Wednesday, December 26, 2012

After the Affordable Care Act? After Obamacare? Part Three: barriers to entry for new suppliers of health care

Reviewing parts one and two of this series, John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.


The next aspect Cochrane examines is barriers to entry for new suppliers of health care. In Cochrane’s words:


“So, where are the Walmarts and Southwest Airlines of health care? They are missing, and for a rather obvious reason: regulation and legal impediments.

A small example: In Illinois as in 35 other states, every new hospital, or even major purchase, requires a “certificate of need.” This certificate is issued by our “hospital equalization board,” appointed by the governor (insert joke here) and regularly in the newspapers for various scandals. The board has an explicit mandate to defend the profitability of existing hospitals. It holds hearings at which they can complain that a new entrant would hurt their bottom line.” (1) (2)


Hence we find new supply, new competitors as they were, having government stand in their way of freely entering the market. Further, in many cases current suppliers support and lobby for continued government sponsored barriers of entry. Therefore current supply becomes the status quo with “profitability” protected by government erected barriers to entry and consumers find higher prices rather than lower prices and lower quality rather than higher quality, both of which, created by intense competition.

Cochrane goes onto to identify occupational licensing creates a restricted supply thereby pushing up price (by the way the subject of one Milton Friedman’s PhD dissertation):


“I’m not arguing that we have to get rid of licensing. But licensing for quality does not have to mean restriction of supply to keep wages up, including state by state licensing, restriction of residency slots, or restrictions that encourage overuse of doctors where they are not needed.”


“If you’re a parent, you’ve been through it. It’s 2 am in
a strange city. The kid has an ear infection. He needs amoxicillin, now. Getting it is going to be a 3 hour trip to an emergency room, hundreds of dollars, so a “real doctor” can peer in his ear, then off to the pharmacy to fill the prescription. A nurse practitioner at the Wal clinic could handle this in 5 minutes for $15.” (3)


What Cochrane is pointing out is that basic services that could easily be supplied at much lower prices are purposely supplied at higher prices. The purposeful overuse of higher priced alternatives is government failure at its zenith.


It is becoming apparent that, if you have read the three parts to this point, a major cost driver in health care is none other than government. More succinctly, politicos through the mechanism of government have created a protected rent seeking proposition through legislation spawning regulation that drives up health care costs.

 

 

 

 

 

 

 
Notes:

(1) After the ACA: Freeing the market for health care.

(2) Certificate of Need: State Health Laws and Programs, NCSL, 03/2012

http://www.ncsl.org/issues-research/health/con-certificate-of-need-state-laws.aspx

 (3) After the ACA: Freeing the market for health care.

 


Sunday, December 23, 2012

After the Affordable Care Act? After Obamacare? Part Two: Supply and Competition

In reviewing part one, John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.



Supply and competition is now examined. Cochrane uses several examples of firms in sectors other than health care that have pushed the cost, innovation and quality frontier “out to its limits, and then discovering where  people really want to be”.  That is, what does the consumer value and at
what price and hence what part of the cost, innovation and quality frontier creates maximum utility. Further, the cost, innovation and quality frontier has been pushed out to choosing a different point on a far better frontier than we faced 20 years ago.” (1)

Problem is, the cost, innovation and quality frontier in health care is not reacting to generate what the consumer values and at what price and hence what part of the cost,innovation and quality frontier creates maximum utility for the consumer. Why? Cochrane’s explanation is very public choice theory oriented: old status quo suppliers within the health care sector are protected by government regulation and new competitors have massive barriers to entry and hence the protected firms merely collect rents with little incentive to find what part of the cost, innovation and quality frontier creates maximum utility for the consumer.

In order to change the situation, Cochrane states:






 
"How will this change come about? My examples share a common thread: Intense competition by new entrants, who put old companies out of business or force unwelcome and disruptive changes. Microsoft displaced IBM, and Google is displacing Microsoft. Walmart displaced Sears, and Amazon.com may displace Wal-Mart. Typewriter companies didn’t invent the world processor, nor did they adapt. The post office didn’t invent FedEx or email. Kodak is out of business. Toyota gave us cheaper and better cars, not Ford/GM/Chrysler competition. When the older businesses survive, it is only the pressure from new entrants that forces them to adapt.

My examples share another common thread. They remind us how painful the cost control, efficiency, and innovation processes are. When airlines were regulated, artificially high prices didn’t primarily go to stockholders. They went to unionized pilots, flight attendants and mechanics. Protection for domestic car makers supported generous union contracts and inefficient work rules, more than outsize profits. A look at a modern hospital and its supply network reveals lots of similar structures. “Bending down cost curves” in these examples required cleaning out these rents, through offshoring, elimination of union contracts and work rules, mechanization, pressure on suppliers, and internal restructurings.





 
The fact that so much cost reduction comes from new entrants, not reform at the old companies, is testament to the painfulness of this process, and the ability of incumbents to protect the status quo.” (2)


Cochrane is correct that the process which is very akin to Schumpeter’s creative destruction is by no means painless. However, it’s totally painless to status quo old firm protected by government regulation that merely pass on higher and higher prices with little or no interest in finding what part of the cost, innovation and quality frontier creates maximum  utility for the consumer.

Finally, Cochrane makes an excellent point if government regulation was removed protecting old firms and allowing new competitors to enter the market at will: “The fear, so often expressed in medical contexts, that unregulated competitive suppliers will pawnpawn off shoddy merchandise on consumers seems exactly false.” Cochrane is correct. The argument is merely the argument put forward by the old firm collecting rents under the protection of government regulation. The same argument has been put forward many times by old firms in protected industries. It is by no means a new argument. His point is very correct and he points to examples such as Toyota dislodging the Big Three Auto makes was not done by selling shoddy products. Nor did Southwest airlines gain market share from United and American by selling shoddy product/service. Rather, Toyota and Southwest actually exposed the shoddy product/services of the old firms. (3)
 






Notes:


(1) After ACA: Freeing the market for health care, John Cochrane, 10/18/2012.
(2) Ibid.
(3) Ibid.

Sunday, December 16, 2012

After the Affordable Care Act? After Obamacare? Part One: Moore's law




John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.


The essay uses the term “after” in its title as it become very apparent after reading Cochrane’s essay that coupling health insurance to health care through massive government intervention becomes a situation of government failure supposedly corrected through additional government failure. That mandating insurance does nothing more than perpetuate the underlying health care demand and supply distortions and the inherent failure of the system. Hence “after” is a term used to point out that “after” more government failure in the form of the Affordable Care Act aka Obamacare a point will come when health care will actually be repaired by the withdrawal of market distortion produced by government failure.



One of the first points in the essay, as mentioned above, is to examine health care separate from health insurance. One of the first observations in the essay is very worthy of note and one would be well advised to reflect upon the observation: why does technological innovation in other sectors either drive costs down or produce significant additional benefits at the same cost yet technological innovation in the health care sector drives cost down at a snales pace in comparison to other sectors, produces additional benefits at a much higher cost or even drives up cost ?


"Why does Moore’s law not apply to medical devices? Why has the price of cell phones, GPS, and computers come down so fast relative to the prices of medical technology? Where is the home MRI? There is nothing deeply different about medical and other technology. The answer is that supply and demand – in the current highly regulated system – is not producing the Moore’s law incentives.” (1) (2)


To be continued.

Notes.

(1) After ACA: Freeing the market for health care.

(2) Moore’s law:
http://en.wikipedia.org/wiki/Moore%27s_law

Saturday, December 15, 2012

Steve Forbes on the Fiscal Cliff and the Wobbly Economy

About That Charitable Deduction: Private Charity or Government as Charity?

“The White House and the nation’s most prominent charities are embroiled in a tense behind-the-scenes debate over President Obama’s push to scale back the nearly century-old tax deduction on donations that the charities say is crucial for their financial health.”

“The charities characterize the lobbying expenses as a sound investment given the money at stake: Americans donated nearly $300 billion to charity last year. The groups say they had to act because lowering the deduction would reduce giving, primarily by the wealthy donors who make the bulk of contributions. With their finances squeezed by the economy and state budget cuts, charities say this would force them to cut funding for services such as aid to the poor and artistic programs.” - White House, nonprofit groups battle over charitable deductions, Washington Post, 12/13/2012
Link to entire article appears below:
 
http://www.washingtonpost.com/politics/white-house-nonprofit-groups-battle-over-charitable-deductions/2012/12/13/80e67400-43f2-11e2-9648-a2c323a991d6_story.html
 

Friday, December 14, 2012

Small Business Intentions? Negative Capital Outlay, No Hiring for 2013

“U.S. small-business owners' net capital spending intentions for the next 12 months plunged to
-14 in November, the lowest level in more than two years, according to the Wells Fargo/Gallup Small Business Index.”

"Consistent with these negative expectations, owners' intentions are to reduce their capital spending plans and their hiring intentions over the months ahead."

- Gallup economy, 12/13/2012
Full story below:
 

Wednesday, December 5, 2012

Social Justice: the mirage of decisions by an abstract concept come to life, otherwise known as “society”

The Fiscal Cliff: The Pie Grows vs. Zero Sum and Negotiation-Failure


Bob Woodward in his book The Price of Politics makes a grand point: Obama has no clue on how to negotiate. Upon the consequential arrival at the fiscal cliff and the negotiations thereof, Woodward’s observation is validated/reinforced. (1)


Negotiate: to deal or bargain with another or others, as in the preparation of a treaty or contract or in preliminaries to a business deal. (2)


The definition may be insightful in and of itself leading to part of the puzzle of negotiation-ability-failure. How so? The definition mentions the term “deal” twice and the term “bargain“. The definition could be argued to implicitly assume mutual self-interest [bargain] at the point of exchange [deal]. Moreover, the definition has a whiff of “the pie expands” as the term “deal” was used twice (both parties deal resulting in gain by both parties).


Considering the above, a particular political view of exchange
is: zero sum in that only one party gains at the expense of the other party. Reflect for a moment on the use of that exchange fallacy (its very much smacks of class warfare at/after the point of exchange). What ilk uses the above mentioned zero sum fallacious argument all the time and every time??? Yes, you guessed it.


Back to the beginning. It’s “negotiation time” once again for negotiation-ability-failure-man. Now consider a situation of all engines full reverse and the class warfare argument placed upon its head. That is, the same zero sum argument that is politically framed as the “rich” only becoming rich at the expense of others, the mantra as it were, is now used by the same politico [negotiation-ability-failure-man] to attempt to produce a zero sum negotiation outcome. Stated alternatively, negotiation-ability-failure-man views “negotiation” as he views “exchange”. Exchange is rejected as mutual self-interest at the point of exchange and only viewed as one party gains at the expense of the other party. Zero sum becomes dogmatic as his aggregate mysticism is predicated on the rejection of mutual self-interest at the point of exchange.


Putting the hypocrisy aside of using the same zero sum exchange concept by negotiation-ability-failure-man by merely plugging himself in as the “rich” in the one party gains at the expense of the other party mantra…..negotiation-ability-failure-man is wholly unable to negotiate as “bargain” and “deal” don’t exist in his zero sum world and bargain and deal are substituted by the only exchange he understands: one party gains at the expense of the other party.


If the above discussion has validity, then negotiation-ability-failure-man is merely a trained creature of an exogenous ideology. Critical thinking is out the window and Pavlov is merely ringing the bell.

Notes:

(1) http://www.amazon.com/Price-Politics-Bob-Woodward/dp/1451651104/ref=sr_1_1?s=books&ie=UTF8&qid=1354685471&sr=1-1&keywords=the+price+of+politics
   (2)
http://dictionary.reference.com/browse/negotiate?s=t&ld=1121
 

Sunday, December 2, 2012

Milton Friedman: coercion and the fourth category of spending

In the main,  when people discuss Milton Friedman's fourth category of spending they do so in a mistaken vacuum. How so? They forget to point out HOW other people's money came to be. Stated alternatively, other people spending other people's money on other people, the discussion thereof, many, many times leaves out Friedman's first point: coercion.

Hence one ends with an isolated discussion of how Friedman's fourth category of spending points out the careless way or ineffective/inefficiency produced by other people [politico] spending other people's money [taxpayer] on other people [recipient class]. True enough. However the isolated discussion  decouples the coercion and only discusses the single phenomena without discussing [coupling] the ability of such a spending phenomena to emerge.

Think about it, how many times have you heard the discussion, in isolation, of other people spending other people's money on other people?? Meanwhile, twenty six discussions later a separate subject is discussed regarding coercion of forcibly appropriating other people's money. Moreover, the discussion of coercion many times appears in isolation from Friedman's total discussion.

Nay, nay! One must discuss both subjects as coercion must occur first and only then can one arrive at other people spending other people's money on other people.

Problem solved! Please go to 11:00 to 11:34 of the Youtube video below and hear Friedman himself discuss the two phenomena in tandem.





Saturday, December 1, 2012

The Perfect Dividend: perfect fairness in hypocrisy

‘When President Obama needed a business executive to come to his campaign defense, Jim Sinegal was there. The #Costco co-founder, director and former CEO even made a prime-time speech at the Democratic Party convention in Charlotte. So what a surprise this week to see that Mr. Sinegal and the rest of the Costco board voted to give themselves a special dividend to avoid Mr. Obama's looming tax increase. Is this what the President means by "tax fairness"?

Specifically, the giant retailer announced Wednesday that the company will pay a special dividend of $7 a share this month. That's a $3 billion Christmas gift for shareholders that will let them be taxed at the current dividend rate of 15%, rather than next year's rate of up to 43.4%—an increase to 39.6% as the Bush-era rates expire plus another 3.8% from the new ObamaCare surcharge.

More striking is that Costco also announced that it will borrow $3.5 billion to finance the special payout. Dividends are typically paid out of earnings, either current or accumulated. But so eager are the Costco executives to get out ahead of the tax man that they're taking on debt to do so.’ - WSJ, Costco's Dividend Tax Epiphany, updated 11/30/2012

Link to the entire article:


http://online.wsj.com/article/SB10001424127887324705104578149012514177372.html?mod=WSJ_Opinion_LEADTop




 

Thursday, November 22, 2012

Economic Results, Economic Processes and Political Judgments of Economic Processes

'Perhaps the greatest achievement of market economies is in economizing on the amount of knowledge needed to produce a given economic result. That is also their greatest political vulnerability. The public can get the economic benefits of such systems by judging results without understanding processes. But in their political behavior, the public must judge processes - including economic processes of which they may be ignorant or misinformed. Public misunderstandings can lead not only to misinterpretations of economic benefit as harm, but to actual harm resulting from policies designed to “correct” perceived problems. Once the process is underway, every perceived problem - whatever its reality or origin - calls for political solution, and these “solutions” tend to create a never-ending supply of new problems to be “solved”.'
-Thomas Sowell, Knowledge and Decisions, p.69




http://www.amazon.com/Knowledge-Decisions-Thomas-Sowell/dp/0465037380/ref=sr_1_1?s=books&ie=UTF8&qid=1353411092&sr=1-1&keywords=knowledge+and+decisions+by+thomas+sowell

Tuesday, November 20, 2012

When getting your kicks on route sixty-six….don't forget San Bernardino

"What happens when public employee unions begin calling too many of the shots in government?”

“Yet on close examination, the city’s decades-long journey from prosperous, middle-class community to bankrupt, crime-ridden, foreclosure-blighted basket case is straightforward — and alarmingly similar to the path traveled by many municipalities around America’s largest state. San Bernardino succumbed to a vicious circle of self-interests among city workers, local politicians and state pension overseers.

Little by little, over many years, the salaries and retirement benefits of San Bernardino’s city workers — and especially its police and firemen — grew richer and richer, even as the city lost its major employers and gradually got poorer and poorer.”

“In bankrupt San Bernardino, a third of the city’s 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. Forty-six retired city employees receive over $100,000 a year in pensions.


Almost 75 percent of the city’s general fund is now spent solely on the police and fire departments, according to a Reuters analysis of city bankruptcy documents – most of that on wages and pension costs.”


Link to the entire article appears below:

The Debt Death Spiral: U.S. City Edition - The Independent Institute


http://www.mygovcost.org/2012/11/15/the-debt-death-spiral-u-s-city-edition/










 

Friday, November 16, 2012

The Day They Took the Twinkies Away: 18,500 Jobs Lost as Hostess is Shuttered

“The company, whose roster of brands date as far back as 1888, filed a motion to liquidate Friday with U.S. Bankruptcy Court after striking workers across the country crippled its ability to maintain production.

Hostess CEO Greg Rayburn said in an interview that there was no buyer waiting in the wings to rescue the company. But without giving details, he said that there has been interest in some of its 30 brands, which include Dolly Madison and Nature's Pride snacks. Experts agreed that it was likely the biggest brands would survive.

Hostess, based in Irving, Texas, filed for Chapter 11 protection in January, its second trip through bankruptcy court in less than three years. Unlike many of its competitors, Hostess had been saddled with high pension, wage and medical costs related to its unionized workforce. The company also faced intensifying competition from larger companies such as Mondelez International, the former snack unit of Kraft Foods that makes Oreos, Chips Ahoy and Nabisco.

The shuttering of Hostess means the loss of about 18,500 jobs. Hostess said employees at its 33 factories were sent home and operations suspended Friday. Its roughly 500 bakery outlet stores will stay open for several days to sell remaining products.

The move to liquidate comes after a long battle with its unions. Thousands of members of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union went on strike last week after rejecting a contract offer that slashed wages and benefits. The bakers union represents about 30 percent of the company's workforce.” (1)

“Hostess Brands Inc. had earlier warned employees that it would file to unwind its business and sell off assets if plant operations didn't return to normal levels by 5 p.m. Thursday. In announcing its decision, Hostess said its wind down would mean the closure of 33 bakeries, 565 distribution centers, approximately 5,500 delivery routes and 570 bakery outlet stores in the United States.

Hostess suspended bakery operations at all its factories and said its stores will remain open for several days to sell already-baked products. In the Chicago area, there were reports of Hostess products
flying off the shelves.”

“The Irving, Texas-based company had already reached a contract agreement with its largest union, the International Brotherhood of Teamsters. But thousands of members in its second-biggest union went on strike late last week after rejecting in September a contract offer that cut wages and benefits. Officials for the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union say the company stopped contributing to workers' pensions last year.

NBC's Savannah Guthrie read a statement on "Today" from the bakers' union that said: “Despite Greg Rayburn’s insulting and disingenuous statements of the last several months, the truth is that Hostess workers and the union have absolutely no responsibility for the failure of this company. That responsibility rests squarely on the shoulders of the company’s decision makers.”

Rayburn responded that he had been “pretty straightforward in all the town hall meetings I’ve done at our plants to say that in this situation I think there is blame that goes around for everyone.”

He denied that the decision to shut down could be a last ditch negotiation tactic to get the union back to the table.

“It’s over,” he said. “This is it.” (2)

Notes:

(1) http://www.myfoxdfw.com/story/20115859/hostess-going-out-of-business-nearly-18000-to-be-laid-off

(2)
http://www.nbcdfw.com/news/national-international/NATL-Twinkies-Maker-Hostess-Going-Out-of-Business-179643161.html

 

 

 

 








ObamaCare Surcharge Levied by Your Local Eatery? No way! Way!

“Florida based restaurant boss John Metz, who runs approximately 40 Denny's and owns the Hurricane Grill & Wings franchise has decided to offset that by adding a five percent surcharge to customers' bills and will reduce his employees' hour

With Obamacare due to be fully implemented in January 2014, Metz has justified his move by claiming it is 'the only alternative. I've got to pass on the cost to the customer.' “ - UK Daily Mail
 
Link to the entire article entitled Denny's to charge 5% 'Obamacare surcharge' and cut employee hours to deal with cost of legislation:
http://www.dailymail.co.uk/news/article-2233221/Dennys-charge-5-Obamacare-surcharge-cut-employee-hours-deal-cost-legislation.html

Monday, November 12, 2012

Voluntary Exchange at the Point of Mutual Self-Interest

“If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can only gain at the expense of another.” - Milton Friedman




The “simple insight” that Friedman mentions above can be difficult to comprehend when, as Friedman points out, zero sum thinking is introduced, that is, “that one party can only gain at the expense of another“.

Is zero sum thinking purposely introduced [that exchange is a phenomena where one party only gains at another party’s expense] as less of a “tendency” and more of a politically motivated event? Stated alternatively, is zero sum thinking applied to exchange to allow for a third party, the politico, to supposedly rectify the gain? To levelize the gain as it were. To become the white knight charging in, to solve the ills of exchange, when in fact no ills exist.

When one states that voluntary exchange at the point of mutual self- interest makes the pie grow, the phenomena may well be assumed to be self evident. If the phenomena is not as self evident as many assume, then an expanse of foggy gray area of not-so-self evident exists which allows the opportunity the politico seeks to introduce third party intervention at the point of exchange. It may well be that the simple insight which is supposedly of a self evident nature [voluntary exchange at the point of mutual self interest makes the pie grow] needs better articulated so as to close the window for politico interests.

One of the better articulations of the concept of voluntary exchange at the point of mutual self-interest which makes the pie grow appears below:


“The basic mechanism of contract is very simple, powerful, and universal. It essentially involves your surrendering something that you value in exchange for something else that you value even more. If both sides allow the trade to occur, there will be an enormous increase in overall well being….”

“What is even better is that this one simple idea of gains through trade is capable of infinite repetition.”

“One good idea bets a thousand bad ones”.

“The logic of mutual gain from voluntary exchange is perfectly general. It rests only on the self-interest of individuals in a world of scarcity. It is not particular to one culture, one time, or one set of values”.

“….exchange is not role specific…”

“It does not create one set of rules for people who are rich and powerful and another set for those who are frail or meek. Instead, the law speaks about two hardy standbys in all contractual arrangements: A and B. These people are colorless, odorless, and timeless, of no known nationality, age, race, or sex.” (1)

Notes:
(1) Simple Rules for a Complex World, Richard Epstein, 1995, Harvard University Press, pgs. 72 and 73.





Friday, November 9, 2012

Losing control of the mechanism established [Milton Friedman]




The entire video is excellent. However, one may very well find insight by paying particular attention to the video from time period 6:00 to 7:04.

Monday, November 5, 2012

Discouraged Workers, Worker Mobility and the Rise in Social Security Disability Claims

The Federal Reserve Bank of Richmond’s publication Regional Focus, second/third quarter 2012 edition has three very enlightening articles regarding discourage workers, worker mobility and Social Security disability claims on the rise. Links to the articles appear below:


Where Have All The Workers Gone? Why are more people leaving the labor force, and what are they doing?



http://www.richmondfed.org/publications/research/region_focus/2012/q2-3/pdf/cover_story.pdf
 

Pulling Up Stakes, Have Americans lost the urge to move?

http://www.richmondfed.org/publications/research/region_focus/2012/q2-3/pdf/feature1.pdf
 
The Sharp Rise in Disability Claims. Are federal disability benefits becoming a general safety net?







 http://www.richmondfed.org/publications/research/region_focus/2012/q2-3/pdf/feature3.pdf

Sunday, November 4, 2012

Say’s Law: Supply Creates its Own Demand? Nay, Nay!

Why is it that conventional wisdom depicts classical economist John Baptiste Say and Say’s Law as “supply creates it own demand”? Is the depiction correct?

“Say’s Law is best known in the form Keynes postulated it in The General Theory: “supply creates its own demand” . Despite the apparent eloquence and simplicity contained in this definition, it obscures the genuine meaning of the concept.”

“Instead, Say’s Law can be interpreted as saying that the ability to produce generates their ability to purchase other products. One can only fully grasp Say’s Law when analyzing the nature of the division of labor in a market economy. Individuals specialize in producing a limited range of goods or services, and in return receive income that they use to buy goods and services from others. The income one receives from production is their source of demand. In other words, “all purchasers must first be producers, as only production can generate the power to purchase” . This idea is intimately linked to the Smithian idea that the division of labor is limited by the extent of the market.“

The above quotes come from a most excellent essay by Garrett Watson of St. Lawrence University.His essay is entitled Misunderstanding Say’s Law of Markets.

 

 


Monday, October 29, 2012

We Vote on Tuesday Because…..?





HT: Carpe Diem

Battery Maker A123 Goes Under: More DOE Money Down the Drain



'Ultimately, the fate of US battery makers will remain tied to that of the electric car itself. And for now, no battery technology can compete cost-wise with the internal combustion engine.

“The outlook in the near future for electric cars does not look that promising,” says Daniel Scherson, an electrochemist at Case Western Reserve University in Cleveland, Ohio. “They are still just too expensive.” ' - nature.com, 10/24/2012

Link to the entire article appears below:

http://www.nature.com/news/pioneering-battery-maker-files-for-bankruptcy-1.11646

Sunday, October 21, 2012

Richard Epstein, The Means of Production and The Zebra Changes Stripes

“Today there is little general sentiment in the United States or abroad in favor of the collective ownership of the means of production that bore the brunt of Hayek’s withering criticism. Instead the newer pattern is to preach the virtue of markets in the abstract, and then to insists that government regulation of private enterprises is necessary to correct the legion of supposed specific market failures that arise in complex modern institutions.” (1)


“Rather, regulation takes certain elements from the owner’s bundle of rights and transfers them to the state, where they again fall prey to the same difficulties that arose when central planning was defended on a grand scale.” (2)


"Even the failure and disintegration of socialism in Eastern Europe and the former Soviet Union has not led to a clear response to the next question: if government ownership of the means of production is so bad, why is government regulation of the private means of production so good?" (3)

 

“…..there is today (fortunately) very little support for the direct government ownership of the means of production. As a political theory today, the socialist remnant operates on a different level. At a personal level, it speaks to the alienation of the individual, stressing the need for caring and sharing and the politics of meaning. At a regulatory level, it seeks to identify specific sectors in which there is market failure and then to subject them to various forms of government regulation. It removes more and more activities from the private area by creating affirmative rights to housing, to education, to welfare, and to health care. The remnant of socialism works, as it were, on the installment plan, where it acts as a powerful counterpoint to the vision of the night-watchman state, chiefly concerned with the maintenance of public peace and order.” (4)


Notes

 

 
(1) Simple Rules for a Complex World, Richard Epstein, Harvard University Press, 1995, preface pages xii and xiii.

(2) Ibid.

(3) Ibid, page 15.

(4) Ibid, page 23.

http://www.amazon.com/Simple-Rules-Complex-Richard-Epstein/dp/0674808215#_



 

Sunday, October 7, 2012

Tesla Motors: When “Green” is Sold Upscale Via Taxpayer Subsidies and Debt Repayment Delays

Tesla Motors Inc. said it plans sell as many as 8 million shares at about $28.25, raising as much as $225 million to avert a cash squeeze amid production delays.

The Palo Alto, Calif., electric-car maker earlier said it hoped to raise about $130 million by offering about 5 million shares after receiving a waiver on terms of a $465 million U.S. Department of Energy loan. The DOE on Monday agreed to delay a $14.6 million payment due next month to February and required the company to submit a plan by Oct. 31 that would repay the loan ahead of its 10-year schedule. - Wall Street Journal, 09/28/2012
Entire story is available at the following link:


http://online.wsj.com/article/SB10000872396390444712904578024071333648886.html

Saturday, September 29, 2012

Thomas Sowell and the Political Proposition of “Trickle Down”

Thomas Sowell recently published a 14 page pamphlet: “Trickle Down” Theory and “Tax Cuts for the Rich”.

Thomas Sowell has pointed out on many occasions that no such economic theory, known as "trickle down", exists. You read that correctly, in all of economic literature no such theory exists. Sowell is correct, no such theory known as “trickle down” exists within the realm of economics. That "trickle down" and its companion "tax cuts for the rich" are merely notional political concepts and such misinterpretation goes all the way back to the 1920's.

Sowell has expressed the concepts which appear in the pamphlet many times, but this time around he expands upon the argument in that he clearly delineates between the change in behavior associated with taxes reductions and the mistaken conclusion of change in income flows to a particular class.

Also, left out of the discussion by many pundits, talking heads and commentators is Andrew Mellon. Mellon merely showed the paradox between lower tax rates and higher government revenue. Mellon’s book Taxation: The People’s Business is in fact a discussion of the change in behavior regarding taxes. (1)

However, Mellon has been vilified by many mainstream historians based on notional propositions without looking at the hard data. Mellon was correct and these particular historians are wrong. Maybe particular historians enjoy vilifying Mellon as he was FDR’s favorite target of: bring government powers to bear against an individual citizen due to FDR’s own personal notional vendetta.(2)

Link to Sowell’s recent publication appears below:



http://www.tsowell.com/images/Hoover%20Proof.pdf


Notes:

(1) Andrew W. Mellon, Taxation: The People’s Business, New York, The Macmillan Company, 1924.

http://www.amazon.com/Taxation-Peoples-Business-Andrew-Mellon/dp/1245159879/ref=sr_1_2?s=books&ie=UTF8&qid=1348932973&sr=1-2&keywords=Taxation%3A+the+people%27s+business

(2) Burton Folsom Jr., New Deal or Raw Deal, NewYork, Simon and Schuster, 2008, pages 159-162.

http://www.amazon.com/New-Deal-Raw-Economic-Damaged/dp/1416592377/ref=sr_1_1?s=books&ie=UTF8&qid=1348933877&sr=1-1&keywords=new+deal+or+raw+deal+how+fdr%27s+economic+legacy+has+damaged+america



 

Wednesday, September 26, 2012

Simpson-Bowles Commission Lecture featuring Mr. Simpson and Mr. Bowles at Wake Forest University 09/25/2012


Simpson-Bowles [National Commission on Fiscal Responsibility and Reform] lecture was held last evening 09/25/2012 at Wait Chapel on the campus of Wake Forest University with the lecturers being none other than Mr. Simpson and Mr. Bowles. 

The lecture was merely a rehash of their findings/recommendations from the original report issued by the commission. Nothing new that can‘t be found in the original report. Was more of an infomercial for their recommendations.


Three items that might be of interest from the lecture were: (a) the use of the word “crazy” used many times to describe the overspending vs. tax revenue available, (b) the failure to explain what phenomena was/is at work that brought us to the point of having the commission in the first place, (c) the whining that they [Mr. Simpson and Mr. Bowles] are "lashed out at" by everyone who would suffer a cutback of their government sponsored privilege via the Simpson-Bowles recommendations.

The “crazy” depiction consisted of:

(1) how can we spend more than what we bring in (crazy),

(2) how can people believe that the system will not go bust (crazy).

What they fail to recognize is the phenomena of rational-irrationality. They call it a catch-all “crazy” and leave it as a murky phenomena rather than in fact explaining rational-irrationality. That is, politicos through the mechanism of government have created an economic system of government privilege as a political constituency building exercise that is going broke. On one hand politicos dispense privilege knowing the system will go broke while on the other hand people accept privilege knowing the system is self destructing. Hence it becomes rational to gain from the purposely built system (politico and recipient class) while simultaneously knowing it is irrational to gain from a system that can not last. It boils down to the old expression of “get it while the getting’s good”.


They completely failed to explain what underlying phenomena was/is at work that brought us to the point of having the commission in the first place. Their position is explained from the starting point of: here we are and this is how to fix it. If one is to “fix” something what exactly went wrong in the first place that caused one to have “fix”? Which then begs a question of: if one “fixed it” why would the something that went wrong merely manifest itself again? That is, the chronic condition is never addressed, only a particular cure is addressed. Completely left out of the discussion is James M. Buchanan’s observation that a purposeful system of government privilege has been created by politicos as an ongoing political constituency building program. That a free market model has been supplanted by politicos with a government privilege model.

The failure to explain the underlying problem leaves them whining about being ““lashed out at“ by everyone who would suffer a cutback of their government sponsored privilege via the Simpson-Bowles recommendations. That is, the “lashed out at” is depicted as “woe is me” for telling the truth. Nay, nay. If they explained the underlying problem and the purposely built government privilege system then they would know such a system generates special interests that have their own politically built constituency that require the privilege to continue or else the special interest and associated constituency disappear. Hence the special interest and associated constituency are rational in lashing out as they want to retain privilege and the “woe is me” proposition misses the point completely.

You Didn't Build That: The Movie

Sunday, September 9, 2012

Should Majorities Decide Everything?

Obama Calls for Lower University Tuition Rates


‘This morning I heard President Obama call for universities to lower their tuition rates so that “everybody in America can go to college.”

 
I am virtually certain that the President is not stupid enough to think that if tuition rates fell to zero,there would magically be enough room in the colleges for everybody in America. So I’ve got to believe that he’s purposely saying stupid things in order to appeal to stupid voters — the sort of voters, in other words, who probably don’t belong in college.

To believe what the President wants you to believe, you’d have to be not just stupid but badly misinformed. At the University where I teach, we do not lack for applicants. The reason we don’t have more students is not that they can’t afford us; it’s that we don’t have room for them.

The President’s proposal would make sense if universities were ordinary monopolists, artificially restricting enrollments in order to keep prices high. But universities, insofar as they are monopolists, are by no means ordinary — they are price-discriminating monopolists — and extraordinarily effective ones at that.

Every year, I tell my Principles students with confidence that “You and the student on your right are probably not paying the same tuition rate”. Universities have detailed information on students’ academic records (which tells them where else those students are likely to be admitted) and detailed information on student’s (and their family’s) financial statuses. They exploit this information to tailor individual aid packages.

That’s important here, because, unlike an ordinary monopolist, a good price discriminator doesn’t leave seats in the classroom unfilled just to keep prices high. Instead, the price discriminator fills empty seats at bargain prices while still keeping prices high for those who are willing to pay full fare.' - Playing the Dunce, Steve Landsburg, 09/04/2012



http://www.thebigquestions.com/2012/09/04/playing-the-dunce/
 
 
Beyond Landburg’s monopoly aspect, what about land grant universities as “the second coming of the post office”? How so?

Administrative positions at universities, as reported many times by Mark Perry, economist University of Michigan,  are now at or exceed the number of professors and instructors at many, many universities. The administrative positions which are increasing at an increasing rate are well paying and come with a litany of benefits driving total compensation to high levels.(1)

Beginning in 1979 to present the escalating cost of higher education is accompanied by escalating administration positions and associated cost. These administrative position are to extent or another the result of a political constituency building process of certain politicos. These expanding public sector administrative positions then rationally require such persons holding such positions to support political candidates that support the growth and maintenance of the growing administration.

Therefore the escalating costs of higher education are politically driven as a political constituency building exercise. A few questions that beg to be asked are: would Mr. Obama be open to slashing this politically built constituency which is very likely part of his voter base? Capacity concerns aside, if institutions overnight jettisoned fifty percent of their administration and consequently lowered cost would Mr. Obama then complain of lost jobs or more succinctly complain of lost jobs which represent his now lost voter base?

In the final analysis, Landsburg is likely correct: “…to believe that he’s purposely saying stupid things in order to appeal to stupid voters”.



Notes:


(1) http://mjperry.blogspot.com/2009/12/college-everythings-going-up-except.html

Peter Schiff at the DNC and His Spoof "Democrats: Let's Ban Profits!"

Sunday, September 2, 2012

Refrigerated Coal?



“Refrigerating coal-plant emissions would reduce levels of dangerous chemicals that pour into the air — including carbon dioxide by more than 90 percent — at a cost of 25 percent efficiency, according to a simple math-driven formula designed by a team of University of Oregon physicists.”
“The cryogenic concept is not new. Donnelly experimented briefly in the 1960s with a paper mill in Springfield, Ore., to successfully remove odor-causing gasses filling the area around the plant using cryogenics. Subsequently the National Science Foundation funded a major study to capture sulfur dioxide emissions — a contributor to acid rain — from coal burning plants. The grant included a detailed engineering study by the Bechtel Corp. of San Francisco.
The Bechtel study showed that the cryogenic process would work very well, but noted that large quantities of carbon dioxide also would be condensed, a consequence that raised no concerns in 1978. “Today we recognize that carbon dioxide emissions are a leading contributor to climate-warming factors attributed to humans,” Donnelly said.
Out came his previously published work on this concept, followed by a rigorous two-year project to recheck and update his thermodynamic calculations and compose “a spreadsheet-accessible” formula for potential use by industry. His earlier work on the cryogenic treatment of coal-plant emissions and natural gas sources had sparked widespread interest internationally.

While the required cooling machinery would be large — potentially the size of a football stadium — the cost for construction or retrofitting likely would not be dramatically larger than present systems that include scrubbers, which would no longer be necessary, Donnelly said. The new journal article does not address construction costs or the disposal of the captured pollutants, the latter of which would be dependent on engineering and perhaps geological considerations.” - Watts Up With That, 08/28/2012
Read the entire post at the following:
http://wattsupwiththat.com/2012/08/28/cool-clean-coal-just-add-refrigeration/