First the spectrum, as I see it. At one extreme is communism, where the means of production and all control of it are by "the workers". The reality of this is that it is impossible. If the group is too large, decisionmaking becomes dangerously unweildy and in too many cases (the presidential election of 2016 is illustrative) easily subverted by shortsighted manipulations. Attempts to implement this have invariably led to brutal dictatorships. At the other end is laissez faire capitalism. This too is impossible. If cheating is tolerated, cheaters will win, which rarely works out for the rest of us. All attempts at being too capitalist have also ended in dictatorship (e.g. mid-70s Chile).
The right answer, therefor, lies somewhere in the middle. Enough free enterprise to foster innovation, but enough regulation to inhibit market failures, such as monopoly or inadequate service, and to take over industries when market failure has occurred.
There are plainly some industries which cannot be left to the free market. National defense is an example. Private armies are either too powerful to be allowed to serve their own selfish purposes, or too weak to be useful in a real crisis. A good case can be made that Rome fell and ended western civilization for a millennium because it had private armies. Fire safety has a similar problem. Many people go through life without ever needing the services of the fire department. But when they do, they need them in a hurry and they need a lot of expensive service. Lots of people, if allowed to make the choice, would choose to not pay for a private fire department and most of them would get away with it. But because fires tend to spread, we cannot allow this. At the same time, there are lots of industries that do perfectly well in a competitive free market, including ones that provide services and equipment to the nationalized industries. Think of companies that build fire trucks and military transports.
This middle ground does not really have a good name. The best is "Democratic Socialist", or sometimes "Social Democrat", but that's both too long and misses the target. True Socialism would have public ownership of too much of business. Democracy too is impossible for groups larger than a few hundred: we need to have a representative democracy, also known as a Republic.
I don't have a good suggestion for a better name: for now Democratic Socialist will have to do. It's important to recognize that as a Democratic Socialist I'm advocating the least amount of national ownership of the means of production as possible while preventing market failure. Capitalism, within limits, is a very good thing. But only through active, competent regulation can market failures be minimized, and only through active, competent management can those failures be corrected.
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The list of industries which have had market failures is extremely long. Here are a few:
The military, Police and Fire departments. Thomas Jefferson and others thought these functions could be served by a militia. It didn't work. The civil war was the crisis that ended the illusion.
Highways. Without government highways, we'd have very few of them. They help the economy enormously, but few would pay for them.
Transit. There are no urban transit systems which pay for themselves, but a large fraction of people are dependent upon them.
Railroads are so amazingly efficient that they can almost make it on their own, even competing with government funded highways. US railroads have had numerous market failures over the years which have required government intervention.
Telecommunications is most efficient as a monopoly, but this leads to gouging and other problems. Regulation worked brilliantly in the middle part of the 20th century, but we're back to monopolies again.
Medical insurance. Attempting to leave it to private insurance has doubled the cost and left about around 1/3rd of the population under or un insured. Nearly all insurance is in market failure, but medical is the worst.
Showing posts with label monopoly. Show all posts
Showing posts with label monopoly. Show all posts
11 December 2017
07 December 2017
Ice
My dad grew up on the North Shore of the Boston area, and when he was a child, there were still ice houses in operation. They would cut up the ice in the from frozen ponds there, transporting it on big sleds into bigger buildings where it would be stored, packed in sawdust, until it could be shipped all around the world.
Frederic Tudor (1783-1864) dreamt up the scheme when he was 22, thinking to sell ice to rich plantation owners in the American south and the Caribbean. Ships would come to Boston and the North Shore with cotton and other raw materials for New England manufacturing, and return with finished goods, which occupied less space and weighed much less. So he could buy space on those return trips for very little. It took him several attempts to overcome skepticism, and figure out how to keep the ice from melting, losing thousands of dollars at each attempt, until he figured it out. But eventually he did figure it out, and ponds all over the north shore were used, and New England ice was shipped as far away as India. Tudor became known as "The Ice King". Walden Pond was one of the sources of ice they used and Henry David Thoreau wrote admiringly about the ice harvest in Walden.
When it was discovered that food packed in ice would stay fresh a lot longer, other businesses copied the practice, and in the 1850s, ice houses began to be built around the country, especially along railroad tracks. Special cars, called Refrigerator Cars, were built insulated sides and ice bunkers on their ends, and filled with meat and other perishables. The ice would melt and drain out, so they needed to be refilled every few hundred miles along their trip. In addition, most homes had an "Icebox", which was just an insulated box into which ice and food was placed. Although invented much earlier, mechanical refrigeration finally became practical in the 1920s with the widespread adoption of electricity, but it took a long time for it to be accepted. My grandfather was a relatively early adopter, buying a mechanical refrigerator in the 1930s, despite living in the home of worldwide ice, and my father barely remembers a time when they didn't have a mechanical refrigerator. Yet my grandfather continued to call the refrigerator an "Icebox" until he died in the late 1970s.
The ice business illustrates several interesting things about economics. The first is about entrepreneurship. Tudor was born into a family that was already very wealthy. Each of his early failed attempts to ship ice cost thousands of dollars, in a time when $500 a year was a 90th percentile income. In today's money, he lost half a million dollars each time he failed, and he failed a lot. He spent time as late as 1813 in debtors prison, until his family bailed him out and he tried again. Finally, by 1816 it was a going concern, and by 1825 he was a very wealthy man. Something similar is true today: there are very few successful entrepreneurs who are making bets that would result in their families going hungry. They may have a bankroll earned in a previous job, a rich relative, outside investors. But if they lose, they lose only what they put in. Their families don't starve to death. This safety net is critically important.
Secondly, several times in the 150 year timeline of natural ice refrigeration, big businesses continued to do things in the old fashioned, labor intensive, much more expensive way despite the obvious superiority of the new way. I'll mention two: prior to 1850, food needed to be used very close to where it was harvested. In the case of meat, this meant shipping the animals alive to a slaughterhouse near where it would be eaten. This was very hard on the animals and unless they gave them rest, food and exercise, a lot would die in route, spoiling a lot of the rest. This was time consuming and expensive. The ice refrigerator became practical in the late 1850s and the basic design was in place by 1880 and would last into the 1970s. Yet shipments of livestock continued until well into the 1930s. The railroads had a monopoly though. (part of this was that they'd centralized meatpacking in Chicago: live animals would be shipped to Chicago. Meat would be distributed on ice from Chicago to the rest of the country)
In 1940, a man named Fred Jones received a patent for for a portable mechanical refrigeration unit that would eventually be the basis for what railroads and trucks would use to this day. He and a businessman friend (Joe Numero) founded a company called ThermoKing. In the late 1940s, the fleet of ice refrigerator railroad cars was pretty much worn out, their usual cycle of replacement being interrupted by the war. Pacific Fruit Express, which owned the largest number of those cars, decided to replace them with updated ice refrigerator cars, requiring the physical plant and labor to be continued, even though ThermoKing's product was obviously completely viable and a lot cheaper, and PFE's near monopoly meant that ice refrigerators continued to be used on American railroads into the 1970s. (That Jones was an African American may have contributed to this, although most likely it's just ordinary conservatism). There was no such monopoly on the highways however, and many trucking companies installed ThermoKing refrigerators on their trucks. Despite the gigantic advantages of the railroads in driving costs, fuel and more, this was sufficient to move the refrigerated transport business almost entirely to the roads, where it persists to this day.
At the same time, passenger service was also moving from rail to highway, and also to air, and the interstate highway system made shipping of unrefrigerated freight by road closer to cost and time competitive with rail. Together, this came very close to killing the railroads despite their gigantic inherent advantages. Through consolidation and government subsidy, they've survived, but it was a near thing.
Frederic Tudor (1783-1864) dreamt up the scheme when he was 22, thinking to sell ice to rich plantation owners in the American south and the Caribbean. Ships would come to Boston and the North Shore with cotton and other raw materials for New England manufacturing, and return with finished goods, which occupied less space and weighed much less. So he could buy space on those return trips for very little. It took him several attempts to overcome skepticism, and figure out how to keep the ice from melting, losing thousands of dollars at each attempt, until he figured it out. But eventually he did figure it out, and ponds all over the north shore were used, and New England ice was shipped as far away as India. Tudor became known as "The Ice King". Walden Pond was one of the sources of ice they used and Henry David Thoreau wrote admiringly about the ice harvest in Walden.
When it was discovered that food packed in ice would stay fresh a lot longer, other businesses copied the practice, and in the 1850s, ice houses began to be built around the country, especially along railroad tracks. Special cars, called Refrigerator Cars, were built insulated sides and ice bunkers on their ends, and filled with meat and other perishables. The ice would melt and drain out, so they needed to be refilled every few hundred miles along their trip. In addition, most homes had an "Icebox", which was just an insulated box into which ice and food was placed. Although invented much earlier, mechanical refrigeration finally became practical in the 1920s with the widespread adoption of electricity, but it took a long time for it to be accepted. My grandfather was a relatively early adopter, buying a mechanical refrigerator in the 1930s, despite living in the home of worldwide ice, and my father barely remembers a time when they didn't have a mechanical refrigerator. Yet my grandfather continued to call the refrigerator an "Icebox" until he died in the late 1970s.
The ice business illustrates several interesting things about economics. The first is about entrepreneurship. Tudor was born into a family that was already very wealthy. Each of his early failed attempts to ship ice cost thousands of dollars, in a time when $500 a year was a 90th percentile income. In today's money, he lost half a million dollars each time he failed, and he failed a lot. He spent time as late as 1813 in debtors prison, until his family bailed him out and he tried again. Finally, by 1816 it was a going concern, and by 1825 he was a very wealthy man. Something similar is true today: there are very few successful entrepreneurs who are making bets that would result in their families going hungry. They may have a bankroll earned in a previous job, a rich relative, outside investors. But if they lose, they lose only what they put in. Their families don't starve to death. This safety net is critically important.
Secondly, several times in the 150 year timeline of natural ice refrigeration, big businesses continued to do things in the old fashioned, labor intensive, much more expensive way despite the obvious superiority of the new way. I'll mention two: prior to 1850, food needed to be used very close to where it was harvested. In the case of meat, this meant shipping the animals alive to a slaughterhouse near where it would be eaten. This was very hard on the animals and unless they gave them rest, food and exercise, a lot would die in route, spoiling a lot of the rest. This was time consuming and expensive. The ice refrigerator became practical in the late 1850s and the basic design was in place by 1880 and would last into the 1970s. Yet shipments of livestock continued until well into the 1930s. The railroads had a monopoly though. (part of this was that they'd centralized meatpacking in Chicago: live animals would be shipped to Chicago. Meat would be distributed on ice from Chicago to the rest of the country)
In 1940, a man named Fred Jones received a patent for for a portable mechanical refrigeration unit that would eventually be the basis for what railroads and trucks would use to this day. He and a businessman friend (Joe Numero) founded a company called ThermoKing. In the late 1940s, the fleet of ice refrigerator railroad cars was pretty much worn out, their usual cycle of replacement being interrupted by the war. Pacific Fruit Express, which owned the largest number of those cars, decided to replace them with updated ice refrigerator cars, requiring the physical plant and labor to be continued, even though ThermoKing's product was obviously completely viable and a lot cheaper, and PFE's near monopoly meant that ice refrigerators continued to be used on American railroads into the 1970s. (That Jones was an African American may have contributed to this, although most likely it's just ordinary conservatism). There was no such monopoly on the highways however, and many trucking companies installed ThermoKing refrigerators on their trucks. Despite the gigantic advantages of the railroads in driving costs, fuel and more, this was sufficient to move the refrigerated transport business almost entirely to the roads, where it persists to this day.
At the same time, passenger service was also moving from rail to highway, and also to air, and the interstate highway system made shipping of unrefrigerated freight by road closer to cost and time competitive with rail. Together, this came very close to killing the railroads despite their gigantic inherent advantages. Through consolidation and government subsidy, they've survived, but it was a near thing.
31 October 2013
The Tea Party
The original Tea Party was a response to a very specific, particularly galling act by the English government. The present Tea Party is fairly close to the exact opposite.
England's American colonies were becoming more and more populated, with more and more agriculture, business, shipping, manufacturing, etc. They had noticable participation in the 7 years war (known by Americans as the French and Indian War). They had proven capable of significant independent action and self government, yet the English seemed to only see them as a source of resources and money. They had bans on American manufacture of tools and many finished products. It was galling to have to send raw materials across the ocean only to buy some of them back as finished products, which they could have made themselves perfectly well, for a lot more money. But the English wanted their monopoly. Tea was specifically protected: Americans could only buy it from certain distributors. The shipowners and sailors that lived in Boston and the communities around it were the ones who were doing all this shipping, but they had to go through a middleman who took a very large share for doing nothing but being friendly with the King or some MP, while they were doing all the work. The last straw was when a tax was imposed on this tea. While they did have a few friends there, such as William Pitt, the Americans had no explicit representation in Parliament at all. Taxation without representation! Yet even then, it wasn't so much the taxes as being cut out of most of the profits of all this trade. They wanted a freer market, with no monopolies, or at least a fair chance of being one of those monopolies.
So one night a few of them dressed up as Native Americans and threw a bunch of it into Boston Harbor.
The new Tea Party also likes dress up, but their goals are almost the opposite. They have, and have had through the entire history of the country, extensive representation. Their ideological ancestors were the ones who didn't want to give the vote to slaves, but did want to count them for purposes of representation in congress. They were the ones who murdered the inventor of our countries economic system in a duel while serving as vice president. They were the anti-immigrant "Know Nothings", they blocked acceptance of the 14 points and the League of Nations, they made the Great Depression much worse by blocking Roosevelts stimulative and social and economic programs, and they cheered as Ronald Reagan and George W Bush destroyed them and brought our country back to depression. It was only when they were rightly voted out of office for their misdeeds that they started their dressup. Even then, they still had a strong enough hand in government to cause all sorts of mischief. There is no possible interpretation by which they can be viewed as being without representation. What they want is for people to do what they want, without going through the representative process.
The more interesting opposite is that they are mostly funded by would-be monopolists: The Kochs and their Cato Institute, the Murdoch press, Pete Peterson, The Heritage Foundation. Without Fox News egging them on, there would be no Tea Party. They like to think of themselves as grass roots, but they really aren't. They are puppets--astro-turf. Their funders are very wealthy businessmen, who are tired of this whole competitive, free market thing and would like to have a monopoly. Where the original Tea Party was largely a strike against monopoly, these guys are, whether they know it or not, in favor of it.
And yes, they are against taxes. The American middle class pays among the lowest overall tax rates of the middle class of any advanced country, and tax rates are lower now, during this recession, than they were in any of the economic booms of the past 80 years. They get a lot for their taxes, and they are extremely unwilling to give any of it up, yet they still want their taxes to be lower. Although they are very willing for people that they don't like to give things up, things like eating and being able to go to school. The original tea party wasn't so much against taxes, they were against not having any representation or even a chance at representation, while still having to pay them.
England's American colonies were becoming more and more populated, with more and more agriculture, business, shipping, manufacturing, etc. They had noticable participation in the 7 years war (known by Americans as the French and Indian War). They had proven capable of significant independent action and self government, yet the English seemed to only see them as a source of resources and money. They had bans on American manufacture of tools and many finished products. It was galling to have to send raw materials across the ocean only to buy some of them back as finished products, which they could have made themselves perfectly well, for a lot more money. But the English wanted their monopoly. Tea was specifically protected: Americans could only buy it from certain distributors. The shipowners and sailors that lived in Boston and the communities around it were the ones who were doing all this shipping, but they had to go through a middleman who took a very large share for doing nothing but being friendly with the King or some MP, while they were doing all the work. The last straw was when a tax was imposed on this tea. While they did have a few friends there, such as William Pitt, the Americans had no explicit representation in Parliament at all. Taxation without representation! Yet even then, it wasn't so much the taxes as being cut out of most of the profits of all this trade. They wanted a freer market, with no monopolies, or at least a fair chance of being one of those monopolies.
So one night a few of them dressed up as Native Americans and threw a bunch of it into Boston Harbor.
The new Tea Party also likes dress up, but their goals are almost the opposite. They have, and have had through the entire history of the country, extensive representation. Their ideological ancestors were the ones who didn't want to give the vote to slaves, but did want to count them for purposes of representation in congress. They were the ones who murdered the inventor of our countries economic system in a duel while serving as vice president. They were the anti-immigrant "Know Nothings", they blocked acceptance of the 14 points and the League of Nations, they made the Great Depression much worse by blocking Roosevelts stimulative and social and economic programs, and they cheered as Ronald Reagan and George W Bush destroyed them and brought our country back to depression. It was only when they were rightly voted out of office for their misdeeds that they started their dressup. Even then, they still had a strong enough hand in government to cause all sorts of mischief. There is no possible interpretation by which they can be viewed as being without representation. What they want is for people to do what they want, without going through the representative process.
The more interesting opposite is that they are mostly funded by would-be monopolists: The Kochs and their Cato Institute, the Murdoch press, Pete Peterson, The Heritage Foundation. Without Fox News egging them on, there would be no Tea Party. They like to think of themselves as grass roots, but they really aren't. They are puppets--astro-turf. Their funders are very wealthy businessmen, who are tired of this whole competitive, free market thing and would like to have a monopoly. Where the original Tea Party was largely a strike against monopoly, these guys are, whether they know it or not, in favor of it.
And yes, they are against taxes. The American middle class pays among the lowest overall tax rates of the middle class of any advanced country, and tax rates are lower now, during this recession, than they were in any of the economic booms of the past 80 years. They get a lot for their taxes, and they are extremely unwilling to give any of it up, yet they still want their taxes to be lower. Although they are very willing for people that they don't like to give things up, things like eating and being able to go to school. The original tea party wasn't so much against taxes, they were against not having any representation or even a chance at representation, while still having to pay them.
10 August 2013
Vaporware
I just read the wikipedia article on Vaporware, and tracked down a few of its references. Interestingly, the inventor of the term is purported to be an engineer for Microsoft Xenix in 1982. There are only about 8 people which that title describes and I'm one of them. The ultimate reference is this 1995 article in the New York Times, which describes a 1982 meeting Ann Winblad had with Mark Ursino and John Ulett. I knew Ursino and Ulett quite well and I think I know what the meeting was about, although I wasn't there. First of all, they're what we called in those days "Marketeers", which was a job that included sales, marketing and what later came to be called "program management". They have some technical understanding, but they were not engineers. For a purely OEM product like Xenix, their job mostly consisted of talking to folks--media like Winblad1, Dyson, etc., potential customers, existing customers, etc., and ultimately the engineers themselves. If I understand the context, what U&U were trying to say with the vaporware comment was that while we intended to do what we'd promised, but there was not an engineer actually working on it at that particular moment. After all, there were only 8 of us and hundreds of promises made. We did eventually stop working on Xenix, but it was not until 1987. We earnestly did try to do everything we'd committed to. We did a lot--Xenix for 8086, z8000, 68000, 286, 386, and in most cases, several wildly divergent platforms for each, and several versions of Xenix. The specific thing I'm guessing Winblad was concerned about, the ability to make an atomic database operation in the face of file system caching and several processes having the file open simultaneously, was done in early '83, about a year after the relevant meeting. It wasn't terribly hard, but it took more than a week.
In the 1960s and '70s, IBM made a determined effort to capture the entire computer market. They came quite close to pulling it off. One of the many dirty tricks they would play was to announce and attempt to sell a bunch of products that somebody thought might be useful, and see which ones had the most buyers. Once they found out, they'd set about implementing those few, not bothering to implement the majority of the proposed products. A smaller company wouldn't have the working capital to pull this off. A customer considering choosing a competitor can easily be reigned in, for the cost of some hype. Eventually, this, and many other of IBMs monopolist stunts, would be banned, but not before most of their competitors had failed. This strategy is now known as "selling vaporware".
It seems to me there are three legitimate things which might be called vaporware:
4. We don't intend to do this, but we're pretending we are, to inhibit you from going with our competitor.
In other words, lying to the customer. Unfortunately, too many people on the marketing side think this is ok. If you change jobs every year or two and never have to face the consequences of being caught in a lie, this may be ok for you. But it undermines the future of the organization that appears to have done it.
1 Winblad was at the time still with a company doing accounting software, Open Systems, Inc, but her real importance was the articles she was writing.
In the 1960s and '70s, IBM made a determined effort to capture the entire computer market. They came quite close to pulling it off. One of the many dirty tricks they would play was to announce and attempt to sell a bunch of products that somebody thought might be useful, and see which ones had the most buyers. Once they found out, they'd set about implementing those few, not bothering to implement the majority of the proposed products. A smaller company wouldn't have the working capital to pull this off. A customer considering choosing a competitor can easily be reigned in, for the cost of some hype. Eventually, this, and many other of IBMs monopolist stunts, would be banned, but not before most of their competitors had failed. This strategy is now known as "selling vaporware".
It seems to me there are three legitimate things which might be called vaporware:
- We're working on it, but it'll take some time before it's ready.
- We intend to work on it, but it'll be a while before we can even free up enough time to start.
- We don't really intend to work on it unless we get enough customer demand.
4. We don't intend to do this, but we're pretending we are, to inhibit you from going with our competitor.
In other words, lying to the customer. Unfortunately, too many people on the marketing side think this is ok. If you change jobs every year or two and never have to face the consequences of being caught in a lie, this may be ok for you. But it undermines the future of the organization that appears to have done it.
1 Winblad was at the time still with a company doing accounting software, Open Systems, Inc, but her real importance was the articles she was writing.
13 August 2012
What isn't a Free Market
The right is constantly harping on how it's important that we let the free market work, that government not pick winners and losers, that the free market is always the best possible system and we must never try to replace free market systems with national ones.
All of this is wrong. Actually, most of it is correct, but the right misapplies it in almost all cases.
The theory is that the market correctly evaluates all ideas and the best ones are the ones that succeed. There's a lot of truth in this, but there are some big caveats. The most important is that there are a lot of cases where the market fails to be free for some reason. More than a century ago, it was recognized that monopolies have the power to manipulate the market for their own purposes, and with very few exceptions, when they did this it was to the detriment of everybody. Railroads, oil companies, banks, the phone company and more were all either broken up or strictly regulated to assure that the good of the public remained the first priority.
About 30 years ago we forgot what the problems had been, and set about reversing this: deregulating all of these industries and more. That mistake has led to the current high unemployment, congressional gridlock and corruption.
There's actually a fairly good metric for whether a market is free. A market is only free if it can be seen embracing new ideas. If there are better ways that are not succeeding, there has to be some reason, and usually it's that there's something preventing the free market from working.
For example, US health care is capable of providing the best service anywhere, but at a sufficiently high cost that most people can't afford that excellent standard of care, and many people can't afford any health care at all. Our rank by "outcomes" is among the lowest of any advanced country and we're the most expensive per capita by far--about double all those countries with better outcomes. We have a collection of tacit collusion, perverse incentives, corruption and several other things that allow insurers and providers to maximize profits without improving service. Most regions have only a handful of providers and many have only one. Until recently, insurers were allowed to reject customers for pre-existing conditions, which prevents customers from changing insurers when they find out their coverage is bad. There are obviously several better ways out there: Japan, Switzerland, Great Britain, many others have a variety of different approaches. All have found that eliminating or strongly regulating the market is what works. Nationalizing seems to work a little better than strongly regulating, but I think it's significant that it's close, and that costs for these others is broadly similar, with the difference mainly being in the program's generosity.
Another example: During the first years of the 20th century, Standard Oil controlled about 70% of the US market for petroleum, and almost 90% of the refining. In 1911, the Supreme Court ruled that Standard was a monopoly and required it to be broken up into 34 "baby Standards". Within a few years 9 of them: Standard of New Jersey (later Exxon)
Standard of New York (later Mobil)
Standard of California (later Chevron)
Standard of Indiana (later Amoco)
Atlantic (later part of ARCO)
Continental (later Conoco)
Standard of Kentucky (later Kyso)
Standard of Ohio (later Sohio)
Ohio Oil (later Marathon)
were all bigger than Standard had ever been. Part of this growth was the rise of the private automobile, but the success of creating a free market is undeniable.
All of this is wrong. Actually, most of it is correct, but the right misapplies it in almost all cases.
The theory is that the market correctly evaluates all ideas and the best ones are the ones that succeed. There's a lot of truth in this, but there are some big caveats. The most important is that there are a lot of cases where the market fails to be free for some reason. More than a century ago, it was recognized that monopolies have the power to manipulate the market for their own purposes, and with very few exceptions, when they did this it was to the detriment of everybody. Railroads, oil companies, banks, the phone company and more were all either broken up or strictly regulated to assure that the good of the public remained the first priority.
About 30 years ago we forgot what the problems had been, and set about reversing this: deregulating all of these industries and more. That mistake has led to the current high unemployment, congressional gridlock and corruption.
There's actually a fairly good metric for whether a market is free. A market is only free if it can be seen embracing new ideas. If there are better ways that are not succeeding, there has to be some reason, and usually it's that there's something preventing the free market from working.
For example, US health care is capable of providing the best service anywhere, but at a sufficiently high cost that most people can't afford that excellent standard of care, and many people can't afford any health care at all. Our rank by "outcomes" is among the lowest of any advanced country and we're the most expensive per capita by far--about double all those countries with better outcomes. We have a collection of tacit collusion, perverse incentives, corruption and several other things that allow insurers and providers to maximize profits without improving service. Most regions have only a handful of providers and many have only one. Until recently, insurers were allowed to reject customers for pre-existing conditions, which prevents customers from changing insurers when they find out their coverage is bad. There are obviously several better ways out there: Japan, Switzerland, Great Britain, many others have a variety of different approaches. All have found that eliminating or strongly regulating the market is what works. Nationalizing seems to work a little better than strongly regulating, but I think it's significant that it's close, and that costs for these others is broadly similar, with the difference mainly being in the program's generosity.
Another example: During the first years of the 20th century, Standard Oil controlled about 70% of the US market for petroleum, and almost 90% of the refining. In 1911, the Supreme Court ruled that Standard was a monopoly and required it to be broken up into 34 "baby Standards". Within a few years 9 of them: Standard of New Jersey (later Exxon)
Standard of New York (later Mobil)
Standard of California (later Chevron)
Standard of Indiana (later Amoco)
Atlantic (later part of ARCO)
Continental (later Conoco)
Standard of Kentucky (later Kyso)
Standard of Ohio (later Sohio)
Ohio Oil (later Marathon)
were all bigger than Standard had ever been. Part of this growth was the rise of the private automobile, but the success of creating a free market is undeniable.
25 April 2011
Medical expenses and inflation
As everybody knows by now, medical expenses have been skyrocketing and are now a large part of government spending, both at federal and state levels. The republicans want to reduce them by reducing government payments. This doesn't work, and it results in ever more people not being able to get medical care. This kills at least 45,000 people a year (and here). So then, what are the causes of the rise in medical expenses?
One of the big areas could fairly be described as gouging. This happens for several reasons, some reasonable, some lame, some opportunistic. By law, Emergency Rooms are not allowed to refuse to care for anybody, including those who can't pay. Moreover, ER care is the most expensive--patients are sicker, equipment, doctors and nurses can't be scheduled (so they have to keep a surplus on hand). Since every medical provider has this huge hole in their budget, they have to shift the cost to elsewhere. Charge higher prices everywhere else. One of the places this happens is spectacularly lame. Every provider has a deal with the insurers they work with often. Generally part of this is an across-the-board price cut, often as much as 40%. Knowing they're going to do this, they raise the prices of the individual services to compensate. Folks who haven't negotiated this deal don't get the cut. This includes insurers that don't do enough business with that particular provider (e.g. they're from a different part of the country) and uninsured customers. If you know to ask for it, they'll typically give you an "Uninsured discount" if you pay promptly or in advance, but this is more often only 25%. But if you don't ask or can't pay promptly, you pay the full price. Of course since there's this radical decoupling between actual costs and list prices, there's lots of opportunity to gouge further.
By increasing the number of people who have insurance and can thus get scheduled care for non-emergency issues, the new health care law should substantially reduce ER costs, and it should allow more people to participate in the "negotiated" price breaks. But notice that the insurance companies managed to convince congress to put this off until 2014 and are now trying to kill it.
Drugs are another big cost. For example, drug companies are able to gouge for new drugs that are still under patent, but not for generics, where the free market applies. A major bit of cynicism is the continual development of new drugs that are really the same as older drugs only different enough to be able to patent. For example, new statin drugs like Lipitor and Crestor are only trivially more effective than older statins like Lovastatin and Simvastatin, but they're able to charge 10 times as much. Doctors and medicare are aware of this but enough still prescribe the more expensive options that it's a profitable scam.. The drug companies have another big cost that is totally unnecessary but is a huge part of their costs: TV advertising. They spend a LOT more on this than they do on R&D. The return from this is small, but significant. If one company stops doing it, they'll lose market share, so they can't. The only way to stop this would be for the government to stop it all. I'm fine with drug companies advertising in medical journals and other doctor-specific promotions. But it should be banned in mass media, like TV, newspapers and general interest magazines.
Another big cost is profit taking and wasteful overhead on the part of insurance companies. A certain amount of waste is unavoidable, but we need to keep tabs on this. One recent study puts this at 20-30% of total costs. Meanwhile, Medicare and the VA are able to keep this under 6% This extra 14-24% goes on top of all other costs, including all of that gouging.
One huge cost that I haven't seen discussed much is offshoring. When Walmart (for example) buys from a Chinese manufacturer rather than a US, the price goes down. When they pay workers less, the price goes down. The standard measures of inflation, such as CPI, consist of a "basket" of products, some of which are reducing in costs this way, and some of which are not. If half the things in the basket are going down in price, and half are going up, then the inflation we measure is somewhere between. Medical care is one of the things that can't be offshored much. Even if medical care were remaining as a constant share of GDP, this would make it seem like it was inflating faster than nearly everything else. But people get sick whether their wages are high or low (in fact, low income people tend to be a little sicker). Inflation-corrected wages for more than half of the population have been close to flat for over 30 years, so those people--the majority--are less and less able to pay. Their wages are being held down, in effect, by offshoring. My solution here: we need to recognize this effect and raise wages for the bottom 80% or so. We can do this with small changes to the tax code--not really redistribution, but the effects are similar. This will be good for everybody and really not hurt those at the top.
One of the big areas could fairly be described as gouging. This happens for several reasons, some reasonable, some lame, some opportunistic. By law, Emergency Rooms are not allowed to refuse to care for anybody, including those who can't pay. Moreover, ER care is the most expensive--patients are sicker, equipment, doctors and nurses can't be scheduled (so they have to keep a surplus on hand). Since every medical provider has this huge hole in their budget, they have to shift the cost to elsewhere. Charge higher prices everywhere else. One of the places this happens is spectacularly lame. Every provider has a deal with the insurers they work with often. Generally part of this is an across-the-board price cut, often as much as 40%. Knowing they're going to do this, they raise the prices of the individual services to compensate. Folks who haven't negotiated this deal don't get the cut. This includes insurers that don't do enough business with that particular provider (e.g. they're from a different part of the country) and uninsured customers. If you know to ask for it, they'll typically give you an "Uninsured discount" if you pay promptly or in advance, but this is more often only 25%. But if you don't ask or can't pay promptly, you pay the full price. Of course since there's this radical decoupling between actual costs and list prices, there's lots of opportunity to gouge further.
By increasing the number of people who have insurance and can thus get scheduled care for non-emergency issues, the new health care law should substantially reduce ER costs, and it should allow more people to participate in the "negotiated" price breaks. But notice that the insurance companies managed to convince congress to put this off until 2014 and are now trying to kill it.
Drugs are another big cost. For example, drug companies are able to gouge for new drugs that are still under patent, but not for generics, where the free market applies. A major bit of cynicism is the continual development of new drugs that are really the same as older drugs only different enough to be able to patent. For example, new statin drugs like Lipitor and Crestor are only trivially more effective than older statins like Lovastatin and Simvastatin, but they're able to charge 10 times as much. Doctors and medicare are aware of this but enough still prescribe the more expensive options that it's a profitable scam.. The drug companies have another big cost that is totally unnecessary but is a huge part of their costs: TV advertising. They spend a LOT more on this than they do on R&D. The return from this is small, but significant. If one company stops doing it, they'll lose market share, so they can't. The only way to stop this would be for the government to stop it all. I'm fine with drug companies advertising in medical journals and other doctor-specific promotions. But it should be banned in mass media, like TV, newspapers and general interest magazines.
Another big cost is profit taking and wasteful overhead on the part of insurance companies. A certain amount of waste is unavoidable, but we need to keep tabs on this. One recent study puts this at 20-30% of total costs. Meanwhile, Medicare and the VA are able to keep this under 6% This extra 14-24% goes on top of all other costs, including all of that gouging.
One huge cost that I haven't seen discussed much is offshoring. When Walmart (for example) buys from a Chinese manufacturer rather than a US, the price goes down. When they pay workers less, the price goes down. The standard measures of inflation, such as CPI, consist of a "basket" of products, some of which are reducing in costs this way, and some of which are not. If half the things in the basket are going down in price, and half are going up, then the inflation we measure is somewhere between. Medical care is one of the things that can't be offshored much. Even if medical care were remaining as a constant share of GDP, this would make it seem like it was inflating faster than nearly everything else. But people get sick whether their wages are high or low (in fact, low income people tend to be a little sicker). Inflation-corrected wages for more than half of the population have been close to flat for over 30 years, so those people--the majority--are less and less able to pay. Their wages are being held down, in effect, by offshoring. My solution here: we need to recognize this effect and raise wages for the bottom 80% or so. We can do this with small changes to the tax code--not really redistribution, but the effects are similar. This will be good for everybody and really not hurt those at the top.
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