The Customers' Yachts

It is said that, one day, a banker was extolling the virtues of his new yacht to the financier J.P. Morgan. Morgan listened patiently for a while and then asked the question that, some one hundred years later and after yet another in an apparently never ending series of financial crashes and debacles, is still applicable:

"But where are the customers' yachts?"

Enough said.

Riding Motorcycles

Today was a beautiful fall day - sunny, gentle breezes and a temperature around 65F. The inevitable result was that there were many motorcycles on the road between Washington DC and Annapolis, Maryland.

Notwithstanding the association with the 'Hell's Angels' gangs, the style of riding practiced by those riding Harley-Davidson bikes is generally sedate. By contrast, the actions of those riding Kawasakis, Suzukis and similar machines can reasonably be described as 'scattering suicide notes along the highway'.

While the number of fatalities resulting from automobile accidents is falling, the death toll as a result of motorcycle accidents is increasing. It is not all that difficult to work out the reason why!

Health Care (2)

The skies are darkened by streams of criss-crossing lobbyists (and campaign contributions from interested parties) as various bills, purporting to reform the American health care system, work their way through the United States Congress.

Unfortunately, while there is some hope of reducing - although not eliminating - the disgracefully large number of uninsured, there is little or nothing being done to reduce the costs of the current system. There is little dispute that these costs are both out of control and projected to consume most of our economy before too many years have passed.

Addressing the issue now is likely to result in much less pain in the long term. Our politicians, however, have shown conclusively that they do not have have the stomach to make hard decisions. Jean Claude Juncker, former Prime Minister of Luxembourg, summarized the situation perfectly:

"We all know what to do. We just don’t know how to be re-elected once we’ve done it."

There are, I believe, three different major problems: none of which are being addressed by any of the proposed bills:

First, patients, encouraged by direct to consumer advertising and their own "research" on the Internet, demand treatments that are often inappropriate, ineffective or both. Overworked doctors, like mothers dealing with whiny and demanding small children and teenagers, get tired of saying "no" - specially as they are not paid for the time it takes to explain their diagnoses and treatment plans. So they schedule the procedure or provide the demanded prescription.

This is a cultural issue and will take time for attitudes to change. It will be hard but the cultural shift with respect to smoking - cool in the 1960s to, generally, an exhibition of stupidity now - provides hope.

Second, most doctors and hospitals, no matter how ethical and honorable, are paid on a fee for service basis. That is, they get paid for "doing things to people".

That is how they keep their offices open, their nurses and assistants paid, and have enough money for a decent living (after paying back the loans taken out to attend medical school) for themselves. In conjunction with the patient demand issue described above, the doctor's incentives are aligned in favor of doing more rather than less.

There is a simple question that all patients should pose to their doctors: "what are the likely consequences if I say no?"

Third, the tort bar is still running amok and the Law of Unintended Consequences is in full flower. Naturally, doctors respond to the threat of being sued by practicing [expensive] defensive medicine since the chance of a lawsuit, from a disgruntled patient bent on vengeance, is much reduced. That is all the more so when a poor outcome follows action rather than no action - even when no action is likely to be the better way.

That last statement almost certainly deserves to be explained further. It's not the multi-multi-million dollar jury awards that are the problem, or even the main driver of costs, so caps on non-economic damages will provide only limited value. The real issue is that when a doctor is sued for malpractice, the insurance company takes over the defense.

All too often the insurance company comes to the decision that it will cost $150,000 to defend the doctor but the case can be settled for $50,000 even though a defense is likely to prevail. So the insurance company settles, the doctor's reputation is modestly besmirched, the attorney takes his one third (or more) of the proceeds without having had to do much work, and the not-really-harmed patient gets a modest, but still undeserved, payment.

That gives lawyers the incentive to file as many suits as possible in a never ending search for easy settlements. Short term savings for the insurance company (quarterly earnings anyone?) result in greatly increased long term costs.

Lawyers will not be discouraged until they start finding out that the sympathy card - as opposed to a finding of true fault - does not work. In the event that the insurance companies were to develop some courage and backbone, a few major victories in court would reduce the number of attormeys willing to file suit where the merits are few - if not entirely lacking - but payments are still highly likly to be made.

The Angles and the Saxons suffered the depredations of Viking raiders between the ninth and eleventh centuries. They paid Danegeld - i.e. blackmail - to try to persuade the Vikings to refrain from looting and pillaging. It didn't work and the Viking problem was only solved when the English kingdoms became willing to fight back. That sounds like a dark ages version of the current medical tort racket.

Plus ca change, plus c'est la meme chose!

American Socialism (5)

The primary characteristic of socialism is that the government controls an ever increasing share of the economy. That applies to both spending and to control of the means of production and distribution.

If we are not yet a socialist nation, we are well on the way.

While socialism is bad enough, our government - admittedly encouraged by an electorate that seems to believe that there is such a thing as a free lunch - is operating in the worst possible way. We have excessive spending matched by low taxes and high borrowing.

Were we to continue the present level of spending, and pay for it through taxation, then there is a chance that citizens might rise up and say "enough". For those, however, who labor under the delusion that the so-called rich can pay, there is not enough money to cover the current deficit - even if the governement were to tax all income over $250,000 at 100%.

Perhaps President Obama, and the Congressional leadership, of both parties, should take note of these two thoughts:

"The problem with socialism is that eventually you run out of other people's money." Margaret Thatcher

"Nobody, no individual or country, can indefinitely spend more than he or she earns." Raul Castro

Those that are conservatives may find Lady Thatcher's thoughts more acceptable, while liberals and so-called progressives can get the same message from Raul Castro. Either way, it is time to return to our roots as a nation of producers and savers rather seekers of entitlements who borrow recklessly to support out of control spending.

Dreaming of the 2010 mid-term elections

Republicans who are dreaming of recapturing the House - and possibly the Senate - in next year's elections should consider this very carefully:

"Just say no" is not a political program. Nor is relying on disillusionment with the current Congress a guarantee of anything.

When Republicans captured the House of Representatives in 1994, after 42 years in the minority, it was because then Representative - later Speaker of the House - Newt Gringrich created a positive political program which he named 'The Contract with America'.

The genius of President Reagan and Speaker Gringrich was that they both had well thought out programs based on sound conservative intellectual foundations. President Reagan also understood that it was possible to compromise on legislation without sacrificing his principles.

Those who claim to be President Reagan's political heirs need to do much better than to pervert Mrs. Reagan's most famous comment. She was speaking to teenagers and college students who were under great peer pressure to indulge in illegal drugs. We, on the other hand, need an alternative to the current government.

The President and his allies in Congress have programs - even if they have many flaws. To win back the Congress, Republicans must develop their own programs or, better yet, tells us which ones they will abolish and how they will balance the budget in the not so distant future.

The alternative is to continue to "just say no" while watching erstwhile supporters walking away from a party that doesn't seem to stand for anything beyond just being in office.

Health Care (1)

After an automobile accident, the insurance company will, with help from the police and sometimes courts, make a decision as to fault.

If you are not at fault, your car may be destroyed but your rates will not increase. If, however, you are at fault, then your rates will rise - often very significantly - or your policy may be cancelled. Rates will also increase if you are the recipient of too many citations for speeding or more serious moving violations.

The reason is simple, logical and fair: if you cause accidents or get caught driving like a maniac, it is highly likely that you will cost the insurance company much more money than does the average driver. So it is only reasonable that your rates should rise.

Health insurance companies, however, care not at all about fault and, under pressure from politicians and interest groups, not much about lifestyle choices. They charge modest additional premiums to smokers but barely consider other lifestyle choices - unsafe sex, lack of exercise, alcohol and drug abuse, excessive consumption of sugar, fats, red meat etc. etc. - that are known to cause massive increases in the risk of contracting diseases that are seriously expensive to treat.

If on the other hand, a person was a passenger, wearing a seat belt, in the innocent car, who suffered extensive injuries - including two amputations - he or she will always have a preexisting condition. As an individual purchaser, if coverage is not declined, that person will be charged outrageous premiums. In contrast with the automobile insurance model, fault is assumed where none exists. Individual underwriting is not unreasonable, but it should take fault into account.

So why do medical insurance companies wonder why they are so disliked?

Reform is urgently needed and it is supported by the electorate. The medical establishment, however, with the insurance companies to the fore, appears to be lining up to oppose it.

Follow the money is a good rule of thumb when evaluating the public statements of any interest group likely to be affected by legislation. Since it is the medical establishment - mostly the insurance and major pharmaceutical companies - that is scattering cash in the general direction of the Congress, there is a serious risk that reform, even if it happens, will be so watered down that it will amount to little.

American Socialism (4)

A government that confines itself to the purchase of public goods and services, such as defense, policing, roads, education, the gathering of statistics and a bit of modest - and very careful - regulation of economic activities, along with support for basic research and exploration, will not consume very much of the national wealth. That is the sort of minimum level of government which, were we thinking about the good of our nation rather than seeking maximum personal advantage from government programs, we should all desire and support.

Unfortunately, regardless of the label attached to the party in power, we have an ever growing socialist government and we have had one since Franklin D. Roosevelt became President more than seventy five years ago.

A major characteristic of a socialist government - second only to the ownership of the means of production and distribution - is the confiscation of wealth from one or more groups that are currently out of favor in order to reward other groups that are temporarily in favor or are able to wield significant political power.

The most egregious current examples are:

• an $8,000 refundable tax credit payable to first time home buyers
• a $1,500 tax credit to those who decide to upgrade the windows in their home
• an additional trade in allowance of $4,500 to persuade owners of semi-ancient low gas mileage vehicles to buy new cars that have better fuel economy.

The potential benefit to a person that falls into all three of these favored groups is $14,000 which is about as much as the gross (before deductions) annual earnings of a full-time employee being paid the minimum wage. Mercifully the so-called "cash for clunkers" program has ended at a cost of only (only?) $3 billion. The other two are scheduled to end before the year is out but interest groups are gearing up to get them extended.

It is possible to make a reasonable argument that there are benefits to society resulting from government run welfare programs such a Social Security, Medicare, Medicaid, and Unemployment Insurance since they are designed to alleviate the effects of poverty and other extreme financial hardships. Even though we might well be better off without them, the economic disruption that would most likely result is a strong argument against abolition. That reforms are needed, and should be undertaken with great urgency, goes without saying.

On the other hand, it is almost impossible to justify - at least while keeping a straight face - large cash subsidies to persons who are financially able to purchase a house, a new car, or to undertake major renovations to their homes. Nor does it make sense that housing costs should be subsidized in the form of tax relief on interest payments because buyers chose to take out a mortgage on the property. (More on that another time)

Some of us who pay our taxes, and do not have our snouts buried in the public trough, are becoming weary of this never ending pocket picking. Unfortunately, we are still too few to influence the crooks and charlatans who occupy the Congress and the State Legislatures.

Frederic Bastiat, a French Economist who lived from1801 to 1850, described our current government almost perfectly: "Government is the great fiction, through which everybody endeavors to live at the expense of everybody else."

Those who receive largesse from the government, and are under the erroneous impression that they are the recipients of "free money", should be very aware of this remark made by Thomas Jefferson: "A government big enough to give you everything you want, is strong enough to take everything you have."

Socialism generates its support from the mistaken belief that there is actually such a thing as a free lunch. It consists of a superficially appealing set of ideas that, however, can never survive in the long term. Unfortunately, its collapse is always very painful even though the subsequent long term benefits are many.

Some one hundred years ago, George Bernard Shaw accurately described the current political dynamic: "A government which robs Peter to pay Paul can always depend on the support of Paul." Given that there are many more 'Pauls' than 'Peters', and given that our form of socialism is not quite as fragile as the version practiced in the Soviet Empire, we are likely to spend at least another decade - or more - before the collapse of the current paradigm.

Although circumstances will be painful, we will then, if we have the courage, have an opportunity to rebuild an America of self reliant, hard working and unselfish people that would be recognizable to those who came so far, in such hard and dangerous circumstances, to found our nation.

Nobel Peace Prize

It is hard to comprehend how the Norwegian Nobel Peace Prize Committee could give this usually, although not always, significant award to President Barack Obama.

Looking through the list of winners from 1901 - 2009 http://nobelprizes.com/nobel/peace/peace.html there are giants and there are those whose achievements were minor. There are none who had achieved so little at the time of their nominations and who deserved the prize less than Obama.

The nomination period closed on February 1, 2009 - at which time President Obama had been in office for a mere twelve days. He had said some good words in his campaign but by then, as could reasonably be expected, had achieved little or nothing. Compared to such worthy recipients as Nelson Mandela, Mother Theresa, John Hume and David Trimble, Lech Walesa, Desmond Tutu, Anwar Sadat and Menachim Begim, or Andrei Sakharov, his accomplishments are not trivial - they are non-existent.

I can only come to the conclusion that the committee members are really not too bright, were desperate for a candidate, or had consumed a week's worth of recreational substances in a single day. Perhaps all three apply!

At least President Obama has not yet started a war even though he has not managed to end or win either of the two wars that he inherited from President Bush (Iraq and Afghanistan). It is not impossible, however, that he may order attacks against Iran nor can a war to defend South Korea against an attack by North Korea be ruled out. There would be much irony - although not exactly enjoyable - were our Nobel Peace Prize winning President to find himself in such a situation.

Awarding the prize to President Obama is arguably as bad a decision as the Committee's failure to award it to Alexander Solzhenitsyn.

Enough said.

American Socialism (3)

One of Karl Marx's more significant prescriptions was the common - i.e. State - ownership of the means of production and distribution.

In the communist world, state ownership of almost every business was the norm. Even in the socialist economies of Western Europe, many companies - sometimes all companies - in major industries were state owned: the seemingly never ending list includes steel, railroads, oil companies, airlines, electricity generation, mining, telephone service and even automobile companies.

The common elements - whether in a socialist or a communist country - were inefficiency, incompetence and vast taxpayer subsidies. The only significant difference between two models was that, in socialist countries, the beneficiaries were the workers who received far higher than justified compensation in exchange for little work.

In communist countries, by contrast, there were no beneficiaries: "they pretend to pay us and we pretend to work", was a frequent comment. Quality, features, reliability and availability were grossly lacking even if the price was acceptable.

In America, we have our own nationalized industries. Amtrak -formally known as the National Passenger Rail Corporation - is arguably the most egregious, but costs only (only?) a few billion dollars a year to provide, except perhaps in the Washington - Boston corridor, wholly inadequate service.

Far more significant is the US Postal Service whose operations, inefficient as they are, are made worse by political meddling. It's business model - a single price to anywhere for each class of mail - makes no sense since its prices are largely unrelated to cost or to the competition's charges. Any suggestions that business improvements might be made - such as reducing mail delivery to five days - are greeted with cries of "but what about our jobs". Worse, the Congress has legislated that the price of a first class stamp may not rise by more than the rate of inflation.

That is the credo of a nationalized industry: price controlled for political reasons and worker-centric. It's major operational objective is to provide well paying jobs, regardless of cost, rather than offering top class products or services that the market will devour at a price that will generate both profits and above average pay and benefits.

When communism collapsed, the group now known as the Oligarchs set about stealing the formerly state owned assets. There was some benefit but not nearly as much as in largely socialist nations of Western Europe which had already set about privatizing their nationalized industries.

In several of those countries, the Postal Service makes an interesting case study. Germany privatized Deutsche Post. The British, on the other hand, kept government ownership, while steadily reducing the scope of the Post Office's legal monopoly, but contracted out small postal facilities to local convenience stores and converted the larger facilities into the government's High Street facility where services to citizens are delivered.

Both of these postal service models seem to work - certainly better than the one that we have. Just don't try to hold your breath until any significant improvements are made here. One of our great national myths, that we are a totally capitalist economy, will surely prevail.

Of course the Postal Service is something of an extreme case. On the other hand, when and how, are the most recently nationalized (wholly or partly) wards of the state to be returned to the private sector?

The Hall of Shame includes:

• Banks (CitiGroup, Bank of America and too many more to list)
• Investment Banks (Morgan Stanley, Goldman Sachs)
• Automobile manufacturers (Chrysler, General Motors)
• Insurance companies (AIG)
• Guarantors of private debt (Fannie Mae, Freddie Mac, Sallie Mae)

Privately owned businesses, although capable of abuses that require regulation, have generally served us well. No nationalized industry can make such a claim.

We are ill served by state ownership of the 'means of production and distribution'. The sooner the government is no longer a business owner, able to dictate policies and prices, the better our economy and our society will be.

American Democracy (1)

2009 is not generally an election year but Governors of Virginia and New Jersey will be elected next month.

There is a joke circulating on the Internet:

Politicians should be limited to two terms: one in office, the second in jail.

Like many of the best jokes, it has a large element of truth but this one tells us nothing really new. Comedian Will Rogers famously said: "[America] has the best Congress money can buy."

Mark Twain, in the 19th century, spoke more directly: "It could probably be shown by facts and figures that there is no distinctly American criminal class except Congress."

Since I live in Virginia, I will have the opportunity to vote for a new Governor next month. Given that the world would likely be a better place were, with a very few exceptions, "forever" politicians to became extinct, the following principles are worth considering:

• Rule 1 - vote against the incumbent
• Rule 2 - if no incumbent, vote against the lawyer
• Rule 3 - if no incumbent, and both candidates are lawyers, vote against the candidate of the party of the retiring office holder
• Rule 4 - if no lawyers are running.... (come to think of it that will never happen, so there is no need for a rule!)

It is a sad commentary on the state of our politics that there are so few politicians worth voting for.