Freitag, September 25, 2009



You don't understand the title?

Yet Another Wonk Who Doesn't Understand Economics.

Michael Lind is "policy director" of the economic growth program at the "New America Foundation", which looks to be a rather wonky collection of Democratic Party operatives (or at least close friends).

He wrote this for the FT.


Mr. Lind's fundamental problem is that he doesn't understand why people are hired and where job growth occurs when it isn't being financed by your taxes.

His view is simplistic at best and downright dangerous at worst.


Because he doesn't understand that you have to have a productive core economy that is actually producing things.

Not services: things.

He calls for health care to provide the jobs needed for future US growth. That and education and government.

He writes:

What is driving this growth? The US healthcare industry is plagued by inefficiency and rent-seeking by private insurers, pharmaceutical companies, hospitals, physicians and lawyers. But even when costs are brought into line with those of other countries, the US healthcare system is likely to increase its share of the economy. One reason is the ageing of the population. Another is the fact that societies, like individuals, choose to purchase more healthcare as they grow more affluent. Health is a good that makes possible all other goods.

That is not the road to prosperity, that is the road to poverty.

Ye gods. Where does Mr. Lind think the affluence comes from that allows people to purchase more healthcare as they grow more affluent? Society isn't "like" individuals: it is made up of those individuals, and not everyone needs to or must buy the same healthcare as others; Health is not the good that makes possible all other goods: health is not a good at all. Health is a situation, a status, but not a good, neither in the classic "pick me up and feel me" or in the more general sense.

To repeat: not a good at all. It is, at best, a status, something that is innate, a resource that must be maintained, but it is not a good: health cannot be produced (we all get sick and die, regardless of what we invest in healthcare) and it cannot be stored up; it cannot be inventoried, and it is not a standardized good at all. Sure, we all know the saying "health is everything", but that is meant to mean that without health, you are so miserable (or dead) that the rest isn't so important to you when you are not healthy. But you not being healthy doesn't change the price of tea in China, so to speak: for the economy, your failure to be able to work means someone else does the job, or the job doesn't get done. Hence: health is not a good, not in the economic sense of the word. You consume healthcare services when you are not healthy until you get well or die; at some point, we all die. It's a service that you consume, including all the pharmaceuticals and equipment that your health care practitioner gives you or uses to diagnose you: it's not a good that is manufactured.

What Mr. Lind and so many do not understand is that without a successful and functioning industrial sector, creating products that meet consumer needs (understood in the broadest sense of "consumer", as much industrial output is input into other industrial production), you cannot have all the niceties of services that Mr. Lind and others think will drive future economic growth.

Now, that doesn't mean that the service economy isn't going to come along: it just means that if you are going to have a growing economy, someone, somewhere, has to be adding value to products or performing vital services that create growth. Services aren't simply services: the only services industries that have long-term futures are those that provide services to industry, services to construction, and services to other services that actually add value to those other services.

And by adding value I don't mean some sort of touchy-feely "that was valuable", but rather actual dollar/yen/euro values. Real value-added.

Put bluntly, neither health care, education and government add value in the classic economic sense: education comes closest, since done properly it raises skill levels and gets you higher wages (of course, US academics tend to deny that this is the reason for their existence, but that's another story entirely and has been covered here already...).

Health care doesn't create value in the economy: it adds value to life, it saves lives, but at the end of the day it is, in an economic sense, non-productive. Providing health care in and of itself doesn't create value, which is what is needed for sustainable development (i.e. development that pays for itself, as opposed to development that requires subsidies or tax supports to survive). Government is a clear drag on any economy, as it allocates resources that would otherwise be used for economic development or consumption: some of the services of government are useful (defense, police, regulation of trade, essential services such as garbage collection and etc), but many are either self-serving (administration of administration...) or luxuries (support for the arts, funding of woman's and minority studies, pork),

My point is that even a post-industrialist economy, an economy no longer singularly dependent on industrial activity, cannot nonetheless simply create long-term sustainable jobs by expanding government and expanding services that are dependent on someone else paying the bills. That way lies poverty: not at first, but somewhere down the road there will be too many people providing services that can't be paid for because of a lack of actual manufacturing or high value-added services jobs around.

It's a causal chain: before you distribute value, you have to create it. Before you can understand how demand is going to be met, you have to understand supply.

Mr. Lind and others who feel that you can solve unemployment by increasing employment in sectors that provide, at best, secondary value creation (i.e. dependent on primary value creation industries) without first ensuring that the primary value creation industries provide the necessary impetus.

Without the productive core, no economy gets richer: they invariably get poorer. Without the productive core, government "picks up the tab" by subsidizing consumption via food stamps and welfare, as well as jobs via subsidies and grants, but since government depends on taxes and bonds, without any "real" value added, government can't expand beyond a certain point without becoming a parasite on the economy in general.

Mr. Lind's ideas are typical of YAWWDUE: you can't count on jobs generated in non-productive areas when the productive areas aren't flourishing. His idea of a future economy where the dominant sector is healthcare is a future economy where no one can afford healthcare because the productive jobs are gone. Without them, you can't pay for the rest. He doesn't understand economics because he doesn't understand that by accepting the downgrade of productive jobs, the ones that actually create value and generate the wealth that President Obama and the Democratic Party wants to redistribute, he is effectively condemning everyone to less wealth and prosperity.

A rising tide raises all ships as long as it is on the supply side. Otherwise it is a flood, turning everything into ruin.

Mr Lind writes:

Healthcare, like education, is heavily subsidised by government when it is not provided by the public sector. Must its growth mean more public sector at the expense of the private? It makes more sense to think of the economy as a mosaic of sectors, most of which, like healthcare, are partly private and partly public. The proper question is whether healthcare, be it public, private or mixed, could crowd out other important sectors. We would not want its growth to damage investment and employment in manufacturing, agriculture, energy and infrastructure. Fortunately, at least in the US, employment can expand in all these areas as well as healthcare at the expense of the low-productivity fast food and recreation industries, with benefits for the quantity of production as well as the quality of life.

This underscores how this hasn't been thought through: he doesn't want the growth of healthcare to damage investment and employment in manufacturing, etc., but ignores the fact - and I don't think anyone can contradict this - that if healthcare is to be run effectively, it must be private and not public. He sees the economy as a zero-sum game, requiring, effectively, the destruction of the fast food and recreation industries so that we can all be healthier.

The problem here is that both fast food and recreation are actually productive industries, since they include, beyond the convenience of fast food, all recreation industries, things that people do with what they have left over after consumption and savings (i.e. movies, video games, etc): healthcare workers are, per definition, not primary creators of value, but rather providers of secondary services.

And when I say he doesn't understand economics, I mean simply this: economics is the study of the most productive allocation of scarce resources under given parameters. It's all about supply, demand and incomes. Those are the three core components of any economy, and ignoring where real value is added and where real value is consumed means that you don't understand economics.


Anonym hat gesagt…

Hey is there any email I can contact you by I like your ideas. What type of economic school of thought do you consider yourself?

John F. Opie hat gesagt…

Anonym -

Given the level of spam I deal with on a regular basis, I'm not going to give away my email address, but you can give me yours...

Economic school of thought? Why be so limited as to put yourself in just one?

If anything, I'd be classifiable as an empiric Austrian, with most of my modeling work based on quantifying elasticities and the usage of asymmetric econometrics...