Freitag, Oktober 23, 2009

Further Data Points For The Trend XII...

Today's take is from the WSJ.

I've recently re-read the 1957 novel "Atlas Shrugged" by Ayn Rand. While it's not really all that well written - in fact, there are huge stretches of turgid prose and if anything the novel could stand as the archetype of the "preachy" novel - the basic story line remains intriguing, with the slow descent of a fictional United States into chaos by stupidity.

This reminded me of one of the tenets of the novel: that you can't make someone do something against his own interests for any length of time without using legal force and/or a rather disturbing emotional blackmail. Fundamentally, the Obama plans for health care require not only the removal of the profit motive, but also the selflessness of doctors: after all, the plan calls for a major increase in the number of "primary care doctors". The problem is that there aren't enough of these right now and there won't be enough of them for the near-term future: those graduating are also not necessarily going to go for this category of work, which is amongst the lowest-paid of all doctor specialties. According to the link, cardiologists earn an average of $419k, oncologists $315k and "ordinary" primary care doctors $173k. For President Obama's plans to come to fruition, the government must count on the vast majority of medical students electing to become primary care doctors, rather than specializing into increasingly difficult and hence more lucrative fields of medicine.

Now, medical students become specialists not only for the higher pay, but also because they don't want to do with the bureaucracy that primary care doctors put up with. The government wants to increase the number of students studying medicine, but does so by lowering standards: further, the expansion of the number of students would cost, according to the link, something like $25bn over 10 years and is not part of the health care plans.

The only way this works is that primary care doctors no longer remain primary care: in order to make ends meet, more nurses and physicians' assistants will be providing primary care. In the UK, the ratio of these folks to doctors is over 5:1; in the US, it is less than 4:1, and it will have to be adjusted upwards.

The fundamental point here is that any government plan that requires the selflessness of others to function is doomed to failure, which in the health care sector is too expensive to risk.

In keeping with the Ayn Rand theme, this underscores another stupidity.

Here the government will control wages in those industries it has bailed out, especially those wages of many of the most skilled and complex jobs around, i.e. upper management. While it is popular and fun to bash corporate executives - and sure, some of them do indeed deserve the bashing, it is another thing entirely to expect that if you cut someone's salary, they will not notice. They may not be jumping ship right now, but what happens during an upturn? The government apparently expects people to continue in their jobs regardless of their pay situation.

Here's a key quote:

The Treasury and Federal Reserve announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks.

Bingo: the government created this problem and is now blaming the bankers for doing their jobs.

What the government is actually doing is setting up the collapse of these bailed-out companies: when an upswing comes, they will move on to jobs without the punishing limits and these companies will lose their most productive people when the upswing picks up.

That's always a great recipe for disaster,


Paul Volcker ... the former Fed Chairman argued in Obama circles that a better way to regulate banks is to separate the riskiest trading activities from those that accept taxpayer guaranteed deposits. That reform would have moved the riskiest proprietary trading out of taxpayer-protected institutions. But the White House and Treasury deemed this too politically difficult, so instead they are now regulating the pay of bankers as an alternative way to diminish those risks. Good luck.

Meanwhile, the Administration still hasn't done anything to change the incentives for excessive risk-taking that are embedded in its own "too big to fail" doctrine. As long as bankers and their creditors believe they have a federal safety net, they will have a cheaper cost of capital that will encourage them to take greater risks. New pay rules will quickly be worked around or through.

As Mr. King put it this week, "The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion." The same can be said for pay curbs.

The most profound mistake in these rules is the terrible precedent they set for wage controls across the economy. The Obama Administration will say that banks are a special case, and that is true. But once politicians feel free to regulate executive pay for one industry, it is no great leap to do it for everyone. Our guess is that these pay rules will prove to be both ineffectual and destructive—a perfect Washington combination.

To see what the effects of such moves are, and to see what happens when labor takes over, read this.

42000 employed when at best 8000 were needed. That way lies madness.

Finally, this.

While not a news item as such, it underscores how close we appear to be to the fictional United States in Atlas Shrugged.

A compliant, non-critical media taking direction from the powers-that-be is a major disservice to both the 1st Amendment and the cause of democracy in the republic.

So, let's review some further data points:

Government plans that require the impoverishment of participants in order to gain political goals: check.

Government interference in market incentives that then cause a drop in services: check.

Government control of key areas of the economy with the goal of removing the profit motive for economic activity: check.

If you can stand the sometimes embarassing prose and the other faults of the novel, do read Atlas Shrugged.

And see the writing on the wall.

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