Archive for the ‘economics’ Category

American Guilds   Leave a comment

When I did my series on the Medieval period a while back, I ran across some articles that were critical of capitalism and advocated for a return to the guild system that operated during the Middle Ages. I found it interesting because the commentators were from both the right and the left. Under this system, each occupation had its own guild and all employees and employers belonged to that guild. The guild regulated business particulars like prices, wages, hours of operation, and product quality. It prevented shops from underselling one another and encouraged cooperation over competition. The result was occupational stability. Everybody had a niche in a given line of work.

Image result for image of a guildThe guild system seems superficially plausible, so it seems attractive to some minds. But, remember, I’m a fan of Bastiat, so I have taken to running every economic proposal through the “seen and unseen” filter.

Consider how a guild system must work in practice. For a guild to work properly, certain people who wish to enter a particular trade are denied entry. If a particular guild happened to have a relatively liberal policy of admitting new producers to its craft, it would insist on a minimum price for all goods sold under the guild’s auspices and/or it would limit the amount of the good that any given master was permitted to produce. Whichever of these three control options (high barriers to entry, fixed minimum prices or fixed production quotas) are employed, the outcome results in higher prices and less production than if free entry into the profession, a free-price system, and unrestricted production were allowed.

Aspects of the guild system have existed in our economy in the past and some continue today, with clearly destructive consequences. Perhaps the most obvious example was the National Recovery Administration, established by the New Deal’s National Industrial Recovery Act in 1933. President Roosevelt believed that business competition had to be restricted in order to tame the alleged problem of “overproduction” and to spread among as many firms as possible what consumer demand existed.

I won’t attempt to explain FDR’s economic reasoning. Biographer John T. Flynn noted that “it is entirely possible that no one knew less about that subject than Roosevelt.” (The Roosevelt Myth, c. 1948 [1998] page 116). Roosevelt’s belief in economic fallacies had terrible consequences. The President’s faulty grasp of what caused the Depression led him to introduce a system similar in operation to the old guild structure, with the explicit intention of reducing competition. FDR borrowed heavily from a system established by Mussolini, by the way.

Under the NRA, each industry was “invited” to establish a production code. This code would set minimum wages, minimum prices, and a variety of other regulations to be observed by the firms in that industry. Note that the code established minimum prices. All sellers would have to sell their products for at least the prescribed minimum. This dramatically reduced intensity of economic competition, since with an established minimum price in effect it was not really possible to undersell one’s competitors.

The great New York Times editorial writer Henry Hazlitt had no illusions about the NRA:

[T]he American consumer is to become the victim of a series of trades and industries which, in the name of “fair competition,” will be in effect monopolies, consisting of units that agree not to make too serious an effort to undersell each other; restricting production, fixing prices—doing everything, in fact, that monopolies are formed to do. . . . Instead of a relatively flexible system with some power of adjustment to fluid world economic conditions we shall have an inadjustable structure constantly attempting—at the cost of stagnant business and employment—to resist these conditions.2

You hear this a lot on social media these days. “Businesses shouldn’t compete. They should cooperate.” It’s held up as some sort of ideal economic arrangement. The NRA gave the force of law to producers’ collusion with regard to minimum prices and wages, hours of operation, amount of output, and still other factors, thereby eliminating competition among producers in exactly the same way the guild system did.

The NRA was a complete disaster in practice. First, although such a system would indeed raise prices, such an outcome obviously defeated the program’s other aim of increasing wages, since a rise in prices must reduce the real value of wages. Increases in prices reduce what wages can buy, so at best increased wages keep even with increased prices, so really aren’t an increase. Second, the program produced such an outcry among sensible people that the U.S. Senate finally managed to force FDR into appointing a commission to investigate the NRA. Its report, issued in 1934, described the agency as “harmful, monopolistic, oppressive, grotesque, invasive, fictitious, ghastly, anomalous, preposterous, irresponsible, savage, wolfish.”3  The act establishing it was declared unconstitutional the following year.

The NRA has been gone for a long time, but a great deal of the guild mentality remains in the U.S. economy. We can observe it in the behavior of such organizations as the American Medical Association, the American Bar Association, and others. These organizations lobby the government to institute stiff requirements to acquire a license to practice, and then places obstacles in the path of anyone else who might want to provide medical, legal, or other services. Milton Friedman suggests what is often really at work in such agitation:

The justification offered is always the same: to protect the consumer. However, the reason is demonstrated by observing who lobbies at the state legislature for the imposition or strengthening of licensure. The lobbyists are invariably representatives of the occupation in question rather than of the customers. True enough, plumbers presumably know better than anyone else what their customers need to be protected against. However, it is hard to regard altruistic concern for their customers as the primary motive behind their determined efforts to get legal power to decide who may be a plumber. (Milton and Rose Friedman, 1979, “Free to Choose: A Personal Statement”, Page 229)

The American Medical Association serves to reduce the number of people who can practice medicine, and thereby increases the cost of medical treatment beyond what it would be in a competitive market. According to Clark Havighurst, Duke University Professor of Law, “Professional licensure laws have long made the provision of most personal health services the exclusive province of physicians. Obviously, such regulation limits consumers’ options by forcing them to use highly trained, expensive personnel when other types might serve quite well.”6

Consider Friedman’s description of the guild’s operations:

One effect of restricting entry into occupations through licensure is to create new disciplines: in medicine, osteopathy and chiropractic are examples. Each of these, in turn, has resorted to licensure to try to restrict its numbers. The AMA has engaged in extensive litigation charging chiropractors and osteopaths with the unlicensed practice of medicine, in an attempt to restrict them to as narrow an area as possible. Chiropractors and osteopaths in turn charge other practitioners with the unlicensed practice of chiropractic and osteopathy.7

Yes, I’m sure most members of the AMA believe that such requirements work to the consumer’s benefit by protecting us from substandard medical care, but truthfully, this highlights how interest groups subconsciously conflate their own interests with those of society as a whole. Mancur Olson cautions people to “note that the examinations are almost always imposed only on entrants. If the limits [on entry into the field] were mainly motivated by the interest of patients, older physicians would also be required to pass periodic qualifying examinations to demonstrate that they have kept their medical knowledge up to date.”8 The fact is, studies find that non-physician providers of medical care, such as midwives, nurses, and chiropractors, “can perform many health and medical services traditionally performed by physicians—with comparable health outcomes, lower costs, and high patient satisfaction.”9

Government regulations on the chiropractic profession, lay midwifery, and on the freedom of nurse practitioners to offer services within their competence, all of which make perfect sense from the point of view of the medical guild that lobbied for them, often make no sense at all from the point of view of consumer wishes or from economic considerations. For example, studies have shown that lay midwives have a much lower mother-infant death rate and a substantially lower delivery complication rate than doctors or nurse-midwives, but they remain outlawed in many states. In many cases, non-physician medical professionals can provide health services far more cheaply than can licensed physicians, but consumers are prevented from making their own decisions regarding their medical care. We shouldn’t be surprised to find that the AMA has put so much effort into undermining its professional opposition.

But if the government doesn’t do it, who will keep us safe from unqualified people practicing medicine? Economist George Reisman explains:

[T]he members of the various state medical licensing boards around the country could constitute themselves into private certification agencies and give or withhold their seal of approval to individual medical practitioners on any basis they wished. They would simply lack the power to make the absence of their particular seal of approval the basis of fining or imprisoning anyone who chose to practice medicine without it. The consumers of medical care, who presently retain the right to judge the qualifications of the state governors and legislators who are responsible for the appointment of the members of the medical licensing boards, would decide for themselves the value of certification by this or that organization. . . . Indeed, if ordinary men and women are to be allowed to vote in elections in which their votes ultimately determine the most complex matters of foreign and domestic policy, and thus where their decisions affect not only their own lives and those of their immediate families but also the lives of everyone else in the country, then surely they are entitled to the responsibility of determining matters pertaining exclusively to their own well-being.10

Reisman further observes that if government regulations allowed only automobiles less than five years old on the roads, there would certainly be an overall increase in the quality of automobiles on the roads. But a great many perfectly serviceable automobiles would thereby become unavailable for use at all. The main victims of such a policy would be the poor.11

The legal profession in the United States is also akin to a guild (or could be called a cartel).  Everyone knows that legal services are expensive, but few realize that the barriers to entry erected by what is in effect a lawyers’ guild bear much of the responsibility for that expense. Thanks to the lobbying of bar associations, the only people who may enter the legal profession are those who possess a license from the state, which is available only to those able to afford the extraordinarily costly path of law school and the bar exam. The outcome is the desired one: fewer lawyers, and therefore higher fees.

As with the medical profession, where costs could be dramatically reduced by allowing medical personnel below the rank of physician to perform routine work, paralegals are more than capable of performing a variety of legal tasks that the guild currently reserves for lawyers only. That means people wind up paying a lot more for basic legal services. In 1987, the chairman of the Legal Services Corporation, W. Clark Durant, made an extraordinary address to the American Bar Association in which he suggested that his agency be abolished and that all barriers to competition in the market be removed. One day later, the president of the ABA was calling for Durant’s resignation.

One paralegal in Portland, Oregon, decided that enough was enough. Robin Smith, who worked for several years in a large law office, had grown tired of lawyers charging exorbitant fees that their clients could barely afford, all for work that she herself had done. She opened her own business, People’s Paralegal, Inc., where she and her colleagues offered basic legal services, such as the drafting of common legal documents, at lower prices. Not surprisingly, the guild went into action. People’s Paralegal found itself on the receiving end of a lawsuit by the Oregon State Bar, accusing the firm of violating Oregon’s prohibition on the “unauthorized practice of law.” People’s Paralegal was shut down, and ordered to pay the legal fees incurred by the Oregon State Bar when litigating them out of business!

The guild mentality results in a privileged few reaping abnormally high salaries while the vast majority are made poorer by higher fees. Should anyone attempt to give consumers an alternative to this kind of exploitation, the guild springs into action to quash the challenge. An entire society organized along these lines is scarcely conceivable, but that is what the guild system amounts to.

Lesser examples abound. During the 1990s, 15-year-old Monique Landers of Kansas opened her own African hair-braiding business. Upon returning from a visit to New York, where she was honored as one of five outstanding high school entrepreneurs, she was informed that the state licensing board of Kansas was shutting her down. No customers had complained, but the guild mentality of already existing establishments didn’t like her competing with them. She was told that she could stay in business if she spent a year at a licensed cosmetology school, but few of them teach the particular skill she already possessed, and none of them would admit her prior to her seventeenth birthday. “The Board won’t let me earn my own money, and won’t let kids like me learn to take care of ourselves,” she said. “I think owning your own business is a way of being free.”15

In The State Against Blacks, Walter Williams provides a lengthy catalog of occupational licensure laws and other barriers whose effect is to place overwhelming obstacles in front of those who wish to enter an industry.

For example, to operate a taxi in New York City, a potential driver needs a medallion from the city, which costs hundreds of thousands of dollars. It is impossible to measure how many jobs are destroyed by this kind of behavior, but we can get a sense of how much higher taxi fares are now that Uber is competing with taxis in some markets.

Agriculture provides perhaps the most disgraceful example of what the guild mentality wrought in reality. The federal government’s assistance to farmers has often amounted to encouraging them to destroy (or not plant in the first place) huge stocks of crops, in order to increase their selling prices. This is what a guild would do, though the guild would more likely keep supplies down and prices up by allowing fewer people entry into the guild in the first place, and/or requiring existing guild members to adhere to a production quota. Government is a substantially less far-sighted than guides were.

The costs and consequences of such an antisocial policy are staggering, and are all the more insidious because the beneficiaries of these policies are clear and visible, while the victims are dispersed and largely unaware that an organized cabal is taking advantage of them. Right, that sounds like Henry Hazlitt’s “Economics in One Lesson”, where he stressed the need to assess the outcome of a given policy — to be aware of the long-term consequences for all groups rather than the short-term gains of one group. How many Americans realize that the price they have to pay for sugar and all foods containing sugar as an ingredient is much higher than necessary as a result of a government program?

For most of the 20th century, the price of sugar to Americans was 500% higher than the world price, thanks to government price supports.17  Sugar producers receive an average of $235,000 a year from the policy, but it costs consumers well over $3 billion per year, and it puts all American industries that use sugar at a competitive disadvantage to foreign producers who are not forced to pay such an inflated price for sugar.18  This latter point is always overlooked by opponents of free trade, who in their zeal to protect jobs in Industry X from foreign competition neglect altogether the destructive effects that their preferential policy for Industry X has for Industries A, B, and C that use X as an input in the production of their own products. Job losses in those industries will rarely be attributed to the tariff or other privileges shown to Industry X. Meanwhile, the government can point with pride to the jobs it has “saved.”

What is seen and what is not seen.

Since 1937, as much as 40% of all oranges grown annually in the U.S. have, by law, been destroyed, fed to livestock, or exported in order to raise domestic prices. Think about that the next time you wince at the price of oranges at the grocery store.

Quotas on peanuts effectively double the price of peanuts and peanut butter.

Every dairy cow in America is subsidized to the tune of $700 per year.

All this inefficiency and destruction of wealth impoverishes society as a whole, and hurts  the poor the most. We will never know the full cost of these policies, since many of their costs include jobs never created and businesses never started.

Still, is this really how we’d like our entire economy to be run?

All of these examples of genuine exploitation amount to one of many reasons that free-market economists hold the beliefs that they do. The greater the scope of state activity, the greater the potential for each pressure group to use the state apparatus for its own enrichment, at the expense of the rest of society. Since the benefits that accrue to such pressure groups from their political agitation are sizable and concentrated, while their costs are dispersed and hidden, the tendency over time is for more and more of this kind of activity to go on at the expense of the ordinary person.

Since guilds operate to restrict competition and price cutting, we must expect that the monopoly power of the guilds will have consequences analogous to those of the government favoritism we have just examined. Through a variety of methods, the federal government has granted special privileges to certain industries. In one way or another, these privileges dramatically limit competition, just as the guild system did and would.

Posted June 24, 2017 by aurorawatcherak in economics, Uncategorized

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ObamaCare House of Cards   Leave a comment

The Congressional Budget Office scored the American Health Care Act and claimed the bill will reduce deficits by $119 billion over the next decade and result in 23 million fewer people being insured by 2026. So clearly, people would be better off if Obamacare were unchanged. This new report from the Department of Health and Human Services dispels that myth.

Reality Bites

The DHHS report shows that premiums in the individual market exchanges increased by 105% in the 39 states using Healthcare.gov from 2013 to 2017. This is equivalent to $244 per month ($2,928 per year) in additional premium payments for people buying insurance through the exchanges. People not eligible for exchange subsidies are fully exposed to these increases, while taxpayers will bear the brunt of subsidies for eligible enrollees.

Despite the promises that Obamacare would “cut the cost of a typical family’s premium by up to $2,500 a year,” average premiums on the exchanges more than doubled over this period. In some states, such as Alabama and Alaska, the average premium more than tripled. Welcome to my world.

B-b-but, Alaska is a small-population state with a huge land mass and people who have to travel long distances to medical care. Surely ….

No, the high average increase is not driven by a few outliers. Twenty-three out of the 39 states included in the analysis experienced premium increases in excess of 105%. Only three states, North Dakota, New Hampshire, and New Jersey, had cumulative premium increases below 50%.

 

As the report acknowledges, the composition of the population enrolling in plans through the exchanges has changed over time due to the adverse selection problems created by the law’s subsidy and regulation frameworks.

Example?

The community rating age bands, which dictate how much more companies can charge older, higher-risk enrollees, were set at 3:1 under Obamacare. A recent study by Milliman estimated that relaxing these age bands to 5:1 would reduce premiums for people aged 20-29 by 15% while increasing premiums for older enrollees.

Lower premiums for younger, healthier people would encourage more of them to enroll through the exchanges instead of foregoing health insurance because it is too expensive for them. Older, less healthy people make up a larger share of the exchange population now than in earlier years, which exacerbates the premium increases on that population.

Due to data limitations, the report does not deal with the population getting plans on the individual market but not through the exchanges. These people accounted for more than a third of the total individual market. They are not eligible for the law’s subsidies, so there is likely less adverse selection for the off-exchange population, but these enrollees have to bear the entirety of the costs of those increases.

Families choosing a plan through the exchanges have seen their premiums more than double since 2013. Alabama and Alaska, which have seen the two highest cumulative premium increases, are both down to only one insurer. In the entire country, only Virginia saw the number of participating insurers increase from 2016 to 2017. Just today, Blue Cross Blue Shield of Kansas City announced it would be exiting the exchange, leaving 25 counties in Missouri without a participating insurer for now.

The trend is absolutely unsustainable.

The lack of choices and competition in a growing number of places makes it unlikely that there will be an end to rapid premium growth without reform. While the CBO estimates will provide some insight into the effects of the bill in its current form, a working group of Senators is crafting a revised bill with major alterations.

Getting the design of replacement legislation right is important, and the CBO score will give the working group more information about which aspects of the bill that passed the House need the most adjustment. Provisions that allow for more competition and choice for people trying to get insurance through the individual market should help bring down annual premium increases.

Real vs Fake Health Care Reform, and How to Tell the Difference | Jeffrey A. Tucker   Leave a comment

You want to know why the “freedom caucus” has balked at passing the Trump-backed Ryancare health care proposal?

Source: Real vs Fake Health Care Reform, and How to Tell the Difference | Jeffrey A. Tucker

Image result for image of freedom caucus balking at ahcaBecause the package does not address the core problem of the existing system. They are leaning – correctly – on a brilliant insight from F.A. Hayek.

Let’s think this through.

Objecting to Obamacare doesn’t have to be a matter of ideology. The contraption just didn’t work.

What was the most fundamental problem with Obamacare? It attempted to set up an artificial market that lacked the most salient feature of markets: genuine competition. Real competition. I don’t mean teams struggling for control. I mean an institutional setting in which producers can innovate. They face free entry and exit. Their well-being depends on serving the consumer.

Obamacare has flopped because it disabled what remained of the competitive system with defined benefits packages, mandates that everyone be covered, requirements that everyone must purchase, and geographic limits on service provision. All these together took health care out of the realm of markets and made it a form of central planning.

And so: Obamacare resulted in soaring premiums, soaring deductibles, shoddy access, and ever-increasing bureaucracy. It became untenable. Objecting to it doesn’t have to be a matter of ideology. The contraption just didn’t work.

The core insight of the “freedom caucus” comes from Hayek and his fascinating piece “The Meaning of Competition”:

It is only through competition that we can assume that these possible savings of cost will be achieved. Even if in each instance prices were only just low enough to keep out producers which do not enjoy these or other equivalent advantages, so that each commodity were produced as cheaply as possible, though many may be sold at prices considerably above costs, this would probably be a result which could not be achieved by any other method than that of letting competition operate …

Yet the current tendency in discussion is to be intolerant about the imperfections and to be silent about the prevention of competition. We can probably still learn more about the real significance of competition by studying the results which regularly occur where competition is deliberately suppressed than by concentrating on the shortcomings of actual competition compared with an ideal which is irrelevant for the given facts.

I say advisedly “where competition is deliberately suppressed” and not merely “where it is absent,” because its main effects are usually operating, even if more slowly, so long as it is not outright suppressed with the assistance or the tolerance of the state.

The evils which experience has shown to be the regular consequence of a suppression of competition are on a different plane from those which the imperfections of competition may cause. Much more serious than the fact that prices may not correspond to marginal cost is the fact that, with an entrenched monopoly, costs are likely to be much higher than is necessary …

Competition is essentially a process of the formation of opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market. It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do. It is thus a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant.

Let me paraphrase and apply: no, there will not be a perfect world. Total freedom is not a political option right now. So what’s the priority for any reform? The most crucial institutions in any society are the signaling systems of prices that reflect existing knowledge and possibilities.

When those are malfunctioning, nothing else works. Costs go up, quality goes down, innovation stops, and the sector starts to atrophy.

Competition Restoration Means Health Care Restoration

The first priority is that competition must be restored through some measure of deregulation. The mandates must go. The pre-set benefits packages must die. Insurers must gain control over their business affairs and customers have to be able to shop and choose.

It is not about ideology. It is about a system of health care insurance that actually works to serve the common good.

We must regain flexibility to inspire innovation and achieve profitability. This must happen or else premiums will keep going up. This is a requirement. Obamacare failed because it disabled the market. Any reform must restore that market. This is more important than any other feature of reform.

Trumpcare or Ryancare or whatever you want to call it does not do that. It replaces a mandate to buy with a tax incentive to buy. Otherwise it leaves the problem of the absence of genuine competition in place. True, the alternative doesn’t do anything about the transfer of payments, but, if you follow Hayek, you know that these are less important to eliminate than are the barriers to competition.

The restoration of competition will discover for us things we do not know about service provision: treatments, plans, new institutional arrangements, new forms of insurance, new methods for serving the public. Competition will grow the market and make profitability the test of success or failure.

If that does not happen, premiums will keep increasing, quality will go down, access will continue to shrink, and public anger will grow as a result.

Now is the time. Again, it is not about ideology. It is about a system of health care insurance that actually works to serve the common good.

California Considers Economic Suicide with Single-Payer Health Care | Daniel J. Mitchell   Leave a comment

Image result for image of single-payer health insurance destroying the economyIn the Dirty Harry movies, one of Clint Eastwood’s famous lines is “Go ahead, make my day.”

Source: California Considers Economic Suicide with Single-Payer Health Care | Daniel J. Mitchell

I’m tempted to say the same thing when I read about politicians proposing economically destructive policies.

Indeed, I sometimes even relish the opportunity. I endorsed Francois Hollande back in 2012, for instance, because I was confident he would make the awful French tax system even worse, thus giving me lots of additional evidence against class-warfare policies.

Mission accomplished!

Now we have another example. Politicians in California, unfazed by the disaster of Obamacare (or the nightmare of the British system), want to create a “single-payer” healthcare scheme for the Golden State.

This Would Be a Catastrophe

Here’s a description of the proposal from Sacramento Bee.

It would cost $400 billion to remake California’s health insurance marketplace and create a publicly funded universal health care system, according to a state financial analysis released Monday. California would have to find an additional $200 billion per year, including in new tax revenues, to create a so-called “single-payer” system, the analysis by the Senate Appropriations Committee found …Steep projected costs have derailed efforts over the past two decades to establish such a health care system in California. The cost is higher than the $180 billion in proposed general fund and special fund spending for the budget year beginning July 1.

…Lara and Atkins say they are driven by the belief that health care is a human right and should be guaranteed to everyone, similar to public services like safe roads and clean drinking water. …Business groups, including the California Chamber of Commerce, have deemed the bill a “job-killer.” …“It will cost employers and taxpayers billions of dollars and result in significant loss of jobs in the state,” the Chamber of Commerce said in its opposition letter.

Yes, you read correctly. In one fell swoop, California politicians would more than double the fiscal burden of government. Without a doubt, the state would take over the bottom spot in fiscal rankings (it’s already close anyhow).

Part of me hopes they do it. The economic consequences would be so catastrophic that it would serve as a powerful warning about the downside of statism.

Accelerating their Slow-Motion Suicide

The Wall Street Journal opines that this is a crazy idea, and wonders if California Democrats are crazy enough to enact it.

…it’s instructive, if not surprising, that Golden State Democrats are responding to the failure of ObamaCare by embracing single-payer health care. This proves the truism that the liberal solution to every government failure is always more government.

…California Lieutenant Governor Gavin Newsom, the frontrunner to succeed Jerry Brown as Governor next year, is running on single-payer, which shows the idea is going mainstream. At the state Democratic convention last weekend, protesters shouted down speakers who dared to ask about paying for it. The state Senate Appropriations Committee passed a single-payer bill this week, and it has a fair chance of getting to Mr. Brown’s desk.

I semi-joked that California was committing slow-motion suicide when the top income tax rate was increased to 13.3 percent.

As the editorial implies, the state’s death will come much faster if this legislation is adopted.

A $200 billion tax hike would be equivalent to a 15% payroll tax, which would come on top of the current 15.3% federal payroll tax. …The report dryly concludes that “the state-wide economic impacts of such an overall tax increase on employment is beyond the scope of this analysis.”

California’s forecasting bureaucrats may not be willing to predict the economic fallout from this scheme, but it’s not beyond the scope of my analysis.

If this legislation is adopted, the migration of taxpayers out of California will accelerate, the costs will be higher than advertised, and I’ll have a powerful new example of why big government is a disaster.

If Single Payer Gets Enacted

Ed Morrissey, in a column for The Week, explains why this proposal is bad news. He starts by observing that other states have toyed with the idea and wisely backed away.

Vermont had to abandon its attempts to impose a single-payer health-care system when its greatest champion, Gov. Peter Shumlin, discovered that it would cost far more than he had anticipated. Similarly, last year Colorado voters resoundingly rejected ColoradoCare when a study discovered that even tripling taxes wouldn’t be enough to keep up with the costs.

So what happens if single-payer is enacted by a state and costs are higher than projected and revenues are lower than projected (both very safe assumptions)?

The solutions for…fiscal meltdown in a single-payer system…all unpleasant. One option would be to cut benefits of the universal coverage, and hiking co-pays to provide disincentives for using health care. …The state could raise taxes for the health-care system as deficits increased, which would amount to ironic premium hikes from a system designed to be a response to premium hikes from insurers. Another option: Reduce the payments provided to doctors, clinics, and hospitals for their services, which would almost certainly drive providers to either reduce their access or leave the state for greener pastures.

By the way, I previously wrote about how Vermont’s leftists wisely backed off single-payer and explained that this was a great example of why federalism is a good idea.

Simply stated, even left-wing politicians understand that it’s easy to move across state lines to escape extortionary fiscal policy. And that puts pressure on them to be less greedy.

This is one of the main reasons I want to eliminate DC-based redistribution and let states be in charge of social welfare policy.

Using the same reasoning, I’ve also explained why it would be good news if California seceded. People tend to be a bit more rational when it’s more obvious that they’re voting to spend their own money.

Stay Golden

Though maybe there’s no hope for California. Let’s close by noting that some Democrat politicians in the state want to compensate for the possible repeal of the federal death tax by imposing a huge state death tax.

In a column for Forbes, Robert Wood has some of the sordid details.

California…sure does like tax increases. …The latest is a move by the Golden State to tax estates, even if the feds do not. …A bill was introduced by state Sen. Scott Wiener (D-San Francisco), asking voters to keep the estate tax after all. …if the feds repeal it, and California enacts its own estate tax replacement, will all the billionaires remain, or will high California taxes spark an exodus? It isn’t a silly question.

Of course billionaires will leave the state. And so will many millionaires. Yes, the weather and scenery are nice, but at some point rich people will do a cost-benefit analysis and decide it’s time to move.

And lots of middle-class jobs will move as well. That’s the inevitable consequence of class-warfare policy. Politicians say they’re targeting the rich, but the rest of us are the ones who suffer.

Will California politicians actually move forward with this crazy idea? Again, just as part of me hopes the state adopts single-payer, part of me hopes California imposes a confiscatory death tax. It’s useful to have examples of what not to do.

The Golden State already is in trouble. If it becomes an American version of Greece or Venezuela, bad news will become horrible news and I’ll have lots of material for future columns.

Posted June 8, 2017 by aurorawatcherak in economics

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What Happens If the IMF Forces Us to Go Cashless   1 comment

A part of my study on the International Monetary Fund (IMF) came across an IMF proposal to abolish cash recommending member countries adopt measures to restrict its use. My gut tightened and now the proposal is working its way into Transformation Project.

Why does something like this concern me? Don’t we all use our POS and credit cards pretty much exclusively? What’s the big deal.

“The European Central Bank (ECB) does not want that depositors to keep their money under the pillow. If any bank in Europe goes bankrupt, then depositors have a guaranteed right that the state will return them the amount of up to 100,000 euros. But not more,” economist Hans-Olaf Henkel, former head of the Federal Association of German Industry (BDI) told Sputnik Germany.

Henkel believes that one of the main reasons behind this proposal is the desire of financial institutions to force people to keep their money in banks. The downside to this is that, if a bank goes bankrupt, people who have savings on deposit of over 100,000 euros will only get 100,000 euros back. Their “excess” savings will be forfeited.

The same thing would happen here in the United States, by the way, although you can have multiple bank accounts to get around that.

Image result for image of pain spending cashIn Europe, many people do not keep their cash in banks, Henkel argued. According to him, the banks want to abolish cash to regain access to the money that people keep at home.

Financial institutions, including the European Central Bank, also justify this measure as a means to combat organized crime. Henkel doubts this explanation:

“Since when is the European Central Bank responsible for combating crimes?” he asked.

From the IMF’s perspective, Brad and I engaged in organized crime this weekend by using cash. We went to a garage sale and bought a lightly-used mountain bike for half what we would have spent for a new one at the store. The private citizen we bought it from didn’t take credit cards (go figure?), so we paid cash. Then we went to another friend’s house and bought raw (unpasteurized) goat’s milk and “accidentally” left money on her table on our way out.

The IMF report did not offer any direct instructions with regard to the issue but recommended member countries to adopt measures aimed at restricting the use of cash in various operations.

According to Henkel, cash is also important in social terms, especially for young people.

“If they go to a party with 20 euros in their pockets and at some point notice that they have only two euros left, they won’t drink anymore. And if they pay only with a credit card, they will never know the value of money,” the expert concluded.

When I was teaching my kids the value of a budget, I operated in cash from envelopes a lot. We would have these conversations in the grocery store aisle or while shopping for school clothes:

The envelope has $100. That’s all we have to spend. Yeah, I know you’d like it if I bought the $40 steak or the $200 dress, but the envelope only has $100 in it. So, no to the dress, find something cheaper. What do you want to do without for the steak? Oh, the $10 steak now looks more appetizing? Progress!

My daughter says this has served her well as an adult living on her own with the limited financial resources of a gypsy bluegrass musician. She knows a lot of young adults on that circuit who never learned those lessons and they are frequently hungry, cold and out of gas. When you’re a musician who has to sell your instruments because the alternative is starvation, you really aren’t winning. And, no, the answer is not easier-to-access welfare programs. It is learning how to budget your money, which is much harder to do with plastic than it is with cash.

The pleasure and pain centers of the brain react in different ways to the use of cash compared to plastic. Several MRI studies have shown that using plastic stimulates the pleasure centers while using cash activates the pain centers. In our consumer-driven society, we need more people in touch with what it actually costs you to spend money … or to rack up debt. The financial crisis of 2008 taught some of us that, but there are so many who still need to renew this lesson. Apparently, the IMF didn’t learn it at all.

Posted June 1, 2017 by aurorawatcherak in economics, Uncategorized

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The Mountain Paths That No One Planned | Barry Brownstein   Leave a comment

The hike to the summit of Mount Lafayette in New Hampshire’s White Mountains climbs a steep and rugged 3550 feet over 4 miles. The winter snows bury the rocks; and after a storm, snowshoed hikers pack the snow into an almost-smooth “herd path” that others can then hike with light crampons. Step off that herd path and you’ll find yourself stuck knee-deep or even waist-deep — in snow.

Related imageIt never occurred to them that what they were experiencing could be a product of human action, but not of human design.

I was hiking this path on a pristine winter day when a fit young couple, well outfitted for the cold, passed me. For a while we hiked in earshot. They were certain the wonderful conditions on the packed trail must have been the product of intentional human design, with work crews shoveling the trail.

I was amazed at their certainty. There are hundreds of miles of snow-packed trails in the White Mountains, and nobody plans it. It is staggering to think of the amount of snow that would have to be shoveled, over rugged terrain in brutal weather, after each storm rolls through. Instead of creating a winter garden path, shoveling would expose the rocks and ledges, which would ice over, and then hiking would be dangerous and grueling.

Just minutes into their hike, the young couple was confident in their explanation for the snow-packed trail they were experiencing: shoveling, presumably by a government agency or kind-hearted volunteers.

Questions depend on theory.

Einstein wrote, “Whether you can observe a thing or not depends on the theory which you use. It is the theory which decides what can be observed.” In other words, the questions we are capable of asking depend upon the theory we are using to observe our world.

The conclusion reached by the newbie hikers was limited by their theory of snow removal. It never occurred to them that what they were experiencing could be a product of human action, but not of human design.

What would have happened had the couple remained puzzled as they experienced the herd path phenomenon? What if, for the moment, they could have been content to let the mystery be and learn more?

Turn on the light.

My undergraduate economics college students often displayed similar confidence in the first conclusions that came to their minds. Few wondered at what produces the modern standard of living, unimaginable to the vast majority of humans who lived in desperate poverty just a few short centuries ago.

In 1800, one hour of light from a candle cost an average worker a staggering six hours of wages.

For example, consider indoor lighting. Matt Ridley in his book The Rational Optimist reports that in 1800, one hour of light from a candle cost an average worker a staggering six hours of wages. Today one hour of indoor light costs merely a half-second of work. Yet, some students simply refused to believe the facts presented by Ridley.

As for those undergraduates who did believe the facts on progress, most, at least initially, believed that government deserved the credit. If these students don’t have the curiosity to explore alternative explanations, what explanation other than the visible hand of government is possible for them? After all, the unplanned human actions that produce their bounty are largely invisible, rarely discussed in the media or schools, and beyond the full understanding of any individual.

Often students did not understand that they, by their actions, are participating in this wonderful chapter in human history.

Order doesn’t have to mean control.

F.A. Hayek in his essay “Cosmos and Taxis” in volume 1 of Law Legislation and Liberty, points us in a direction that many have not yet considered. Order and thus progress, Hayek explains, can be a spontaneous phenomenon that is not controlled by anyone or any group of people. There are “orderly structures which are the product of the actions of many men but not the result of human design.”

Importantly, Hayek instructs us that spontaneous order has a “degree of complexity” that “is not limited to what the human mind can master.” Spontaneous orders have two other essential characteristics: they “need not manifest [themselves] to our senses” and although they have no “particular purpose” they “may be extremely important for our successful pursuit of a great variety of different purposes.”In the absence of curiosity, people show an intolerance of uncertainty.

For those who are not curious, what possible interest could they have in Hayek’s ideas on an order? If spontaneous order cannot be observed by our senses, nor controlled, nor mastered, why would the incurious turn and look in its direction? Debates over the hollow promises and plans of politicians seem more real than unplanned progress that emerges as individuals pursue their own purposes.

Indeed, among some of my undergraduate students, more were concerned about redistributing wealth than they were about inquiring into the principles by which human action creates wealth.

They could not conceive that implementing a plan to redistribute wealth will interfere with progress, just as the winter hikers could not conceive that shoveling the snow would worsen, not enhance, trail conditions.

Curiosity is essential.

In his book Curious? psychology professor Todd Kashdan reports on a study by famed psychologists Martin Seligman and Chris Peterson. Curiosity is one of the traits most highly associated with experiencing happiness and overall life fulfillment.

Kashdan writes that in the absence of curiosity “people show an intolerance of uncertainty.” Economic progress creates uncertainty. Does the absence of curiosity create an intolerance for unplanned progress?

John Taylor Gatto has written eloquently about how public schools stamp out curiosity. In his book Dumbing Us Down, Gatto explains how schools value compliance with rules more than expression of curiosity.

Look around: we are surrounded by phenomena that we don’t understand. In a state of not knowing, it is natural to be curious, ask questions, and explore assumptions.

The truth of life is that mighty and invisible forces are working unceasingly and impersonally on our behalf.

Are we content to let the mystery be, or do we want to fill in the blank with instant answers?

Kashdan encourages us to live “a life of wonder,” in which we are “always questioning, investigating and wondering.”

When sharing the ideals of liberty, might it serve us to rouse curiosity by posing more questions and providing fewer answers? With a heightened sense of curiosity, individuals might look in a different direction and investigate the ideas of liberty for themselves.

The truth of life is that mighty and invisible forces are working unceasingly and impersonally on our behalf. If curiosity stirs us to look in the direction of those forces, a new respect for liberty is a natural result.

Source: The Mountain Paths That No One Planned | Barry Brownstein

Posted May 25, 2017 by aurorawatcherak in economics, Uncategorized

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Economic Diagnosis of Venezuela   Leave a comment

I firmly believe you can be a smack-awesome journalist without having gone to college. Yes, I have a BA in journalism, but I’ve met reporters who were better than me who never went to college. Journalism is about curiosity and writing skills and, in my estimation, the ability to be balanced with a story and seek out as many facts as can be ascertained … even the facts we don’t like.

I received several benefits from my university education that you don’t actually need to attend college to acquire, but it was helpful. For example, I took an economics course, which gave me an interest in the subject that I pursue even today. I haven’t taken a university-level economics course in 30 years, but I read at least one book a year on the subject.

By the way, books not written as textbooks … WAY more educational because they aren’t so boring.

So, I’m a little puzzled as to why reporters keep scratching their heads about Venezuela’s descent into extreme poverty and chaos?  Anyone who has read widely on economics can diagnosis the cause — socialism. From there, the treatment is obvious. End Venezuelan socialism and you will end the misery.

When the New York Times wrote about Venezuela’s ongoing collapse a year ago, it described how the country was suffering “painful shortages” of basic foods, and how “electricity and water are being rationed, and huge areas of the country have spent months with little of either.”

According to the Times, Venezuela’s dire situation was caused by factors out of its control:

The growing economic crisis (was) fueled by low prices for oil, the country’s main export; a drought that has crippled Venezuela’s ability to generate hydroelectric power; and a long decline in manufacturing and agricultural production.

Times’ reporters failed to mention the fact that Hugo Chávez tried to turn Venezuela into a socialist paradise and his successor Nicolas Maduro has continued those policies. Unfortunately, the Times’ coverage of Venzuela demonstrates that many journalists are economically illiterate.

Venezuela was never a model free market economy. A couple decades ago, the Heritage Foundation gave it a 59.8 ranking on its Index of Freedom. If you’re unfamiliar, this index measures how free or government-controlled an economy is. That put Venezuela at the edge of being “moderately free.”

Then Chavez nationalized the oil industry, agricultural operations, transportation, power generation, telecommunications, steel production, banks and other industries. Today Venezuela is the third least free economy in the world, ahead of only Cuba and North Korea.

As a direct result of those actions, Venezuela went from being one the wealthiest countries in South America to a country where people are literally fighting for scraps of food while surrounded by a wealth of natural resources. Last year, Venezuela’s economy shrank 18%. The unemployment rate is 25% and climbing. Inflation could reach 2,068% next year. Riots have become everyday events.

Alaska (and Norway) is also suffering from the effects of low oil prices. Nobody is starving here (long as the barges keep running). We still have lights and water. There hasn’t been a riot since Black Friday (although there were demonstrations at the Arctic Council meetings). Why isn’t Alaska spinning out of control too? Because, despite being a colony of the United States, we still have a vestige of market economy and so we are not entirely dependent upon the central planners to make sure we get food (as long as the barges keep running).

The cause of Venezuela’s dire conditions is socialism, not oil prices, the weather, greedy businessmen or name that excuse. Venzuela’s economic crisis what socialism produces in every time and every place. The history of socialism has produced as close to an iron law of economics as there can be.

Yet reporters continue to avoid, if not totally ignore, this economic reality when they try to explain to readers what is going on there.

The Los Angeles Times says that it’s only “anti-government protesters” who “blame Venezuela’s economic crisis on the policies of Maduro and his predecessor, Hugo Chávez.” While “supporters of the government say the culprits are a drop in international oil prices as well as ‘corrupt’ business leaders.”

There’s no attempt made by the reporter to say who is right.

The Associated Press blames the “oil boom and bust” for the crisis:

The plunge in world oil prices has left the government owing money across the board, from foreign airlines to oil service companies. Most of the anti-poverty gains made under Chavez have been erased and people are grappling with severe food and medicine shortages.

USA Today said that the reason Venezuelans were resorting to hunting dogs and pigeons for food was because:

although Venezuela has the world’s largest petroleum reserves, the country has suffered from a combination of lower oil prices and tight limits on dollar purchases that have cut off vital food and most other imports. The result has been a plunging economy and the world’s highest inflation rate — above 700%.

Others blamed a drought for the country’s problems. The Wall Street Journal reported last spring that “the newer hardships are water scarcity and increasingly critical power blackouts — a byproduct of the lack of water in a country dependent on hydroelectric dams.”

I think reporters ignore the obvious because most of them are liberals who are infatuated with the idea of socialism.

Consider how AP lovingly described Chavez:

a political outsider promising to upset the old order and funnel some of the country’s enormous oil wealth to the poor. Poverty rates fell sharply during his administration, and many people continue to see him as a beloved Robin Hood figure who gave them houses, free health care, better education and a place at the table in government.

That list of “accomplishments” reads eerily like the Democratic Party platform.

Reporters’ unwillingness to admit that socialism can’t work drives so many mainstream journalists to look for something, anything, else to blame when socialist economies invariable fail, but at some point, it behooves us to read an economics book to discover the real reason.

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