…a Bloomberg reporter commented, “American consumers were a lone bright spot as households spent more to heat their homes and access health care.” In other words, if it were not for greater hardships that befell consumers, namely an unusually cold winter and a greater scarcity of health care, the U.S. economy would not have performed as well as it did in the first quarter of 2014. According to this topsy-turvy Keynesian logic, it would have been better for the U.S. economy if the winter had been even more severe and health care even more expensive, stimulating U.S. consumers to spend more trying to stay warm and remain healthy.
My wife sent me this great article by health care reporter Lola Butcher. In it, Butcher explains why the traditional “volume-based” payment system for the general acute care hospital is “in its death throes.” In its place, hospital executives are exploring new business models that incorporate hospitals into a larger continuum of health care services, including both pre- and post-acute services, hospice and palliative care and even patient-centered medical homes that emphasize planned and consistent care over episodic inpatient treatment.
Indeed, regardless of payer mix, bed size or ownership status, the business model for American hospitals is in a time of upheaval. As health care moves from a volume-based payment system to one that rewards value — cost divided by quality — inpatient hospital utilization is no longer the breadwinner it used to be. In fact, emerging pay models discourage hospital use as much as possible.
Among several examples, Butcher cites Mountain States Health Alliance, which is in the middle of a 10-year strategic plan to move away from a “hospitalcentric” business model to one based on managing population health and accepting financial risk. Some components of MSHA’s plan involve increasing outpatient and retail services to offset reduced inpatient revenues, establishing a community-based “accountable care organization” and, of course, reducing operating costs.
This is all interesting, but my question is: Don’t these services already exist elsewhere? Take a look around almost any hospital and you’ll find various clinics nearby delivering the full spectrum of health care services. What hospitals like MSHA are doing, then, is nothing more than consolidating the breadth of health care services under one financial roof.
Maybe I just don’t understand the benefits of this. I know that scale can help reduce costs (think Walmart), but I’m not convinced that this isn’t anything more than hospitals buying into enterprises that might be profitable on their own, but don’t change the fact that inpatient stays have become a moneysuck for hospitals and prohibitively expensive for many people. Think Facebook’s recent $19B buy of WhatsApp — a product Facebook says won’t be integrated with their flagship social networking service and does nothing in the way of solving Facebook’s other problems. In the end, the problems of rising costs and falling demand for inpatient stays remain, and it spells disaster for those of us (that is, all of us) who will need inpatient stays at some point or another.
From Tyler Cowen, writing at MarginalRevolution about a separate post by Scott Sumner:
…a lot of the debate about taxation is more about showing the wealthy that they need to lose (or win, on the other side of the debate) a few political battles than it is about actual canons of efficiency or, for that matter, even well-specified theories of egalitarian justice. For instance, I find that few proponents of a higher inheritance tax realize it will increase current consumption inequality by encouraging the wealthy to consume more rather than paying the tax. Nor do they seem to care, once this is pointed out.
“Crony capitalism is about hollowing-out market economies and replacing them with what may be described as political markets.
In political markets, the focus is no longer upon prospering through creating, refining, and offering products and services at competitive prices. Instead, economic success depends upon people’s ability to harness government power to stack the economic deck in their favor. While the market’s outward form is maintained, its essential workings are supplanted by the struggle to ensure that governments, legislators, and regulators favor you at other people’s expense. In that sense, crony capitalism certain constitutes a form of redistribution: away from taxpayers, consumers and business focused on creating wealth, and towards the organized, powerful, and politically-connected.”
Ok, so these aren’t actually about Piketty. But I came across a few selections tonight reading through Jesus Huerta de Soto’s Money, Bank Credit, and Economic Cycles that are very relevant in light of recent discussions about Thomas Piketty’s book Capital in the Twenty-First Century and his r>g theory.
The first is from Bohm-Bawerk:
“There was and is always the choice between maintaining, increasing, or consuming capital. And past and “present” experience tells us that the decision in favor of consumption of capital is far from being impossible or improbable. Capital is not necessarily perpetual.”
The second is from Hayek:
“This basic mistake–if the substitution of a meaningless statement for the solution of a problem can be called a mistake–is the idea of capital as a fund which maintains itself automatically, and that, in consequence, once an amount of capital has been brought into existence the necessity of reproducing it presents no economic problem.”
That last one is especially relevant to Robert Solow’s review of Piketty’s book, in which he states:
“The key thing about capital in a capitalist economy is that it reproduces itself and usually earns a positive net return.”
…a statement Peter Klein has called “nonsensical from the point of view of microeconomics, entrepreneurship, uncertainty, innovation, strategy, etc.”
Matt Ridley has a great column in today’s Wall Street Journal combatting ecologists’ “carrying capacity” beliefs about earth’s resources and, by implication, political efforts to regulate resource consumption.
“What frustrates [economists] is [ecologists’] tendency to think in terms of static limits. Ecologists can’t seem to see that when whale oil starts to run out, petroleum is discovered, or that when farm yields flatten, fertilizer comes along, or that when glass fiber is invented, demand for copper falls.”
He continues later:
“This disagreement goes to the heart of many current political issues and explains much about why people disagree about environmental policy. In the climate debate, for example, pessimists see a limit to the atmosphere’s capacity to cope with extra carbon dioxide without rapid warming. So a continuing increase in emissions if economic growth continues will eventually accelerate warming to dangerous rates. But optimists see economic growth leading to technological change that would result in the use of lower-carbon energy. That would allow warming to level off long before it does much harm.”
Piketty and his admirers define “capital” as a homogenous, liquid pool of funds, not a heterogeneous stock of capital assets. This is not merely a terminological issue, as those familiar with the debates on capital theory from the 1930s and 1940s are well aware. Piketty’s approach focuses on the quantity of capital and, more importantly, the rate of return on capital. But these concepts make little sense from the perspective of Austrian capital theory, which emphasizes the complexity, variety, and quantity of the economy’s capital structure. There is no way to measure the quantity of capital, nor would such a number be meaningful. The value of heterogeneous capital goods depends on their place in an entrepreneur’s subjective production plan. Production is fraught with uncertainty. Entrepreneurs acquire, deploy, combine, and recombine capital goods in anticipation of profit, but there is no such thing as a “rate of return on invested capital.”
While this analysis is somewhat advanced, suffice it to say that Piketty’s use of the “rate of return on capital” is a cheap shot. It oversimplifies the complexity inherent in the capital structure and, frankly, economists like Piketty should know better. In this vein, Klein continues:
In short, profits are amounts, not rates. The old notion of capital as a pool of funds that generates a rate of return automatically, just by existing, is incomprehensible from the perspective of modern day production theory. Solow states: “The key thing about wealth in a capitalist economy is that it reproduces itself and usually earns a positive net return.” This is a nonsensical statement from the point of view of microeconomics, entrepreneurship, uncertainty, innovation, strategy, etc.
Again, the “rate of return on capital” is an oversimplification at best and logically incoherent at worst. Comparing it to the general rate of economic growth might yield interesting results, but nothing meaningful toward crafting policy (or toward a sturdy argument for higher taxes, for that matter).
I must say I haven’t read Piketty’s book. I hope to get around to it this summer.
(And in case you have no idea what I’m talking about, Piketty’s book is #1 on Amazon right now. It’s gotten rave reviews from progressives like Paul Krugman and the Obama administration, as it purportedly justifies many of the views about inequality progressives have been preaching for years — namely, that inequality is a serious problem that threatens the health of the economy as a whole and will only get worse without significant state intervention.)
David Harsanyi published today at The Federalist:
Like many progressives, Piketty doesn’t really believe most people deserve their wealth anyway, so confiscating it presents no real moral dilemma. He also argues that we can measure a person’s productivity and the value of a worker (namely, low-skilled laborers), while at the same time he argues that other groups of workers (namely, the kind of people he doesn’t admire) are bequeathed undeserved “arbitrary” salaries. What tangible benefit does a stockbroker or a Kulak or an explanatory journalist offer society, after all?
Thomas Picketty’s book Capital in the Twenty-First Century is #1 on Amazon. It’s become a big hit among progressives, who, in Harsanyi’s words, see it as an intellectual validation for their preconceived notions about the evils of capitalism.
Sandy Ikeda writing in The Freeman on April 17:
“A planner can’t build an entire city (or neighborhood eve) because she can’t begin to design and construct the necessary diversity and social intricacy that happens spontaneously in a living city. And I don’t think she should even try because it can irreparably damage, even kill, the living flesh of a city. What can government do? In the ordinary course of its activities a government can perhaps at best refrain from doing the things that would thwart the emergence of the invisible social infrastructure that gives rise to diversity, development and genuine liveliness.”
I recommend the entire article. For me, it brought to mind childhood memories of playing computer games like SimCity, Civilization and Age of Empires. What games like this have in common is they allow the player to play dictator–view cities from the top-down, manage their economies, identify problems and create solutions by drawing upon knowledge of how the cities’ inhabitants (modeled to act like real human beings) respond to various stimuli. It’s great fun, and can make managing an economy seem relatively easy once the game’s rules and parameters are understood.
But of course, no model can account for the awe-inspiring intricacy that is the human mind, no matter how advanced. While it might be possible to centrally plan a city in the virtual world, it’s impossible in real world, where rules and parameters are always changing.
Arthur Brooks, president of the American Enterprise Institute, has a great column in today’s New York Times.
Tibetan Buddhists actually count wealth among the four factors in a happy life, along with worldly satisfaction, spirituality and enlightenment. Money per se is not evil. For the Dalai Lama, the key question is whether “we utilize our favorable circumstances, such as our good health or wealth, in positive ways, in helping others.” There is much for Americans to absorb here. Advocates of free enterprise must remember that the system’s moral core is neither profits nor efficiency. It is creating opportunity for individuals who need it the most.