Seriously, I love competition and market-driven solutions, but if you get shot you don’t have time to compare your choices and pick the most efficient hospital.
…
You want competition? Let’s try to compete with some of the public systems that work, let’s compete toward making it more cost-effective to do business in America.

Source

My response:
This is the typical rhetorical device used in these arguments. You justify the third-party payment system for normal health care by taking a catastrophic event and say that it needs to be covered by a third-party payer.

What we call “health insurance” in this country is really two things. First, it is guard against catastrophic medical events, and it doesn’t do a very good job at this because it’s not a true insurance product (see next point). Second, it is a stupid third-party payment system for normal, predictable, elective medical events. What is the value-add for me to pay $x/month to a third-party which then pays about 30% less than $12x/year to my health care provider for my annual physical? There is no value-add because there is no reduction of risk (which is the point of the premium on insurance).

If you want to solve the price inflation problem, you need to do two things. First, you need to separate catastrophic medical event insurance into its own insurance product, and you have to have individuals pay directly for predictable health care items, some of which will allow for lower premiums on their catastrophic insurance because they are correlated with lower chance of catastrophe (just like how your car insurance works). Second, you must remove the tax credit on health “insurance” premiums. This is always marketed as a benefit to the consumer, but it is not; it is a benefit to the insurance industry because their premiums are cheaper to the consumer without affecting the insurance industry’s profit margins. This effectively increases demand without them lowering their prices. It’s a brilliant way for them to rake in the cash.

Wait, who is Dennis Kneale? Yeah, that’s what I said…

I can’t find the video of exactly where he proclaims that the recession is over, but he did. Here’s a clip where he tries to drum up support for his position, and almost everyone on the panel tells him (politely) that he’s bonkers:

Here’s what I think, though. He knows he’s bonkers. He’s a nobody. I had never heard of this guy before, and chances are you hadn’t either. He, or his marketing team, recognized that he can drum up some ratings by making this ridiculous proclamation (with which even the most optimistic of Federal Reserve projections disagree).

Then, the blogs called him out on it, as blogs often do. He, or his marketing team, then realized he had struck a publicity gold mine. So he stoked the fire:

Yes, friends. He googled himself in that clip.

Shut Up, Already

This guy is not an idiot. There is no way he believes what he’s saying. Unemployment will continue to increase throughout AT LEAST this quarter (Fed says even into next year). That means fewer people have jobs. That means fewer people can buy goods. That means company revenues drop. Et cetera. To say that the recession is over is to suggest that unemployment has long since stopped declining and has recovered enough to support a recovery of spending and prices. That’s fantasy, and there is hard data (um, from Thursday) to prove it.

Job losses increased

He’s not even worth talking about. To do so (like I have in this post) just gives this nobody exactly what he wants… publicity.

Instead, we should just chalk this up to CNBC continuing to increase its irrelevance and horrible track record of predicting anything of value.

Forty years ago in 1969, if you had earned $1 from working hard, you could have gone out and bought $1 worth of goods or services. Or, if you were prudent and decided to save it until you retired in 2009, you could go out and spend that same $1 to buy 17 cents worth of goods! (There are many measures of inflation. This is based on the Consumer Price Index (CPI) which is the most commonly used and the most relevant to the example.)

Inflation is Difficult to Understand

Inflation is a difficult topic to understand for many people, because the nominal value of the money doesn’t change. That $1 doesn’t turn into a dime and 7 pennies. It’s still a dollar bill after 40 years.

The easiest way to understand it is to think that you could buy the same amount of goods with $1 in 1969 as you can with $5.87 in 2009. So if you think of things that you can buy today with $5.87 (e.g., a sandwich from Subway), you could buy those same things in 1969 with only $1 (this assumes the value of the good hasn’t changed over those 40 years; you get the point, though).

Personal Responsibility

It’s hard to save $1 today, knowing that when I want to retire in 40 years that $1 will only be worth 17 cents. The great things we do to invest our money and make it grow are partially a way to escape the the government-induced devaluation of our money. In fact, low-yielding investments like deposits in normal savings accounts usually earn interest at a rate below inflation! That means, the numbers in your account may increase, but your investment is guaranteed to lose real value (meaning you are guaranteed to be able to buy fewer goods with your money after the investment than before the investment).

For people who understand this, they realize that they must take on risk in order to avoid devaluation of their savings. They must invest in vehicles that have a chance at outpacing inflation, like stocks and bonds. Investing in these things is not bad; in fact, it is good. But as any financial planner will tell you, the key is proper diversification not only across stocks but across your entire portfolio of asset types. Meaning, you should have a certain percentage in cash (savings or money market account), a certain percentage in bonds, a certain percentage in stocks, etc. The key point here is that people who understand inflation will adjust those percentages for riskier investments upward, beyond where they would have decided was optimal without inflation.

Not Everyone Agrees

I recently got into a bit of an economics argument with someone on Slashdot, because that’s what I do instead of watching the idiot tube. He, as do many modern politicians, believes that monetary inflation is necessary (even though it wasn’t possible before the dollar left the gold standard).

Let us break down the ill logic.

$10 BOY deposit

$9 = $10 * (1.0 – 0.10) => value of $10 after one year with -10% change in price level (deflation).

He has already screwed up. You have to realize he is talking in real terms, not nominal terms. In other words, he is stating $9 as the inflation-adjusted value of $10 after one year. But he says that a deflation of 10% (which is ridiculously high, by the way) causes $10 to be worth only $9, a 10% drop in purchasing power. This is exactly what inflation of 10% would do, not deflation. If prices all around you have fallen by 10%, then your $10 can suddenly buy more. The inflation-adjusted value of $10 after 10% deflation is $11.

$1 = $10 – $9 => nominal loss in value.

That is not a nominal loss in value. There is no nominal loss. That would be a real loss (here is a Wikipedia article explaining the difference). But, as I explained above, he’s not even correct about there being any loss, nominal or real! There is no nominal change, but there is a real increase in value of $1, because the saver can now buy what used to cost $11 last year with only $10.

We’re only 3 lines into his math and he already has 2 serious problems.

-9% => the bank’s advertised APR.

As we’ll see later, he us using a negative interest rate of 9%, based on his previous faulty math.

$9.10 = $10 * (1.0 + -0.09) => EOY nominal value, what’s in your account.

11% = $9.10 / $9.00 => your real return.

Simplifying somewhat, a real return Nominal – Inflation. If inflation is 4% and nominal interest is 7%, the real return is 3%. If inflation is -4%, and nominal 7%, the real return is 11%. To get a real return of 3% when inflation is -4%, nominal is -1% (because 3% = -1% + -4%).

That’s the math: the bank pays you a premium over the prevailing changes in the price level — a real return — in exchange for your money. The problem is that you, as the holder of the original $10 in my example, are better off not depositing your money. If you accept the bank’s deal, you’re left with $9.10. If you ignore the bank, you’re left with $10. And $10 beats $9.10 any day of the week, come inflation or deflation. Most people figure that out pretty soon when faced with the prospect, and banks quickly become unable to attract deposits. Etc., etc.

This is utter silliness. The first problem with his argument is that no bank offers an interest rate of 7%. The real return on most savings account is negative. According to his argument, no one would ever deposit their money into a bank account because the inflation-adjusted return is negative.

He is attempting to say that banks would need to offer an interest rate of -9% in order to give a small premium (1%) over deflation. Again, though, he is screwing up his understanding of deflation completely. Deflation increases the value of money, not decreases it. In order to offer a small premium over deflation, all you’d have to do is offer an interest rate of 1%. So if deflation is 10%, then the real value a dollar stuck under one’s mattress is $1.10 after 1 year, and the real value of a dollar stuck in a savings account at 1% is $1.111 ($1 x 1% savings account interest x 10% deflation).

This isn’t rocket surgery. The inflation/deflation situation is largely independent of interest rates. The bank must compensate depositors for use of their money by providing an interest rate. Meanwhile, inflation and deflation will occur on an economy-wide level regardless. Depositing your money in a bank account does not magically remove it from the effects of deflation (or inflation).

The truth is, more money would flow into the banking system in a deflationary scenario, because depositors know they could spend their $10 today for $10 worth of goods, or wait a year and be able to buy $11 worth of goods. And this is the true (indirect) impact on interest rates. Since there is so much more deposited into banks, banks need to compete less to get the capital they need, so interest rates will fall (but that’s okay).

Real Deflation Happens Anyway

What is so odd about this fellow is that he is clearly a modern Keynesian, but doesn’t seem to agree with Keynes at all when it comes to the causes of inflation/deflation:

There is no such thing as real deflation from increases in efficiency. Change in the price level, inflation or deflation, is a monetary phenomenon.

Keynes believed only one factor of inflation is the money supply.

Anyway, the suggestion that there is no real deflation from increases in efficiency is just bizarre. The easiest way to debunk this nonsense is to transform prices from dollars to hours worked. In other words, a loaf of bread costs about $2 today and perhaps 34 cents in 1969, but if there is no real inflation-adjusted price change, then the number of hours (on average) an American must work in order to buy that loaf of bread would be the same.

But that isn’t what we see. The truth is that buying a loaf of bread today requires much fewer working hours than it ever has before. This is due to two things, both if which are the same thing: we are more efficient. We are more efficient, therefore we are paid more than we used to for every hour we work. We are more efficient, therefore it costs less to produce the same loaf of bread. The important part is the last part. Costs to produce the same goods decrease due to efficiency. That should cause prices to fall, or deflate, at a steady, gradual rate. But it’s hard to see this real inflation-adjusted price deflation because the money supply is manipulated in such a way that nominal prices continue to increase.

In other words, the numbers quoted by our government for inflation are misleading. If we have 5% price inflation due to monetary policy, we think that means that we “should” have been able to buy $1 worth of stuff for $1, but inflation requires us to spend $1.05 in today’s dollars for $1 worth (in last year’s dollars) of stuff. But that assumes that there would have been no price change without the monetary disturbance, and we know in a healthy, competitive, capitalist economy, prices should gradually deflate. So the comparison for inflation is not a price change of zero, it’s something negative. If, without monetary manipulation, prices would have deflated by 5%, then a 5% reported inflation is actually a total inflation of 10% (+5% inflation to counteract the would-be -5% deflation to bring the change to 0, and then 5% on top of that to bring the year-over-year change to +5%)!

I don’t claim to be an expert in economics, by any means. But even rather intelligent people on Slashdot (where your average joe has above-average intelligence, to begin with) can’t even keep inflation and deflation straight in their heads. How can we expect the general public to understand this? Meanwhile, their wealth is being eroded because money, which is supposed to store value in a constant manner, continually decreases in value due to the government’s monetary policy. The American people may not understand this phenomenon, but they nevertheless feel the effects of it when they’re trying to figure out whether they can retire.

One of America’s most influential conservative judges, Richard Posner, has proposed a ban on linking to online content without permission…. “The bloggers are parasitical on the conventional media… They copy the news and opinion generated by the conventional media, often at considerable expense, without picking up any of the tab. The degree of parasitism is striking in the case of those blogs that provide their readers with links to newspaper articles. The links enable the audience to read the articles without buying the newspaper.”

More here.

Both of these guys are Republicans, and the left of course is eating this up. Some Republicans run on social conservative issues, and regardless of whether these two ran on those issues, they are branded as hypocrites as a result.

But the left is completely missing the point. The hypocrisy isn’t aimed only at the Republicans; it’s with the big government types in general.

This is evidence of only one thing: government officials are human, too. The left (which I think often includes the Republicans) constantly elevates the federal government above the capabilities of mere mortals. Individuals can’t save for retirement, or pay for their health care, or find a job, or donate to charity, or structure a curriculum. Only government is capable of doing these things. What they forget is that mere mortals make up this government. Ben Bernanke is a smart guy, but he’s just a guy. Barack Obama is charismatic, but he’s just a guy. These people have the same vices, faults, influences, failures, defects, and emotions that anyone else has. Yes, they have risen the political ladder, but most of us will admit that with rare exception public service does not attract the best of the best.

These sex scandals are not an opportunity to take cheap shots at the other side. They are an opportunity to remember that government officials are not gods; they are humans like we are, except we have given them the power of gods.

Many bloggers have accepted perks such as free laptops, trips to Europe, $500 gift cards or even thousands of dollars for a 200-word post. Bloggers vary in how they disclose such freebies, if they do so at all. But now the Federal Trade Commission is paying attention. New guidelines, expected to be approved late this summer with possible modifications, would clarify that the agency can go after bloggers — as well as the companies that compensate them — for any false claims or failure to disclose conflicts of interest.

Well, thank Zeus that the federal government is finally doing something about this. Thank you, FTC, for saving me from my own incompetence. For years I have been unable to discern intelligent, thoughtful, investigative journalism from worthless spam posts. But I believe you can, FTC! If there’s one thing I have learned about government in my lifetime, it’s that it is much more capable of figuring out this sort of thing than I am. And what more important topic is there than regulation of reviews done by Uncle Ed in Boca Raton in between his 4th and 5th daily trip to McDonalds?

Well, I guess there might be one topic more important: Ponzi schemes. No, not Social Security… I’m talking about the private sector version of the Ponzi scheme. It’s a good thing that the SEC was there to catch Bernard Madoff before he ripped off a bunch of rich folks.

Oh, wait, the SEC missed that one.

Perhaps you think I’m being unfair. The SEC can’t possibly oversee everyone and catch everything, right? Maybe the SEC just had no reason to be suspicious.

No reason, that is, except for all the people (from the free market) jumping in front of them waving their arms saying that something Madoff is doing is fishy and needs to be deeply investigated. You investigated and gave Madoff a clean bill of health, which led to more people feeling safe investing him and eventually being ripped off (perhaps you’ve heard of the term “moral hazard”).

But, thank you, federal government. The free market can clearly not regulate itself as well as you can. I can’t tell that the blog post I’m reading about Snuggies might be biased, and no one in the market could have seen the Madoff thing coming.

And, just to give the FTC something to do… I have done significant tests and have found that wearing a Snuggie significantly reduces the risk of cancer.

You’ll have to wait for the FTC to get around to to telling you whether that is a legitimate statement. In the meantime, why not buy two or three Snuggies just to be safe? Tell ‘em Matt sent you.

Now I’m sure there are perfectly good excuses (not explanations) for this, but I’m tired of excuses. I heard bullshit excuses during the Bush administration, and I thought we elected something different (actually, no I didn’t think that; but that seemed to be the general consensus).

But, I do want to give Obama credit in one area where he has turned out to be exactly what we would expect of a liberal Democrat: spending and deficits. Under the Bush administration, we all expected fiscal responsibility. We expected that a Republican administration would mean that the establishment of new government programs would bring with it a way to fund the new government programs. Naive, to say the least.

How angry would I be if a liberal Democrat took office and pulled the same switcheroo, just in reverse? If Obama came into office and balanced the budget, stopped spending money we didn’t have, stopped borrowing from foreign governments, stopped inflating the currency, stopped bailing out failing corporations, and took care of the looming $53,000,000,000,000 in future promised medical and retirement (MA and SS) benefits for which we have no workable way to pay. I’d be hopping mad that, once again, a politician promises one thing and gives us another.

Thanks for sticking to your implied promises, President Obama. Now if only you could stop with the bullshit rhetoric to the contrary.

Related: Ron Paul’s response to the supplemental appropriations bill

In an affront to all those who thought they voted for a peace candidate, the current president will be sending another $106 billion we don’t have to continue the bloodshed in Afghanistan and Iraq, without a hint of a plan to bring our troops home.
…
As Americans struggle through the worst economic downturn since the Great Depression, this emergency supplemental appropriations bill sends $660 million to Gaza, $555 million to Israel, $310 million to Egypt, $300 million to Jordan, and $420 million to Mexico. Some $889 million will be sent to the United Nations for so-called “peacekeeping” missions. Almost one billion dollars will be sent overseas to address the global financial crisis outside our borders.

Absurdly expected.

The CBO

I love the Congressional Budget Office. It’s one of the few independent bodies that, for the most part, states the numbers as they are no matter who is in power that year and no matter what the topic is.

Peter Orszag and The CBO’s Partisan Twin

Let’s be sure not to confuse the CBO with the Office of Management and Budget, which is an office in the White House’s Cabinet and obviously therefore a mouthpiece for the President’s agenda.

Office of Management and Budget Director Peter Orszag said last Friday that Obama’s plan will save $100,000,000 over 10 years “by forcing hospitals, outpatient clinics, and medical device makers to become more efficient“. As it turns out, for years these businesses have had significant opportunities to increase their profit margins and make personal yacht loan payments easier on their CEOs, and yet these businesses left all that money on the table. Luckily for them, a dozen bureaucrats in Washington, some of whom may have even worked in the health care industry before, are there to save these ignorant executives from their own inefficiency.

Orszag used a CBO report created while Orszag was chief of the CBO to support his position. The report essentially said that these entities could be forced to become efficient and avoid “overcompensation” of Medicare reimbursement. Health care professionals already get reimbursed only for a portion of their submissions. Many claims are rejected due to errors in assigning the treatment the proper code. So, when Orszag talks about avoiding “overcompensation” and increasing efficiency, my reading of that is he plans to implement policy that increases the likelihood that claims will not be reimbursed by Medicare.

In the very report he uses, in the paragraph after his selected quotation is the following, which he neglected to mention in his speech:

“An argument against this option is that reducing the payment updates might cause some providers to lower the quality of care they provided or to stop serving Medicare beneficiaries altogether. In addition, different types of health care services may be more capable of achieving such productivity increases than others are. If so, this option could cause considerable hardship for providers that are not able to increase their productivity by the amount assumed in the update.“

The Public ‘Option’

Three days later on Monday, the Congressional Budget Office released its findings on the current health care proposal. It found that Obama’s plan would cost $1,000,000,000,000 over the next decade. Obama has a plan that he says will find $1,000,000,000,000 in money from cost savings and tax increases on health care providers (so, we’re going to tax health care providers and at the same time expect their prices to decrease?).

The CBO estimates that the health care plan would reduce the number of uninsured by 16 million. This number is so low because, as people have been saying for a long, long time, introducing a tax-subsidized option will result mostly in transfers of people who are currently insured through their employers. The CBO found that 15 million people currently covered by their employer and 8 million people currently covered by other means would move to the tax-subsidized option. The named intent of the bill is to cover uninsured people, yet only 16 million uninsured will be covered. Meanwhile, 23 million (15m+8m) who are already insured will take the option of having the taxpayers subsidize their health insurance.

And I don’t blame those estimated people. I’d want my chunk of that $1,000,000,000 pie, too.

The so-called public option is not really an option. The idea is to create a tax-funded ‘competitor’ to the market competitors and to use that government competitor to exert price controls. It would be more intellectually honest, although politically more difficult, to legislate the price controls directly (but no, that would trigger accusations that we’re engaging in central economic planning, and we don’t do that here in the US). If an MRI costs $2000 now, the government can start offering MRI reimbursements at $1800. Either:
1. the hospital loses $200 on every MRI
2. the hospital makes up the $200/MRI by charging more on everyone else’s insurance
3. it stops accepting people with public health insurance (which would probably be made illegal if it became popular)
4. or the hospital finds some way to save $200 in costs to break even

Obama is betting on the latter. Again, though, this implies that these health care companies could have been making an additional $200/MRI in profit if they would have just realized they could make some cuts.

Good thing the government is there to show us the way.

The answer, by the way, is about 2 times the purchase price, depending on the interest rate, meaning that you’d pay about $200,000 for a $100,000 home. Or, put another way, with $200,000 you can either buy two homes or finance one. That’s a pretty big concept, and yet most people would be surprised by it.

Bad Money Advice

One of my favorite blogs is Bad Money Advice. It’s authored by the pseudonymous Frank Curmudgeon, and I’ll leave it up to you to figure that joke out. Its sole purpose is to follow around the popular personal finance blogs and even the mainstream media and keep them in check with reality. Here are some recent examples:

• June Frugal Friday: Frank discusses various suggestions by frugal bloggers on ways to save money on toilet paper and other ridiculous ideas.
• This Time It’s Not Different: Frank gives you four excerpts from journalists and figureheads that you might think are about the current economic crisis, but are instead from numerous instances of this same occurrence over the last couple centuries. Try telling the mainstream media or the government that this isn’t novel.
• Introducing the Expensive Loan Option: Frank mocks recent advice from Suze Orman and Brett Arends.

The fact that a blog can have enough content just criticizing the failures of other “experts” is extremely telling. (It’s also a great example of market self-regulation, but I’ll leave that one alone…)

How to Become a Personal Finance Expert

The general populace has no idea how to manage their money and debt. Sometimes they look to “experts” like Suze Orman, who really just discuss what should be common sense, like paying down the credit card with the highest interest rate first. Even worse, though, the demand for personal finance guidance is so great that people flock to personal finance bloggers, who are simply amateurs trying to make a quick buck on advertising. Most of them have no finance or economic background (certain company excluded), and many of them only consider themselves credible because they were $75,000 in debt and managed to dig themselves out of it. While that is no small feat, I think a bigger feat would have been seeing a $7,500 credit card bill and realizing they have a problem that needs to be fixed.

But in the land of the blind, the one-eyed man is king. Thanks to the beauty of federally-controlled public schooling, a couple hundred bureaucrats in Washington decide what is important to learn and what is not. And let’s face it, they’re doing a great job. If I were in there, I’d probably make the mistake of toning down the advanced calculus and using that time to teach our kids how to balance a checkbook or understand their credit rating.

And, look, if we did that, there would be no one to calculate the negative slope of Visa’s profit curve as they siphon less wealth from productive people in the form of relentless monthly interest payments.

The left’s solutions to these problems are embarrassingly juvenile. Poor people don’t have food and health insurance? Ok, give it to them. Elderly people don’t have retirement savings? Ok, give it to them. If the solutions to these real and complex problems were so simple, does the left truly think there would be any debate?

Oh, I’m sorry. I seem to be ignoring the real issues this country is facing, like David Letterman’s joke about Palin’s daughter copulating with Alex Rodriguez, getting to the bottom of why Miss California lost her crown, hamburgers eaten by Joe Biden, the so-called swine flu that has caused the death of upwards of 45 people, and whether any of Obama’s words in his speech in Cairo could be construed as anti-American by Sean Hannity’s defective brain.

What was I thinking?

Why Politics is Dumb

Perhaps a better question is why was I thinking? The Republicans sure didn’t for 8 full years. I’m not just talking about people in Washington; I’m talking about Average Joe Republican, who somehow was on board with:

1. Increased federal control of public schools
2. The misnamed PATRIOT Act
3. Illegal wiretapping by the federal government
4. Detainment of innocent people in Guantanamo Bay without due process
5. Government-sponsored prescription drug plan that cannot be paid for
6. Seizures of property and arrests by the federal Drug Enforcement Agency of people running medical marijuana farms in California that state and local law says are perfectly legal
7. Huge deficit spending and increases in the national debt
8. Taxpayer bailouts of failing corporations
9. Use of government spending in an attempt to “stimulate” the economy
10. The list goes on…

For years the Republicans ran against every one of these things. Apparently, though, when the Republicans actually have power, these things are good. Now that the Republicans are the minority party again, once again you hear them yammer on against a number of these items.

This hypocrisy isn’t limited to the Republicans. During the Bush administration when the Democrats found themselves in the minority, they suddenly were the champions of individual liberty. Obama ran partially on this platform. And yet we’ve seen nothing from him or the rest of the Democrats so far on this front now that they have power.

Sorry, I’m not falling for it this time. The robotic incantations of the Democrats and the Republicans have nothing to do with truth and everything to do with helping their team win. The political beliefs I hear most people talk about do not originate from a thoughtful reflection on what makes sense; they are instead based on talking points memos from Side A or Side B, and the side is inherited either directly from their parents, or as a knee-jerk rebellion against their parents, or some other external force.

Glimmers of Hope

Every once in a while, though, an intelligent topic comes into the public discourse and smart people think it all the way through. Take for example Ron Paul’s presidential campaign and ongoing movement. Whatever you think about Ron Paul, it’s difficult to argue that his arguments are anything but thoughtful and devoid of partisan games. He was one of the few Republican voices blasting the treachery of the Bush administration, and he has never had a problem going against his party when principles demand. The same can be said on what most would say is the opposite side of the political spectrum about Dennis Kucinich. I agree with almost nothing this guy says, but I have serious, serious respect for his willingness to stick to principles and think about tough topics.

These glimmers of hope are mostly confined to political professionals. The general populace, on the right but especially on the left, is with rare exception completely incapable of thoughtful discourse on the tough issues. If I had $1 for every time someone on the left has completely dismissed me – without thought and without listening – after labeling me “on the right”, I’d be rich… at least until the currency is inflated away.

Oops, there I go again.