Categories
economics

Some great explanations of inflation

If you’re confused about the arguments that have been floating around about inflation, economic growth, and prosperity in general, I recommend this post over on econlog. This is part of an ongoing review of Murray Rothbard’s “For a New Liberty” published back in 1978 (available online at The Mises Institute BTW). You can get concise critique of the suddenly popular Keynesian approach to economics plus a critique of that critique. The Austrian business cycle theory is explained pretty well and I think that is a service in and of itself. I wonder when people are going to rediscover this theory that as been right over and over again…

Some of the review is a bit dense, but once you get into the body it goes pretty smoothly. I find that the comments are especially educational. Caplan quotes tyler Cowen (from marginal revolution), someone that I normally bow down to. But in this case, it doesn’t make much sense to me. There is a devastating critique of Cowan’s “banana” theory in the comments. This is good stuff and fairly approachable.

Austrian business cycle theory has been prover correct over and over again in the past. It is currently predicting a substantial inflation to come from the government’s actions. Ignore it at your own risk…

Categories
economics medical

I have an MRI appointment! and more on health costs

At long last I am going to have an MRI. My doctor wasn’t getting anywhere with the insurance company, so he wanted to arrange another visit to get a more particular differential to present to them. Of course, that meant that there was going to be another charge for a visit, plus probably more lab work etc. There wasn’t much difference between what the insurance company was going to pay (if they agreed to it) and what I’d pay out of pocket in the first place. When you added another doctor’s visit just to get the insurance to cover it, I was going to end up paying more. So I said screw it and scheduled one.

Just google for “low price MRI” and you’ll pull up a bunch of sites to help you find a good price. It turns out that AZ and Vegas have some of the lowest prices. At $350 for an MRI without contrast, it might make sense to fly out there to get one if you need a bunch done.

Mine cost me $800 because I needed one with and without contrast. That’s still pretty good, and still the same or less than using my doctor’s usual place with my insurance. It pays to shop around! Now if only the insurance companies would pick up on this we might get somewhere on prices…

Here’s a website and blog fighting the fight for lower cost medical care. It’s called Out of Pocket, and I hope many more pop up like it!

Categories
economics

AIG

This is getting ridiculous. I can’t take any more of this “outrage.” First off, those bonuses were in the contracts of those employees. When you negotiate a contract, you try to get as much as you can, who among us wouldn’t have signed those contracts? Yes, it looks like they were stupid ones for AIG to sign, but they did. To my mind, it is symptomatic of a badly run company, as is going into the red by billions and billions of dollars.

So the employees signed contracts that were beneficial to them. Is it their fault that AIG got federal money? It does sound like one division (which did get bonuses) was largely responsible for the collapse of the company. But here’s the thing, absent federal bailout money, those people would not have gotten any bonuses because AIG would have been in chapter 11. Bad decisions usually end up hurting the people that make them.

The bailout money was designed to keep AIG running and part of that is honoring their contracts. Those people do not deserve they money that is in their contracts, but it is in there. A deal’s a deal. This bailout is what allowed the contracts to be paid, they are what prevented those people from being thrown out. When you prop up failed businesses, you end up being saddled with their bad decisions, why is this a surprise? It is exhibit “A” for why we, as taxpayers, shouldn’t be involved in companies like this, they pay amazing amounts of money to people that are first class screw ups.

Instead of the government owning up to their bad decision, they are outraged, OUTRAGED that money is being paid to the very people that got the company into that situation. Now they are going to take back that money by force. If the government didn’t want money going to people that didn’t deserve it, they should have allowed AIG to go through bankruptcy. One of the usual occurrences of chapter 11 proceedings is to remove management, remove or redo debt, and redo contracts.

What a bunch of buffoons we have in DC. What scares me even more is the general idiocy of the public at large. Yes, those people do not deserve to be paid, but why aren’t we angry at the people that bailed out the company instead of letting it go under? The government is what prevented just desserts from being distributed to the people that screwed things up.

Categories
economics medical

How to keep healthcare costs down

My medical issues have been very illuminating. I need some MRIs and the insurance company is balking at paying for them. There’s a chance that they may come around, but an even better one that they won’t. But I need those MRIs, so what do I do? Like anything else I might buy, I’m shopping around.

I asked the regular place my doctor uses for MRIs what they charge for a single one. It is a hair under $3000. Ouch! Independent labs look like they are charging anywhere between $2000 and $2500 but I’m not sure that my insurance will be accepted at those places. That’s a little better but still… I have an insurance plan that pays 80% while I have a 20% copay. I’m going to ignore the deductible just to make the calculations easier. So, if my insurance does “pay” for the MRI, I would be out 20% or $3000, that equals $600.

What a lot of people don’t know is that if you pay up front, you can get big discounts. My doctor’s regular place will give you a 20% discount. That’s not bad, but there are much better deals to be had. With a little looking around, you should be able to find a place that will do an MRI and have a radiologist read it for you for $650 (without contrast stuff being injected into you, that’s extra), maybe even less depending where you are.

Of course that got me thinking. It is well known that insurance companies only pay a small percentage of whatever bills they get from medical establishments, but the copay is determined by the full amount. I assume that the $650 that the companies charge for cash payments is pretty close to what they end up getting paid when they jump through all of the insurance company hoops. In other words, all of those “hoops” cost the office money to process and there is a the issue of waiting for the payment to come through. After you subtract those costs the office probably clears $650 even though the insurance company eventually cuts them a check for something closer to $1000.

In any event, I know that $650 is a lot less then thousands of dollars. Why doesn’t my insurance company allow me to negotiate the best rate I can, pay for it, and then reimburse me. Let’s look at the typical dealings. I go to the MRI place and get one done. They charge $3000 to my insurance company and get some proportion of that. I’m thinking it’s going to be in the $800 to $1000 range, but I’m just guessing. I then have to pay a $600 copay. How about this alternative universe, I go to the MRI place and negotiate a price of $650 if I pay up front. I then submit that claim to my insurance company and they reimburse me my 20% copay of $130. The insurance company pays a total of $520.

What just happened? The total cost of the procedure and the work involved has just dropped. It’s true, I have to do a little more legwork and I have to wait to be reimbursed, but my total cost has gone down, the insurance company’s payments have gone down, and the provider gets their money much quicker.

If this model became popular, you can bet that competition would drive down the prices, just like it does for everything else. Making the consumer initially bear the entire cost of the procedure is a sure fire way to lower the overall cost of medicine. I know, there are some problems with this when you start to talk about really big things, but as a basic framework, it is a good model. One of the primary reasons that healthcare is so expensive is because consumers are so insulated from the costs. Consumers are likely to order every test and procedure without once considering the cost. That will make the price creep up no matter what kind of service we’re talking about.

Health insurance is so weird, if it were more like home insurance, everything would be much less expensive. It may seem counter intuitive to people, but paying up front would mean lower prices, insulating ourselves from the pricing mechanism is not in our best interests.

Categories
books economics

Sign of the times

Sales of “Atlas Shrugged” have tripled over this time last year. I wonder if one of the effects of this administration will be to make libertarianism cool again…

Categories
culture economics

Nations are not "virtuous"

A friend’s facebook status asked if there were any virtuous countries. He’s still smarting from his visa issue and I believe that the state department has shattered his image of the US.

One obvious way to get around his disappointment is to point out that the consulate in Ghana is not the US government. We could take that another step and say that the government is not the nation. I’m going to go ever further and point out that there’s no such thing as a nation.

No, this is not some sort of metaphysical investigation… When I say there’s no such “thing,” I mean exactly that. A nation is an idea, not a breathing, thinking thing. Only people can be virtuous, not ideas. The nation is made up of hundreds of millions of people. What you see as a nation “doing” is in reality a person, or maybe a group of people doing something.

We should always think whenever we ascribe human attributes to ideas like nations, religions, and any other group. Those things are only ideas. We all know this, but all of us (including myself) act as if those ideas are capable of thinking and capable of rational action. Blame people, not ideas for the world’s shortcomings.

Categories
economics free market

More wisdom from the Austrian school…

The story is told that Ludwig von Mises was once asked, “Do you mean to say that the government should have done nothing during the Great Depression?” Mises responded, “I mean to say it should have started doing nothing long before that.”

The point being that it isn’t enough to “do nothing” once a bad situation comes up. I certainly advocate non-intervention in market processes but the important thing to remember is that there hasn’t been a major economic “crisis’ that wasn’t fueled by government distortions and incompetence. I may sound like a broken record, but it’s true. Systematic collapse and long term depressions are not possible without government meddling.

HT FEE

Categories
economics

Hayek my hero

This is from a Barons article. Hayek is probably one of the best known of the so-called “Austrian” school of economics. That school of thought is routinely belittled by mainstream economists because they do not rely on mathematics despite the fact that the Austrians were the only ones able to predict and diagnose the great depression, the recession of the late 70’s early 80’s (which is still worse than today’s mess), and the current mess. What most mainstream economists miss is the reason that the Austrians don’t use mathematics. The reason is summed up beautifully in Hayek’s quote.

“When Friedrich Hayek won the Nobel Prize for economics in 1974, he embarrassed many economists by noting their failures. Speaking in the midst of a great inflation that caused a greater loss of stock-market wealth in the U.S. than the Great Depression, he noted that the inflation was “brought about by policies which the majority of economists recommended and even urged governments to pursue.” He added, “We have indeed at the moment little cause for pride: As a profession, we have made a mess of things.”

Hayek pronounced the failure of economics to be rooted in a “scientistic” attitude that employed the habits and methods of physical science where they were not appropriate. He faulted particularly, “the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level.”

Hayek conceded that there was quantitative evidence for the assertions and beliefs adduced by John Maynard Keynes and his followers, but he warned that the evidence was not good enough: “In the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process…will hardly ever be fully known or measurable.”

Economists, Hayek continued, “happily proceed on the fiction that the factors which they can measure are the only ones that are relevant. The correlation between aggregate demand and total employment, for instance, may only be approximate — but as it is the only one on which we have quantitative data, it is accepted as the only causal connection that counts. On this standard, there may thus well exist better ‘scientific’ evidence for a false theory, which will be accepted because it is more ‘scientific,’ than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it.”

Hayek, of course, was on the side that had less quantitative evidence.”

He had less quantitative evidence, but a lot more wisdom.

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Categories
economics free market politics

Hate to say I told you so

GM is looking for more money. Let them go into bankruptcy already. People are going to get fired in any event, we should allow the things that are worth something to be sold and the rest go away. Why are we being saddled with keeping this failed corporation alive?

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Categories
economics

Profit is important!

Another repost from my website.

The real story behind profit

by Isaac Crawford

      The concept of profit is a nebulous and contentious one with many people. Ideas such as “profit is exploitation” and “profit is never earned” are very common, but they show a real ignorance of what it is and what it accomplishes.

      One reason for this is the confusion between what accountants and economists consider profit. Economists usually trumpet the virtues of profit, but everyone thinks of accounting profit. What they see is how someone else (perhaps their employer) gets a “profit” and the company got it through their hard work! Surely this is unfair, if someone does the work, they should get the “profit” from that effort.

      To understand what economists call “profit”, let’s look at why the worker continues in this “unfair” arrangement. The worker needs money for a variety of reasons, so work will be required (we’re going to ignore government hand outs for the time being). He looks at the available jobs, applies for some, and some of them offer to hire him. Let’s look at some hypothetical examples of job offers:

1) The first job offers him a yearly salary of $27,000. It is a fairly undemanding (for him) job, regular hours, no overtime, and is close to where he lives.

2) The second job offers him a position that pays $52,000 a year. It is a management position and there are a lot of responsibilities and pressures. It is also requires a bit of a commute.

3) The third job pays $107,000 a year. He would be a company rep, traveling extensively (3 1/2 weeks a month), endless meetings, phone time, and will require 60-70 hour weeks in order to get everything done.

4) The fourth job is a commission one. There is no guaranteed pay, but people are earning anywhere between $40,00-$450,000 a year. Like all commission jobs, there are long hours, and there is a lot of effort required in order to make a living. The best performers are putting in 60-70 hours a week and put up with endless rejections and abuse from so-called leads.

      So which job does he take? Here’s where the concept of economic profit comes into play. Obviously, the money that each job offers is only one of the criteria that the worker has to think about when trying to choose a job. When you are in the accounting mindset, the only thing that matters and is counted is the money. Everyone engages in economic reasoning even if they don’t realize it. Cost benefit analysis is the technical jargon for what happens. The worker weighs the amount of the benefit (in this case we’re assuming that it is mostly the salary and what it will allow him to do) vs. what it will cost him. Economic cost (or opportunity cost) is the next best thing you give up in order to get whatever it you want. For example, if the worker values time with his family, he will have to weigh the “cost” of seeing them less for more money. Obviously, there isn’t a way to quantify that exactly, but we can get a rough idea of how much he values it by the choice he makes.

      If he picks the traveling rep job, it is obvious that he values the $107,000 more than time with his family. On the other hand, if he picks the management job, it becomes clear that he values the time with his family at more than $107,000 a year. This is called revealed preference, and it is a powerful way of seeing how people actually value things as opposed to how they say they value them. There are endless situations and personal reasons for picking any particular combo of costs and benefits. Imagine if the guy hates his wife but can’t divorce her, cannot stand commuting to point of it affecting his blood pressure and health, has a child that needs specialized (and expensive) medical care, has a child that has very time intensive needs (retardation, handicap, etc.), or any number of other situations that could make him choose one job over the other. There is no way to know what kind of decisions people face, so it is best to allow them to make the decisions that are best for them.

      So the worker makes his choice. His economic profit consists of the benefits he receives vs. the cost he incurs. The salary is a big part of that, but do not get too hung up on the numbers. What is important is what he will do with the money, not the money itself. He works in order to do these things, not to make money. Other things that may also be a benefit include liking the job, having a sense of accomplishment, prestige, power, etc. The costs are spread across the time spent, aggravation, time away from the family (although this could be a benefit for some), stress, etc. The biggest cost is what else he could be doing. This is what is being given up in order to work at the job, it is the opportunity cost. As long as the worker thinks the job is “worth it” and there is nothing better that he can do, he will continue in the job. He feels that he is getting more than he giving up.

      This does not mean that the worker loves, or even likes his job. It only means that he feels that he is getting as much benefit out of a job as he thinks he can get. Obviously, the more “profit” he gets, the more likely he is to like his job. This can happen by lowering of the costs (less stress, shorter hours, shorter commute, etc.), raising the benefits (more money, more prestige, etc.) or a combination of the two.

      That is a long winded way of saying that workers profit from having a job. The nature of this profit can be seen by observing what the worker can do (or feels in a positive aspect) with the job that he couldn’t without it. if there were no profits to be had, if the job cost more than what he would get, he would stick with the “normal” unemployed condition. A job that had no economic profit in it would make him worse off than having no job at all.

      OK, that is all well and good, but c’mon, the company still makes money off of the worker. That still isn’t “fair.” With people, profit can take all sorts of forms, a nicer home, a new car, sending the kids through college, not starving, etc. Companies take profit in one form only, money. Just as the worker will not work if there is no profit for him, the company will not employ someone if there isn’t any benefit to them. It’s pretty simple, each side has to profit in order for the transaction to take place.

      The interesting thing is that there are opposing forces at work. Each side wants as much profit as it can get. Sometimes there is no agreement to be had. The company cannot hire (or continue to employ) someone and achieve the profit that they want. The employee is not willing to go as low as the company wants. The worker can go look for another job. The company has four options:

1) Accept lower profits.

2)”Outsource” the labor to a place that has lower labor costs. This could mean moving the work from Dearborn to the Philippines or from Dearborn to Tennessee.

3) Invest in machines (capital) that can do the job instead.

4) Go out of business.

Just as with workers, companies have various reasons to want/accept certain levels of profit. Pressure from stock holders, trying to attract investors, or just wanting a good return on the money you are putting on the line are all common reasons for picking a profit point. It is important to understand that option #4 is always available, and a company would rather be “unemployed” than to operate in a way that brings in a negative profit, or a profit that is less than the alternative use of the money on the line (opportunity cost again).

      There are many people that think that things are often skewed so that the company profits (in all ways) much more than the employees. This is most noticeable in developing countries. The thing to keep in mind is that the workers are still enjoying a profit, if they didn’t they wouldn’t work there. Along the same lines, if they thought they could do something else with more profit in it, they would do that instead. In short, the company is offering them their best alternative. Remember, there has to be profit on both sides for the exchange to happen. If a company is facing the decision of where to open a plant, it will go with the place that, all things considered, will maximize the profit for the company. The workers pick what will maximize their profit and the company does the same. While some may feel outrage that there is more profit on one side than the other, remember that we are talking about profit. In the places where this sort of thing happens the most, the people are happy to be able to profit at all. Development economics is complicated (if it wasn’t, we wouldn’t see so much poverty around the world), but this is the very very short version of how things improve even when there is a great disparity of profits at the beginning. The basic idea is that even if the company takes all of its profits back home, the people working have to do something with their profits. They will purchase things, so people have to provide those things. The profits from the first job lead to profits in another and then another… I will devote another essay to this, but for now take my word that profit begets more profit. It is a process that takes time. But as long as we are talking about profits, everyone (company and workers) are made better off.

      The same concepts hold true when the situation is reversed. When a consumer is trying to decide whether to buy something or not, they weigh the cost and the expected benefits. If they think the product is “worth” the price, they will buy it. That is, if they feel that the benefit is worth what they have to pay, they will pay the cost in order to enjoy that profit. For those of you that are still stuck on the idea that it is “unfair” that a company makes a profit off of the labor supplied, let me ask you this. Is it fair that someone can pay $800-$900 for a really nice set of pots and pans for a kitchen and use them to run a successful restaurant? Those pots and pans may generate $30,00-$40,000 (or more) and yet the company (and indirectly the workers) only got $900! There are endless examples of consumers buying a product and benefitting tremendously in the financial sense. Cars, tools of all sorts, haircuts, clothes, they can all lead to better financial outcomes for the consumers that buy them, is that fair? Should we try to even everything out?

      That would be a bad idea. You see, everything that is bought or made, every job that is performed, every service rendered, is all done for the sake of economic profit, or at least the potential for it. If we limit or try to lessen the amount of profit made by anyone, workers, consumers, companies, we will have far fewer options. In addition, all innovations and new inventions have profit as their primary motive. With a little thought, it will be easy to see why any sanctions to “punish” companies enjoying “excess” profits will also punish workers and then consumers. Successful companies are the source of employees’ profits, and the products that the two of them produce are the source of consumers’ prfoits. In the big picture, all of these categories are the same. Every company is a consumer, every worker is a producer, and every consumer is an employer. You cannot affect one without affecting the others. If you look at countries that limit profit through taxation and other government meddling, you will see far less innovation. When was the last time you heard of anything new coming out of France?

      Profit is what makes things go, it is the reward for offering products, labor, or satisfying a demand. Without profit, or the chance of profit, we have few products, no jobs, and little happiness. Without the possibility of a good profit, why would people ever risk the money they had in order to make a new product? Why would companies try to fill the gap when there is a want that is not being fulfilled in the market? Why would anyone work when they could sit around the fire and enjoy the great outdoors all year long? Economic profit is necessary, without it, nothing happens. It is difficult to ascribe a definite good/bad label on accounting profit, but economic profit is unambiguously good for both the immediate beneficiaries and society as a whole.