Wednesday, December 08, 2010

Dying by Degrees: The Economics of FUBAR

This is the text of a speech that I delivered at Augustana College's Center for Western Studies yesterday (12/01/10).

Dying by Degrees: The Economics of FUBAR
By Robert E. Wright, Nef Family Chair, Augustana College

FUBAR is an acronym that stands for Fouled (ahem!) Up Beyond All Recognition. Many military veterans know it as one of a family of acronyms, like SNAFU, TARFU, and SUSFU, that express anger for, and cynicism and distrust of, the status quo and the powers that be. Movie buffs learned the term FUBAR from films like Saving Private Ryan and Tango and Cash. I used it in the title of my book about the hyper-dysfunctional parts of the American economy because saying FUBAR isn’t cursing according to the word police but it definitely carries the connotation of the f-bomb. Like most folks, I’m a sinner … yep, yep, it’s true … and so I do curse when I’m angry or hurt. And the state of the U.S. economy has me feeling both of those powerful emotions.

But please don’t get me wrong – I’m not trying to cash in on the recent financial crisis … at least not in this book. The subprime debacle and subsequent financial system meltdown wasn’t the cause of America’s current economic plight but rather was a symptom of a much deeper illness, one that is slowly killing our economy. Hence the title of this talk, “Dying by Degrees.”

Given the events of the past couple of years, few people dispute that the financial system is totally FUBAR. Ditto with slavery, another melancholy subject covered in the book. Sometimes, however, people wonder if construction, higher education, healthcare, and Social Security are as economically dysfunctional as I claim. They certainly are if one accepts a simple objective criteria: quality and the price level constant, the costs of built infrastructure, college degrees, healthcare services, and retirement savings have been rising for decades and show no signs of abating. Dollar for dollar, our buildings, transportation infrastructure, and college graduates are no better now than a generation ago, Social Security continues to offer a substandard basket of disability and life insurance and retirement annuities, and our healthcare outcomes, as measured by mortality and morbidity rates and patient satisfaction, have improved relatively little, especially compared with those same outcomes in some other rich nations, like Switzerland. Yet all four services cost a lot more in inflation-adjusted terms than they once did – Social Security tax rates have risen over a dozen times, for example, and everyone knows about the soaring costs of tuition, health insurance, and construction services. As a consequence, those sectors swallow ever larger percentages of our GDP or total national income. Healthcare expenditures, for example, continue to soar towards 20 percent of GDP, or approximately the economy’s arm and leg.

The economy is littered with other trouble spots as well -- like military defense contracting, 401K administration, and automobile manufacturing and repair -- that I just don’t know enough about to discuss at present. But I heartily encourage others to do so using my theory of FUBAR-nomics, or the causes of economic hyper-dysfunction.

The core cause of the economy’s plight, I believe, is our society’s collective inability to first identify and then ameliorate what I call hybrid failures. No, not a Prius that won’t start but rather complex combinations of market failures and government failures that fester for decades until the infected sector or industry functions so poorly that vaguely obscene military acronyms become apropos. To understand my thesis, one must of course know a little bit about both market and government failures. After quickly reviewing some examples of each, I’ll then describe how they combine to suck the life out of some of the most important parts of our economy.

Market failure is the term that economists use to describe 5 situations in which markets do not function in the neat ways described by Adam Smith.

One: market power, or the ability of some sellers -- monopolies and cartels for example -- to make prices, generally by imposing their will on supply, rather than to take prices from the market as competitive firms must.

Two: public goods, or goods -- which is to say merchandize or services with a positive value -- that no seller could profit from by providing. National defense is the classic example but I like to expand the concept beyond the military to the Lockean trinity of protection of life, liberty, and property, the end all of all good governments.

Three: externalities, or situations where some of the costs or benefits of a good are not included in its price. Pollution is the classic example of a negative externality, one where some of the costs of production are not internalized by the polluter, who responds rationally by producing more goods and hence more pollution, than it would have if it had to bear the costs created by the pollution. Education is the classic example of a positive externality because some the benefits of education do not accrue to the student. More on that one later.

The fourth type of market failure is asymmetric information, or disparities in the quality or quantity of information possessed by the buyers and sellers of a good. There are three main varieties, adverse selection, moral hazard, and agency problems. The classic example of adverse selection is the lemons problem, the high probability that the purchaser of a used automobile in the person-to-person market who doesn’t know much about cars will pay too much. The most famous example of moral hazard is burning down the barn or shop for the insurance money. Agency problems are perhaps best exemplified by the shiftless fast food chain employee that we’ve all encountered or, in my case, was, albeit for a brief period.

The fifth and final type of market failure are asset bubbles, or periods when investors pay more for specific assets – sometimes land, sometimes equities, sometimes gold, sometimes Merino sheep, sugar beets, or other agricultural goods – than fundamental variables like interest rates suggest that they should. Some economists dispute the existence of bubbles, or at least definitions of them that assert the irrationality of bubble participants. That reminds me of a joke: “When an economist says the evidence is mixed, she means that theory says one thing and data says the opposite.” Whether they are rational or not, bubbles have certainly existed in the past and there is no indication that they are extinct.

Almost all economists agree that market failures exist but more libertarian slash Republican leaning ones tend to downplay their importance while more socialist slash Democratic ones seem to think that all markets are deeply infected with one or more failures. The opposite reaction occurs with government failures – libertarian-style Republicans see government failures everywhere and uphold them as the key problems to solve while liberal Democrats ignore or at least minimize them.
Government failures come in many different flavors but are most easily understood with reference to competition and incentives. No organization – government, non-profit, or for-profit – is likely to meet its goals in an effective way if it is cloistered from competition AND if the incentives of its employees are not clearly aligned with the organization’s goals. That is because a dearth of competition allows an organization to wax fat and inefficient and employees tend to do precisely what they are rewarded for doing.

Governments rarely face much competition, which is often legislated away. No bank, for example, can compete with the Federal Reserve’s monetary policy or regulatory powers; the Post Office has a legal monopoly on first class mail, which used to be important; in many municipalities it is illegal for anyone but local government employees to collect homeowners’ trash. And so on and so forth. Due to the government’s monopoly or quasi-monopoly power, customers need the government but the government doesn’t need the customers. Agencies like the DMV – those of every state are about equally notorious – are the result.

Compounding the lack of competition is the fact that most government employees are paid a salary based on the number of years that they have been employed. That incentivizes them to do the bare minimum, which they understandably negotiate to the lowest possible level, and also persuades them to NOT innovate because introducing new ideas might be seen as “rocking the boat” and lead to dismissal or undesirable assignments.

Thankfully, we live in the worst form of government except all the others, a democracy. So the public sometimes gets so irate at government inefficiencies that vote-hungry politicians take notice and implement some reforms. Were it not for that, and the occasional public-spirited do gooder, I suspect many government clerks would still be using quill pens. … I’m only half joking.

If you perceive from these comments that I lean toward libertarianism … kudos! … you’re paying attention and are an astute student of the subtleties of language and rhetoric. But I’m far from the anarchic end of libertarianism and in fact embrace so-called “pragmatic libertarianism,” a term applied to my thinking in a review of Fubarnomics that appeared in the Los Angeles Times early in the fall term. I’m not trying to score ideological points but rather am attempting to move public discussion out of the steep partisan ravine into which it has fallen. Instead of blaming market failures for our economic ills as Democrats tend to do, or government failures as Republicans tend to do, I argue that the FUBAR parts of our economy stem from combinations of the two. What that means in practical terms is that both sides hate me. …

Examples taken from the book are the easiest way to proceed next. The recent financial crisis -- you know the one that caused a worldwide recession and that injured the livelihood or savings of almost all Americans -- was caused by both market and government failures. The latter included all the artificial props to home ownership that various parts of the government implemented over the years as well as said government’s inability to see the Frankenstein it was unwittingly building in time to stop it from burning down the neighborhood if not the entire town. The mortgage interest deduction combined with the retirement savings tax structure rewarded people for staying mortgaged to the hilt and using their savings to speculate in the stock market, albeit via favored intermediaries rather than directly. Ironically, that led to LESS homeownership, as measured by the total equity invested in homes rather than the government’s preferred metric, the percentage of households who owned nominal amounts of equity in a house. That, in turn, led to an Alanis Morrissette-sized irony: homeownership was supposed to give people a stake in their communities and governments but the bass ackwards way that home ownership was encouraged actually decreased people’s commitment because they had so little of their own money invested. Instead of paying off their mortgages and owning their homes outright as in the pre-Depression period, most Americans today are essentially renting from the bank in exchange for an equity put option sweetener.

The most obvious market failure in the recent financial crisis was an asset bubble, or rather several of them. Homeowners paid too much for houses and lenders and appraisers were complicit. Please bear in mind that the conclusion that people were paying too much isn’t hindsight: every housing affordability metric, including the Price-Rent Ratio, was setting off more alarms than a high rise fire. Investors, goaded on by paid cheerleaders like the ratings agencies, also paid far too much for fancy securitized mortgage products like mortgage backed securities and collateralized mortgage obligations. Again here, some observers correctly perceived the bubble, arguing that no financial alchemy could turn a bundle of 125 percent LTV loans made to major credit risks into a golden opportunity.

Another major market failure contributing to the financial crisis was the principal-agent problem, though certainly asymmetric information and negative externalities were also present to some degree. In a nutshell, investment banks morphed from private partnerships into publicly traded joint stock corporations in the 1970s, 80s, and 90s but the new owners, mostly institutional stockholders, did not take effective control of the new companies, employees did. Exploiting our greatly weakened system of corporate governance, itself a hybrid failure, those employees compensated themselves both liberally and in a dangerous way. Basically, they created a game of “tails I win, heads you lose” that rewarded them for taking large, short-term bets. If a gamble paid off, they made literally millions of dollars in bonuses. If a gamble failed, they personally didn’t lose anything except maybe a job, one that after several years of large bonuses they no longer needed because they had already made enough to live out their days not just in the lap of luxury but in its very loins.

Sure there were some boneheads on Wall Street who didn’t understand what they were doing or who were fooled by the smoke and mirrors of fancy equations and theories. But most knew that it was not a good long-term business strategy to make adjustable rate loans to so-called NINJAs – borrowers with No Income, No Job or Assets. But Wall Street bigwigs didn’t care because they were not paid to care about next year, let alone next decade, they were paid to create short-term accounting quote unquote profits.

Custom construction contractors, by contrast, are paid to complete homes, office buildings, roads, and other types of built infrastructure. Its close connection to concrete reality, however, does not make custom construction immune to the hybrid failure disease. As you may know, most construction projects are over-budget, late, and/or under-quality. Unsurprisingly, productivity in the sector has been flat for decades, meaning that each inflation-adjusted dollar put into a construction project creates no more building, bridge, or tunnel than it did when I was born in 1969. So far over my lifetime, however, productivity in the manufacturing part of the economy has increased several fold.

The main market failures in custom construction are asymmetric information and market power. Owners and their minions cannot see everything that a general contractor does, or doesn’t do, and the general contractor cannot monitor all of his sub-contractors 24/7. The reasonableness of change orders, essentially increases in project costs, cannot therefore be accurately assessed and even if they could a construction company already on the job can be replaced only at considerable cost. Once a bid is won and a company is on the job, it is a near monopolist. Bids are therefore not an offer of a fair price but rather a strategic game, the sole goal of which is to win the job so that profitable change orders can be submitted. If an owner refuses to comply, profits can be extracted in other ways, by slowing down production or using inferior techniques or materials.
Yes, government officials inspect most buildings during construction but only to ascertain if they are up to code, the local minimum standard in other words. They do not verify that the materials or techniques specified in the contract have been actually utilized. Building inspections and codes are one of the government failures in the construction sector. They tend to be outdated and cause needless delays and their idiosyncrasies from municipality to municipality also help to keep construction firms smaller and less efficient than they would otherwise be. Governments also interfere with construction wages and labor conditions and help to perpetuate the flawed bidding system just described.

Before somebody in a hard hat takes a pot shot at me, I should describe the hybrid failure at the heart of ever rising college tuitions. As mentioned previously, the market failure in education is a positive externality. Specifically, if left to their own devices individuals would acquire less education than is socially optimal. Highly educated people, the standard argument goes, make better citizens and dinner party guests and are also more creative and innovative in ways that often enrich our culture and economy without necessarily enriching educated individuals. Ergo, the government needs to subsidize higher education. As a professor at a college that receives sundry government grants currently speaking at said college, I wholeheartedly endorse the standard argument.

Where I part ways with the status quo, however, is with the payment of educational subsidies to schools rather than to students. By supplying a large portion of higher education themselves, governments actually fail us. By and large government schools are not as efficient as private ones. Instead of investing in undergraduate education, most state schools invest in research, often of the most careerist, least socially remunerative types, and in lobbying legislators for more funds. Like other government entities, in other words, state university systems tend to bloat bigger than South Dakota roadkill … in July!! Private colleges often suffer the same fate, but generally to a lesser degree because they are less assured of receiving subsidies.

One major problem with colleges and universities of all types is that -- from the richly endowed private Harvard University to the public University of Virginia to the for-profit, stockholder-owned University of Phoenix – they all consider professors to be mere employees. That, I sincerely believe, is a major mistake because professors are professionals, the heart and soul of their institutions. Treating professionals as mere employees exacerbates agency problems, leading to bizarre institutions like the current system of lifelong tenure. Many tenured professors continue to work hard but enough don’t to serve collectively as a rather weighty millstone around the necks of their institutions and hence taxpayers and students and their families.

Slavery was – or rather I should say is because it persists in many places in the world – another hybrid failure. The government failure was allowing one person to own another, a clear violation of the enslaved’s natural right to liberty. Had the government failure ended there, slavery in the antebellum U.S. South probably would have petered out, as it did in the North, because slaves were not very efficient workers. Slaveholders didn’t have to pay them a wage but they had to pay a purchase price for them and feed and clothe them, even when they were sick or there was no work for them to do. Even more costly, slaves resisted bondage in a wide variety of ways, ranging from outright rebellion to working soft and dumb instead of hard and smart. As a result, slavery was generally unprofitable unless slaveowners could cajole the government into assuming some of the control costs of their peculiar chattels, which of course they did up until the Civil War. Slavery, then, was in a sense a negative externality, a form of pollution that planter-controlled governments not only countenanced but abetted far too long.

Rapidly rising healthcare costs are also caused by a hybrid failure, one almost completely unaddressed by so-called Obamacare. Health insurers suffer from adverse selection and moral hazard. More specifically, sick and sickly people are more eager to purchase insurance than healthy ones are and people who have insurance are more likely to seek medical attention, and more expensive varieties of medical attention, than uninsured people are.

The health insurance industry was well on its way to ameliorating those problems when the Great Depression struck and mucked things up. Then the government interceded in very damaging ways. First, the government literally regulated an entire genre of small mutual health insurers, fraternal benefit societies, out of business. That was damaging because small mutual insurers were very good at limiting adverse selection and moral hazard by carefully screening insurance applicants and monitoring claimants. Next, the government used the tax code to encourage employers to offer health insurance as a fringe benefit. That was damaging because employer-provided health insurance essentially de-coupled the cost of insurance premiums from the cost of healthcare by encouraging people to seek the best doctors rather than the most cost-effective ones. It also abetted pre-existing condition clauses and, given our extremely flexible labor markets, swelled the number of uninsured individuals. The government also became a little too friendly with the American Medical Association, which restricts the supply of doctors. Because of their artificially limited numbers, doctors have the market power to insist on being paid for seeing patients rather than returning them to health, another major flaw in our post-Depression system of which more a little later.
The government also responded in damaging ways to the retirement savings crisis created by the Great Depression. Social Security, in short, was a permanent solution to a temporary problem. The concept of retirement was more or less unknown until the late nineteenth century. Before then, numerous well-to-do Americans stopped working before they died but there was no widespread expectation that most people’s final years would be spent outside the labor force, except in cases of disability or dementia. As increasing numbers of people began to outlive their ability or willingness to work, families began to save for what came to be known as retirement by purchasing real estate outright and by investing in savings bank accounts, life insurance policies and annuities, and stocks and bonds. As a result, there was no epidemic of impoverished old folks leading up to the Depression. Some of the aged were indigent but most, in fact, were able to live off their savings, inherited wealth, and/or contributions from their children.

The Depression pinched those resources, however, by decreasing the value of real estate, stocks, and riskier corporate bonds, by throwing older people out of work sooner than expected, and by decreasing the ability of their children, many of whom were unemployed as well, to aid them. If the government had simply provided indigent seniors with direct monetary aid and not created Social Security, prudent Americans today would save for retirement at much higher levels than they currently do and would be much more astute about matters of personal finance. Instead, the government took a very different path that threatens to cause tremendous economic and possibly political instability. It strikes me as more than a little un-democratic that long-dead politicians, now accountable only to God or, more likely, Satan, should be allowed to burden posterity with such unnecessary legislation.

In case any of you are wondering, the Great Depression itself was a prime example of a hybrid failure. It began due to a real estate bubble and was exacerbated by the stock market crash of 1929, two clear market failures. But the numerous bank failures that followed were actually government failures caused by regulations that prohibited branch banking in most states. That left most banks small and hence vulnerable to local and national shocks that a wing of the government, the Federal Reserve, did not adequately address even though macroeconomic stability was its stated mission. A single policy, Roosevelt’s devaluation of the dollar, was sufficient to bring the economy out of the Depression. The rest of the New Deal was a mixed bag comprised mostly of government failures like the Agricultural Adjustment Act and the National Industrial Recovery Act. Even the Federal Deposit Insurance Corporation, which stabilized the deeply flawed Depression-era banking system by guaranteeing retail bank deposits, helped to cause subsequent financial crises, most notably the Savings and Loan crisis, by rewarding bankers for taking on excessive risks. The bastard offspring of the S&L crisis, the infamous Too Big To Fail Policy, played a major role in the most recent crisis.

Additional details on the financial crisis and all of the other topics touched on here today can of course be found in Fubarnomics but now I would like to sketch out the book’s recommendations. It is important to note that I do not think that any of these solutions are possible in today’s political climate, although the results of the recent election may have brought us closer to some of them. I offer them in the hopes that they will be discussed, critiqued, and revised so that they may be implemented when politicians get serious about fixing the economy and make the policy changes that will unleash the entrepreneurial energies under girding each recommendation. I should make clear at the outset that all of my recommendations essentially entail reversing or untangling the hybrid failures that cause the economic dysfunctions just discussed.

If we don’t want another gut wrenching financial panic and economic downturn, the government should:

1) abolish GSEs, or government-sponsored enterprises, including Fannie Mae and Freddie Mac. Andy Jackson called the GSE of his era, the Second Bank of the United States, a hydra-headed monster and he was right. Figuratively speaking of course. If an enterprise is profitable, the government doesn’t need to subsidize it. If it isn’t, and we’re sure it involves a public good as previously defined, then the government itself should provide the good.
2) reform credit rating agencies so that they actually assess credit risks again instead of merely pandering to issuers as they have the last few decades. That will entail returning to a subscription-based revenue model and eschewing payments from issuers, a business model that turned into a form of ratings-for-payment bribe.
3) expunge Too Big to Fail Policy from businesses’ expectation set by making it clear that if any company runs into difficulty it will be allowed to fail. Streamline bankruptcy reorganization procedures, especially for financial institutions, so that the threat is credible.
4) learn to learn from past mistakes. The subprime debacle of 2007 was not the first time that a mortgage securitization scheme in America blew up. It was the seventh. No kidding. Fool me once, shame on you. Fool me twice, shame on me. Fool me seven times and … that is, as they say in Boston, “wicked retawded.”
5) reward regulators for regulating intelligently, for discouraging bubbles, and for acting before matters get out of hand. The status quo is to reward regulators for preparing to fight the last crisis rather than the next one, a flaw that also pervades the TSA’s so-called thinking. But that is another conversation.
6) improve corporate governance by mandating deferred compensation or bonus-malus systems where ever and whenever appropriate, which would include at least some positions in most financial services firms.
All of those proposals have been made by others, but no one else, to my knowledge, has recommended all six.

The construction industry can be fixed by moving away from the current system, where numerous small firms compete based on their strategic bidding and change order skills rather than on their efficiency. Governments and private firms should choose the best bidder, not the lowest one. The best bidder could be ascertained more easily if someone had the incentive to track construction company and individual performance over time. Eliminating the bidding system altogether could work as well, as in new construction systems where architects, designers, and contractors are compensated to develop change order proof plans, or in other words are paid by owners to dramatically reduce both asymmetric information and post-contractual monopoly power. A recent book, the Commercial Real Estate Revolution by Rex Miller and others, essentially calls for the same reform, though for a less compelling reason.

Higher education would be vastly improved if professors were allowed to own their own colleges in professional partnership. Instead of being mere employees, they would be professionals akin to attorneys or business consultants and would have long-term incentives to provide students with the most inexpensive, highest quality undergraduate and graduate educations possible. Under such a system tenure would dissolve of its own weight but academic freedom, the right of tenured professors to say pretty much anything they want to without fear of being fired, would be priced in the market. A professor who is a partner in a college organized as a professional services firm could not be dismissed, he or she would have to be bought out by the other partners, essentially pricing tenure and academic freedom.
Other salubrious reforms would include the government allowing more competition in higher education, the creation of a system of standardized exit exams, the payment of subsidies only to students and not to schools, and passage of a GI-like bill expanded to include a wide variety of public service, not just military duties. Again, almost all of these ideas have been proffered by others, but never as a complete package designed to eliminate the hybrid failures at the heart of rising tuition costs.

The cure for slavery is economic development. Ironically, economists have a very poor track record at creating economic growth in poor countries. That is why vast swathes of Latin America, Africa, and Central Asia continue to suffer with per capita incomes not far above the subsistence level. A growing consensus among an interdisciplinary group of scholars who study the wealth question, however, suggests that national wealth is largely a function of institutional quality, particularly whether the government adequately protects life, liberty, and property or not. Where it does not, poverty is certain, even if oil or diamonds are present. Where it does, wealth is certain, even in barren, windswept places like Iceland … and South Dakota.

Of course dictators control most poor nations and most do not behave as enlightened despots and protect life, liberty, and property of their own accord. I suggest in Fubarnomics that dictators can be rewarded for providing such protections through the judicious use of aid and carefully designed long-term compensation schemes. It’s a long-term fix that won’t alleviate the suffering of all people enslaved today but will help to prevent the enslavement of future generations because slavery is highly unprofitable where governments are against it and where wage laborers are abundant and efficient, as they are in developed economies.
Speaking of enslaving future generations, it is now time for the big two, Social Security and healthcare. Seriously, the former might survive intact if the economy grows really robustly. If growth is anemic, as some fear, Social Security could be extended indefinitely by some combination of tax increases and benefit cuts, including raising the retirement age. My recommendation, however, is to simply eliminate it for myself and every younger than me and to pay the promised benefits to everyone older than me out of general revenues. My rationale here is that younger people still have time to save for retirement but older Americans don’t. Moreover, Social Security payroll taxes are highly regressive and the payout structure is distorted towards preferred groups. As a whole, the system redistributes wealth from poor minority men to middle class white women, a rather cruel and ironic outcome especially after, say, 1970. The structure of the system and demographics virtually ensure that poorer Americans, especially those from disadvantaged minority groups, almost never receive even modest inheritances, a leading spoke in the wheel that perpetuates the cycle of poverty. Due to the payroll tax, the poor can’t afford much whole life insurance or other asset building financial products.

I wouldn’t replace Social Security with anything other than the government’s solemn promise that when people my age and younger get old we will be on our own so we had better start saving now. And don’t worry about silly claims emanating from mass media outlets about the negative effects of higher savings rates on consumption. Via the financial system, one person’s savings becomes another’s consumption. We also need a much better, longer, and more comprehensive system of personal finance education, ideally supplied by teachers and professors in professional partnerships of course. I don’t want to hear any of this bull puckey about “privatizing Social Security” or “investing in the stock market.” Proper investing starts with rainy day savings, preferably in low-cost depository institutions like credit unions, then moves on to insurance, and only then moves on to well diversified portfolios of financial securities, derivatives, and commodities, portfolios that become less risky as the investor’s target retirement age approaches.

Finally, we also need much less but much better financial system regulation. The topic is too detailed to delve into during this talk but suffice it to say that pre-Depression historical precedents suggest that intelligently regulated financial markets and intermediaries can provide Americans with solid private security in a much fairer way and at a much lower overall cost than Social Security has done. Recent and current problems with pensions, 401Ks, life and disability insurance, and other private security products are due to relatively minor hybrid failures that could be fixed in fairly short order if desired.

That leaves us with health insurance. As hinted at previously, healthcare costs would stabilize and perhaps even decline if doctors were rewarded for healing people rather than merely treating them. That may sound like a radical idea but the U.S. healthcare system was moving in that direction when the Depression struck and the government sent us down a very different path. They were called prepaid plans. People paid monthly fees when they were healthy and stopped paying when they were sick. Healthcare providers therefore had strong incentives to keep people from getting sick in the first place and to fix them up quickly if they did fall ill. Today, doctors in most parts of the United States have incentives to keep patients sick. And don’t even get me started on pharmaceutical company incentives.
Another salubrious change would entail the creation of large mutual health insurers, under a general agent sales system, that offer joint life and health insurance policies that I call “health for life.” Mutuals are for-profit corporations owned by their customers, in this case their policyholders. Their profits accrue to the policyholders and to their general agents, which like large blockholders in joint-stock corporations serve to keep the companies’ executives on task. The joint policies would commit insurers to providing large sums for healthcare by promising a life insurance payment as well as health insurance. A rational company would pay healthcare costs up to the discounted present value of the life insurance due multiplied by the probability of treatment success. It’s called incentive alignment and it works much better than government mandates likely to spur premium increases or, if that avenue is blocked, exit from that line of business.

In addition, for a given premium level the life insurance benefit would decline as more healthcare was used and increase if relatively little was utilized. That would help to reduce the adverse selection problem by inducing healthy people to buy more health insurance. “Health for life” policies would also force insured persons, especially those near the end of their lives, to decide between living a few extra months and leaving an estate for their heirs, a vast improvement over the current system which more or less rewards people for receiving as many final treatments as they can get insurers or the government to pay for, no matter how expensive or futile. By leaving the final choice to the individual, “health for life” policies would be far preferable to any sort of non-price rationing system, fictional or factual.

Again, most of these ideas are not entirely original but no one else has offered them all and no one else to my knowledge has a set forth such a clear theory of the causes of such a wide range of economic hyper-dysfunction. I therefore encourage you to buy Fubarnomics, read it, and post 5-star reviews of it on Amazon. … But I also encourage you to critique any aspect of it that you think does violence to reality because, again, my goal is to have policies ready if and when politicians are prepared to save our economy from dying by degrees.

Thank you! I’ll now entertain a few questions.