that this isn't sustainable.

So every week, some time is devoted to finding a "real" job... By which I mean, a W2 job where I show up and someone else tells me what to do, then I do it, get paid & go home, never to think about that day again.

Over the past 3 years I've seen a steady decline in available jobs for someone with my background & skills. This is somewhat shocking as I have a fairly considerable range of abilities.  Without going into excessive detail, as a media producer my resume is pretty good - even in spite of the rough environment I've been stuck with since college.  And aside from the skills provided by my formal music production education, I've gone out of my way to learn a lot about graphic design, website creation, videography & video editing, and maybe most importantly of all, business management, systems organization and economics.  Of course, I have my weak areas as well - the most glaring being salesmanship (which is admittedly the one thing I probably most need to do better).

But one way or another, I've still forged on and applied for a number of positions that I've been qualified for - all while still trying my best to work in a freelance capacity.  Most of these jobs I really don't care about, and were either marginally qualified for or really not interested in anyway.  As I noted earlier on this blog, my career goals have shifted from working generally in entertainment towards working in media production for educational & liberty-oriented projects.  That is the goal, and one I continue to pursue diligently.

And that's where it gets frustrating for me... There have been a few jobs in the last year or so which I have been perfectly qualified for and which I have been immensely passionate about doing.  Yet, in the last month I was told that I was in the "top 20" candidates for one, and I went through 2 rounds of interviews before being rejected for another.

I'm struggling to figure out why...

Don't misunderstand me either, I'm not whining - and I'm not denying the fact that it is possible that there are 20 people out there who are better, more passionate or who have better resumes than I have with respect to these positions.  I submit, as humbly as possible, that I find that a bit unlikely...  But it is certainly possible.  I won't rule that possibility out, but it seems more likely to me that I'm actually doing something wrong.

I feel like perhaps I've missed a beat somewhere or I've offended someone perhaps - although to be quite honest, the one person who I thought I might have offended recently re-blogged my Profits video with compliments, so I have considered that I may be wrong about that.

So, I'm getting back up again, dusting myself off once more and taking the ego bruising.  But anyone reading this probably knows me at least enough to realize that I'm a pretty decent student of economics and that I recognize that the market provides signals which can only be ignored at one's own peril.

Is the market telling me I'm not good enough, not wanted or not well-suited for the path I have chosen?  In this I mean specifically producing educational & libertarian media.  Am I being rejected because I lack the appropriate connections or friends, or because I tend to be suggesting a somewhat different approach to these things than a lot of the people I'm pitching my ideas to are used to?  Or am I being rejected because I'm not actually the right guy for these jobs and should give up on this career path and start from scratch?

My goal for two years now has been to become a prolific producer of a specific type of media, but for all my efforts, I still feel like I'm spinning my wheels.  The projects that have gotten me the most notoriety have been done painstakingly with no funding what-so-ever and in my spare time.  I can't live like this indefinitely.

As it says in the blurb at the top of this blog, learning when you're wrong is the first step towards being right.  And this is my livelihood.  If I am going about something the wrong way, or if I have chosen poorly - I need to know.  I think that now's the time to look outside myself and ask my friends and readers.  So...

Please... You tell me:  What am I doing wrong?

Saturday, March 6, 2010

The Prisoner's Dilemma and Other Games

I want to briefly talk about the Prisoner's Dilemma...

For those who don't know what that is, let me quote wiki:
"In its classical form, the prisoner's dilemma ("PD") is presented as follows:
Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects from the other) for the prosecution against the other and the other remains silent (cooperates with the other), the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation.
How should the prisoners act?"
It goes on to say that we must:
"...assume that each player cares only about minimizing his or her own time in jail"
But why should we??

That's an arbitrary assumption to make based on a researcher or thought-experimenter's own values.  There are many situations which are easy to imagine where other values would be clearly dominant.

For example, in the real world being a "snitch" or being thought of as one carries extreme consequences to some criminals.  Some people also turn to crime because their alternatives are severely limited by their skills, education, social ability, personal history, intelligence or geography - and thus in some situations jail would offer an improvement to the perceived standard of living of some individuals.  Point is, there are thousands of such scenarios where the choice that game theorists define as the "optimal" solution wouldn't be the real one chosen by actual human beings.

As a result we get study after study claiming that people behave irrationally even though in reality their choices are directed by value-seeking behavior that just doesn't conform to the predicted value structure of the researchers.

However... Real life is always the baseline of what we should define as correct and theories which don't accurately describe real life need to be understood as false, or at least partly false.

Now you might think that this may be an example of question begging or circular logic since based on my above statements it would seem like I'm suggesting that irrational behavior is impossible.  As a matter of fact I do believe that irrational behavior is certainly possible but it should be defined as actions which go against a person's value-oriented goals.  In the above scenario, if a prisoner knew he was going to be murdered or injured for being a "snitch", and he did not want to be murdered, then he'd be irrational if he picked the option that led to that outcome.  Irrational behavior is possible... But the Prisoner's Dilemma actually really doesn't prove that point at all - and neither do most other game theory hypotheticals.

The trouble - from the standpoint of sociological research methodology - is that we can't actually know what the prisoner's values are.  We can make guesses and estimates, and we can even ask him (though it's dubious that he would tell any particularly intimate beliefs or feelings truthfully to researchers he doesn't even know), but ultimately human beings aren't blessed with the ability to read minds and as a result we are all in the dark about what others of our species are really after.

As a general rule, Abraham Maslow's hierarchy of needs is a good starting block:

But even the base is imperfect (some people wish to commit suicide, for instance), and once you make it into the emotional territories of Love & Belonging, Esteem and Self-actualization all bets are basically off as to what that means to different people.  You don't know what makes me happy and feel loved any more than I would be so presumptuous as to tell you what type of creativity suits you best.  It is in recognizing my ignorance on that point that a large pillar of my unwavering belief in freedom is founded.  I don't know what the best decisions for you are, and even if you make what I think are bad (or "irrational" based on my value judgment) choices from time to time, they are still yours to make.

Sometimes, researchers and perhaps more accurately lay people and science reporters need to simply be more aware of their intrinsic ignorance on these fronts.

Game theory is interesting and can be useful in some ways - but it's worth noting that we shouldn't take it as the be-all, end-all of understanding human behavior.  Likewise, any theory of societal organization, politics or economics that doesn't work in reality or is "utopian" in nature is just a bad theory.