Friday, September 27, 2013

If it seems that easy, you are doing it wrong

As the debate over healthcare reform nears the final rounds-- the last desperate punches are being thrown, the threat of a government shutdown looms in the near future, another debt-ceiling debacle lurks around the corner, patiently waiting to take another bite out of the country's credit rating and the economy-- the airwaves have been flooded by pundits, talking heads and various experts who just happen to have great media skills.

All of them are ready with a simple headline, talking point or summary that encapsulates a sentiment which amounts to this: this is an easy problem to fix/avoid, the country just needs to do X.

Whether the answer is to stop mandating how Americans choose to live (healthcare, abortion), or stop doing things that hurt the middle class (cutting education funding, food stamps) the answer, according to these sages of the airwaves is so simple that anyone who does not do it must be an idiot.

I wonder why these problems haven't been fixed yet? The solutions are so simple.

Part of the answer as to why it seems that the country is caught in a deep ideological divide that cannot be bridged is because everyone has a simple answer.

The challenges that we are trying to deal with at the national level aren't simple problems, ergo they don't have simple answers.

Ideologies are simple, that is why they are popular and easy to sell on the airwaves.

Big government: bad. Big Business: bad

It is generally that easy.

A Luddite might say the answer is to stop relying on technology. A Capitalist might say the answer is to let the market sort it out. A Utopian might say we all need to share and live off of the earth.

End of story, stop X behavior, or take X singular action and poof there go all of the problems. Why won't people just listen?

The Free-Market Fix: Doing Nothing, Solves Nothing


Again, complex problems generally can't be sorted out with simple actions. And-- this part is important--even simple actions have complex consequences in a complex, heterogeneous society.

Why doesn't the government simply get out of the business world, except for moderately taxing profits, and let the market self-correct? Isn't that what laissez-faire economics says? The Invisible
Hand will correct the market.

Invoking Adam Smith's Invisible Hand is the magic formula for getting government out of business. It is simple, an oscillation of self-correction like the classic wolves and rabbits poulation example from Biology 101: More wolves makes less rabbits, less rabbits leads to less wolves, which leads to more rabbits and so forth.

Simple. And wrong. (Also, if you believe in that as a format for commerce, you are encouraging anarchy-like, to-the-death business practices)

There are two major issues (well, actually it is not that simple either, but bear with me) with the laissez-faire model that have led to modern economists ditching the laissez-faire model (the real ones, not the ones who make a paycheck for spouting what someone wants them to say). First, businesses are out to make a profit, not to make things better for the consumer. Which plays into the second factor, pure competition is not a great way to make profit.

Sure, if monopolies are broken up, they can't drive up prices because there is more competition. But, just because multiple companies have to compete for market share, does not mean that they cannot draw their battle lines in a way to minimize risk--and maximize profits across the board.

That means that just because Apple and Samsung or Pepsi and Coke are competing doesn't mean that the price is going to go down dramatically.

Companies realize that even an incomplete market share can generate tidy profits as long as the margin is big enough. Simply put, they tacitly agree not to start a price war. They offer incentives that include sale prices, but neither company will drastically undercut the other because they both would rather take guaranteed profits over the risk associated with trying to win a true competition.

It gets worse. "Competitors" can outright agree to simultaneously raise prices to increase profits for both, ensuring that neither loses significant market share (well, depending on the price-elasticity of the product and pain point of the consumer--I did warn you that it is not simple).

So that is why the government needs to be involved in regulating business. The government's job is to level the playing field between buyers and sellers. How much government should be involved is another complex question.

If you don't believe me, watch this clip from the film A Beautiful Mind. It is about a real economist, John Nash, who made Adam Smith's model obsolete.



The healthcare reform plan draws on this understanding of leveling playing fields. The consumer pain point for healthcare is pretty high (if you don't pay, you could die--are you going to refuse treatment because of cost?)

That is why there is health insurance. Of course, some people are more expensive to insure-- they have more costly medical conditions. Insurance companies realized that healthy people are more profitable to insure. If one company accepts all of the higher risk patients (riskier to profits) then they are out of business.

Government to the Rescue or Invading Our Freedoms?


By mandating that everyone purchase health insurance, more healthy people are in the system. This allows insurance companies to function with a reasonable risk and accept higher cost patients. As long as the pool of the insured is large, insurance companies can afford to offer coverage to those with preexisting conditions and still make a reasonable profit. Simply put, the government mandate balances the sicker patients higher costs with the insurance companies ability to make a profit.

Is the plan perfect? No. Are there problems associated with it that will need to be addressed in the future? Almost guaranteed.  Should the country scrap it and go back to the old way with sick cancer patients losing health coverage because their treatments are too costly?

One side says simply: Yes.
They want their profits back without all of these tedious regulations. So they are running this ad:



Of course, this debate is not as simple as a gloved, governmental finger in the rear.  And it has been argued many times, and will be argued many more. But anyone who tries to tell you that the answer is simple, is simply full of it --and I don't mean full of Creepy Anti-Obamacare Uncle Sam.


Bonus: Daily Show compares Creepy Uncle Sam to Burger King Mascot and more.


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