Monday, March 29, 2010

Manipulators and Maintainers

Is increasing income stratification due to increasing complexity equitable? Or does it constitute a rigged system?
With increasing complexity, an increasing proportion of the population cannot be expected to cope. Indeed, many of the potentially most productive members will be less capable of coping, because they have invested a greater percentage on their education in their skill, rather than in their ability to cope with the system. In most cases their skill will be necessary to maintain the system. The system, as it becomes more complicated, thus selects against its most useful members, those most skilled in maintaining the system, and selects for those most skilled at coping with, or manipulating the system. (Or course these skill sets are not independent, but there is only limited overlap, as is evidenced by specialized educations. Not all education is to learn to do things that help maintain a society.) There is increasingly a separation of population, into those skilled at manipulation of the system, and those who maintain it. Those who manipulate the system come to do so for their own benefit, at the expense of those who actually maintain it. They thus gain income at the expense of those who maintain the society. Further, it is in the interests of the manipulators that it be sufficiently complicated that those who maintain it cannot both maintain and manipulate.
But with the prosperity of the manipulators, more people become manipulators, and fewer maintainers. Since the maintainers are the strength, and the manipulators are the weight, the society gains weight and loses strength, becoming less capable of performing essential functions. Increasing income stratification due to increasing complexity is not only inequitable, it is destructive of the society.
And we have not even addressed the issue of those who are insufficiently skilled at either maintenance or manipulation, for whom the maintaining skills, and the manipulation skills, are simply too complicated for them to cope with, but who could cope with and perhaps even prosper in a simpler society. To what degree of exclusion should these people be relegated, especially considering that society is, for many of them, at least partly responsible for their miseducation.

Friday, March 26, 2010

The real problem with Health Care in the US

Well now that health care reform has passed, it's time to look at the real problem with health care. The real problem, and the reason that health care in the United States is so expensive, and takes a larger share of our GDP than that in other industrial nations, is that the United States does not provide adequate health care to its people.

With health care, an inadequate supply will show up in things like reduced life expectancy, higher infant mortality, use of emergency rooms by the poor because there are not enough clinics, shortages of doctors in some areas, especially rural ones, and higher prices than in countries that have adequate or better than adequate care for their people. These things we see. Also, the mere fact that payment is such an issue suggests there is demand among those who cannot pay for it.

With health care, people only need so much, but that much they need. They are willing to pay high prices if they have to, and if they can. But even with low prices, they are not, individually, going to buy that much more health care than they need. ( Unless they are sold more. We have heard of some places where they are sold more, driving up expenses still further.)

If our health care is inadequate, why is it also so expensive? The paradox of a nation paying more and getting less is explained by elementary economics. Health care is an
example of what in economics is called a service with inelastic demand. (More properly the equilibrium point of supply and demand for health services is in the inelastic region of the demand curve.) The demand for such a service, or such a good, like oil, does not change much, no matter what, within reason, is the price. If the supply decreases, the quantity demanded does not change much, but the price goes up a lot. An inadequate supply will lead to excessive prices.

Conversely, increasing the supply a comparatively small amount will lead to a dramatic decline in prices. The paradox arises because, if the health care system supplied enough services to meet or exceed demand, the share of the nation’s resources consumed by the health care system would be less than it is now. Competition would drive the price down. (Down to zero, in fact. The role of government would be to keep compensation up to cover costs, despite prices being insufficient to cover those costs. But the total cost would still be less.)

The calculation is simply quantity of services provided times the costs of those services. This equals the burden the health care system places on the economy. For an inelastic service like health care, a small increase in that service, times the large decrease in price, would bring about the reduction in total costs, reducing that burden on the economy.

And clearly health care is an inelastic service, because other industrialized nations provide their people more health care, and usually more than adequate healthcare, for a smaller share of their countries’ GDP than ours. If instead the demand for health care were always elastic, no matter how low the price, no country could afford a nationalized health care system. Then the nominal prices charged by many national health care systems, which are much less than the costs, would lead to an uncontrollably greater demand, and the total costs to an economy would be impossibly large.

On the contrary, it is the cost of the US’ privatized system that is becoming impossibly large. Already 17 percent of GDP, it is estimated to increase to 20 percent of GDP, an incredible burden that the rest of the economy perhaps cannot even bear. This is happening because a privatized system is unlikely to provide adequate, and thus inexpensive care, or even to restrain its costs. It simply cannot be expected. Since adequate care will drive down prices, and thus drive down profits and force down costs, it is in the interests of a privatized health care sector to keep health care inadequate. That is, to keep it in short supply. It is rather unreasonable to expect private health care providers to act altruistically, and contrary to their own interests. Indeed, the future may well correspond to the delivery of an even more inadequate service, especially with reform expanding demand, but not supply.

Many would claim competition is in fact keeping the price of health care down. However, by this principle, we would expect competition to keep prices lower than the non-competitive nationalized health care systems in other countries. It does not. Therefore the amount of competition in the health care industry is simply not enough to restrain its prices. The sheer cost of privatized health care, as it is in the United States today, justifies its replacement.

If the United States had adequate health care, it would cost less for individuals, however they paid, and take up a smaller share of our GDP. It would be more efficient. This would increase the efficiency of the entire economy, free up resources for other, more vital, uses, and increase the competitiveness of American industry in the world market.


Monday, March 22, 2010

The Nuclear Equivalent to the War on Terror

All the money spent in Iraq and Afghanistan represents resources destroyed. How much, in terms of real resources, does $1000 Billion represent. Let's do residential. Say $140K per house, on average,which isprobably generous. That's about 7 million houses. The equivalent value of 7 million houses which is not being invested, rather is being destroyed in warfare. 7 million houses which are not being built.
7 million houses figure 4 persons per house, 28 million people. So the residential equivalent of a several very large cities has being leveled. This kind of calculation has been done, more accurately and in greater detail, both nationally and for the share of one's locality, and can be found by searching in say: 'cost of the war in Afghanistan'. Nobody is being hurt though. But:
Let's look at it in terms of man lives. Average GDP per worker is roughly, $14T/140M in the labor force, these days gives $100K per worker. So the cost is 10M man years. Figure 40 years productive life: $4M per life. So: $1000B/$4M = 250K lives. So the war on Terror has destroyed the lifetime production of 250 thousand men. Economically speaking, these are the casualties the US has sustained.
Let's check the nuclear option. When you nuke a city, you destroy only half the lifetime productive capacity of the population (half has already been contributed) so DOUBLE the number of people killed. Figure 500K. Note we are now considering everyone in our city as labor or potential labor. Now the total capital of the US is about $50T. Divide by total people (300M) and you get about $170K per person, of physical capital, that is houses, factories, offices, roads, utilities, etc. they occupy and use. An interesting number in its own right. But we'll use $200K. So that's $100B worth of capital our 500K people occupy and use. (200K x 500K.) Figure $100B to be the equivalent of 25K man lives. ($100B/$4M = 25K man lives.) We subtract 25K man lives because we're blowing up their productive lives equivalent in material destruction, giving 475K. We're subtracting it because we don't want to count it twice. But we see that counting the actual material that is blown up is just a small correction. We can just as well ignore it, given the approximate nature of all our numbers
So, roughly, the War on Terror has, so far, cost the economic equivalent of the total destruction of a city of 500 thousand people. Give or take. That's everyone and everything in it. That's a lot of terrorism. Of course ‘economic equivalent’ does not include pain and suffering. Or cleanup.
Most of the numbers we've used understate the answer. One can argue that we understate the earnings per man life, but don't forget capital is spent on the individual at both the beginning and end of his life, so the net contribution of a person to society is probably considerably less than 40 years of labor.
By our calculations 9/11 resulted in the destruction of something under 5 thousand man lives of production. The War on Terror is, it seems, a rather disproportionate response. But then, one can always claim WWII was a disproportionate response to Pearl Harbor.

Monday, March 15, 2010

Why no government is best. No, really.

Little theorem on no government.
Government is bad. We will proceed to demonstrate this: Consider a purely market economy. It consists of different sectors, with different functions, each contributing to the economy. Each sector buys from all the other sectors, and each sector sells to all the other sectors. (This assumption need not be so strong. The sectors just have to be 'well connected.' They don't all have to be connected all to each other.) Let us start with the economy in equilibrium, each sector at some appropriate size so that its supply and demand is in balance. To simplify, consider consumption and production each proportionate to the size of the sector. (They need only be in the same direction, larger size implies larger production and consumption. Smaller size implies smaller production and consumption.)
Now let's say some sector grows larger compared to all the others. Its production also increases. In the market, however, this will drive the price of its product down. Its income will decrease, so it will shrink back to where it was at equilibrium.
Now let's say some sector shrinks compared to all the others. Its production also shrinks. In the market, however, this will drive the price of its product up. Its consumption will decrease, driving the price of its inputs down. Its income will increase, so it will expand back to equilibrium.
Thus the economy will stay in equilibrium, each sector in fixed relative size to the others.
Each sector will grow (or shrink) in fixed relative size to all the others. The economy as a whole will grow with each of its sectors staying in the same proportion.
Anyway, let's introduce government to this happy state of affairs. Let us suppose the sectors each have influence with government, and these influences are not equal. Then each sector will seek to use its influence to become larger, and inflated by subsidy. But only those sectors with the greater influence can gain subsidy by influence. By the conservation of the whole, the subsidies have to come from somewhere. Other sectors must pay this subsidy. These sectors must be taxed. Taxed, they will not grow as fast as the subsidized sectors, and may even shrink. The larger sectors, therefore, will become disproportionately large compared to the less influential sectors, and these sectors will become disproportionately small. (Further, the sectors with greater influence will use that influence to acquire even more influence with the government, and the influence of the other sectors will decrease, and they will receive proportionately less, so the situation becomes increasingly aggravated. )
Now those sectors which receive inputs from disfavored sectors will develop shortages. But all sectors require inputs from the disfavored sectors, either directly or indirectly, and so all will experience shortages, bottlenecks in production, and production will be slowed. Growth will be slowed, halted, or there may even be decline. Thus the economy will become increasingly 'unbalanced,' in a way which will become clear if we look at a concrete case, such as the US economy.

Some sectors do clearly have more influence with government than others, and we would expect these to become larger in proportion to their influence, and others with less influence to become smaller, in their ability to compete in the government for resources. It's easiest to see this by pairs. For instance, suppose manufacturing has less influence than traders. Then this would lead to free trade and a trade imbalance, and erosion of our manufacturing position in the world, and considerable international debt.( Note, however, that imports would become increasingly necessary to maintain the economy, as shrunken sectors no longer able to keep up the necessary production to maintain the other, sometimes bloated sectors.) Suppose the motorist/highway lobby has more influence than rail. What would we see. Below real cost gasoline prices, a surplus of roads and vehicles. Desultory efforts at passenger rail. Deferred maintenance of rail. Sprawl. Inefficient use of resources and space. If the financial sector has more influence than the public, then this would lead to a bloated financial sector, making it a disproportionate burden on the rest of society, high interest rates to the public, and a government looking after finance's interests despite the sector's manifest peculation. If labor has less influence than management, then we would expect a stagnation of wages and disproportionate remuneration of executives. An increasing flow of wealth to the top. If the health care industry has disproportionate influence with government, we would expect increasing costs and decreasing quality of care for many, and ineffectual efforts at reform, and slowing and arresting of growth of the economy as a whole. I'm sure the reader can come up with many other if-then pairs.
Then the wealthy seize control of government, the wealthy cannot help but destroy the society which supports them. Wealth and income will become ever more concentrated, until they can no longer be supported by the rest of society.
In the short term it is in their separate interests to corrupt the system to their benefit. They will cooperate to do this, and secure advantage over the people. They may even engage some of the people, making them temporary allies, though they will be discarded, must be discarded, later. Securing advantage, they will plunder the wealth of the people. But then they will compete, they must compete, to secure advantage over each other, and further advantage over the people. Those who do not compete will be at competitive disadvantage. Thus all are forced to compete. They will compete to cause the government to pursue purposes to their own separate ends, the very definition of corruption. These interests, the benefit of the wealthy, harm the system, and the people, necessarily, by the law of externality: Those costs which can be externalized, will be. Thus the costs of the benefits to the wealthy will be laid upon the people, until the wealth of the people is exhausted. But the welfare of the people is essential to their own welfare, and where it is compromised, so is their own. If they destroy the income flow of the people, they destroy their own income flow as well.

In the long term, an uncorrupted government serves their interests better. A government can only remain uncorrupted to such degree as their influence is limited.

For wealthy (also) read people.
A small government, if corrupt, is relatively harmless. Relatively useless, too.
Well...In securing their separate interests, they will cooperate with the exchange of gaining favors, (trading for votes) which is not 'zero sum' as regular trade is, but both gain, and both their influence on, and burden on, government will expand. That is, through the instrument of government, they both acquire disproportionate size. And since all resources are competed for, other (sectors) are at a disadvantage.

Thursday, March 11, 2010

You are at

Another Amateur Economist:
Eccentric insight from eclectic theory.