Some actual capitalism for a change

Good to see that the EPA will start to require major industries to track and report their CO2 emissions. The important thing to remember is that assessing costs to those who emit greenhouse gases is completely in line with the tenets of capitalism, since emitting greenhouse gases imposes a cost on everyone that is not properly priced in the market (the costs--which are mostly deferred until the ecological shit really hits the fan--end up being socialized as governments bear the burden of cleaning up after the effects of global warming).

Carbon taxes correct a market failure--and you can't tax carbon if you don't know how much is being emitted.

Unfamiliar game

A good article about how the markets of today are fundamentally out of whack. The first-and-last:

When a young Jack Nicklaus won the 1965 Master's Tournament, golf legend Bobby Jones said Nicklaus was "playing a game with which I am not familiar." I have the same feeling about today's financial markets.

This is not capitalism as I learned it. Rather, for the past three decades financial engineers have been playing a game with unlimited upside reward and, thanks to the Federal Reserve and the White House, limited downside risk.

...

In the words of Fortune Senior Editor Allan Sloan, "Private profits, socialized losses."

Something has to change; a free market economy undergirded by unregulated players that are considered "too big to fail" ain't really free, in my opinion.

Basic fairness

I usually admire George Will for being a good and intellectually honest writer, but I think he really misses the main liberal concern over McCain's noninterventionist approach to the credit and housing crisis. Says Will approvingly:

[McCain] says "it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers." For now, he is with Senate Republicans in opposing the Democrats' proposal to empower judges to rewrite the terms of some mortgages, an idea that strikes at the sanctity of contracts and hence at the ethic of promise-keeping that is fundamental to social life.

He goes on to criticize liberals as typically anti-market:

With the command-and-control propensity of contemporary liberalism, Clinton predictably advocates a policy that has a record, running from Roman times to the present, that is unblemished by success. It is the policy of price controls: Her proposed five-year freeze on interest rates would be a control on the price of money.

And concludes with a standard conservatives-are-all-about-
individual-responsibility-and-ipso-facto-the-free-market comment:

Obama says that McCain's (again, relatively) noninterventionist response to credit difficulties proves that he favors a "you're on your own" society. McCain, a center-right candidate seeking to lead a center-right country, should embrace Obama's accusation as an accolade, saying:

"This is the crux of the difference between the two parties -- belief in the competence, responsibility and accountability of individuals. When Obama characterizes my position as 'little more than watching this crisis happen,' he again has part of a point. The housing market must find its bottom, and no good can come from delaying the day that it does."

For all this talk of personal responsibility and the sanctity of the free market, it is amazing to me that Will doesn't so much as mention the 400-pound gorilla in the room: the Fed's multi-billion dollar bailout of Bear Stearns. There is widespread agreement--from economists of both liberal and conservative stripe--that it was right for the government to bail out Bear Stearns, because it and other firms in similar liquidity trouble are "too big to fail". That is to say, if Bear Stearns and other Wall Street financial institutions were allowed to sleep in the disheveled beds that they've made for themselves, the ramifications would be so extreme as to usher in a second Great Depression--causing a chain reaction of firm failures and a credit drought that would cause the economy to grind to a halt and implode (metaphors mixed: 4!). Since that would be a horrible disaster for everybody, it is widely agreed that, though doing so constitutes a "moral hazard"--i.e., would be rewarding bad behavior in the market--it is nevertheless necessary for the good of all to bail out these huge firms.

The liberal--or not even really liberal, just the common-sense question is: how can you justify bailing out the financial institutions while at the same time leaving individual homeowners to fend for themselves? It seems to me that basic fairness dictates that what is good for the goose is good for the gander: if you're going to bail out some players, you have to bail out all the players, irregardless of the accidental fact that some are "too big to fail" and others aren't. Sure, this consitutes a "moral hazard"--but isn't it true that your market morality has already been heavily compromised by the Bear Stearns bailout in the first place?

To George Will's credit, it appears as though, if it were up to him, there wouldn't have been bailouts for anyone, Bear Stearns included. At least, that's what I glean from this comment from his appearance on This Week with George Stephenopoulos:

The Republicans have now put themselves in a bind because people now say look if you have Wall Street socialism, whereby you save Bear Sterns, or at least save JP Morgan to buy Bear Sterns, and you are thereby socializing the losses and keeping the profits private, why not help everybody. Soon we’ll hear from everyone in the country who has a student loan. This is,it’s a burden, help me.

Setting aside the empirical question as to whether or not this course of action would have caused Depression II--a result that I think we can all agree is a lot worse than violating "the sanctity of contracts" and, by way of slippery slope, inviting the collectivist ire of indebted grad students--I think Will is guilty of the same sort of ideology-induced fallacy that affects liberals who want troops out of Iraq just because they never should have been there in the first place. In both cases, the question is of the form: Given that x has already occurred, what should we do about y? You can't just give an ideologically-pure, pat answer that condemns both x and y. The answer needs to acknowledge that the fact that x has already happened complicates things, and that, pragmatically, this affects our decision about y. For the liberal on the Iraq issue, that means acknowledging the possibility that leaving Iraq could be way worse than staying; and for Will on the housing crisis issue, it means acknowledging that there is at least a problem of perceived unfairness with regards to bailing out Wall Street while ignoring Main Street.

Re: The market doesn't have an M.D.

Carlos responded to an earlier post with a thoughtful comment, which I thought I'd reproduce here in case you missed it:

Dude, you just opened the healthcare reform door...

So, yes, our healthcare system is incredibly inefficient and wasteful, with spending rising faster than inflation and GDP, while our country's health indicators remain at the bottom of the industrialized world.

Why is it so inefficient? You hit one point on the head: People can not be expected to make good spending decisions regarding health care. If people knew exactly what they needed when they were sick, we wouldn't need doctors! We'd only need a few pharmacologists and a few surgeons who'd set up shop and just fulfill their customer's orders. Also, since many people have health insurance, most are completely unaware or unconcerned about the amount of money that goes in to providing them with care, and so they seek care freely. And health insurance companies distribute payments on a fee-for-service basis, so doctors are incentivised to over-treat so that:

1. They don't get sued.
2. They get as many insurance payouts as possible.

Health insurance companies were initially designed to be the watchdogs of the system. They would make profit by covering as many people as possible, and reduce costs by promoting cheap preventive care and denying payment for unnecessary care. But here, we find that:

1. Insurance companies are not very good at determining what is necessary since they aren't the patient's doctor.
2. It's easier to just assess the riskiness of each potential enrollee and deny "high-risk" customers from the get-go.

So this is where all the "health insurance horror stories" come from. Stories of people getting denied treatment for their fatal cancer. Stories of construction workers getting injured on the job, not being able to work, and being denied private health insurance.

And of course, this is all ignoring the fact that there are millions of people in our country who are completely without any kind of health insurance, and so become exceedingly risk-prone and are unable to get care they need due to prohibitively high costs.

So, what do we do? The government is in the health industry's pocket, and the health industry is benefiting from the status quo, so change is slow, nonexistent, or retrograde. The people suffering the most are the uninsured who are already relatively quiescent in the political realm and are not able to leverage much pressure on the political system. Further, conservatives bust out their best "socialism" fear mongering whenever anyone tries to talk about healthcare reform. And so we wait until the middle class gets pissed off enough with the system that change can be made through the ballot.

What kind of change? Well, that's a whole other rant, but for a quick hint, look at France's health care system.

The market doesn't have an M.D.

An essay by one Sandeep Jauhar, M.D. talks about the difficulties of treating patients without gouging them. His cardiologist friend relates the story:

“When I started in practice, I wanted to do the right thing,” he told me matter-of-factly. “A young woman would come in with palpitations. I’d tell her she was fine. But then I realized that she’d just go down the street to another physician and he’d order all the tests anyway: echocardiogram, stress test, Holter monitor — stuff she didn’t really need. Then she’d go around and tell her friends what a great doctor — a thorough doctor — the other cardiologist was.

“I tried to practice ethical medicine, but it didn’t help. It didn’t pay, both from a financial and a reputation standpoint.”

This, I think, really illustrates a problem with the argument that the free market should primarily determine how healthcare is distributed. The idea is that an informed consumer choosing between competing healthcare providers in an unfettered market will result in the most efficient distribution of healthcare, with the lowest costs.

But as the cardiologist's story shows, since people are not experts in medicine, it is impossible for them to accurately judge the performance of a doctor. People end up making irrational decisions based on superficial impressions of thoroughness, or on whether the doctor's methods and equipment seem cutting-edge, or some other such thing.

Moreover, because the stakes are so high where a person's health is involved, patients become extraordinarily risk averse and their decision process becomes clouded with emotion, resulting in more services and higher costs. For example, let's say I take my car to the shop and the repairman tells me that I should have some moderately expensive work done on the engine. He says that if I don't, there's a .01% chance that the engine will be ruined. Do I have the work done? Probably not--it's a risk I can live with. But suppose a doctor tells me that if I don't have a moderately expensive treatment done, then there is a .01% chance that I will die a slow, painful death. I don't know about you, but I'd get the treatment, if I could afford it, even though the likelihood of me dying would be very remote.

So it seems to me that the idea of letting the patient make an "informed decision" is problematic, because the patient lacks expertise and has distorted levels of risk aversion (i.e., is overcareful).