Government Regulation

Regulation, oh regulation.  How do you feel about government regulations?  There is at least one person that likes each regulation.  Right?  If there isn't, how did it become a regulation?

I'm not going to argue for "this" regulation or against "that" regulation; they may or may not have merit, but I would like to point out two things.  One, when someone considers the merit of a regulation, they often don't consider the "unseen".  Two, the more the regulations and the bigger the organization, the easier it is for regulations to become bureaucratically idiotic.

We may be better off in one dimension, but there are costs associated with every regulation, some of which are unseen.  Consider, the government requires a company to use a specific technology to reduce pollution.  True, in one dimension we're better off, we have less pollution, but what is unseen is how that regulation affected the companies behavior or choices toward other parties involved.  What might the company have bought if they wouldn't have had to buy this new technology?  How has the new regulation affected their business strategy?  Likely the cost is passed on to the customers, what might have they done with their money if their costs hadn't increased?  The consequences are hard to observe, let alone measure, but that doesn't mean they're not there.

As the regulations multiply in large organizations, it is easy for them to become more and more idiotic.  Consider this story and the examples of regulation stupidity.  The stupidity is bad enough (time waster), but that time wasting starts to cost us.  The regulation has to be dreamt up.  It has to be documented.  The regulation has to be enforced.  These are all costs associated with the regulation and when its not even possible for one part of an organization to know what another part is doing, you get inter-regulation inefficiencies.  Sometimes even working at cross purposes.

The upshot?  Try to consider the unseen when measuring a regulation's merit and even with merit there is a point where enough is enough.  I wrote a funny poem once where Congress finished they're work.  They came up with all the laws we needed and then were able to go home and close Congress.  That would never happen, but it's something to think about.  Do we come up the regulations because we feel compelled to come up with regulations, to try to fix the world through legislation?  Can you imagine a point where all the laws you wanted passed, were passed?

“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

—C. S. Lewis, God in the Dock: Essays on Theology and Ethics (1970)

In Search of Excellence: Face Painters

We had a company party a few months ago.  The company did a great job.  They thought of all the kids that were going to be there and rented a couple blow up houses to play on.  One even had a ball pit.  They were a hit.  There was lots of food, of all different varieties for every kind of taste.  They even had a cupcake truck.  Yes, that's right!  Think of an ice cream truck but instead of ice cream, lots of cupcakes!  Fun!

There was a lot that was awesome, but the best thing was the face painting and balloon tying.  The planners had a hired a company that performs for parties.  You'll find their link below.  They were excellent at their jobs.  They were personable, friendly, and engaging.  You can imagine that it might be tedious to paint faces for a never ending line of little kids or have to tie balloon after balloon, but there was none of that and we weren't even close to being the first group that came through.  They were professional and genuine entertainers.  The work they did and the gentle way the did it for kid after kid was amazing.  Can you tell I was impressed?

http://www.happilyeverlaughterparties.com/

It got me thinking about excellence again.  Do you strive for excellence in anything you do?  That question shouldn't sound accusatory, I'm sure there are things you do excellently.  There are some things that I strive to do excellently.  But there are other things at which I don't try as hard.  We have to make trade offs because we only have finite time (one of the only things we really do have), but could we do what we do a little better?

In my occupation, we call that extra striving "plussing".  Recently watching a documentary about Walt Disney, I found that he used it with his staff.  You can only do so much and the project has to go out the door, but plussing means doing just a little more than what was expected.  You meet the deadline, you finish the work, and then you do just a little bit more just to make it that much sweeter.

It's amazing what that last little bit does for whatever you're working on.  Thinking about it, that might be all that separates "really good" from "excellent".  The face painters and people tying balloons, certainly would have been really good if they had just practiced their craft.  But it was that little extra, the way they engaged the kids, the way they entertained that made them excellent.

Why should someone strive to be excellent?  It's rewarding, internally and externally.  If we were setting up a big party for kids and I was looking for entertainment, who do you think I'd check out?  That's right.  Because they were excellent.

"What-e'er Thou Art, Act Well Thy Part."

Tax Rates and Behavior

This is a long article about Cisco Systems Inc and how they legally avoid paying billions of dollars in taxes.  Check it out.  I'll wait...Ok?  Done?  Let's move forward.  Did you think, "Those dirty $@&%*#!  They should pay their 'fair share'!"?

That's not what I want to talk about.  Let's talk about why they do it.  That's obvious, right?  They don't want to give Uncle Sam billions of the dollars they've earned.  Did you notice the other thing?  They're willing to pay some taxes, if the rate is lower.  That's what all that jazz about a "tax holiday" was talking about.  It turns out that tax rates affect behavior!

You're probably thinking, "No d'uh, Jake!"  Well, it also turns out there are lots and lots of people that either don't believe it or ignore it because it doesn't fit with the agenda they want to push.  Check out this little blurb from Walter Williams:

           "Politicians, news media people and leftists in general entertain what economists call a zero elasticity view of the world. That's just fancy economic jargon for a view that government can impose a tax and people will behave after the tax just as they behaved before the tax, and the only change is more government revenue. One example of that vision, at the state and local levels of government, is the disappointing results of confiscatory tobacco taxes. Confiscatory tobacco taxes have often led to less state and local revenue because those taxes encouraged smuggling.           

            "Similarly, when government taxes profits, corporations report fewer profits and greater costs. When individuals face higher income taxes, they report less income, buy tax shelters and hide their money. It's not just rich people who try to avoid taxes, but all of us -- liberals, conservatives and libertarians.

            "What's the evidence? Federal tax collections have been between 15 and 20 percent of the nation's Gross Domestic Product every year since 1960. However, between 1960 and today, the top marginal tax rate has varied between 91 percent and 35 percent. That means whether taxes are high or low, people make adjustments in their economic behavior so as to keep the government tax take at 15 to 20 percent of the GDP. Differences in tax rates have a far greater impact on economic growth than federal revenues."

And the article about Cisco is great example of that adaptive behavior.  Think how much money it costs them to play those shells games, how much money they have to pay to lawyers and accountants, and how the complexity of the organization leads to inefficiency. It must cost a lot, but it certainly costs less than the taxes they would pay.

The upshot?  Unlike others, don't assumes that raising tax rates will necessarily bring in more income for the government to spend. 

Universal Health Care P3 (health insurance)

In the last post we looked at how life insurance helps us mitigate risk.  Let's take a look at health insurance.

Health insurance works in a similar way.  We have premiums that we pay the insurance company to get the insurance and then depending on the terms of the insurance we either split the bill with the insurance company (coinsurance) up to a certain amount (out-of-pocket maximum), make a fixed payment per visit/service (co-pay), or pay the whole bill till we've payed a certain amount (deductible).  Your co-pay may also go toward the deductible.

Here's an example.  Bob goes to the doctor.  The doctor charges $200 dollars for the visit.  Bob's co-pay for doctor visits is $20, so he pays $20 and the insurance company picks up the rest.  The doctor tells Bob that he needs surgery, so they schedule it.  The surgeon charges $4000 for the surgery and the hospital charges $2000 for his recovery, a real bargain (I'm simply making these numbers up for illustration sake).  Bob's deductible is $500 and after that he pays 20% up to $2000 for a given year. So breaking out the calculator, the entire bill from the surgery was $7000, Bob pays the first $500, then he pays 20% of what's left ($6500) which is $1300.  So with this doctor appointment and surgery, Bob has payed a total of $1820, bringing him $180 shy of his maximum out-of-pocket.  So he only needs to spend $180 dollars more until everything will be covered by the insurance company.

If you were Bob what would you do?  If you had any medical expenses already planned, of course you'd proceed with them.  If there was anything you were on the fence about, you'd probably go ahead with those too.  After you'd reached the limit, might you be less price sensitive?  It would be completely logical if you were.  This essentially distorts the price signal.  This is the problem with using insurance to pay for things that should be handled as regular transactions.  Even with paying 20% there's a price distortion. 

Remember, insurance is a tool to help us manage risk.  What if we purchased all our groceries with insurance?  You had some deductible and then some maximum out-of-pocket.  When you reached your maximum out-of-pocket, what would you do?  Oh yeah, it would be steak and lobster every night!  Your price sensitivity would be greatly reduced and it would affect your choices in food.  Suppose a bunch of people reached the max out-of-pocket and were buying up the steak and lobster.  What do you think would happen to the price of steak and lobster?  Those people buying steak and lobster aren't directly paying for it, but someone is.  What does the insurance company do to cover the increased cost?  The money doesn't come from the Tooth Fairy or Santa Claus (thanks Dr. Williams), they have to adjust the different costs of the insurance.  What's the up shot of all of this?  When insurance isn't used to manage risk but part of regular transactions, things don't "work right" in the market.  Would you be surprised if food and food insurance cost a lot more or if you couldn't even purchase some things at the store because demand completely outpaces the supply?

This is part of the problem with our health care system.  Health insurance definitely has a place in our system because of the catastrophic things that can happen to us, but I think eliminating it from the day to day medical interactions would help a lot.  We definitely DON'T need MORE insurance in the form of government insurance where everything is covered.  Worse would be "free" health care for everyone because it isn't really free.  The money has to come from somewhere and you'll have the problems outlined above.

Universal Health Care P2 (risk and insurance)

We talked about some of the costs of health care in my previous post. But there are still more. Some of them are related to insurance so maybe we should take another look at what insurance really is.

In life there are risks. Everyday you take many risks, calculated ones and impulsive ones. Sometimes the risk is part of making a decision and sometimes the risk is part of just being alive. Some risks are so large that if things go wrong you could end up with a disaster on your hands. Insurance is a financial tool used to manage risk.

Let's take life insurance as an example. I have a small family. My wife stays home to take care of the kids. We rely on the income I bring home to sustain our family. If I died, apart from emotional concerns, my wife would have a problem. How would she obtain the money necessary to support our family? She could go to work, but then someone else would have to take care of the kids. She could try to find work that would allow her to stay home; that might be hard. She could turn to relatives or friends for help. She might even turn to the government and go onto welfare. Personally, I don't like any of those solutions. That's where life insurance comes in. There is some risk that someday, before our kids are grown, I may kick the bucket. For that reason we purchase 8-10 times my salary in life insurance so that if I die, my wife can invest the money and live off the interest. We pay some money now hoping that we'll never need the insurance, but the colossal risk has been managed (and term life insurance is relatively cheap).

How does this work from the insurance company's point of view? I've shifted the risk to them, they assume the risk of me checking out early, and then spread that risk out over lots of other people that also sign up for life insurance. The idea is the company needs to take in more money than they pay out in benefits when people die. So they set the premium (what I pay) to some level that they calculated will keep them from losing money.  There's a lot of information that goes into that calculation and for the insurance company to be viable they have to be good at it.  I don't want them to lose money. If they lose money long enough they'll go out of business and my insurance won't be effective anymore.  I want them to stay in business.

In summary I've transferred the risk of a catastrophe and by spreading that risk over lots of people the insurance company makes money. "That's all well and good" you say. "But what about the person that can't get insurance?" Someone that can't get insurance needs to make a different plan. They need to work toward being self-insured. They should make their decisions in life through the prism of the risk they're taking. Say my twin couldn't get insurance and did die, leaving a family...they would need to make those hard decisions about finding work versus staying with the kids. Hopefully they prepared in a way to make it less of a disaster.

But before all that I would ask why can't they get insurance? Did they procrastinate getting insurance until it was too late? Do they have an occupation or play a sport that makes them uninsurable? Is it because they say they can't afford it? Given the risk of not insuring shouldn't you work out a way to afford it? Do you need to live cheaper? Do you need to get your income up? I believe there is a lot we can do for ourselves before looking for a solution from someone else.  But they should also be free to say, "We want to take the risk ourselves.  We're not going to buy insurance."

In part three we'll look at health insurance.