Dienstag, September 28, 2010

Unintended Consequences...

One of the downsides of the lack of economists in the loop is that those making policies are making mistakes, serious ones: the law of unintended consequences applies here with a vengeance.

Case in point: this.

Good old Matt Yglesias is in form, ranting and raving about how health care reform is key to making progressive policy "irreversible."

He presses all the proper buttons, using the plight of a middle-class family with their adopted daughter as a keystone, talking about how forcing the insurance companies to cover her regardless of her pre-existing condition will be one of the cornerstones of the health reform efforts, and how mean and nasty everyone is who opposes this.

What he doesn't talk about are the unintended consequences.

What are these?

Simple: health insurance companies are not offering that type of insurance any more. Rather than provide coverage that virtually guarantees that they will lose money, the insurance companies are no longer offering the coverage at all. Zilch, nada.

Of course, that the insurance companies would decline to enter into business activity that would lose them money never, ever crossed the brow of folks like Matt, who know significantly less about economics than they think they do.

But ask any industrial economist, someone who understands how companies behave under competitive pressures and how companies move their center of business around to meet market demands - we call these companies successful and survivors, as opposed to those companies who stick to a business plan and cannot consider themselves being anything but a producer of widgets in an economy that no longer demands widgets - and you'd get a "duh".

Companies are in business to make money. Take away their ability to make money, and within a very short period of time the only companies left are either doomed or are paid to not make money (aka "subsidies").

This is not rocket science. This is basic microeconomics. Which apparently the health reform people wouldn't recognize if it came up in front of them, waving a flag, and smacked them upside their face with a 2x4.

I'll give you another example of unintended consequences when no one listens to economists.

The US once had a broad-based and very successful shipping fleet. US-crewed and registered ships were profitable and more than competitive. Personnel costs in shipping are basically irrelevant, as fuel and capital costs are the vast majority of costs.

What happened?

The US tax code changed and US shipping companies had to pay US corporate taxes on overseas operations. Given that the US is the only country that taxes its shipping companies in this manner - it is one of the reasons why shipping can be a very lucrative business, as it operates largely tax-free because the activities involve are not within tax jurisdiction - this meant that US companies either moved their corporate headquarters overseas (duh) or sold their operations off to competitors before these operations became a loss-center.

Hence in the attempt to increase tax revenues - the justification for this, after all, was that it was "unfair" that these companies have what amounted to a tax break - an entire industry was basically eliminated.

The funny thing is, the industry was paying taxes. Any stock owner got rather nice dividends, which were then taxed at the personal tax rate. But in its infinite wisdom, the government decided that it was better - more just - that the industry cease to operate as American companies.

As a result, there is now movement to open up intra-coastal shipping (shipping from one US port to another US port) to foreign shipping because there is not enough US shipping to meet demand.

Duh. Given these circumstances, there never will be.

The laws of unintended consequences are simple. Just ask any industrial economist how they work. Were that a few more folks would do so, rather than be blinded by the brilliance of their sophomoric ideas.

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