Market Forces and Health Care

Posted by PITHOCRATES - March 4th, 2013

Economics 101

Keynesians try to reduce Human Behavior down to Complex and Confusing Math

We hear a lot about introducing market forces into health care.  But what does that mean?  What exactly are market forces?  Are they like magnetic forces?  Electric forces?  Hydraulic forces?  No.  Market forces are not forces that conform to the laws of science.  Rather, they belong in the realm of the social sciences.  That are less science.  And more opinion.  Where there are a lot of theories.  And politicians massage the data to fit their theory.  As Mark Twain said, facts don’t lie but liars figure.  And politicians figure.  A lot.

So there are no hard rules when it comes to the social sciences.  Just a lot of theorizing.  And a lot of drawing conclusions.  Based on the data.  And how some massage the data.  Something to keep in mind whenever anyone discusses economic numbers.  For the accepted school of economics most politicians adhere to is the Keynesian school.  The dirty little whore of economics.  For there is a whole lot of massaging going on with Keynesians.  With the data.  Not each other.  Politicians love Keynesian economics because this school of economic thought calls for governments to tax, borrow, print and spend.  Empowering government.  Making government grow.  And become more intrusive in our personal lives.  All things politicians love.  Which is why they massage the economic data.  They have to.  Because this school of economic thought doesn’t work.

Keynesians make economics very complex.  Open a text book and you will find a lot of graphs and formulas.  Where they try to reduce human behavior down to math.  Very complex and confusing math.  And you can’t do that.  Humans have free will.  They make decisions based on any number of things.  One influencing factor more or less could change the way they decide.  And there’s no way we can quantify all the variables in our lives.  Therefore, there’s no way to reduce human decision-making down to math.  Which is what drives market forces.  Our decision-making process.  That point in time that triggers the free exchange of money for goods and/or services.

When it comes to the All-You-Can-Eat Buffet Customers think more in Terms of Quantity than Quality

Consider an all-you-can-eat buffet.  And how it changes your decision-making process.  But first let’s look at some typical behavior at a normal restaurant.  Where you may spend $15 for a 4-course meal and drink.  Soup, salad, entrée and dessert.  Which you enjoy with a friend.  You have pleasant conversation as you enjoy each of your 4 courses.  Taking your time.  Enjoying each course.  Slowly getting full.  And satisfied.  The portion sizes are just right.  Leaving just enough room for dessert.  You’re full.  But not too full.  Comfortable.  You’re able to go for an after-dinner walk.  Even take in a movie.

Now let’s consider the all-you-can-eat buffet.  Where you may pay $20 for unlimited access to the buffet.  You’re paying more than for a sit-down service.  Why?  Because you plan to eat more.  You will maximize the value you get for your $20.  Which means you’ll probably skip the soup and salad.  And start loading your plate with the expensive entrées.  You’ll probably go back once or twice.  Making sure you get a taste of everything.  And a lot of anything that is expensive.  Again, to maximize your value.  In fact you maximize so much that you become uncomfortably full.  Too full to sit through a movie without nodding off.  And too full for a walk.  All you want to do is go home and nap.

The restaurant sees this from a slightly different perspective.  The all-you-can-eat buffet is simple to serve.  You mass produce food to load up the buffet so it’s ready at the beginning of the buffet hours.  You replace the items people eat most.  While the less popular items sit longer in the buffet.  Becoming less fresh.  Also, the buffet is a good way to get rid of things approaching their ‘serve by’ dates.  Saving the freshest food for the made-to-order sit-down service.  And putting the older food in the buffet.  Because when it comes to the buffet you know customers are thinking more in terms of quantity than quality.  The food is good in the buffet.  But not as good as the food for the sit-down clientele.

If you Pay Cash at the Pharmacy you are more likely to Ask for the Less Expensive Generic Drugs

These are market forces.  People have come together to make voluntary exchanges.  The quantity of food available makes some people opt for the more expensive all-you-can-eat buffet.  Others may opt for the less expensive but higher quality made-to-order sit down service.  For the person who places the greatest value on eating mass quantities of food will choose the buffet.  The person who places the greatest value on the dining experience (quality of food, made-to-order, conversation, after-dinner walk or movie, etc.) will choose the sit-down service.  If more people are choosing the buffet the owner may extend the buffet hours.  If fewer people are choosing the buffet and leave a lot a food to throw away the owner may end the buffet service.  These are market forces.  Buyer and sellers coming together in the marketplace.  Seeing what each has to offer.  If they come to a mutual agreement they make an economic exchange.  The buyer willingly exchanges his or her money for goods and/or services.  The seller willingly accepts an amount of money in exchange for his or her goods and/or services.

The private economy works because it is buyers and sellers meeting and making exchanges they both freely agree to.  This is the key of market forces.  It’s what makes people with money go to the marketplace.  And it’s what makes people bring goods and/or services to the marketplace.  Because they will seek each other out and make these exchanges.  After which both buyer and seller will come away with something they value more.  This is what is missing in health care.  Buyer and sellers aren’t meeting to make exchanges.  In fact, the buyer and seller do not even meet.  Patients never ask for any prices.  Because they aren’t paying for anything.  Their insurer is.  And the medical provider will always provide the most expensive treatment billing guidelines will allow.  For that’s who they must please.  The people paying them.  Not the patient.  And they have to charge as much as they can to cover all the things they won’t get paid for.  People they treat without insurance who can’t pay.  And for the billings the insurers deny.

So this changes the decision making process.  For everyone.  Introducing a third party into the equation removes market forces.  If you pay cash at the pharmacy you are more likely to ask for the less expensive generic drugs.  If you get free prescription coverage you will ask for the most expensive name-brand medicine they have.  For when you’re not paying price is no object.  But when you are paying price is a very important object.  Because when it’s our money getting value for our money is very important.  So we’ll ask if the name-brand has any more value than the generic.  For who would spend more for something that doesn’t give you any more value than something you can get for less?

When it comes to medical tests and procedures patients aren’t going to ask for more than they absolutely need.  And doctors aren’t going to prescribe any more than a patient needs.  Because they aren’t billing a faceless bureaucrat.  They’re billing someone they have a close and personal relationship with.  And they sure aren’t going to try and bill someone they have a close and personal relationship with for someone else’s unpaid bill.  Not if they want to keep them as a patient.  Because a doctor-patient relationship is a long-term relationship.  A doctor could lose a lot of business by mistreating a patient to make an extra buck.  These are market forces.  Which makes the private sector work so well.  And why their absence makes the health care system not work so well.  Transforming our health care from a moderately priced, high quality, custom, sit-down service to a higher priced, mass-produced, lower quality, all-you-can-eat buffet.

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Public Goods

Posted by PITHOCRATES - April 9th, 2012

Economics 101

You can’t put a Price Tag on Units of National Defense or Sanitary Sewers and Wastewater Treatment Plants

The free market works because people only trade when buyers and sellers agree on price.  Those agreed upon prices are fair to both.  For the sellers place a higher value on the money they receive than the things they’re selling.  And the buyers place a higher value on the things they’re buying than the money they’re spending.  And because of property rights this can happen.  After these transactions the buyers have exclusive use of what they just bought.  And the sellers have exclusive use of the money they just received.  And this holds true whenever we’re buying and selling private goods.  Things people own and use exclusively.  And have the right to buy and sell.  Thanks to property rights.

There are things, though, in our everyday lives that we don’t use exclusively.  Or own exclusively.  Things that we can’t exclude others from using even if they don’t pay to use these things.  Such as the military.  You can’t put a price tag on units of national defense that people can buy.  Some people don’t like the military and would never buy units of national defense.  If the country was under attack, though, our military couldn’t exclude these people from the common defense they provide.  Because there is no way to exclude them. 

You have another problem with sanitary sewers.  Those pipes under our roads that pipe our toilets to a wastewater treatment plant.  We have to pay for our toilets and the pipes running from our houses to the common sanitary line in the street.  But developers built that common line in the street long before someone built our house.  As they built the wastewater treatment plant long before they built our house.  These go in before they build neighborhoods.  But we still have to pay for these long after we build them.  And once our streets are paved you can’t expect new homeowners to install new sewer lines from their newly built homes to the wastewater treatment plant.  And you can’t build new wastewater treatment plants for each new house built.  They tend to take up a lot of real estate.   And need a place to discharge the treated water.  Usually into a river, lake or ocean.  So it just doesn’t make any economic sense to build more than one sewer system and treatment plant in a given geographic region.

Government Typically provides Public Goods because there are no Viable Private Sector Alternatives 

The military is a public good.  Sanitary sewers and wastewater treatment plants are public goods.  Public goods share two characteristics that make them public goods.  They are non-excludable.  Like the military.  Where it’s impossible to exclude people from the common defense while providing the common defense.  Because it’s common.  Everyone benefits from our warships that protect our shores from invasion.  Whether they pay for them or not.  And public goods are non-rival.  Like sanitary sewers and wastewater treatment plants.  When my neighbor flushers his or her toilet it doesn’t prevent me from flushing my toilet.  That is, their use of the good doesn’t reduce my use of the good.

Because public goods are non-excludable and non-rival it is impossible to put a price tag on them for individual units of use.  This is why we pay for public goods with taxes.  Because we need these public goods and everyone benefits from these public goods we force people to pay for them with taxes.  Something only the government has the power to do.  So government typically provides public goods.  Because there are no viable private sector alternatives. 

There is an option to a public sanitary sewer system, though.  And we use them all the time.  For houses in the country.  Where they pipe their toilets to a septic tank that collects much of the solid waste.  The septic tank then drains the residual wastewater into a septic field.  Where it leaches back into the water table.  But if we don’t connect a house to a public wastewater system we typically don’t connect it to a public water system.  Meaning these people draw their water from a well.  That draws water from the water table.  So septic fields and wells can’t be too close together.  So you don’t end up drinking your wastewater.  Which limits how close you can build homes together.  Not a problem in the country.  But a problem in the city.  Which we can’t build without city water and sanitary sewer systems.  Public goods.  That we pay for with a water meter on every house.  That charges for each unit of water we use.  And each unit we use includes a cost for our sanitary waste.  Because all wastewater starts off being clean city water.

Health Care is NOT a Public Good because there are Viable Private Sector Alternatives

Charities can provide some goods that can appear to be public goods.  Like feeding the hungry.  Housing the homeless.  Or leaving an endowment to a university or a hospital.  But charity doesn’t pay for warships or wastewater treatment plants.  So we generally think of public goods as government-provided goods.  But not all government-provided goods are public goods.  Because they aren’t both non-excludable and non-rival.  Such as feeding the hungry.  And housing the homeless.  Charities were doing these long before government stepped in to provide them.  And continue to do so today.  Soup kitchens and homeless shelters clearly show that these aren’t true public goods.  Because there are viable private sector alternatives.

Government welfare, then, is not a public good.  But the government has taken over welfare from those who have historically provided for them.  Charities.  Churches.  And rich people wanting to give back to the country that was so generous to them.  Andrew Carnegie had a passion for knowledge and built public libraries.  John D. Rockefeller had a passion for education and public health and poured his wealth into these.  John Hopkins built hospitals.  They did these things, and others, out of the goodness of their hearts.  Becoming philanthropists after making their wealth.  To help other people.  Rich people are still doing so today.  After creating great wealth Bill Gates is planning to give pretty much all of it away through the Bill & Melinda Gates Foundation.  Like other great philanthropists before him.

And speaking of health care, health care is not a public good.  Because it is NOT non-excludable.  Your health care is exclusively yours.  There is a direct relationship between patient and health care services.  You consume hospital stays, medicines, rehabilitation, etc.  If you’re not a patient that treatment doesn’t happen.  Unlike a warship protecting our coast.  And health care is NOT non-rival.  When people consume health care services other people can’t consume those same services.  An MRI can only scan one person at a time.  A radiologist can only look at one x-ray at a time.  Hospitals can only transfer someone out of the emergency room when a bed is available elsewhere.  So when people consume these services it reduces the amount available for others to consume.  Which makes health care NOT a public good.  And one the government shouldn’t be providing.  Because there are viable private sector alternatives.

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Monetary Policy

Posted by PITHOCRATES - January 30th, 2012

Economics 101

Monetary Policy created the Housing Bubble and the Subprime Mortgage Crisis

Those suffering in the fallout of the Subprime Mortgage Crisis can thank monetary policy.  That tool used by the federal government that kept interest rates so low for so long.  Following the old Milton Friedman idea of a permanent level of inflation (but small and manageable) to stimulate constant economic growth.  Why?  Because when people are buying houses the economy is booming.  Because it takes a lot of economic activity to build them.  And even more to furnish them.  Which means jobs.  Lots and lots of jobs.

But there is a danger in making money too cheap to borrow.  A lot of people will borrow that cheap money.  Creating an artificial demand for ever more housing.  And not for your parent’s house.  But bigger and bigger houses.  The McMansions.  Houses 2-3 times the size of your parent’s house.  This demand ran up the price of these houses.  Which didn’t deter buyers.  Because mortgage rates were so low.  People who weren’t even considering buying a new house, let alone a McMansion, jumped in, too.  When the jumping was good.  To take advantage of those low mortgage rates.  There was so much house buying that builders got into it, too.  House flippers.  Who took advantage of those cheap ‘no questions asked’ (no documentation) mortgages (i.e., subprime) and bought houses.  Fixed them up.  And put them back on the market.

Good times indeed.  But they couldn’t last.  Because those houses weren’t the only thing getting expensive.  Price inflation was creeping into the other things we bought.  And all those houses at such inflated prices were creating a dangerous housing bubble.  So the Federal Reserve, America’s central bank, tapped the brakes.  To cool the economy down.  To reduce the growing inflation.  By raising interest rates.  Making mortgages not cheap anymore.  So people stopped buying houses.  Leaving a glut of unsold houses on the market.  Bursting that housing bubble.  And it got worse.  The higher interest rate increased the monthly payment on adjustable rate mortgages.  A large amount of all those subprime mortgages.  Causing many people to default on these mortgages.  Which caused the Subprime Mortgage Crisis.  And the Great Recession.

The Federal Reserve System conducts Monetary Policy by Changing both the Money Supply and Interest Rates

Money is a commodity.  And subject to the laws of supply and demand.  When money is in high demand (during times of inflation) the ‘price’ of money goes up.  When money is in low demand (during times of recession) the ‘price’ of money goes down.  The ‘price’ of money is interest.  The cost of borrowing money.  The higher the demand for loans the higher the interest rate.  The less the demand for loans the lower the interest rate.

So there is a relationship between money and interest rates.  Adjusting one can affect the other.  If the money supply is increased the interest rates will decrease.  Because there is more money to loan to the same amount of borrowers.  When the money supply is decreased interest rates will increase.  Because there will be less money to loan to the same amount of borrowers.  And it works the other way.  If the interest rates are lowered people respond by borrowing more money.  Increasing the amount of money in the economy buying things.  If interest rates are raised people respond by borrowing less money.   Reducing the amount of money in the economy buying things.  We call these changes in the money supply and interest rates monetary policy.  Made by the monetary authority.  In most cases the central bank of a nation.  In the United States that central bank is the Federal Reserve System (the Fed).

The Fed changes the amount of money in the economy and the interest rates to minimize the length of recessions, combat inflation and to reduce unemployment.  At least in theory.  And they have a variety of tools at their disposal.  They can change the amount of money in the economy through open market operations.  Basically buying (increasing the money supply) or selling (decreasing the money supply) treasury bills, government bonds, company bonds, foreign currencies, etc., on the open market.  They can also buy and sell these financial instruments to change interest rates.  Such as the Federal funds rate.  The interest rate banks pay when borrowing from each other.  Moving money between their accounts at the central bank.  Or the Fed can change the discount rate.  The rate banks pay to borrow from the central bank itself.  Often called the lender of last resort.  Or they can change the reserve requirement in fractional reserve banking.  Lowering it allows banks to loan more of their deposits.  Raising it requires banks to hold more of their deposits in reserve.  Not used much these days.  Open market operations being the monetary tool of choice.

There is more to Economic Activity than Monetary Policy

Fractional reserve banking multiplies these transactions.  Where banks create money out of thin air.  When the Fed increases the money supply a little this creates a lot of lendable funds.  As buyers borrow money from some banks and pay sellers.  Then sellers deposit that money in other banks.  And these banks hold a little of these deposits in reserve.  And loan the rest.  Borrowers create depositors as buyers meet sellers.  And complete economic transactions.  When the Fed reduces the money supply a little this process works in reverse.  Fractional reserve banking pulls a lot of money out of the economy.  Some treat these economic transactions, and the way to increase or decrease them, as simple math.  Always obeying their mathematical formulas.  We call these people Keynesian economists.  Named for the economist John Maynard Keynes.

Big interventionist governments embrace monetary policy.  Because they think they can easily manipulate the economy as they wish.  So they can tax and spend (Keynesian fiscal policy).  And when economic activity declines they can simply use monetary policy to restore it.  But there is one problem.  It doesn’t work.  If it did there would not have been a Subprime Mortgage Crisis.  Or any of the recessions we’ve had since the advent of central banking.  Including the Great Depression.  As well as the Great Recession.

There is more to economic activity than monetary policy.  Such as punishing fiscal policy (high taxes and stifling regulations).  Technological innovation.  Contracts.  Property rights.  Etc.  Any one of these can influence risk takers.  Business owners.  Entrepreneurs.  The job creators.  The people who create economic activity.  And no amount of monetary policy will change this.

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The Big Economies are Increasing their Debt and Heating up the Competition for Buyers

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Keynesian economists don’t see a problem for governments to run deficits.  They’ll look at the current bond rates, do some calculations and note that the additional interest expense for the government is negligible in the grand scheme of things.  But interest costs are not the only problem governments will have.  They also have to first find someone to buy their debt (see Biggest Economies Face $7.6 Trillion Bond Tab by Keith Jenkins and Anchalee Worrachate posted 1/3/2012 on Bloomberg).

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg…

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show…

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

So even in the Keynesian world there is a limit on deficit financing.  When there is more debt than buyers some debt will go un-purchased.  And to make sure that isn’t your debt you’ll have to entice those few buyers to buy your debt.  By the only way you can.  With higher interest rates.  Which makes your original problem worse.  By increasing your overall debt.

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