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Archive for the ‘Free Market’ Category

The title of this post may be a slight exaggeration. I actually recommend you read the entire two-page paper by Devon Herrick of the National Center for Policy Analysis. But this chart from that study is an excellent visual display of what’s wrong with the health care system.

You can see that the price of medical care is rising twice as fast as inflation, but you can also see that prices for cosmetic services are rising only half as fast as the general price level. Why are general health care prices soaring, yet prices in one segment of the health care world are very stable (and actually falling relative to all other prices)? The answer is simple. As Devon writes:

A primary reason why health care costs are soaring is that most of the time when people enter the medical marketplace, they are spending someone else’s money. When patients pay their own medical bills, they are conservative consumers. Economic studies and common sense confirm that people are less likely to be prudent, careful shoppers if someone else is picking up the tab. Thus, the increase in spending has occurred because third parties – employers, insurance companies or government – pay almost all the bills.

Study this image for two minutes and contemplate the implications. After that, you’ll know more about healthcare economics than 98 percent of all politicians (though that’s not exactly a huge accomplishment).

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Thanks to the folks at the Mises Institute, Professor George Selgin of the University of Georgia (!) has a superb presentation on the failings of the Federal Reserve. George was one of my professors at George Mason University back in the 1980s and is one of the world’s experts on competing currencies. This video is 1,000-times more substantive than the famous “QE2″ video I posted last month. Fed bashing is fun, but watch this if you want to understand economics and history.

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A paper posted on the Social Science Research Network looks at nations that are prospering compared to those that are stagnating. Not surprisingly, limited government and free enterprise policies are associated with better economic performance. Here’s an excerpt from this new research.

What can we conclude about the effect of various policies on economic growth? What lessons can we learn from the growth miracles of recent years, and how can we avoid the sorry fate of the growth disasters? The countries that have been most successful at increasing their economic growth rates, and therefore at raising the living standards of their population, have all shared a commitment to increasing economic freedom, limiting the role of government, stamping out corruption, and strengthening the rule of law. They relied on free markets, rather than on central planning. They lowered their tax rates, and some even adopted a flat income tax. They made their labor laws more flexible, and allowed their firms to hire new workers more easily. They privatized their inefficient state-owned enterprises. They lowered tariffs, and opened up to trade and international competition. They courted foreign investors, and created a favorable business environment to lure them in. In other words, growth miracles have occurred in countries whose governments have adopted policies that reflect the classical liberal ideals of economic freedom, limited government and rule of law. Our brief survey of economic successes around the world shows that this lesson is universal: Countries as diverse as China, Estonia, Germany, India, Chile, South Korea and Slovakia have benefited from applying a similar set of market-oriented policies.

The paper also makes a key point about economic growth and living standards.

Over time, even modest increases in the economic growth rate can, furthermore, lead to vast improvements in the standard of living. If China sustains the eight percent annual GDP growth rate that it has achieved since its market-oriented reforms began in 1978, its inhabitants will double their living standards every nine years. By contrast, in the United States, which has grown at an average annual rate of about two percent, a doubling of living standards would require thirty-six years.

This is an under-appreciated observation. The author cites a rather dramatic example, but the key observation is that even modest differences in economic growth can have a big impact on relative prosperity with a couple of decades. Here’s a chart I include in many of my Powerpoint presentations. It shows how long it takes to double GDP based on different growth rates.

Let’s look at a real-world example. Hong Kong has been growing by more than 5 percent each year for decades, while France has been growing by less than 2 percent annually. Now let’s ask a couple of big-picture questions. Why have Bush and Obama been trying to make us more like France? Do they fail to understand that this means less future prosperity for the American people? Don’t they realize that this means a loss of relative competitiveness?

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Christina Hoff Sommers of the American Enterprise Institute decimates the bean-counting feminist “paycheck fairness” legislation being considered by the Senate. Republicans presumably know this is a bad idea, but one can only wonder whether they will do the right thing and block this initiative that at best will be a boon for trial lawyers and at worst will lead to massive government intervention in employment markets. Here’s an excerpt from her New York Times column.

…[O]n the Senate’s to-do list before the November elections is a “paycheck fairness” bill, which would make it easier for women to file class-action, punitive-damages suits against employers they accuse of sex-based pay discrimination.

…[T]he bill…overlooks mountains of research showing that discrimination plays little role in pay disparities between men and women, and it threatens to impose onerous requirements on employers to correct gaps over which they have little control.

…[P]roponents point out that for every dollar men earn, women earn just 77 cents.

…[T]here are lots of…reasons men might earn more than women, including differences in education, experience and job tenure.

When these factors are taken into account the gap narrows considerably – in some studies, to the point of vanishing. A recent survey found that young, childless, single urban women earn 8 percent more than their male counterparts, mostly because more of them earn college degrees.

Moreover, a 2009 analysis of wage-gap studies commissioned by the Labor Department evaluated more than 50 peer-reviewed papers and concluded that the aggregate wage gap “may be almost entirely the result of the individual choices being made by both male and female workers.”

…The Paycheck Fairness bill would set women against men, empower trial lawyers and activists, perpetuate falsehoods about the status of women in the workplace and create havoc in a precarious job market. It is 1970s-style gender-war feminism…

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I don’t know if this is hope or change, but the United States fell from 2nd to 9th in the Forbes index of “Best Countries for Business.” Denmark is first, which may be a surprise, but the Scandinavian country is very free market other than fiscal policy. Hong Kong, meanwhile, enjoyed the biggest increase.

The U.S. economy is teetering on the edge of a double-dip recession. High unemployment and a weak housing market are dragging down economic growth. But there’s another major issue that isn’t getting much attention these days: The business climate for entrepreneurs and investors in the U.S. is starting to lag behind other countries’.

The U.S. dropped from No. 2 to No. 9 in our fifth annual ranking of the Best Countries for Business. Blame the high tax burden and a poor showing on trade and monetary freedom compared with many other developed nations. The 35% federal corporate tax rate is the highest of any OECD country according to the Tax Foundation. Meanwhile the government’s significant intervention in the economy during the economic downturn has weakened economic freedom in the U.S.

…A big mover up the rankings is Hong Kong, which swapped places with the U.S., moving up to No. 2 from No. 9. It scored in the top three for taxes, investor protection and both trade and monetary freedom.

The Top 10

1.  Denmark
2.  Hong Kong
3.  New Zealand
4.  Canada
5.  Singapore
6.  Ireland
7.  Sweden
8.  Norway
9.  United States
10. United Kingdom

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In a free society, people obviously should be free to join unions and companies should be free to negotiate with unions. But that also means that companies should be free to resist union demands and hire non-union workers. There is no right or wrong in these battles, just as there is no right or wrong when McDonald’s decides to sell french fries for a particular price. The market will reward good decisions and penalize bad choices. The only appropriate role for policy in this area is to enforce contracts and protect public safety. The government should not attempt to tip the scales either in favor of unions or in favor of employers. Our friends on the left, however, want the rules rigged in favor of unions, in part because of a reflexive desire for coerced equality. E.J. Dionne waxes nostalgic in the Washington Post for the good ol’ days, when unions held significant power in the American economy.

Only 12.3 percent of American wage and salary workers belong to unions, according to the Bureau of Labor Statistics, down from a peak of about one-third of the work force in 1955. A movement historically associated with the brawny workers in auto, steel, rubber, construction, rail and the ports now represents more employees in the public sector (7.9 million) than in the private sector (7.4 million). Even worse than the falling membership numbers is the extent to which the ethos animating organized labor is increasingly foreign to American culture. The union movement has always been attached to a set of values — solidarity being the most important, the sense that each should look out for the interests of all. This promoted other commitments: to mutual assistance, to a rough-and-ready sense of equality, to a disdain for elitism, to a belief that democracy and individual rights did not stop at the plant gate or the office reception room.

You might accuse me of being a union romantic, and in some ways I am, having grown up in a union town, loved the great union songs, and imbibed such novels about labor’s struggles as John Steinbeck’s fine and underrated “In Dubious Battle.”

There would be nothing wrong with Dionne’s love letter to big labor – but only if he also agreed that the government should not take sides. Unfortunately (and predictably), that’s not the case. Like other statists, he wants a thumb on the scales to help unions. He thinks he is being pro-worker, but his mistake is failing to understand that above-market wages (at least in the private sector) are not sustainable in the long run. Workers ultimately get paid on the basis of what they produce and if it costs $25 per hour to employ a worker and that worker produces $23 per hour of output, that ultimately is a recipe for unemployment.

A good example is the American auto industry, which has declined in part because of a compensation system that is not matched by productivity. This does not necessarily mean that wages are too high. It could mean that productivity is too low. Some of that, to be sure, is the fault of government policies such as a corporate tax system that penalizes investment (thus making it more difficult for workers to boost productivity). But unions also have used their government-granted power to insist on absurd workforce practices. The picture below, taken from Mark Perry’s excellent blog, compares union contracts in 1941 and 2007. With all the bureaucracy that is buried in those pages, is it a surprise that American auto workers don’t produce as many cars per hours as their main foreign competitors?

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Just because something is free, that doesn’t mean there is no cost. This is the core message of Walter Williams’ column, which uses the example of “employer-paid” Social Security taxes to explain how politicians specialize in giving us very expensive things for “free.”

Scarcity means there’s no free lunch. Having more of one thing requires having less of another. You might say, “Williams, that’s where you’re wrong. Someone gave me this newspaper and I’m reading your column for free!” Not true. If you weren’t spending time reading my column, you might have spent the time reading something else, chatting with your wife or children, or going out for a jog. You’re reading my column for a zero price but you’re not doing so at zero cost. You have to sacrifice something. There are zero-price services such as “free libraries,” “free public schools,” “free transportation” and free whatever. It doesn’t mean that costs are not being borne by somebody.

The vision of getting something for nothing, or getting something that someone else has to pay for, explains why so many Americans are duped by politicians. A congressional hoax that’s flourished for seven decades is the Social Security hoax that half of the Social Security tax (6.2 percent) is paid by employers, the other half (6.2 percent) paid by employees. The law says that if you are self-employed, you get to pay both halves. The fact of the matter is whether you’re self-employed or not, you pay both halves of the Social Security tax that totals 12.4 percent. Let’s look at it.

Suppose you hire me and our agreed-upon weekly salary is $500. From that $500, you’re going to deduct $31 as my share of the Social Security tax and you’re going to add $31 as the so-called employer’s share, sending a total of $62 to the IRS. Here’s the question: What is the weekly cost for you to hire me? I hope you answered $531.

…The reason why Congress created the fiction of the employer share was to deceive us into thinking that we’re paying fewer taxes than we in fact are.

Reminds me of P.J. O’Rourke’s famous line about, “If you think health care is expensive now, wait until you see what it costs when it’s free.”

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