Why Socialized Healthcare Will Not Work

One of the big missions of the current administration is to usher in nationalized healthcare. Recently, many corporations have come to the fold and are endorsing such a policy in order to relieve the burden or providing coverage to their employees. More specific to my area of southeastern Michigan, this issues surfaces all the time.

The automakers want to shed these costs to become competitive. The UAW does not want to have to fund and maintain its VEBA. And furthermore, you have the Detroit underclass and greater Detroit blue-collar contingent who are feeling the burden of a poor Michigan economy - job losses, declining housing prices, etc. - who would also like to offload their healthcare costs. Thus, for many politicians (mostly liberal, but I am sure there are a few conservatives as well), socialized medicine appears to be an easy way to pander for votes.

Sadly, socialized medicine will not work. Please allow me a brief hypothetical, and then I will make the corollary.

Imagine that you own a sushi bar. One day, members of congress pass legislation that forces you to provide free sushi to whoever wants it - under the auspices that the government will pay for it. All the sushi lovers in your market hear the news, and rush to your sushi bar. Next thing you know, the line is out the door, and around the block. What do you do?

Option 1: You could decide that instead of making normal sized rolls, you could cut every piece of every roll into 2 pieces… or 3 pieces… or as many pieces as necessary in order to supply the demand for sushi that is around the block. You could decide that instead of offering a whole menu, to offer only tuna rolls. Both results, while seemingly different, are at their core, similar: the change in consistency of the product to increase supply.

Option 2: You see the huge line out the door and around the block, and tell the government. They pay you more money in order to hire more staff, get a larger building, and make more sushi to supply demand. Another instance of this situation is when an entrepreneur sees the line out the door and decides that he too will open up a sushi bar. These two are the same because whether the government is funding one restaurant for the entire market, or two restaurants, the same amount of money is being spent.

Option 3: You decide that the quality of your sushi is too important to you, but you are not going to break the law by charging for sushi. Thus your only option is to limit how many customers can come to your establishment at any one time.

Now let's analyze these three outcomes. The first outcome has the restaurant changing the consistency of its product - either by segmenting it, or specializing in just one type that it can make more of efficiently - to supply the increased demand. I would argue that this has the result of decreasing customer utility. Both serving a customer a fraction of a single roll, providing only one type of roll, or a combination of the two certainly makes customers worse off when they had to pay full price but got as much or what they wanted.

The second outcome is largely untenable because the government cannot borrow or tax an infinite amount of money. This results in a limit to how much sushi the government can subsidize, so as long as the growth in demand does not outstrip the growth in government revenue, it is theoretically possible. 

The third outcome is really quite practical. It would be the easiest to implement as far as a restaurant is concerned. All they would have to do is accept, say, the first 100 people. Or on certain days, only people that fit this, this, and that criteria could be served. Looking back at history, we see this methodology has already been done during the gasoline crises of the 1970s, when only people with license plates ending in odd numbers could fill up on days x and y, while those that ended in even numbers could fill up on days z and a.

Based on my hypothetical, you can probably see where I am going with this. Just replace sushi with healthcare, and you see why socialized healthcare will not work. Outcome one - the dilution/standardization of supply - will only work if you wish to diminish healthcare quality. Healthcare covers thousands of different procedures and processes that cannot be split up or standardized. One cannot have half a CAT-scan just as much as you cannot standardize every chemotherapy cocktail without jeopardizing quality.

The second outcome is only possible if the growth in demand does not increase, or government revenues do not decrease. Both these are determined by many factors, including population and demographic dynamics - which effect the demand for healthcare and the tax base to pay for it. Given the fact that there is always inflation, and the population will either increase (currently in the U.S.) or decrease (Japan and Europe) going into the future, it appears inevitable that demand will always increase, or that the tax base to support the system will eventually be too small. As such, I believe this outcome to be untenable. 

The third option - limiting supply - is really the only tenable option if maintaining quality is a primary goal. However, this has a nasty effect of forcing people to wait for crucial care, and the potential for casualties. You see this happen in Canada, Britain, France, and numerous other countries with fully socialized healthcare. It is why cities like Detroit, Cleveland, and Buffalo have burgeoning healthcare sectors, because legions of Canadians who are waiting for hip replacement or other types of treatments are crossing the border in droves.

In reality, socialized healthcare will not work. The government will have to limit what it supplies, the amount of supply, or borrow/tax itself to oblivion. Now, as for how we can fix our current system. I sadly will have to leave that for another day.

Economics Missive #1

Economic Missive of the Week

PI = PS + CS + GS,

PI = Private Investment
PS = Private Savings
CS = Corporate Savings
GS = Government Savings, i.e. surplus

Written in terms of output (we assume that people either consume or save all their personal income), we have:

PI = αpYp + αcYc + GS

Where αp and αc are the marginal propensities to save for the private and corporate sectors, respectively. We also know that people save after-tax dollars, and so we introduce taxation into the equation. Because government has some residual costs of upkeep, we postulate that it is always greater than zero, i.e. government entropy.

PI = αp[(1 - τp)Yp] + αc[(1 - τc )Yc] + [Τ – GC], Σ[Yxτx] = Τ and GC > 0

Where τp and τc are the private and corporate aggregate tax rates, which represent the fraction of the private sector’s output that are remitted to government and is equal to the government’s total tax revenue of Τ.

So what can we infer from this identity now that we have broken it down into its various components? We see that the marginal propensity to save has a huge effect in on private investment. This is quite obvious – if a firm or individual wants to consume, it will save just that much less. What is not quite as obvious is the relationship between personal and corporate savings. Economic intuition would dictate that when individuals consume goods and services, the providing firms would see an increase in income. Firms will then invest a proportion of those savings to enhance their operations, some of which will feed back to individuals via increased or new wages.

This savings-consumption cycle can flow the opposite way. In this case, we have individuals who have saved previous income investing it in firm equity. This provides the capital firms need to produce goods and services that are sold to other consumers – the future earnings that end up back with the investor via dividends and coupon payments. The question is not so much about which way the cycle flows, but which agent, the firm or the individual, has that initial savings to start it.

Another interesting discussion is the affect taxation has on private investment. First, taxation merely redistributes income from the private and corporate parts of the equation to the government part. Secondly, given government entropy, this re-allocation would result in diminishing private investment by the amount of the costs of maintaining government. So why would the government want to modify the balance of investment when it results in a smaller final amount? This question will be answered in next week’s missive.

The Decline of Michigan's Economy

Recently, someone asked me if I could comment on Dick DeVos' television ads. I guess this person forgot that I have been in London, and thus have not had a chance to see them yet. The part she was puzzled about concerned Michigan's economy and some of Dick's claims to fix it. Though I could not offer my analysis on what his claims were, I could offer some insight on how our economy found itself in this situation, what the government can do it fix it, as well as provide my opinion on who is the better gubernatorial candidate. My analysis on Michigan's economy does not offer any partisan views, but is strictly entrenched in fundamental Austrian-school economic theory. I understand that there might be some conflicting views from Keynesian economists, but I have decided for brevity's sake that I will not include them. I will save that debate for another blog. However, my opinion on who I feel is a better governor is just that - my opinion. Having said that, here is my analysis...

Frankly, Michigan is in bad shape. It is the only state in the Union that is in a recession. Our GDP is pitiful, and our state continues to hemorrhage jobs at an alarming rate. The answer to these woes falls into what we did not do in the past, and what we are not doing now. Long ago, Michigan's economy was primarily manufacturing, with a smattering of agriculture, while in the UP, natural resources like iron. Most of the natural resources that are cheap enough for extraction have already been extracted due to WWII. Agriculture is a very minor product of our economy. The one part that kept us afloat in the past was manufacturing. The reason why manufacturing was such a staple of our economy was, not only because the assembly line was developed here and we had relatively cheap labor, but because our climate was temperate enough to allow for production throughout the year - something that the south, despite their cheap labor supply, could not provide without air conditioning.

Thus, Michigan's economy depended more and more on manufacturing from companies like GM, Ford, and Chrysler. Back at this time, they had pretty much 70% of the market share, so their profits were fat. They were able to compensate their employees very well - the great benefits and wage that you see them fighting for today. However, over the course of time, there R&D departments got stagnant. They did not embrace technology that would help them limit their fixed costs, and the amount of quality cars developed started to decline. This is when the Japanese companies came in. Toyota, Nissan, and alike offered great quality cars that were desirable, as well as being a fraction of the cost of their American rivals. American companies started to lose money, and what do companies do when they lose money? They cut costs. However, during their period of prosperity, instead off offering bonuses and add-on benefits that were not permanent, they cemented their labor costs (pension, wages, etc.) into a permanent "Contract" with their workers (UAW). This kept GM, Ford, and Chrysler from cutting their cost of production. The result: restructuring, massive lay-offs, etc. But even that did not solve the problem. They did not focus on innovation and creating products that would sell. Chrysler, which was bought by Daimler Benz, targeted this and is now somewhat successful. Ford and GM, however, did not and are still hurting. Their market share is down, and they are not generating the kind of revenue to sustain their operations. Thus, jobs continue to be lost. The decline of Detroit is a result of the decline of the auto industry (as well as some racial tensions of the late 70's).

Now, this only touches on the route to our State's financial situation. The reason why our State rode with GM and Ford down into the dumps is because of government's lack of initiative to diversify the economy away from manufacturing. We just have not provided the incentives for people to start businesses, whether they are small start-ups or million dollar companies. We have a single business tax - something DeVos wants to remove - which heavily penalizes small businesses from growing. If I can remember clearly, we are the only state to have it. We have continued to cut funding on our Universities, which is a grave mistake. UofM is one of the best engineering schools in the nation, and should be funded to churn out engineers that can create new technologies to be created by Michigan businesses. Michigan State is a great bio-chem and bio-med school, with the 2nd most patents (including one of the most effective cancer drugs on the market) only to NYU. It should be funded to create more drugs and spin off companies to undertake their production.

The largest misconception, especially given by liberals, is that if you cut taxes or provide tax breaks to businesses, you have to raise taxes in other areas to make up for that lost revenue. That simply is false, and is demonstrated with the record federal tax revenues received this year after the Bush tax cuts. The more money one gets to keep, the more incentive there is for him/her/it to work more to make more money, and thus a smaller percentage on a much larger income results to as much, if not more, taxes then before under the higher tax rates. The same principal works with businesses as well. The more you cut their taxes, the more incentive they have to make even more money. The extra money that a company makes can then be used to hire more workers, invest in new businesses, and so forth. The results are two fold. First, higher profits taxed at a lower percentage result in equal, if not higher tax revenue from companies. Secondly, unemployment decreases, and personal income increases. As personal income increase, people spend more money, which is great for a state like Michigan that only has a sales tax. Thus, it is clear how tax cuts and incentives can benefit the economy. Of course, you cannot cut taxes totally, because there are still basic services that you need, but the key is to find a percentage that grows both jobs and business, as well as funds the state. This is what the State of Michigan desperately needs to do.

Furthermore, Michigan needs to give incentives for manufacturing to stay in Michigan. This is the one area that I know for sure Granholm has failed. A while back, Toyota was looking to come into Michigan, buy out some of the old GM plants that were not in use, and revamp them for manufacturing today's cars. The problem is, there is a ton of red-tape for foreign car companies to come to Michigan to start operations. They have to be unionized by the UAW, and undergo all this other crap - the result of which was a 5 year timeframe. Toyota asked Granholm if they could forego the rhetoric and unionization in order to invest billions of dollars into Michigan. She declined it, and the jobs that could have gone here, resulted in going to Georgia and other states (all with open arms and open wallets) down south - armed with cheap labor and cheap air conditioning. I feel this was a mistake.

Globalization is often touted as the cause of Michigan's decline. This is false. The people who benefit from globalization are you, me, and even the poor. The cheaper one can produce a good, the cheaper it can be sold at a profit. Even the working poor – the very people that Granholm is trying to embrace with her usual Democrat rhetoric – are better off because they can afford more goods and services due to globalization. Also, businesses benefit from it greatly, which helps the state as well. Even if a company, incorporated in Michigan, produces its goods in China (subsequently hiring Chinese employees) to sell them in the US for profit; the profits are not taxed in China, but Michigan. Indeed, it bolsters the revenue of the state, and allows it to continue all their wonderful programs. Look at Apple for instance. The components of an iPod are produced in Taiwan for 20 cents, shipped over to China to be assembled for 2 dollars, and then shipped to the US to be sold for 300 dollars. Who gets that money??? Apple does, which then gives it via taxes to the state and federal government. I can assure you that they would not have gotten as much if it was done entirely in the US.

And don’t worry about China always being the country of low wages. With more investment and job growth, wages will start to naturally increase, and eventually reach our wages. By then, companies will have found other ways to produce the goods and services that we want even cheaper, and the whole process goes around again. If the larger profits are your concern, then I ask you the question: What kind of company do you want in your state, one that makes no profit like GM or Ford, or one that makes billions of dollars of profit like Apple? Even from a liberal prospective, a healthy company pays out more in taxes to the state, and well as creating more jobs, than a weak company. This tax revenue can then be used to invest in education for jobless people, as well as students, thus making them more competitive in the job market and enhancing their wages. I rest my case!

As far as who I support for governor, I support De Vos. The fact that he is a businessman – having sustained and grown Alticor – is a needed thing for our state government. I feel that government should be more like a business instead of a bureaucracy. If a business squanders money, it goes bankrupt. If a government squanders money, it just continues at our expense. That is why I like the idea of a businessman coming in and cleaning things up. Making programs responsible for their results, and if they prove to be a waste of money, than cut them out. I also think he has a better vision of what Michigan needs to do in the future to make it competitive, including providing incentives for businesses. I feel Granholm is just pandering to her base in Detroit with money and social programs, instead of truly trying to empower them and build them up so they do not have to depend on government. After all, that is what Government is for: protecting and helping people, not supporting them. If Michigan can create jobs and grow its economy, then I think its people can take care of themselves quite well.

The Fall of a Historical Context

Living here in jolly ol' England, while reading its fascinating history, as well as staying up to speed with the current events in the Middle East, has prompted an analysis. This past weekend up in Edinburgh, Scotland, I put a huge dent in the book that is totally captivating my attention - To Rule the Waves: How the British Navy Shaped the Modern World, by Arthur Herman. This book focuses on the Royal Navy: its origins; battles; technological innovations; and most importantly, how it affected the progression and shape of the world that we live in today. It is just chalked full of little tidbits of info - things that you hear about today, and cannot believe were started because of the institution that is the Royal Navy. Here are some examples:

1. Knots, used to measure nautical speed, came to be because it was the measure of how many knots of rope were dragged out behind a ship during a minutes time. So 6 knots would be the speed in which, during a minute, 6 knots on a rope would be dragged behind the ship
2. Captains log was literally a log that the ship used to drag behind it in order to determine distance traveled. It would be thrown over attached to a rope with pre-set length, so once the rope became completely un-furled, the ship's captain knew that they had sailed a certain distance
3. "The Cat's out of the bag" was a saying used by seamen to represent the cat o' 9 tails, or lash, coming out of a crimson bag to be administered to a sailor as punishment

These are just a few of the little things that you read and marvel at, because despite the hundreds of years, they still are entrenched in our colloquial speech. More importantly, by reading books like this, you develop a certain historical context that I feel is being lost by most people today. For instance, throughout the history of the Royal Navy, France and Britain - separated by a 30 mile English channel - were engaged in approximately 6 wars, each one killing thousands of sailors and soldiers. At the British Empire's zenith, it controlled vast tracts of land on every continent, in every time zone, and almost every latitude. India was crushed into submission, China was made into a puppet. Thousands of Boers of South Africa were slaughtered, and their women and children were thrown into concentration camps that would even make Hitler jealous of their viciousness. Millions of slaves were brought from Africa to the West Indies, mostly to either die immediately, or die while toiling on sugar plantations. Australia was founded as a penal colony, where all of Britain's worst-of-the-worst were taken. The levant was carved into a war zone, and eventually after WWII, Israel - the bane of Islam - thrown smack dab in the middle of it. And what was this all in the name of? Not imperialism, but economic progress I kid you not!

For this was the difference between rulers like Victoria, and those of Hitler and Napoleon. The later were only concerned and consumed with power. They were on a quest for personal glory and hegemony via the domination of man. Ironically enough, it was the rulers of the British empire - from William and Mary up until George V - who consolidated more power and generated more economic prosperity than a man like Hitler or Napoleon could ever dream of. In fact, if Hitler or Napoleon would have been smart, they would have seen the constant failings of the useless exploits of their predecessors' attempts towards global hegemony through conquest and followed an approach like Britain: hegemony of global trade. Phillip II of Spain controlled vast swathes of Europe, as well as 95% of the New World colonies. Nevertheless, he spent more resources carrying the Catholic zeal and trying to invade Britain than protecting those colonies and trade. The result: Spain became the economic sick-man of Europe and would never fully recover until the 20th century. Louis XIV, better known as the Sun King, followed this same ploy. Again, he tried to invade Britain, and he failed. His economy went to shambles, and France never really presented itself as a serious threat across the channel again. In contrast, it was the economic incentive towards protecting and growing foreign trade, not conquest, that led Britain to surpass these great European powers, and to stay one step ahead of the ones to come.

The net results speak for themselves, both positive and negative. India and South Africa received more investment in infrastructure, education and political institutions than they could ever have dreamed of if they were still living as tribes or under Maha Rajahs. South Africa's economy is primarily dependent on its commodity resources - first invested by British merchants like Cecil Rhodes who founded De Beers. Sadly, apartheid rule took place, but is finally starting to be undone. Australia and New Zealand, before just desolate islands with very little native inhabitants, are huge bustling economies. Singapore, Malaysia, and Hong Kong are all global economic powers that received a huge boost from the UK. The Middle East was first invested for oil production by the British - the same oil production that leverages their own agenda even to this day. And last but not least, the United States. Though today we feel that our economic prowess was self-made, please think again. After the War of Revolution, who do you think traded with us? Britain. In fact, we were just as dependent on British trade before the revolution as we were after. Our nation might have been brought to prosperity, but it certainly was the British who gained even greater wealth from trading with us. We were, after all, their largest market for British-made goods. This is why having a historical context is so important.

However, today we are taught that imperialism is bad. We learn all about the misgivings of people like Napoleon, Julius Caesar, Alexander, Louis XIV, Hitler, and alike. We even are told to frown upon the acts of Queen Victoria and the British Empire. Even today, with those institutions no longer existing, the media constantly barrages the USA government for appearing too imperialistic. "The Iraq war is largely mistake," they say. "All the problems in the levant are Israel's fault." We constantly hear these echoes from the senate floor or the media. They cry out for diplomatic solutions. They argue that armed conflict is wrong. But most importantly, they try to make us feel guilty for what we do. Guilty for our past transgressions: slavery in the American case; Imperial injustices in the British case. This weakens us, and forces us to use only a fraction of the power that we could muster.

Living here in England for the past few months, I can see it more clearly than ever. Britain used to be the foremost global power. When something disrupted global harmony (or in layman's terms, global trade), they were dealt with swiftly and decisively. The French tried to block channel shipping - they were destroyed (Battles of Finnestere, Cape St. Vincent, Nile, Trafalgar, etc.). Boers led uprising in South Africa - they were cut down fast and ruthlessly in two different wars. In India, there was the fighting to control India, let by Robert Clive of the British East India Company, as well as the Sepoy Rebellion much later. Both were cut down ruthlessly and quickly. The Boxer Rebellion and the Opium Wars in China - the Opium Wars being even more specifically concerned with economic stability, were put down. These events, while sadly necessary, ushered in even more prosperity and development. Nonetheless, it seems as if most Britons have forgotten their past. In newspapers today, there are open cries for pulling out of Iraq, and for condemning Israel for their attacks - attacks and operations that are more British in historical nature than anything than anything else.

The guilt has sadly set in here, as it is in America. Instead of feeling guilty, we need to see how the world works. Imperial domination has progressed to globalization, where independent and autonomous countries of the world throw there hat into the global market - trading their strengths for their weaknesses - while in the pursuit of economic prosperity. This is why conflict is still a necessary force in the world. One rogue nation not only affects the prosperity of those that it attacks, but both the prosperity of its own people, as well as the attacked nation's trading partners. Look at Lebanon for instance. Not only is Hezbollah affecting citizens of its own country by preempting an Israeli attack and forcing the country to essentially shut down, but it also promotes instability within the entire region that affects wealth creation and prosperity for millions.

This is why there must be someone, or some group, that can offer security and stability throughout the world. The minute economic activity is disturbed, wealth creation is stopped. This is why the British Empire fought the many conflicts to keep the flow of trade continuing. This is also why America has been on the offensive throughout the world in an attempt to promote freedom. Indeed, prosperity takes root in conflict, and grows during peace. You can see this in any major world power. Britain fought numerous wars, and became a juggernaut. America, after World War II, became the world's largest economy. Japan, after being nuked and bombed during WWII, has grown to be one of the top 5 largest economies. The European Union, battered by wars throughout the ages, has grown into a formidable and prosperous block of nations. All have been in wars to protect interests, and have come out stronger and more prosperous than ever. However, in order for that prosperity to grow, there must be freedom. People must be free to carry out economic activities that enrich their lives, instead of living within a turtle's shell of fear and terror. If ideas cannot be nurtured, or commerce allowed to take place, everyone suffers. It gives credence to what America is doing now, and the British Empire used to do: combating fear and terror in order to provide a framework for people to carry out commerce in security, thus enriching their lives.

A historical context is necessary in order to fairly analyze the world today. War is definitely not an enemy, nor is it a friend as well. It is a means to an end that is sometimes necessary to promote peace and stability, which allows prosperity to take hold. I think it is time that people open their eyes beyond the 1960's and all the peace movements and utopian facades, and see how our world is not much different from the world of history. Violence is at times a necessary evil - and that freedom and stability, regardless of the means, is the best path to global prosperity. As it has been said:

We make war that we may live in peace -- Aristotle