Category: Economics

Greater risk demands greater reward

Uh-oh:

Wal-Mart Stores Inc. is scaling back the health-care plans available to new employees, sparking fresh criticism over whether the giant retailer is providing adequate coverage to its workers.

As of Jan. 1, the company will offer new hires only two health benefits packages in which the monthly premium can be as low as $11 but the deductible can reach $6,000, according to documents provided to The Washington Post by Wake-Up Wal-Mart, a union-backed group.
…

Wal-Mart spokesman Dan Fogleman said yesterday that he expected the change to save most employees money. He said a review of the company’s health-benefits plans showed most had opted for a package with a monthly premiums between $70 and $100, and a $350 deductible, but that more than half never paid that much.

I doubt the Wake-Up Wal-Mart documents would have any bias. Just in case they might, consider Wal-Mart’s decision within the context of this study by the Kaiser Family Foundation that found health insurance premiums increased last year. That makes since because my insurance increased about 7% last year (apparently because I had a birthday). It’s a real scandal, except it isn’t.

For some reason, many people believe that consumers can have complete coverage with low premiums and low deductibles. Insurance doesn’t work that way. The greater the likelihood that an insurer will pay claims, the higher the price it will charge for that coverage. This is not complicated. If an insurer disregards this basic rule of finance, it won’t be an insurer for long. Unfortunately, no amount of government can overcome this, contrary to how many pleasant feelings the idea of government-regulated health insurance may create.

Again, I don’t like Wal-Mart, but this action seems wholly reasonable. If its employees don’t use their health insurance enough to hit a $350 deductible, it’s a reasonable assumption that they’d prefer the lower premiums that coincide with their actual usage. That’s wise, not evil.

The need to “do something” isn’t enough.

Robert Samuelson’s column from today’s Washington Post:

If you’re in Asheville, N.C., stop by Biltmore, the vast estate that George Vanderbilt III — heir to a railroad fortune — constructed between 1889 and 1895. You can tour most of its 250 rooms, including 43 bathrooms and an indoor swimming pool. When few Americans used electricity, Biltmore had its own generators. To take the tour is to grasp one of the great advances of the 20th century: The gap between the super-rich and most Americans has narrowed enormously. In Vanderbilt’s time, most Americans lived in filthy slums or on modest farms. Now even the wealthiest among us live more like ordinary people than Vanderbilt ever did.

To better reflect reality, I’d rewrite that last sentence as follows:

Now even the most ordinary among us live more like wealthy people than Vanderbilt’s contemporaries ever did.

Mr. Samuelson goes on to provide various economic details about how “trickle-up economics” benefits only the rich, which “seems un-American.” Meritocracy is decidedly un-American, I guess, but that’s not really what’s useful here. Instead of debating the merits of the potential causes of this supposed economic disparity, including “costly” employer-provided “squeezing take-home pay in the middle,” this passage matters most:

What might government do? The Bush administration’s enthusiasm for tax cuts for the rich could be tempered; to reduce the budget deficit, their taxes could be raised without dulling economic incentives. (For the record: I supported the first Bush tax cut and opposed his cuts on capital gains and dividends.) Equally, liberals and others who support lax immigration policies across our southern border should understand that these policies deepen U.S. inequality.

But many familiar proposals would be mostly symbolic or hurtful. Raising the minimum wage might directly affect only about 5 percent of workers and might destroy some jobs. Protectionism might save a few well-paid jobs but would inflict higher prices on those least able to afford them. Still, no one should be happy with today’s growing economic inequality. It threatens America’s social compact, which depends on a shared sense of well-being.

Of course government must do something. Otherwise, our shared sense of well-being will die. Huh? From what I can decipher, Mr. Samuelson is not saying we should just continue with the same government policies. Good for him. But what evidence does he have for believing that some other government program we haven’t tried, which I believe is his assertion, will save the social compact? He acknowledges the perverse consequences of existing government policy. To the question of what might government do, the answer just might be to get out of the way.

Capitalists Unite: Demand Fairness!

Who wants to bet we’ll hear no outrage from our politicians?

For a rare episode of the Gasoline Price Wars, turn to Gainesville, where station manager Kristin Daggle pulled out the equivalent of a laser-guided missile: a big, white, plastic “1” placard.

Daggle — a 25-year-old field general on a well-traveled stretch of Lee Highway — posted the number, followed by two “9” placards, on a 20-foot-tall sign in front of her 17-month-old Exxon station over the weekend. And just like that, a milestone in the competitive world of gasoline retailing was reached.

“This is the first day we’re below $2” this year, Daggle said, as customers streamed in Saturday. “Our goal is to be competitive.”

The Congress must rectify this unfair increase in Windfall Savings&#153 by customers. Are customers, as the beneficiaries of risk-taking by business owners, not entitled to a cap on their savings? Gas station owners have to pay their mortgages, too. We clearly need legislation and the politicians just sit around allowing the laws of economics to screw businesses.

Other nuggets of goodness exist in the article, particularly surprise that supply and demand conspire based on market forces rather than the whim of evil corporations, but you can read those on your own. Just remember how little you’re hearing from Washington about this “travesty” for gas station owners the next time gas prices spike upwards. They’re all hacks.

Price gouging is a political invention

I carry 5 bottles of water to work every day. I buy them in cases, where the unit price is 25¢ instead of the $1 I’d pay in my building’s convenience store. Five bottles is just right. It’s perfect planning every day.

I commute to into DC with my brother because we live close together. Some days he forgets to bring his yogurt-drink thingy or juice or whatever it is he brings in those strange bottles. On those days, he asks to borrow a bottle of water. I instead sell him one because I’ll drink 5 bottles during the day. If I let him buy one, I have to replace it at some point during the day. My cost to replace it is not the 25¢ I paid at Target, but the $1 I must pay at work. I charge him $1.

Am I gouging him, as he’s jokingly contended in the past? What happens to that answer if I add this new condition I learned yesterday: I sold him a bottle of water for $1, when my original cost for that bottle was 25¢. Having only four bottles during the day, I purchased a new bottle late yesterday afternoon. The price is now $1.15. I lost 15¢ in the deal. How long would I go on with that deal before I must stop selling to him altogether? Am I guilty of price gouging if I now charge him $1.15 when he forgets to bring a beverage to work? How is this scenario different from our most recent alleged example of price-gouging, gasoline?

I must charge my replacement cost, not what my current inventory cost me. That is economics, not price-gouging.

Popular and expensive doesn’t equate public good

I’m more intrigued by the background of how this case made it to court than I am in the specific ruling:

The park district described the dispute as “a far-reaching issue of great public importance,” while the Bears argued that the real heart of the disagreement was money.

The [Chicago] Bears claimed that the park district, which owns Soldier Field, simply didn’t want to pay the additional cost of having police pat down thousands of fans arriving for games.

The park district refused to conduct the searches last season, and the team hired a private security firm to do it. Fans were searched before the final home game and a playoff game.

I’m a tad confused as to why the park district would sue, so the judge’s ruling that the it lacks standing seems correct. Yet, I’m amazed at how the issue arose. Presumably the Bears have a lease for Soldier Field, and presumably that lease indicates if game security is provided (or not, by omission). Since that isn’t indicated in the story, I’m working under the impression that it’s not stated. If I’m correct, can the Bears possibly be so arrogant as to expect the park district will provide it security services as the team deems appropriate? The public handout of a cheap stadium isn’t enough?

The better scenario is for the team to operate its own stadium, and provide the security it deems appropriate. If the fans deem the search requirement onerous and unfair, they won’t attend. The team can’t search a fan on his couch. If this results in harm to the team, it’s worthwhile to remember that the team is not entitled to any guarantee of revenue or continued existence. That’s a bit like the burden every other business in America faces.

——-

Previous thoughts here, although my opinion has changed since I wrote that entry. I must’ve still been upset by that loss by the Redskins to express the proper skepticism for the searches.

Flavor Flav teaches economics

By last count Danielle had received more than 800 hits today, thanks to last night’s season premiere of Flavor of Love 2. My highest traffic for one day barely exceeded 100 hits, and that was because a blog with a wide audience linked one of my posts. Most days I slog through issues that matter (subjectively) on a grander scale than a simple reality television show, yet I don’t generate the traffic in a month that one post on Flavor Flav generates. There are various reasons for the disparity, which aren’t necessary for this analysis, but the one constant that remains is a lack of any kind of marketing. Danielle doesn’t link everywhere just to generate fake traffic, a policy to which I adhere, as well. I can only conclude that Google tells the story of the masses. Write what people are interested in and the readership will follow. It’s simple supply and demand.

Post Script: I’ll be watching Flavor of Love 2 from my DVR now, so I won’t piously claim that I’m appalled by the bottom of the entertainment ladder claiming more attention than the top. I just wonder where else those readers are going when they’re done with giant clocks and pretend drama, because it’s not here.

Let’s live in huts and wear animal skins

Ummm, the definition of capitalism is not this:

The deteriorating relationship between the German government and business was underscored on Wednesday when a senior member of Chancellor Angela Merkel’s Christian Democratic Union called on the party to shed its “capitalist” image.

“The CDU is not a capitalist party,” Jürgen Rüttgers, state premier of North Rhine-Westphalia and one of the party’s four deputy chairmen, told Stern weekly. “It is a community of values that is not just rooted in materialism.”

Mr. Rüttgers should get his reasoning correct, since capitalism is not as he describes it. I believe the term he’s searching for is consumerism.

Consumerism is a term used to describe the effects of equating personal happiness with purchasing material possessions and consumption.

Compare that to capitalism:

Capitalism is an economic system in which the means of production are mostly privately owned, and capital is invested in the production, distribution and other trade of goods and services, for profit. These include factors of production such as land and other natural resources, labor and capital goods. Capitalism is also usually considered to involve the right of individuals and groups of individuals acting as “legal persons” (or corporations) to trade in a free market.

Capitalism, as Mr. Rüttgers should realize, means that individual Germans can decide how much or how little materialism is appropriate in their lives. The CDU’s responsibility is to get out of the way. I’m sure Christian social awareness will survive the purchase of a new iPod or twenty.

Cleaning out the aggregator

My server died last Tuesday, locking me out of my site. My hosting company finally resurrected it late Wednesday, but by then my vacation interfered. Rare access to the Internets, as well as general mental decompression, stood in the way of regular posting. So I disappeared for almost a week. In no particular order, here are a few items filling my news inbox while I was away.

————-

From Reason’s Hit and Run, I think I might be the only person in America who answers Yes and No instead of some other combo.

…, New York Attorney General Eliot Spitzer fielded two questions on marijuana. One: Would he legalize medical marijuana? Two: Had he ever smoked marijuana? The answers: No and yes. The terror of Wall Street has picked up and run with the old Clintonite maxim: Do as I say, not as I did.

Spitzer should’ve been discredited as a candidate for any number of actions he’s taken, but this is just further proof that the people of New York need to see more than (D) when they get in the voting booth. I suppose it should be comforting to know that Virginia isn’t the only state with hack politicians.

————-

Is anyone shocked by this:

The federal government will need to either cut spending or raise taxes down the road to pay for extending President Bush’s recent tax cuts, the Treasury Department said in a report released [last Monday], dismissing the idea popular with many Republicans that such sacrifices can be avoided.

My question should be rhetorical, but there are many people in this town who will probably be genuinely shocked. Okay, actually, the shocked people will be voters. Those who are not shocked, but are bitter that the Treasury Department could be so treasonous as to impugn the American economy this way, will complain among themselves that their secret is revealed.

————-

Maybe I can start a network and force Comcast to air it:

After more than a year of inaction, Federal Communications Commission Chairman Kevin J. Martin yesterday addressed a dispute that has kept Washington Nationals games off the region’s biggest cable network.

The Mid-Atlantic Sports Network (MASN), which carries most of the team’s games, asked the FCC in June 2005 to order Comcast Corp. to begin carrying the games immediately, but the agency took no action.
…

MASN now has the right to seek a resolution to its complaint through the FCC process or take the path of arbitration.

Shouldn’t customers decide whether or not MASN is important to them? Of course, lack of competition due to regulatory monopolies prohibits customers from having a sufficient voice, say to cancel and switch to a cable provider that carries MASN, but I’m certain the answer is not to push the regulatory hand deeper into the industry.

————-

Tomorrow MTV turns 25. Being old enough to remember the early days of MTV, and young enough to enjoy them, the present-day celebration is good for reliving fond memories. But this explanation of why MTV evolved (devolved?) into what it is broke the spell:

“I think we started as an idea with very little content; it was more like a radio station with songs and cheesy, hair-metal videos,” says Van Toffler, president of MTV Networks’ music/film/Logo group. “But we quickly realized the novelty of music videos wore off and was not repeatable with thousands of viewings. So we evolved into being more about TV production — yet still sloppy, live and organic.”

Forget that my musical tastes are stuck more in early MTV than current MTV, which means I don’t watch most new videos. The video has not gotten old. Look at iTunes and its music video sales. There is a market, meaning the novelty didn’t die. MTV killed it with its repetition of the same tiny number of videos.

Early on this was necessary due to the newness of the form. But by the late ’80s, that didn’t hold. MTV abandoned it. Today, when I watch music television, I watch the extra music video channels like VH1 Classic. Even when I’m watching country music videos, I’ll flip to the all video channels rather than the regular channels. When original programming appears on any regular music channel, I almost always pick up the remote. I understand that I’m not MTV’s target audience, but I didn’t age out of that audience. MTV decided my viewership didn’t matter. But that makes sense, because my money is not green, it’s plastic.

Where are the tofu subsidies?

As a vegan, testing or not testing for bovine spongiform encephalopathy (Mad Cow Disease) isn’t a particular concern. One cow with the disease, or one billion cows, my brain is going to continue functioning nicely. (Open to interpretation, of course.) And the politics involved, through subsidies for meat and dairy production, preclude my “Save the cows” pleas from making any headway. So, instead of complaining or applauding the wisdom of the Agriculture Department’s decision to cut testing for BSE, I’ll highlight this quote from the story about the possible impact of the decision:

“It surely will not encourage consumers in the U.S. or Japan to rush to the store to buy more beef,” said Carol Tucker Foreman, food-policy director for Consumer Federation of America.

The government shouldn’t be in the business of encouraging consumers to buy more beef. Or less beef. Or chicken instead of beef. Or beets instead of chicken. Or… you get the point.

If consumers want beef, they’ll buy it. If they deem BSE or any other possible contamination to be a risk, their inevitable decision to stop buying beef will suggest responses from beef marketers. They could stop selling beef. This might be necessary if the cost of testing proved prohibitive to what consumers are willing to pay. More likely, they would test their beef, which would raise their costs. They would pass that increase to their consumers. Taxpayers like me, who do not consume the beef we’re all paying to protect, would no longer be forced to artificially support the carnivorous habits of everyone else.

Capitalism. It’s what’s for America.

Cross-country network of dollars communication

Since politicians have already shown their economic ignorance through copious central planning, the unintended consequences caused by advances in communications technology will surely surprise them. I’m not surprised:

Rural phone-service subsidies are so bloated and inefficient that providing wireless or satellite phones is cheaper, an economic analysis prepared for a senior citizen advocacy group suggested yesterday.

Taxes to support the universal service fund, which is intended to pay for higher costs of serving rural areas, are growing so fast as to force some low-income people to drop phone service, said Thomas Hazlett, a George Mason University economist who prepared the analysis for the Seniors Coalition.

“It’s perverse when shifting tax money around for the universal service fund results in more people leaving the network than joining it,” said Hazlett.

Why I should subsidize those who choose to live in rural areas is a question I will never accept. Since it’s not up to me, I worked around it (and other similar questions of fees and taxes) years ago when I abandoned traditional phone service¹ almost five years ago. Now I use a combination of cellular and VoIP. I’ve never missed the land line, and I’ve definitely never missed the higher costs. I changed because I assessed my needs and made the decision that new technology satisfied my communication needs. No politician could know that.

More importantly, how much faster would rural customers have received phone service if politicians had let the free-market sort out customer requirements? Of course, that question is merely interesting because of the multiple interest groups involved. Each group wants it own special consideration, which only makes the tax structure confusing and the collection process more bureaucratic. For example:

Universal service subsidies have become so widespread that rural phone companies on average collect only 27 percent of their revenue from customer payments, Hazlett found. Even so, many rural customers are opting to drop traditional wired service to go wireless because “it’s cheaper, and they like the mobility,” he said.
…

Many rural carriers receive subsidies that exceed $1,000 a year per customer, with some subsidies topping $10,000 a year per customer, Hazlett said.

There will be no incentive to innovate in that atmosphere. Why bother, when the government will take from those living in cities and give through subsidies to those who don’t. There is no sense in this, other than politics. But politics rarely makes for good economics. It’s time to cut the apron strings and let each customer bear the cost of his choices.

¹ I have a land line today, but it’s the minimum service and is used only to provide communications for my home’s security system. Fees or not, I want emergency services contacted when necessary. I don’t think that gives politicians an open invitation to tax me for the economic inequality-du-jour.