Cell Phone Service Competition

I just read an article about prepaid cellphone service competition.
http://finance.yahoo.com/family-home/article/109153/how-low-can-low-cost-wireless-carriers-go
Without going into detail on the article, one point raised is that because prepaid customers are free to switch at any time, this spurs intense competition to retain customers as they cannot rely on contracts to retain customers. So how about extending this principle to post-paid plans to spur competition in that market. But first we need to look at some of the principles of postpaid plans. One of the principles of post-paid plans is that the plan subsidizes the cost of the handset. A purchaser of a post-paid plan buys a handset at a reduced price subsidized by the carrier. The carrier recoups this cost from the monthly plan price. The contract exists, from a pricing model perspective, because the carrier wants to ensure that they recoup the cost of the handset that they basically fronted. Now we could say that they are not allowed to subsidize the cost of the phone, but the carriers would rightly claim that this creates a burden to the customer to front the money for the full handset cost.

So here's the solution. The carrier can continue to subsidize the upfront cost of the handset, but this is essentially billed as a "loan". That is, the repayment of the subsidized handset cost shows up as a line item on the bill, and there is no plan contract as the only contract is the repayment of the phone cost. Several things then happen. Once the phone is paid off, your monthly rate goes to the actual service plan cost - you no longer continue to subsidize the phone that has already been paid off by continuing to pay the same plan price indefinitely. You can better plan your cell phone costs as you now have better information as to what you are really paying for in terms of hardware vs service. You know what your handset really costs and can make better informed choices of handsets, plans, and carriers and on things such as how much of the handset is subsidized. You can control how the handset is paid for. You are no longer forced into accepting the carrier's subsidizing the cost. And most importantly, you are free to change carriers at any time and you know the true costs of doing so - the only "penalty" cost is to pay off any remaining balance on the handset cost. This means the carriers now have to compete more ardently on all fronts of handsets, service plans, and payment plans. They can no longer obfuscate real costs and the information the consumer should be entitled to as a mechanism to retain customers.

Principles on Taxation

Just a random comment. I think we approach spending and taxation policy from the wrong angle. We always seem to fixate on a balanced budget but a large part of what keeps us from a balanced budget is we can't fundamentally agree on what that budget should even be. This is due in large part to an inability to agree on what is the right size government economically. It always seems to be from one side that they just keep wanting to add more stuff to government without regard for the economic cost and then devise ways, ie taxes, to come and get their hands on more of our money to feed that ever growing government. Basically politicians argue and fight about spending and taxation to get to a "balanced budget" when they fundamentally have no consensus on what that budget should be. And then in the rare cases where agreement is reached, it all gets thrown out the window when the economy changes. What got me to thinking about this is it seems they just keep thinking up new ways to get more of our money and more ways to spend it. Obviously they can't just keep taking more and spending more because eventually we would end up just giving everything we make to government and this is just not tenable nor sustainable. We ought to be able to just have the proper taxes in place and then it should just be able to be left more or less alone with minor adjustments as the economy shifts. If we communally have to devise new taxes or ways to circumvent limitations, then this is a sign that something is wrong and we are not on a sustainable path.

Maybe an approach that would be more successful in achieving this as well as getting a "right size government" is to first decide what the budget should be and then argue about how to raise that budget funding and how to spend it. First we decide first how much of our economy we want government to consume. This would be as a percentage of GDP (whether we're talking state GDP for state budgets or national GDP for federal budgets). Then we decide how to raise that revenue and separately we decide how to spend it.

What got me to thinking about this is that in the EU they have benchmarks for debts and deficits in terms of percentage of GDP. Fundamentally, government can't continue to grow disproportionately to growth (or shrinkage) in the economy. There is an optimum percentage of the economy for government. The "right size government" is set by a percentage of GDP. If government is too large with respect to GDP it has a deleterious affect on the economy as it "sucks the air out" of the economy. Government can't continue to grow indefinitely as if there is no limit to the amount of GDP that it can consume. Too small can also have a deleterious affect as it makes insufficient investment in infrastructure to promote growth and does too little for the health of the general society. So the "right size" government is the one that is the right percentage of GDP so that it does not become so large it stifles the economy or too small that it doesn't support a healthy state. More specifically, the level of annual revenue that the government takes in should be set to some percentage of annual GDP and of course there should be some range of wiggle room. There should be a target percentage of GDP plus or minus some range. There should be a range so that there is some flexibility in adjusting for short term needs. Of course the trick is that revenue really should be the at the nominal level and not just end up effectively at the upper end of the range. Perhaps something like a policy of every year that revenues exceed the nominal target, there must be offsetting years below nominal. Thus they can't just "run it to the max" indefinitely without consequence, because if there are no consequences to just always running it at the max then that's just what they'll do. In short, setting revenue as a percentage of GDP basically let's us decide up front how big we want our government to be and how much government is fundamentally economically sustainable, ie how much government we can actually afford.

It is much easier to set up a spending budget once we know how much we can spend rather than approaching it from the other end of trying to decide taxing and spending to reach some vague, nebulous undefined "budget" figure. Once we have a budget, we can decide how to spend it. We know how much we are allowed to spend so now we can set about prioritizing what's really important and not just what pork can be jammed into the spending bill. And, importantly, some percentage of this "spending" should be savings for a rainy day. And independently of spending we can set about deciding how best to construct a tax regime to raise the tax revenue that has already been determined as the level of taxation we want. Again, we can decide what are the really best tax revenue sources and not just who we can keep soaking for more and more or on whom to levy punitive taxes just because someone doesn't like them.

Simply, rather than trying to establish a "budget" in one colossal spending/taxing/budgeting process, break it down into tractable pieces (are you seeing a trend on how I think government should work?) First decide how much GDP should go to government, that is how big we want government and how much we think we can afford. Then once we know how much we think we SHOULD be spending, we can figure out how we OUGHT to be spending it because we can much more effectively prioritize spending when we have a fixed spending limit. And separately we can decide what is the best way to go about obtaining that revenue that is least deleterious to the economy and where we want the economy to go. We turn the tables from government deciding how much they're going to spend then taking our money to fund it, to telling government how much they can spend and they then decide how best to spend that.

The Best Health Care Solution

Due to the importance an timeliness of the issue, I wanted to get something posted rather than wanting until I had the time to polish it. I may be updating this post as I have time to fine tune it.

Ok, here it is. The (financial) solution to the health care debacle is composed of 4 components. The problem with current implementations and proposals is that is having a hammer as the only tool. The problem is that paying for health care is principally composed of three distinct components.

In the current situation, the only tool is that of "insurance." When your only tool is insurance, then you pervert and contort "insurance" to service these three distinctly different financial aspect. The first step in fixing health care and providing the best health care possible is to realize that the "problem" is not solved with one overarching solution, but is actually composed of multiple distinct issue that are each best addressed with targeted solutions. The three components are (1) ordinary and customary health care such as regular doctor visits, (2) "acute" care for things such as broken bones, heart surgery, hip replacements and the like that are of a one time nature, and (3) "chronic" health care problems such as cancer, diabetes, and other health issues that require ongoing care. The insurance hammer only deals well with category number 2. It doesn't handle either of the others very well at all, yet we try to contort "insurance" into servicing these types of costs as well. Our current health care implementation is like trying to use our auto insurance provider to finance our auto purchases and to pay for regular maintenance in addition to accident coverage. We intuitively understand that to do so would be inane, yet for some unknown reasons, this is exactly the approach we gravitate to for health care.

Similarly, the current proposed "solutions" are trying to apply the tool of government control which is not a good tool for providing goods and services.

Now, what tools do we really need for these distinctly different classes of problems?

(1) Two key issues driving the cost of health care are accountability and financial efficiency. The first level solution to this is to restore accountability and efficiency with the effective use of health care spending accounts (HSAs).

One of the biggest factors that drive of the cost of health care is that of accountability. That is, those receiving health care are not accountable for the cost. Who ever makes the payment is the one in control of the product. When some other agent, be it insurance or government, acts as the paymaster, control over the product is relinquished by the receiver of that product to the payer of that product. He payer becomes the driving force in how health care is provisioned, not the end user of that health care. That is, the utilization of health care is not accountable to a cost benefit analysis by those obtaining the service but to the whims of those who pay the providers of the service. One effect of HSAs is to restore control over health care to those actually receiving health care (which in and of itself is a good thing) so that those receiving health care make the choices such that they receive the best health care for their dollar. This drives prices down while driving up quality of service. This IS a fundamental property of free markets.

For ordinary expenses, the most effective and efficient means of dealing with this is the same way we handle all of our other day to day expenses - we simply pay directly for them. If we give our money to someone else to write the check for us, they will simply bill us the full cost, plus add additional expense to cover their cost of providing the check writing service. So the first step to reducing health care costs is to stop paying someone else to write our checks for us. Now, there are two arguments against this. One is that of getting people to see a doctor regularly or at least before minor issues become major issues. But on the other hand it is argued that people who don't go to a doctor regularly subsidizes the cost of those who do and if this "subsidizing" is not done then people will have to pay more to cover their full cost. Well, first, you can't have it both ways. If everyone took full advantage of what they are paying for, then there is no "subsidizing" and we all pay our own full cost. And if the goal is for everyone to fully utilize regular doctor visits, then achieving this goal means we all pay full price for regular doctor visits anyway. If "health care spending accounts" are used to pay for regular medicine, then people are incentivised to see a doctor regularly because they have money sitting in an account that is available to them for this purposes, which addresses the first counter argument. And how does the money get into this account? It gets there the same way our "insurance" premiums are currently paid. An additional benefit to this is that since we possess the money, we can see any doctor we want and obtain any services we want. Regular medicine now operates in a fully functional competitive market place which drives down cost and improves services. And the insurance companies don't take their cut.

This saves money because we are not paying a third party to write the checks for us. This drives down costs and drives up service because there is accountability and free market competition.

(2) For acute medical treatment, this is actually where insurance in conformance to the actual insurance business model actually works the way it is supposed to. It looks a lot like a regular auto insurance policy. You purchase a policy for a set period of time at a set price for set coverage. This doesn't pay for "regular maintenance" but only "accidents." Break a bone or have a heart attack or other emergency during the coverage period of the policy, and this policy covers the financial liability. This policy is cost effective and efficient because the financial liability to the insurer is well defined and they can construct an effective and efficient policy and premium structure. These types of problems are well defined and tractable, so we should isolate this class of problems so that we can at least keep the solution for this type of issue as simple as possible.

This saves money because the insurance company can focus on that which conforms to the well understood insurance business model and mathematics without have to also finance liabilities that are essentially 100% probable.

(3) The third category is somewhat trickier. This is where the conventional (as currently implemented) health care insurance fails as is a major contributor to the overall failure and expense of the current system. The problem is that what we have is what started as a conventional insurance business model that has been contorted to handle expenses and liabilities that don't conform to conventional insurance mathematics. From a perspective of current insurance, what we are expecting health insurance companies to do is the same as if we expected an auto insurance company to cover the liability for an accident we had before obtaining the insurance. The problem is that, as I have previously posted, insurance operates on a statistical mathematical principle called "expected value" which is a function of probability of an event. The problem with chronic illness is that the probability of a liability for treatment is 100%. When the probability is 100%, the price of the policy is simply set to include the cost of that liability. If you have an illness that it is known will cost $100,000 to treat, this means the "insurance" company know a priori that you will cost them $100,000. To charge you less that $100,000 when it is known in advance that they will have to pay $100,000 is not insurance, it is charity. And if they are going to charge you the $100,000, you would simply be better off just paying that yourself. Probably the best approach to this is something that would look more like a life insurance policy. You would purchase a lifetime insurance policy to insure against the onset of a chronic illness. Of course the issue remains as to what happens if you do not have such a policy in place before the onset of a chronic illness. Now, while this is still a form of insurance, it needs to be separate from insurance for acute problems. The issue is that these two type of insurance become unmanageable (read inefficient and expensive) when commingled. Separating these two forms allows the exclusive application of the most appropriate models to the particular needs of the particular issue.

The overarching objective here is to break the distinctly different factors apart so that the most appropriate, effective, and efficient mechanisms can be applied to each rather than an "every problem looks like a nail when your only tool is a hammer" approach. When we recognize that what we are dealing with is not one homogeneous issue but is comprised of distinctly different types of problems, we can separate them so that the best solutions can be applied to each. When we fail to do this, we have not only the complexities of each type of problem, but the added complexity of attempting to handle distinctly different problems with one all encompassing solution. The better approach is the peel away the simple problems and dispatch those with simple solutions. Paying for regular every day health care? Simple, just pay directly like any other regular every day expense. Have an isolated health issue? Simple cover that with insurance just like we carry auto insurance to cover accidents. We are already familiar with this type of insurance and it's operation, which is well defined. Now we are left with the somewhat more complex issue of chronic illness, but it is much more tractable now that we can focus on the specific issues of this type of problem without all of the distractions and complications of other unrelated types of problems.

This doesn't solve the issue of people who fail to properly obtain the necessary coverage and then become chronically ill. It also doesn't explicitly solve how to ensure that everyone has access regardless of financial means. However, what this does do is to peel away the "easy problems" and deal with those in a simple and effective manner. These "easy problems" are not held hostage by that which is at the kernel of the "hard problem." And once the kernel of the "hard problem" is isolated, it makes that much more tractable.

If we could adopt these solutions, we could then discuss how to make sure everyone has access. Also, once we have deconstructed health care into it's constituent problems, we can much more readily address how to handle government assistance to extend the availability of health care.

Why Single Payer Health Care Can't Solve Our Problems

And for that matter, why our current "insurance" based system can't work.

First a very brief primer on what market economies do. There are two key fundamentals to markets and what market do. When people make choices in what they buy, they are motivated to get the best value for their money where that value is determined by their personal criteria. The second thing is that markets then respond to servicing what people are buying. Thus markets serve to allocate resources in order to deliver to consumers what they deem to be of most value. (As a side note, this is why jobs get shipped overseas in spite of our protestations: when we make the choice to buy, we place higher value on price, eg. Walmart, rather than US jobs.) This eliminates waste since resources are utilized to provide that which is valued most and not wasted on providing that which is not as highly valued. When resources are not tied up providing that which is of lesser valued, there are then more resources available to provide that which is more highly valued.

Now consider what single payer does. Consider a restaurant. Now in a market system, people choose items off of the menu that provide that which they most highly value. If you have a choice between chicken or lobster you will consider if the value to you of lobster over chicken is worth the additionally higher cost of lobster over chicken. If, to you, the value of lobster does not justify the additional cost, then you will choose the chicken. Now consider a single payer system. Since you will be sending the bill to the "single payer" the additional cost of the lobster is of no consequence to you. If you like lobster more than chicken, you will always choose lobster regardless of the actual cost of either. Now, the "single payer" will be paying the cost of providing the lobster even though you don't think the lobster is worth the extra cost. The cost of the meal has been removed from the equation of the person making the choice. Since government is that "single payer," the money to pay for the meals must come from somewhere. That somewhere being taxpayers. Thus we end up being taxed to pay for lobster dinners even though we don't think lobster is worth the additional cost. Thus the only way to control cost in this system is to decree that everyone shall only get chicken. The result now being that even if on occasion, you may feel that lobster is worth the extra cost, that option is not available to you and you no longer have a choice in what to eat. Thus the ultimate result for a single payer system is that either we pay for lobster whether or not we think it is worth the cost or we only get chicken and have no choice in the matter.

So for heath care this is disastrous. The result must necessarily be either that we have out of control health care costs (lobster) or we get no choice as the whether or not to receive certain tests or therapies (chicken). The only way to control health care costs is for those receiving the service to be the ones to decide which tests and therapies actually produce value. Health care costs are reduced because we are not paying for tests and therapies that don't add value and we are not wasting resources on those tests and therapies and making them available to provide tests and therapies that add more value. In order to reduce cost and waste in any market, cost vs. value must be considered. When cost is removed from the equation used to make choices, either waste and excess cost result or rationing and elimination of choice result. People calling for a single payer system are simply trying to avoid making the real choices that must be made and are living in denial that in reality there are real limitations and choices to be made and those choices have real affects on health care costs and resource allocation and utilization. Trying to live in denial of the need to take responsibility for our health care choices, including the costs of those choices, only consigns those choices to be made by government bureaucrats (or insurance bureaucrats). We just get what bureaucrats value, not what we value. Single payer simply replaces one dysfunctional system with another dysfunctional system and gets us no closer to affordable, quality, and abundant health care.

Fundamentally, our current system of health care that allows us to shirk the responsibility to make value based choices is what got us in this situation in the first place. And single payer simply does not fix that problem but merely propagates it. Our "insurance" based system allowed us to ignore the costs of our choices and single payer simply allows us to continue to ignore those costs. Until we stop trying to deny that there are real costs and resources and economic principles to consider in providing health care, we will never be able to deliver affordable, quality, and abundant health care. Those realities can't be swept under the rug by trying to hide those costs with a dysfunctional "insurance" system or with a dysfunctional "public" system. The sooner we face those realities, the sooner we can get the health care we want.

Open Letter to the President

In your State of the Union address, you said you were interested and willing in hearing ideas.

A quote popularly mis-attributed to Mark Twain states: "For every problem there is always a solution that is simple, obvious, and wrong." In the world of political "problem solving" I would restate this as "For every problem there is always a solution that is simple for the laity to understand, ideologically obvious, and in the real world, wrong." Or, to grab a sound bite from an unrelated topic, Democratic Senator Evan Bayh succinctly sums up this principle in stating, "I think this is one of those things that sounded good in theory, but in practice doesn't work so well."

I solve problems for a living. My customers don't care about ideology, wishful thinking, or the earnestness of good intent, they only care about whether or not their problem is solved. Thus I don't have the luxury of solutions based in ideology or wishful thinking. If I am to solve my customers problems I have no option but to create solutions the are pragmatic and within the realm and limitations of reality. "Sounds good in theory" won't solve my customers problems. To do my job, my solutions must actually work in practice.

Unfortunately, politicians never seem to think past "sounded good in theory" and we are left being stuck with the fallout of "in practice doesn't work so well." And not thinking past "sounded good in theory" wouldn't be so bad because then we could at least discuss and debate that and work through to practice. Unfortunately, politicians mistake ideology for theory. So restating Senator Bayh's statement for how politicians really work would be "sounded good ideologically, but in practice doesn't work so well." In my view, this is descriptive of not just Republicans or Democrats, but nearly the entirety of American politics today. And I don't think I'm alone on this.

If you and other politicians are serious about regaining the trust of Americans, politicians must cut through the "sounds good in theory" and start delivering "works in practice." The first step is for politicians to stop trying to bludgeon each other into submission with their ideological clubs. If politicians can't get past that, all hope is lost. It is one thing to listen to what the other has to say and proceed to ignore it, it is another thing entirely to attempt to completely muzzle the other from even saying anything. The attempts of Democrats to completely shut out Republicans from any participation goes beyond the pale and is the height of arrogance, regardless of how you view Republicans. It is unconscionable that Democrats can't even extend that same courtesy to fellow Americans that they apparently want to extend to those outright acting to harm this country. I applaud your meeting with Republicans as a step in the right direction, albeit a small one, to correct this. But even a small first step is sometimes the biggest.

I applaud the effort to call for more civil debate and working together and treating opponents first as fellow Americans. It is very disheartening to see politicians debate policy and legislation not on the basis of merit but on the alleged villainy of the opponent, and "bi-partisanship" apparently meaning the opponent is supposed to surrender to an ideological bludgeoning. It seems to be a widely held belief that the only way someone else can have a differing opinion is if they are evil. In this way, it is then "justified" to ignore the opponent and shut them out of the process. It never seems to be considered that it is not "evil" that is the reason for the dispute, but that one or the other could simply be wrong. The "debate" devolves into who is evil rather than the merits of what is being said. It's politically easier to call someone evil than to prove yourself right and them wrong. If your opponent is evil then by political definition you are right and they are wrong. QED. Except that in reality, they are neither evil nor wrong by extension just because they have a different opinion. Another saying is "never attribute to malice that which can be attributed to ignorance," which I think is at the heart of your call to treat opponents as Americans first. The problem is that attribution to malice provides political justification and expediency in discounting opposition. If the attribution was ignorance, this would then carry an obligation to at least have a discourse with the opposition.

I see in you an internally conflicted individual. You seem at times to shoot from the ideological hip and at others to take aim with reason and pragmatism. I think that you have a capacity to approach problems pragmatically but yet too often you have a knee jerk reaction to the issues to "shoot from the ideological hip." The"shoot from the ideological hip" President Obama gives us things like an edict to close Guantanamo before fully understanding the ramifications in the reality of that order. Ideologue Obama votes against a troop surge in Iraq while pragmatist Obama orders a troop surge in Afghanistan. "Shooting from the ideological hip" produces statements like "the cop acted stupidly." (I guess in a choice between a white cop and a black man facts aren't important when you have ideology to tell you who must have "acted stupidly")

Everyone agrees that health care reform is needed. The disagreement is about the best way to go about that. It is unfair to say Republicans have not contributed, when the reality is that they have been shut out from contributing because they have ideas that are disliked by Democrats. Since Republicans had the audacity to disagree with the solutions being proposed by Democrats and didn't blow sunshine up their nether regions, well, that simply couldn't be tolerated and they were shut out of the process. "We'll listen to what you have to say as long as it is to agree with us" is not bi-partisanship. You also refer to the "Party of No" as if that's a bad thing. When the bus is in imminent danger of being driven over the cliff, "No" is the first order of business before suggesting an alternate destination. Today the people and the Republicans are saying "stop the bus!" And before that when Republicans were in the drivers seat, the people and Democrats were saying "stop the bus!" And in both cases, the driver was accused of heading for the cliff out of malice rather than ignorance. And the driver accused those trying to stop the bus as evil for not letting him follow his good intentions even though doing so takes the bus over the cliff. When the only choices we are allowed is to continue over the cliff or to stop the bus, then the "Party of NO" is exactly what we need and it's not a bad thing. Now that the bus seems to be coming to a stop, perhaps now we can discuss an alternate heading that doesn't take us over a cliff.

You claim that Republicans should be happy about working to end deficit spending. Unfortunately this claim shows to independents such as myself as well as Republicans, that you don't fully understand the problem. While eliminating deficits is important, as a matter of budgetary policy it's simply a bait-and-switch for dealing with the real problem. If deficits were the only problem, that is easy solve, simply tax people into oblivion. But that's why people are not satisfied with merely ending deficits, the problem is to stop spending so damn much of our money in the first place. Ending deficits merely means that our children are not being saddled with our debt, it doesn't mean we aren't being taxed into the poor house instead. Just because you stick it to today's taxpayers rather than tomorrow's doesn't make it OK and it certainly doesn't make it somehow free of cost. New spending with $0 in deficit spending is not the same thing as spending $0 more. New spending of $10T with $10T in new taxes would be zero deficit spending. $10T in new deficit spending would clearly a problem. But $10T in new taxes doesn't make it not a problem and somehow negate the $10T cost. The problem then becomes the $10T in new taxes used to zero-out the deficit. It's not so much a problem of who's getting stuck with the bill, as it's a problem of stop racking up such a massive bill in the first place. More government spending without deficits doesn't mean it's free and not yet more burden on taxpayers. You say that all this new spending is being paid for with taxes on other people. We're not that stupid. The new tax bill may be delivered to somebody else, but in the end we're the ones who pay. Just because we're not being taxed directly doesn't mean we're not the ones ultimately paying the bill. Follow the money. It is widely understood that ultimately consumers drive the economy because that's where the money begins. The same principles hold for taxation: consumers are ultimately who pay for government. Money flows from consumers into the economy, taxes merely flow in the opposite direction onto the shoulders of consumers. Saying we're getting a tax cut because you're handing the bill to someone else is just political smoke and mirrors. Every new dollar of government spending might not come directly out of our pocket directly, but one way or another, it eventually does.

"Pay-as-you-go" is a good approach to dealing with the problem of deficits and also the larger problem of out of control spending. This effectively attaches a cost to every new measure. This is like the difference between paying with credit and paying with cash. It is analogous to the difference between "asking permission" and "asking forgiveness". "Pay-as-you-go" requires asking permission. Creating new spending without funding is then like "asking forgiveness." Once the spending has been created it becomes a question of how to fund it, not if it should have been created in the first place. It is too easy to create new spending when you are not on the hook for funding it. Having to fund it up front makes it that much harder to create new spending in the first place. When you pay with credit, it is too easy to put off worrying about how you will pay for something. This is what leads to consumers being in debt to the tune of $10,000, on average, for every U.S. consumer. This is also how deficits and government spending get out of control. When you pay with cash, you have no choice but to deal with the cost at that time and maybe decide you don't really need a thing after all, rather than letting the costs and debt skyrocket into a problem deferred to the future. One key difference that needs to be addressed; however, is that when consumers want to spend more than their income will allow, they can't simply go to their employer and extort more money out of their employer. Government needs to also work within the reality that it can't endlessly soak taxpayers for more and more taxes as if taxpayers were government's personal bottomless ATM. It should not be forgotten that it was the vision of our Founding Fathers that government is supposed to be a means to people making better lives for themselves, government is not supposed to be an end in itself. Government is supposed to help us work for ourselves, not for us to become slaves to government.

I was heartened to hear you statement that the best anti-poverty program around is a world-class education. I am a believer in the saying "give a man a fish, feed him for a day, teach a man to fish feed him for a lifetime." The solution is not a system that creates more handouts and entitlement programs and creates a "dependence society" that is dependent on those programs, but rather a system that works do develop self-reliance and self-sufficiency so that people provide for themselves and can be competitive in a global economy. And yes, sometimes that means people must be pushed kicking and screaming toward self-reliance. And further, a society that let's the people influence things such as economic policy and the application of science needs to better understand what they are influencing. We don't let the passengers on an airplane make the engineering choices for the engineers designing the aircraft because the passengers lack the education, training, and experience to do that. But when it comes to things such as the economy and health care, this is essentially exactly what we allow. If people are going to be influencing policy on issues such as these, it is in our interest that they have the tools to understand the principles involved. And our elected officials and policy makers are only as capable and equipped as the pool from which they are drawn. Thus our elected officials must also have the tools to understand, explain, and justify the policies they are legislating. If we are to be able to cut through the ignorance and ideology and not be held back by that, people must have the tools to see the way forward. You can't design an aircraft by a committee of laypeople, especially when those people fundamentally have no concept of aerodynamics and aeronautical engineering.

This doesn't mean passengers (and the pilots!) have to be able to design an airplane, but they should be equipped to understand the principles involved enough to grasp the significance of what it is the aircraft engineers are doing. Frankly, it is a problem when people think that having heard the term "supply and demand" along with five minutes of contemplation makes them more of an expert on economics that economists who have made the study of economics their life's work. It's a problem when people think that fundamental economic principles and scientific theories are simply a matter of ideological debate. As if the right ideological argument can somehow make 2+2 not equal 4, or somehow make an object thrown off of a cliff to not be influenced by gravity, or that somehow obstructing the free market can eliminate market influences on the economy. We won't be able to solve our problems when people seem to think that fundamental laws of nature, science, and math and principles of economics are no more than matters of ideological debate or that the way to resolve our ideological differences is with more earnest ideological demagoguery rather than with an understanding of the fundamental principles involved.

The solution to health care is not found with the denial of fundamental economic principles. We don't build airplanes by denying the existence of nature's law of gravity, we build airplanes by harnessing the laws of nature. The same is true for health care, we don't fix health care by denying laws of economics, but by harnessing the laws of economics. People will say that countries with government provided health care are able to successfully provide health care. Well, first, it is debatable as to how well this is achieved. Even if we were to say that these are the best systems we have, that doesn't mean that they are the best possible. I would argue far from it. Governments can also build cars and produce food, but I think when we look at this in comparison to what competitive free markets produce, it is clear which is better. Government farms feed their people, barely if at all. Competitive free markets feed the rest of the world. Governments can produce cars like the Trabant, Yugo, and Volga. Competitive free markets produce cars like Honda, and VW, and Toyota. And yes I list Toyota deliberately. When a company like Toyota screws up we still have other high quality and affordable options. When "government motors" is your only option and it screws up, you just have to accept that. If we want not just marginally acceptable health care but rather the best possible health care on the planet, we can't allow ourselves to be held back by denying fundamental economic principles. If we follow the models of others, then we will have health care that is no better than anybody else's. We didn't create a quality of life, an economy ,and technologies that are the envy of the world by following others. Likewise, we should not limit ourselves in health care by limiting ourselves to what has already been proven marginal at best elsewhere.

I think that fundamentally the take away is that, yes, people want health care reform, but they don't want government take over because having government provided goods and services as your only option simply cannot produce those goods and services with the same quality, affordability, abundance, and advancement as can competitive free markets. The solution to the question is how can we leverage those forces of competitive free markets to produce not only the best health care system the world has seen, but also the best health care system humanly possible? People are clamoring for real health care reform but politicians simply keep warming over the same rejected government programs. I think this is just another example of when the only tool in you tool box is a hammer, every problem looks like a nail. The problem is that the only tool in Democrats' ideological tool box is government take over, so every problem looks like the only solution is government takeover such and entitlement programs and handouts all on the backs of hard working taxpayers and government over-regulation that increases costs and reduces jobs. This is not what Americans want. On the other hand, the only tool in Republicans tool box is laissez-faire policies. Americans don't want this either.

What has been proffered under the guise of "health care reform" is not health care reform but health care financing legislation. Consider going to a restaurant. The issue has devolved into paying the bill with cash, credit, or debit. This doesn't fundamentally change the bottom line on the bill. In fact, what is being proposed not only doesn't address the cost of what we are eating, but also attempts to pay the bill for everyone else's meal as well. This doesn't make our cost go down, it makes it go up. The way to bring down the bottom line of the bill is to change what items are ordered and, more fundamentally the cost of producing the items on the menu. Unfortunately, it's much more "simple" and "obvious" to argue over how to pay the bill than to address what drives the cost of the bill in the first place.

So here is what we should be doing. First, forget about single payer or the so called "public option". The statement about a solution that is simple, obvious, and wrong applies to "single payer" and the "public option". And saying that there are a few medical professionals that advocate single payer, or some such, is nothing other than the same argument by creationists that claim that a few scientists believe creationism somehow proves evolution wrong in the face of all of the other scientists who say otherwise. The first thing that needs to happen before we can extricate ourselves from this ideological morass is to step back and understand what is insurance. In your address, you stated "...who are just one illness away from financial ruin" and this is at the core of what health insurance is supposed to do, no more, no less. Ask your advisors what exactly is the fundamental insurance business model and the math behind it. Our current health care "insurance" and what we are asking of it is far from this. At best we are asking insurance to be a financier, at worst we are asking it to be an agent of socialization. This is largely why our health care system and the proposed "solutions" are such a mess. Insurance companies have been pushed, and are being pushed further, into roles for which they are ill equipped and not the best solution. One of the first things that should be obvious is the issue of "pre-existing conditions." When people buy auto insurance, it is pretty much obvious that if you've had an accident and then buy insurance, it is completely absurd to expect to pay for the accident that you had before the policy was active because that is fundamentally not how insurance works. Yet people are completely baffled when "insurance" companies don't cover pre-existing conditions when that is precisely the health care equivalent of expecting an auto insurer to pay for an accident you've already had. I also disagree with the assertion that insurance should "cover preventive care." This is not the job of insurance. We don't expect our auto insurance to pay for oil changes because this is not insurance and is not financially effective. If we did this, the insurance company would simply bill us for the oil change and tack on additional charges to provide that "service". So why do we expect our health insurance to provide this "service" and why are we surprised when doing so makes it so expensive? Why would you give money to an insurer that you know 100% you are going to ask for it back, only so that the insurer can keep some of it by acting as a middle man? This isn't "insurance." Isn't this better served by a different financial business model? The answer to this is HSAs that really work and that are not a farce. The company I would for provides it's employees' just such a program. Our HSA is managed by a finance company, not an insurance company, and has the ease of use of a debit card (literally). I am baffled as to why insurance company financed preventative care is to be preferred to financing through actual financial institutions. But that's part of the problem, that we have become so conditioned that insurance companies should not only handle the actual insurance aspects of health care, but also all other aspects of paying for health care and we really need to get away from that. Insurance needs to get back to focusing exclusively on the business of insurance and not of running the entirety of health care. And in as much as insurance companies should focus on the business of insurance, that also needs to be conducted in an environment of a competitive free market. And no, adding just one more dysfunctional "competitor" to a dysfunctional market doesn't somehow make it a healthy functioning market that will reduce costs. The only way to do this is to fully enable the forces of a competitive free market and this starts with eliminating protectionist regulation. This is not meant as a recipe for health care reform but rather to point out that we can't devise health care reform by denying fundamental principles. You can dress a pig in a tutu and expect it to magically become a ballerina. Pigs are good for what pigs are, and that is not ballet and a tutu won't change that. Similarly, we can't simply layer on more legislation on top of our misconceptions of how we think health care ought to work and expect it to magically provide quality, affordable and abundant health care to everyone. Before anything can work, we must first get the fundamental principles right. And this includes not mistaking ideology for fact.

These reforms are only a start and do not address the core business of health care and it doesn't address how to provide health care to those who can't afford it. For that I think we can look to a model that we already know basically works. Our system of free market agriculture is the worlds largest producer of food and as a result, feeds a significant portion of the world. On the other hand, we look at countries whose "solution" is for government to provide food and they are in most cases only marginally able to even feed even just themselves. Why would we think health care would be any different? No, the answer to extending health care is not for government to provide it to everyone with the only possible result that no one gets particularly great health care, if at all. The best solution is for the forces of competitive free enterprise to produce the highest quality, affordable, and abundant health care with government assistance for those who cannot afford it themselves. If we can feed the world with this model, why would this not produce the same result in health care? However, we do need to beware of the "freeloader" mentality. I worked hard and made wise choices so that I would not be dependent on government for my needs, including health care (in spite of liberals' attempts to force me into dependency on government). Now, what should not happen is that the "reward" for my hard work is to not only provide for myself but also those who are too lazy to take responsibility for providing for their own needs or those who make unwise choices and are unwilling to deal appropriately with the consequences. When people make life choices, they inherently understand that they have an obligation to provide food and shelter for themselves. What should not happen is for people get a pass on their obligation to provide their own health care and pass that obligation on to those of us who do take the responsibility to shoulder our own obligation for ourselves. Some people claim that there is a "right" to health care. Let's say for the sake of argument this is true, that does not somehow extend into a right to expect other people to provide that. Even if you have a right to health care, you don't have a right to take it from other people. If there is a right for people to demand other people to provide them with health care, then who do those people providing them their health care get to demand provide their health care? And what about my right to keep what I worked so hard for? If you want what I have, what gives you the "right" to just take it from me rather than working hard and making wise choices yourself as I have done? This is part of the problem with the proposals in the legislation that deal with how to pay for the legislation. It presents a kind of "Morton's fork" in that if you can afford your own health care then you can obviously afford to pay for other peoples' health care also. I think this is at the core of why unions are opposed to the proposed taxes, or fees, or however you spin it, that are to be levied on peoples' health care plans.

The way to provide quality, affordable, and abundant health care is not through direct government control. Attempting to suppress or subvert free markets is not the solution. The most effective solution is to leverage the free market mechanisms that are already know to be effective in producing quality, affordability, and abundance in every other market. And introducing a dysfunctional "public option" "competitor" into a dysfunctional market doesn't magically transform it into a healthy, functioning market. One of my favorite illustrative stories is this. Years ago the Lotus Formula One race team embarked on a program to develop "active suspensions" for their race cars. An "active suspension" is one where computers and hydraulic rams directly control the movement of the suspension rather than with springs and shocks. What they discovered is that this approach yielded inferior results and at greater cost and complexity than conventional methods. What was realized is that the classic spring and shock suspension was far more effective than direct control. The point being that if direct control could not produce better results over natural physical elements in something as relatively simple as a race car suspension, how can we conceivably hope to produce better results with direct control in something orders of magnitude more complex? Just like leveraging existing elements produced superior results to direct control for race car suspensions, we already have fundamental economic elements that can naturally produce quality, affordability, and abundance. As in race car suspension engineering, the best economic results are obtained by better leveraging the already naturally occurring and understood elements rather than attempting to directly control the system in contradiction to the governing physical or economic principles.

I also disagree with the constant scapegoating and vilification of lobbyists. I'm not saying that lobbyist don't wield undo influence. What I am saying is that in the political debate, everyone has a right to make their concerns heard and considered about how policy and legislation affects them. An important tool to enable people to express their concerns to politicians is through lobbyists and special interest groups. The point being that lobbyists and special interest groups perform an important function in a democratic system and should not be universally vilified out of hand because that access gets abused at times. It is a two edged sword. Lobbyists and special interest groups give the voices of the people access to politicians to have their voices heard. At the same time, that access creates opportunity for abuse. And really what are lobbyists and special interest groups? A lobbyists and special interest groups represent a collection people, Americans, who have a particular focus, and have a right to express their concerns about the impacts of legislation the same as any other American. It is a key feature of our system and the intent of our Founding Fathers that just because you are in the minority does not mean you have fewer rights. Even those in the minority have equal rights as anyone else. Being in the majority does not give anyone the right to infringe the rights of others and being in the minority does not forfeit your right to protect your rights against abuse by the majority. Lobbyists and special interest groups are the important tools available to those who may be in a minority position to protect their rights against the tyranny of the majority.

I would agree with the popular assessment that government it trying to take on too much. Your argument that there is no reason to not strive for "too much" rings hollow when, for example, on the other hand you argue that prosecuting two wars has distracted us from the fundamental issue of combating terrorists. The issue is simply one of resources and opportunity cost. We lack the resources to prosecute two wars with the resulting opportunity cost of losing focus and dropping the ball on battling terrorism. Similarly Congress simply lacks the resources to pursue the immense agenda that Congress and even the President has laid out for itself. Congress became obsessed with health care with the resulting opportunity cost being the failure to address the more immediate needs of the economy and jobs. We can attempt to solve every major problem that ideology tells us we "must" address and not solve any of them as a result. Or we can choose our battles and solve the most pressing and immediate problems and then move on to others. Health care reform is needed, but health care reform doesn't solve the more immediate problem of putting food on the table and a roof over our heads. Ideologues proclaim all of these issues that "must" be addressed and "can't wait", but if in so doing we fail to solve any of them because resources become spread so thin that no single problem has sufficient resources to solve it, who has really been served and benefited? What is the point in pursuing health care reform if in so doing, we not only fail in producing health care reform, but also incur the opportunity cost of failing to put food on the table and a roof over our heads? It may serve the purposes of ideological pandering to refuse to accept limitations on what can be achieved, but the reality is, yeah, you kinda do have to accept that there are limitations. In a battle between ideology and reality, ideology will always ultimately lose. Denying the harsh reality that limitations really do exist is not the road to solving problems. If you were to deny the limitations of gravity and go jump off a cliff as a result, no amount of earnest, heartfelt ideological denial will prevent the resulting rude awakening. There are numerous programs that can be run your desktop computer. But try to run all of them at the same time and the result is it can't run any of them.

You are right, the people want their money back that has been lent to some financial institutions. However, there s a right way and a wrong way to go about that. If they are in violation of the law or a contract, there are courts to deal with that. If they are not in any violation, then imposing a "fee" is just political vigilantism via taxation and retroactive legislation. It's pretty scary when government decides to legislate punitive measures simply because they don't like someone very much. If government failed to satisfactorily craft the legislation to compel repayment, well that's your screw up (act in haste, repent in leisure) and you don't have a right to retroactively alter the contract with punitive ex-post-facto taxation, or 'fee' as you call it. No one has a right to unilaterally and retroactively impose a new contract on someone just because the one they both signed up for didn't produce favorable results. This is also true with government and it's pretty scary when government thinks it can harass someone, no matter how much disliked, with punitive and arbitrary taxes ("fee" is just a legalese euphemism for "arbitrary taxation" to avoid calling it a tax) just because poorly crafted legislation failed to produce the desired results. It is not OK to pass a poorly crafted law and then expostfacto turn around and say "what we meant to say was..." This is not how a system of rule-of-law works. If you can't write legislation that says what you mean, don't be surprised when you don't get what you expected. And when you don't get what you wanted, move on and let that be a lesson to you to be more deliberative next time. A system where to people are obligated to second guess what the law "really meant", when all they have is the words in front of them, is a system where people must live in fear of government harassment, as they can never be sure of what is legal behavior when the law is left open to interpretation, at best, and at worst, reading meaning into a law that was never intended. In a system of rule of law, the people have an obligation to comply with the law and so too does government have an obligation to comply with not only the law but also the implied social contract of fairness and objectivity in treatment of the people with respect to the rule of law. People are opposed to warrentless wiretapping because once you start down that road, where does it end. Similarly, when government starts reaching into the pockets of law abiding citizens under the guise of a "fee" not because they have broken any laws but just because you don't like them and think they owe you, people are concerned that it will never end and eventually government will start picking their pockets too. It creates a society of fear that you could follow all the rules and still be punished by government. This is exactly the kind of government the first American settlers came here trying to escape.

"Toyota" Still Better Than Government Run

I made a comment in a previous post that I would prefer "Toyota" health care to government run health care. I can here it now, "so how do you like Toyota now?" Well, my claim still stands. Sure, Toyota has flamed out, but I still have numerous other quality options. I could instead buy from Honda, VW, Ford, and any number of other manufacturers. If Government Run Motors was our source of cars, what choices would we have? We'd just have to accept inferior quality. It's not like government is immune to similar meltdowns. Katrina anyone? But unlike free markets, if government run markets have a meltdown, we're pretty much just SOL. It's not like government faces the same pressures that Toyota faces to get it right. In the case of Toyota, having options, Toyota has a huge incentive to make it right. Making it right is a do or die situation for Toyota. In government markets, what incentive do they have? It's not like government has the immediate concern about going out of business. If a government run market melts down, we have no options and there is little incentive for government to fix it. In a free market, we still have other quality options, and any company in melt down has a huge incentive to fix it. This is fundamentally why government control is inferior to competitive free markets. Government control simply lacks the incentives to push for quality and to fix flame-outs because government will simply continue to exist whether it gets fixed or not. It's not like government is going to go out of business if they fail to delivery quality. For businesses, it's a do or die proposition and this creates huge incentives that simply don't exist in government run markets. And true this doesn't always produce the most desired results. But if markets where these incentives exist is imperfect, what hope is there of desirable results when these incentives simply don't exist?

A Better Approach to Economic Policy

Perhaps one of the biggest roadblocks to effective economic policy is the usual impediment of both the public and politicians to get the big picture. As per usual, the subject of economics is viewed through the same black and white lens as is everything else. Everything can only be black or it can be white, there are no grays, there are no colors. The problem is that in reality, there are grays and there are colors and it is usually in these grays and colors that the most effective solutions are found. Economics is no different. When it comes to competitive free markets, the prevailing views are that of either a complete laissez-faire approach or that of onerous and stifling government intervention and control. One ideology says that the best solution is zero involvement by government while the competing ideology is that government must bludgeon the economy into submission. Both strategies are doomed to be ineffective solutions at best and outright disaster at worst.

To understand why this is the case, we must first understand how competitive free markets work. First, the principles and properties of markets is not a philosophy any more the the theory of gravity is a philosophy. We know that dropping an object, that object will fall in accordance with the laws of physics, and where gravity is the only force, that object must necessarily fall. No amount of philosophical debate will change how the physical laws act on that object. We don't need to know the math behind the laws that govern the laws to know their qualitative effects are real. The same is true with economics. The economic laws of supply and demand are fundamental economic laws, just as gravity is a fundamental physical law. It is also a fundamental fact that if there is insufficient profit opportunity to make it worthwhile for people (suppliers) to enter a market, they will simply take their effort and investment to other markets with greater opportunity for profit. The result being that if the profit opportunity is insufficient to entice people to serve that market, then that market goes under supplied and rationing results. It doesn't take a rocket scientist to understand this fundamental concept, yet people seem eternally unable to understand why free markets with price controls (or profit restrictions, or excessive punitive taxation) are subject to rationing. The key here is that unless forced labor is employed, all markets are necessarily "free" on the supply side. Unless people are forced into working particular markets, they are FREE to enter or leave any market as they see fit. If there is insufficient profit opportunity in a market to entice people to make the free choice to serve that market, they will freely choose to serve other markets. The point here being that treating markets as free markets is not a philosophical option, but a fundamental economic principle that must be considered in any economic policy.

Mathematically, the economy is represented as what is referred to as a "system of of equations." What those equations are specifically is not germane to this discussion. In fact, the equations are so complex that the exact forms of those equations are hotly debated and this is one of the reasons why attempts to directly control markets is a lost cause. If you don't even know the exact form of the math governing the economy, how can you hope to directly control the market without wrecking havoc? Fortunately for us, to construct a healthy, vibrant economy that serves us effectively and efficiently, we need not know the exact details of all of the equations.

One of my favorite illustrative stories is this. Years ago the Lotus Formula One race team embarked on a program to develop "active suspensions" for their race cars. An "active suspension" is one where computers and hydraulic rams directly control the movement of the suspension rather than with springs and shocks. What they discovered is that this approach yielded inferior results and at greater cost and complexity than conventional suspension designs. What was realized is that the classic spring and shock suspension was far more effective and efficient than direct control. The point being that if direct control could not produce better results than natural physical elements in something as relatively simple as a race car suspension, how can we conceivably hope to produce better results with direct control in something orders of magnitude more complex like the economy? To deploy an active suspension, engineers must know the exact form of all of the equations that govern race car suspension dynamics. But fortunately for race car engineers, the existing elements that compose a conventional race car suspension naturally "solve" those systems of equations effectively and efficiently. The same is true of economics in that the fundamental nature of the existing elements of economics already naturally, effectively, and efficiently "solves" the systems of equations that govern the economy, in whatever form they take, if we would only let them.

What does it mean to "solve" these systems of equations? First let me say that we don't need to know the entirety of specific details of the equations to know what the solutions look like. In mathematical terms, it would be said that we know the basic form the equations take and as such, we can also know the basic form the solution will take. So what does that mean? Its like if we see an image of a face, we don't need to know who's face of even be able to see much detail to know that it is an image of a face. OK but what does a "solution" look like? Well this is key to being able to develop practical and effective economic solutions - not what it looks like so much as what is a "solution."

Consider a bowl that occupies some space. In this example, the bowl represents what is referred to as a "solution space". Now imagine we have a marble the is free to roll around in the bowl. This marble represents what we call the "instantaneous state solution." Don't worry we're getting close. The location (and trajectory) of the marble represents inputs to the system of equations. If the system of equations are mathematically consistent with these inputs, this location is considered a solution of the system of equations. In our example, any place that the marble is located on the surface of the bowl will satisfy the system of equations that describes the bowl. If the marble is somewhere that is not in the bowl, the equations are NOT satisfied. Mathematically this means that the equation reduces down to something that is incorrect or inconsistent, such as 2=3, which is mathematically incorrect and therefore not a solution to the system of equations. So what does this mean physically and why can't we have the marble not on the bowl? Consider an articulated doll. There is a system of equations that describes the movements of the limbs and joints. Any positioning of the limbs that doesn't break the doll is thus a solution to those equations. If you attempt to put a limb in a position that is not a solution to the equations, the limb breaks or is damaged. Conversely, a position that breaks or damages a limb is not a solution to the equations that describe the doll. And this is the point in economics, if the economy is forced into a state that is not a solution to the equations that describe the economy, then things break and bad things happen to people. In extreme cases, this is things like rationing, starvation, people losing their homes and their jobs, etc.

So what does this mean for economic policy? Well, first let me just say, this is why policies that attempt to force the economy into a state that is not in the "solution space" are a bad thing. The big problem when trying to force the economy into a particular state is how do you know when a state is in the solution space or not? The problem is, given the complexity of the system, you don't. Remember the race car suspension? The good news is that just like that, we don't need to know exactly what the solution space is, if we skillfully use the properties of the natural elements we have available to us. In the example of the race car suspension and the marble in the bowl, these are what are called "equilibrium seeking systems." In the case of the race car suspension, the suspension naturally seeks equilibrium between gravity and the action of the spring against the weight of the car. In the marble in the bowl, being at the bottom is the equilibrium state and the marble will naturally roll to the bottom. The marbel also represents what is wrong with laissez-fair government policy. If the marble rolls down one side, it then rolls past the equilibrium point and up the other side. The marble could keep doing this forever unless there is some amount of rolling resistance such that it eventually stops the marble at the bottom. Obviously, never stopping at the bottom of the bowl, economically speaking, is not a good thing. This is what we refer to as an "under-damped" system. The Tacoma Narrows Bridge is a classic example of what can happen in an under-damped system. The motion of the marble in the bowl is what we call a "trajectory." The good news is that economics is also naturally an equilibrium system. The bad news is that, just as in the case of the marble rolling in the bowl, "equilibrium seeking" does not mean that equilibrium is reached in what we might consider a controlled fashion. And that being the case, the resulting trajectory could take the economy into realms where disaster results. This is at the core of arguments against free market economics. The problem with this as an argument is that it doesn't disprove the reality of market economics. This is the same as attempting to use the fact of someone dying from falling off of a cliff to disprove gravity as a philosophy. At a fundamental level, we can't understand how it is that person died if we deny gravity on philosophical grounds. Similarly, we can't understand economic calamity and take action to rectify the situation by denying market principles on philosophical grounds. You can't just nullify laws of physics or economics because you disagree with them on philosophical grounds, no matter how earnestly you hold that philosophy.

Now we have enough to get to the meat. Consider a chalet at the base of a hill. At the top of the hill is a large boulder that is rolling down the hill toward the chalet. Now, those subscribing to an ideology of government control of the economy would attempt to stop the boulder in its tracks. Obviously the first problem is simply not just getting run over by the boulder in the process. The second problem is, even if we are successful is stopping the boulder, we can't hope to simply hold it there forever. On the other hand, those subscribing to a laissez-faire ideology, would simply do nothing and let the boulder smash the chalet since philosophically, the trajectory of the boulder must not be tampered with. Obviously, both ideologies produce unacceptable results. Now what we can and should do is to deflect the boulder from it's current trajectory. This effectively uses the existing physics already at work to effectively and safely save the chalet in a sustainable manner with little effort on our part.

The best most effective economic policy is one that leverages the principles of economics that naturally and effectively "solves" the system of equations that is the economy but yet directs the trajectory of that solution into a direction that is beneficial and not counter-productive or outright destructive. In the example of the race car suspension, this is analogous to tuning the spring rates and shock rates, and choosing the geometry of the suspension components. Rather than trying to do all the work ourselves with computers and hydraulic rams with sometimes disastrous results and at great cost and complexity, let the springs and shocks and suspension components do the work that they already do effectively and tune them to produce optimal results. The key to such an economic policy, as is suspension design, is to create what is referred to as a "critically damped" system. Just as the shocks control the speed at which the suspension reacts, we can also attempt to moderate the rate at which the economy reacts. We already do this to a degree by influencing interest rates. However, when expressions such as "irrational exuberance" start creeping into the daily lexicon, that should be a indicator that we are dealing with an "under-damped" system.

The key to economic policy is thus not to attempt to directly control the economy into a state that subverts the natural equilibrium or obstructs or prevents the natural equilibrium seeking forces or, at worst, that is not a solution to the system of equations and the concomitant resulting disaster, but rather, to leverage those natural equilibrium seeking forces in a controlled manner that safely, effectively, and efficiently arrives at a sustainable equilibrium via a trajectory that the produces the maximum benefit and minimum damages.

And now for the extra credit. However, in reality we know that the economy is not a static system. The equilibrium point is a continually moving target. It is not like it is simply a problem of finding equilibrium and we're done. A simple example is a "fad". When something becomes more or less popular, this moves the equilibrium point. This is readily apparent by the fact that when something becomes more or less popular, the demand changes accordingly. Shopping for Christmas toys is usually a pretty stark example. If the producer of a popular toy, underestimates the popularity of that toy, the supply and demand equilibrium for that toy is totally thrown out of balance. This is why it is doubly important to leverage the natural "equilibrium seeking" aspect of market dynamics to function properly. It is impossible enough to directly control an economy whose equilibrium never changes, but to make that a moving target makes it yet orders of magnitude more complex a task as the shifting market must also be factored into those direct controls.

If The Profit Being Made Is The Profit That Is Required To Get Food To The Table, Then It Isn't "Obscene"

People will attempt to counter explanations of free market economic principles by giving individual counter examples. The problem with this is that it is not individual behavior that moves markets, it is the behavior of individuals in aggregate that moves markets. For example, a proposed solution to health care costs is to simply pay doctors less. Free market principles tell us that the result to paying doctors less can only be to have fewer doctors in practice. Contrarians observe that if doctor pay is reduced there are doctors who will continue to practice. And this is absolutely correct. However, the problem lies not with these individual doctors who choose to continue to practice, but with those who decide it is no longer worth their while to continue to practice or to start a practice that produces an aggregate reduction in the number of practicing doctors. Reducing pay will not make some people now decide to become doctors as if "I'll become a doctor now that I'll make less money." What will happen is that people will decide it is no longer sufficiently profitable or even possible to keep their practice open and people will decide that it is no longer worth their while to make the huge investment in becoming a doctor in the first place. The only possible result to reducing doctor pay being fewer practicing doctors. And this is the case in any competitive free market.

Many people think that it is possible to choose what is the "right" amount of profit to earn in any market. They are outraged at the perceived "obscene" profits some people make in some markets. They think that it is possible to set by edict, decree, or fiat the profit one can earn in any given market. The problem is that the "right" amount of profit is that which makes supply sufficiently abundant to meet demand. This is why competitive free markets are "genius" in producing abundant supply. They naturally find the right amount of profit that is required to make sufficient supply available to meet demand, no more, no less. This is called an "equilibrium seeking" system.

Profit available in the market increases to entice more and more people to decide that it is worth their time to supply the market in question. Once demand is met, profit stabilizes and stops increasing. Profit is held in check by competitive market forces. It can be viewed as demand drives up available profits to draw in more supply to satisfy demand. Once the demand is satisfied, there is no longer a force to increase available profits any further. The "equilibrium seeking" aspect is that if profits continued to increase, this would draw in even more supply that would now be in excess of demand. When there is an oversupply, this forces prices down which results in decreasing profits. Thus a fully functional competitive market naturally limits the profits that can be made. Furthermore, if profit is reduced, it can only cause some people to reverse their decision to supply the market and available supply decreases. Thus market forces function to find the exact required profit opportunity to keep supply and demand in equilibrium.

Free competition is the mechanism that creates one of the forces that produces the "equilibrium seeking" nature of competitive free markets. Without going into detail on the mathematical principles involved (which I am happy to discuss but are much more involved than necessary for this discussion), the net effect is that market competition culls the players so that those willing to take the least amount of profit are left. No one else is willing to enter the market at the prevailing profit or less profit, or else they would already be in the market. The necessary result in reducing the available profit is that, while certainly there are those who will accept the reduction, there are those who are "fence sitters" at the prevailing profit and would thus choose or be forced to exit the market if profit is reduced. And since all players who would be willing to supply the market at the new prevailing reduced profit already entered the market at the previous higher profit, the is no one to replace those "fence sitters" who exit the market. Thus the result is can only be reduced supply in the market.

We are seeing a real-life experiment on this effect today in Venezuela. Venezuelans had access to food in relative abundance. Then Chavez decides that those providing the food are making "too much profit" and that it was "immoral" to make that much profit in providing food. So he instituted new price controls to reduce the profit these people could make. The inevitable fallout is that many of the providers decided it was no longer worth their while to provide food at the new reduced profit. As a result, the food supply has dwindled and Venezuelans now have much less access to food and some resort to black markets in order to obtain the food they need. For Venezuelans, the "right" profit is not what has been decreed, but that which enables food to be put on their tables.

One "Counter Example" Does not Disprove a Body of Knowledge

I use quotes around "counter example" because often times a "counter examples" asserted by the laity is in fact not a counter example but a confirmation of the theory. Consider air travel. The design of aircraft is governed by the body of knowledge, both experimental and experientially, that describes the laws of aerodynamics, properties of materials, and gravity, etc. A thriving air travel industry has been built on the knowledge base. Now, the critic would present an airplane crash as "proof" that the theories on aerodynamics, properties of materials, and gravity are wrong. For simplicity, let's assume such a crash was the result of a structural failure in the wing. The thing is this doesn't disprove the body of knowledge but rather confirms it. The structural failure would have occurred as understood with known principles of materials properties and structural engineering, thus confirming this knowledge base, not contradicting. And one the wing had failed, the aircraft aerodynamics would be such that they could no longer counter the force of gravity, thus the plane crash is a confirmation of the laws of aerodynamics and gravity, not contradiction. The crash is a confirmation of this knowledge base, not a contradiction, because the existing knowledge base explains why and how this occurred. This is why we don't scrap the air travel industry as being based on "misguided" aerodynamics and such every time a plane crashes.

Now lets turn our attention to a current popular "contradictory example" for market economics, the failure of GM. Quite simply let's revisit one of the key principles of competitive free market economics. That is that any producer that cannot compete against other producers in a market governed by the prevailing supply and demand conditions will necessarily be forced out of the market to make room for the produces who have a more effective and efficient business model and thus better able to serve the interests of the market. In this case, the failure of GM is not in contraction but exact accordance and confirmation with market theories. GM became bloated, ineffective, and inefficient and could not operate as effective and efficient a business as, for example, Toyota. Thus, had things been allowed to progress naturally, more effective companies such as Toyota would have displaced an uncompetitive GM in the auto market. This process is explicitly why western auto manufactures produce a higher caliber of product than communist block auto manufacturers are capable of. In the free market, the market undergoes continual evolution with the result being ever more advanced product, at higher qualities, and at reduced prices. On the other hand, and this is key, in communist block countries, there is neither the incentive, as there is no opportunity for profit, nor is there a mechanism, as all production is run by the government, for someone with a better way of doing things that advances the product and makes it less expensive to displace the laggards. In the specific case of GM, that company was incapable of evolving its product focus as business model as were companies such as Toyota with the result being that they were incapable of surviving in the market. Companies such as Toyota were better able to serve the market than was GM, with the result being the GM was dying off to make way for other companies that were more capable of serving the market.

Letting "Immoral Profit" Get in the way of Health Care

In the Middle Ages, Western culture had the same "anti-profit" mind set regarding usury. Church doctrine at the time was that usury was immoral and therefore forbidden to Christians. The zeitgeist at the time was that profiting from the lending of money was immoral. Jews, not being part of the Christian religious establishment, where not bound by such strictures. This, combined with Jews being bared from the conventional trades of the time essentially pushed them into usury. I think a compelling argument could be made that the advent of usury gaining a toe hold and it's implementation by the Jewish community was a significant contributing factor to making the Renaissance possible by making available the financing required to drive the Renaissance. The point being that the Renaissance was made possible by getting past the notion that usury for profit was "immoral" and accepting it at least a unnecessary evil to improve the quality of life. And the corollary then is that regions that did not have access to the for-profit-lending of Jewish usury were at a developmental disadvantage as a result.

In modern times we have seen what the engine of profit opportunity in competitive free markets can achieve. And what's more we have "experimental controls" against which to compare. In scientific endeavors, experimental validation of a theory requires not only demonstration that the theory in fact produces the predicted results, but also "control sets" that demonstrate that absence of the theoretical mechanism does not produce similar or contrary results. We are well aware of the notion of "double blind trials" in medical pursuits used to validate new therapies. We have the same situation available to us for the study of market economics, if; however, not quite as rigorous as in a laboratory environment. Our market enabled consumerism has product some of the most vast leaps in technology and production. Two glaring examples are the production of automobiles and food. The stark contrast between Eastern European and Western produced autos is staggering. We have any number of manufacturers in the west that have produced the most advanced, quality, affordable, and widely available autos the world has today. Eastern European, non-market communist economies have been unable to produce anything remotely comparable. Some of the examples that we are familiar with are such as Yugo, Trabant, and Volga, cars of notoriously poor design and quality. The opportunity to make a profit in a competitive market has provided the economic engine that has produced the cars we have in the West. The absence of the opportunity to make a profit in a competitive market has produce the likes of Yugo, Trabant, and Volga.

In the production of food, profit opportunity in competitive markets has produced a food production powerhouse that feeds not only itself, but a large portion of the rest of the world. When we look at countries that deny to opportunity to make a profit in providing food, we see countries barely able to feed themselves with pitifully bare market shelves. Anecdotally, I know many people that have come from various parts of Russia and one of the things that was most shocking to them in coming to the US was the abundance of food on market shelves. They were astounded not only by the sheer abundance but also the vast variety from which to choose. And we have other illustrative examples that are virtual lab experiments. Many countries view profit making in the production and providing of food to be immoral, much like usury was viewed in the Middle Ages, and health care is viewed today. On one hand we have Cuba. A principle food distribution mechanism is the kind of "community farmers markets" where, basically, the food producers go to sell their products. In Cuba they have introduced (free markets) along with the customary government regulated markets where, well, everything is regulated by the government. In the more or less "free" markets (with some constraints) farmers are able to sell "excess" at market rates. The difference between the two is stark. The "free" markets are better stocked and with higher quality food than the regulated markets, and the prices and not dramatically different. And the people much prefer shopping at the free markets as a result of the availability and quality of the wares. Naturally this creates tension with government as a preference for "free markets" over government markets is anathema to a communist regime. On the other hand, we have Venezuela that is taking the opposite tack going from market based to government controlled. Before government controls, food availability, quality, and pricing was much like any other market based country. Now, after having government controls imposed, with the overt and stated goal of eliminating "immoral" profit opportunities as a result, many items, especially staples such as dairy, are in short supply and shelves are mostly bare. Needless to say, many Venezuelans must resort to black markets to get basic food supplies. The question becomes, which is more immoral: the making a profit in providing an essential product or making that product unavailable as a result of preventing the making of such profits?

The point here is that we should not fall into the trap of profit being "immoral" and the inability to get past that so that it effectively hamstrings our ability to reform health care so that it provides the best medical care possible. The opportunity to make a profit lending money fueled the Renaissance. The opportunity to make a profit has fueled the most advanced, abundant, quality, and affordable consumer products, such as cars and electronics, the knows today. The opportunity to make a profit providing food feeds the world while citizens of governments that prohibit "immoral profits" are starving. We can look all around the world and see that profit opportunity in competitive free markets pretty much universally outperforms government controlled and operated markets in quality, availability, affordability, advancement, and growth. Yet so many people can't get past the notion that profit is immoral and should not be allowed in the providing of health care. It's as if these people seem to think that the economic principles and realities that govern every other market known to man should somehow not be in effect in the health care market. This is like thinking gravity should or would somehow not apply if you are falling off of a cliff, because it would be immoral for gravity to cause your death. No matter how earnestly you hold such beliefs, that can't make laws of nature or laws of economics not apply simply because you are uncomfortable accepting the reality that is at odds with your ideology.

The typical counter argument is how "wonderful" European health care is. First I would say, that is debatable and there is evidence to the contrary. Secondly I would say that if you don't have a car, a Trabant might seem similarly "wonderful." That doesn't make the Trabant the best possible car. And it is argued that our health care is inferior. Again I would say there is evidence to the contrary. I would also say that there is no real basis to assume that the European model would necessarily produce any better results here as outcomes are not solely determined by the provisioning models, but also the population to which they are applied. If the populations are dissimilar, then it is unreasonable to assume identical results. Also, if you look at the segments that do in fact operate as true free markets, those segments actually outperform European models. Where the US system falls apart is in areas that do not operate as free markets, often as a result of government or anti-market meddling. It is also argued that European models manage to deliver decent health care. There is no argument about that. Yugo, Trabant, and Volga also manage to produce drivable cars that get people where they are going. However, just because cars made by Yugo, Trabant, and Volga manage to get people where they are going, do you want to limit yourself to products of that caliber or do you want products of the caliber produced by companies operating for profit in competitive free markets. The crux of the argument against government run health care is that I would prefer to have "Toyota" (high quality, widely available, technologically advanced, and affordable) health care rather than be limited to "Yugo" health care. The only way we can have "Toyota" health care is if people can get past the "immorality of profit in health care" ideology. If we cannot get past the "profit immorality in health care" ideology, our ability to advance health care development, expand availability and reduce cost will be severely limited. The net effect on health care as a result of eliminating free market economics and imposing government controls will be exactly counter-productive and in opposition to achieving to the stated reasons for doing that. It took getting past the "profit immorality of usury" ideology to make the Renaissance possible. Regions that couldn't were at relative disadvantage as a result. It takes getting past the "profit immorality in food production" ideology to allow free markets to feed the world better than government controlled markets. Citizens of governments that can't go hungry as a result. It takes free markets to produce the caliber of goods and services that we take for granted. Governments that restrict markets are held at a disadvantage and relegated to producing inferior goods and services.

If government controlled markets are so great, why are people in countries with government controlled markets chronically unable to adequately feed themselves or at least unable to eat anywhere near as well as people in countries with free markets to provide their food? The best health care reform would be to leverage into health care the same market forces that has been the engine of development that has provided the highest caliber products in other markets. But in order to do so, people must get past the "profit immorality in health care" ideology. We can see for ourselves the resulting benefits of free markets in advancement, quality, availability, and affordability in every other market yet people cannot make the leap in understanding that, economically speaking, health care is just another product or service just like any other. Just like gravity does not distinguish whether the object falling off of a cliff is a rock or a person: it produces exactly the same effect either way; laws of economics are no different: it makes no difference whether the product is big screen TVs or health care, the effect is the same. Leveraging free markets in health care would produce the same benefits it has in every other market and that preventing the natural free market from working will only produce the same disadvantages and developmental retardation that doing so has produced in every other market. Government controlled economies can produce cars too, but would you prefer a Western made car or a car made under a government controlled economy? Now ask the same question but health care instead of cars. How can you answer any differently?

And yet another "Five Lessons"...

There has been a lot of hay made in the blogoshpere about everyones' "five lessons" from the recent election of Scott Brown. So, herewith my "Five Lessons":

1) Winning an election should not be automatically construed as an endorsement of your agenda.

This was a mistake Democrats made. It's also a mistake Republicans eventually made with respect to the rout of Democrats in 1994 that led to their own rout in 2006 and 2008. Democrats beat out Republicans in 2006 and 2008 and then proceeded to assume this was an endorsement of liberal Democratic ideology and then worked to impose their liberal agenda. What is probably closer to reality is that the voters voted against Republicans in repudiation of their conservative agenda. And Democrats only won because they were the benefactors of that repudiation. And now voters are sending the message to Democrats, "we didn't elect you as an endorsement to pursue a liberal agenda, we elected you to stop Republicans from pursuing a conservative agenda."

2) Everything involving people is represented by the classic "bell curve."

This is especially true when it comes to socio-political views. The vast majority of voters are somewhere in the middle. If you get voted out of office, it's probably because you are on one side or the other of the bump in the middle and have pissed off that large number of people in that bump in the middle. When you are sitting out there on the lip of the bell curve and this is why you got kicked to the curb, it makes absolutely no sense to move further out on the lip as a strategy to regain voter favor. Even if those out on the lip think you are too far toward the center and vote against you as a result, those people who might now vote for you are far fewer in number than those who will now vote against you by shifting away from the center. And yet surprisingly, or perhaps not so surprisingly, some of the Democratic demagogues are proposing doing exactly this: if people voted against us because we weren't extreme enough the answer is to become even more extreme. Well, good luck with that. If you think a lot of people voted against you before, wait and see how many vote against you after you move even farther afield.

Consider these two examples. The last time Joe Lieberman ran as a Democrat, the Democrats decreed that Joe Lieberman, the incumbent at the time, was not liberal enough to suit the Democratic demagogues, so they selected a more liberal candidate to run for the Democratic party. Joe Lieberman then ran as an independent and beat the more liberal Democrat. Recently in a race for a New York senator, two candidates were vying for the Republican nomination. The candidate who was more moderate and in all likelihood would have won had he been nominated, was ousted by the right wing demagogues in favor of the more extremely conservative candidate. Needless to say, the Democrat won. If your seat is in jeopardy, moving farther from the middle in order to "recapture your 'base'" is a "strategy" that is mathematically certain to fail.

In the end, if your candidate is to win, he must be voted for by a majority of the entire voting public, not just your "base." It does no good to "energize your base" if in the process you alienate an even larger portion of the general public. Alienating the major portion of the population in the big fat middle of the bell curve is not the path to victory but rather to defeat.

Apropos of points 1 and 2, I came across a posting on a message board where the poster stated that the voters are schizophrenic because they first voted for Democrats in 2006 and 2008 and then have been voting against them of late. Of course the flaw is that logic is the assumption that they voted _for_ Democrats in 2006 and 2008 more so than as Democrats being the benefactor of deservedly voting against Republicans. It is not schizophrenic to repudiate Republican ideological idiocy on the right in 2006 and 2008 and then repudiate Democratic ideological idiocy on the left now when all along what you wanted was the middle.

3) Solve the problems people want you to solve, not the problems you want to solve.

Too many Democrats were so mono maniacally obsessed with addressing health care that they neglected the, literally, bread and butter issues that people are most concerned about today. I think many Democrats viewed "fixing" health care as a hallmark achievement for liberal ideology and desperately wanted that trophy to hang on the wall and they put that quest above the will of the people. Serving the will of the people and actually making American's lives better should not take a back seat to "big game trophy hunting," or worse yet, get left on the curb. I think too often, the "helping people" aspect of liberal ideology is less about actually helping people and more about making the acolytes feel good about themselves about having "done something to help the people" regardless of whether or not anybody is actually any better off or even worse off as a result. Health care took on this dimension. It was no longer about fixing health care, helping anyone, or about dealing with the problems people wanted fixed, it was all about the obsession with passing health care legislation so that they could have that trophy to hang on their wall, and damn the torpedoes. The problem is that, while many people want health care reform, it is moot when what they need or are worried about is keeping a roof over their head or putting food on the table. Its good to have good health care coverage, but having health care doesn't put a roof over your head or food on the table. "Great! I have health care but I lost my job, have nowhere to live, and nothing to eat!"

4) Nothing has to be solved as an all encompassing "comprehensive reform" colossus.

In fact, most things probably can't be solved as such. And this has as much to do with the fact that it is virtually impossible to get a committee of people to agree on anything that massive that the end result will actually do anything to make anything the least bit better. The problem and the task at hand to solve it are made unnecessarily so massive that it simply can't be addressed in any meaningful way. The saying goes: "How do you eat and elephant? One bite at a time." (I've addressed the "elephant" problem in a previous post) Politicians would do well to heed this wisdom rather than trying to eat the elephant all in one bite and choking to death on it as a result. Why is it so wrong to solve a problem by tackling all the smaller problems one at a time in bite sized tractable problems especially if the end result is a much better solution or even any solution as opposed to none at all?

5) Saying a thing doesn't make it so.

Democrats continually trumpeted that the people wanted health care reform and that they were going to solve it and make health care so wonderful and cheap and everyone was going to have it. Well, they were right that people wanted health care. But the people didn't want the train wreck that Democrats were pushing as "health care reform." They didn't want what was being pushed and they didn't buy that it was going to produce what Democrats proclaimed it would. Democrats kept on with their mantra of how their health care reform was going to do all of these wonderful things. But as people had time to look at the text of what was being proffered, it became more and more apparent the this colossus was not going to achieve even half of what Democrats were saying it would do, if it even did anything net positive at all. Now Democrats are saying they failed to get the message out. Actually I think they did succeed and that was their problem. As people had time to digest the colossus, they discovered that what Democrats were saying it would do and what the legislation would produce in actuality were two completely different things. People saw through the smoke screens and colossally flawed logic and understood it simply was not going to do even half of what Democrats were claiming and only going create more new colossal government spending. Democrats could say what they probably honestly believed it would do, but no amount of saying what they were saying can make the legislation do it in actuality. And when politicians focus on "deficit neutrality" rather than the cost to taxpayers and even try to hide the real cost behind the smoke screen of "deficit neutrality", rest assured, it's going to hit taxpayers hard. (I've already addressed how "deficit neutral" doesn't mean free in a previous post)

You can candy coat crap all you want but that doesn't make it not crap. You can build a car and go around saying it's going to go 200 MPH, but saying it all you want, no matter how earnestly and fervently believed, won't make it go that fast if it hasn't been crafted with the engineering that is required to accomplish that. You can put a horse in high heels and a ball gown, but that doesn't make it a ballroom dancer. You can paint racing stripes on a Pinto and put race slicks on it, but it's still not going to win a Formula One Grand Prix. So when people see that it's just a lawnmower engine on a plank with four wheels, and still just a horse, and still just a Pinto, don't be surprised when people don't believe your claims of 200 MPH, doing the Tango, and winning the race no matter how fervently you believe those claims yourself.

At the end of the day, any legislation has to be evaluated on the merit of what it actually accomplishes, not on fancy feel-good titles and flowery rhetoric. I even remember a time when it seemed that every piece of legislation coming out of politicians nether regions was touted as "for the children." As if saying "it's for the children" even when seemingly no children are involved is supposed to obviate any need to evaluate the legislation based on actual merit and efficacy. "I should support this without actually understanding what it really does because I know that whatever it does in the end has to be good when they tell me 'it's for the children.' How could you oppose anything that is 'for the children'?" You can say "it's for the children" all you want, but that doesn't mean that any children are actually going to be better of as a result. Only legislation crafted in view of pragmatism and reality can produce the desired result, not fancy titles and flowery rhetoric based in ideology and denial.