Category Archives: Economics

Chinese Banking

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Few things are as mysterious as Asian business practices. It is a strange combination of complexity and opacity, sprinkled with a heavy dose of dishonesty that is forever off-limits to the Western mind. The word “inscrutable” comes to mind. A good example is right here. In the West, a firm struggling to pay its bills and threatening to default will do so in a very public fashion. If the regulators take over, they perform a public audit, liquidate the assets and pay creditors based on an agreed upon framework.

If the firm goes into bankruptcy, that is also a public process. If a white knight comes in and puts up a bunch of cash, then we learn who it is and why they are coming to the rescue. It is not perfectly transparent, but the public and interested parties will know enough to judge the results. A big part of Western economics is transparency. That does not mean there are no insiders doing inside deals, but we have laws against insider dealings for a reason.

In China, the banking system is a mystery to everyone, including the people in the Chinese banking system. China Credit Trust Co has no money of its own. It sold a product to investors promising a ten percent return on loans to a firm that has no money to repay the loans. That’s not how it was presented, but that is the reality of it. In the West, this is called fraud, but in China this is just how deals are done. They make New York City real estate seem simple.

Zhenfu Energy, desperate for cash, went to private firms to borrow money at rates well above market. China Credit Trust Co appears to have created a product to be sold to retail banking customers to funnel money into the struggling energy company. It was a fraud, but most of modern banking is a fraud. Now that the energy company is defaulting on the loan, China Credit Trust Co cannot pay the retail investors their promised return.

This was all supposed to happen at the end of the month. Today a mysterious and undisclosed white knight has arrived to supply the cash. Everyone knows the white knight is the Chinese Communist Party, but no one will dare say it. It is simply a “restructuring” that papers over the problem for now. A month from now some mid-level functionary will kill himself and everyone will know why, but no one will dare say.

It is no way to run a modern economy, but that’s another thing everyone knows, but no one dares say. Instead, the West looks the other way and hopes those inscrutable Chinese keep buying up the useless paper the credit machines keep emitting every month. At some point, the incompatibility between Asian practices and western practices will become too obvious to ignore. Most likely, it will cost the West a lot to learn this lesson.

Inequality Thoughts

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Jim Geraghty has a post up on National Review Online about the “polarization” of the public over politics. Usually what these guys mean by polarization is that the public is not buying what the media is selling them. When a non-liberal shows up on campus to give a speech and is heckled, he is polarizing. When an abortion fanatic shows up at a Catholic college and is heckled, he is courageous. Anyway, the point of his post is that people are mad and it has nothing to do with politics.  I posted this in the comments:

First off, Frank Luntz is probably a sincere person and all around great guy, but his profession is closer to witchcraft on the empiricism scale than it is to science. He makes his living telling the Sean Hannity audience what they want to hear. I don’t want to call him a charlatan as I think he believe this stuff. If he were not performing on the Hannity show, he would be watching it.

Second, income inequality is not just a leftist fad for the political season. Keep in mind that the Left has embraced the modern tools of crowd sourcing. While far from perfect, they are very useful in defining trends. Americans are increasingly aware that the folks in charge live vastly different lives than the rest of us. There’s also a growing suspicion that the interests of the ruling class are at odds with the middle class. A rich tech billionaire moaning about paying his market rate does not go unnoticed.

Third, this is not the first time America has seen this sort of problem. The new robber barons are different in that they are Davos men, cosmopolitan citizens of the world who got rich from global capitalism. Their loyalty to country and culture is nearly non-existent. That makes them seem <i>alien</i> to the hoi polloi. The robber barons of old were men who embraced country and culture.

Global capitalism is a boon to rich people in rich countries and smart people in poor countries. It is a bane to the middle class of rich countries. As a political matter, the GOP has a choice. It can be the party of the middle class and stop chasing after the favor of the plutocrats. This, I suspect, is a lost cause. Alternatively, they can go back to their historic role as accountants to the ruling class. The Left works on reorganizing society and the Right keeps the books.

The narrative says the GOP represents conservatives, by which is meant middle-class white people, but that’s a myth. The recent actions of Boehner and McConnel make that clear. The early embrace of Chris Christie as the choice for 2016 is another clear sign the party would like to be rid of the Tea Party and the other non-conformists. For half a century, the GOP was about defending the public finances and defending against the communists. Otherwise, they went along with whatever the liberal democrats wanted.

A careful reading of history shows that all ruling elites have these two factions. One side wants to charge ahead with all sorts of schemes. The other side wants to tap the breaks and steer clear of trouble.  Otherwise, they agree on most of the important stuff. In modern times, we are seeing the ruling elites move closer, as they begin to define themselves in opposition to the people over whom they rule. In Europe, this is well under way as formerly ideological opposites are now in power sharing deals. The Tories and Labor, for example

The question is whether the people on the outside will go along with this deal. In America, the slow grinding down of the middle-class is not going unnoticed. Europe has all sorts of weird social unrest. People are unlikely to go along with a new system where everyone is relatively poor compared to the ruling elite. Then there is the question of sustainability, as global capitalism rests on the belief that borrowing rates at the top can always be zero.

This can only work if the elites can control capital almost entirely and even then, it is hard to see how that can be sustained. People will first note that “both parties” fail to deliver, while the wealth gap grows ever wider. Then the people notice that voting has no effect on the process. That’s when people start looking for option, usually at the extremes. The Left will search out screamers who promise to rally the fringes against the middle-class whites, while those middle-class whites tart listening to those promising to defend their stuff.

In the end, gross inequality leads to social unrest.

 

The Truth About Bitcoin

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Tyler Cowen has yet another post up about Bitcoin. The topic is becoming an obsession with a certain type of libertarian academic. The mere mention of it has them thinking about how great it would if they were John Galt, just without all the hard work and danger that comes with it.  Whenever the topic comes up, they began chanting the all of the usual lines, like they are incantations. The comments sections of Bitcoin stories always have a weird cult-like vibe to them, but libertarianism is pretty much a cult now anyway.

The basic thrust of Cowen’s post is that Bitcoin is like any other commodity. Once a sufficient number of others get into the crypto market, the price for all of these currencies will fall to cost plus some tiny profit. In other words, he sees crypto as something like trading sheep or shiny rocks in the market place. Since the currency has no intrinsic value and there is no authority to set the value, the market sets the value based on utility or popular fads or some large manipulator buying or selling large quantities.

Putting aside my complaints about Bitcoin as a currency, the main problem with these digital-currencies is the same problem we saw in the Free Banking Era. Central governments hate the idea of a currency they cannot easily manipulate. That has been true since Pheidon. If you control the money, you control the people. Naturally, ruling elites will seek to control the money as a top priority. There’s also the issue seigniorage, which is no small thing. Wars have been fought over control of a single mint.

It has nothing to do with economic efficiency and everything to do with order. Order is what allows the best citizens of the polity to rise and remain at the top of the status system. It is also what allows the less talented to live something close to a sane existence. Order is how humans guard against the anti-social fraction that exists in every human population. Despite the fevered dreams of libertarians and anarchists, you cannot have a society without order. There has to be rules and enforcement of rules.

This natural desire for order naturally leads to a ruling class that is the final authority on everything, including the value of money. That authority, in order to be an authority, needs a method to control the people and thus the society over which they rule. Controlling the money is a great way to accomplish this. Controlling land or monitoring individual transactions is unworkable over the long haul.  The cost exceeds the benefit.

One simple way to control the populace is through the coining of money. That makes taxing easier for the authorities and it gives them control of trade and labor. It allows for the authorities to audit the citizenry to ensure compliance. There’s also the issue of seignorage, which has always been an important aspect of rule. Wars have been fought over control of a single mint. Having a bunch of competing currencies works against order and against efforts to impose order, therefore can never be tolerated.

Think about it this way. Let’s say I come up with a digital heroin. That is, a drug that can be transmitted on-line that you load on a flash drive, shove up your bum and get amazingly high for eight hours. Obviously, I’m not getting a lot of takers initially. The lack of customers means I’m losing money every time I make a batch. I manage to get a few takers to try it and begin to build a client base through word of mouth. I hit the same spots at predictable times and sell my digital heroin the old fashioned way.

This goes on for a while and no one is the wiser. The cops don’t care as it looks nothing like criminality from their perspective. The drug gangs don’t care at first because I’m not doing business on their turf. They are unaware of the threat I pose initially. But, they notice a drop in sales eventually as I build my business. Eventually they will figure out that someone is taking their customers. They may figure out it is me before they figure out what I’m selling or it may be the other way around, but at some point they put it together.

The drug gang will have three choices. Obviously, they can kill me, but that will require knowledge they may lack. They may know I exist, but not exactly where I exist. I could have advanced to the point where I’m selling my drug on-line. Drug dealers are not fools and they will recognize their lack of knowledge and see that as a risk in itself, perhaps a bigger risk. Killing me could create unknown problems. After all, I could be part of some much larger enterprise as unknown to them as the magic drug I sell.

The second choice is to figure out what I’m doing so they can either muscle in on my business or come up with a better way to compete. There is a reason we have such an array of street drugs. A clever guy creates a new product and the drug gangs eventually take it over and add it to their portfolio. The same guys controlling the weed sales in one area control the heroin sales too. Maybe they cut their prices or find some way to improve their product. Maybe they invent a new drug that is better than my drug.

The third option is to enlist the state to take out my business. I’m conducting business and that means taxes are involved. It also means a mountain of rules and regulations. My drug may be legal, but not paying taxes on sales is illegal. Not filing for a business license and not abiding by the laws governing record keeping are against the law. If I have employees, then I need to pay them and that means taxes, workplace laws, social security, Medicare and unemployment taxes. As any small businessman knows, there are a lot of rules.

Here we ultimately see the problem with Bitcoin. Disruptive technology is not ignored by the folks at the top of the established order. In the drug example, the established authority is the drug game, which served as a proxy for the state. In the above ground world, the state will defend itself from the threat posed by Bitcoin and they have many tools at their disposal. They also have tanks, planes, missiles and other military goodies. Bitcoin can only exist as long as the state allows it to exist. That means it will have to serve the interests of the state to survive, which brings us right back to where we are now.

End of the Free Money Era?

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It is easy to forget that the way things are now is not the way they have always been, which means the way things are now is not how they will be in the future. For instance, the giant book stores that are going out of business never existed forty years ago. For most of the post-war period, there were mall shops to sell best sellers and popular stuff and there were boutique book shops for the stuff aimed at serious readers.

Then with the invention of free money from the global financial system, every town in America suddenly had a massive book superstore. Barnes & Noble started out a rickety old warehouse in Boston. With free money, they built book warehouses all over the country. The story is similar with Borders Books, which started in Michigan. Now, they are going under as people remember that they don’t really read that much after all.

The same is true of casual dining. Thirty years ago, casual dining meant a local joint run by local people, often foreigners. Immigrants could start a restaurant, because it required more labor than capital. They could make it a family business. Then all of a sudden we are flooded with massive chains like Olive Garden and Red Lobster. Now it appears they may be following the path of Borders and Barnes & Noble.

In a move sure to set the culinary world and classy guys everywhere reeling, Darden has announced that it will either sell or spin off its Red Lobster restaurants.

Adding to the devastation, the company, which also runs Olive Garden and other fine-dining establishments, said it will suspend the opening of new Olive Garden locations and slow down new locations for LongHorn Steakhouses.

Why, you ask? Dear God, why??

Because Darden isn’t doing so good. It seems that consumers are turning their noses up at hoity-toity sit-down places like Red Lobster and Olive Garden these days in favor of cheaper chains like Chipotle.

Darden is one of the largest companies in the casual dining industry, with a market value of $6.7 billion, but its core chains have had stagnant growth, according to The New York Times. Last quarter the company experienced a 31 percent drop in net earnings. “The reduced unit growth will lower capital spending by at least $100 million annually,” the company said in a statement.

Red Lobster has 705 restaurants in the United States and Canada and had annual sales of $2.6 billion in 2013, but we guess that wasn’t enough for ol’ Scrooge Darden.

Putting aside the millennial snark from the writer, there could be a bunch of reasons for this that have nothing to do with the economics of chain restaurants. For example, Red Lobster is awful. It’s everything that is wrong with the American diet on the same menu, but made worse somehow. Olive Garden is better, but they tend to be over priced for what you get. Paying $25 for spaghetti seems wrong. In other words, whatever novelty there was to them has worn off and people now realize these places are not very good.

There’s something else going on with big retail. The rise of massive chain stores is due in large part to the credit boom. When you can get money at 2%, you will make different bets than when the money costs 10%. More important, you can make money from things with 2% money that you can’t with 10% money. Big capital projects like restaurant and bookstores can’t exist at borrowing rates at or above historic averages.

Cheap credit allows for a form of pump and dump that cannot exist under normal borrowing conditions. Cheap money allows for massive expansion, where revenue is realized today, but the cost of expansion is pushed off into the future. That draws in more money, allowing the original investors to get their money out with a profit. The chain expands until it runs out of room and then those costs come home.

Interest rates remain artificially depressed, but lending is not as free as we saw for two decades leading up to the crash. Giant corporations can get plenty of credit, but their customers are a different story. The Fed keeps pumping money into the system hoping the clogs eventually break free, but no one know if that will happen, before the consequences of loose money turn up in other parts of the economy.

Even assuming the smart Jews running the global finance system can keep the plates spinning forever, there’s another aspect to this problem. Cheap money allows for cost reductions by eliminating competition. These chain restaurants have killed off the local dine, for example, but rigging the supply chain so they get much lower costs. That works for a while, but there is a natural boundary. Costs never fall below zero.

The free money era feels a lot like a bust out. The boom and bust of giant bookstores, for example, left us with no bookstores. One company, Amazon, now controls 80% of the book business. The boom and bust of chain restaurants is about to leave us with no local restaurants, but soulless chain stores owned by some global capital group. It’s one company operating under a dozen brands, selling the same food.

Bad Bits

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Block chain technology could be the great innovation that gets us over a serious hump into a low-work society. Or, it could be a clever idea that has no practical use. That’s thing with technology. It’s often not as useful as people assume initially. Many times the technology ends up in something completely different from what the inventors originally imagines. The microwave over is the best example.

The idea of a digital currency is fine as it already exists to a certain extent. The use of cash has declined, because people now charge everything or use a debit card. That’s an electronic version of your home currency. This is made possible by the vast digital network that allows you to engage in commerce digitally. Specifically, it allows people to convert their currency into a digital representation for transmission around the globe.

One of the primary attributes of currency is portability. Cash and coins are more easily transported than sheep or bales of hay. Converting sheep into coins, means the shepherd can turn his labor into something he can tote to the next village and trade for something produced by some other farmer. Currency makes the value of labor quantifiable and portable, which means it then move around in society as property.

Another primary attribute of currency is it is not easily destroyed. Coins are hard to destroy. If one is damaged, it can be exchanged at the mint for a new one. Similarly, paper money is quite durable. It does not decay over time if properly cared for by the holder. This is the bulk of what the US Bureau of Engraving and Printing does every year. Currency is durable and the replacement of that which is destroyed is predictable and orderly.

In this age, we have figured out how to increase the amount of currency in circulation to keep pace with natural attrition, but also the increase in labor. That’s a long topic that can be debated forever, but in theory, a slowly expanding money supply reflects growing efficiency and growing value of labor. In a perfect world, there would be no inflation and no deflation, as the amount of money would grow and shrink in sync with labor.

That last bit is what gets lost in discussion about Bitcoin. A crypto-currency has a finite supply. The cost of getting the first “coin” is X. The next coin is X plus some small additional amount. The next coin is X plus a slightly larger amount. This continues on at a predictable rate until the final coin is minted. The cost of minting increases with each coin so the cost of minting coin X is less than the cost of coin X+n.

This means the coins increase in value over time. A single currency unit of labor, for example, will increase in value. Put another way, the amount of lawn work I can buy with a currency unit today will be less than I can buy tomorrow. That makes the currency deflationary by design. In times of great technological progress, it will be wildly deflationary. In this way, it has the same defect as hard money. It’s cyclical.

Now we have another big problem with Bitcoin. It is easily stolen. The QR code *is* the money, not the bit of paper on which it was printed. Try stealing a coin on paper currency through the television and see how that works for you. For better or worse, stealing hard money, so to speak, means physically taking to from the holder. There are no special precautions one need take to keep their money safe when it is physical coin or paper.

With Bitcoin, there’s no truly safe place. Worse yet, you don’t know it is stolen, in this case, unless you try to use it. There’s also the problem of the vault where you keep your money suddenly disappearing. If you keep your coins locally and your hard drive fails, you coins are gone. If you store in the cloud and the cloud company disappears, your money disappears with them. Bitcoin is by definition, a fragile storage of value.

Now, this raises two other issues. One is the currency is not self-validating. I can examine a coin or paper and determine if it is real. I do not require a third party. Bitcoin requires validation of each transaction. That third party is a network of computers, but they are not anonymous. To work, they must keep a record of every transaction of every coin. That means the third party tracks your every move in order to function as a validating authority.

Everything about Bitcoin says it cannot be a widespread currency. At best, it can be a short-term transition point. Person X wants to give Person Y money, without using the above ground financial system. Person X then converts money into Bitcoin, sends it to Person Y, who immediately turns it into real money. if you are a drug dealer or a revolutionary, this is useful. To everyone else, it is a pointless novelty.

People Are Not Rational

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The main complaint about the field of economics, at least libertarian economics, is that it starts with assumptions not based in reality. The number of references to “rational behavior” or “rational actors” indicates the people into these subjects are powered by wishful thinking, rather than clear-eyed realism. Humans, alone or in groups, are not rational. People regularly act irrationally, even when the rational option is obvious. A good example is right here in this story on the supplement scams:

But surely consumers play some role in the rise of the vitamin industrial complex. Research about the ineffectiveness of vitamins, or worse, has been around since the 1940s, after all. “People over time and particularly people in the United States have been led to believe that vitamin and mineral supplements will make them healthier, and they’re looking for a magic pill,” Dr. Cynthia Mulrow, another of the Annals of Internal Medicine editorialists, tells Reuters.

And the “magic pill” habit may be hard to break, scathing editorial or no. For what it’s worth, here’s the pushback from the supplement trade group the Council for Responsible Nutrition:

The Annals of Internal Medicine editorial “demonstrates a close-minded, one-sided approach that attempts to dismiss even the proven benefits of vitamins and minerals,” says the group’s CEO, Steve Mister. “It’s a shame for consumers that the authors refuse to recognize the real-life need for vitamin and mineral supplementation, living in a fairy-tale world that makes the inaccurate assumption that we’re all eating healthy diets and getting everything we need from food alone.”

All those rational actors economists talk about will look at the mountain of studies on one hand and a collection of con-men on the other and believe the con-men, even though they sort of know they are being swindled. Facts and evidence will play no role. They want to believe. They will listen to goofy celebrities and TV airheads about whole food vitamins and be convinced this stuff is beneficial. The fact that these people are wholly unqualified to talk about any of this stuff will count for nothing.

It’s why much of libertarian economics is absurd. In the very general sense, sure, markets are rational in that they display preferences of the participants. But, there are few unadulterated markets and therefore few truly rational markets. That implicit irrationality is known by the participant, which alters their behavior. People are not moist robots, acting on a simply set of binary instructions. We may be controlled by our code, but it is vastly more complex that the simplified models that come for modern economics.

Barnacles

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There’s an interesting thread on Marginal Revolution about software patents. In recent years “patent trolls” have become a parasitic industry all to themselves. Companies are created to acquire patents from the holders so they can then shake down whoever may be using them in their product. The patent troll buys a patent and then seeks out who may be using something like it. The user may not even know they are using a technology that is patented by another. Their choice is fight in court or pay up. It’s a form of green mail.

This form of business goes back a long time to when travelers would take over an inn or a private home and you had to pay them to leave. Imagine a town suddenly infested with appear to be gypsies and carny folk. The choice is to get a gang of men to drive them off or pay them to go infest the next town. Of course, just as gypsies target the weak and stupid, the patent trolls tend to pick on little guys lacking the means and sophistication to fight back. This from EFF is a good example.

The idea of a patent or license is to encourage and direct the behavior of the creative into practical things. Instead of offering a prize, the inventor is granted exclusive rights to his invention for a fixed period of time. The world gets the invention and the inventor gets money, maybe lots of money. Otherwise, the smart and creative would have every reason to conceal their cleverness. The farmer with a better plow would not sell his idea, as that would work against his interests. Patents, in theory, increase human knowledge.

The assertion that patents are necessary to spur invention is a new idea. In fact, the idea of patents for intellectual property came under heavy assault in the 19th century.  That was an age of industrial growth and an explosion of innovation. For most of the last 500 years, starting from the advent of the patent system in Venice, patents were limited and temporary. There was an understanding that no idea remains hidden forever. If the first discoverer did not publish it, others would discover it in time and publish it.

What we see today with patent trolls is how the law is easily turned into a weapon by the parasite class. In a prior age, the landlord had to actually own real property, before he could extract rents. Today, you get rich by finding a way to freeload off the system in some way. The better you are at it, the richer you get. Perhaps you get so rich you can buy land and rent it out. The modern economy, thanks to technology and complex financial instruments, is highwaymen shaking down everyone in the normal economy.

The current morass is just another example of why schemes to correct some aspect of the human condition always fail. There’s a fraction of every human society that seeks out ways to live on the labor of others. It is their one skill and their sole focus. Some become salesman or lawyers. Others go into banditry or illicit trades. They are always with us. Try to protect the rights of the honest with patent laws, for example and the parasites will find a way to use that as way to lever money from the honest. Since they are really good at being parasites, they can never be out foxed by new laws. They always win in the end.

The Problem With Health Care

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Friday I went to the doctor for an evaluation. The reason for this is the dentist saw a tiny little bump on my tongue that she said was probably nothing. Since I have insurance, she said I should get it checked out by a specialist. She gave me a referral to someone she knows. With some worry, I made the appointment. Unless I have the slowest growing tumor in history, it is a nothing issue, but you never know and the hygienist is right about having it checked out to make sure. Who knows? This could be my last post here.

I made the appointment and was told to show up 30 minutes early to do paperwork. I was given a clipboard and five forms. Half of it was the basic data a doctor would need in order to get a general history of the patient and get paid for services. The rest was data to defend him against future lawsuits. Liberals have argued for years that litigation is a tiny part of health costs, but they have a conflict of interest as most are lawyers abusing the court system. The rial lawyer lobby is very powerful in America.

Even objective studies cannot account for the millions of hours wasted filling out forms forced on us by the plaintiff’s bar.  A partner in a law firm filling out forms at a doctor’s office is a $1000 of waste. Multiply that over tens of millions of people and you have billions squandered in the morass of paperwork alone. That’s before you consider how many times you fill out the same form. Every visit to the doctor seems to require a new form, with the same data, but in a slightly different order with a new date.

I finish the forms and the whatever you call the people at the front desk took a copy of my insurance cards and driver’s license. Again, the scan of the license is about money. If they have to chase me, they now have my photo ID. This was something truck hijackers would do in the 50’s and 60’s. They would take the truck driver’s license and tell him to claim it was two black guys or two Mexicans. Since they had his license, he was under obvious pressure to cooperate. It’s an interesting comparison.

Then I wait and wait and wait. I had 12:30 appointment but did not get to see the doctor until 1:00. He was with me for 132 seconds. I know because I timed the great event. I then spent fifteen minutes checking out and paying my bill. That part was an issue because I learned they did not take insurance, but would submit the claim to my carrier for reimbursement. I tried to use my HSA VISA card, but that was declined for some reason. I then used my regular credit card to pay the $150 for the 132 second consultation.

The consultation resulted in another appointment. He will remove the bump and send it out for examination. He says it is unlikely to be anything but I will have peace of mind knowing for sure. He will also have $650 for the service. If I want my HSA to cover it, I will have to spend hours working that process. There’s a cost there as my time is worth something to me. I could pay out of pocket, but I have insurance for this stuff. They ain’t giving me a discount for not using it. It is another hassle for a service that is probably unneeded.

This is the problem with health care in a nutshell. It is something we all need, so it has attracted a special class of highwaymen. They stand between you and the product or service you need, demanding a toll. Unlike a stickup man, they force you to fill out forms and wait in line to be robbed. This is also why American health care will collapse before it is reformed. Those highwaymen have powerful lobbies to prevent laws curtailing their activities. We’ll just have to wait until we’re all bled dry, before there is reform.

Those Damned Sick People

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In the fullness of time, this age will be described as one where the people in charge had to re-learn everything about human nature, that people had known for thousands of years, but somehow been forgotten. Maybe forgotten is not the right term. It’s as if people have un-learned things. A deliberate effort has been made to deny basic parts of reality, in an effort to prove crackpot theories about human nature and human organization. This story about health care costs in the Washington Post is a good example.

The bottom 72 percent of Illinois Medicaid recipients account for 10 percent of total program spending. Average annual expenditures in this group were about $564, virtually invisible on the chart. We can’t save much money through any incentive system aimed at the typical Medicaid recipient.

We spend too little on the bottom 80 percent to get much back from that. We probably spend too little on most of these people, anyway. For the bulk of Medicaid beneficiaries, cost control is less important than improved prevention, health maintenance and access to basic medical and dental services.

The real financial action unfolds on the right side of the graph, where expenditures are concentrated within a small and incredibly complicated patient group. The top 3.2 percent of recipients account for half of total Medicaid spending, with average expenditures exceeding $30,000 annually.

Many of these men and women face life-ending or life-threatening illnesses, as well as cognitive or psychiatric limitations. These patients cannot cover co-payments or assume financial risk. In theory, one might impose patient cost-sharing with some complicated risk-adjustment system.

In practice, that is far beyond current technologies and administrative capabilities. Even if such a system were available, we couldn’t push the burden of medical case management onto these patients or their families.

Decade of analysis has revealed the shocking truth behind medical costs. It turns out that what drives costs are sick people. No kidding. This is why the word “wonk” has become a synonym for sophist or a grifter. Harold Pollack seems like a decent fellow and his credentials suggest he may even know a few things about the medical business, but you have to wonder what he was doing before he made this discovery. It’s hard to imagine why anyone would be shocked to learn that sick people drive health costs.

People have always known that the young feel like they are indestructible, because they are healthy and vibrant. As a result, they don’t need to see the doctor, take a bunch of pills or use various health services. On the other hand, old people have all sorts of things going wrong, so they need emergency services, doctors, pills and treatments. In modern societies like ours, old people organize their lives around regular trips to the doctor. Most of it is preventative and low cost, but it adds up as the population grows older.

That’s why the basic question, regarding public health, is how to pay for the old people and the sick poor people. The former need lots of care, often more than they can afford. The latter needs less care, but they have no money. People used to know this. One option is to rely on private charity and market forces to address the problem. Another option is to have the state pay for health care. A third option is a mix, where the state operates as the insurer of last resort, but otherwise private arrangements prevail.

Look at these discussions a century ago, when the notion of the welfare state first gained traction in the West. People understood these truths. No matter what sort of system you adopt, it means some form of rationing, as all goods and services are rationed. That means some people are told they can only have so much while others get more. In some cases, the person gets nothing at all. This is in every part of life. There are no goods that are not rationed by price or by some control over supply.

Rationing is a part of life, yet somehow our rulers have decided that health care is an exception, so there must be a way to arrange things so everyone gets all the health care they want, without having to pay for it. Guys who insist on calling themselves wonks keep working on their perpetual motion machines so that one day, if we arrange things just the right way, we can have plenty. It’s a form of alchemy. Instead of turning base metals into gold, the modern alchemists seek to conjure plenty from scarcity.

A Big Hoax

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The Left can believe things that are obviously wrong. So much so, they can convince people who should know better that up is down and down is up. Health care is a great example. For example, the ObamaCare debacle is turning into the greatest public works failure in the history of man. If the Hoover Damn had cracked open on the first day and crumbled into a pile of stones, it would not be as big a failure as ObamaCare.

Every day brings another hilarious failure of the website or some aspect of it. What has gained less attention is the fact few people have bothered to even try to sign up. Of those, almost all should have been on Medicaid all along. The Left claimed 20 million Americans were without insurance and would buy it if it were cheaper. They claimed another 20 million or so were young people who should be paying into the system, but are not.

The Left believed the 40 million uninsured myth with the intensity of a fanatic. As the numbers come in, they hold to it. Even non-Liberals still accept the claim. Never mind that the figures never held up to experience or reason. If you are young, you don’t need insurance. If you are poor or old, you can go on the dole. If you have a job, you most likely have a policy from work. Small business people have private plans.

Of course, a trip to the local ER shows it is full of illegal aliens who should not be here in the first place. The great uninsured never existed in numbers worthy of this initiative. The uninsured, those who legitimately exist, are like the unemployed. They are a temporary class, a shifting, dynamic cohort that is transitioning from one job state or life state to another. There was never a great emergency to be addressed, but the Left believed it.

The great uninsured was a big fat hoax. They never really existed in numbers warranting state action. Instead of asking to look behind the curtain, everyone went along with the claims made by the Left. So much so we have a multi-trillion dollar disaster on our hands that will end up helping a handful of people, who probably never needed the help in the first place. Those who did need help could have relied on existing programs.

Even now, the debate still focuses on how to replace it or how to fix it. No one is bothering to ask why the premise of the thing is not holding up to empirical fact. You can be sure that if anyone publicly challenges the claim they will be called a monster. Obama will keep wheeling out white people supposedly helped by his program and the liberal press will yammer about the lack of an alternative. No one will question the premise.