The Liberal Order

Paul Krugman Is Disingenuous

Paul Krugman writes:

Um, economists have known for 45 years — ever since Kenneth Arrow’s seminal paper — that the standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.

Adverse selection is ostensibly problematic in that markets cannot accurately assess individual behavior, so an average charge is imposed on everyone in a given market where adverse selection is present. Because of the information uncertainty, only those who stand to benefit in excess of this average (i.e., the costliest for which to provide the good or service) remain, as the lower cost consumers exit the market. 

Paul's concern is with health care, so his argument is that with insurance the healthy exit the market (the average premium exceeds what they expect to benefit in terms of health care consumption), leaving only the unhealthy to consume health care for which the insurance company is financially liable. This drives up insurance premiums, thus driving out the marginally healthy. Consequently, health insurance premiums have to rise further, again driving out the next marginal block of unhealthy people. And so on until there is no longer a health insurance market.

As Pete Boettke and I discussed in our paper on the Akerlof "lemons" model as part of this volume, this neoclassical view of markets removes any semblance of market competition. MARKETS EXIST BECAUSE OF INFORMATION PROBLEMS, NOT DESPITE THEM.

Even still, if Krugman's concern regarding health care is really about adverse selection, he should certainly be a proud and vocal proponent of genetic testing of everyone, and at least of those seeking to insure against medical problems. 

I doubt that this is Paul's actual concern.

HT: Greg Mankiw

Will and Mankiw on Government Health Care Insurance

You cannot have profits without the potential for losses. In other words, capitalism fails to most efficiently create wealth unless investors and decision makers of all group sizes incur costs for their poor decisions. Because government has no profit motive, its moving into the health care insurance provision will distort the signals of what is desired and at what social cost.

From George Will:

In a survey released in April by National Public Radio, the Kaiser Family Foundation and Harvard, only 6 percent of Americans said that they were willing to spend more than $200 a month on health care, and the price must fall to $100 a month before a majority are willing to pay it. But according to Grace-Marie Turner of the Galen Institute, Americans already are paying an average of $400 a month.
Most Americans do not know this because the cost of their care is hidden. Only 9 percent buy health coverage individually, and $84 of every $100 spent on health care is spent by someone (an employer, insurance company or government) other than recipients of the care. Those who get insurance as untaxed compensation from employers have no occasion to compute or confront the size of that benefit. But it is part of the price their employers pay for their work.
The president says that the health-care market "has not worked perfectly." Indeed. Only God, supposedly, and Wrigley Field, actually, are perfect. Anyway, given the heavy presence of government dollars (46 percent of health-care dollars) and regulations, the market, such as it is, is hardly free to work.
As market enthusiasts, conservatives should stop warning that the president's reforms will result in health-care "rationing." Every product, from a jelly doughnut to a jumbo jet, is rationed -- by price or by politics. The conservative's task is to explain why price is preferable. The answer is that prices produce a rational allocation of scarce resources. 

And from Greg Mankiw:

An important question about any public provider of health insurance is whether it would have access to taxpayer funds. If not, the public plan would have to stand on its own financially, as private plans do, covering all expenses with premiums from those who signed up for it.
But if such a plan were desirable and feasible, nothing would stop someone from setting it up right now. In essence, a public plan without taxpayer support would be yet another nonprofit company offering health insurance. The fundamental viability of the enterprise does not depend on whether the employees are called “nonprofit administrators” or “civil servants.”
In practice, however, if a public option is available, it will probably enjoy taxpayer subsidies. Indeed, even if the initial legislation rejected them, such subsidies would be hard to avoid in the long run. Fannie Mae and Freddie Mac, the mortgage giants created by federal law, were once private companies. Yet many investors believed — correctly, as it turned out — that the federal government would stand behind Fannie’s and Freddie’s debts, and this perception gave these companies access to cheap credit. Similarly, a public health insurance plan would enjoy the presumption of a government backstop.
Such explicit or implicit subsidies would prevent a public plan from providing honest competition for private suppliers of health insurance. Instead, the public plan would likely undercut private firms and get an undue share of the market.

Michael Jackson, A Successful Capitalist

The best analysis of Michael Jackson's death I've read.

An Example of Real Estate Agent Commissions

In response to a question about realtor commissions in the post below, let me use this example.

Suppose there is a home for which I am willing to pay, say, $300,000, and for which the owner is willing to sell for anything over $260,000. To simplify matters, let's say that there is a lump sum commission of $20,000 payable to the real estate agent(s). As long as the gains to both buyer and seller exceed this $20,000 there is a mutually advantageous exchange. In this example, since our difference in values is $40,000, there is a potential exchange somewhere between $280,000 and $300,000. 

Why $280,000 and not $260,000, which is what I noted was the seller's reservation price? Because the seller must remit $20,000 to the realtor as a commission for facilitating the sale. (Again, facilitating is a questionable term to use for most real estate agents as far as I'm concerned.) After paying the $20,000 from the sale of the proceeds, the seller is left with a minimum of $260,000.

Now, at what price the house sells depends on the market conditions. If it is a seller's market the selling price will be closer to $300,000. And if it's a buyer's market the selling price will be closer to $280,000. Let's say that market conditions are such that no side has power over the other. We can surmise that the price will be around $290,000. I receive $10,000 surplus (my value for the home above what I actually paid to own it) and the seller, after disbursing $20,000 to the realtor from the proceeds of the sale, ends up with $10,000 of surplus (the price he received above what he was willing to sell the home).

Now, in an extreme seller's market, the price is $300,000, which leaves me with no surplus and the seller with $20,000 surplus. In an extreme buyer's market, the selling price is $280,000, leaving me with the $20,000 surplus and the seller with no surplus.

Lastly, what if I don't bring an agent into the picture. We'll assume that both agents would have split the commission 50:50, with each receiving $10,000 for their efforts of facilitating the sale. (Again, that's a dubious term here.) In a buyer's market and me not using a realtor, I might just offer the seller $270,000. I'm not brining an agent into the picture, which means the seller is not obligated to pay $10,000 to a realtor working on my behalf. If his agent insists he pay him/her the total $20,000, then that's a problem the seller and his agent have to work out; it has nothing to do with me. Nobody else is bidding on the house and both the buyer and his/her agent are better off selling it to me for $270,000, both walking away no better nor worse off than had I brought in an agent on my behalf who had to be paid $10,000 out of a $280,000 selling price. 

If it's a seller's market it's a little trickier, but still the same. I offer $290,000 and both the seller and his/her agent are no better nor worse off had I brought in an agent on my behalf who is due $10,000 and me paying the full $300,000. The seller still ends up with the $20,000 surplus and his/her agent with $10,000 in commission. The difference, however, is that there may be another buyer lined up with no agent representing him/her and that buyer is offering the full $300,000. Since the listing agent is better off if his/her client sells to the latter, then we'd expect him/her to push for that sale, even though the seller is no better off in doing so. In fact, I may have stellar credit and little expected problem obtaining financing for the home, while the latter buyer's credit or financing may be somewhat shaky. The unscrupulous agent is still likely to push for the latter offer since he/she stands to gain an additional $10,000 (minus the broker's part of the commission, of course). 

Who Actually Pays a Realtor's Commission?

I keep beating my head against the wall when it comes to real estate agents. Here's another.

We are looking to purchase a home.  I don't use a real estate agent, largely because at least half of the agents I meet fail to impress me, and the ones I've used in the past decreased the value of the transaction for me, not increased it. Many are good, smart, and hard-working people, but there are just too few of them for me to spend time weeding out the incompetents for what I need.

Additionally, given the technology available today, the services of an agent are largely unnecessary, especially since I know the areas where the homes I am interested in are located. I therefore don't need an agent to purchase a home.  

Consequently, I deduct 2.5 to 3% from any offer I make in addition to what I would have offered had I used an agent. (My offers are actually a bit more complex than this analysis, but I'm trying to keep it simple.) When discussing this with agents, I am invariably told that I don't pay the commission anyway - the seller does - so it's not fair if I offer less simply because I don't have an agent.

I explain to them that first, much like the incidence of a tax, who actually ends up paying the commission depends on market conditions: in a seller's market the buyer is normally stuck footing more, if not all, of the bill, and in a buyer's market it's the seller. Yes, either way the money is traditionally collected by the seller in the form of a higher price and paid out to the agents, if any, but the selling price varies based on the market, reflecting the incidence of the agents' commission. Ceteris paribus, in a buyer's market the price will be lower than it would be in a seller's market. 

Real estate agents usually stipulate in their listing contracts that buyer's and seller's agents will split the commission in some way, and if the buyer is sans agent, then the listing agent keeps it all. This is a crock. By not having an agent in this buyer's market I am not bringing another mouth to feed to the table. Therefore, additional charges are not being incurred predominantly, if not exclusively, by the seller and doled out to an agent working on my behalf. I am incurring the additional work, writing my own contracts, taking the risks, etc., and I want to be compensated for my efforts, not the listing agent. 

The Glass Is Half Full

At least 57% of Americans aren't totally illiterate when it comes to economics. Unfortunately, they fail to realize that the federal government ALREADY HAS given GM and Chrysler an unfair advantage over their competitors who have thus far resisted going on welfare.

Yeah, me too!

Greg Mankiw goes through the same experience as a potential juror as I did in 1999.

Jury screening began on December 16, and we were told that it would last probably three weeks. You could tell that nobody wanted to be there. There were (I believe) 34 of us to begin with and only about eight were still around by the end of the day. 

My turn was pretty late, so I was there most of the day. My way out of this medical malpractice case simply required me telling the lawyers, after the judge asked if I could be impartial, that a) I had been to law school (only for a few classes as part of a law and economics field), and b) "I don't believe in strict liability for medical malpractice cases." The plaintiff's attorneys both looked up at me and then used one of their preemptory challenges to immediately disqualify me from the pool of potential jurors. I actually want to sit on a jury sometime. 

A "jury of your peers" is an oxymoron. Today it simply means people not necessarily competent to preside as a juror over complex issues that arise as part of a lawsuit. 

Creative Destruction

The end of an era.

Kodachrome, the storied camera film that has documented historic events and everyday lives since the Great Depression, is about to fade into oblivion.
Amid a long-running shift to digital photography, Eastman Kodak Co. said Monday that because of plunging sales, it is ending production of the film it first introduced in 1935. The company said the final batch of the slide film, known for its rich colors and clarity, is being manufactured now in Mexico and that supplies should probably last until the fall.

Here is a retrospective on Kodachrome from Kodak.

Here is one of the many outstanding images taken using Kodachrome.

Once, We Would Have Called It A Scandal

This needs to be spread around everywhere.

In 1921, oil tycoon Harry Sinclair gave several prize head of cattle and around $269,000 to President Harding’s Secretary of the Interior, Albert Fall.

In return, Sinclair got the exclusive rights to drill in an oil field in Wyoming.  Sinclair’s no-bid contract became the Teapot Dome scandal, the most notorious example of political corruption in America prior to Watergate.

Between 2000 and 2008, the United Auto Workers (UAW) union gave $23,675,562 to the Democratic Party and its candidates.  

In 2008 alone, the UAW gave $4,161,567 to the Democratic Party, including Barack Obama.

In return, the UAW received 55 percent of Chrysler and 17.5 percent of GM, plus billions of dollars. 

But nobody’s calling this a scandal.  It’s time we start.

Enforcement In Search of Violation

Public choice economists have argued for decades that antitrust enforcement is invariably motivated by politics, not to promote economic efficiency. For example, firms located in districts where the representative in Congress from that district sits on a committee use this connection to bring about Federal Trade Commission investigations against their competitors. 

Another and more recent example is the Microsoft case. One theory (argument) is that Microsoft's financial success made it an attractive target for antitrust enforcement.G Go after the big money companies until they give. Microsoft never donated to political campaigns or maintained a presence in Washington, DC until after the case against them. Now they do.

Now that the Obama Administration has embarked on a new enforcement path for antitrust enforcement, will we see more of this taking place? Obviously so. Google, Yahoo, Apple, and other highly successful tech companies are now targeted.

WASHINGTON — The Justice Department has launched an investigation into whether some of the nation's largest technology companies violated antitrust laws by negotiating the recruiting and hiring of one another's employees, according to two sources with knowledge of the review.

The review, which is said to be in its preliminary stages, is focused on search engine giant Google; its competitor Yahoo; Apple, maker of the popular iPhone; and biotech company Genentech, among others, according to the sources, who spoke on condition of anonymity because the investigation is ongoing.

Justice Department officials declined to comment about an investigation, as did officials from Google and Yahoo. Apple and Genentech didn't immediately respond to requests for an interview.

The sources said the review includes other tech companies and is "industrywide." By agreeing not to hire away top talent, the companies could be stifling competition and trying to maintain their market power unfairly, antitrust experts said.

"This could be collusive restraint on trade, which could have a serious impact on competition," said Albert Foer, president of the American Antitrust Institute.

Ah. It's not in selling their product that these companies are colluding, it's in purchasing their inputs. But aren't labor unions simply collusive bargaining units? If these allegations are legitimate, why don't the rules apply when the tables are turned?

I like this.

Google has long been known for its exhaustive recruiting process to find people who fit into its culture and create innovative Web technologies. In 2005, Microsoft sued Google for hiring away Kai-Fu Lee, Microsoft's vice president for Web Interactive services, to head Google's operations in China.

Oh, I see. So they collude and agree to not bid talent away from each other and then sue each other for bidding talent away from each other. Sounds anticompetitive to me.

This industry is highly competitive, both in its input and output markets. As Microsoft used to argue, their biggest competitor doesn't even exist yet - it's always the competition that is looming that is the concern. That means you have to have an outstanding workforce. 

But there is also a lot of company enmeshment as well, where your competitor is also in many ways your customer. A good rule of thumb for any business is to not piss off your customers. This may put some pressure on these firms to not bid away the talent from other companies.