The Morality Of Capitalism

Posted on March 25, 2013 by alsanblog

In an op-ed piece for the Washington Post, Steven Pearlstein suggests that the nation is caught up in a historic debate over free-market capitalism and poses the question:  is capitalism moral? Pearlstein points out that over the last thirty years, the experiment with communism has been “thoroughly discredited,” and that a “billion people have been lifted from poverty through free-market competition.” But he also claims that we’ve recently seen a dark side of free markets, which for Pearlstein includes stagnation, inequality, financial crises, and 20-year-olds still living with their parents.

In praising capitalism, Pearlstein uses the phrase “free-market competition,” but when he describes the evils of capitalism, he uses the words “free markets.” Although Pearlstein doesn’t draw a distinction, these phrases are not interchangeable.  Markets can be free and at the same time non-competitive, such as monopoly. There are different forms of capitalism and what free-market advocates support is free-market competition (which is another way of describing decentralized economic power), not the consolidation of power that characterizes noncompetitive markets.

The dark side of markets that Pearlstein highlights are more likely to occur under state capitalism or crony capitalism, which  exhibit a high degree of government involvement and control over markets. Free-market advocates oppose these corrupt forms of capi-talism as much as they oppose centrally planned economies, and their solution to Pearlstein’s evils is not more government, but more competition. In so far as state capitalism and crony capitalism best describes America today, Pearlstein’s dark side is actually a critique of big government, not free markets properly understood.

Pearlstein suggests that free-market advocates believe that individuals and firms should be free “to act as greedily and selfishly” as they want within the law, “absolved from any moral obligations.” But does Pearlstein even understand how voluntary exchange within competitive markets works? Yes, firms seek to maximize profits, but  so what? In a competitive market, firms only earn profits if they can first figure out how to serve people in some way (not to mention that competition restrains prices). So let the greed flow, it’s powerless as long as consumers have alternatives, which is to say as long as markets are competitive.

It’s hard to see how serving others is immoral. Free markets serve people to a degree that government bureaucrats can only dream about (that is, if they have any imagination to start with).  Pearlstein is wrong when he implies that free-market advocates have a weak moral case against government interference. Free-market advocates do not call for laissez-faire capitalism – they understand very well that government is necessary to provide the legal framework, including the regulations dealing with legitimate market failings within which competition will thrive.

Pearlstein concedes that free-market advocates have a stronger case against government “confiscating the money earned by one person to give it to another.” But for Pearlstein, one of the glaring problems with the moral case against redistribution is that because today’s economy is so complex, capitalism might not distribute income in a way that “accurately reflects everyone’s relative economic contribution.” Because big government is the alternative to competitive markets, Pearlstein’s skepticism implies that politicians and bureaucrats are more qualified to measure everyone’s economic contributions than a competitive market.

Pearlstein’s confidence in big government is misplaced. One of the great strengths of free markets is precisely the ability to sort through today’s complexities. For example, know-ledge is decentralized and markets are better suited to exploit knowledge than bureau-crats. Pearlstein is right that the gap between top income earners and average earners has been expanding, and that labor’s share of national income has been declining. But this is more likely the result of a lack of competition in markets and so the solution again is not more government, but more antitrust enforcement to insure competition.

Free markets and competition in America have created an economy that has generated the greatest prosperity for the greatest number of people in the history of the world. Prosperity and freedom of this magnitude could hardly be characterized as immoral. Pearlstein doesn’t seem to get this, especially when he confounds (intentionally or otherwise) state capitalism with competition in free markets. America needs to go back to the decentralized approach that has made this country great, not continue down the road with policies that created the “dark side” of the economy in the first place.

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Story Of The Bill

Posted on March 19, 2013 by alsanblog

The reaction over the proposal by Cyprus to tax the savings deposits of the country’s banks is pretty amusing. Evidently, many people think the proposal is shocking, but how shocking is it really? Don’t people understand that at some point, after living large under the European welfare state (as if the problem is confined only to Europe), they would eventually have to pay the piper?

This affair is reminiscent of the old Seinfeld comedy bit about the reaction of people when they get the check after an extravagant dinner at a restaurant. Everyone is mystified by the strange object as they pass it around:  Does this look right? Does that look right? Why did we order so much food? – we’re not hungry now. Restaurants sometimes put the bill under a cover so that it looks like a book which Seinfeld calls the “Story of the Bill.”

So now the good people of Cyprus have their own Story of the Bill. Except rather than be mystified, they’re angry that they might have to pay the bill themselves. For sheer gall, this is only matched by Sandra Fluke’s demand in this country that others pay for her contraception. The mullahs in Iran must be rolling on the floor with laughter – taking the West will be like taking candy from a baby.

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Demand Competition In Healthcare

Posted on March 16, 2013 by alsanblog

Wise Boy (aka Ezra Klein) and other members of the Big Government priesthood often claim there is no evidence that competition can control healthcare costs. Although it’s true that many healthcare markets may be less competitive than they should be, the answer is more enforcement of the antitrust laws, not a turn toward greater control by a central authority.

One of the basic truths about social activity (Basic Truth #1) is that the existence of alternatives in a voluntary exchange context makes it very difficult for one party to exploit another. Of course, Wise Boy may be too busy reviewing graphs, charts, tables, etc., and looking at all the trees, to have time to think about basic truths and big pictures, but most likely he and his co-religionists would at least agree with this truth about alternatives.

So when Wise Boy denies that competition can control costs in healthcare, he implies that alternatives do not exist in healthcare markets. Now, one reason alternatives might not exist is that the market is too small to support more than one producer, and such markets are recognized as natural monopolies. In cases of natural monopolies, society can choose:  (1) private monopoly, (2) government monopoly, or (3) private monopoly regulated by the government.

In sparsely populated rural areas, there may be room for only one hospital, and in those markets, one of the three choices must be made. But most geographic markets in health-care – hospitals, physicians, medical devices, pharmaceuticals, insurers – are large enough to support many producers. The markets for medical devices and pharmaceuticals are worldwide in scope whereas geographic markets for hospitals, physicians, and health plans are local, but most are still large enough to support competition.

Liberals ultimately don’t argue that healthcare markets are natural monopolies and so evidently we all agree that alternatives are at least possible in healthcare markets, viz. competition can work in healthcare. Yet liberals reject policies to foster competition in favor of a system that centralizes control over healthcare to an unprecedented degree: no country in the developed world places 315 million people under the thumb of a central authority.

The liberal position is baffling because a second fundamental truth about social activity (Basic Truth #2) is that economies based upon markets and competition always out-perform economies that are centrally controlled and planned. The question isn’t even debatable – it’s been settled for a long time – but liberals ignore the facts and instead demand a system guaranteed to produce low quality, stagnation, and eventual decline. And this from those who claim to be “empirically driven.”

In addition to competition in markets, competition should also be understood to include competition between states in a decentralized political system that limits the power of the central government. Healthcare is primarily a local activity:  most people go to hospitals and doctors that are located within a few miles of where they live. This fact, along with the clear superiority of market-based economies and ideas of self-government and self-determination undermine the liberals’ rationale for central authority.

So how should the antitrust laws be enforced? For starters, the government should not only block proposed mergers that would lessen competition, but go beyond this to actually break up dominant entities in any healthcare markets, not just markets for insurers as conservatives demand. Some argue that “accountable care organizations” represent a new model that will reduce costs, which is all fine and dandy. But antitrust enforcement would still be needed to insure that efficiencies are passed on to consumers through competition.

If accountable care organizations aren’t restrained through competition, we’ll be looking at price controls implemented by the central authority. And to handle the excess demand that price controls invariable create, the central authority would be obligated to restrict access to care. Any government can control costs in this manner, but by continuing to preach Big Government, Wise Boy and his cohorts are advocating nothing more than stagnation and decline for almost 20% of the economy. Americans deserve better.

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Good Riddance To Hugo Chavez

Posted on March 7, 2013 by alsanblog

Let’s see – rumor has it that Hugo Chavez and his family amassed a fortune of $2 billion during his 14 year reign in Venezuela, which would amount to an average salary of about $142.8 million per year. Not bad work if you can get it – Chavez made Wall Street executives look like pikers. And what exactly did Chavez accomplish to earn his lofty salary, you might ask? Well, nothing less than leaving his country in shambles.

Chavez left Venezuela with one of the world’s highest rates of inflation, largest deficits, and fastest growing debts. Not to mention the power outages, rolling blackouts, and Venezuela’s murder rate – more people are killed in Caracas on an average weekend than in Baghdad and Kabul combined. And if you’re still not impressed, consider the political repression and the shortages of milk, flour, and sugar. Maybe Venezuelans should ask for a refund of that salary.

Hugo lovers praise Chavez for reducing the poverty rate in Venezuela from 50% to 32%. But that fact by itself is meaningless – we need to put it in perspective by comparing Venezuela’s poverty rate with other Latin American countries over the last 14 years. As the Daily Beast points out, Venezuela falls short in this regard – its poverty rate is higher than the average in Latin America and countries like Brazil and Peru improved more than Venezuela. This suggests that Venezuela would have done just as well with any other leader.

And then there is Venezuela’s oil industry, with oil and gas reserves that rank among the largest in the world. Oil production has dropped by one-third since Chavez took office, and the state oil company apparently is ready to start paying suppliers with IOUs instead of cash. Slate’s Raul Gallegos characterizes the industry’s problems as a lesson in “oil wealth mismanagement,” but it can also be viewed as a lesson in mob rule.

Chavez was an authoritarian, but he still needed to win elections. Chavez may have relied on general thuggery and other heavy-handed measures to help win his elections, but he also needed the support of the mob, which he bought by stripping Venezuela’s oil indus-try. The resulting decline of the industry is almost a classic example of how authoritarian governments fronting the mob will kill the golden goose.

During the U.S. presidential election last year, the Obama team ran a campaign ad aimed at college students. In the ad, Obama promised to throw money at students for college and surprisingly enough, the ad even identified the source of the money:  the wealthy and – wait for it – the oil companies. The U.S. is far from being Venezuela, but it’s troubling that Obama seemed to be pulling a “Chavez” in promising oil company wealth to win votes.

Hopefully, politicians will think long and hard before moving toward our own version of mob rule. America’s founders worried most about mob rule and attempted to construct a form of government that would avoid it. Chavez and the Venezuelan example should serve as a reminder of where such a path ends.

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Raising The Medicare Eligibility Age Would Not Increase Costs

Posted on March 6, 2013 by alsanblog

In Medicare discussions, the suggestion arises from time to time that we could reduce federal spending by raising the Medicare eligibility age, for example, from 65 to 67. The popular liberal response (see e.g., this Kaiser Family Foundation report) is that raising Medicare’s eligibility age actually would increase healthcare costs, not lower them. But if we rethink this, we would see that raising the eligibility age indeed would not increase costs, and so the original suggestion is correct.

In its simplest formulation (i.e., assuming that the Medicare eligibility age conforms to the Social Security retirement age), increasing the eligibility age to 67 would mean shifting healthcare coverage of 65-year-olds and 66-year-olds from Medicare to private health plans. The only difference between the current structure and the “but-for” world (eligibility age = 67) would be the source of payment. So for costs to be higher in the but-for world, the shift of 65 and 66-year-olds to private plans would either (a) cause the patients to become sicker or (b) otherwise result in higher costs per unit.

It’s unlikely that changing the source of payment would cause 65 and 66-year-olds to become sicker. After all, the government doesn’t operate its own healthcare system with its own hospitals and doctors reserved for Medicare recipients. Rather, patients are treated by the same providers and treatments, whether covered by Medicare or private plans. Providers who treat 65-year-olds and 66-year-olds are unlikely to start providing substandard care simply because private health plans insure these patients.

But what about providers who charge private health plans more than they charge Medi-care? Wouldn’t this mean higher costs if we shifted 65 and 66-year-olds from Medicare to private plans? Yes, providers do charge private plans more than Medicare, but this doesn’t mean that total costs would increase if we raised the eligibility age. In the first place, the government would save the amount spent on 65 and 66-year-olds and this savings would go to the private sector in the form of tax reductions. This would give the private sector the means to cover most of the additional costs due to the shift.

Medicare prices are lower than prices paid by private health plans although not because government is more efficient, but because the government arbitrarily sets low prices. If providers accept low prices from one group, they make up the shortfall with higher prices to another group. This is called cost shifting* and it means that private plans effectively pay (i.e., subsidize) a portion of Medicare costs.

So the portion of Medicare costs that the private sector already subsidizes plus the amount returned to it in the form of tax reductions would cover the costs of the additional 65 and 66-year-olds that the private sector would cover. If the Medicare eligibility age were 67 instead of 65, we would expect that (1) Medicare costs would be less because the government would cover fewer patients, (2) total costs would remain the same, and (3) the average premiums for those covered by private plans would tend to be less because there would be more private patients and fewer Medicare subscribers to subsidize.

In some instances, liberals claim that raising the eligibility age to 67 would increase costs because shifting 65 and 66-year-olds to private plans would result in older and less healthy populations covered by both Medicare and private insurers. Both populations indeed would be older, but this is irrelevant. All that counts is the impact of shifting 65 and 66-year-olds to private plans, and as the analysis shows, Medicare costs and the average costs for individuals covered by private plans would decrease, so the liberals reliance on this fact is unjustified.

The tax reductions and cost shifting is what liberals fail to see and consider – there isn’t even a hint of their significance in the Kaiser Family Foundation report. This omission and the mistaken conclusion that raising the Medicare age would increase costs is a classic example of the kind that Frederic Bastiat wrote about in his 1850 essay entitled “What is Seen and What is Unseen.” Liberals fancy themselves “progressives,” but they’ve hardly progressed at all since 1850.

*UPDATE: Some economists, such as Austin Frakt at The Incidental Economist, deny that cost shifting occurs, but his explanation for this (following a monograph by Michael Morrisey) is based on assumptions that are unrealistic. See my post about Frakt’s analysis here.

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Wise Boy Should Wise Up

Posted on March 3, 2013 by alsanblog

According to the Wise Boy (aka Ezra Klein), the sequestration (automatic across-the-board spending cuts) proves that the U.S. government is “dumb.” Yeah, for Klein everything is dumb except more taxes and spending. He especially loves the high tax recommendations of the deficit reduction experts at the Hamilton Project which he thinks are very smart, indeed.

So Klein still cannot control his tax addiction, but really, should we even pay attention to him in the first place? One of the basic truths about, dare I say, collective action is that decentralized economies (i.e., based on markets and competition) easily outperform those that are centrally controlled and planned. It may seem that markets mess up, but if we take a closer look, we’ll usually see government behind the mess:  gross mismanage-ment of the money supply and protectionism = Great Depression; insisting that everyone own a house = Great Recession.

Yet the ineffectiveness of Big Government doesn’t stop Klein from almost always supporting policies designed to place 315 million people under the thumb of a central authority for just about everything. If Klein fails to understand society’s most basic truth, how can he understand anything else? Maybe it’s time for the Wise Boy himself to wise up.

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Sequestration Hysteria

Posted on February 28, 2013 by alsanblog

With the sequester about to take effect, the liberal propagandists are beside themselves. According to liberals, Republicans must become Democrats and any who refuse are sick or crazy. David Ignatius of WaPo characterizes Republicans as a bunch of alcohol addicted drunk drivers who are going to drive the nation’s car off the road. And he’s feeling soooo helpless as a passenger stuck in the car.

All of this because Republicans are sticking to the sequestration that will only slow down the rate of growth of federal spending. Indeed, federal spending after sequestration will still be greater this year than it was only two years ago. Rather than a nervous passenger in the car, Ignatius is more like the passenger in the old airplane disaster movies who becomes hysterical and needs to be slapped back into coherence. Liberals really need to chill out.

For some time, Democrats have shown themselves to be addicted to spending, and now Ignatius attempts to turn the addiction argument around by claiming the addicts aren’t the big spenders. No sir, the addicts are Republicans who attempt to stop the spending. And what exactly are the Republicans addicted to, one might ask? Well, according to Ignatius, they’re addicted to “showdowns.” Nice try Davey, but no cigar.

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More Medicare Is Not The Answer

Posted on February 27, 2013 by alsanblog

Matthew Yglesias is again misrepresenting Medicare, advocating that more of it is the answer to high healthcare prices. As Steven Brill has pointed out, tightening the antitrust laws is the real answer to the problem (although Brill may not really believe his own suggestion). But Yglesias is a known devotee of Big Government, worshipping at its altar, so it’s no surprise that his solution is central planning and price controls. Yeah, that’s the ticket:  315 million people firmly under the thumb of the central authority (for what is a local activity).

Yglesias is wrong when he claims that Medicare is more efficient than healthcare obtained through private health plans. The government does not have a separate system with its own hospitals and doctors who treat people covered under Medicare. Rather everyone uses the same providers and everyone gets the same treatment – the only difference is the source of payment. Yglesias claims that Medicare’s volume and “vast bargaining clout” gives Medicare lower prices, but such a claim is dubious.

Healthcare is a local activity and because it’s local, the number of Medicare patients in any one geographic market may be no larger than the volume that private health plans can offer to providers. Thus, based on volume, the private health plans should be able to wrangle similar prices in most markets. The reason that Medicare has lower prices is because the government arbitrarily sets low prices. Providers accept them because they can make up the difference by charging higher prices to the private health plans.

The higher prices paid by the private sector represents a hidden tax used to subsidize Medicare’s prices. When the private sector eventually disappears, as would happen as more people are covered by Medicare (according to the Yglesias plan), the subsidies would also disappear. At that point, the cat’s out of the bag and we’ll all be looking at a system defined by central planning and explicit price controls. Of course, Yglesias and other liberals would love a single-payer system, but it’s hardly a good idea.

The historical evidence shows that price controls and centrally planned economies are always inferior to decentralized ones that rely on markets and competition. Any government can lower costs by implementing price controls and restricting access to healthcare. But what does that give us? Nothing more than low quality healthcare, stagnation, and eventual decline. Costs may be lower in Europe, but then European healthcare systems either provide lower quality care or most likely have been able to maintain quality by free-riding on the American system.

When the U.S. completes the movement to centralized healthcare, the free-riding ends and we will all be worse off. Are liberals just ignorant about the effects of central planning and price controls that they advocate? Or do they understand the effects, but are okay with them because they believe that central planning will bring about greater equality (by lowering the quality of life for everyone)? As a factual matter, centrally planned economies do not result in greater equality, but even if they did, harming everyone to do so would be despicable.

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Break Up The Big Hospitals

Posted on February 26, 2013 by alsanblog

In his Time magazine cover story, Steven Brill criticized the prices that M.D. Anderson Cancer Center in Houston charges patients. In an op-ed piece appearing in the Wash-ington Post, a couple of the hospital’s doctors step forward evidently to defend their employer against Brill’s criticism. And no surprise, the good doctors point the finger away from the hospital and at the drug companies.

To fix the problem, the doctors suggest that Medicare be allowed to negotiate drug prices, which the law now prohibits, and they want to outlaw “pay for delay” agreements through which drug companies delay the introduction of generic products. The doctors also sug-gest that “market forces should have a greater role” in cancer drug pricing.

Their definition of “market forces,” however, would require FDA approval which the doc-tors apparently do not understand is the opposite of market forces. Brill does the same thing in his article:  he wants us to tighten the antitrust laws, meaning a move toward markets and competition, but then Brill makes additional suggestions that would destroy markets and competition. Both Brill and the doctors are incoherent.

Brill is quite correct that more antitrust enforcement is needed to control healthcare prices. But blocking mergers in obscure markets would not be sufficient – the government must also break up the big hospitals and the other big players in the industry. And a good place to start would be with the Texas Medical Center to which M.D. Anderson belongs. As Brill points out, the Texas Medical Center is a 1,300 acre, 280-building complex with 19,000 employees. It could be broken up nicely into perhaps three separate companies.

Breaking up the Texas Medical Center would increase healthcare competition in Houston and even beyond and start to bring prices down. Relying on this kind of market-based approach would be better than the centralized approach that everyone seems to find acceptable, even though all the evidence shows that centrally planned economies never outperform those based upon markets.

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Healthcare Prices

Posted on February 25, 2013 by alsanblog

In his lengthy cover article for Time magazine, Steven Brill argues that the first question in the healthcare policy debate should be “why are the bills so high,” rather than blowing past that issue to ask who should pay. Most of his article is an appeal to the readers’ emotions as he reports on the cost of healthcare, but can be objectively summarized:  the healthcare industry is very, very lucrative. According to Brill, Americans overpay for healthcare to the tune of $750 billion a year, based on comparisons with Europe.

Okay, we pay more for healthcare than the Europeans. Assuming that’s a bad thing, what should we do? Amazingly enough, Brill has exactly the right answer:  tighten the antitrust laws to keep hospitals from becoming too dominant in healthcare markets. Not only does Brill seem to favor a market-based approach, but he’s wary of heavy handed action by the central government. He understands that the deficit cannot be cut by lowering the price that Medicare and Medicaid pay hospitals because providers would simply offset such price cuts by charging private insurers more. This would in turn bring the deficit back up due to the increase in subsidies required under Obamacare.

Brill doesn’t explain how the antitrust laws should be tightened, but the ongoing consolidation in the industry would surely require the FTC or DOJ to do more than block an occasional merger in some obscure market. In other words, it would be necessary for the government to affirmatively go after and break up the big hospitals and other big actors in the industry, which would move America back toward functioning healthcare markets and freedom. The government could hardly do better than adopt such a policy.

So far so good. But wait, although Brill correctly identifies antitrust as the answer to high healthcare prices, he also makes suggestions that would mostly destroy markets. For example, he wants to impose a 75% tax on hospital profits and a tax surcharge on nondoctor salaries that exceed $750,000. Brill also favors revising the patent laws to limit profitability as well as limitations on what Medicare pays for CT and MRI tests. So it seems that Brill apparently doesn’t really believe in markets and competition after all.

Although Brill questions the effectiveness of Medicare price cuts, he oddly enough wants to give Medicare the power to negotiate lower prices with drug companies, which the law presently does not allow. But again, the price cuts resulting from such negotiations would only be offset with higher prices to private insurers. Brill also believes that Medicare is more efficient than the private sector and wants to lower the eligibility age to cover more people. In truth, Medicare is not more efficient than private health plans, but may seem so simply because the government arbitrarily fixes the prices it pays providers.

Brill’s remedies to control healthcare prices are contradictory and incoherent. The suggestions for more Medicare amount mostly to a call for more government imposed price controls and movement toward a single-payer system. Centrally controlled economies never work as well as market-based ones, and it’s quite disheartening to see Brill and others so misguided.

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