Tag Archives: Simple Economics

Simple Economics and Health Insurance: a Perversion of the Free Market

Setting aside all the nitty-gritty specifics of the various bills running through Congress, it seems to me that reestablishing some baseline facts on health insurance is in order. In writing this post, I am setting out to prove that there is not, in fact, any such thing as a free market economy where insurance is applied to a given industry. To demonstrate this, I’ll build on a few Economics 101 concepts that we all know and love. The point of this exercise is to establish that any economic structure which employs for-profit insurance is endemically doomed to fail.

Economics 101: Supply and Demand

In the capitalist marketplace – in its purest form, what we call “Free Market Economics” – there are two fundamental building blocks of the system: supply and demand. There are those who produce goods and services and there are those who require or want those services. It is the interplay between those two building blocks that determines price, quality and availability.

More specifically, the Marketplace requires an Educated Consumer and an Honest Producer. The educated consumer is not necessarily a college graduate; the education I’m referring to in this case is the knowledge of the product or service that the consumer is buying. In the Free Market, if I require an appendectomy, I check with local hospitals and doctors, patients and consumer groups to determine which doctor or medical facility performs this procedure with the greatest success rate, greatest customer satisfaction and lowest price. Basically, I bargain shop for the best deal. This process, multiplied over all the people in my area seeking appendectomies and other procedures, forces producers to keep honest about what it costs to perform their duties to the best of their abilities. Hence the price and quality of medical services is kept at a balanced level, relative to the ability of consumers to pay.

This is a concept upon which every economist agrees, as do the rest of us who took seventh grade business math. There is no doubt that this concept, like Bernoulli Principle in physics, is a quantifiable, predictable force on our economy. But what happens when, rather than paying for services directly, we pay insurance companies to provide that service?

Enter the Insurance Company

In our current health care market, things work a bit differently. As consumers, those of us fortunate enough to have insurance pay insurance companies a monthly fee, in conjunction with our employers, to have constant coverage for our medical needs. When we require medical services, we go to a doctor, get the work done, get a prescription for whatever pain or antibiotic medication they deem necessary, pay a copay for the service and be on our merry way. But the important point is this: we do not pay our health care provider and we do not consider cost when choosing that provider.

Right off the bat, without much thinking or digging, we find that one of the fundamental pillars of the Free Market is eliminated from the equation. There is no Educated Consumer in this scenario, because we as consumers have no idea whatsoever what a given service costs, what a prescription costs, what the total of the bill will be. What’s more, we really don’t care because as consumers of insurance products, there is an expectation that we will get what we paid for.

With no educated consumer, only unrestrained need, there is nothing to control medical costs. As medical costs rise, so too do insurance premiums. Of course, this is what happens in a supply and demand economy when the cost of supplies goes up without a correlating change in demand. There will be no change in demand, because we all need medical attention from time to time, no one can afford it on their own and thus we all actively pursue jobs with health benefits. The inevitable result is that insurance companies – who have a profit motive and will not simply go bankrupt on moral grounds – need to lower demand the only way possible: cutting off services.

Let’s Stop There

We could go farther with our example, citing case after case where the above scenario is currently in effect and speculating where it heads next. We could continue to expand on how the imbalance of insurance surrogating the Demand side of the equation is continuing to erode our medical security in this country. We could discuss the effects of the uninsured and the Hippocratic Oath that compels doctors to treat them. But while in doing so, we could come up with much that is demonstrably wrong with our current system, we would stray further from the central point and in my opinion, the most critical for a serious discussion of health care reform in this country. That point is to say that there is no scenario in which the unfettered health insurance industry – free of government reform or a public option – will arrive at any other result than the one we find ourselves with now.

It is an important concept which cannot be ignored: we are not in a health care crisis because of a few bad apples; we are not where we are because we need some new laws passed. We are in our current dire straits because our current system is fundamentally, systemically flawed at its core. The solution is to introduce a new player to the field; one which can arbitrarily change the rules of the game to fit the best interests of the American people.

Simple Economics IV: Nationalization

Once again, I find myself explaining concepts discussed in the media but rarely ever explained by the media. Today’s discussion is “nationalization” of the banking industry.

Or, how about “bankruptcy?” In a bankruptcy of a business, the debt and assets of the company are assumed by the government, who then restructures the company and if necessary, sells of the company’s debts to cover the liens against the company. Then the company is either released to continue or else is sold outright to some buyer who wants a good deal.

If this sounds at all familiar, that’s most likely because this is precisely the remedy proscribed by Dean Baker, Paul Krugman and almost every single other serious minded economist whose looked our current situation. To the extent that the federal government is involved in the day to day operations of businesses in bankruptcy, yes, it is nationalization. But this kind of thing happens all the time to all kinds of businesses without a peep of objection from the Republicans in Congress. In fact, it even happens to local banks all the time, which is one reason that we have a thing called the FDIC.

But it doesn’t happen to the big boys who have the money to pay off politicians and drive the conversation in the most objectionable direction possible.

Interesting side note: guess what the Republican, Dick Shelby proscription is for the Detroit automakers? If you guessed “nationalization,” you’re right!

Ideology

I know I shouldn’t be to surprised when the news nets let people speak crap without challenge, but I still am. The talk I’m seeing on television this morning centers on the idea that there is an ideological difference between the Republicans who oppose the stimulus package and the Democrats that support it. Obviously, there are many ideological differences between Dems and Republicans.

But this isn’t an ideological difference any more that arguing over the boiling temperature of water is. This is economics 101 and less, since I get it and I’ve never taken an economics class. ((Maybe I’ll pick one up when I go back to college, but that’s hardly the point.)) Basic economics says that you have supply on one side of the equation and you have demand on the other. When one goes away, the other side of the equation must balance out. Right now, demand is vapourizing in the face of a 7.6% unemployment rate which still doesn’t accurately reflect the total number of people who will be laid off based on the announcements of last week. People are scared shitless about their jobs and they should be, because the lack of demand necessarily precipitates a lack of supply which precipitates more layoffs.

And basic economics also says that when the people stop spending the money, the only thing that prevents a depression is the government spending money to compensate. It’s that simple. There’s no ideology in that statement, only time-tested economic theory of the most basic order.

It would be nice if someone in the mainstream media would do us all the favour of pointing that out.

Simple Economics, Simply Explained III

In order for you to buy things, they generally must first be manufactured, which requires that someone have a job in manufacturing the shit you want to buy. When you spend money, you almost always do so on things that were manufactured by people with jobs. And when we as a nation stop spending money because we’re worried about our own jobs, that means that the jobs of those people who produce the shit we want to buy with our money are in danger.

Likewise, if the government begins to spend money, its equally expected that they buy things produced by people who have jobs. If those people were in danger of losing their jobs, they might not be now, because the government is spending money. Thus government spending is a good thing in a down economy, because it replaces some of the demand lost to the market because we’re all scared of losing our jobs.

Cutting taxes, however, only benefits those people who have a source of income. That’s a smaller and smaller number of people with each passing day. Fully 7.6% – getting damned near one out of ten – of our population is getting no income to speak of at all. And those who are still getting paid are, again, afraid to spend any money and will likely use any extra cash to either save it up, or pay down credit card debt.

And as explained in another Simple Economics post, a dollar of spending is the same as a dollar of tax cuts in terms of our government’s budget.

See? Tax cuts = Republican bullshit. Stimulus (or spending or whatever) = saving our economy. Simple.

OK, Simple Economic Concept, Explained Simply.

Let’s say you have a job where you get paid $20 an hour. In a forty hour week, you get paid $800, right? Forget the taxes and stuff, your gross is 40 x $20.00 = $800.

Now, if you spend $20 on a new CD, that leaves you with $780.00. On the other hand, if you cut out an hour early from work on Friday, you’ll only get paid for 39 hours, thus 39 x 20.00 = $780. Either way, you get $780.

So it doesn’t matter if you cut your revenue or spend extra money: twenty bucks is twenty bucks. And when you hear from Republicans that spending money in the Obama stimulus package will increase the debt, remember that their alternative – cutting taxes by the same amount – will also increase the debt by leaving us with less to pay it off with. You’re either spending more money (stimulus) or you’re cutting revenue (tax cuts). Whatever other discussions are of value, this one’s pretty much garbage.