Tuesday, January 11, 2011

ObamaCare: the repeal of first stage economic thinking

The government solution to a problem is usually as bad as the problem. - Milton Friedman

Thomas Sowell has written extensively that politicos have a short political time horizon i.e. the next election cycle. Politicos then match their short term political time horizon to first stage economic effects of policy proposals. Matter-of-fact, Sowell wrote an entire book regrading first stage economic thinking entitled Applied Economics, thinking beyond stage one. (1)

Government solutions and the ObamaCare Repeal vote Wednesday 01/19/2011

The vote next week to repeal ObamaCare is odd out. That is, Friedman's advice is coming home to roost. Politicos always cave-in or never can quite muster a vote on the concept: "The Government solution to the problem is usually as bad as the problem". Never quite bring ourselves to test Friedman's quote. Ah, but the evil of it all.....next Wednesday Friedman is coming to bat.

Political time horizons and first stage economic consequences

Friedman's observation above and Sowell's "thinking beyond stage one" are worth considering regarding ObamaCare and much legislation in general. The basic premise is that legislation can have immediate economic consequences that are favorable. This short term favorable economic consequence matches the short term political time horizon of politicos. However, the exact same legislation has long term unfavorable economic consequences (known-knowns) as well as long term cascading unintended economic consequences (known-unknowns).

The long term economic consequences of legislation is not a concern of politicos as their focus is on a short term political time horizon i.e. next election. Hence legislation becomes a tool to create first stage favorable economic consequences to match a short term political time horizon. The problem immediately arises that legislation in fact creates long term economic consequences. These long term consequences are what James and Jane Goodfellow, their children, grand children, and so on must live with for years and decades to come. The Politico on the other hand merely wants to win the next election.

Therefore we have policy making politicos of the short term world creating long term economic consequences for the long term world that James and Jane Goodfellow live within. Real life examples abound. Social Security had major short term favorable economic consequences and hence matched the short term political time horizon of legislators of the time. Decades later James and Jane Goodfellow find that the unfunded future liabilities of Social Security are daunting. Merely take the term Social Security in the prior sentence and plug in Medicare, Medicaid, welfare, food stamps, public sector pensions, etc., etc.. The legislation created short term favorable economic consequences followed by cascading unintended economic consequences.

Behind the curve, ahead of the curve, and the 70 year dream

An odd out item with ObamaCare aka socialized medicine is that certain political groups have been pushing for socialized medicine for decades and decades stretching back at least seventy years. The socialized medicine scheme, when debated in 2009 and 2010, was referred to as a "dream" by proponents. A seventy year old dream.

Exactly what grand scheme had been developed and tested during these seventy years of dreaming? If one wants an item for seventy years wouldn't one have developed a comprehensive plan with details? Apparently not. In essence seventy years of a dream of socialized medicine was kept right in the dream world with nothing more developed than a fuzzy theme with no plan. For a group that wants to rely so heavily on government central planning it seems odd that for seventy years they forgot to develop a central plan. You might say proponents were/are seventy years behind the curve as ObamaCare was/is a cobbled together plan that boils down to a scheme of centralized price fixing. Problem is: central planning fails miserably and price fixing schemes have never worked in all of economic history. (2) (3) Brilliant! A failed delivery system delivering a known failed result!

However, there appears to be a vast majority of James and Jane Goodfellows that have looked ahead of the curve. You might even say, that for once, politicos have been caught with their hands in the short term political time horizon cookie jar. One might even speculate that James and Jane Goodfellows have come to the point of clearly understanding and adopting the classic essay by William Graham Sumner "The Forgotten Man". That is, the Goodfellows clearly understand they have in fact become the Forgotten Man: "He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him". (4)

So many social insurance and social welfare plans have exposed themselves as failures. That their long term economic consequences and cascading unintended economic consequences are failures for all to see. That massive hulking failures such as Social Security, Medicaid, and Medicare, have shown the public that long term dire consequences await them and their children. That the dreams of certain politicos become nightmares of the first order.

Behind the curve, politico's political time horizon, and a failed delivery system with known failed results.

The repeal vote, which is a vote on HR 2, becomes an affront to proponents of ObamaCare. How could anyone want to repeal a dream they have held for 70 years? A dream that in their view has become a reality.

The repeal vote is more reality than dream. The seventy year dream was really a theme with no plan. Then the plan was cobbled together based on politico's using first stage economic thinking to match their political time horizon. With the entire plan based on using a failed delivery system with known failed results. The problem is that the plan does not even have first stage favorable economic consequences. That the plan right out of the gate failed. Hence a cobbled together plan that was suppose to have, at the very least, first stage favorable economic consequences became an immediate cascading unintended economic consequence nightmare. That is, the politico's that are proponents of ObamaCare were so silly as to produce a plan that doesn't even create the illusion of favorable results to match their very own short term political time horizon. In other words, proponents of ObamaCare by their very own design produced the stage, set the stage, and generated the momentum for the repeal vote.

Collectivism's long history of failure

One only needs to examine history to see how collectivist plans fail. First we have the dawn of recorded history up to the Agricultural Revolution that was century-in, century-out of collectivism. Yes, collectivism is the oldest of economic systems. The results of collectivism up to the agricultural revolution was that mankind lived in an environment of constant starvation. Life was basic subsistence. Basic subsistence handed down from one generation to the next.

Collectivism's results were so poor that Malthus developed his theory of the Malthusian Population Trap. That mankind was stuck in a perpetual environment of basic subsistence and starvation as population was growing faster than food production. That mankind was stuck in a never ending battle to merely sustain life.

What changed the Malthusian Population Trap? The advent of private property agriculture in the Agricultural Revolution. Private property farming suddenly produced abundance in agriculture and man could for the first time feed himself. Out with Malthus in with abundance. (5)

Along the way private property, private property rights, and the price system developed. Note that private property, private property rights, and the price system "developed". That is, no central authority decided upon private property, private property rights, and the price system. Mankind merely stumbled into the systems. The systems occurred due to decentralized means. (6)

A basic premise should appear very quickly to the reader: decentralization created abundance and collective centralized planning created never ending subsistence results.

A major source of objection to a free economy is precisely that it ... gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

If collectivism is a failure why do collectivist propositions such as ObamaCare continue to be proposed?

The answer goes back to the constrained vision of mankind and the unconstrained vision of mankind.
The unconstrained vision of mankind, held by most collectivists, is that the nature of mankind can be changed, improved, and molded only by institutions of state. That a central authority [state] through governmental institutions is the only way to improve the nature of mankind.(7)

A review of the basis for repeal and first stage economic thinking

Prior to the repeal vote next week its likely a good idea to review the laundry list of basic errors within ObamaCare. Although this is not a complete list it should suffice to say that the problems are those of a plan doomed to fail:

(1) Federal bureaucrats overriding state rights and circumnavigating the McCarran-Ferguson act.
(2) The demise of consumer directed health-care.
(3) ObamaCare purposely designed to collapse into a single payer system.
(4) Another unsustainable entitlement atop of current unsustainable entitlements.
(5) A central planning scheme that is a known failed delivery system.
(6) A plan based on price fixing that results in quantitative and qualitative reduction in supply aka rationing.
(7) Ultimate third party decisions removing consumer choice.
(8) An unconstitutional individual mandate.
(9) The error of categorical risk management.
(10) A plan based on reverse risk management.
(11) A plan that fails to address let alone bend the cost curve.
(12) A plan that is based on the fallacy of universal coverage as universal coverage does not mean universal access and access will deteriorate.
(13) A plan with massive administration needs at a massive price.
(14) A plan that fails to address the allocation of scarce resources with alternative uses.
(15) A plan that fails the risk management matrix which is an axiom of insurance theory.
(16) Shifting costs to states in the form of massive increases in Medicaid that will bankrupt already stained state budgets.
(17) Massive tax increases.
(18) Lose of individual freedom.
(19) Add your basis for repeal here ---> ________.

Also, one sometimes will refuse to let issues stay settled by the adverse decision of such a procedure, specifically when the wrong decision is worse even than the disruption and costs of refusing to accept it, when the wrong decision is worse than conflict with those on the other side. - Robert Nozick


If one wishes to reform, improve, stream line, create more efficiency, allow for freedom of choice, reduce costs then ObamaCare needs scrapped. The ObamaCare plan has so many built-in failures that beginning anew is the only course of action. Ford once built the Edsel and they scrapped it. Howard Hughes built the H-4 (The Spruce Goose) and he scrapped it. There comes that point that a failed plan needs scrapped and a new course of action is desirable.


(1) Applied Economics, Thinking Beyond Stage one, Thomas Sowell.

(2)At 35, Nixon freeze still chilling, William Neikirk, The Swamp. http://www.swamppolitics.com/news/politics/blog/2006/08/at_35_nixon_freeze_still_chill.html

(3) Nixon, Price Controls, and the Gold Standard, excerpt from Commanding Heights by Daniel Yergin and Joesph Stanislaw, 1977, ed., pp. 60-64. http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_nixongold.html

(4) The Forgotten Man by William Graham Sumner, 1876 http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=1654&layout=html

(5) From Economic Man to Economic System, Harold Demsetz

(6) Hayek: His Contributions to the Political and Economic Thought of our Time, Butler and Riggenbach.

(7) A Conflict of Visions, Thomas Sowell.

1 comment:

  1. Nice post.

    "Along the way private property, private property rights, and the price system developed. Note that private property, private property rights, and the price system "developed". That is, no central authority decided upon private property, private property rights, and the price system. Mankind merely stumbled into the systems. The systems occurred due to decentralized means."

    This is a difficult thing for people to grasp. It probably took me much too long to get it. The world looks like much different place now though.