Free Trade Versus Managed Trade

I like this article that explains the difference between free trade and managed trade. Couple quotes:

In establishing a free economic system for the United States, the Framers mandated free trade among all the states in the union. They spelled this out in Article I, Section 9, of the Constitution:

No tax or duty shall be laid on articles exported from any state. No preference shall be given by any regulation of commerce or revenue to the ports of one State over those of another: nor shall vessels bound to, or from, one State, be obliged to enter, clear, or pay duties in another.

At 54 words, this was the original North American Free Trade Agreement. As we shall see, the 1994 agreement that goes by that name makes a travesty of free trade.

and

The North American Free Trade Agreement (NAFTA) is the quintessential managed-trade vehicle sold under the rubric of free trade. The first tip-off should be its size. While we earlier saw how 54 words in the U.S. Constitution established free trade among the states of the Union, NAFTA weighs in at over 2,000 pages, 900 of which are tariff rates. (Under true free trade, there is one tariff rate—0 percent.) The agreement does have trade-liberalizing features, to be sure. Consisting of a 10 percent reduction in tariffs to be phased in over 15 years, however, they are all but buried under the profusion of controls NAFTA also establishes.

and finally

The crowning jewel of managed trade is the World Trade Organization. Instituted to replace GATT, its 29,000-page treaty is a bureaucrat’s dream come true. Its driving force comes from those who see government’s job as civilizing the market (which they believe would otherwise operate as the law of the jungle). While those 29,000 pages say little about deregulating trade, they say a great deal about regulating everything else. Whereas GATT had been a voluntary forum for nations seeking mutual agreements to lower tariffs, the WTO has enforcement powers, with trade sanctions chief among them.

Thanks to Vijay for pointing me to the article.

The End of Money

These two articles offer an interesting perspective for how debt-based monetary systems like ours can fail.

http://financialsense.com/fsu/editorials/2005/1212b.html
http://drmss.com/wordpress/?p=8

Where do you draw the line?

Some good comments coming in.

Jasmine says

Jon, I'm glad you've started this blog. Your + Joel's debate is a very interesting read....But for every example you provide of how government has done more harm than good, it seems that one could also find examples of how government regulation has probably been "good" for us too (e.g., education or gun control). And I agree w/ Joel that a wholesale absence of government wouldn't necessarily.

And John says

I'm not sure I agree with the statement "The more government tries to create a better society, the worse off we are".

Collective goods like air quality, endangered species, and child labor/sex laws are examples where state-imposed limitations on our freedom has resulted in a world that is better off.

I am certainly not an anarchist and I do believe there is an important role for government. I am still figuring out where the lines should be. One general principle is that you should push the government down to the lowest level that makes sense. So if Congress is going to make a law, we should ask, could this be done at the state level? If a state is making law, we should ask, could this be done at a local level? The further down the pyramid you push the regulations and the limitations, the more people feel like they are making decisions about their own lives. Otherwise,you're risking having a few people in a far-away city making decisions that affect people's lives without them having much say in it.

This is what drives libertarians crazy about world government organizations like the U.N., the WTO, the IMF, and the World Bank. In 1950, according to Wikipedia,

The invasion of South Korea came as a surprise to the United Nations. In the preceding week, Acheson had told the United States Congress on June 20 no such war was likely. Instead of pressing for a Congressional declaration of war, which he regarded as too alarmist and time-consuming when time was of the essence, Truman went to the United Nations for approval.

According to the Constitution, going to war must be an act of Congress. Truman sidestepped the people's representatives and went to war under the legitimacy of a world body that is not elected or accountable to US citizens. This should have been an impeachable offense and was a terrible precedent. Not only has every military action since been done without Congressional authorization, we still have thousands of troops stationed in Korea. World government making decisions for people is pushing the decision making as far away from the people as possible.

George Washington said

The constitution vests the power of declaring war in Congress; therefore no offensive expedition of importance can be undertaken until after they shall have deliberated upon the subject and authorized such a measure.

And James Madison said

War should only be declared by the authority of the people, whose toils and treasures are to support its burdens, instead of the government which is to reap its fruits.

The division between federal law and state law is extremely important. If a person doesn't like the laws in his state, at least he can leave and go to another state. This creates competition between states. Competition leads to lower costs and improvements. Even though not everyone has the resources to relocate, just the threat of people leaving at the margin is enough to keep states in check. At the federal level, there is very little choice. You can't easily change your citizenship (it's almost impossible, you become persona non gratis and you still have to pay U.S. income taxes for several years).

The other benefit of allowing states to make most of the laws is that it allows for experimentation. Experimentation leads to innovation. Libertarians are horrified when a state like California legalizes marijuana for medicinal purposes and then the Federal government prosecutes people suffering with terminal cancer.

Finally, we have wandered far away from what the Constitution, the supreme law of the land, says. In article I, section 1, line1, the Constitution says "All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives." That line is pretty important. It says the Congress shall have all legislative powers, yet today we have executive orders, signing statements, and agency rules that have the effect of law. We also have the courts making decisions that have the effect of law. It also says "herein granted," but you would fine that most laws passed today by the Federal government are not granted within the Constitution. The founders knew the dangers of a centralized government and tried to drastically limit its power. Of course, citizens become complacent and people in power always try to obtain more. The founders would be shocked that the Federal government involves itself in defining what marriage is, outlawing marijuana, preventing people from drinking unpasteurized milk, and determining what we should be teaching our children in schools.

Private Charity

Joel's comment's on a recent post

Jon: "I think it's interesting to note that many of the people that propose government try to solve these problems are also well-educated people enjoying a comfortable upper-middle class socio-economic life style. In their case, the mantra is, "I am smarter than you so I should run your life and prevent you from making bad decisions."

Either that or "I've been very lucky in this world and feel some obligation to try to give back to those who have been less lucky."

I feel incredibly fortunate too. If we feel an obligation to give back to those who are less fortunate, we should. I give some to charity, but if I didn't give about 30% of my income to the Federal Government, I would give a lot more to charity. Instead, my money funds things I disagree with like

• A continuing war in Iraq that wastes life and treasure and makes us less safe,
  
• Billions of dollars on wasteful overseas military spending,
  
• Subsidies for farmers that have given us a corn-based economy,
  
• An incredibly wasteful and misguided war on drugs,
  
• Prisons for over a million Americans who have not committed a violent crime ,
  
• Prisons to incarcerate 10.4% of the entire African-American male population in the United States aged 25 to 29,
• Wasteful Medicare spending to extend people's lives 3 months.

As a former liberal/progressive, I think the thing that most appealed to me about paying high taxes is that it made me feel less guilty for those less fortunate. When a huge portion of my income was going to the government, it alleviated me from the responsibility of worrying about the problems around me. "Oh the government will take care of those poor people. The government will provide everybody with healthcare. It's the government's responsibility to fix the homeless problem." And then I could live guilt free in my well-off, yuppie neighborhood and not worry about it.

But I've woken up. The government cannot solve these problems. The government will not solve these problems. Most of the people in the government are incompetent and they don't get paid enough or have the incentive structure to solve these problems. What we have today is Corporatism where Big Business is in bed with Big Government.

If Ron Paul is elected President and abolishes the income tax, I'll commit right now to give 10% of my income to charities I support.

Krugman and Inequality Since the 1970's

The synopsis of Paul Krugman's latest book The Conscience of a Liberal, contains

With this major new volume, Paul Krugman, "the heir apparent to Galbraith" (Alan Blinder) and, today’s most widely read economist, studies the past eighty years of American history, from the reforms that tamed the harsh inequality of the Gilded Age to the unraveling of that achievement and the reemergence of immense economic and political inequality since the 1970s.

On August 15th, 1971, Nixon closed the gold window and officially took the United States off the gold standard. We switched to a new monetary system based on fiat currency. I don't think it's a coincidence at all that this is when we saw the "reemergence of immense economic and political inequality." As I pointed out in Federal Reserve and the Inflation Tax, without anything backing the currency, the Federal Reserve in conjunction with the federal government can grow the money supply and effectively print money. This inflation disproportionately hurts the poor and the middle class by eroding their wages and dollar savings. This is known as the "Inflation Tax" and it is the most regressive tax of all. Wealthy people protect themselves by keeping the majority of their wealth in hard assets whose real value isn't affected by inflation.

Ron Paul: Statesman

When's the last time you heard a speech from a politician like this? From June 29, 2006.

Transcript

Democracy Is Not Freedom

The word Democracy does not appear in the Declaration of Independence, the US Constitution, nor in the constitution of any of the 50 states. Many people think we live in a Democracy but we actually live a Republic. This was a very intentional decision by the founding fathers. Ron Paul does a good job explaining it in his speech Democracy is Not Freedom.

Response to Joel's Comment

This entry is a response to Joel's comment:

This is an argument most easily made by well-educated people enjoying a comfortably upper-middle class socio-economic lifestyle. "I'm doing well, leave me alone."

I think it's interesting to note that many of the people that propose government try to solve these problems are also well-educated people enjoying a comfortable upper-middle class socio-economic life style. In their case, the mantra is, "I am smarter than you so I should run your life and prevent you from making bad decisions." I don't know of any evidence to suggest that libertarians have a different socio-economic distribution than the population at large.

Let's now pretend that you didn't have that kind of education. That your biggest problem was where to get cash to buy your medication or the next meal for your children. Then, do you have the opportunity to read through all the fine print, to run your Excel model to understand the annual interest rate you are paying, or to negotiate the terms?

As a blanket statement, this a dangerous and more importantly, hopeless policy. Why can't we hold onto the hope that it's the role of government to create a better society?

So why can't we hold onto the hope that it's the role of government to create a better society? The answer is not complicated. The more government tries to create a better society, the worse off we are. In my previous entry on healthcare, I discussed how government made healthcare much worse in this country by creating a system of employer-provided health insurance that removed the natural pressures normally present in free markets to innovate and lower costs over time. Millions of Americans do not have access to healthcare today because of a bad decision made by FDR in the 1930's. This is a perfect example of government trying to make things better but making it much, much worse.

Of course, there is always danger in having someone else decide what a "better" society looks like and so I understand your perspective. But don't we have (some) answers to that in the form of Checks and Balances, Division of Power, and Democratically-elected leaders? Granted, these systems have come under real attack lately, which is a topic for an entirely different discussion. Nevertheless, advocating such a hands-off laissez-faire position seems defeatist and hopeless. And most importantly, it favors the well-off.

We don't have solutions to this. The GDP of the country is about $13 trillion. Last year, the government spent about $3 trillion. Consider that for a moment -- about 23% of the total amount of money spent in our economy is spent by the government. A few hundred people decide how a quarter of our nation's spending is made each year. This is a huge honey pot for special interests. This vast majority of this money doesn't benefit the people who aren't well off. It's exactly the opposite. Most of this money is given to special interests. It's given to the military-industrial complex who needs us to constantly be in state of fear and war to try to justify these expenditures with a War on Terror and a War on Drugs. If you look at the companies who lobbied for the Medicare prescription drug plan, it was pharmaceutical companies. If you look at who's lobbying for universal healthcare, it's the HMOs. We're in the midst of creating a medical-industrial complex.

As long as a few hundred people determine how an enormous amount of our nation's wealth is spent, this will always be to the benefit to the wealthiest and those most connected to the government. It does not benefit the vast majority of Americans. Only the free market which perfectly aggregates everybody's demands for products and services can efficiently allocate our resources. This type of central planning is inefficient and benefits those in power and connected to government It's the same reason why Russians had to stand on line for bread under their Communist government and the millions of Chinese people starved under Mao. The more money that we send to Washington for bureaucrats to allocate, the more we will head towards a communist system to the detriment of the exact people you want to help.

There will always be those less fortunate, less educated, less blessed by the outcome of the ovarian lottery. They may not know that seatbelts save lives. They may not know that cigarettes cause lung cancer (certainly there have been well-funded fraudulent messages, but even in the absence of those, there are people who just won't get the facts). These people may not fully understand macroeconomic trends that will cause their monthly house payments to spike beyond their ability to pay. Yes, it's a slippery slope, but one we much venture down. If we don't, together, as a nation (as a government), then individual members will slip down that slope on their own...

There will always be rich people and poor people. The government cannot fix that, but it can make us all poorer. This nation did not become well off because of what government did; it became well off because of what government didn't do. The Government does not provide the services and goods we need and want. Bureaucrats in Washington D.C. do not provide health care, do not build houses, do not create the next Google. This is a really simple concept, but it seems to be entirely lost. People have come to depend on government for so much that they think the government actually provides these things to us. All of these services are provided by individuals: doctors, construction workers, software engineers. They are often provided in the context of corporations that employ these individuals.

The best answer to help poor people is by having less government. Do you know that poor people pay more taxes than wealthy people? Oh, it's not done through the IRS or through payroll taxes. It's done by the Federal Reserve which prints money to fund all the corporate welfare and militaristic spending our Congress passes. See Federal Reserve and the Inflation Tax. The inflation tax is the most regressive tax of all. It transfers wealth from the poor and middle class to the wealthiest parts of our society. Read my post and you will see why no politicians discuss it, except Ron Paul.

You are not isolated: a person harming himself becomes a blight on society. Over-consumption of trans-fat causes cholesterol problems which leads to heart problems which turns people into a cost on the medicare / medicaid system (not to mention a lack of production in the workforce). The same argument could be made of credit issues, seatbelts, etc. Unless you are also advocating a drastic scaling back of social services (which you may be, but I didn't want to assume--maybe a topic for another blog post), a person harming himself does not have isolated impact on society.

Letting people harm themselves will continue a dangerous stratification which has already started. Maybe that's OK at the beginning (if you're on the right side), but a very dangerous national trend.

This is NOT to defend all actions, causes, or methods of any particular government (especially not our current one). But it does represent a Hope that society, in a dynamic and constantly evolving way, can work towards a place where we lift up ALL of us instead of those of us who are currently more fortunate, more well educated, or in a better negotiating position.

I believe that government can and should be much more than a wall than protects good people from bad people. It should offer each of us the opportunity (or at least the hope) to make a better life for our children than we have had for ourselves. It should be the force which allows the strong, the weak, the rich, the poor, the lucky, and the unlucky to work together to build a nation that is better for everyone tomorrow than it was yesterday. For everyone, not just those currently in a good position to make smart choices.

As I said, the best way to make people better off is for the total wealth of the nation to increase. If the government doesn't interfere, this wealth will distribute itself in a reasonable way. It's the government policies through the printing of money at the Federal Reserve that is responsible for the growing wealth disparity in this country. The solution to a problem that the government creates is not to have more government. It's to get rid of the parts of government that create the problem.

I have hope that our country can be a better place for everyone. But I have no hope that the government can do it. The government is for the most part incompetent. I consider my friends to be in the top strata of the most educated and capable people, but not one of them works for the government. Why is this? Because, for the most part, the government does not attract the most capable members of society. The most capable members work in industries where they can be financially rewarded. These industries, for the most part, make profits because they provide valuable products and services to the public. I say "for the most part" because this isn't true where the government interferes through government handouts (e.g. military companies) or subsidies granted by the government (e.g. the banking cartel and agriculture companies). So I have no hope that the government can solve our problems. The solution to our problems is innovation and competition in a free market that creates products and services at cheaper and cheaper prices over time.

Our brilliant government has left us with a $9 trillion debt and $60 trillion in financial obligations. We're going to be bankrupt at the state we're going. The people who are not so well off will be in really bad shape when the financial system of this country completely fails. It's not far off at the rate we're going.

Protecting People from Themselves

My friend Matt recently created the website, predatorylendingassociation.com, which is a satirical attack on payday lending. I have great respect for Matt. He wants to make the world a better place. He recently created walkscore.com, which educates people on living in high density areas that don’t require dependence on automobiles.

Matt believes the payday lending industry should be regulated out of business because it does more harm to society than good. He applauds a North Carolina law that outlawed payday lending. This begs the question for me: should government regulate or outlaw industries in order to protect people from themselves?

I have no love for the payday lending industry, but I disagree that it’s a good idea for government to pass a law in order to protect people from themselves. As corrupt as this industry may be, nobody forces anyone else to take a loan from them. These loans are entered into by adults of legal age with their full consent. If two parties wish to enter into a contract, why should the government stop them?

If it’s the government’s mandate to protect people from themselves, where does one draw the line? Cigarettes have been shown to be incredibly dangerous. My mother smoked all her life and died of lung cancer. There was a time when cigarette companies made claims that smoking was healthy. This was outright fraud and stopping fraud is the domain of the government and the courts. But these days, there is a ton of education and warnings about the dangers of smoking, yet millions of people still smoke. I have several friends that regularly smoke. Should government step in and protect these people from themselves? Should we outlaw cigarettes because they cause more societal harm than good?

I have many friends that regularly smoke marijuana, but the government decided it harmful and therfore should outlawed. My friends would argue that they are really illegal because of a misplaced war on drugs and a desire to limit competition to tobacco companies. Ah, this is one of the problems with protecting people from themselves – the people in power get to decide what is harmful.

A libertarian-minded friend of mine told me this quote, “Never give a friend a power you wouldn’t want an enemy to have.” Most of my socially liberal-minded friends want women to have easy access to abortion. It’s not that much of stretch to imagine certain elements coming into power that would claim we need to protect women from aborting their fetuses and suffering eternal damnation. Or maybe they might decide that homosexuality should be outlawed because for the same reasons. Giving the government the power to protect people from themselves is a slippery slope. I do not want the government to have this power.

In a free society, the government should not try to protect people from themselves. People should be free to make their own choices, whether they are good ones or bad ones. When government tries to decide what is best for us and makes our decisions for us, the result is a small group of people in a far away city running our lives. This may start out with the best of intentions, but it leads to abuse and eventually the people become slaves of the government.

Government, free markets, and healthcare

Can government solve our problems?
I want to make the case that government cannot solve our problems, but it can and often does make them much worse. The typical argument of my progressive friends is that it should be the role of government to fix our problems. Government is needed to ensure people make a living wage, prevent corporations from having too much influence, redistribute income so that the distribution of wealth is fare, and provide us with necessary services such as healthcare.

Libertarians would argue that the fundamental premise is immoral. In order to provide these services, government must take from one set of people in order to give to another set of people. People should not have to give up the fruits of their labor. Let’s set this aside for the time being and assume that the aforementioned goals are moral and should be pursued. What if it turned out though that in creating more government to accomplish these goals, the exact opposite effect was achieved instead?

In this entry, I will take up healthcare as the example because I feel it is one of the most important issues affecting this country and it will be an important issue in the next election for what role government should play.

Many of the supporters of universal healthcare argue that healthcare in this country is completely broken and the reason is the free market has failed. I agree that healthcare in this country is a large failure, but it is not because the free market has failed. It is because we don’t have a free market for healthcare at all and haven’t since the 1930’s. And this is because of government interference with the free market.

Employer-Provided Healthcare
For those who have access to regular healthcare in this country, it is generally paid for by the employer. This already is a strange state of affairs. Employers don’t generally provide auto insurance for their employees. Employers don’t pay for people’s groceries or clothing. Employers generally don’t provide us with housing. How is it that we ended up with a system where the expectation is that employers provide us healthcare? And is it a good system?

Most people would say it’s a bad system. If we started from scratch, very few would think this is a good idea. People don’t want to lose their healthcare when they change jobs. And people don’t really want their employer knowing any of the details of their medical issues. So how did a system that most people wouldn’t want come to become the norm? Of course, the free market didn’t create it – the government did.

According to Princeton Professor Ewe Reinhardt, who worked on the original Clinton healthcare plan, the employer-provided health care model is now being called an "accident of history."

Employer-provided health care was born in the 1930s after Franklin Roosevelt decided not to try for universal socialized medicine. In a move that seemed ingenious then because health care was comparatively cheap, the federal government passed laws offering economic incentives to businesses that provided health care to employees.¹

Calling this an “accident” is missing the point. It wasn’t an accident at all. It was an unintended consequence of bad policy. The reason we have employer-provided healthcare now is because the government subsidized it. The government also froze wages during World War II via the National Labor Board, another way government interfered in the free market.² This made employer-provided healthcare a way for employers to compete for labor.

When an employer provides healthcare to its employees, the cost is tax-deductible. When an individual pays for healthcare, the cost isn’t. As basic economics tell us, when you subsidize something, you get more of it. When you tax something, you get less of it. Just as organisms evolve, small economic advantages magnify over time. The model of employer-provided healthcare was subsidized by the government so it didn’t take long for it to become the winning model. It was the result of the government choosing to prefer it over a different system. There is nothing free market about that. The free market will pick the most efficient model, but in this case, the government interfered with the free market. It turned out be a bad system. And now we’re stuck with it.

Employer-provided Healthcare Made Costs Rise
There are many obvious problems with employer-provided healthcare. As mentioned above, employees have to change their healthcare when they change jobs and they also have to deal with their employer potentially knowing intimate details about their medical problems. But this isn’t the worst of the problems.

When employers were made responsible for paying the healthcare costs of their employees, the natural price signals necessary for a free market to function correctly were removed. When an employee and his family members went to the doctor, they didn’t care what the cost of the service was because a third party was paying for it. In normal free market conditions, producers compete on price and consumers find the lowest cost provider. In the market that developed under employer-provided healthcare, there was no incentive for consumers to find the lowest cost alternative. This didn’t mean that doctors could necessarily charge whatever they wanted because at some point, the employers would push back. But it did mean that the consumer in general wasn’t looking for the lowest cost option and the suppliers of medical services weren’t under normal market pressure to continuously innovate and reduce costs.

If one considers innovative industries like the computer market, we have seen dramatic decreases in prices and improvements in products over the years. This is because we have normal market conditions where there is healthy competition and suppliers are constantly innovating to provide better and lower cost products. This attracts investors and capital because there is profit to be made when a producer can provide a better product at lower costs. This further spurs innovation and the cycle repeats. This is the virtuous cycle of the free market. And this all happens when consumers provide pressure by pursuing the best product at the lowest cost.

When government introduced employer-provided healthcare, the law of unintended consequences took hold. The suppliers of medical care did not have the incentives to constantly lower cost. In fact, it may have caused the opposite incentive where consumers would prefer much higher cost products when they thought they had even a slight advantage. This is similar to how an employee will purchase a first class airplane ticket that costs 5x more when the employer is paying for it but not when he is paying for his own trip because he knows the benefit isn’t justified by 5x the price. With airplane tickets, employers can crack down. It’s easy for them to distinguish between the benefit of a first class seat and a coach seat. But with medical services, employers don’t have the expertise to know what services their employees should purchase and in any case, privacy issues prevent them from exercising that type of control even if they could.

Introduce the HMOs
As prices rose due to a non-functioning market, healthcare became more and more expensive for companies to provide. They needed to do something about it. This brought about HMOs. HMOs basically were introduced to keep costs down since the consumers of the healthcare weren’t doing it themselves. HMOs negotiate with the doctors on prices and what services are allowed. But this is not a free market at all. This is a managed market. In a normally functioning free market, producers and consumers negotiate on price and producers compete to provide the lowest costs to consumers. With HMOs, the market is further distorted. The consumer doesn’t have much choice which HMO to use because the employer is paying for it. The employer is most interested in using the lowest cost HMO that just does enough to meet the expected obligation of employer-sponsored healthcare. Like any profit-seeking company, the HMO has an incentive to keep prices down as much as possible but its customers are captive and have no alternatives should the HMO fail to provide good coverage. This is a complete market failure.

Let’s just take another look at the complete market failure of the participants. Employers pick the HMO that is cheapest and just barely meets its obligation. The employer is happy as long as the cost is low and the obligation does not go below a certain threshold where they clearly aren’t meeting their obligation. Therefore, we can assume that the HMO, in order to maximize its profit, will always stay just above this threshold.

The healthcare providers negotiate deals with the HMOs to give them a steady stream of patients. The HMOs negotiate rates for different procedures with the doctors, but they can’t possibly be involved with every decision to determine if it’s cost effective. This means doctors have an incentive to game the system to provide the highest cost procedures that are just below the threshold for what will arouse the HMO’s ire. They don’t have an incentive to reduce costs on a case-by-case basis because the patient has no real choice except to go to another doctor that’s part of the same HMO that has the same exact incentives. There is no virtuous cycle here that occurs under normal free market conditions.

How the Free Market Should Work
To recap, this little bit of government interference during World War II had this gigantic unintended consequence of reshaping the entire healthcare system into a very inefficient and non-free market system. Imagine if the government had decided that employers should provide their employees with computer systems. The computer industry would look very different today.

Even when somebody drops out of the employer-provided healthcare system and decides to purchase healthcare on their own, they still have to participate in the same market that is already heavily distorted by the vast majority of the people who are in the system. There is no way for the free market to work effectively.

In a real free market for healthcare, we wouldn’t have seen all these distortions. Consumers would shop around to find the most cost-effective healthcare. There would have been enormous pressure and competition over the last 70 years to innovate and reduce costs. This is because the medical providers who found lower cost solutions would have made a large profit by catering to the majority of people who couldn’t afford it otherwise. As mentioned above, this would have attracted investors and capital. We would have seen innovation that we can't possibly even imagine. We would have seen a huge diversity of options catering to all points on the demand curve like we see with other items that exist in the free market. For example, we have computers at many different price points. We have inexpensive cars with few options such as the Dodge Neon all the way up to the cars that cost hundreds of thousands of dollars. We would have seen healthcare work this way as well. Except even the cheapest healthcare would probably be better than the average healthcare we see today just like the cheapest car produced in the free market was still much better than the average car produced by Communist Soviet Union.

Medicare Makes it Worse
In some ways, one can think of Medicare as just providing employee-provided healthcare to senior citizens. In that way, it works like an employer except the employer is the government.

Medicare makes it worse though. At least with employer-provided healthcare, the costs burden is placed on a profit-seeking company. The management of that company has the incentive to keep costs down. If they don’t, the company will see its profits decline or even turn to loses and the shareholders will fire the management. On the other hand, if they are able to keep costs down, the company will make more money and the management will be rewarded with lucrative stock options and benefits. When the government is providing healthcare, the decisions are made by government bureaucrats. These bureaucrats are spending taxpayer money. They don’t get fired if the costs are too high and they don’t make more money by reducing costs. The government can run a deficit for years or even decades. On the other hand, senior citizens are a very powerful voting lobby. If they see their care get worse, they will vote their politicians out of office. Therefore, there is very little pressure on almost all fronts to keep costs down. That sends the wrong price signal to the healthcare providers who then don’t have the correct incentives to innovate and lower costs.

Medicare also distorts the market in another way. At any one time, there is a fixed amount of healthcare resources. By practically providing infinite funds to take care of senior citizens, this reduces the number of resources that are available to take care of everybody else. In this way, Medicare causes there to be less healthcare available to children and non-senior adults because they don’t have an entity with infinite resources and very little price sensitivity paying for their healthcare

Big Government Further Makes it Worse
The country’s resources at any one time are fixed. There is a fixed amount of labor able to do all the things we want done. The healthcare industry uses some percentage of this labor. When the government spends a huge portion of the nation’s resources on the military-industrial complex, farm subsidies, and other corporate welfare, it causes those industries to use a disproportionate amount of the nation’s resources. That means there are fewer resources available for other things, such as healthcare. Only the free market which perfectly aggregates everybody’s demand for products and services can efficiently allocate the resources. The government causes misallocation of resources because central planning never results in the right allocation (for example, the Soviet Union and Maoist China) and because the government caters more to special interests than to the needs of the individuals in the population.

Fixing this Mess
If government caused the problem, the answer shouldn’t be more government. Unfortunately, there are many cases where government caused the problem and the answer we come up with is to add more government (e.g. housing bubble and bad mortgages). This is the wrong approach and it will make healthcare worse.

The first step is to get rid of the distortion where employer-provided healthcare is subsidized. We should make all healthcare tax free. This will make the free market start to take hold in that many employees will prefer to just take the money their employer would have used to purchase healthcare as an increase in salary used to purchase healthcare themselves.

Beyond that, I am not sure what all the steps should be. We have some path dependence where we can’t go back and undo everything that led to the current system. We may never be able to get the system we would have had if we had never interfered with the market in the first place. Some say that it would help if doctors had the right to collectively bargain with insurance companies (currently this is illegal).

What I do think is that we want a system where the price signals and market pressures are restored between consumers and healthcare providers. Otherwise, we will forever be stuck with a system where the costs continue to rise out of control.

1. http://findarticles.com/p/articles/mi_m0843/is_6_32/ai_n169107622.
2. http://www.bls.gov/opub/cwc/cm20030124ar04p1.htm

Federal Reserve and the Inflation Tax

The Federal Reserve system and monetary policy are topics that are barely ever talked about in American Politics. Sure, we hear about them in economic news when people wonder whether the Fed will change short-term interest rates, but it rarely comes up as a political issue. But some of us believe it is the most important issue facing Americans because it is the root cause of many of the problems we are experiencing including

• A mortgage crisis that threatens to destroy our banking system and cause millions of Americans to lose their homes,
  
• A weakening dollar that is resulting in increasing prices of things we buy from overseas (which is most things at this point),
• Increasing income inequality between the poor/middle class and the wealthy,
• A $9 trillion Federal debt that continues to rise.
  

There are entire books dedicated to explaining what the Federal Reserve is. I'll give a brief explanation for how it relates to this topic, but if you want to take the Red Pill and see how far down the rabbit hole goes, I recommend watching Fiat Empire - Why the Federal Reserve Violates the US Constitution for a detailed explanation.

In brief, the Federal Reserve is not an agency of the Federal Government, nor is it a private company. It is a cartel made up of the largest banks with special privileges granted to it by the Federal Reserve Act. Its exact shareholders to this day are kept secret. This cartel is not unlike OPEC or other cartels. It's goals are to reduce competition and maintain control over its product, in this case, money and credit in the United States. It was granted the power to have a monopoly over the legal tender of the United States. The Federal Reserve produces Federal Reserve Notes by fiat and there is very little oversight of it granted to the Federal Government. Many people believe the Federal Reserve Act violates the Constitution.

So besides possibly violating the Constitutional and having little oversight, if the Federal Reserve is so bad, why does Congress allow it to exist? The reason is that as government grew over the years, Congress needed to find ways to pay for all its programs. Congressmen often get elected by promising money to their constituents and special interests. How can they pay for these programs and handouts? Raising taxes is one way, but it's very unpopular and would cause them to lose elections. This is where the Federal Reserve comes in. Congress can spend more money than it receives by simply issuing debt, effectively borrowing the money. The Federal Reserve makes this possible by effectively printing money. When the US dollar was backed by gold and silver, this wasn't possible because the money was redeemable in gold. This is why old Federal Reserve Notes used to say "Will pay to the bearer on demand N dollars." A dollar was defined as a certain number of grains of gold or silver. Today, we have fiat currency and fractional reserve banking. Money is created as debt by the banking system. This first half of this video explains how that works.

This printing of money by fiat causes many of the problems we experience today. The most important one is probably the inflation tax. This is barely ever talked about. When new money is created by our Federal Reserve system via the issuance of debt, the money does not uniformly distribute itself throughout the economy instantly. The people who get the money first benefit from it because the prices in the economy are based upon the amount of money that previously existed. The people who first get the money include the banking system, the military-industrial complex via large defense contacts, and other large recipients of government spending. As this money is spent and percolates throughout the economy, the market starts to react to all the new money. The actual amounts of goods and services haven't increased because the new money isn't the result of real growth in economic activity. According to the laws of supply and demand, as there is a higher supply of money but virtually the same number of goods and services, prices must rise to balance supply and demand. This results in things rising in price that every day Americans buy like food, energy, clothing, health care, college tuition, and entertainment. The problem is that the wages don't catch up as quickly as prices rise so people find that their standard of living must go down to accommodate the expenses or they must work harder (like have both parents have full time jobs to support the family when only one was necessary in the past).

This inflation tax affects the middle class and poor people much more than the wealthy. Wealthy people keep most of their investments in hard assets such as real estate, precious metals, oil production, utilities, and the general stock market. These assets have real intrinsic value and their real value, in aggregate, stays somewhat constant over time. Middle class people and poor people may have some savings but it's mostly in bank accounts denominated in dollars. They also live on incomes that do not keep up with the overall pace of inflation. In this way, the inflation tax is the most regressive tax of all. It transfers wealth from the the poor and middle class to the wealthy. This is why you will hear Dick Cheney say that the Federal Debt doesn't matter.

For more information, see

Wikipedia Inflation Tax
Inflation Tax by Ron Paul
Mish's Economic Analysis on how inflation is really counterfeiting

This is just one aspect of why the Federal Reserve system is bad. In subsequent posts, I'll talk about how it creates the boom and bust business cycle, how it created the subprime mortgage crisis, what this has to do with China, why prices should naturally fall if it weren't for monetrary inflation, the differences between monetary inflation and price inflation, and other related topics.

For now, I'll leave you with some quotes from Thomas Jefferson:

If the American people ever allow private banks to control the issue of their currency, first by inflation then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

I believe that banking institutions are more dangerous to our liberties than standing armies.

I wish it were possible to obtain a single amendment to our constitution - taking from the federal government their power of borrowing.

Another attempt at a blog

I think this is the third or fourth blog I've started. I usually write one or two posts and then lose motivation. This blog may be different because I am not writing about myself, a topic even I find pretty boring. I am going to write about politics, which I always have a lot to say for better or worse.

I was a liberal/progressive and have turned into a libertarian over the past two years. A lot of this blog, at least initially, will be explaining to my liberal/progressive friends why I have done that and why I am supporting Ron Paul for President.