The Magic Market Meets the Covid Pandemic

The Magic Market, or, more precisely, Magical Market Thinking, has met the Covid-19 Pandemic and been found wanting. Magical Market Thinking, the fantasy that Capitalism and the Free Market can address every problem better, faster, and more completely, has been ascendant among the proselytizers and acolytes of Capitalism for several decades and has now found a home in the White House in the persons of Larry Kudlow, Peter Navarro, and the President himself, Donald Trump. Whatever the problem, whatever the outcome desired, all they have to do is wave the Magic Market Wand and everything will work out fine. Need healthcare, let the Market do it. Need education, let the Market do it. Need to solve inequality, let the market do it. No problem is too big or too complex that the Market cannot solve. (Never mind that the Market has been doing its thing in the US for several hundred years and we are no closer to solving these problems than we were at the beginning.) These beliefs can lead to poor policy decisions and, sometimes, very bad outcomes. They can blind policymakers to urgent problems that need to be addressed in a different way. They also led to the single most monumentally stupid decision by a President in the middle of a crisis - Trump changing our policy for dealing with a health crisis during the biggest pandemic in 100 years without warning, consultation, public discussion, or preparation. The abrupt change from a Federal Government lead assault on the crisis where the Feds help to coordinate the response and supply assistance when necessary to one where every state and even individual hospitals are on their own and fighting it out in the markets for supplies is akin to the US being invaded and the President declaring that he wasn’t going to use the military to fight it, but each state would have to get their own tanks and planes to do it. Trump is the general who sits in his tent, holding back his troops, while the outcome of the battle raging around him remains in the balance. No one outside the administration was aware the change was going to happen so when it was thrust upon the country, the public and private sectors were unprepared. There is a discussion worth having about whether the Federal Government, the states, or some mixture is the proper way to meet such pandemics, but in this case there was just a unilateral, unannounced determination by Trump that the Federal Government would not lead in this crisis, but also would not serve as the supplier of last resort to aid those places which were overwhelmed. Had the states, cities, and healthcare system known that this was going to be the case, they could have planned better for how to meet the crisis. The same goes for the private sector, which would have worked with the public sector to parse out production and supply lines so that it did not turn into the Wild West where everyone competed separately for limited supplies, driving up prices and creating scarcities. But that is the Magic for its proponents, especially Trump. Demand and high prices, market signals, would draw more providers in and solve the problems of shortages. How did Magical Market Thinking do with the Pandemic? It’s too soon for a final answer, but not too soon for a definitive one. Markets performed well, but too slowly and inefficiently to keep the potential pandemic from becoming a real one. A lot of companies responded, but no matter how quickly, they were starting at a standstill and unprepared for the speed of response required. To the extent that supply has met demand, it is due more to efforts to slow or halt the spread of the virus than it is to increased supply. Had the initial rate of spread prevailed, the healthcare system in many places would have been overwhelmed no matter what the supply increase was. And some critical supplies, such as PPE, remain far short of need. It is not fair to blame the private sector for this shortcoming; they were just as surprised by the policy change as anyone. It took longer for them to realize just what their mission was and slowed their response. When you have a crisis where the only thing you cannot waste is time, any lag is too much. It only allows for the further spread of the virus. Why would such a destructive change be made so abruptly and secretly in the middle of a crisis? Other than the mercurial nature of the President, that is. Magical Market Thinking and the use of The Magic Market Wand have led Trump to this moment. His absolute belief in the power of the Magic Market to save the day. All that was needed was to let loose the Animal Spirits and the pandemic would be beaten, defeated utterly. The Market would seamlessly move to ramp up to meet the challenge. The Gospel of Capitalism and unfailing Market Success are the roots of this. But Capitalism is not a religion and the Market does not perform miracles. There is no economic system more powerful than Capitalism and nothing more efficient than the Market, but there are times where they are insufficient to meet the challenge of the moment. The damage is not limited to the Covid response, either. It is no coincidence that as Magical Market Thinking has ascended, the attraction of socialism among the young has too. They see that Capitalism is failing them and many of those around them and are looking for an alternative. The inflated claims cannot be met in reality and this failure has disillusioned many. We saw a similar outcome in post-colonial countries which embraced Socialism in counterpart to the Capitalism of the colonial overlords. So, let’s put down the Wand, start thinking clearly, and begin to tackle the pandemic the most effective way, leadership from the top.

THE SEARCH FOR A BUNGEE CORD MONETARY POLICY

U.S. Federal Reserve Chairman Alan Greenspan has defended the Fed’s actions concerning the Nasdaq price bubble, largely on the basis that to fight the bubble would have required the Fed to send the economy into a major recession. The benefits, if any, of pricking the bubble did not appear to outweigh the costs involved and thus no action was taken. In any case, it was not even clear if there were a bubble. Without such a determination, policy prescriptions are not clear and the danger of economic calamity from incorrect action increases. Under this scenario it made little difference whether the recession came from a burst bubble or Fed policies. There has been debate as well between the efficient market adherents and the behavioralist wing in economics as to whether this was a rational or irrational event. An examination of the situation shows both Greenspan and the efficient marketers to be correct, although a fuller explanation is required. There are several aspects to this review. The first is that identification of a bubble is difficult, mostly accomplished in ex poste fashion by witnessing the collapse. How best to deal with them is even less clear since they are so hard to identify. It may be that there are different kinds of asset bubbles, rational and irrational, and that they require different policy approaches to deal with them. It may also be that asset bubbles only become bubbles when they are perceived as such and actions are taken in regard to this perception. They may not be a problem until they are a problem or turned into a problem. Finally, the wisdom of mitigating the impact of asset bubbles and the responses by policy makers need to be fully examined. The proposed response by many observers amounts mostly to a let them have their cake and eat it, too, approach. Let’s have bubbles, but let’s find a way to mitigate the fallout. Identification of an asset bubble is very difficult, even after the fact. The real question seems to be not so much whether there is an asset bubble, but whether such a bubble holds the possibility of large, negative consequences when it bursts. That determination seems to be dependent upon whether the bubble is viewed as having a rational or irrational basis. Asset bubbles that are viewed as having a rational reason for their existence are viewed as less likely to cause massive dislocations outside the particular economic sector in which they grow when they finally burst. Inside the sector there will be significant fallout, but it will not threaten the stability of the financial system. Asset bubbles that appeared less rational in nature or which infect large areas outside the initial sector are considered far less benignly. Their potential for disruption is greater and more likely to affect many areas of an economy. Such a widespread collapse would engender financial instability and threaten the well-being of the economy. Rational asset bubbles may best be seen as adventures in valuation pricing, an attempt to place a value on an asset for which there is little historical background. Asset bubbles associated with new technologies may be the best examples of these rational bubbles. In the initial excitement over the promise of new technologies, such as railroads, telephones, or internet, investors may include all benefits from the technology in the prices they are willing to pay and not just those benefits which will accrue to a given investment or stock. The initial price euphoria captures the benefits from externalities as well as the specific benefits that will be given to an investment. Investments as a class are even more likely to reflect this global pricing and become overvalued on the basis of the benefits rightfully flowing from the investments themselves. Since investors are unsure which stocks will benefit in the long run, all get bid up. Once investors become convinced that the investments will be unable to attain the full benefits implied by the global pricing, the prices collapse and often do not return to the same levels again for a long time, if ever. It is tempting to view these asset bubbles as irrational, and many have done so, but it is more correct to view them as the initial stage in the valuation of a new technology and the initial pricing as rationally including all perceived benefits flowing from that technology. The prices are accurate in that they fully account for the whole potential of societal impact from the new technology. The desire to capture future benefits leads to overinvestment, or more precisely premature investment. Investors see the future stream of benefits, but not always the difficulties in making them a reality. (The same mechanism may be at work when markets overshoot on the upside as well as the downside. Investors overshoot on the upside when trying to price in all the good news by generally bidding up all assets and overshoot on the downside trying to accommodate the bad news by generally bidding down all assets. This will hold true for all levels of the market down to and including individual stocks.) The roller coaster ride that was Nasdaq is a perfect example of this phenomenon. The euphoria surrounding these stocks built gradually and compounded on itself as the potential of the new technology became more apparent. To be sure, there were other factors for a given stock, such as speculation or day-trading, but as a whole the rise was driven by the vision of the future. The ways in which many of these companies accounted for their futures on their balance sheets reflected this view as well. Once it became clear the future was a long way off and that reaping the profits would be difficult, investors took a closer look. At that point, investors began to question assumptions about future sales and profits and how they were accounted for and the ability of some companies even to survive. Much of this reflection occurred as these companies came back to the markets for a second round of financing and it became clear that they would burn through this capital as well with little to show for the investment. Once the foundations for the prices were eroded, the pyramid collapsed. It is unclear if these prices will ever return to their peak levels. Asset bubbles that do not stem from new technology are more likely to exhibit irrational pricing behavior and to affect the pricing of other asset classes. The collapse of such a bubble will have more far-reaching negative impacts as a result and tend to cause instability in the financial system. Asset prices in this case do not reflect the global return for an asset, but a belief that the price of the asset will continue to go higher and higher with any price fall in the distant future or of negligible amount. Such bubbles tend to drive up the prices of other asset sectors to raise their return to compete with the now relatively higher returns in the bubble sector. A generalized rise in asset prices results and the collapse of the bubble tends to take all other prices down as well. The recent rise in Japanese stock and land prices is a good example. Stock prices in Japan rose continually on the view that Japan’s economy was headed for the moon, which in turn caused real estate prices in Japan to follow suit. The bubble was compounded by the use of stocks and real estate as collateral to buy each other, pyramiding the growth in prices to unheard of heights. Capital expenditures financed by the proceeds reinforced the feeling of Japan’s economic invincibility and fed even higher prices. To make matters worse, the asset bubble in Japan spilled over into other regions and into other asset classes such as art and precious stones. Japanese buyers pushed up real estate prices in many foreign countries for both commercial properties and homes, while the Japanese love for art and jewelry led to buying binges in these areas. The collapse of the Japanese Bubble starting in 1990 had an effect in these sectors as well. The Japanese bubble had far-reaching and destabilizing effects that mark it as irrational in nature. (It is conceivable that the bubble could be viewed as pricing in Japan’s future prosperity, but the widespread impact of the bubble outweighs this.) Another factor that may be at play here, too, is that markets may be asymmetrical in their ability to handle surplus versus scarcity. Markets appear to work quite well when there is scarcity by allocating resources to the investments with the highest returns. It is usually quite clear what these investments are so that the markets allocate the available resources quite efficiently. Such may not be the case when there is a surplus of resources, as we have recently experienced. The available return on investments falls as those with the highest return are invested in first and the ones available have a lower rate of return. Complicating this is that the number of investments at a given level of return rises as the return is lowered, making allocation a more difficult task. Given sufficiently low enough returns, it becomes even less certain which ones are the most desirable to invest in since it is hard to predict actual versus expected returns. This may cause long-term difficulties in an expansion and lead to its collapse. Investors may then have several reactions. They could invest in all available investments driving up prices across the board since it does not matter which ones are chosen. They could be indiscriminate about which particular ones they invest in since it is unclear which ones will yield the highest return, driving certain assets that become popular to astronomical heights. They may eschew investing in investments with a low return since they are not certain which ones are best and over-invest instead in those areas that have shown a high return. This drives these asset prices far higher and creates an over-investment in capacity in that sector. The root cause in each case is that a surplus causes a change in investment behavior due to the difficulties in identifying the best investments that is not seen in times of deficit. This reaction raises the question of whether investors invest to maximize return or to receive a given rate of return. The answer may depend on the prevailing circumstances. Low interest rates and a booming economy, such as in the 1990s, may push investors to pursue maximizing returns, which means that they also maximize risk. Investment is distorted and the economy eventually slows. High interest rates in a slow economy may lead to investors setting a given rate of return as their goal since only high return investments can be profitable, but the high risk may be too much in a slowdown. This will lead to underinvestment and keep the economy slow. Low interest rates in a slow economy will likely yield the best allocation of resources with investors seeking to put money into projects that exceed a certain return, while high rates in a booming economy will tend to move investment to the highest uses only. Even with so obvious an asset bubble as the one in 1980s Japan, however, the question remains what should be done about them, what role is there for monetary authorities in addressing them? Even more to the point, should anything proactive be done or should action be confined to ameliorating the effects of the collapse? While one can easily see the rationale for considering irrational asset bubbles a menace, it is not so clear why a rational bubble escapes this view. Granted, the scale of the collapse is generally smaller and narrower and, therefore, less of a threat, but that does not provide a basis for examining which bubbles should be left alone and which should attract more attention. There is substantial common sense in the view that if an asset bubble is perceived to be forming then monetary and fiscal authorities should move to halt its growth or attempt in some way to manage it. The hope is that by doing so you prevent the hyperinflation of the balloon and its eventual, inevitable collapse. Negative effects are therefore minimized and financial instability is avoided. There are, though, several caveats to this approach. The first, of course, is identifying whether a bubble exists and then whether it represents an unacceptable risk. Many bubbles are perceived as they form, but others are less obvious and therefore less addressable. It appears that just the initial step of identifying a bubble can prove an inordinately high hurdle to cross since there is still disagreement on whether a bubble preceded the ’29 Crash. A second problem is determining if we are dealing with a rational or irrational bubble. It may seem straightforward to some – all bubbles are irrational – but that simplistic view is likely to result in bad policy on many occasions. The policy prescriptions will be different for each type of bubble and applying the wrong ones can make matters much worse. A third problem is deciding whether or not to take steps to address the bubble, rational or irrational, and what steps to take. A simplistic view would be to always say “yes,” we should address the bubble creation because of the problems they create when they burst. Again this shows no differentiation in bubble types, but it also may force action where none is called for. It may be that no bubble exists until we turn a situation into one. Does a bubble exist in real time or only ex post facto? Does a bubble exist only once it bursts? Before it bursts, it is unclear if the bubble is going to get bigger, burst, or slowly deflate. It may do any of these three of its own accord or as the result of changes in policy. We can, through our actions, turn a potential bubble into a burst bubble with all its consequent effects. A Ponzi scheme may best illustrate this. A Ponzi scheme will work until it no longer works, until there are no more entrants. But until that time, the Ponzi runs smoothly and all is well. Losses can be hastened, though, and their incidence shifted to different entities than would otherwise be the case if shut down prematurely. This desire to stop a bubble assumes the rightfulness and usefulness of addressing a bubble. It does not take into account that there may be more to be gained by letting bubbles run their course than by cutting them off. The consequences from cutting off a bubble on the downside are more readily apparent, but there may be upside benefits lost as well. One of the benefits, and perceived negatives, to the bursting of an asset bubble is that it clears out a lot of the weak participants in the sector and redirects investment to the stronger ones and other sectors. This leaves the survivors stronger and better capitalized to move forward once the sector starts to recover from its plunge. Any curtailment of this process will likely lead to fewer participants being weeded out, leaving more competitors fighting for a limited pool of capital, personnel, and business. The recovery may take longer as a result and a second wave of purgings will occur as the weak competitors finally bow out. Curtailing the bubble will not change the outcome, but will stretch it out over a longer period of time and could result in greater losses rather than fewer if the second purge carries out some competitors that would have survived if only one purge happened. It may also lead to greater concentration of the sector than would otherwise have resulted. Who survives will change as well. Japan may be a prime example of this outcome, suffering a decade-long stagnation because the process was short-circuited. Cutting short a bubble may have long-term negative consequences for the competitiveness of the sector by failing to attract the right competitors to the market. It appears to be assumed that those who arrive early to the bubble and those who arrive when it is still not in hyperinflation fare the best in the long run. Those who arrive at the end of the cycle are felt to be the weakest, least capitalized competitors and basically serve as fodder for the bubble’s growth. It is not clear, though, which group of competitors fares best in the long run and by keeping out the late-comers we may be denying some of the best competitors their shot at success. Some large, deep pocket players may not arrive until late in the game as well after surveying the sector for the best entry point. Even if it turns out that they who come last to the party are the worst dancers, they may still fill a vital role in the creation and destruction processes that will go unfilled and reduce the competitiveness of the sector. We create winners and losers in this way who might not have filled those roles otherwise. Slowing the bubble may also slow down adoption of new technology and slow its pace of innovation. The bubble is created by the rush of new entrants and financiers to the sector, and that creates its own momentum for adoption of the new technology while increasing the rate of innovation. If the bubble is cut short, the technology may not achieve a critical mass needed to bring forth the best variant of a technology and result in a less innovative change than it would otherwise. The stated reason for addressing an asset bubble is to minimize the fallout from the bubbles and to avoid any financial instability they can cause. What seems to be unstated is that we should really be trying to enjoy the benefits of the bubble and avoid its costs. Part of the attractiveness of creating a bubble is the thrill of the ride. It is akin to the thrill of a freefall jump, it’s just that sudden stop at the end that’s the problem. Through the wonders of technology and ingenuity, we can now experience the thrill of the freefall, yet avoid that nasty stop at the end. Bungee cords, quite literally, allow us to experience the thrills of a fall and live, not only to tell about them, but to do it again. It appears that this is what many are seeking when they argue for intervention to address asset bubbles. They want to enjoy the ride and benefits of the bubble, they just don’t want to pay the price at the end. They’re looking for a bungee cord monetary policy that will allow us to enjoy the trip and not fear the landing since there is none. Just when disaster approaches, the cord snaps us back and saves the day. We are relieved, but thrilled. Let’s do it again. Greenspan is correct when he states the Fed did the right thing by not popping the Nasdaq bubble. It is painful for those who have gone through the process, but any action would have just shifted the incidence of the pain and prolonged it. He is right, too, because the bubble had a rational basis and short-circuiting its run would have lead to inefficiency and stunted innovation. There is no doubt that there has been a great deal of pain brought about by this collapse and that many are looking for a way to stop the pain next time. To do so, however, will leave our economy more not less vulnerable.

The Healthcare Market Conundrum

In a few weeks, the Supreme Court will rule on subsidies for the Affordable Care Act (ACA or Obamacare to most, Obamanationcare to opponents). However the ruling turns out, we will still be faced with how to provide Americans, all Americans, with healthcare. Do we keep the ACA, amend it, replace it, or just scrap it and revert to what prevailed before (the best healthcare in the world for most and a Third World system for the rest)? Whatever is decided (and we really should decide the issue and not blunder about) we need to take into account some of the attributes of healthcare that make it a unique market before determining its structure. Without addressing those aspects, we will be destined for failure in whatever form our healthcare system takes. Most Americans’ impulse is to put their faith in the Free Market System to deliver us the best system. Free markets are a wonderful thing. They are better at providing a wide variety of goods and services than any other system. They move resources to those areas most in demand and which provide the highest returns. They do it automatically and swiftly, far faster and better than even the most advanced computer could possibly do. Markets have provided us with a standard of living that even Kings just a short time ago would envy. One meddles in markets at grave risk of reducing their effectiveness in providing us with wealth. But one thing markets have not provided us with is universal healthcare. Markets are not perfect and, more to the point for healthcare, they do not meet all demands for a product or service. Nor are they meant to. Markets exist to allocate and ration resources, not to see that everyone gets whatever they want but may not be able to afford. Resources are finite and there is a cost associated with them that rises as more are provided. Thus, there is a point at which no more will be provided because there is no one left who is willing to pay. And, there is a point below which no one is willing to provide the good. Inevitably, there are some sellers who cannot sell and some buyers who cannot buy (recall your Econ 101 Supply and Demand Graph). This exists as certainly as any law of nature. So what does this mean for healthcare in America? It means that, under the present system, some percentage of Americans will always be unable to buy healthcare in a free market. Others will only be able to afford partial coverage, while most will be able to enjoy the best medical care in the world. The bottom line is that there will be those who will continue to suffer from treatable conditions, who delay treatment for less serious problems until they turn into serious ones, and who die prematurely because they could not get treatment or got it too late. No matter how you set up a free market healthcare system, you will have these negative outcomes. It is locked into the system as surely as the sun will rise tomorrow. It is more difficult in healthcare than in other markets to meet everyone’s needs because healthcare is a unique market with attributes that no other markets possess, except in limited ways. These unique attributes are why no purely market-based solution is possible to provide universal healthcare. The first attribute is that there are few if any alternatives for many medical procedures, such as a heart transplant. The second is that there is no continuum of products that can be provided at various price levels. The third is that a consumer may become involved in the market without their consent in emergency situations. The fourth is that providers are mandated, either by law or by professional ethics, to provide their services free of charge if necessary. The last is that there are no secondary markets or ability to provide the service by oneself for most medical care. For most markets, there are alternative products, producers, or services that can fulfill the needs of a consumer. The alternatives may be less efficient, more expensive, or less attractive, but they can usually fit the bill. Or, something else can be used that is totally different from what was originally desired and make the consumer just as happy – you want new shoes, but settle for a new pair of gloves. In healthcare, those substitutions are usually limited or non-existent. There may exist several forms of treatment for a medical condition, but the choices are limited and often only one is appropriate. You cannot just decide to forget about your ailing heart and decide you would rather have your stomach treated or just forget it all together if you want to live. In most markets, there is a price continuum that consumers can avail themselves of to buy a product at the price they wish. One can spend a few bucks to thousands of dollars for a pair of shoes, but almost everyone can buy them. For most of medical care, especially that required for serious problems, there is no price continuum or not a meaningful one to most consumers – a heart transplant will cost too much regardless. Worse, there is no transparency on prices to allow comparison, even if there is time to do so. It is also difficult to compare offerings for quality. Unique to healthcare is that a person can become a consumer of the product and be responsible for paying for it without giving consent. In many emergency situations a person is not capable of giving consent, but the standards of the industry is to treat them and worry about payment later. Often the consumer is still liable for the cost of the treatment even without agreeing to do so. You also do not get to pick the product at the price you want to pay, that is dependent on your medical situation. Medical professionals and hospitals, unlike any other economic sector, are obligated to provide their services for anyone who is in urgent, life-threatening need, regardless of their ability to pay. Because of this requirement, medical providers must charge their paying customers a higher price to cover non-paying or low-paying patients. Many hospitals, doctors, and other care providers charge above market prices to those who can pay to cover the costs of those who cannot. This is possible because of the fragmented nature of the current health system and limitations on competitors. A move to a free market system, ironically, will remove the ability of healthcare providers to subsidize nonpayers. They will only be able to charge at cost because other competitors will do so and payees, such as insurance companies, will not pay more. The only way for providers to help non-payers is for them to achieve excess returns by charging above average costs. That can happen only when they have pricing power, such as a monopoly or oligopoly. In a free market, there will be no excess returns. Free markets will lower costs and expand treatment somewhat, but that will be offset by fewer non-insured patients being treated and some higher cost providers dropping out. A free market could thus end up with less care provided rather than more. As a result, there cannot be a truly free market in healthcare; it is a prisoner to ethical requirements. Lastly, there does not exist any secondary or used markets for most medical care and most care cannot be provided on your own. The only secondary markets that can be said to exist are actually not markets at all, but services provided by various governments, such as local clinics or county hospitals. Even privately run clinics are mostly financed by the government, so that, in effect, there is no secondary free market. Moving them to a free market basis would make them unaffordable for the very people they are designed to help. Again, a free market would provide less health care than we now have, not more. And certainly not universal coverage. Overseas treatment is another option, but still for a limited few who can afford the trip. Used markets are limited to some medical devices, but do not exist for most of the system. You cannot recycle an operation, consumers are forced into the primary market. In addition, consumers cannot provide most medical services themselves or through the informal economy, the procedures are just too complex or dangerous. The next closest example of such a market, education, is still way ahead of healthcare because it is possible to teach oneself many things or become educated in a variety of ways. Self-treatment in healthcare is rather limited. Why is universal healthcare our preferred outcome to the current system, which means some do not get sufficient healthcare and others are locked into place by fear of loss of access to healthcare? Beyond the moral imperative of providing for our fellow Americans, there is an economic cost to the current system and potential economic benefits from expanding coverage. People who do not have access to healthcare are less productive due to not being treated. Workers cannot change jobs or start new enterprises for fear of loss of access to healthcare. In a free economy, many workers are stuck in place and unable to maximize their contributions to the economy. Universal healthcare, available to all regardless of where they work, will increase the economic efficiency of the US. If our goal is universal healthcare, as it should be, then a free market system alone will not suffice. There must be a significant non-market component or even a totally non-market system. A free healthcare market cannot cover everyone, regardless of how low the insurance or how high the deductible. This is true of every market to some extent, but when a person has a serious ailment, the consequences of not being able to afford the product can be deadly. When the situation is serious enough, such as failing kidneys, a consumer has no choice but to seek treatment if they are to live. If our goal is to make our medical system into a free market and to not “socialize” it, that can be done quite simply by doing nothing – unless, that is, we dismantle Medicare and Medicaid and make them free market programs, too. (Reducing the amount of care provided in the process.) Whoever chooses this way, however, must justify the unnecessary suffering and premature deaths, which will result as acceptable outcomes. This is not some abstract capitalism versus socialism debate. It is literally life and death for a significant portion of our society. Total dependence on the free market may, perversely, prove even more intrusive than a government run model, since it would require a degree of transparency in information to make it work effectively, such as doctors’ patient results or hospital costs, that many would find intolerable. There are any number of different approaches in countries around the world that could be adopted – some more market-oriented than others. All have a major non-market component of universal provider, universal payer, mandated coverage, regulated operation, or a combination of these approaches. How would I do healthcare? We can see the beginnings of a more rational system already, one that stratifies delivery of services by the level of medical need – clinics that provide screening, well-being care, and low level emergency care that are primarily staffed by nurses and physician assistants; patients needing greater care then can move on to a doctor for further examination and referral for treatment; major emergencies and treatment are handled at hospitals. It is a system that maximizes resources by allowing non-physicians to perform much of the primary care and doctors to concentrate on treatment of more serious concerns. In a rational system, the most valuable resource, the doctor, would not be the front line of care. The doctor-centric system is the system we have developed over time and Americans like it, but if you were to design a system from scratch, you would not put doctors on the front line. How to pay for it? First, there should only be one system not the hodgepodge we have now. That only raises costs. Second, it makes no sense to buy individual policies or make businesses provide health insurance because the cost is too high for individuals and the disincentives too great for businesses. Everyone should be automatically enrolled. Third, even with portable insurance there is a cost to moving around, providing disincentives to do so. In the end, the best way to finance healthcare is through the tax system with a single payer providing the funds to care givers (directly as in Medicare or through private insurance companies as in Germany). We do not need a government run system, but we do need a government financed one. To choose we need an honest debate and open minds. The current debate has descended into some kind of Boschian Hell that has terrified many into total opposition to any change. We can provide healthcare for all Americans if we are willing to address the gaps created by our current market-based system. That will require an acceptance of a role for non-market-based programs to provide care that the market cannot. Given the current level of the debate, though, that appears to be an uphill climb. Getting to a common starting point on the problem, that the current system cannot succeed as structured, would at least lay the groundwork for a solution.

Hyperinflation Versus Deflation

What seems to be lost in the debate over deflation versus hyperinflation is that the world’s economy has fundamentally changed over the last 25 years. Prior to 1989, the world’s economy was divided into three major areas – the Capitalist West, the Communist East, and The Rest. In 1989, the Communist bloc collapsed and joined the Capitalist West. This was soon followed by major additions to the Capitalist economy such as China. The part of the international economy governed by market forces has grown by several orders of magnitude in a very short time. This expansion has added huge numbers of workers and consumers with a largely deflationary effect as their low wages and increased productivity restrain prices around the world. True, commodity prices have increased, but those prices have not pushed through to the rest of the economy as the deflationary effects constrain the ability of producers to pass on the higher costs and the rise in productivity in newly emergent capitalist countries lowers other production costs. The best way to look at this is that the parameters that govern our economy have shifted dramatically allowing for a huge rise in productivity that creates deflationary pressures. Will this change soon? Not likely. India is about to join the party in a big way along with other Asian countries not yet fully integrated in the international economy, while Latin American countries also are becoming more integrated. Even Africa is moving forward and will join more fully in the years to come. The upshot is that deflationary pressures are likely to continue for a very long time and the return to a “normal” monetary regime is not likely any time soon. This is not your Grandfather’s deflation, either, that was experienced in the Great Depression. There, a loss in demand led to a generalized drop in prices that had a self-reinforcing effect as the productive capacity of the world was greater than the ability of consumers to buy. Reversing the deflationary spiral proved extremely difficult. Today’s deflationary effect is almost a background factor and not the engine for price changes. Consumers are able to buy more goods at cheaper prices because the productive capacity of the new producers is so high. Prices are not dropping from a loss of demand, quite the opposite has happened. Demand is higher, but prices for many goods have fallen because of lower production costs. Consumers have realized a marked increase in their standard of living as a result, not a fall. There are downsides to this deflation, however. At the same time that consumers, largely in developed countries, have enjoyed the increase in lower-priced goods, the transfer of production to low cost areas has lead to a loss of jobs and wages. Those countries that have been able to increase their productivity levels, such as Germany, have been able to maintain employment, although incomes have not done as well. Those that have not been able to increase their level of productivity have seen higher unemployment and loss of income. In the US there is now a debate over what happened to middle incomes and it is likely that this deflationary process has contributed to the stagnation in middle incomes to some degree (The stagnation of income predates the beginning of deflation, however.) The US has not adapted as well as Germany, but still far better than most other developed countries. It is time we faced up to the fact that we are looking at a low interest rate environment with accompanying deflationary pressures for a very long time. And that’s not even accounting for an economic downturn/collapse in a place such as China which will then have huge production overcapacities that it will use to flood markets with goods to keep the country going (And that day appears to be drawing very close.). If you want to plan for the future, plan for how to negotiate a world that will present challenges for how to continue to integrate more productive capacity and its resultant deflation. There is a point in the future where this process will play itself out, but that does not appear to be coming soon. Inflation will then become a much more serious threat than it is today.

Who Understands The Markets Better, The Pope Or His Critics?

One of the recurring themes about Pope Francis is that the criticisms he makes about Capitalism and markets are misplaced because he does not understand them. He does not understand, much less acknowledge, that Capitalism is the path out of poverty into prosperity. He should be praising Capitalism for the unequalled success it has had in raising living standards around the world rather than criticize what he sees as its excesses and shortcomings. The Pope, however, understands markets and the outcomes of those markets. It is his critics who do not understand them or who purposefully gloss over the negatives. They misunderstand or misstate the consequences of markets and the outcomes they produce. The Pope acknowledges what they will not, that one of the outcomes of Capitalism is that not everyone benefits and that there will always be those at the bottom of the income scale. It is inherent in how a Capitalist economy runs. The Pope’s critics do not see or ignore these poor. The critics say they are poor of their own doing and not as a result of the workings of the market. If only they tried harder, learned more, invested in their future then they too could move up into the higher incomes. The critics of the Pope would have us believe that Capitalism and markets will lift all boats, that everyone will prosper from them. The Pope’s critics seem to believe these poor just appear as if by magic, while the rich are the well-deserving beneficiaries of the market’s largesse. It is a beautiful, optimistic story and if we only fully embrace Capitalism then all will be well. It is a Lake Woebegone world where everyone can be above average. But markets do not work that way. While this is true enough individually, it ignores that there will always be low paying jobs and those for whom working is very difficult. Some prosper and others do not. Not everyone can do well enough to leave the bottom; there is a distribution of outcomes that are produced as a natural course from the operations of a market economy. The US has had a Capitalist economy for more than 200 years, how long does it take for those at the bottom to prosper? Who do they think will do all the low paying jobs? The Pope understands this – the poor will always be with us – and this is the genesis of his criticisms. That and the attitudes of those who have prospered from Capitalism. He sees that many of the rich disdain the less fortunate, blame them for their poverty, and accuse them of being leeches on the economy. The Pope sees that many of the rich are proud of their wealth and feel God gave it to them because of their virtue. What he does not see is humility, generosity, or empathy. Granted, the Pope should acknowledge the importance of Capitalism to the fight against poverty, just as his critics should admit the role of the markets in producing poor people. We can give the Pope more of a pass on this matter, his focus and concern is on how to help those in need today and not let them suffer until some future nirvana. His critics, however, get no such pass. Their argument is misinformed or misleading and serves to justify their inaction. They look only at the parts that tell their happy story and ignore the rest. How can you work to solve a problem when you only acknowledge half the issue? A policy that ignores a significant part of the problem cannot succeed. To deny the way that markets work is to bury one’s head in the sand when a clear view of reality is needed. Why do they deny the market? To be generous, they want to focus on the optimistic, the success so far of Capitalism in raising billions from poverty and its ability to do even more. Less generously, they just do not understand how markets work and do not realize that the poor are a function of the markets and not something that just appears. Least generously, the critics are trying to distract attention from the inequality and put the blame on the poor for being poor. Helping the poor in fact is akin to keeping them poor and dependent. It is a convenient way to absolve themselves of responsibility to them or taking action to help the poor and reinforces their belief in how God has blessed them for their virtue. The Pope begs to differ. Capitalism is not a religion and markets do not perform miracles.

The US Tax System – Reform or Reformation

The US Federal income tax system is in desperate need of replacement. It is a system skewed to the rich and powerful, built in an ad hoc, thoughtless fashion, and one that does not meet the basic criteria of a tax system – to be fair and efficient. It is indisputable that the current US federal income tax system is neither fair nor efficient. Any worthwhile tax code should meet both criterions. What would a fair and efficient tax code look like? Most proposals include simplifying the code, closing loopholes, and lowering tax rates. Others would go further and eliminate it altogether, replaced by some other tax system, or have just a simplified flat tax whose main virtue is that it treats everyone equally. While all these proposals have their attractions, none really get at the root of why our system is so out of balance or what really would reform the system. A modest proposal follows. What does it really mean for a tax system to be fair? What does it mean to be efficient? And how do they determine the bona fides of a good tax structure? First, fairness can be seen as a system that asks the same of everyone, so that no one pays a greater proportion of their income than anyone else does. Fairness can also be seen as a tax structure that is progressive, i.e. one that asks more of the taxpayer as income rises. Fairness in this context, however, would seem to mean that the system does not disadvantage anyone, which is not the same as a flat tax. Fairness is also inextricably linked to efficiency. Efficiency, for the purposes of this argument, means that the tax system does not advantage or disadvantage any part of the economy. There would be no distortions attracting money to one area or away from another or affecting investment strategies to take advantage of a tax break. The two concepts, therefore, must both be met to create the best system. What would it mean then for a tax system to be both fair and efficient? First, everyone would be treated as the same. There would be no distinctions between an individual, corporation, or organization. The same set of laws, rules, and rates would apply to each. Why should one taxpayer be treated differently just because of their legal standing? The current system bestows advantages on one kind of taxpayer and disadvantages on others without any real economic justification. Second, there would be no (none, zilch, zero) exemptions, deductions, incentives, etc. to the code. Again, these change how people behave and who wins or loses. This prohibition puts everyone on the same level to compete for the resources available in an economy. Money should flow to the best and highest uses and will be accomplished by equal treatment. What is the best measure for determining how taxes are determined? The simplest way would be to make every dollar of income the same regardless of its source, who receives it, or who pays it. With no offsets such as deductions, losses, or tax expenditures. Thus, a babysitter and GM are equivalent when determining how much income they have to be taxed on. Income is a better means for determining a tax since it is far too easy to manipulate profits (no movie ever made one) and losses. In addition, why should the tax system subsidize the inefficient? Governments would not be given the privilege of tax-free financing; public projects would compete with the private sector as to which had a higher return. This would be the baseline from which any reform of the tax system should begin. Think of it as akin to zero-based budgeting where everything has to be justified to be included. There are many reasons, some justifiable most not, for creating “distortions” in the tax system. The problem with our system is that it has been built by Rube Goldberg wannabees with no logical thought given as to the exemptions, let alone the system as a whole. The real question is not whether we should make distortions to the tax code, but which ones and why. Changes should only be made if the benefits outweigh the effects it causes on the rest of the tax system and how much it advantages or disadvantages different taxpayers. The system works best that is least complicated, but some changes may reap more than a simple system and should be considered. But only after carefully weighing the balance of costs and benefits. We have built a terrible system precisely because we have not given any thought to why we make changes. How to ensure this? This would require a major change in how Congress deals with approving changes to the tax code and spending (on which taxation is based). First, contrary to most proposals, tax increases should require only a majority vote and tax cuts a supermajority (60-66%). Why? Tax increases carry their own inherent disincentive in that the voters often react by dismissing public officials they see as passing unnecessary tax hikes. Second, tax cuts and exemptions are very popular and easy to do so they are done – repeatedly. The only way to control tax reductions is to force every action that decreases tax revenue to be subject to a supermajority. Every bill that includes such provisions would have the same requirement so no riders could be snuck in to bypass the restriction. The fairest, simplest tax system would soon be riddled with distortions without a restriction on introducing them. Third, spending would also require a supermajority (55-60%) to ensure that spending remains controlled. Governments could still deficit spend (there are times when this is vital), but it would be more difficult to do unless in the most dire straits. The lack of a tax exemption on debt would also serve as a brake on deficit spending. The only “distortion” that I would recommend is to make tax rates progressive rather than flat. In part, this is because it seems more “moral” that those who benefit most should pay the most. The Federal income tax cannot be viewed in isolation from other taxes and fees since those affect how the total tax burden falls on a taxpayer. A large number of states and local governments have very regressive tax structures, payroll taxes disproportionately affect lower income workers, and user fees have the same effect. The regressiveness of other taxes needs to be taken into account when designing an income tax system that is fair to all. The main reason, however, is that a flat tax would not promote enough investment to grow an economy at its fastest pace. This is in opposition to the arguments by most for a flat tax, that a flat tax would promote more investment by allowing the rich to keep more of their money to invest. It is true that they keep more money, but their tendency is to invest for safety and not risk when an economy needs risk-takers to take advantage of opportunities. A higher tax rate, one not offset by shelters, trusts, etc., would force the higher income earners to invest in higher risk, higher return investments. They would be forced to be more entrepreneurial and less stewards. Otherwise, the economy is likely to underinvest in the long run and be less prosperous. (There is some historical evidence in this in that higher economic growth has been associated with higher marginal tax rates.) This change, however, would have the effect of favoring the rich over other taxpayers to the extent that the higher returns from their investments would increase their incomes relative to the other taxpayers. This would be offset at the end of their lives by an estate tax to bring balance back into the system. The standard objection to a higher rate is that the rich would just invest in tax shelters, but there are no God-given tax shelters, only Man-made ones and these would be unavailable. Tax reform should be a bottom-up process with an eye to consistency and the interplay of the various parts on the tax system as a whole. It must go hand-in-hand with some political changes, however, or we will just renew the cycle of distortions multiplying until the tax code once again becomes a nightmare. To do otherwise is a waste of time and harms our economy. The continual tinkering with the tax code makes investment more uncertain and leads to a less productive economy. It is time to set up a rational tax system and leave it alone.

The Market in Education

We have come to a crossroad for the question of how we should educate our children. Do we continue with the American system of public education that has served us well or allow an educational market to perform the task, which some believe will be superior? It is a question with far-reaching consequences and much disagreement. There is a way to combine the two approaches, however, that may hold the key – creating a student-centered market. The problems and shortcomings of our present public school system are well known and seemingly insolvable. As a result, a push to make schools more accountable through market forces has gained momentum. It would seem that those who promote charter schools and/or vouchers do so because of their confidence in market forces. That these market forces will inevitably and inexorably lead to the outcomes they envision – a good education for every American child at a reasonable cost (i.e. cheaper than currently). It is a faith that markets are inherently better at everything than non-market approaches. It is also a faith that envisions that the outcomes are knowable and predictable because it is the “market” that is being allowed to determine the mechanism by which these outcomes are achieved. It is a faith professed without any basis grounded in knowledge or indeed an understanding of exactly which market is operational. The outcomes the market proponents envision for their programs are just that – their visions of how the markets will work. None of it is based on empirical evidence of how markets work or what outcomes these markets will produce given how they are operated and what resources are used. The proponents first envision their outcomes and then attribute the market approach as achieving them without fail. It is nothing more than wishful thinking since there is no way to effectively know what outcomes will be produced by a market. It may be as well that the proponents are not even focusing on the correct market, that the ones they are promoting – school vouchers and charter schools – are too nebulous and broad to achieve their stated goals. The promotion of vouchers and charters appear not to operate on the educational achievement of students, but rather on who operates the schools and how much they make. Far too many of the charters and vouchers end up enriching the school operators and not educating students, especially those with more needs than the average. There currently is not sufficient information available for most parents to make an informed decision about which school is best to apply their resources to. The school operators hold most of that information and are often reluctant to make it available. Parents must choose with insufficient information, which allows the school operators to attract students by means other than their real successes. The governing market in this case is not parental choice or educational achievement, but the school operators. Even a voucher program does not target the right market. Parents may have the monetary means to choose a school, but they still do not have sufficient information to make prudent choices and students are still not the focus. In addition, in many areas of the country these are not viable solutions since there are not many educational options. The best market, the one that most directly affects those who are being targeted - the students – is the one that allows market forces to work directly for and with students. We have given money for charters, for merit systems, for vouchers, and other things when it is the students that we need to target. We have tried using market forces everywhere but where it will be the most effective. It is time that we do so. It is the students we are expecting to meet the goals we are setting and it is only they who can achieve them. There is an objection to this in that we prefer to promote the idea that students should be filled with the desire to learn and not turn learning into a clone of the rest of the economy. That love of learning should be an end in itself. But the fact is, that will be the only thing in their lives not market driven, not subject to the forces that will drive the rest of their days. It also does not preclude a student from loving learning. Many will anyway, but for those who do not initially, a market approach can motivate them to learn. How should this be done? There are two possible approaches – pay students as they go or pay the money into a savings account they can access after graduating high school. The pay as you go method has the advantage of an immediate payoff, which can motivate the students. It is a real, tangible reward for the efforts made to learn and do the schoolwork. It can also help support families with low income. Depositing funds into a savings account does not have that immediate payoff, but can provide long-term motivation for wanting to stay in school and continue to learn. It combines, to a certain extent, the love of learning approach and the market approach. It also helps reinforce the concept of delayed gratification that has been shown to be very helpful for success. There are obviously many issues that need to be addressed – how much do you pay students, when do you pay them, how is it financed, who holds the funds, who has access to the funds at the end of high school, and many more. Which method is more effective has to be determined as well. It is still a more direct market approach than the ones proposed and has the added benefit of not having to blow up our educational system to implement it. We can just add it to schools as they exist today. Our current educational system represents a huge investment in resources and talent that can be leveraged for the student-focused market. A lot of times, those proposing charters/vouchers appear to have more than educating children as their goal. Privatizing education, getting rid of teacher unions, or controlling the curriculum all seem to play a more significant role than they should if the goal is educating children and not controlling education. This is the only market where people are trying to pay less and expecting to achieve higher quality. That by paying teachers less, making their jobs less secure, and giving them less flexibility we will get a better outcome. No other business would expect that result. They would raise pay, provide stable jobs, and give them more freedom – what one would think of as the rational market response. America has a long, proud tradition of public education that has promoted a democratic, inclusive spirit to the country and we should preserve our system of public schools. There is no need to dismantle our current system, as attractive as that may be to some, it needs to be refocused. We can do that by using the power of the market at the appropriate point of the system – the students.

Why Market Outcomes Are Hard to Predict

It is a recurring conundrum as to why the expected outcomes from a business or public program do not always turn out as predicted. Sometimes the outcome is better than expected, but mostly they fall short of what is planned for. This leads to business closures and program failures. There are three major and interrelated reasons for this lack of predictability. The first is that there is no systematic, rigorous way to determine outcomes as for many other areas such as mathematics or physics. The second is that there are many levels of decision-making involved in determining an outcome and those making predictions do not always look at the correct level of decision-making which will actually govern the outcome of the market. The third is that decisions depend on a cascading series of decisions through layers of a market which must all come to pass as predicted. In the end, what these three issues means is that market theory has no predictive power. Predictions are not made by any process that allows for someone else to replicate them. Also, if outcomes are not as predicted they are treated as the anomaly and not blamed on the predictive process. There is no iterative learning process as a result. Predictions continue to be made in the same manner with the same lack of predictability and the same variable outcomes. The decision process is not faulted or even reviewed. The lack of a systematic system to evaluate outcomes means that not all possibilities are included. The decision-making becomes ad hoc, dependent on gut feelings, and things we “know” play an outsized role in the process. The final decisions represent more a shot in the dark, a hope that we got it right than well-informed guesses. Most outcomes are just assumed as flowing in the manner in which we envision they will play out. This is just a form of Magical Thinking. We believe X will result if we do Y and are surprised when W happens. Cash for Clunkers or gun buybacks easily represent this problem. Cash for Clunkers had the desired effect of motivating people to trade in their older vehicles for cash to get them off the roads, but it also motivated them to trade in vehicles that were no longer on the roads and did not represent an improvement in air quality since they were not working. Gun buybacks get guns off the street, but also out of the closets, garages, and elsewhere, many of which are inoperable. In the end, neither were fully successful. Even if a more rigorous process is followed and a more well-thought out outcome arrived at, the actual outcome may still prove different than expected. The problem is that in a market there are layers of decision-making that affect the outcome. You can evaluate a market on one level and arrive at an appropriate outcome only to find that the actual locus of the decision occurs on a different level. Usually the level evaluated is higher than the one where the critical decisions are made. The predicted result depends on the outcomes flowing down through the multiple layers of decision-making, it does not take into account the upward influence of decisions made at the lower levels that may have more impact. It is not always obvious that the wrong level has been chosen until the market is allowed to operate and we don’t get the expected outcome. Charter schools and vouchers are a good representation of this problem. The idea behind them is that parents will choose better schools for their children if given the opportunity which in turn will force all schools to improve. Education overall will improve and the educational system will become more efficient and productive. It turns out that is not how it plays out. Parents usually don’t have sufficient information to choose among the alternatives so that their choices do not drive improvements in education outcomes as expected, but mostly enrich the operators of the schools. The level of decision-making is too indirect to the desired outcome to have the expected result. The expected flow through of effects from this program do not occur because the expected governing level is at the top when it is actually much lower. It only appears that the level identified is a low level (parents), when in actuality it is much higher (schools). The third major difficulty is that some outcomes depend on a series of decisions that if not arrived at in the manner envisioned will lead to a different outcome than expected. It is expected that the effects will cascade through the layers and result in the predicted outcome. It is a complex, almost Rube Goldberg, way of reaching the final outcome rather than a rational process. It is more akin to a series of if/then statements that all must be true in order for the predicted outcome to prevail. Again, school vouchers are a good example of this since the success of the program depends on a series of decisions all moving in the predicted manner. Is there a way to systematize decision-making in the markets to improve outcomes? It is possible that a foolproof method of making correct decisions is not realistic, that we can come up with a way to make the right predictions each time. Markets may not lend themselves to such a system. There are just too many variables when it comes to human decision-making on a large scale. We can, however, improve the process by which we make decisions and thereby produce more predictable outcomes. First and foremost is to stop engaging in Magical Thinking, that whatever we develop in our heads is how it will play out. A more structured, thoughtful approach is needed and we need to be willing to review our decisions and outcomes and adjust future approaches to making decisions. Second, we need to try to identify where and how decisions are made and drill down as close as possible to that point in evaluating the probable outcomes. Third, we need to recognize how dependent our outcomes are on the series of decisions involved coming true and how we can influence that. No doubt this will require an extended iterative process to improve our decisions to where unexpected outcomes are the outliers and not the norm. Only with a more rigorous approach can we get better results.

Do People Really Vote Against Their Economic Self-Interest?

One of the recurring mysteries of the past few decades is why do some people continually vote against their economic self-interest? Why do they seemingly prioritize non-economic factors over their economic interest even to the point of voting for people who will actually make their lives less economically viable if elected? A number of explanations are put forth – social issues, prejudice, guns – but that requires that people remain economically irrational for an extended period of time, not just for a momentary lapse of judgment. It is very unlikely that a large group of people in many different areas of the country would all be irrational for a long time. It is more likely that the observers of the trend are the ones who are mistaken, that they misunderstand the economic worldview of these people – predominately in small towns and rural areas, but by no means confined to them. It is more a failure of imagination and empathy on the observers’ part to understand that there is more than one perceived rational economic reality. It seems unimaginable to these observers that these irrational people could in fact have a very rational view of their economic self-interest, just one very much at odds with the perceived wisdom. How can these people not perceive the economic reality that has been perceived for them? The difference is rooted in the fact that these supposedly irrational people can actually see their future. And their future is telling them they are screwed with no one really trying to help them. Their future shows fewer jobs, lower wages, declining government resources, and smaller, aging populations. They see nothing in the current economic environment that will help them stay afloat much less prosper. They feel abandoned, reviled, and ridiculed – not least because outsiders consider them too stupid to know what’s good for them. Acceptable perceived rational economic self-interest is that they should pursue more education, develop higher level skills, and move if necessary to where the good jobs are. If they don’t follow that model then they are not acting in their own best interest. Instead they stay rooted where they are, vote for politicians who support their backward social views while robbing them of the programs that could help them, and fall further out of the economic mainstream. All of which is true, but it is not rooted in an irrational economic worldview. It is based instead upon a very real analysis that the economic future being offered to them by the mainstream is not very attractive and not nearly as good as either their current economic situation or, especially, their past one. Unless they can be offered an economic future that is better than what they have, and, most significantly, have had, the calculus for determining what is the best economic future will be affected by the relative possible outcomes. How does this play out? Let’s say you’re a 50-year-old male just laid off from a good job. The accepted rational economic self-interest would have him return to school, get new skills, move if required to find a job, and live a better life thereafter. So why does he not do this? School takes a long time and you need money for the courses and living. A lot of people are doing the same thing so the area gets flooded with job-seekers for a limited number of jobs. Moving requires leaving family and friends, selling a house in a dead market, and moving somewhere on your own with very few resources to make it work. It is not a vision that inspires many people. So, this is where that so-called irrational voting comes in. A lot of it gets couched in social issue terms and it often appears to be a motivating factor, but the real crux is the economic message they are being offered. In addition to all the social messaging, the economic message is that the past economic world will be renewed. That the future economic world will look like the past one and far exceed whatever else is on offer. Unless and until someone can offer them an economic future that is better than their economic present and, most importantly, their past one, they will choose the one that looks better. It is not that they put much stock in the ability of these politicians to actually deliver, but it looks like at least as high a probability and far faster than whatever else is on offer. They’re not living in the past but making a calculated bet that sticking with what they know has a higher potential payoff. So, the question then becomes, how do you give them a better economic future that will move them forward with the rest of the economy? And, how do you address the challenge of meeting the different needs of the older workers versus those who are younger or still in school? The needs of the older workers have to be addressed now, which is why restoring their old economic life is so attractive, while the needs of the younger workers have a longer time horizon to be met. It would seem that the way forward is to find a way to draw money from urban/suburban areas into the small towns and rural areas both by private and government resources. A lot of people in small towns and the countryside believe they subsidize the cities and suburbs, which no longer is the case. The incomes and economic activity is so much higher in cities that they dwarf the rural areas. Making small towns and rural areas economically viable will require a transfer of wealth of no small magnitude, but not a budget buster, either. The two areas will have to be economically integrated to an extent they never have been and contact between them will have to increase in order for any programs to be successful. Fortunately, we now are developing ways to accomplish this that just a few years ago would not have been possible. High-speed broadband can accomplish a lot of this integration and is now a high priority for many states. With the internet as a backbone, a small town can improve schools with video classes, keep hospitals open, operate businesses whose main customers are in cities, make connections for selling goods worldwide, create videoconferencing facilities, and provide entertainment such as movies or concerts. All of which make the towns a more attractive place to live and can boost incomes. Greater involvement by regional colleges, improved infrastructure, and income sustenance for retraining and living would need to be upgraded by state and federal governments. Business creation will be important in addressing jobs for the older workers. This is far from a complete proposal and more than broadband will be required. Many aspects are already being implemented in parts of the country, but there is as of yet no complete concerted effort. Would it work? Would the people in small towns and rural areas seize the opportunities such an approach will provide? You need look no further than those quintessential rural folk, farmers and ranchers, for your answer. Farming and ranching today bear little resemblance to what they were like 20 years ago, much less 50 years or more. You’re no longer just a farmer or rancher, but a small businessman who happens to farm or raise livestock. The technology being utilized, the business needs, and global competitiveness have all forced farmers and ranchers to fundamentally alter how they run their operations. It was adapt or die and most have adapted. It is still not easy, but it does show that these areas are not lost causes. Lest anyone think this is catering just to these ever-shrinking economically important areas populated largely by whites, this applies as well to those parts of our cities and suburbs experiencing many of the same issues. It may be that the people are of different colors in these areas, but the problems of job loss, substandard schools, deteriorating housing, and negative social issues knows no color. These two areas are natural allies if they will only remember that the most important color in America is now, and has always been, green.

Toward A Rural Renaissance

As a follow-up to a previous post, “Do People Really Vote Against Their Economic Self-Interest?” (https://www.linkedin.com/pulse/do-people-really-vote-against-economic-self-interest-david-bice/) , this post will more fully review what an economic revival program could look like for our small towns and rural areas. The future for these places with current trends shows fewer jobs, lower wages, declining government resources, and smaller, aging populations. A relative decline versus urban areas that will leave them further behind. The residents of these areas do not believe the economic future being offered to them by the mainstream is very attractive and not nearly as good as either their current economic situation (as bad as that may be) or, especially, their past one. So, the question then becomes, how do you give them a better economic future that will move them forward with the rest of the economy? And, how do you address the challenge of meeting the different needs of the older workers versus those who are younger or still in school? The needs of the older workers have to be addressed now, while the needs of the younger workers have a longer time horizon to be met. It would seem that the way forward is to find a way to draw money from urban/suburban areas into the small towns and rural areas, both by private and government resources. Making small towns and rural areas economically viable will require a transfer of wealth of no small magnitude, but to not invest the resources means that we will have a growing dichotomy between the more prosperous cities and economically declining rural areas. In the long run that is not a tenable situation. The two areas will have to be economically integrated to an extent they never have been and contact between them will have to increase in order for any programs to be successful. There will likely be some resistance to closer integration by the generally more conservative rural areas with more liberal cities (and vice versa), but economic success has a way of breaking down barriers. Given that the two sections of the country have coexisted for several hundred years and are not much more integrated than they were decades ago, it is fair to ask how this might now be accomplished. Fortunately, we are developing ways to accomplish this that just a few years ago would not have been possible. High-speed broadband and cellular networks combined with more sophisticated mobile devices can accomplish a lot of this integration and are now a high priority for many states. With the internet and cellular networks as a backbone, a small town can improve schools with video classes, keep hospitals open, operate businesses whose main customers are in cities, make connections for selling goods worldwide, create videoconferencing facilities, and provide entertainment such as movies or concerts. They can also integrate a region to pool resources and make a larger market. How would this look? With high speed facilities you can set up call centers and back office operations that are now sent overseas and they don’t have to be located at a single site; you can videoconference with anyone, anywhere and compete for business; you can hold regional get-togethers or simulcasts that would otherwise be unaffordable; telemedicine can keep medical facilities open that otherwise might close and retain medical professionals who will still have jobs; schools can access higher-level classes that allow their students to better compete for college admissions; and overall it will make living in a small town or rural area feel less remote and more connected. The provision of these networks alone is not sufficient to bring many of these to fruition, facilities and entrepreneurial centers will have to be established to promote them. Colleges and universities often play this role in more populous areas, but they are not prevalent in most rural areas. Even community colleges are not common as they will cover a wide region of a state. What are prevalent, however, are high schools and even elementary schools in the more remote regions. Higher ed institutions will have their role to play, but the day-to-day work needs to be closer to the people who need the assistance. Also, high schools tend to have a lot of existing resources and facilities, such as auditoriums and classrooms, that can be utilized without having to construct them. New facilities, such as teleconferencing, can be more highly utilized if shared by the high school and the public. High school teachers are well educated and can easily be trained to play a role in business development. This role would provide a challenge as well as possible monetary rewards that will make teaching in smaller districts more attractive. Community colleges and other higher ed institutions will serve as regional coordinators and resource providers for the towns in their districts. How would this allow for greater economic prosperity? By removing many of the barriers to communication between cities and towns, especially in an age where instant communication is valued more than ever, this will allow businesses in the rural areas to compete on a more level playing field for providing goods and services. To the extent that rural areas have competitive advantages, such as lower labor costs, they can be capable of overcoming some of their disadvantages, such as distance. Many service industries are not tied any more by place, too, so that provides options for new rural operations. To the extent that rural areas can provide goods that are in high demand in cities, such as organic foods, businesses that can produce them can make the needed connections to find customers. The reality is that many of these will be small businesses rather than large ones so the number needed to be created will be relatively large. Many would also be more like boutique or niche businesses as well. Providing the funds for these businesses can be a challenge, but with new peer to peer online lending there exists an opportunity for risk takers to provide the funds. These loans can be higher rates than for other areas given the risks to provide an attractive return and perhaps hire facilitators to monitor the loans. To the extent that costs are lower in rural areas for overhead, the size of the loans can be smaller so less is at risk. Business creation will also be important in addressing jobs for the older workers. In some areas, existing, but declining, industries may still provide jobs for some, but many will need to find work in different fields. It is possible, however, to utilize many of the existing skills of these workers and address some of the needs in these areas. Not everything is cheaper in rural areas, one of the biggest is energy. Housing is cheaper, but much of it is substandard for current needs. Retrofitting these houses for energy efficiency and installing solar or wind energy to reduce energy costs will provide a benefit to the homeowners and jobs for older workers. These workers will benefit directly by employment with newly created businesses as well as indirectly with the increased income in the area providing for added job creation. An infrastructure program directed at these areas could also absorb a portion of the older workers. This would serve the purpose of upgrading the infrastructure to better compete for business and provide employment. The infrastructure needs in most areas are not costly, but they are critical. All of which make the towns a more attractive place to live and can boost incomes. Greater involvement by regional colleges, improved infrastructure, and income sustenance for retraining and living would need to be upgraded by state and federal governments. Other factors, such as the provision of medical insurance, have larger issues for the country as a whole, but are critical for maintaining a rural economy. Many aspects are already being implemented in parts of the country, but there is as of yet no complete concerted effort. Lest anyone think this is catering just to these ever-shrinking economically important areas, this applies as well to those parts of our cities and suburbs experiencing many of the same issues and could benefit from such an approach. The problems of job loss, substandard schools, deteriorating housing, and negative social issues are prevalent in both. These two areas are natural allies and should work together to make this a reality. Without an influx of money into these areas, they will be less and less economically viable and more and more isolated from the greater economy. That is a long-term prescription for growing resentment and possibly conflict.

The Market In Education - There is a better market approach than vouchers or charters.

We have come to a crossroad for the question of how we should educate our children. Do we continue with the American system of public education that has served us well or allow an educational market to perform the task, which some believe will be superior? It is a question with far-reaching consequences and much disagreement. There is a way to combine the two approaches, however, that may hold the key – creating a student-centered market. The problems and shortcomings of our present public school system are well known and seemingly insolvable. As a result, a push to make schools more accountable through market forces has gained momentum. It would seem that those who promote charter schools and/or vouchers do so because of their confidence in market forces. That these market forces will inevitably and inexorably lead to the outcomes they envision – a good education for every American child at a reasonable cost (i.e. cheaper than currently). It is a faith that markets are inherently better at everything than non-market approaches. It is also a faith that envisions that the outcomes are knowable and predictable because it is the “market” that is being allowed to determine the mechanism by which these outcomes are achieved. It is a faith professed without any basis grounded in knowledge or indeed an understanding of exactly which market is operational. The outcomes the market proponents envision for their programs are just that – their visions of how the markets will work. None of it is based on empirical evidence of how markets work or what outcomes these markets will produce given how they are operated and what resources are used. The proponents first envision their outcomes and then attribute the market approach as achieving them without fail. It is nothing more than wishful thinking since there is no way to effectively know what outcomes will be produced by a market. It may be as well that the proponents are not even focusing on the correct market, that the ones they are promoting – school vouchers and charter schools – are too nebulous and broad to achieve their stated goals. The promotion of vouchers and charters appear not to operate on the educational achievement of students, but rather on who operates the schools and how much they make. Far too many of the charters and vouchers end up enriching the school operators and not educating students, especially those with more needs than the average. There currently is not sufficient information available for most parents to make an informed decision about which school is best to apply their resources to. The school operators hold most of that information and are often reluctant to make it available. Parents must choose with insufficient information, which allows the school operators to attract students by means other than their real successes. The governing market in this case is not parental choice or educational achievement, but the school operators. Even a voucher program does not target the right market. Parents may have the monetary means to choose a school, but they still do not have sufficient information to make prudent choices and students are still not the focus. In addition, in many areas of the country these are not viable solutions since there are not many educational options. The best market, the one that most directly affects those who are being targeted - the students – is the one that allows market forces to work directly for and with students. We have given money for charters, for merit systems, for vouchers, and other things when it is the students that we need to target. We have tried using market forces everywhere but where it will be the most effective. It is time that we do so. It is the students we are expecting to meet the goals we are setting and it is only they who can achieve them. There is an objection to this in that we prefer to promote the idea that students should be filled with the desire to learn and not turn learning into a clone of the rest of the economy. That love of learning should be an end in itself. But the fact is, that will be the only thing in their lives not market driven, not subject to the forces that will drive the rest of their days. It also does not preclude a student from loving learning. Many will anyway, but for those who do not initially, a market approach can motivate them to learn. How should this be done? There are two possible approaches – pay students as they go or pay the money into a savings account they can access after graduating high school. The pay as you go method has the advantage of an immediate payoff, which can motivate the students. It is a real, tangible reward for the efforts made to learn and do the schoolwork. It can also help support families with low income. Depositing funds into a savings account does not have that immediate payoff, but can provide long-term motivation for wanting to stay in school and continue to learn. It combines, to a certain extent, the love of learning approach and the market approach. It also helps reinforce the concept of delayed gratification that has been shown to be very helpful for success. There are obviously many issues that need to be addressed – how much do you pay students, when do you pay them, how is it financed, who holds the funds, who has access to the funds at the end of high school, and many more. Which method is more effective has to be determined as well. It is still a more direct market approach than the ones proposed and has the added benefit of not having to blow up our educational system to implement it. We can just add it to schools as they exist today. Our current educational system represents a huge investment in resources and talent that can be leveraged for the student-focused market. Also, it is a system that can be adopted everywhere including rural areas and small towns where there are few educational options. A lot of times, those proposing charters/vouchers appear to have more than educating children as their goal. Privatizing education, getting rid of teacher unions, or controlling the curriculum all seem to play a more significant role than they should if the goal is educating children and not controlling education. This is the only market where people are trying to pay less and expecting to achieve higher quality. That by paying teachers less, making their jobs less secure, and giving them less flexibility we will get a better outcome. No other business would expect that result. They would raise pay, provide stable jobs, and give them more freedom – what one would think of as the rational market response. America has a long, proud tradition of public education that has promoted a democratic, inclusive spirit to the country and we should preserve our system of public schools. There is no need to dismantle our current system, as attractive as that may be to some, it needs to be refocused. We can do that by using the power of the market at the appropriate point of the system – the students.

How To Preserve The Mandate

Obamacare – just because you think we need it, doesn’t make it constitutional.

Obaminationcare – just because you don’t like it doesn’t make it unconstitutional.

It is not enough that the healthcare bill needs to have mandated coverage to make it work to justify it as constitutional. It is also not the case that striking down the mandate is proof the rest of the bill should also be disallowed. The arguments presented for both of these bear no relation to a constitutional approval or disapproval; they are mere excuses for what the proponents want. Opponents of the mandate have legitimate concerns that it could set a precedent for future actions, although the arguments they present border on the silly. The arguments presented by proponents that without the mandate the system will not work and that everyone will be part of the system sooner or later, these are not sufficient to make healthcare unique. Other markets could be said to possess the same attributes. A finding that the mandate is constitutional needs to be crafted very narrowly so that the unique qualities of the healthcare system are used to preclude its application to other areas.
Healthcare does possess some unique attributes, though, that can be used to distinguish it from all other markets. The first is that there are few if any alternatives for many medical procedures, such as a heart transplant. The second is that there is no continuum of products that can be provided at various price levels. The third is that, by definition, the free market cannot provide for all who need healthcare. The fourth is that a consumer may become involved in the market without their consent in emergency situations. The fifth is that providers can be mandated, either by law or professional ethics, to provide their services free of charge if necessary. The last is that there are no secondary markets for most medical care.
For most markets, there are alternative products, producers, or services that can fulfill the needs of a consumer. The alternatives may be less efficient, more expensive, or less attractive, but they can usually fit the bill. Or, something else can be used that is totally different from what was originally desired and make the consumer just as happy – you want new shoes, but settle for a new pair of gloves. In healthcare, those substitutions are usually limited or non-existent. There may exist several forms of treatment for a medical condition, but the choices are limited and often only one is appropriate. You cannot just decide to forget about your ailing heart and decide you’d rather have your stomach treated or just forget it all together if you want to live.
In most markets there is a price continuum that consumers can avail themselves of to buy a product at the price they wish. One can spend a few bucks to thousands of dollars for a pair of shoes, but almost everyone can buy them. For most of medical care, especially that required for serious problems, there is no price continuum or not a meaningful one to most consumers – a heart transplant will cost too much regardless.
A free healthcare market cannot cover everyone, regardless of how low the insurance or how high the deductible. This is true of every market to some extent, but when a person has a serious ailment, the consequences of not being able to afford the product can be deadly. When the situation is serious enough, such as failing kidneys, a consumer has no choice but to seek treatment if they are to live.
Unique to healthcare is that a person can become a consumer of the product and be responsible for paying for it without giving consent. In many emergency situations a person is not capable of giving consent, but the standards of the industry is to treat them and worry about payment later. Often the consumer is still liable for the cost of the treatment even without agreeing to do so. You also do not get to pick the product at the price you want to pay, that is dependent on your medical situation.
Medical professionals and hospitals, unlike any other economic sector, are obligated to provide their services for anyone who is in urgent, life-threatening need, regardless of their ability to pay. Because of this requirement, medical providers must charge their paying customers a higher price to cover non-paying or low-paying patients. As a result, there cannot be a truly free market in healthcare, it is a prisoner to ethical requirements.
Lastly, there does not exist any secondary or used markets for most medical care and most cannot be provided on your own. The only secondary markets that can be said to exist are actually not markets at all, but services provided by various governments, such as local clinics or county hospitals. Even privately run clinics are mostly financed by the government, so that in effect there is no secondary free market. Used markets are limited to some medical devices, but do not exist for most of the system. Consumers are forced into the primary market. Also, consumers cannot provide most medical services themselves or through the informal economy, the procedures are just too complex or dangerous.
A single payer system would work, but that would involve ever greater government involvement than the current proposal. Total dependence on the free market may, perversely, prove even more intrusive since it would require a degree of transparency in information, such as doctors’ patient results or hospital costs to make it work effectively, that many would find intolerable. It may be the mandate is the least burdensome on our citizens and not the most. The argument over the mandate, therefore, should rest upon the unique circumstances of the healthcare market. It should not just depend on whether we think it is needed or we find it intrusive, but because healthcare, in order to be available to everyone, needs something more than other markets do. Some markets may have one or more of the characteristics that are described here, but none has all of them. That is what makes it constitutional for Congress to use the mandate.

The Village Of Broken Windows - A Fairy Tale

The Village Of Broken Windows
A Fairy Tale

Once upon a time, there was a village that nestled in a beautiful valley. It was a very prosperous village for its citizens were a hard-working, clever people with great business acumen. They were renowned throughout the Kingdom for their industry and success and their ability to turn dreams into reality. A steady stream of outsiders made their way to the village to do business and to seek help in making their ideas profitable. The villagers grew fat and proud and showered their riches on the village so that it was like a jewel in an emerald valley.
One day, the King decided that he needed to help the poorer people in his Kingdom who lived in windowless hovels in large, mean towns. He decreed that his Kingdom would make their lives better by providing them with new windows. They would no longer live in dark, morose homes, but enjoy the sunlight and fresh air, which would spur them on to improving their lives.
The King found, however, that he could only afford to buy windows that were broken; the glass was too expensive if he were to provide enough windows to make a difference for more than just a few subjects. They could still benefit from the light and air, even if it would make the winters a little more difficult. So the call went forth for the supplying of broken windows to the King so that he might begin his great project.
The villagers, naturally, seeing a great opportunity quickly searched their homes for broken windows to sell. A few of the more enterprising folks broke a few intact windows that they no longer needed and sold those as well. The most entrepreneurial “borrowed” windows from their neighbors, broke them, and sold them to the King’s representatives.
Being savvy, energetic businessmen, it occurred to the villagers that the King was only going to be able to provide a small number of the poor with broken windows. Most would not get them for a very long time if at all if the King’s project were the only way for the poor to get them. They decided, therefore, to begin providing broken windows on their own and selling them to the poor. They knew, once some of the poor got the windows, that the others would want them, too.
But there was a problem; all of the broken windows were gone. A few of the villagers began to venture out to neighboring villages to purchase their broken windows, while others, even more energetic, decided to set up production facilities to make their own. Yet another group set out to find a way to get the poor left out of the King’s mission to buy them.
They soon proved that the legends about their prowess were true and then some. It did not take long for the poor to beat down their doors in search of the windows and at first it proved easy to sell them. The villagers bought the windows from the suppliers who in turn made more. The strangeness of making broken windows to sell only lasted as long as the first sale.
Soon, however, they found fewer of the poor who were able to buy the windows. Faced with an impending collapse in their sales, the villagers once again proved more than adequate for the task. If the poor did not have money of their own to buy the windows, then they would provide it. A profit could be made on both the loans and the windows. This proved successful beyond their wildest expectations and the money flowed as never before.
Being just a small village, though, they soon found that their financial resources were limited. They would be unable to continue lending and thus sales would cease, throwing the village into a tailspin. Ah, but the villagers proved once again why they were the best businessmen in not only the Kingdom, but the world. Through their many contacts they were soon borrowing vast sums to finance the construction of the windows and for lending to the poor for purchasing. What had once been a flood of money turned into a raging torrent. There was no end to their prosperity.
And, the selling of broken windows was having a salutary effect on the Kingdom’s economy. Factories were humming night and day, while workers in the plants and window installers were growing prosperous as never before. They, too, desired broken windows for themselves and soon demand was outstripping the supply.
The situation was made worse, too, because the villagers, knowing a good deal when they saw one, had begun to hoard some of the windows, cutting the supply and driving up the price. This proved no obstacle to the villagers who became even more aggressive in their sales and lending to keep the process going. The villagers grew even fatter and more prosperous than even their dreams had allowed them.
The villagers then thought, now that we have all this money and window-making factories, this would be a good time to make new windows for ourselves. We can even break our old windows and sell them for a handsome price. And so that’s what they did. Soon every window in the village was removed, broken, and put up for sale.
But, no one came to buy them. The villagers were perplexed. Where had all the poor gone to? Why did they no longer want to buy the windows? To their horror they discovered that they had sold windows to just about everyone who wanted one. Those who did not have them were truly the poorest of the poor and they could not afford them at the high prices the villagers now charged. Not even if the villagers lent them the money at the most favorable rates imaginable. There were no more customers for the villagers to sell to.
Then, to their greater horror, they found that many of the poor who had bought windows could not repay their loans – they were poor after all. Income dried up, repayments disappeared, their loans went unpaid, and they found they were holding large quantities of now useless broken windows. The collapse was as sudden and complete as the rise was meteoric. The factories shut down, the installers were laid off, and the villagers were left wondering how it had all gone wrong.
Worse, winter was coming and they could not now afford to put in new windows. They put back their broken windows and prayed that the winter would not be too harsh. They, along with the poor, would have little to protect them from winter’s cruel vengeance.


And, that is how it should have ended. But the King, seeing what had happened to the villagers, took pity on them and opened his treasury to give them the money for their new windows. He took pity on the poor as well and bought up many of their loans, but did not provide new unbroken windows. The purchase of the loans restored much of the fortune of the villagers and they were made almost as whole as before. And, yes, it was a long, cruel winter that the poor suffered mightily from, but the villagers had a grand time all winter regaling each other with their newest legend in the making as they put another broken window on the fire to keep themselves warm. And they lived happily ever after. Except, of course, for the poor.