Octavo Dia

Sunday, December 09, 2012

Soak the rich.

You know what the problem with soaking the rich is?  We're soaking the wrong ones.  Hedge fund managers take almost all of their income in cash.  Consequently, we tax that income more heavily than we do others who take their income in other forms.  Celebrities, for example, take much, if not most, of their income in social status and self-actualization.  When the Beatles were paying a 95% tax rate, they were still performing.  By contrast, as Britain has recently discovered, a rate of 50% was ineffective at raising revenue from run-of-the-millionaires.  Other than ticket sales, it's rather difficult to tax legions of adoring fans directly.  However, most celebrities would continue to produce and perform just for their art and their status.  In other words, celebrities are inflexible suppliers.  Consequently, they can be taxed heavily with minimal impact on the total supply of entertainment. Tax the rich, but take a broader view of income and soak the celebrities.

Saturday, December 08, 2012

Supply, Demand, and Obamacare

Let's say you go to the doctor.  The improvement in your health as a result of this visit is worth $2,000 to you.  The total resources used at your visit, i.e., before profits, is $1,000.  If that's where things stopped--you paid $1,000--that would be a really, really good deal for you.  You just got $2,000 worth of benefits for $1,000.  From your perspective, you just profited $1,000 (you took your profit home in improved health).  However, for everyone else in the transaction, that would be a really bad deal.  They invested in the clinics, pharmaceuticals, and human capital, and all they've gotten for their investment is their money back.  They'd have been better off putting their money in a savings account and getting a job at WalMart.  Now suppose you had the same visit, only now it cost you $2,000.  From your perspective, that's a terrible deal.  You could have made more money by putting it in a savings account at half a percent interest.

In a theoretically perfect world, the extra $1,000 is elegantly divided among every party to the transaction.  The pricing mechanism (on which entire textbooks are written) communicates and creates information.  The price communicates the total resources each party has invested, how scarce those resources are, and how valued they are for other purposes in society.  It also creates information, as the profit opportunities are not lost either on the parties to the transaction, or to the economy as a whole--other individuals and businesses will see the money to be made, and decide to try for a piece of the profits as well.

Unfortunately, this doesn't work perfectly for you.  If we turn to game theory, since your health is unique to you, you are a single-shot player in this game.  All the other parties in the game are repeat players--you aren't, after all, the first and last patient of the doctor's career.  Your negotiating position is consequently weakened, because you don't have the strategic options or information that the other players in the game have.  Consequently, you end up with a smaller share of the profit than you otherwise would.  What this means for the other parties to the transaction (and potential competitors) is that the profits are out-sized, and thus they supply more health care than they otherwise would, but you are simultaneously signaled to demand less health care.

So what happens if there's an insurance company?  Basically, instead of you being a single-shot player, your insurance company becomes a repeat player on your behalf.  This is a step better for you, because the insurance company's negotiating position is better than your own.  However, the insurance company's interests are not identical with your own (see the principle-agent problem), so even though it's better than paying for things yourself, you're still not capturing as much of the profit as you'd like (though, of course, you'd like to capture all of it).  However, the increased profit captured by you and your insurance company reduces the profit captured by the other parties.  This sends a signal to the parties, and to the rest of the economy, to supply less health care, and you to demand more.

Enter the government.  So what happens if there's a single-payer health care system?  A single-payer system has all the advantages that an insurance company does in negotiation, but now it's the only game in town: a price-maker.  The other parties can either quit the business or take what's on offer.  If the government pays less than even the insurance company does, it sends an even stronger signal to supply less health care and you to demand still more.  Since many of the parties already have significant sunk costs (the doctor's investment in human capital, for instance), many of them will stay on to recoup what investments they've made, but it still causes a long-term reduction in health care investment.

The long-reduction in health care investment is not inevitable.  It is just as likely that the other parties to the transaction will invest in political activity of their own to protect their profit margins, e.g., by restricting the number of individuals who can attend medical school.  Thus even though the profits are there, and the profit signals are there, there is no additional investment.  This, with a combination of single-payer (Medicare, Medicaid) and insurance companies, is approximately where we are in the United States.

In a single-provider world (the government provides all healthcare at taxpayer's expense), there's no reason for you NOT to seek health care.  Unless restricted, only the inconvenience of seeing a doctor prevents you from demanding that society invest in curing your every minor ailment.  Such societies typically use queuing to prevent just such a situation, which is a failure of prioritization, investment, and a monumental waste of time.  In this circumstance, you demand far more health care than you need, and society invests resources that could have been better used elsewhere.

In an optimal world, you would demand healthcare until there was something better you could do with the money, e.g., if you're starving it's better to buy food than a cancer screening.  Unfortunately, the free market doesn't give you an incentive to demand an optimal amount of health care because you lack information and repeated transactions.  Consequently, under the free market model, you demand a less-than-optimal amount of health care and the economy devotes too many resources to providing health care.  That disconnect causes waste on all sides.  On the other side of the spectrum, the single-provider world, you demand an excessive amount of health care and the economy devotes too many resources to providing that health care.

Wherever on the spectrum the ideal arrangement lies, Obamacare isn't there.  To borrow from Hitchens on the HMO, Obamacare entails "the maximum of capitalist gouging with the maximum of socialistic bureaucracy."  The government and insurance companies are wastefully duplicating functions, voters and corporations are wasting money on political activity, profits have no effect on supply and demand and Obamacare cannot provide that balance.

Book Review: Sun Tzu: The Art of War

Sun Tzu: The Art of War.

If you're reasonably well read in history and political science, don't bother reading this.  You've already read all the good parts.


Wednesday, December 05, 2012

We don't need no (more) education.

I've read several hand-wringing articles about how the current generation is on track to be less educated than its parents.  What's wrong with that?  We can be prosperous with less education.  In fact, we may even be more prosperous with less education.

First, education, like everything else, suffers from diminishing returns on investment.  Turning a peasant into a factory worker is fairly easy, increases productivity immensely, and can be done with just about any individual.  Turning a Ph.D. into a post-doc requires a tremendous investment, provides only a marginal return, and only a tiny sliver of the population is able to perform at that level.  We may be able to eke out more returns by increased investment in education, but if we have more profitable things to invest in, why should we, as a society, devote scarce resources to an extremely marginal investment in an elite?

Second, technology has reached a tipping point with regards to education.  In generations past, every new technology required new expertise, and more education, to master.  The technology that we are producing today requires less expertise, and less education, to master.  For example, most entry-level accounting jobs have disappeared, because entry level accounting is done by a relatively-unskilled data entry clerk with a computerized accounting program.  Training entry level accountants is unnecessary, because there's no role for an entry level accountant.  It's only on the upper margins, the creators of new technology, that increasing levels of education are needed--and once again, producing those returns requires an investment in an elite.

Essentially, every year of education that does not translate into productivity is wasted. A pizza-delivering-Ph.D. is waste, not investment.  If we're becoming less educated, perhaps that's because we've got better things to do with our time and our money.

Monday, December 03, 2012

Why You Can't Starve the Beast

The theory behind "Starving the Beast" is that, by restricting government revenue, you can restrict the government's growth.  Though that makes sense mathematically, it just doesn't work in reality.

First, a government with monetary authority (a central bank) cannot be starved of nominal revenue--the Treasury is legally able to mint a handful of trillion-dollar platinum coins.  There's no way to starve the beast out of that.  All it would do is create inflation, which in this case is a stealth tax paid by those with cash assets.  To starve the beast you need to control monetary policy.

Second, like anything that is starving, "the beast" will not cut the fat.  It will cut the muscle.  A government threatened with revenue cuts will put the most important thing that it does on the chopping block to discourage further cuts.  If you try to starve the beast, it will cut popular programs, and the budget will be restored by popular vote.  To starve the beat you need to control the budget.

Third, if the government in question is a sovereign borrower, it can continue to borrow to economy-destroying levels before the market will act.  This borrowing makes government benefits seem comparatively cheap.  The benefits received from the government exceed the costs of supporting that government, so people will naturally demand more government even though it's just delaying the inevitable.  To starve the beast you need to control borrowing.

Fourth, a government can stay within whatever limits are imposed on it by simply moving spending off the books.  For example, rather than subsidizing housing directly, we provide a tax break.  Rather than subsidizing charities directly, we provide a tax break.  Rather than paying for a great many things on the books--which would require raising and spending taxes--the government neglects to collect the taxes it would otherwise be owed.  To starve the beast, you would need to control tax policy and accounting.

Fifth, a government can move many of its expenses off the books, simply by mandating that someone else do something.  The government could, for example, mandate that all tax forms be submitted electronically, thereby moving the cost of data entry from the government to the individual tax payer.  To starve the beast, you would need to control regulatory authorities.

So in short, to starve the beast you need to control monetary policy, the budget, borrowing, tax policy and accounting, and the regulatory authorities.  Once you have controlled all of that, you don't need to starve the beast, you are the beast.

Saturday, December 01, 2012

Book Reviews: Intellectuals and Society

Intellectuals and Society by Thomas Sowell.

This book reflects a goodly number of my own views, so it wasn't exactly helpful to read it.  It was also extremely long.  He could have made his case in less than half the space he used.  Basically, you can skip the last ten chapters and be fine.

Here are the parts of the book I thought were particularly good:

The difference between causality and conveyance: An actor may convey something without being the cause of it.  A merchant may not be the cause of the high prices his store conveys.

The human mind is limited, so it is only by going to extreme levels of abstraction that you can conclude anything on a societal scale.  Consequently, humility is in order, as any time you change something, you'll change thousands of other things, most of which you don't know about (this is something I deal with at work all the time).

I liked the phrasing of "abstract people in an abstract world."  You need to be able to take a theory down to the individual specimen and test it, but this almost never happens systematically in the social science world.

I liked the chapter on filtering reality.  I think this plays into my view of science as a result of being a creationist.  Scientists know their own field very well, and know there are things they can't explain.  Places the theory doesn't work.  However, they don't know the doubts about other scientists' fields, and the "overwhelming evidence" from other scientists produces confidence that the theory is valid despite the flaws before their eyes.  If everyone you know and respect is saying one thing, being the odd man out prevents most everyone from speaking out, especially given the opprobrium that will be heaped on the heads of those who question sacrosanct theories.