Unaffordable Health Care

Ok, it has been over a year since I have last blogged.  The current health care debate is so important and so misunderstood that I feel like I have to put something out there.  So I want to talk about how insurance works.

Insurance companies were created to provide people with an assurance that whatever they buy insurance for will be protected.  Let's talk about simple fire insurance.  You can buy fire insurance for your home.  Let's assume a company in Utah offers fire insurance for $100/year.

Year 1: 1,000 people decide to buy this insurance.  The revenue for that insurance company for that year is $100,000.  During that year, only 1 home was destroyed by a fire.  The home was worth $200,000.  The insurance company is then obligated to buy a new $200,000 home for that insured customer.  Where do they get the other $100,000?  Well, since this was their first year in operation, they would have to borrow that money from a bank.

Year 2: The insurance company has to make up the $100,000 that they now owe the bank, and they need to protect themselves from going into bankruptcy - which is what will happen if they don't increase their revenues.  So they raise everyone's rates to $200.  Year 2 revenues are thus $200,000 and luckily no homes burn down.  So they pay the $100,000 back to the bank and have $100,000 in profit.

Year 3: The insurance company needs to analyze their history to decide what rates need to be for the future.  Since they have so far had .5 houses burn down every year, and the average cost of the home is $200,000, they need to make at least $100,000/year.  Oh wait, let's say there are 3 employees each making $50,000 each.  That is an extra $150,000 that they need to make in revenue.  Plus their rental and utilities cost $10,000/year.  Taking only those basic expenses into account, the company's expenses equal $260,000.  With the 1,000 people that are on their insurance rolls, that comes down to a "premium" of $260/year for year 3.

Insurance companies can't pay out more than they take in.  Let's now talk health insurance.  Until recently, people who wanted health insurance could buy it and the structure would work just as we explained above.  With the new Obamacare regulations, insurance companies can only charge so much for certain people (they can't charge more for higher risk people like women who frequently have babies and cost the hospitals more money on average than men).  Since the expenses of the insurance companies don't change, their only option then is to raise the premiums for EVERYONE in their pool, men and women.  Same scenario when you consider pre-existing conditions.  The new regulations say that all insurance companies have to cover anyone with pre-existing conditions.  That is similar to someone who didn't have insurance before their house burned down and, once it burned down, they come to the insurance company and the insurance company is forced to pay for their home.  Where does that money come from?  Liberals believe that the evil, rich insurance companies are now forced to foot the bill.  In reality, the insurance company will just file the cost on to the other insured customers, who have been paying the premium all along even though their house hasn't burned down.

Keep in mind, when Obama and other liberals mention all of the "wonderful" additions to the health industry through the affordable care act, none of them are free - and none of them will be paid by "evil insurers or pharmaceutical companies".  All companies must make a profit or they will go bankrupt.  You can count on seeing the added benefits in your plans, but you can also plan on seeing higher premiums.  Oh, don't forget about all of the additional taxes that need to be raised to now pay a third party - the government agency in charge of the all of the regulations for the new law.

Why Mr. Krugman is wrong - every time

Paul Krugman is a frequent columnist for the liberal New York Times.  He is also probably the nation's most prominent liberal Economist.  His most recent post is upside down.  I'll tell you why.

Paul is a "Keynesian".  "Keynesian" economists believe that every economic problem can be solved by the government printing and spending money.  They are named after John Maynard Keynes who tried to sell the strategy beginning in the early 1900s.  They use tricky words like "infuse" money into the economy to "stimulate" it.  They claim that food stamps give people the nutrition they need IN ORDER to work, implying that without food stamps they are too weak to work.  They claim that unemployment checks give a 2:1 return to the government because people who receive the money go out and spend it on goods and services at small businesses, then the small businesses grow and hire more people who then pay taxes on their money.

First of all, does this pass the smell test?  When Paul says that all we really need to do to get out of this recession is SPEND MORE MONEY, does that sound right to you?  Our debt was around $10 trillion when Bush left office.  Obama has now racked up more debt in 3 years than ANY President EVER before in ALL OF HISTORY!  Our debt is now nearing $17 trillion.  Did you know if you took the total combined wealth of the two richest men in America and put it towards America's debt, it would pay for 3 months of INTEREST on the debt?  That's it.  And has this massive spending helped the economy?  Unemployment is still higher than it was when Obama took office - and the spending began even before he took office when President Bush passed the first stimulus to "save the free-market system" - the biggest gaffe statement ever made by Bush.

Even if the Keynesian philosophy could work, is it worth the cost?

Cost:

1. More dependency on government.  People on food stamps and unemployment are dependent on the government for their lives.  They are victims of modern day slavery.

2. Inflation.  Printing money is not free!  Every dollar printed means less value of the dollar that you are holding.  And it is apparent in rising grocery and gas prices.

Big government, big spending solutions go against common sense and conservative principles.  So when will Paul Krugman catch on to common sense?  I suspect never.

Is There Such A Thing As A Free Lunch?

It seems like everyone wants stuff for free now-a-days.  Aly and I use "buy one, get one free" coupons all the time.  When I go to Costco, I like to enjoy the free samples available.  Sometimes I find myself doing or eating things that I don't like, just because they are free.

Liberals seem to want the government to provide free health care, free food, a "free" salary to the unemployed, free homes, free birth control, or even free diapers.  But is anything truly free?  There are 2 unseen problems for getting stuff for "free".

1. Nothing is free.  Everything has a cost associated to it.  Someone is always paying.  Those samples at Costco?  Someone paid a worker to produce that sample, the food itself cost something, someone paid to ship it to Costco, and Costco is paying the employee to distribute it.  Free health care?  Someone has to pay the doctor's salary, and if no one repays the doctor for his work, then it comes out of the doctor's pocket.  The doctor pays.  Free salary to the unemployed?  Where does the money come from?  It may be free to someone, but it is costly for someone else.

2. Things that come from the government, don't actually come from the government.  The government is simply an entity that survives on OUR tax dollars.  They have absolutely no income except that which is given to them from its fruitful citizens.  You may think that the government can print money, so it is free money.  Does that sound right?  If the government actually could print unlimited amounts of free money without a reciprocal affect, don't you think we would have already solved the problem of world hunger along with any other problem in our world?  The truth is, every dollar that is printed makes everyone else's dollar less valuable.  It's kind of like cutting a pizza.  If you have a 16" pizza sliced into 8 pieces but there are 12 people, does cutting the pizza more and more make the pizza bigger?

Next time you hear someone say they think health care should be free for everyone, ask yourself, "but who would pay for it?"

Creative Destruction

Creative destruction is the term economists use to describe industries that die due to better technology.  The classic example is the typewriter.  Before people used computers and after people wrote by hand, people used typewriters.  These machines were so great!  The type came out neatly, and people could write much faster with a typewriter than by hand.  Because of the wonderful invention, sellers of typewriters sprung up across the nation - creating thousands of jobs.  Then the computer came along.  Typewriter shops across the nation and world went out of business.  Thousands of jobs were lost.  People demonized the computer industry and labeled it as a job destroying industry.

Laughable, right?  Computers destroying jobs...  Believe it or not, people are making the same argument today.  Newspaper companies complain that news comes free online.  And the President of the United States demonizes ATM machines for taking the place of bank tellers.  Ignorantly he said, "there are some structural issues with our economy where a lot business have learned to become much more efficient with a lot fewer workers."
  

This argument has been made for centuries and will always be made by the people who don't understand the concept of creative destruction.  When industries are replaced by better or more efficient methods because of changing demands of the customers, the jobs seem to disappear.  The fact is though is that it is an ever-revolving cycle.  The jobs don't disappear, they change hands.  And society is better off.  Any product you can imagine probably destroyed an industry, but made the world better.

This post was inspired by George Will's blog post today.

Minimum Wage

You may have heard of supply and demand.  In the labor market, the suppliers of labor (employees) are represented by the "S" curve, and the employers (McDonalds) represent the "D" curve.  The market will naturally, via Smith's "invisible hand", determine the correct wage for the amount of labor being offered in the economy.  This wage is represented by the intersection of the S and D curves (P1 below), or when Supply = Demand.  When the government decides that this wage is not "fair", they mandate a minimum wage that employers must pay.  This sounds great, right!  Now the little guy gets more money!  Not so fast.  Lets say the equilibrium wage represented by P1 is $6.00.  When the government steps in and requires employers to pay $8 (P2), look at where P2 intersects with the supply curve and the demand curve.  Who is willing to supply labor at $8/hour?  A lot more people, right?  But how many employers demand labor at $8/hour?  Quite a bit less (Q2).  What ends up happening is employers become more efficient with the laborers they already employ.  They do this by laying some of their workers off and increasing the productivity of the workers left over, or by employing machines - which don't require wages.  The government's intent was to raise the quality of living for the equilibrium number of workers (Q1), but the effect is that people get laid off, and the people left with the jobs in the end most likely are not the people that the mandate was trying to help.  

You may be saying, "Sure, that's what the graph says, but that's not what really happens."  There are actually many example of this effect.  Walter Williams describes multiple scenarios on his blog, and here, and proves that the law of supply and demand actually does hold even in this scenario.  The law being: The higher the price of something, the less people will take of it; and the lower its price, the more people will take of it.

More from Walter Williams: First here, Second there, Third somewhere.

Presidential Profile: Rick Santorum

Rick Santorum has a lot of problems when it comes to Economics.  He has the most baggage in his voting record, or at least as much as Newt Gingrich.  Rick Santorum has been an "active duty" politician for 16 years, first serving in the House of Representatives and then a Senator for Pennsylvania for 12 years straight.  During this time, he cast a lot of votes.  His voting record can be found here (via votesmart.org). 

He made a few bad Economics votes, such as voting to raise the minimum wage which seems like a good thing for lower-income workers, but in fact has been proven to hurt more people than it helps by forcing employers to lay their workers off instead of increase their wage.  Employers then either double the work load of the remaining workers, replace workers with wage-free machines, or produce things in China where they can pay remarkably low wages.  

Rick Santorum voted for No Child Left Behind.  There are arguments as to whether this program is successful or not, but regardless, it is bad policy.  It has huge expenses and gives more power to the Department of Education.  This federal department should not exist - it creates too much waste and inefficiencies.  The responsibility to educate should lie with the States and local government.  Let the states come up with their own programs, and let the people migrate to the state with the best program.  Competition between the states will improve education while decreasing cost and inefficiencies.  

Rick Santorum has voted to increase military spending every single time that he has had the chance, and he has voiced that he will continue to do so (to be fair, so has every other candidate but Ron Paul).  But Rick seems to be the one who is most emotionally and religiously attached to protecting our allies and destroying our enemies.  Emotion and religion should not play a part in defense spending and military action.  Keep in mind, that defense spending is our 2nd largest budget item leading to our $15,300,000,000,000 debt.

Rick Santorum has increased the debt limit 5 times since he has been in office.  The debt limit increases allow Congress to spend more and more and more and more.  We need someone with the courage to vote against these debt increases, forcing us to default on our payments to our debtors, causing them to downgrade our credit, thus causing us to cut our welfare and military spending.  Rick Santorum could not make this tough decision, so how can he make tougher decisions as President?

These are a few reasons why Rick will not win my vote.  

Presidential Profile: Ron Paul

Ron Paul is running as a Republican, but is known mostly as a Libertarian.  He believes in following the American Constitution in determining the role of government.

This means that drastic changes would occur with President Paul, and they would pretty much all represent free-market philosophy.

President Paul would phase out Medicaid, Medicare, Social Security, Food Stamps, Unemployment insurance, and almost any other federal program that you can think of.  If it's not in the Constitution, he is not for it.

The real effect of these positions is not that any of these programs would be abolished.  As President, you don't have the authority to do that.  The greatest power given to a President is his power to veto.  This power allows him to nullify bills that pass through congress.  Using this power, Paul would not pass any increase in growth to these programs, thus forcing congress to pass budgets that would keep these programs from growing any more.  Then he would advocate slowly decreasing these benefits until they are gone (over a huge generational time span).  These social programs are the largest budget item and are the culprit of our ever-increasing federal deficit.  They must be reformed, and if you're a believer in the Constitution, these government dependency programs must be phased out.

President Paul would decrease military spending to Constitutional levels.  He would close down the hundreds of bases that we have spread out across the world.  This "defense" spending is currently the second largest culprit to our federal deficit.  President Paul would follow the Constitution and only spread our military power when we declare a war - something that hasn't been done since World War II.

President Paul wants to get rid of the Federal Reserve (blog post forthcoming).  This is the private company who controls the supply of the dollar.  Currently our dollars are backed by nothing but the "full faith and credit" of the United States government.  Paul would advocate that a resource (such as gold) backs our currency.

Economically and constitutionally, Paul is the best choice for the Presidency.  He would balance our budget and get rid of unconstitutional social programs.  He would have no interest in subsidies or special interest spending.  Paul is my man.