And the Winner Is (and always will be): Arithmetic

Charlie Martin over at PJ Media has a great post on Obamacare vs. Arithmetic that explains why the promises of Obamacare can’t be kept and never could have been. You should go and read the whole thing of course but this part on Gammon’s Theory of Bureaucratic Displacement is worth excerpting:

What does change the relationship is that we start to run into something Milton Friedman called “Gammon’s Law,” which originated with a study of Britain’s National Health Service done by Dr. Max Gammon. Friedman called it the Theory of Bureaucratic Displacement:

In a bureaucratic system, increases in expenditure are paralleled by a corresponding decrease in production.

Translated from the economist-ese, that means in a bureaucratic system, the more you spend on something, the less you get of it.

Gammon’s original work in which he identified this found the correlation was very nearly perfect: as the number of pounds spent on the National Health System increased, the number of hospital beds declined. The correlation was    -0.99.

Aside: for those of you who don’t eat and breathe statistics. Imagine you have a loaf of sliced bread. You weigh the bread, then take out a slice, then weigh it again; keep taking out slices of bread and re-weighing.

The correlation between the number of slices taken out, and the weight of the remaining bread, will be around -0.99.

Why does this happen? There are at least a couple of reasons. As more money goes into the bureaucracy, there’s more pressure to make sure it’s being spent well, which means more forms, more auditors, more independent review boards. All of that takes time and money, and that time and money are being taken away from what used to be the goal.

The second reason is that as administration develops, it becomes its own constituency. Administrators are more important that the people doing the work — they must be, right? I mean, they’re the managers. Administrators get paid more, and in a bureaucracy, administration is the route to higher pay, better offices, and more perks. What’s more, the people doing the work have to do more work to support the administrators. Doctors are seeing that now — new record-keeping requirements, from HIPAA to electronic record systems.

The upshot, though, is that once a system becomes bureaucratic, adding money makes it worse.

And that’s the arithmetic of Obamacare. You start off with something that makes some sense — it’s perfectly reasonable to want insurance against the chance you’ll be hurt in a car accident or develop cancer. Then, because of weird tax incentives, you start doing something that makes less sense: asking insurance companies to pay for things instead of giving you the money to pay for them yourself. Then we start mandating coverage too — so I have to pay for maternity and OB/GYN coverage, even though I’m a 58-year-old single man with no obvious prospect of impending pregnancy.

Economics–It Isn’t Called the Dismal Science for No Reason

Forbes has a good article on why America doesn’t need monetary policy, or  economists. More damage has probably been done to our economy and our markets by attempts to centrally plan our economy than could ever be done by leaving markets to their own devices. From the article:

Let’s be blunt. Whatever economics is, it is not a science. Unlike physicists, who can predict an asteroid’s closest approach to earth within a few miles when it is still 100 million miles out in space, economists can’t accurately predict this quarter’s GDP. Indeed, they are still arguing among themselves about what “really” happened 83 years ago.

In light of the economics profession’s track record, it is hilarious to hear pundits and politicians say things like, “Most economists agree…” as if this mattered.

Read the whole thing.

Detroit. An Economics Lesson on How Not to Do It.

Over at The Market Ticker, Karl Denninger has a primer on how not to run a government.

If you increase tax rates then you decrease economic surplus.  This inevitably slows economic expansion; it mathematically must.

If you make political promises that can only be met through increased tax rates, now or in the future, you begin the process of slitting your own throat.  That outcome is inevitable when you agree to political promises that have escalating expenses over time as pensions, medical benefits, salary "step" increases, bond issues that have a payment schedule longer than the useful life of the asset bought and similar.

This is a must read article.

Megan McArdle Is Back (Again), Now at Bloomberg

If you aren’t reading Megan McArdle every day, you are really missing out on some very thought-provoking writing in the areas of business and economics. I have been following her writing since she was blogging from a trailer at the bottom of Ground Zero where she was working for a disaster recovery firm. She progressed from there to The Economist, The Atlantic, The Daily Beast and now here.

For just one example of her insightful writing, look at this post on minimum wage jobs, “McDonalds Jobs are Drive-Thru, Not Dead End.” An excerpt:

Even if it were possible to mandate that everyone in the country make almost the median income, this would come with a cost; I’d guess that most economists would agree that such a hike in the minimum wage would cause fairly significant job losses. The direct cost of labor at an average McDonald's is about 25 percent of payroll, according to Burgerbusiness.com, and of course, everything else they buy also has a substantial labor component. If everything at McDonald's cost, say, 30 percent more, they would sell fewer burgers and need fewer staff.

The real question no one has actually answered is whether every job should pay you enough to live on your own, or whether it’s OK for there to be jobs that are mostly a temporary arrangement, a waypoint en route to somewhere else. It doesn’t strike me as obviously wrong for those jobs to exist -- especially when the alternative may be no jobs at all. Even if I did think it was wrong, I’m not sure what I’d do about it. You can make McDonald's pay people more per hour. You cannot keep McDonald's from cutting those hours.

Read the whole thing.

Nobody Knows How to Make a Pencil or Why Government Locks In Failure

Kevin Williamson has a great article over at National Review Online talking about how in the private sector everything gets better and cheaper all the time, e.g. mobile phones, and how

“We treat technological progress as though it were a natural process, and we speak of Moore’s law — computers’ processing power doubles every two years — as though it were one of the laws of thermodynamics. But it is not an inevitable, natural process. It is the outcome of a particular social order.”

He goes on to show how competitive markets allow for competitors to come and go, rise and fall, and how important it is for failure to be possible as contrasted with institutionalized failure when politics takes over and government tries to pick winners and losers:

“Politics creates the immortal corporation. Amtrak and the U.S. Postal Service are two institutions that would have failed long ago if not for government support — subsidies for Amtrak, the government-chartered monopoly on letter delivery for the postal service. The cost of their corporate immortality is not only the waste associated with maintaining them, but also the fact that their existence prevents the emergence of superior alternatives.”

It comes back to “the knowledge problem” or as Hayek put it, the fatal conceit that a small group of people or an individual can have all the knowledge necessary to direct an entire industry (think healthcare, e.g.) or an economy. This article is one of the best discussions of this I have seen.

Read the whole thing.

How Debt Ruins Systems–Nick Gillespie Interviews Nassim Taleb Over at Reason

Over at Reason Nick Gillespie interviews (video and transcript) best-selling author Nassim Nicholas Taleb, a  former trader and hedge fund manager, and a groundbreaking theorist on risk and resilience. He is also a finance professor at New York University and a research scholar at Oxford. He has some great insights about why systems fail and why decentralized systems are more resilient than centralized systems. An excerpt from the transcript:

Taleb: To cite the great Yogi Berra, a good antifragile system is a system in which all mistakes are good mistakes. And the bad system is one, again to paraphrase Yogi Berra, where you tend to make the wrong mistakes. Let’s compare the banking system to, say, transportation. Every plane crash makes the next plane crash less likely and our transportation safer. Now, with the banking system, [a failure] leads to increased probability of failure of an entire system. That’s a bad system.

reason: What’s the best way to stop that so you’re not allowing the problem to replicate throughout the system?

Taleb: What fragilizes an overall system? Three things: One, centralization. Decentralization spreads mistakes, makes smaller mistakes. Decentralization is where we converge with libertarians. A second one is low debt. The third is skin in the game.

I’ve just acquired The Black Swan and will most likely buy Antifragile when I finish with that. Links to the books below.  I highly recommend reading the interview transcript (or watch the video, 56 minutes. Your choice but I can read faster). Links to the books below.

 

             

Milton Freedman on the Most Persistent Economic Fallacy of All Time

This is Milton Freedman on the fallacy that Economics is about money. Economics is about production and when the government takes money from the productive sector of the economy and spends it, it is not growing the economy.

Thomas Sowell on Intellectuals and Society

This half hour or so video is well worth the time to watch.

Daniel Hannan–Occupy Wall Street Debate at the Oxford Union

British MEP Daniel Hannan gave a speech in a debate before the Oxford Union earlier this week in which he defended capitalism and pointing out that the system we have now is not capitalism but corporatism. He also said that the Occupy Wall Street crowd were occupying the wrong places.  This man is one of the most eloquent speakers I’ve ever heard. Watch, listen and learn.

Where Socialism Leads, and Why You Should Vote Republican This Tuesday, November 6, 2012

The following video is from a man who has been there, done that (to him). Learn from his experience so that you don’t experience it yourself.

Why “You Didn’t Build That” Is So Offensive

There’s a great piece over at Tigerhawk on why Obama’s (and Elizabeth Warren’s) “you didn’t build that” argument is so offensive to the business community. You should definitely read the whole thing but here is a brief excerpt that takes on the typical leftist’s straw man argument that the rich don’t want to pay “their fair share” :

Anyway, I know a great many "successful" people, and not one of them believes that "successful" people should pay less tax, either in absolute terms or as a percentage of their income, than "unsuccessful" people. Further, I am unaware of anybody important who advocates that result. When politicians on the left argue otherwise, they are dishonest. Not only have "successful" people paid an ever higher proportion of direct taxes at all levels, but they are paying a higher proportion relative to their own share of national income. In 2010, I paid 42% of my income in direct taxes -- income, FICA, Medicare, and property -- divided by adjusted gross income. That is a higher proportion than any "unsuccessful" person would pay, and it obviously does not include sales taxes, gasoline taxes, excise taxes, "fees" paid to governments so I can do something I should be allowed to do anyway, taxes on my wages paid by my employer, and corporate taxes paid by companies in which I have invested. If the taxes I pay are not a high enough proportion of my income for Warren and Obama, how high should it be? President Obama believes it should be substantially more and it will be on January 1, 2013 unless Mitt Romney wins. Personally, I do not believe I am failing to pay my "fair share" by forking over more than 42% of everything I earn to the government. If you do, then please tell me how much of my time I "should" work for the benefit of the government? We need to understand what liberals believe.

The U.S. Tax System: Who Really Pays

Our math-challenged president needs to read and internalize this article by WSJ Senior Economics Writer Stephen Moore. It is a point-by-point debunking of some of the most common claims from the left about the fairness of taxes and who is paying what. It's too long to excerpt here, so just go and read the whole thing.

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Whole Foods CEO John Mackey on the Moral Case for Capitalism

In this Reason TV video Whole Foods CEO John Mackey says we need to change the narrative on capitalism and make the moral case for why it is the best system for bettering humanity. He says the narrative has been hijacked by intellectuals who depict capitalism as being solely focused on profits and self-interest while ignoring the value it creates for not only businesses but everyone that touches that business from suppliers to employees to customers.

Let’s not forget Milton Friedman as well.

“You Didn’t Build That” The Flip Side of the Coin

Writing over at PJ Media, Ukraine native Oleg Atbashian explains the flip side of the coin on which President Obama's famous "you didn't build that" speech was engraved. In short, by the same logic that all get credit for the achievements of a few, then all can be punished for the failures of a few also.

If the businessman “didn’t build that,” who did? Apparently, all of us did. And if the credit is equally shared, so must be the reward. Jackpot winners all, no more worries about paying the mortgage or filling the gas tank. This thrilled Obama’s voters during the 2008 election, as his speeches removed moral barriers protecting other people’s property, establishing a new morality of forced redistribution of wealth — previously known as looting.

But here’s the catch: everything in this world has a price. If all of us can be credited for someone else’s achievement, by the same logic, all of us can be punished for someone else’s failure. Just as all individual credit goes to the society as a whole, so does all the blame. And if the entire group, class, nation, or race can gain moral authority because some of its members did something right, the same standard grants the moral authority to blame any other group, class, nation, or race because some of its members did something wrong. In the history of collectivism this concept translated into wars, slavery, pogroms, terrorism, ethnic cleansing, expropriation of wealth, deportation, internment, resettlement, and genocide.

The two notions, collective achievement and collective punishment, are as inseparable as two sides of a coin.

But there’s more: if nothing is to your credit, then nothing is your fault. What is the cost of that bargain? In a seemingly fair trade-off, we lose our right to individual achievements but gain the right to blame others for our failures. Collectivism provides us with a sufficiently analgesic illusion of fairness. If you turn out to be a loser, it’s not because you are unqualified: on a whim, with objective standards removed, you can now self-righteously put the blame on those close to you, or on the unfair system, or even on the big wide (and deeply flawed) world.

Read the whole thing. .

Economic Illiteracy at 1600 Pennsylvania Avenue

Barack Obama on the Romney campaign pointing out that there is a difference betweeen "outsourcing" and "offshoring": “Yesterday, his advisers tried to clear this up by telling us that there was a difference between ‘outsourcing’ and ‘offshoring.’ Seriously. You can’t make that up.”

Actually, you wouldn't need to "make this up," because there is a difference. This is not by any means the sole example of Barack Obama's economic illiteracy but he manages to make himself sound even smaller and more petty than usual. Kevin Williamson at National Review explains: 

“Outsourcing” happens when a firm contracts out its non-core functions to other vendors, e.g., a hotel decides to hire a cleaning service rather than keep maids on the hotel payroll. To take an extreme but illustrative case, consider that the firms that provide car-driving services do not manufacture their own automobiles or stitch their drivers’ uniforms, even though doing so would “create jobs.” They outsource those tasks to GM or Ford and to whomever makes their uniforms. Likewise, their communication systems are outsourced to Apple or Motorola or RIM.

But at least they should “buy American,” right? GM is an “American” company building “American” cars, but it too outsources many of its needs, sometimes to other U.S.-based companies, sometimes to companies overseas. Moving facilities overseas is what “offshoring” means; it is not synonymous with “outsourcing.” GM has decided that it can build cars without manufacturing brake pads or tires, much less manufacturing steel or rubber, and its production partners include facilities, workers, and investors from around the world. (This is, it should go without saying, a good thing. People who talk mistily about the virtues of “global cooperation” rarely recognize it when they see it.)

The belief that seems to be popular on the left is that the point of offshoring is to take advantage of cheap labor but in Williamson's article he points out that the offshored functions tend to go to high wage countries like Germany and Japan, not Haiti and Rwanda. Williamson:  "That is because low wages are not the goal of offshoring. High productivity is the goal of offshoring. There is a reason that BMW does not move all of its manufacturing operations to India, and patriotism is not it."

Read the whole thing. 

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Daniel Henninger: A middle class is the result of growth, not its cause.

That is an important point made by Daniel Henninger in yesterday's Wonderland column in the Wall Street Journal in which he asserts that the coming election boils down to one issue: economic growth. Voters need to choose between two economic growth models, Barack Obama's class based growth model or one that actually works; a low-tax, regulatory certainty and no more than absolutely necessary. In other words, as close to a free market as possible.

Go read the whole thing.

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The US Budget Explained

I ran into this over at Samizdata while on my Daily Blog Patrol this morning. I believe it is quite self-explanatory so I will make no further comment.

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Video: "If I wanted America to Fail"

Yup. This is how I'd do it too.




(Via Instapundit)
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Government: Where Does the Money Come From and Where Does It Go?

In a new Firewall video entitled The Vote Pump, Bill Whittle explains where the funding for government comes from and where it goes. Actual government, incuding defense, is actually only around a third of all expenditures, The rest is entitlement spending. We can't solve the problem unless we address that.



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Mark Steyn - Corporate Collaborators

Mark Steyn writes at National Review about corproate collaboration with the Occupy Wall Street movement (is that like a bowel movement?) as "in the Nazi-occupied-France sense: The city’s feckless political class are collaborating with anarchists against the taxpayers who maintain them in their sinecures."

It's all good but here is what it boils down to:

At heart, Oakland’s occupiers and worthless political class want more of the same fix that has made America the Brokest Nation in History: They expect to live as beneficiaries of a prosperous Western society without making any contribution to the productivity necessary to sustain it. This is the “idealism” that the media are happy to sentimentalize, and that enough poseurs among the corporate executives are happy to indulge — at least until the window-smashing starts. To “occupy” Oakland or anywhere else, you have to have something to put in there. Yet the most striking feature of OWS is its hollowness. And in a strange way the emptiness of its threats may be a more telling indictment of a fin de civilisation West than a more coherent protest movement could ever have mounted.

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