Posts Tagged ‘Economics’

A Rational, Self-Interested, Free Market Argument for Socialized Health Care

September 14, 2009

Private health insurance is worthless. Purchasing it does not benefit me.

Let’s say I purchase private insurance. So long as I don’t get very sick, it don’t actually get any benefit – as I could have just saved the money that goes into my insurance and paid for it out of my own pocket (and had the rest as, y’know, actual money).

So, the only way private health insurance could possibly benefit me is if I become so sick that the insurance company would necessarily lose money by paying for my sickness.

So all the people who actually need health insurance are people who are non-profitable for health insurers.

Which leads to a fascinating Catch-22: as any company whose objective is to make profit (all private health insurance) is encouraged to immediately cease to do business with me when it becomes apparent I need their service – because, as noted, I’m not profitable for them.

Even worse, the more sick I am, meaning the more I need their service, the greater their incentive becomes not to provide me with that service.

Furthermore, a free market can not solve this problem through the introduction of honest health insurance companies.

Any market in which an honest health insurance company must compete against a dishonest health insurance company, will have business flowing from the dishonest health insurance company to the honest health insurance company, as interested and informed individuals change their service. However, interested and informed individuals are the ones who need the service, and are thus by definition not profitable (as previously established). So honesty can only ever net a health insurance company reduced profits, ensuring their inability to compete in a free market.

Even a free market in which, somehow, only honest health insurance companies can resist this effect – as it is the nature of free markets to encourage innovation which increases profits, and there is no greater boost for the profits of a health insurance company than refusal to provide health insurance.

Ultimately, this means that I can not trust any health insurance company to actually provide health insurance – while there is a chance that I may receive health insurance if I need it, there is a chance I may not, and the very company which is supposed to provide me with health insurance would conspire that I do not get it.

Health insurance, like all forms of insurance, is a service in which I pay money in exchange for reducing my risk – in this case, my risk of not being able to pay for health care. However, private health insurance does not fulfill this function.

Instead, it shifts my risk – from the risk of being unable to pay for health care, to the risk that my private health insurance company will refuse to do so, leaving me without even the money I would have had if I’d never used private health insurance.

An insurance system that does not reduce risk is a nonfunctioning insurance system.

Furthermore, no amount of regulation can solve this.

Regulation is by its’ nature static and slow-to-adapt, while the market is quick to adapt towards the objective of increasing profits. The government can not be trusted to keep up with a dynamic and strongly motivated private system dedicated to refusing to provide me with service.

Furthermore, successive layers of regulation will increase the system’s complexity, ultimately making it easier for the highly-competitive private health insurance industry to scam me out of providing service, as I must not only contend with the health insurance industry itself but with the additional bureaucratic structures created by the government in an attempt to make public health insurance function.

So ultimately, all government can do to private health insurance is make it even more so a waste of my money.

So I gain nothing from private health insurance. The market can not fix this (and in fact enforces the worthlessness), and the government can not fix this. There is no way a private health insurance company can provide me with a service that I can trust and remain in business.

Ergo, private health insurance is worthless.

Meanwhile, the very problem that most plagues social service – a lack of profit motive which encourages unprofitable spending – is the only thing that can produce a trustworthy form of health insurance. If I need socialized health insurance, the government won’t care! They’ll happily pay the bills at my time of greatest need, not worried that I’m costing them money that they could conserve by simply letting me die.

The government does not need to make money – so they have no reason not to provide me with health insurance.

So I can trust them – socialized health insurance can function to reduce my risk of being faced with health care bills that I can not pay.

So, to reiterate:

Private health insurance: Absolutely, uncorrectably worthless for me.

Socialized health insurance: Accidentally perfectly functional for my needs.

As a self-interested, healthy member of America’s socioeconomic middle class, the only tenable option for me for health insurance is the government.

And I’m pretty sure that applies to everyone else too.

Now the question is: To flowchart this, or not to flowchart it?


A Depressing Analysis of the “Too Big To Fail” Phenomenon

June 25, 2009

Typing ‘too big to fail’ into Wikipedia gets this:

The Too Big to Fail policy is the idea that in economic regulation the largest and most interconnected businesses are “too big to [let] fail.”

The justification of Too Big To Fail (Henceforth abbreviated as TBTF) is essentially that a company can get so big that if it gets run incompetently, it will take down the entire economy, including all of us, and that this is really bad. My definition does not involve this justification. In fact, I think that justification is just an excuse, a distraction away from the real TBTF problem.

We didn’t get the bank bailout, after all, because politicians were concerned for the welfare of the people. We got the bank bailout because the banks asked for one. Politicians made little to no choice in the matter, except to get talked into it by lobbying organizations representing banks (and offering sweet reelection cash).

Which leads us to my definition of TBTF: An organization or group of organizations becomes Too Big To Fail when it gains the leverage to be able to purchase its’ continued existence from a third party even when it’s being run so badly that it should collapse.

The large banks, who essentially bribed the government into saving their asses, qualify for this definition. GM, in combination with their union, the UAW, accomplished the same, making them TBTF. In fact, all my TBTF businesses are also the government’s TBTF businesses.

But there is a difference – my analysis is predictive, because it comes with a theory.

Namely, that once a business is able to purchase TBTF power, that business can only collapse once the third party it’s purchasing TBTF power from collapses.

That is to say, I am predicting that the banks bailed out, and GM, will only be able to collapse once the government is bankrupt and no longer able to save them*.

So we’re looking at a number of supercorporations run by greedy, incompetent people, who can essentially keep getting rewarded for screwing up over and over, each time putting the government in that much more danger until finally the government collapses under corporate dead weight.

I told you in the title it’d be depressing!

Now, you may be wondering, “Well, so, are we all just doomed? What do we do about this?” Well, we might indeed all be just doomed. But the solution would be to cut down the power of any company big enough to effectively lobby the government by itself (like those banks), and to demolish any organizations coordinated enough to do the same (like, for instance, the RIAA).

Can that happen? Probably not. We’re living in a nation so utterly in the thrall of corporatism that the thought of actually controlling the entities that essentially run all our lives has become absurd.

So, yeah. Depressing.

*-It may be possible that this prediction could be wrong and yet the fundamental theory still correct, due to pricing modifications of TBTF power once invoked. In this event, verification of the theory would require much more in-depth examination of political corruption and campaign finance bribery. I hope this is the case, because this scenario offers a way for TBTF corporations to collapse possibly before the government goes with it.

All Economies Are Doomed!

June 12, 2009

So,  it occurred to me today that I am a market failure fatalist.

The systemic and all-consuming flaws inherent to the structure of the free market itself seem impossible to me to overcome, short total economic failure* (that probably includes all the rich people dying violently to clear up the nepotism).

A quick look at some of the problems I see, above and beyond known inherent free market flaws:

  • Self-interested actors function without ethical boundaries whenever possible – constant consumer visibility and vigilance is required to enforce a semblance of correct behavior upon industry decision-makers.
    • It is thus in the interest of said industry decision-makers to stifle consumer visibility, be it through intentional or unintentional process obfuscation, deliberate spread of misinformation, generating conflicts of interest for ideally unbiased individuals (such as scientists), or just outright lying – all to keep consumers from being aware of corporate practices and policies. Essentially, access to information about the market is an extremely valuable thing, but its’ widespread proliferation is essential for proper market function, and that proliferation is a common good which the market can not be expected to provide (further complicating things, the estimated value of that good may well exceed the value of the goods the information actually concerns).
    • It’s also in the interest of market actors to stifle consumer vigilance. Public relations maneuvers to engender ‘trust’ in corporate interests without doubt have the function of reducing scrutiny of corporate practices and policies. Furthermore, it is in the interest of market actors to leave individuals without the very skills required to correctly understand and make decisions based off of market information. Essentially, it is in the interest of the market to avoid empowering consumers, economically and intellectually, to the greatest extent possible.
  • Markets expand and new industries are created through the commercialization of goods and services – a free market can be expected to make a marketplace of anything, provided only that there is money to be had as a result. And no potential industry in the world offers a greater incentive for commercialization than the industry of legislation.
    • Not only does the free market require extensive government intervention in order to function, but the more effective that intervention becomes, the greater the incentive to any given firm becomes to manipulate the laws to remove barriers which restrict profitability. Essentially, as the law takes steps to try to prevent illegal/unethical greed, unethically greedy individuals have more and more reason to manipulate the law such that not only can they not be stopped, but so that the law can be worked to their outright advantage.
  • Economies of scale promote the focusing of greater amounts of relative wealth into successively fewer hands. This ultimately leads to a “too big to fail” problem in which one individual or a small group of individuals gain enough clout to potentially destroy markets, turning them from economic assets to potentially catastrophic liabilities. Mind, also, that this problem is not new to humanity: “Too big to fail” is a problem that has plagued government, and continues to do so to this day (frankly, that makes this problem the most solvable, as we have centuries of experience trying to fix it).
  • The ability to benefit from assets in the short-term, then divest of potentially unstable assets, combined with the concept of limited liability for asset holders, provides an incentive to work to obtain short-term profit regardless of long-term ramifications. What would normally be a high-risk/high-return gamble of assets on exclusive short-term gains becomes a low-risk/high-return gamble when limited liability is introduced into the corporate environment, even without taking into account the ability to ‘cut and run’ from a company you no longer believe you can wring further high profits from. This leads to a scenario in which our economy is collectively encouraged to ‘bet the farm’ (or firm, as the case may be) repeatedly until, inevitably, the bet fails and the economy catastrophically collapses**.

These problems are in addition to the known, and very widely-impacting common good problem, in which nobody is incentivized to develop common goods and/or everyone is incentivized to deplete them. Among other problems, this:

  • Provides incentive towards the destruction of the environment and other unsustainable business strategies.
  • Provides incentive against development of workers, community, and other infrastructure.
  • Provides incentive towards overexploitation of the consumer for profit, a resource which the depression we are sliding into has shown is not an infinitely exploitable resource.

Also, there are all the very human market problems, such as discrimination, nepotism, monopolies, the list goes on.

All in all, well. Markets fail, and we can’t stop them. They are self-consuming machines which render 99% of humanity as engines of enrichment for the phenomenally wealthy and powerful 1%, and even then dysfunctional such that people can figure this fact out every so often and go on a ‘revolutionary’ killing spree of that 1% out of spite.

*-I hope to one day learn or develop a way to overcome these problems, but solutions to them quite evidently do not exist at present.

**-Envision the following theoretical game (Which I hereby dub “Indon’s Casino”):

Each player begins the game with 1 point and may bid any number of points each round. After each player has bid, each player must roll a die with 100 sides – if that die comes up as anything but a 1, the bid is doubled. However, if it comes up as a 1, each player who did not get a 1 must reroll for that bid once for each person who got a 1.

A Story Regarding Ownership

June 5, 2009

Okay, story time!

A house owner comes along hard times and goes to talk to someone who is renting out a room in his house.

The owner says to the renter, “Sorry, I’m kicking you out.”

The renter is necessarily shocked. “What? Why!”

The owner says, “Well, money’s tight, you’re eating my food and taking up space I could use to have a home office, and the rent you’re paying me just isn’t worth it.”

The renter says, “Well, if you’ll give me a few months, maybe I can get a promotion or something and be able to pay you more rent?”

The owner replies, “That really wouldn’t align with my best interests, and the way things are, I’d much rather prefer you out as soon as possible.”

The renter grows desperate, “But without a place to live, I’ll almost certainly lose my job and starve to death! Don’t you care that you’d have my life on your hands?”

The owner says, “I don’t really see how your life is any of my concern – this is my house and I’ll do what I want with it, as is my right.”

So the owner kicks the renter out, and the renter, without a place to live (and before long also without any job prospects), eventually dies of exposure.

The moral of this depressing story? There is none – it’s a parable, I must confess to having planned a bait-and-switch.

What I want you to do now is consider your sympathies between the owner and the renter, and I want you to think of what your position on abortion is.

If you felt for the owner, are you pro-choice, and support a woman’s ownership of her womb and her resulting right to do whatever she wants with it, even if it kills someone?

If you felt for the renter, are you pro-life, and feel that the welfare of those in need outweighs the rights of those with privilege?

It seems strange to me that the american political movement nominally in favor of the rights of ownership is the same one in favor of government control of the means of production (pun extremely intended), while the american political movement that would prefer welfare for the disadvantaged is the same one that advocates that gestation needs to be privatized (and if there’s a good pun there, I intend it too).

So, yeah, just a thought I had. Plus, a story. Everyone loves stories, right?

World Depression 2: This Time, it’s Personal.

May 21, 2009

The world is in a depression.

No, it’s not a recession, except in the inane, technical sense that, say, the Vietnam War was a “police action”. And anyone who tries to tell you otherwise is, at best, comically wrong.

We have an exceedingly high measured unemployment rate despite years of attrition to the workforce leading people to simply give up on trying to get jobs, and very many of those in the workforce currently have jobs paying less than they did before, or need to work two jobs, just to make ends meet.

We didn’t even collapse into this depression from a “Boom” or “Economic Expansion” or whatever the news would have you call it.  Our economy has limped from one near-recession to the next for getting close to a decade before it all fell down – oh, but during those years, well, if you were rich and invested you could make lots of money, so people pretended like the economy wasn’t in any trouble, when in fact quite the opposite was going on. The only “Boom” we’ve had over the past few years has been a boom of self-deception.

Homebuyers deceived themselves into believing that lenders could be blindly trusted. Bankers and investors deceived themselves into believing they could get a free lunch. Consumers deceived themselves into thinking that they could keep up their debtor’s living forever. Americans as a whole deceived themselves into thinking our culture and economy was healthy and even thriving – plus, we thought it was a good idea to elect Bush, twice!

We need to get over lying to ourselves, and lying to each other. We’re in a god-damned Great Depression: Great Depression Two.

No, wait, better idea. We’re in World Depression Two. WWI used to be called “The Great War”. Well, we used to only have one Great Depression – now we have two. So we should take a page from our own history books and retcon the Great Depression into “World Depression One”, while what we’re in now becomes “World Depression Two”.

It should work out well to our advantage – WWI, followed by WWII, presents a simple series with a logical next step: World War Three. It’s a terminology that helped, no doubt along with many facets of the cold war, to bring the understanding of the possibility of another global military conflict within our grasp. We couldn’t lie to ourselves when the prospect of another World War is as easy to understand as counting to three.

Similarly, we can benefit from calling this spade what it is (preferably before we start digging our next hole with it, please). World Depression One could have been a unique event – but now it’s happened twice. We should do our part to ensure that the peoples of Earth can never forget this fact. We need to warn ourselves (because we’re stupid and we forget hella fast) and future generations that this shit can all happen again. We need to make it as easy as counting to three.

Would World Depression Three be the same as WDII? Of course not.  WWI and WWII were each quite different (and in fact, one of the reasons we were blindsided with WDII was our naive assumption that it would be the same as WDI, leading us all to sit pretty in our 80-year-old, neglect-decayed Maginot Line of protections convincing ourselves it could never happen again).

We need to start thinking about what WDIII could be. We need to get paranoid about it. We need to make the understanding of our global interreliance on each other, to the point where greed and carelessness on the part of one of us can spill over to affect all of us, we need to make this understanding ubiquitous to the human condition. We need to start making stirring personal stories about how people’s lives are getting jacked up by WDII that get turned into award-winning movies (preferably before computers drive the industry bankrupt). I’d make a call for movies about post-apocalyptic WDIII aftermaths too, but Mad Max was made some time back, that market’s clearly been there for a while.

Anyway, we should all do our part to stop lying to ourselves and to each other.

We’re in a depression. Don’t let people tell you otherwise.

Universal Commonalities in Competitive Systems and A Call for Lateral Thinking

May 21, 2009

What’s the difference between military strategy, plotting a con game, and business planning?

To a large degree, scale.

That is to say, each of these systems all follow a similar functional model, as each is built around analysis of complex systems predominantly featuring humans and their behavior, with an aim towards the analyst gaining an advantage.

That model is, roughly, as follows:

  • Acquire a target.
  • Analyze the target for vulnerabilities.
  • Exploit vulnerabilities as appropriate (to your advantage and/or the target’s disadvantage)
  • Analyze the actions you took to improve your approach.
  • Repeat.

There are ultimately deep commonalities when it comes to any system primarily characterized by individuals’ attempts to exploit each other and avoid exploitation in turn. And yet, working from the same fundamental dynamic, each of my examples developed in wildly different ways.

In the military world, this dynamic is analyzed to a great degree, and there’s an understanding that this is, in essence, a science dedicated to such dynamics in the context of war – and it’s a science of interest to many sophisticated militaries around the world.

In regards to con games, where the average person finds himself on the defensive end of the model, we find ourselves woefully unprepared. Despite having a wealth of understanding of analysis of such systems in general, we continue to find ourselves nearly defenseless before individuals who take people for hundreds or thousands of dollars, if not even more. We seem impotent to fight the “war” against systemic, illegal exploitation, which in my mind begs the question as to why this is the case – I might explore this in greater depth in the future.

And yet, the most lopsided of the three systems I noted, in terms of preparedness to work within and understand a system of competitive exploitation, is the corporate world. I find this the most fascinating example of the model out of the three, as in our society we find ourselves both the aggressors and the defenders, and yet in so many industries we find the aggressors with an unsurmountable, systemic advantage over their consumers.

How can we, as a people, understand so much about human nature and yet find ourselves so utterly powerless to prevent people from taking advantage of us with it? Is there some form of Marxist-like class structure at work, with the strategists of professional economic exploitation having removed themselves from the populace at large, which remains vulnerable to well-coreographed advertisements and litanies of fine print? Do we simply not realize that we are the targets of our own corporate voraciousness, that the organizations taking our money with military-like precision and effectiveness do so not out of any desire to provide a service, but to take as much of our money as they can while providing as little as they can get away with?

Is, perhaps, our very collective inability to identify and work against individuals who have targeted us for exploitation, itself some form of vulnerability, exploited willfully or accidentally against us?

But to get to the point – I can’t help but wonder if and how we can apply lessons from any one of these exploitation systems to others of its’ ilk. I envision the greatest obstacle there to be one of applicability – how can you apply, say, the lessons of asymmetrical warfare and apply them in the context of spam mailing campaigns of credit card offers? How do we get inside the OODA loop of a corporation that spends millions of dollars trying to preemptively predict, say, our eating behaviors to get us to purchase more of their food?

It’s not an easy problem by any means – but that just means it’s all the more worthwhile to think about it.

The Rich Get Richer: The supremacy of scale in personal finance

May 15, 2009

There’s an economics term called the ‘economy of scale’. It’s what you describe a phenomenon that increases efficiency rate as operational size increases. A good way to describe it (which I saw on Wikipedia, heh) would be “When the amount of money you put into the operation doubles, the results more than double”.

Similarly, there is also such a thing as a ‘diseconomy of scale’, which is something that, when you put twice as much money into an operation, causes you to get less than double the results.

Economies and diseconomies of scale are concepts meant to be applied to the operations of businesses: An example of an economy of scale could be bureaucratic consolidation or the ability to pay off politicians, an example of a diseconomy of scale could be controlling so much of a market that your products end up competing against each other (Or, alternately, CEO pay). It’s all a very complex interplay of things.

Individual wealth features economies and diseconomies of scale, as well, but it’s not nearly as complex. In short, individual wealth is dominated by economies of scale, with only a single notable diseconomy of scale, the effect of which will be discussed.

An easy way to grasp the concept of the economy of scale when applied to personal finance is to buy in bulk. This allows you more return on your investment than you would have obtained otherwise. Now, for most goods, a bulk purchase might not be an obvious choice – after all, you might not be using everything you buy.

This works together with another fact, however: that an investment ‘uses’ itself. You need pay no attention for an investment to grow, though you can (which is tied to our one diseconomy, which I’ll get to in a bit). This allows you to buy investments, things which will make money for you, ‘in bulk’, allowing you to make money faster (and/or safer, in fact) when you have more money.

So you can use money to make yourself more money, and if you double the amount of money you’re using to make money, you can more than double the amount of money you get from it, thanks to our economies of scale: But wait, there’s still that diseconomy of scale.

The diseconomy of scale in personal finance is simple: Regardless of how rich you are, you’re only one person, and there’s only so much time in the day to research and select investments. There are investments you don’t need to research, but they have lower return rates or commission fees.

And this diseconomy of scale would matter, if everyone actually invested their own money. As it happens, though, people both wealthy and poor tend not to do that (as everyone has something better to do than to tend to something that makes money without needing to be tended), but instead rely on experts to make their investments, allowing them to mitigate some of their gains in exchange for a decrease in risk (admittedly, the existence of a field of expert finance is a gigantic waste of time, but that’s a subject for another post).

So, uh, yeah. In the event you were not sure, wealth begets wealth, and wealth begets wealth exponentially faster based on the wealth you have to start with. There’s the name and description of why the rich get richer.

The economy of scale. Not as economists typically use it, in regards to businesses, but applied on a personal level.

The Sales Tax of Credit.

May 12, 2009

Credit is by its’ nature a risky venture, and it has launched a regular industry built around managing that risk properly.

One of the big solutions the industry has come up with, is to increase the ‘price’ of credit as the risk increases – this means that for any given level of risk, you’re likely to make enough from those who pay you back, to make up for the money you lose from those who don’t.

This means, in essence, that anyone successfully paying off their debt, is also effectively paying off the debt of everyone at their risk level who did not pay off their debt.

It’s essentially a surcharge added to all of your credit transactions – a form of market-imposed sales tax.

But, as sales taxes go, the ‘tax’ on credit is rather unique: Because this surcharge increases as the risk of a credit transaction increases, this surcharge ultimately functions as a recessive sales tax.

This leads to two interesting conclusions:

-Point the First: In political arenas, welfare and other social support networks are often derided due to their costs. Yet, society already publicly bears the cost of the most expansive, market-provided support net (being credit). Moreover, the price of high-risk loans given out to people in dire need is paid by precisely those least fit to pay it: People taking out high-risk loans because they are in dire need. So it turns out we already kind of do have welfare – and it’s already very expensive and very ineffective, both by its’ very nature.

-Subpoint A: I would suspect that high fees and interest rates on loans would increase the default rate of a loan, leading the nominally precautionary measures by credit institutions to make a profit to ultimately function to decrease the rate of individuals successfully paying off their debt. Oops!

-Point the Second: When the government does this, it’s called “Private Profit and Public Risk” – I remember that from when I took my Bailout 101 class from the major media outlets. But apparently, when the market does the same thing, people neither notice nor care.