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Wednesday, September 28, 2011

Economic Creation Myth

From the dawn of man until just a couple hundred years or so ago, humans lived a hand-to-mouth existence, with average global per capita consumption about $3 per day (in today's dollars). While there were important inventions over the millennia like the plow, paper, and gunpowder, and some of those inventions did boost production, they came relatively infrequently, and population growth kept humanity limited to its meager rations.

Suddenly, somewhere around 1800, the rate of innovation exploded, catapulting humanity away from the Malthusian limit and the average global per capita consumption is now $30 per day. And in the west, we've done far better, so much so that we consider consumption limited to a mere $30 per day to be mired in poverty!

The rapidity and magnitude of material progress can't be stated often enough or too strongly. At least an order of magnitude increase in average per capita consumption in less than a dozen generations! It's astounding and yet most people rarely consider it.

So how can we explain the creation of the goose that laid this golden egg of prosperity? Incredibly, nobody really knows and many narratives really don't fit history very well. As a result, we're each entitled to our own economic creation myth about where this prosperity came from. In fact, more than that, it's imperative that we form a framework to explain it because the Soviet Union and Communist China proved beyond a shadow of a doubt that it's possible to kill the golden goose.

Nobody knows what caused the exponential explosion of entrepreneurial endeavors, but there are a lot of things that we know didn't cause it. For example, it wasn't government funded education because there wasn't any; it wasn't government funded social safety nets because there weren't any; it wasn't socialism of any kind - Marx hadn't been born yet; it wasn't government funding of infrastructure - no increase (from very low levels) there; it wasn't government funding of research or development - no increase there either; it wasn't that suddenly civilization became stable or that urban population density reached a critical mass because China had both those characteristics for millennia; it wasn't because of an increased savings rate or capital accumulation - there's just no evidence for that; it wasn't just one or a handful of critical inventions - it was instead a massive number of incremental innovations in business process, trade, and lastly technology; it wasn't sudden discovery of natural resources as this was again very incremental; and it wasn't imperialism or slavery, in fact both waned as innovation exploded.

So what's your Economic Creation Myth?

Tuesday, September 20, 2011

Not Free to Die

Recently, a friend sent me the following email containing a link to a article by Paul Krugman:

Bret, as you know, I often find myself well-aligned with Krugman's thinking. Here's a recent article by him that invokes Hayek, so I immediately thought of you: .

Glad to have your thoughts when you have time.
The following is my response.

In the past I've mentioned to you that I don't have a big problem with government (possibly even the federal government) covering at least some classes of catastrophic health expenses. My wife (who works in health care administration) calls this the "doughnut" approach where the government covers some preventative care (the "hole" of the doughnut), each individual is responsible for routine expenses up to some maximum (somewhere between $5k - $20k per year and this is the main part of the doughnut) that can be either paid directly out of pocket or covered by auxiliary private insurance purchased by the individual, and the government covers expenses beyond that (the "outside" of the doughnut). It's as if everybody has one of the high-deductible plans with some preventative care (e.g. vaccinations and the like) thrown in.

I would do this for an overwhelming practical reason. As my wife also points out regularly, some people have health insurance, others have sufficient assets to pay, and others have "coverage" such as medicaid. Whether or not you have insurance, assets, or coverage, if you show up at an emergency room with a life threatening condition, they will treat you, regardless of ability to pay. Why? Because in the seconds or minutes that action needs to be taken to save you, there isn't the minutes, hours, or days to determine ability to pay so they have no choice but to go for it. This is a strictly practical consideration and really has nothing to do with compassion.

If, during the treatment, you end up in the ICU for 6 months, nobody will pull a life support plug, even if you can't pay. Not me, not Ron Paul, not the crowd, and certainly not the medical staff. As a society, we have a hell of time pulling the plug on someone who's in a brain-dead coma for ten years, much less someone conscious with terror in his eyes as you go for the plug. Not going to happen.

Because it's not going to happen, and absolutely everybody has this access regardless of ability to pay, the money ought to come from a public source. Currently, it comes from the hospital increasing fees on everybody else. This means that a relatively poor person who plays it safe and buys health insurance (or who is paid less to fund health insurance out of their compensation package) is subsidizing the relatively high earning 30-year-old man in the example. Whether or not the poor should carry their own weight, I certainly don't think that they should be subsidizing higher-income people, so funding catastrophic health care (i.e. very high deductible health care) from the progressive tax system makes sense and is the only solution that I see that makes sense. That may make me a bad libertarian, but I don't much care.

On to Krugman's column. Clearly, Blitzer, Krugman, and Paul all assume that it is possible to deny life saving coverage in the emergency room and ICU, so let's assume that from here on out, even though it's not true. You wrote that you "often find [your]self well-aligned with Krugman's thinking", but you didn't mention if you were aligned with his thinking in this particular article. I'm trying to imagine which of the attitudes and opinions he expresses in this article that you might agree with.

The first opinion expressed is that one ought to demagogue issues and demonize and ridicule opposing viewpoints. His "Free to Die" title initiates the demagoguery from the very start and is an eerie echo of the "Death Panels" quip by that great demagogue of the right, Sarah Palin. Everyone is "free to die" and indeed we all will die at some point, though ironically, as I've described above, in the hypothetical example the 30-year-old man isn't free to die. Both Palin and Krugman are referring to the unavoidable fact that some entity somewhere, whether individuals or government departments need to decide how to allocate non-infinite resources. That does mean that some people will die at different times than they might have otherwise if there were unlimited resources. "Free to Die" and "Death Panels" are just demagoguery meant to appeal to passion and stifle rational debate. Is demagoguery the part of Krugman's (and Palin's) thinking that you're aligned with?

The second opinion expressed is that "American politics is fundamentally about different moral visions." I don't think the visions are fundamentally moral visions, rather they are visions of the capabilities and motivations of the human animal. Sowell does a good job describing the visions from a fundamental perspective in "A Conflict of Visions". Have you read that book yet now that summer has passed? The optimal level of government involvement in the decisions of individual citizens is inextricably linked with the different visions. From reading Krugman's articles over the past years (especially within the past decade), it seems he's never met a government intervention in personal affairs that he didn't like and he seems to call for ever expanding regulation - not only for business, but for personal affairs as well. Is this the thinking you're aligned with? Should the government limit risky activities like parachuting, driving a car, motorcycling, bicycling, playgrounds for children (it's already doing this), or poor eating habits (think Bloomberg's salt reduction regulation in NYC) or should individuals be allowed to weigh the risks with benefits and make their own decisions, both for themselves and their children?

Or is it just for the specific area of health-care? Should the 30-year-old man (why does it matter that it's a man?) in the article be required to buy health insurance in order that he's forced to do the "right thing"? (I argued above that as a practical matter, there's really no choice but for publicly supplied catastrophic health insurance, but now we're back to the theoretical/philosophical argument in the hypothetical which can have a completely different answer). Should the federal government intervene if he then gets sick and can't afford to pay for care required to save his life? Only a little more than 1 in 1,000 30-year-olds die in a given year from all causes. The other 999 that didn't buy health insurance had money to do other things like make or save for a down-payment on a house, go out to dinner more with family or girlfriend or date a prospective wife, travel, enjoy entertainment, etc. Is it really the government's place, or Krugman's, or yours, to balance the trade-offs and make the decision for each and every individual? Should everyone be required to cling to a relatively mediocre life or might it actually be rational and beneficial to some to decide to take the risk, even if there's some small chance of death? Clearly, according to Krugman, the answer is no. Is that where you agree with Krugman?

From the articles of his that I've read, Krugman also has never met an excuse for raising taxes and/or increasing government size that he didn't like, and certainly extending government health care entitlements fits in this category. In other words, it's impossible to tell whether he actually cares about health care or whether it's just an excuse to give the government yet more money and power. Perhaps this is the thinking you're aligned with? What if, instead of specifically subsidizing healthcare, we simply gave the money to the poor such that they could buy health insurance if they wanted, or they could spend it on other things? I wonder how many would choose to spend it on health insurance? My guess is that a very low percentage would get the health insurance - even those with children. Why? Because they might think it better to buy other things for their children like piano lessons, some travel to see the world, nicer clothes, better food, better and more entertainment, college education, etc. The trade-off is a more mediocre, safer life or a most probably better life with some risk. And since we've decided that everybody must have health insurance, a greater slice of GDP will go to health care, even if many or most of the poor would've preferred it went to other things.

Lastly, I completely disagree with Krugman's definition of "compassion" (and yours if this is where you agree with his thinking). First, the mechanism is inherently not compassionate. When group A takes from group B to give to group C, it matters little if group A is marauding bandits taking from townfolk to give to their favorite prostitutes or the government taking non-voluntarily from one group using its full force and authority to give to another group it favors. It's only compassionate and charitable in my definition if group B gives voluntarily to group C. It may be necessary for the government to force redistribution (and as I wrote in the beginning of the response I think that's the case), but it has nothing to do with compassion. Second, Krugman says he cares about children in Texas (color me skeptical since he seems to dislike everything about Texas), yet he doesn't mention children in South America, Africa, South-East Asia, etc. Why not? Why are Texas children more important? By increasing government involvement in health care, we're likely going to slow down innovation that would eventually help the billions of existing and future poor children and adults, both within the United States and elsewhere. How is that compassionate? Krugman writes "the weak economy continues to wreak havoc on American lives". Isn't it possible that Obamacare is one of the reasons for the weak economy?

In summary, I'm wondering which of the following you agree with Krugman: the imperative to demagogue issues and demonize opposing viewpoints; the intrusion of the government into the private resource allocation decisions of individuals, whether universally or just for health care; the dishonest use of emotional issues to facilitate higher taxation, more regulation, larger government, and greater redistribution even if the those receiving the benefits would rather have other kinds of aid; that forcibly taking resources from people is somehow compassionate; or that the lives of poorer Americans (who are relatively well-off compared to much of the rest of the world) are more important than the poor elsewhere in the world?

On to the Hayek quote. Here's the encompassing paragraph:

"Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provisions. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance -- where, in short, we deal with genuinely insurable risks -- the case for the state's helping to organize a comprehensive system of social insurance is very strong. There are many points of detail where those wishing to preserve the competitive system and those wishing to supercede it by something different will disagree on the details of such schemes; and it is possible under the name of social insurance to introduce measures which tend to make competition more or less ineffective..."

I'll have to admit I didn't recall that paragraph and had to look it up. I'm also somewhat surprised by it. Nonetheless, there are some important caveats. The first is the concept of "genuinely insurable risks". That would imply significant limits to the health care provided and I think this aligns with the "doughnut" plan I described above. It doesn't look like Hayek believes that all medical expenses should be covered (or covered with a copay).

Also note that the case is for the "state's helping to organize" the system. I'll admit that I'm not sure what he had in mind, but he doesn't advocate for the state to run said system.

Last, he notes that those "wishing to supercede" "the competitive system" will want to use this system of social insurance as an excuse to do so and may "make competition more or less ineffective". From my perspective, a lot of the effort looks like it's specifically aimed at make competition more ineffective.

I'm not sure what his view of Obamacare would be, but I doubt it would be favorable as it goes well beyond an insurance function, the state will likely end up running the system, and it will make competition in health care yet more ineffective.


Monday, September 12, 2011

Flying on 9/11/11

I was on three flights on the 10th anniversary of 9/11: Adelaide to Sydney, Sydney to Los Angeles, and Los Angeles to San Diego. Every flight was completely full, there was no extra security or any sign of worry, and the immigration and customs lines into the United States seemed faster than usual.

The memory of 9/11 seems to be mostly faded as far as travelers are concerned.

Thursday, September 01, 2011

Consent of the Governed

Some people think that the survival of a democracy becomes questionable or should be questioned if it loses the consent of a substantial majority of the governed.
"Governments are instituted among Men, deriving their Powers from the Consent of the Governed, that whenever any Form of Government becomes destructive of these Ends, it is the Right of the People to alter or to abolish it, and to institute a New is their Right, it is their Duty, to throw off such Government, and to provide new Guards? for their future Security."
-- Thomas Jefferson
I rather doubt that at this point westerners of any sort could summon the energy to follow Jefferson's advice and redo government, regardless of whether or not the government has the "Consent of the Governed." As a result, I don't think the survival of our government is in danger. However, I do think it's harder for a country to thrive without the "Consent of the governed" (depending a bit on the exact definition of "consent").

A recent Gallup poll finds that 84% of Americans disapprove of the job Congress is doing and I think that approval is a plausible proxy for "consent", or at least close enough that it's worrisome.

The problem is that roughly half of those disapproving think that the government isn't anywhere big enough (i.e. "doing" enough) and that the other half think the government is Way. Too. Big. There is such a wide chasm between the two sides that, as a result, I don't think America will ever again have the consent of the vast majority of the governed.

I'm confident America will survive, at least for a while, but I question whether or not it will thrive.

Update: Apparently congressional approval was a very good proxy for consent of the governed.