Bastiat's Bastions

According to this article in the Nicholls Worth yesterday (3/19/2009), the way in which room assignments will be made by a new system. The first pick of rooms will, if Dean Johnson’s plan is not overturned, is one based upon personal characteristics–GPA and classification. In chapter 6 in my principles of economics classes, we examined the efficiency and the fairness of different systems in allocating resources to various uses and to various users.

Here are a few questions to think about in addressing the situation and for you to write back in response in the comments section.

Is Dean Johnson’s proposed system an efficient one in allocating rooms? Can you think of how a system might be more efficient, that is, how improvements can be made that would increase the wellbeing (surplus) of the winners by more than the losses in wellbeing by the losers? For instance, how would a market, an auction, work to allocate the rooms to those who want them the most? How fair would various systems of allocating rooms be? How well would a lottery work in terms of fairness? in terms of efficiency?

If all students were charged the same for their room, whether it was a choice room, or more of a dump, would that be fair even if the rooms were allocated by lottery (chance)? And what if rooms were allocated by majority rule? Would that be efficient? Fair?

Consider the current system to establish current “property rights.” Is the reallignment or redistribution of property rights via the process that Dean Johnson is using, by a vote of the student committee mentioned in the article a “fair process?”

If you are a commuter student and have no concern or knowledge of the housing allocation method currently being used, you might want to think about how parking decal requirements limits the number of cars that can park on campus (and diverts non-payers to Bowie Road) and how personal characteristics (student vs. faculty/staff) and first-come-first-served further allocates or rations parking spaces, and about the fairness and efficiencey issues that surround our parking allocation methods.

Well, try answering some of these questions, or think of similar ones with some of the other systems mentioned in the text, such as command or force.

-MC

We are told by politicians that the way to reduce health care costs is by getting more people covered with health care insurance and getting more preventative care. Maybe. Maybe not.  When we look at the numbers, we have to conclude that the problem is that demand is shifting up faster than supply.  The only thing that will bring health care prices down is if we are able to get supply to increase faster than demand.

Recently, the White House hosted a Health Care Summit. C-SPAN had some good coverage on it that you see at their website. The links to the events are:

Summit Opening Remarks, Breakout Session, Obama and Kennedy: Closing Remarks on Healthcare Summit, BilyTauzin Interview on Pharmaceuticals.

Most of the discussion centered on health care coverage–insurance. I would suggest that the problem that most Americans face is not whether or not they are covered, but the high cost of coverage.  Premiums are very expensive. A lot of the productivity gains of the American worker in the last 20 years has been paid to the employee, not in wages, but in the employer’s share of health care premiums.

I plotted some health care data and came up with an interesting picture. I based this picture on two date sources: 1) National Health Expenditures 1960-2007 from the Centers for Medicare and Medicaid Services (http://www.cms.hhs.gov/nationalhealthexpenddata/ downloaded 3/10/2009) which provides estimates of the total expenditures in the US on health care and 2) the Consumer Price Index (CPI) subindex on health care (just like there is one on energy and another on food) which comes from the Bureau of Labor Statistics. I got a relative price of healthcare by dividing the Health Care CPI by the complete CPI (all goods and services). This tells us which is going up faster, general prices or health care prics and if HC is becoming more scarce (more in demand relative to what is going on with supply).

I divided the expenditure data by the Health Care CPI to get a quantity measure and then divided through by the population, to look at the quantity in per capita terms (more people means more buyers, but more suppliers too). Price and quantity combinations observed in the diagram below do not show a supply curve or a demand curve, but rather show where supply and demand intersect–the “equilibrium” values.

On the diagram above, the price is the Medical Care component of the Consumer Price Index (CPI) divided by the general (all goods and services) CPI, and multiplied by 100. 1983 is used as the base year (1983=100 for both all prices). The Quantity axis measures Health Care Expenditures per capita (Expenditures divided by the population) for that year and then divided by the Medical Care CPI, which gives us a measure of quantity for that year. Then, this quantity figure is “standardized” by 1983’s quantity (all years quantities divided by 1983’s quantity. The above should not be thought of as a demand or a supply curve, but showing the path of equilibrium prices and quantities for the years from 1960 (point furthest to the left) to 2007 (point furthest to the right). Think about how supply and demand must be shifting to give such numbers.

By the way, the 1960 point is at the lower left and the 2007 point is at the upper right. For things to look like this though, the demand must be growing or shifting out to the right faster than supply is increasing. And why has this occurred? Expanding health insurance coverage. The more someone else is paying our bills, the more we spend and the less attention we pay to our costs. Ever notice all those scooter store ads on TV, ads you never saw before Medicare started paying for scooter chairs? And all the ads say buy this and let Medicare pay for it (“If we approve it and Medicare turns you down, you get to keep the chair”), not a cent out of your pocket.

So, health care is way too expensive, because we have pushed up demand with all of our health insurance–and the politicians’ answer is more of the same, more HC insurance, more 3rd party payment, less individual responsibility. The folks at the Health Care Summit routinely avoid talking about doing anything on the supply side of the market–getting more doctors, more nurses more hospitals, more pharmaceuticals for the same prices (shifting supply out). Here are the questions we should be asking: How do we get the FDA to speed up its approval process? How do we get the med schools and nursing schools to open up their doors a bit wider? These are the things we need to get affordable health care, as universal health care increases demand without doing anything about supply.

-MC

By now, we all know about Bernard Madoff (pronounced “made off,” as in “he made off with our life savings”), the Wall Street financial advisors to the rich and famous who confessed that his business was ‘all one great big lie’ (for instance, see this article in The Independent). “The investment returns were fake, and he had been paying old clients with money from new ones. In its conception, the scam is a classic.” This classic scam is known as a Ponzi scheme, named for Charles Ponzi who bilked many out of their savings with his pyramid scheme in the early part of the 20^th century. A pyramid scheme is one where initial investors earn high returns, but those returns are all financed by the investments of those buy into the fund later, kind of like what we know of as ‘network marketing.’ As mentioned in this article on Ponzi schemes, “For this scheme to work, there needs to be an ever increasing number of investors.” The number of investors will not continue to increase, so the fund collapses, as investors cannot continue to receive payments.

People are outraged that Madoff, who once called for a higher level of ethics on Wall Street, has been so unethical as to defraud so many out of their millions. Some have pointed out that this is exactly why we cannot let people invest their own social security funds. However, Social Security, the biggest of all retirement funds, is financed in exactly the same way as Madoff’s Ponzi scheme, with people who are retired now being paid from the payroll taxes of those who are working. However, with the baby boomers beginning to retire and with far smaller age cohorts working to support them, there will need to be more and more workers paying into the system, but it cannot continue, as the boomers had far smaller families and our population growth has slowed.

So, many of our politicians who have pooh-poohed Bush’s proposal for people to have some control over part of their social security accounts are now learning the wrong lessons from the Bernie Madoff. The lesson should not be that people cannot be trusted with their own funds, but rather they should not trust the Bernie Madoffs of the world with their retirement, nor anyone in Congress, because Congress has given us the biggest of all Ponzi schemes, Social Security, a Ponzi scheme that dwarfs Madoff’s.

Perhaps we should try to be wiser than Twain’s cat. Mark Twain remarked once: “We should be careful to get out of an experience only the wisdom that was in it—and stop there, lest we be like the cat that sits on a hot stove lid. She will never sit down on a hot stove lid again—and that is well, but also she will never sit on down on a cold one anymore.” The lesson from Madoff is not that private individuals might try to rob you of your retirement funds, but that we know for sure that our funds in the governmentally run Social Security Ponzi scheme are not safe, and they might also be at risk in private accounts if you are not sure how the funds are really being invested, but at least with private accounts you have a chance.

MC

We all understand that political instability can bring about economic instability and economic woes can breed political woes.  We certainly saw the latter with Carter’s loss to Reagan in 1980, with Bush I’s loss to Clinton in 1992, and McCain’s loss to Obama this last year.  And right now, the shrinkage in the national economy is as bad as it was in 1983, in the early years of Reagan, years that were not filled with gloom and doom.  But here is a story that would be funny if not for the seriousness of the dire predictions involved.  Associated Press writer Mike Eckel reports here in the Detroit Freepress that Igor Panarin, the dean of the Russian Foreign Ministry’s school for diplomats and Russian TV talking head, is predicting that the US will collapse in 2010.  Wait, his predictions go a bit further.  He goes on to suggest that the US will break apart into six nations and Alaska will go back under Russian control.

And the cause of our demise? Our moral decline, as seen by our school shootings, our large prison population and the number of gay men in the US.

Why is it now that the US collapses instead of our Civil War? Or our many other recessions and panics, such as the one we call the “Great Depression?”  Or in 1968 when 2 of our most important political leaders, Martin Luther King, Jr. and Bobby Kennedy, were assisinated and when cities across this country were plagued by a series of race riots and war protests?  Or every year after that unitl 1975 when we finally pulled out from that conflict?  Or what about 1973, when we faced the Arab Oil Embargo and Nixon was being investigated by Congress for involvement in the Watergate breakin?

The point is our nation has faced tough times in the past and will undoubtedly go through tough in the future.  But we have a system that provides for disagreement and for venting of strong disagreement, especially with the likes of Chris Matthews and O”Reilly of Cable and Limbaugh on the Radio, and Matt Drudge and others on the web.   We bend some, but we do not break.

One thing that makes us flexible is our economic system that allocates resources based on prices that result from the competitive bargaining between buyers and sellers, rather than the direction of politicians.  It looks as if this is something that the current administration has not yet come to appreciate.

What makes the predictions of the Russian leaders cause for concern, though, is that they seem to be underestimating the US.  Miscalculating.  And the problem with miscalculation, especially when made by leaders who have been very opportunistic in the past and may continue to be opportunistic, is that it can lead to very horrible wars.  Wars are almost always the result of miscalculation.  Countries invade others when they think it will be a walk in the park, when they are ready to pronounce “Mission Accomplished!” shortly after they have begun.  When leaders miscalculate, they often find themselves in protracted conflicts for which they are often unprepared, or should I say, their citizens are unprepared.  If the Russians think we are on the brink of collapse, and just a little push from them will push us over the edge, they might get the idea that they can attack and defeat us.  Miscalculation, I am afraid, leads to wars with many losers and no winners.  We can only pray that Russian Prime Minister Putin will listen to someone other than Dean Panarin. 

MC

Maybe I am just being…what’s the politically correct version…uh, overly precise, but I hate when journalists do a crappy job. Take the following offering from CNN.com. The headline on the main page reads:

“Quarterly GDP worst in 26 years”.

That statement is wrong – or at least horribly misleading.

Reading that, it seems to suggest that the most recent quarter’s GDP was lower than GDP in all quarters in the last 26 years. Run for the hills!

I assure you, even with the tough times we are facing, the economy is more than twice as large today as it was in 1983.

While the economy has recently contracted, it has only contracted to the level that was first achieved in Q3 of 2007. We’ve wiped out a bit more than a year’s worth of growth, not 26 years of growth as some might be led to believe from that headline.

What they meant to say was:

“Quarterly GDP growth rate worst in 26 years”.

And that’s not quite right either. They really mean:

“Quarterly real GDP growth rate worst in 26 years”.

That statement would actually be accurate. I’ll save the fun of real variables for your macro professor.

But they continue to screw things up when you actually get to the article. Click on the link, and the following headline and sub-headlines appear:

GDP slides 6.2% on slower consumer spending:
A revised reading on fourth-quarter gross domestic product was its worst in 26 years.

I’ve already railed against the second part. How about the first part?

That, too, is inaccurate – and this one drives me nuts.

I’m afraid GDP did not slide 6.2% in that quarter. (Nor would it be correct to say that real GDP slided by 6.2% in that quarter.)

What the author meant to say was the annualized real GDP real growth rate was -6.2%.

What is annualized growth rate?

They take the growth rate from the current quarter, and imagine that the same growth persists for an entire year. Roughly speaking, the economy shrank by about 1.5% in the fourth quarter or 2008. In the next three quarters also result in 1.5% reductions, at the end of the fourth quarter, the annual reduction will have been 6.2%. Will the economy shrink by 1.5% next quarter? Almost certainly not. It may shrink at slower rate (possible), it may shrink at a faster rate (quite possible), or even grow (don’t hold your breath). You finance types understand annualization — it’s just an example of compounding.

Don’t get me wrong, having the economy shrink by 1.5% in a quarter is not good. It is a rapid decline – but the point is that you have get the facts right. For reference, an “average” quarter would involve a roughly 0.7% increase in real GDP or equivalently, an annualized growth rate of 3%.

To be fair, the article finally does explain stuff…

Gross domestic product, which measures the output of goods and services produced in the United States, fell at an annual rate of 6.2% in the fourth quarter, adjusted for inflation, according to a preliminary report from the Bureau of Economic Analysis.

But after all that — consider the following headlines.

“Real GDP shrunk by 1.5% in the forth quarter, showing the worst quarterly growth rate since 1983.”

“Quarterly GDP worst in 26 years”.

They paint different pictures, no?

–CT