Monthly Archive: January 2016

Unintended consequences.  That phrase could be the rallying cry for millions of people adversely affected by either poorly conceived or too-broadly applied regulations.  Often these regulations, which are usually put in place to protect the economic interests of one party against the encroachments or abuses of a second party, have harmful side-effects on a third party – what economists call negative externality.  Net neutrality seems to be one such type of regulation rife with all sorts of unintended consequences.

The aim of net neutrality seems noble.  Keep the internet free from interference by the internet service providers (ISP) so that there is an uninterrupted conduit from content-provider to content-consumer, regardless of the nature of the content or the identities of provider or consumer.  The ISP should act as a public utility maintaining the infrastructure through some equitable fee structure so that big and small alike can achieve the same throughput but, otherwise, should stay out the way.

The concern that is being addressed can be best illustrated using a hypothetical situation.  Suppose that two content-providers are competing for the hearts and minds of the great movie-streaming audience out there.  One is a large well-established firm, like Netflix, and the other a smaller, newer company, like Hulu, that can be view as upstart competition.  The situation that net neutrality is supposed to prevent is where an ISP, such as Comcast, enters into an agreement with the larger provider.  The nature of the agreement is that the ISP will enhance the bandwidth of the larger streaming service, throttle the flow from the smaller competitor, or both in return for additional compensation.

Supporters of net neutrality point to the fact that the net result of such an agreement is that the smaller provider faces an extremely large barrier to entry.  They need to have capital to cover not only their operating costs but also to ‘grease the palms’ of the ISP.  Small business thus starts out on a playing field that is far from being level.  Furthermore, consumers are harmed when denied access to all content and that they end up paying more for two reasons.  First, the larger content provider has less competition thus ensuring that it has a consistently high demand almost independently of the price it sets.  Second it wants to pass on the cost it incurred in making the deal with the ISP onto its customers and can do so without fear.

Detractors point to the fact that government intervention in the free market often does more harm than good, that the government regulation stifles free speech and harms entrepreneurship.  An additional critique that occurs to me (but which I haven’t seen expressed in the debate) is that compliance with government regulations is often so expensive that it constitutes a barrier to entry for small businesses.  So net neutrality may enhance completion between service providers big and small but it may substantially diminish competition in the ISP market.

Obviously, the net neutrality argument is heavy and heated and extremely complex, with government being asked to balance a multitude of competing wants and needs.  I’m not sure what is the best solution and I am not going to remotely try to explore all of the pros and cons.   Rather I wish to comment on a small and interesting l little corner that has recently come to my attention.

In her piece Net Neutrality and Religion, Arielle Roth points out that an unintended consequence of the net neutrality is the chilling effect it would have on smaller ISPs who tailor their offering to a particular customer base that wants certain corners of the internet off limits.  The usual scenario is one where a religious demographic would like to restrict access to pornography, or sacrilegious or blasphemous content.  These customers want to enter into a legal contract with the ISP in which they pay to the ISP to deal with the segments of free expression for them.  In other words, these customers want someone to shield them from content they would find offensive and they are willing to pay for the service.

Such a service would be in violation of net neutrality since it would disadvantage a ‘dirty’ provider (say Playboy) relative to a ‘clean’ provider (say Billy Graham) even though the customer wants that disadvantage.  And it isn’t clear at all how to write an exemption that respects one scenario without running afoul of another scenario.  How should the government define ‘excludable content’ from ‘essential content’ without encounter the slippery slope type of arguments that manage to make all content excludable or essential.

Some free speech advocates will, no doubt, say that this is the price we pay for free speech. But that argument is not persuasive.  Free speech protections guarantee an individual’s right to say just about anything (within some narrow limits) but it doesn’t guarantee that anyone must listen.  And besides, there is an equally valid constitutional argument that says individuals have the right to freedom of association, which means they have the right to not associate with content they deem unacceptable.

And so this little corner of the net neutrality debate shows just how complicated and thorny it can be to try to regulate economic behaviors.

It was only about 4 scant months ago that I wrote a column about China and the real and present dangers it presented to the global economy.  And here we are on the edge of the meltdown, watching as the Chinese stock market drops and drops in value.

Nothing seems to help during this latest flurry of devaluation on the Chinese Stock Market.  The automatic circuit breakers halted trading on two separate occasions before the Chinese government concluded that they were doing more harm than good.  The market then proceeded to tank again.  And despite all this turmoil, the central government keeps beating the drum that growth in the economy is still on pace for 6-7%.

Meanwhile, back in the United States, many market participants on the NYSE or NASDAQ have lost their collective heads and have begun selling everything off in sight.  Of course, cooler, less-emotional heads are buying and at a discount but it looks like the public at large doesn’t care.  There is an old saying, which goes something like “the beatings will continue until morale improve”, that applies here.

I bring up these crazy, irrational responses as way of a prelude to the main point here.   Human behavior gets muddled when strong emotions are roiling under the surface.  Nothing new there! And few things engender strong emotions as much as money – or more precisely the freedom that having lots of money implies.  But the less-cynical-me had hoped that paid professionals in both the financial and media sectors to be able to detach emotion and discuss objectively.

Anyone with common sense and the ability to keep their emotions in check would have been able to warn that the ‘China miracle’ was anything but.  There was no shortage of voices who were questioning the Dragon’s wisdom in constructing high-rise apartment buildings in which no one lives, or the raising of large malls where no one shops.  And yet, China’s ‘new economy’ made headlines all over the world.

Even now, with the precipitous loses of the last two weeks, the best that seems to come out of ‘money reporting’ are tame and vapid pieces like Heather Long’s Why China doesn’t know what it’s doing.  Ms Long’s lead in reads

Huh?  When did China ever know what it was doing?  I’m willing to bet that she is someone who would dismissively scoff at the ordinary sorts of miracles that those religious ‘country bumpkins’ accept.

Later in the piece she is willing to ask the question

I would love to see what she would have said if she were reporting on the pyramid scheme of Bernie Madoff.  Perhaps her text would read

And so the more-cynical-me jumps to a conclusion that it wishes to share.  There will always be buffoons in the market, like rubes in at the circus.  Eager to see something new or strike it rich or whatever, they are willing to suspend not only disbelief but common sense.  They are quite willing to look the other way while their pocket is picked clean.  Some members of the financial industry and of the intelligentsia in the media aid in this shearing by acting as either side-show barkers or as those encouraging bystanders who tell us “What have ya got to lose.”  Other members act as the ‘friends’ who consoles us with platitudes about it not being our fault or how could we have known or it was just bad luck.  Only a few, honest ones continue to tells us that there is no such thing as a free lunch.  I just don’t think many of us will ever listen those guys.

What do National Review, The Hill, The Orange County Register, The Week, The New York Post, The American Spectator, NPR, Vox, The Huffington Post, The New York Times, and The Washington Times all have in common.  At first blush the answer is probably nothing substantial other than that they are all media outlets of one fashion or another that publish in English (spoken or written) in the United States and that each tends to cover political content of the day.  But there the commonality seems to end.

National Review, The New York Post, The American Spectator, and The Washington Times are all to the right-of-center while the Hill, NPR, Vox, The Huffington Post, and the New York Times are left-of-center and The Orange County Register and The Week sit somewhere in-between.

But the fall of 2015 saw each of these publications issue articles on the structural problems and the corresponding growing issues of the Affordable Care Act (ACA).  In other words, concerns about the economic integrity of the system, more commonly known as ObamaCare, are being raised all across the political spectrum and that, in and of itself, is worth noting.   Regardless of your politics, the immutable facts of economics remain constant and, unfortunately, merciless.

Now to be clear, I personally like the overall aims of the ACA. The idea of opening access to regular health care to the largest possible segment of American society is laudable.  As is the aim of lowering cost by competition and keeping coverage transportable by lessening the ties between policy and place of employment.  These are admirable requirements that are firmly couched in the ethical notion that man is intrinsically worth something – that each human being has a value quite independent of his economic output.

But while we can ignore economics in defining our ethically-based goals we can’t ignore it in our plans to achieve these goals.  Immutable laws of nature, both inanimate and human, must be taken into account.  As well discussed in this interchange

there is no logical support that allows us to go from the idea that human life, in general, is the most valuable thing in society, to the idea that an infinite value should be place on an individual human life, since there is not a infinite amount of resources to apply to the well-being of any person.

And yet, the enactment of the ACA seems to have been done in full denial of this economic reality of life.  The evidence for this is found peppered throughout the coverage that came out this past fall.

In the article Obamacare Is Dead, Kevin D. Williamson of the National Review, notes that of the 21 million participants needed to provide a cost-sharing base, only about half are actually participating.  In addition, the current demographics are heavily weighted towards the sick and/or elderly, who are looking for a payout, while the younger and healthier buyers, needed to offset the rising costs, are staying away.  There are several mechanisms used by this latter group to ‘opt-out’.  Some decide that their most rationale course of action is to simply pay the penalty rather than join.  Others, 12 million in last sign-up cycle, took advantage of the 30 exemptions.  As a result, and despite the federal subsidies, already half of the co-ops have gone under financially.  Williamson also points out that the ACA further distorts the notion of insurance, turning it into a badly-constructed cost-sharing program, and that private industry (e.g Medi-Share) does a much better job of delivering health care than government.

Robert Pear of The New York Times points out in his article Many Say High Deductibles Make Their Health Law Insurance All but Useless that many consumers are complaining that ‘sky-high’ deductibles make it impossible to actually go to see a doctor.  Pear cites many cases, the most startling being a median deductible of $5000 in Miami, with the obvious implication that there are policies for which the deductible is even higher (probably much higher depending on the spread of the distribution).

Deductibles this high cause a perverse outcome in which the healthiest people stay out of the exchanges altogether.  The reason is that the law gives them a disincentive.  David Catron, of The American Spectator, argues in his piece entitled ObamaCare Endures the Death of a Thousand Facts, that a healthy consumer faced with high deductibles (e.g. the Miami median of $5000 mentioned above) is quite rational in electing to give up their health coverage, even if the premiums are low, and pay the small penalty ($695) – it is cheaper to stay away.  This approach is especially attractive since the consumer can’t be denied coverage later if a catastrophic illness were to arise.

It is true that not all plans have high deductibles.  Policies with relatively low deductibles use higher premiums to offset the cost.  So the consumer has to pay one way or another – either up front with the premiums or on the return with deductibles.  And, as Sarah Kliff of Vox notes (Why Obamacare premiums are spiking in 2016), it looks like premiums are heading up across the board.  So even affordable premiums, independent of deductible size, may be a thing of the past. In her analysis, Kliff lays the blame at the feet of insurance companies who “underestimated how sick health law enrollees would be.”

But the flood of sick enrollees shouldn’t have unexpected and, therefore, underestimated.  The ACA attracts the sick while giving the healthy (and their money) a reason to run and hide.  These kinds of perverse economic incentives are at the root of massive losses in the state-run co-ops.  Akash Chougule (Obamacare Enters a Downward Spiral as Co-ops Fail and Enrollment Slows) notes that:

• 22 of 23 co-ops lost money in 2014 despite receiving $2.4 billion in taxpayer support
• Iowa and Nebraska co-op offered artificially low rates causing a tenfold increase in enrollment over what was expected; this forced the co-op into liquidation
• Louisiana’s co-op went under due to “onerous burdens” sending 16,000 enrollees looking for new policies

Chougule also points out that individual-market insurance costs rose by 49% in 2014, so the additional increases that Kliff sees on the horizon amount to adding salt to the wound.

I could go on but I’ll stop here by noting that I barely scratched the surface of all the articles that are out there.  Additional food-for-thought is easy to find.  Here is a sample

• ObamaCare's predictable collapse – Rick Manning of the Hill
• Obamacare at 5: Sick and getting worse – Mark Landsbaum of The Orange County Register
• The quiet unraveling of ObamaCare – Shikha Dalmia of The Week
• A new taxpayer bailout to cover up ObamaCare’s failure? – Betsy McCaughey of the New York Post
• Many Health Co-Ops Fold, Others Survive Startup Struggles – NPR
• The Figment of Affordable Health Care - Washington Times

Each and every one, spanning all parts of the political spectrum, is touting the gloom and doom of the ACA.  Each and every article serves as a reminder that there is no such thing as a free lunch.  To bad the champions of the ACA didn't want to recognize that.

Well we just finished another haul through that end-of-year spending frenzy that passes for yule-tide spirit.  This bit a crass consumerism in the name of the virgin birth often leaves a bad taste in my mouth and a reasonably large dent in my wallet.  But it also gives ample opportunity to observe and even dissect American economics with particular focus on the household-to-firm side of the three-legged stool that comprised the bulk of our economic activity.

Now before I report on my observations, I think, in the interest of full disclosure, that I make it abundantly clear, that I prefer to make the majority of my holiday purchases online.  There are several reasons for this.  The most important reason is that I would rather spend my precious time with family and friends rather than slogging through a mall but I would be remiss if I didn’t mention that I simply don’t like interacting with people that much.  It helps that the majority of gifts I look to purchase are easily obtained with a little cyber-spending.

All that said, this past holiday season emphasized one point with emphasis.  Despite dire predictions to the contrary, I see no end in sight for brick and mortar establishments.

Often over the past 10 or 15 years we’ve all heard that brick and mortar establishments – ranging from big box stores like Best Buy to mom-and-pop stores just across the street – were facing insurmountable competition from the online presences.  The end was nigh so said the gloomiest of the economic pundits and yet here we are years later and brick and mortar shops are still here.

To be sure, they are not quite in the same embodiment that they were in before the internet revolution.  The fierce competition from online vendors, particularly Amazon, has substantially changed the face of how books are purchased. But brick and mortar establishments have adapted in the face of this competition.  They’ve capitalized on those facets of their business that give them the greatest advantage and have responded to free-market forces in a way that would make Adam Smith proud.

And what are those facets that give them an edge over the internet providers?  Well, a little bit of thought should convince you that the primary advantage that brick and mortar provides its customers is what I like to call purchase certainty.  Purchase certainty takes several forms that are best illustrated with examples.

First type of purchase certainty is certainty in the quality of the product.  Most of us, I am sure, have had the experience where the item online looks good but when it arrives it is a disappointment.  The one that personally affects me is the purchase of comics.  I like to selectively collect comics and my emphasis is on finding good stories.  I am willing to compromise on the art provided that the story has good exposition and is thought-provoking.  Individual comics can run between 2 and 4 dollars for 32 pages of material at a comics specialty shop and, when it is realized that a good story can run between 10 and 40 issues, the dollar cost can be quite high in comparison with other mediums.  This cost can be substantially reduced by buying in advance through online services (e.g. Discount Comics Buyer Service), which gives discounts of, on average, 40%. Of course, the publishers are willing to provide this discount to receive the improved certainty in forecasting the number of books they will need to print.  The flip side is that as a consumer I pay for their improved certainty with loss of certainty of my own as to the quality of the product.  The brick and mortar establishment allows me to directly observe the product before purchasing at the cost of a higher price that is the premium associated with the freedom they provide and the corresponding uncertainty they face (will I or won’t I buy).  Of course, brick and mortar stores are most vulnerable in this advantage since a consumer may go to the showroom to see the quality and then turn to online to buy.  But I believe people are starting to become economically savvy to the fact that they can’t have their cake and eat it too and are willing to not exploit this vulnerability.

The second type of purchase certainty involves returns.  As a consumer buying from a brick and mortar you know that you will have a much easier (and more certain) experience trying to make a return.  Recently, my wife purchased a costume from the Amazon marketplace.  When the package arrived, the item sent looked nothing like the item shown online (another example of the item quality certainty discussed above) and she resolve to return it.  However, the process to return it was slow and cumbersome.  It took weeks to get the vendor to even agree that they had made a mistake and another month or so to get the shipping label and receive the refund.  The closure process for brick and mortar stores is faster and more certain again offering a tangible advantage over the online experience.

The third type of purchase certainty is the certainty in enjoyment. Being able to go to a brick and mortar store and find what you wanted (even if you didn’t know you wanted it until you saw it) means that there is greater certainty in getting instant gratification than is possible online.  The extra time that one gets to enjoy the purchase is valuable in its own right and is yet another advantage that brick and mortar businesses offer over their online competitors.

So while it is true that some businesses have suffered from their competition with online rivals, the majority of brick and mortar stores have adapted to showcase their unique advantages.  The ultimate winner is the consumer and the ultimate loser is those pundits who predicted the demise of the brick and mortar experience. Brick and mortar businesses are there to stay.