Mankiwniversity

Harvard econ professor, econ textbook author and sometimes New York Times columnist, Greg Mankiw points out that his Intro to Econ course, or Econ 10, is the largest course at Harvard.  Story here.

I wonder if Mankiw has given any thought to following in the footsteps of Sebastian Thrun and Peter Norvig, who taught their Stanford intro to computer science course online to 165,000 worldwide students.  Given the demand, Thrun gave up his tenure to start his own online university, Udacity, with novel goal of teaching people who want to learn how to program.

There are a few people who could stand to learn basic economics.  Perhaps Thrun has a spot for Mankiw on his faculty.

Limit the freebies

As I’ve written about before, one problem with health care in our country is caused by the government mandate to provide emergency services regardless of patient’s ability to pay in the Emergency Medical Treatment Act from 1986.  As the linked Wikipedia article  points out, hospitals that don’t  abide by the act lose out on Medicare and Medicaid payments, which pay for 44% of total medical costs.

The emergency care act is well-intended.  Few people want to see people in dire medical need be denied care.

But, unfortunately, the discussion and thinking usually stops there — are you compassionate or not?

We never seem to proceed to the next step of exploring the real world consequences of this compassionate mandate.  One real world consequence is moral hazard, which leads to an externality.

The moral hazard is that I face less incentive to arrange for cost-effective medical care by doing things like buying insurance and building a relationship with a primary doctor, because if I need medical attention I can get it at an emergency room.

The externality is that my poor planning causes others to have to pick up the cost of my emergency room visit through higher emergency room fees.  According to the emergency care act Wikipedia article, 55% of emergency care goes uncompensated.  No wonder emergency room bills are so high.  Those who do pay have to cover for those who don’t.

Free emergency care is a good deal.  Sometimes businesses run good deals too and they put a limit on them, like “Limit 1 Per Customer.”

Maybe with emergency care we should set a limit on the number of freebies that you get.  Maybe at some point we should expect those who are using the system to pay for it or to find a more cost-effective solution.

I know folks would likely still have a trouble denying care to someone who has run out of freebies, but maybe at that point we start taking a closer look at their lifestyle and see why they can’t afford to buy insurance or pay a $50 doctor’s office visit.

Even the insurance that I pay for has a maximum lifetime benefit.  Why shouldn’t the free stuff have a limit too?

Lemonade Stand Economics

Thanks to Russ Robert of Cafe Hayek for pointing me to Jerry Jordan’s Investors Business Daily article,  Government Accounting is Like Lemonade Stand Economics.

I attempted to explain the same topic that Jordan writes about last September in my post, Government is an expense.

My key point then was that GDP is often misused as a measure of health for the economy, but that is like measuring the health of a business by adding its revenues and expenses together.

Jordan explains it better than I did with a lemonade stand example.  In his example, kids invest $10 in a lemonade stand, make $7 back by selling cups of lemonade and folks think that is good because there was $17 worth of economic activity, instead realizing there was a $3 loss.

GDP is not a good measure of the health of the economy because it’s like considering the $17 of lemonade stand spending and saying that was good, rather than realizing that $3 of value was lost in the process.  None of us would last long if we kept turning $10 into $7.  But, that’s essentially what we do when we increase government spending to keep GDP up.

The lemonade stand kids should learn from the signal they received from the market.  The signal is that selling lemonade in the neighborhood is not worth their while because customers do not value a glass of lemonade in that time and place to pay enough for it.

So, the kids should try other things.  Maybe they should try a different drink or different corner.  Or maybe they should offer to do yard work for their neighbors.

They should keep experimenting to discover things that their neighbors do find worthwhile enough to pay enough to make it worth the kids’ while too.  Full disclosure, I tried the lemonade stand experiment a few times too.  I tried it in the street and at family garage sales.  It never produced profits for me.  I did much better doing things like mowing lawns, raking leaves, shoveling snow and assembling bicycles.

We do no good encouraging the kids to keep at turning $10 into $7 to maintain that $17 of economic activity.

Did you get that hot Christmas toy?

Last night I heard this sound bite from President Obama:

If you [colleges] can’t stop tuition going up, your funding from taxpayers will go down.

I wonder if he has considered that the funding from taxpayers is the very cause of rising tuition?

Have you noticed that the areas of the economy where costs tend to rise faster than inflation — education (K-12 & college) and health care for example — receive the most taxpayer dollars?

The areas of the economy that have little or no taxpayer funding tend to produce exponentially better and cheaper products.

It’s not just coincidence.  It’s basic economics.  Supply and demand.  We all know what happens to the price of that hot Christmas toy every parent wants to buy their kids — it goes up from the strong demand.

Now, imagine that government comes along and says that no child should be without that hot Christmas toy.   In fact, government is going to give a $50 voucher –provided by taxpayers, of course — to ensure that every family gets one.

What do you think would happen to the price of that hot Christmas toy?  Yes.  It will go up further because of even higher demand.  So, that $50 voucher just gets built into the price.

In the same way, the taxpayer dollars that flow into education and health care just gets built into the price.  Education and health care are our hot Christmas toys.

What happened?

While reading the following portion of this morning’s Wall Street Journal’s Weekend Interview, with New Jersey Governor Chris Christie, a metaphor occurred to me.

“What happened before in state government was that they would just spend, and then in April they would come to the governor’s office and say, ‘Oh, oops. Sorry, we need another 30 million. We need another 50 million.’ And there would be a huge number of supplemental spending bills that would get passed on June 30th along with the budget for the next fiscal year,” often with tax hikes to pay for them, says Mr. Christie. “And I said to my folks, ‘If you don’t manage to budget, you’re going to get fired.'”

Here’s the metaphor:  It’s suicide when a parasite begins think of itself as the host, as it will proceed to consume the host and then wonder what happened as it dies.

Here government is the parasite and the private market is the host.

I do not intend to use the word parasite in its pejorative.  I intend to use its biological meaning.  There are many cases of parasite organisms that provide benefits to the host and I do believe that government can provide benefits to its host.

Government is a parasite that feeds from the private market.   While it does provide benefits, like defense and a backing to the rule of law, it would not exist if it were not for a valuable resource from which it could draw its life force.

In some cases, that resource may be natural.  Middle Eastern governments are sustained by the proceeds of oil.  Warlord governments in Africa form around resources such as diamonds.  The crony kleptocracy of Russia persists on the bounty of Russia’s natural resources.

And our representative democratic government persists on the wealth generated in the private market.

But, few people see that.  They reflexively see each new perceived problem as a job for government to solve, without considering private alternatives, and then when the government runs out of money, they simply say, raise taxes.

Governor Christie describes this mindset in New Jersey.  “Ooops.  Sorry, we need another 30 million.”

This mindset leads the parasite to incrementally consume the host and then wonder why it’s dying.  Where did the jobs go?  Where are the new jobs!? Why are tax revenues declining?  Raise taxes on the rich!

Sounding Off

In this post, I pointed out that a big problem in our society is the strong encouragement we give to getting your voice heard, while not encouraging thinking, researching and applying reason to arrive at our positions.

In this one, I quoted from a Sowell book and wrote about how we are taught what to think not how to think through something.

In this column from Thomas Sowell, he calls what has resulted presumptuous ignorance and agrees with on a potential source of it:

One of the reasons for so much presumptuous ignorance flourishing in our time may be the emphasis on “self-esteem” in our schools and colleges. Children not yet a decade old have been encouraged, or even required, to write letters to public figures, sounding off on issues ranging from taxes to nuclear missiles.

Agreed.