A Profit Motive for Your Life

Eddie Spaghetti is a man of means. Looking to multiply those means he looks around for a good investment. Upon doing so he discovers Jose Conseco's Steroids and Bats Emporium. Jose, wanting to expand into the baseball business as well, is in need of some fresh investment capital. They talk, they sign contracts, and shortly Jose Conseco's Steroids and Bats Emporium becomes JC's Steroids, Bats, and Balls Super Center. The very first day Joe, Mo, and Flo all arrive in need of steroids, bats, and balls respectively. They collect their products, pay the cashier, and the transactions are completed. Everyone is happy; it's a fine business. It is not from kindness that Jose sells Joe, Mo, and Flo their goods, however, nor the charity of Eddie which leads him to lend money to Jose, but rather because what they all hope to obtain from the deal: profit. It is the profit motive which compels them to act, and it is the profit motive which makes them good people.

Eddie Spaghetti, now enriched, looks for another business opportunity. He finds Darryl Strawberry and his Baseball Glove and Medical Insurance Warehouse. Looking to expand, they talk, they sign contracts, and shortly D. Strawberry's Baseball Glove and Medical Insurance Warehouse expands into four neighboring territories. The very first day Joe, Mo, and Flo arrive at the store all coincidentally in need of health insurance. They peruse the options, discuss with the agent, and the transactions are completed. Joe and Mo leave with insurance, but Flo does not. Flo, it seems, is from San Antonio and her diabetes, polycystic ovarian syndrome, hairy chin, and compulsive cigarette use have precluded her from being insurance eligible. Mo has chronic medical issues himself, having lingering lung problems from contracting tuberculosis while working in the Peace Corps years back, and so has to pay a higher premium, but he is simply happy to have any coverage at all. That year Mo's tuberculosis, thought beaten, returns and is found to be multi-drug resistant. Due to pre existing condition exclusions and high copayments Mo is later led to file for bankruptcy. Some people are happy, some people are not; it's the health insurance business. It is not from the stinginess of Darryl that he denies Flo coverage, nor the greediness of Eddie that leads him to reject the claims of Mo, but rather because of what they all hope to obtain from the deal: profit. It is the profit motive which compels them to act, and it is the profit motive which makes them bad people.

As often stated I make no claims of being an economist. I did my two semesters in college, found them to be moderately interesting, and then moved on. Pareto efficiency and fiduciary relationships tend to give me seizures. Thankfully, the economics of health insurance are relatively straightforward. Whereas in most industries the profit motive spurs towards better products for less money produced more efficiently -- by practically speaking reducing costs and competitively pricing -- this is not so with the business of medical coverage. Instead in the health insurance industry product supply and demand are both constrained by the nondiscretionary nature of most medical care, cost management is limited by the science of medicine, and negative selection drives insurers to discriminatory distributions of coverage. Practically speaking, profit is obtained by maximizing coverage of healthy people and minimizing coverage of the sick. This may work for a large percentage of the population that is healthy or only mildly ill, but it will never and can never succeed in providing adequate care at reasonable prices to that sizable segment of the population with serious, chronic medical disease or the significant portion of the population that will find itself one day burdened with the same. It is not because of lack of competition nor lack of compassion, but simple, straightforward economics. You can not make money off of a Down Syndrome child and there is no profit to be had from lymphoma and leukemia.

And so socialism.

Socialism as a theory is currently empty. It is no way to run an economy. Nevertheless, there are lessons to be learned and numerous possible isolated applications to be had, and it is essential that we as Americans, with our historical fear of anything smelling of communism, remember this. Especially in our current and likely numerous future debates about health care. Socialized fire protection, socialized police security, socialized national defense, and socialized park systems are all industries long since collectivized, and happily so. Although there is today some debate about further privatizing education and many utilities the fact is for most these industries' histories they have contributed to a better and more prosperous nation and even today they continue to provide reliable, cost-effective business to those desiring their services. Few complain that the police department has a monopoly on preserving domestic order or that there is no competition to watch over our parks and maintain our monuments. Whether we realize it or not, we are in many ways a partially socialized nation already. Somethings are best tackled in spite of any profit that can be derived.

Such it is with health care. We can tweak and adjust, modify and massage, hope and pray, and we will never find a comprehensive solution or even a partial coverage solution at a reasonable price using private coverage. No matter how deductibles are calculated or plans are managed, medical insurance will remain expensive and outside the hands of a good number of people. Even Obama's hybrid system that satisfies no one and confuses everyone will not likely significantly change things. Universal coverage on the other hand abandons the false pretense that money can be made providing adequate health care and simply focuses on doing the best for the most with what we've got. It will certainly add some to our waits and reduce some efficiency, no doubt, but what do we have now? Our hospitals are already full, good people already fall through the cracks, care is already being rationed. Without the burdensome bureaucracy that accompanies herding a dozen different insurance programs and without the waste pervasive in the system as a result of poor communication and repeat testing the added costs would by most calculations likely be minimal. If the entire rest of the Western world can get by doing it -- if the French and the Italians can manage it -- certainly we can do one better. In the end universal health care is much like democracy; it is not a great option, but it is certainly the best one. There is, unfortunately, no "good way" to take care of people. And nothing makes this more clear than the economics of it all.

The OECD, US, and health care.

Medical insurance and bankruptcy.

Conservative case for universal health coverage.

Socialism!

Let Them Use Change

Something interesting. Perhaps.

I heard recently on the old radio that new studies in economics could suggest alternative ways to tackle the recession. Briefly detailed, the first study consisted of paying gas station customers $5 for filling out a brief survey before they went in to pay for their gas. Depending on how they were given those $5 determined how they spent it. More specifically, those given the cash in the form of a five dollar bill typically ended up placing the cash in their wallet and moved on with their lives; while those given five individual one dollar bills typically spent a small portion on drinks, candy, and corn nuts; while those given five one dollar coins typically spent the most leaving the store with nothing but Big Gulps, a handful of lotto tickets, and a receipt for their short sightedness. The lesson: either people just really hate one dollar coins and strive to relieve themselves of them as quickly as possible, or smaller denominations of currency leads to increased spending.

To further push this point home a second study was cited. In this study, women house cleaners in China were given a week’s worth of their salary in varying denominations. Those given larger bills tended to save while those given a giant wad of small bills tends to splurge frivolously.

So the practical recommendation? If Obama wants to stimulate the economy, or if Bush wanted to back in the day with his tax rebates, he should refrain from sending out bulk sum checks. Instead give everyone change. Flood the nation with Sacajawea dollars and people will be consuming again in no time.

And I agree. Although likely not terribly practical to dispense sackfuls of coinage, it does make sense that if people feel that they have a lot of something of little value, say a handful of small bills, they will spend it more freely than if they feel they have a few of something of great value, say one or two Grover Clevelands. I can even say I have consciously experienced this effect myself, which is why I propose we go one step further. Let’s join with our transatlantic, Western brethren and adopt the euro! If economists thought people spent one dollar coins fast, they haven’t seen tourists go through shiny silver and gold two euro coins. Not only do they pack greater value into a single coin, but with exchange rates as they are we get even more bang for our buck. Hand a man a handful of euro change, and he will be poor and penniless again in no time. That, my friends, is some serious stimulus spending.

The Audacity of Economics

What I have always loved about chemistry is that, at its base, it is so simple, reliable, and efficient it is almost mathematic. Writing a chain of chemical equations is itself like writing out a series of arithmetic problems; under the right circumstances, when all variable are appropriately controlled for, compound X will always react with element Y to produce exactly the same amount of molecule Z. Despite this apparent simplicity, it is chemistry, this illustrated mathematics, that shapes and animates life. It is beautiful, in a way, how such complex things can be reduced down to such a clean and basic level.

And then there's economics. The social sciences are many levels removed from the cause and effect of the hard sciences. Despite attempts and protests to the contrary economic and political studies have never been able to provide us with truths resembling anything like a mathematical proof or scientific law. And despite this, or perhaps because of this, everyone seems to be an expert in these very fields. The lack of hard set, verifiable data which should produce caution in interpretation instead seems to provoke people to fits of interpretive grandiosity. A few ideas and perhaps a few examples are all that are needed for people to make sweeping, dogmatic generalizations on how our economy, and indeed all economies, should be run. This has never been more true, or so it seems, than now in our current crisis with our current president. Stimulus or no stimulus? Bailout or no bailout? Nationalization, socialism, and communism or private enterprise, free markets, and minimal governance? It is with all this ballyhoo that I feel led to share the only three things about economics that I know: the Keynesian multiplier, the Laffer curve, and Adam Smith.

The Keynesian Multiplier -
Sometimes a little money goes a long way. Or so the idea itself at least goes. In certain circumstances $5 will go a lot further than $5. For example, suppose I were to give five bucks to my dear old friend Eddie Spaghetti to build me an interstate highway. Being the managerial type, Eddie keeps a small portion of this as his income and then highers the appropriate laborers, engineers, and undocumented migrant workers to get the job done. Each of those individuals of course takes their share in turn (and spends it on food, clothing, and assorted dry goods further stimulating the merchants of those respective items as well.) The $5 is not done, however. Beyond labor, the few dollars spent in capital and supplies required to build this highway can all themselves come from other proprietors and entrepreneurs, and the resulting freeway will create economic opportunity for further economic investments spreading the wealth even further. Five dollars can thus be spent many times over stimulating the economy in a way a simple tax cut may not necessarily do. The spending is effectively multiplied. And even though all projects conceivably multiply to some extent, it is often state directed projects, such as the construction of bridges, airports, and port facilities, which are the biggest multipliers. Theoretically, if spent wisely and judiciously enough the projects would pay for themselves and would be less empty "spending" and more investive "stimulus." Thus we have, in simplified form, government driven, stimulus supported recovery.

The Laffer Curve -
But suppose we could do it another way. What if we could, instead of deficit spend, deficit save? Lower tax rates and still, at the end of the day, have more in the way of total tax income? That's where the supply sided recoverists sally forth with the all-triumphant Laffer curve. Like the Keynesian multiplier, it breaks down a whole lot of complex economics, digests it, and spits out nothing but lean, pure economic truth. Unlike the multiplication trick of before, however, we must now work with a parabola. This parabola, basically described, suggests that if we were to look at tax rates vs total tax revenue we would find that on opposing extremes of taxation rates we will receive no actual money in taxes. On the near end of the graph if taxed nothing then no matter how much business we have there will be no revenue for the state, and, conversely, on the far end of the graph if we tax too much profit will be impossible, no one will do business, and we will still end the day with zero net income. Conceivably then there should be a sweet spot somewhere in the middle of this curve where tax rates are primed just right to maximize tax revenues. More importantly, if we have taxed to excess and are thus descending down the curve from this maximum we should be able to actually increase total tax inflows by lowering tax rates -- something that at least on superficial analysis would seem counterintuitive. Thus by taxing Eddie Spaghetti less he and his highway building cohorts will reinvest their added profits and business will boom to such an extent that when we send out our tax gatherers at the end of the year we actually have more money. In short, privately driven, tax cut supported recovery.

Adam Smith -
So what should we do? Deficit spend or deficit save? Supply or demand?!

I sure the hell don't know.

But maybe... Adam Smith does? What does the patron saint of economics have to say? Is he a Reaganite or a FDR at heart?

"It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages."

Uhmm....

"It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

But....

"The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder."

Okay. It is settled then. I have no idea what I am talking about, and will not pretend otherwise.

Hopefully much of the rest of America can agree to do the same.