"The public be dammed" (sic)
Churchill famously remarked that “democracy is the worst form of government, except for all the others.” This is a great lead-in to distinguishing democracy as a collective decision making process that is useful for some purposes, but not for others. For instance, democracy is not well suited as a decision mechanism for running a company. You haven’t heard of a company run as a democracy? There’s a reason for that.
In fact, when we look at the governance spectrum for companies as ranging from democracy (e.g., shareholder-run firms) to oligarchies (e.g., board-run firms) to dictatorships (e.g., “imperial CEOs”), it is worth noting that the overwhelming percentage of wealth created in this country was by imperial CEOs, folks like Ford, Disney, and Jobs. Imperial CEOs also fail, of course, sometimes spectacularly. When they do, corporate critics pounce and say, “See? An imperial CEO runs the company into the ground! If there had been more checks and balances, more shareholder involvement or awareness, this would never have happened.” It is very hard to argue against that. Except that no company run as a shareholder democracy has ever generated enough wealth to even be worthy of a scandal.
Today, we are hearing the drumbeat about the evils of “shareholder value.” Here is one drummer, Lynn Stout, beating on shareholder value:
The idea that corporations should be managed to maximize shareholder value has led over the past two decades to dramatic shifts in U.S. corporate law and practice. Executive compensation rules, governance practices, and federal securities laws, have all been “reformed” to give shareholders more influence over boards and to make managers more attentive to share price. The results are disappointing at best. Shareholders are suffering their worst investment returns since the Great Depression; the population of publicly-listed companies has declined by 40%; and the life expectancy of Fortune 500 firms has plunged from 75 years in the early 20th century to only 15 years today.
Stout, like many other corporate critics, is conflating the movement for shareholder value that gathered steam in the early 1980s with the movement toward shareholder democracy that gathered steam in the early 1990s.
These are different things.
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Here’s an article about the use of a new technology to treat prostate cancer:
Roughly one in three Medicare beneficiaries diagnosed with prostate cancer today gets a sophisticated form of radiation therapy called IMRT. Eight years ago, virtually no patients received the treatment.
The story here is about what is behind that trend, i.e., the fact that some groups stand to gain financially from the adoption of a new treatment that has proven at least somewhat effective.
Taking advantage of an exemption in a federal law governing patient referrals, groups of urologists across the country have teamed up with radiation oncologists to capture the lucrative reimbursements IMRT commands from Medicare.
Under these arrangements, the urologists buy radiation equipment and hire radiation oncologists to administer it. They then refer their patients to their in-house staff for treatment. The bulk of Medicare’s reimbursements goes to the urologists as owners of the equipment.
While I’m obviously a big fan of perverse incentives stories, I know enough about them to be wary of narratives that only look at surface incentives and behaviors without getting down to the root causes. This story, in particular, blames doctors for rationally reacting to the pricing structure created by Medicare, which is like blaming children for chasing a Good Humor truck down the street that is accidentally dropping ice cream boxes out the back. This becomes a story of “self-referral,” with greedy doctors pushing patients into more expensive treatments. One doctor whom the writers place in the role of “defense” encapsulates his position as: “Our credo in medicine is not, ‘spend the least money,’ It’s, ‘first do no harm.’ ”
The story then goes after the politicized decision making on how reimbursement rates for these treatments were set, and how congressmen caught between physician and patient groups have no incentive to control costs. All those costs, of course, are ultimately born by the taxpayer. The story ends with the plaintive quote: “how are we going to pay for that?”
Then it stops.
I once recall reading a story about profiteering in shoes in the Soviet economy. For the benefit of its western readers, the story began with the fact that in the Soviet system the supply and distribution of shoes were largely controlled by the state. It described how bad the shoes were, how hard it was to get them, how the state blamed “profiteers” for the shortages. It described how bureaucrats were continually coming up with more and more rules to circumscribe the increasingly dysfunctional behaviors in shoe distribution, and how the scoundrels in the supply chain were continually working around those rules for their own enrichment.
What struck me was how a reader outside of the Soviet system, one who understood how a market-driven system could create an entirely different set of incentives and constraints, would read that story and say, “What a hopeless case. They need to dismantle the state-controlled system,” but a reader from inside the Soviet system would react by blaming the scoundrels and bureaucrats.
It occurs to me now that any description of our current medical system has us blaming the scoundrels and bureaucrats, not the central planning system in which they operate. And that is why journalists have taken up that narrative, even in the WSJ, and stopping before they question the system of treatment prices set by central planners, and paid for by anyone but the patients.
From a speech today:
“Every single day, I’m pushing this economy forward, repairing the damage that’s been done to the middle class over the past decade and promoting the growth we need to get out people back to work,” Obama said.
No statement better reflects the fatal conceit.
Contrast with this, from one of Hayek’s discliples:
There were two great triumphs, two things that I’m proudest of. One is the economic recovery, in which the people of America created — and filled — 19 million new jobs.
Good god, what a difference.
A frequent complaint about standardized tests as a measure of scholastic achievement is that teachers, who know the general content, can simply “teach to the test,” i.e., they will focus on those content areas to the exclusion of others in order to maximize the performance of their students so that they, as teachers, look good. This is not good. It limits the range of inquiry to those that are bureaucratically mandated, and can actually inhibit real learning.
If the teachers know the particular content of a test, then you get a double distortion: On top of the inhibition on real learning, you will now also get artificially high scores that don’t reflect any learning at all. And if the teachers are being paid or selected based on their students achievements on such tests, then the teachers must teach to the tests as a matter of personal career survival–a real and legitimate sore point for teachers and their unions.
The problem is that we can’t generally know when a teacher is teaching to the test. In certain extreme cases, one can use statistical analysis to see if a teacher is actually cheating. But generally, it’s hard to see in a sea of “gains” how illusory those gains are, and how much of them were the result of teaching to the test rather than real learning, even learning limited to the content of the content areas to be covered by the test.
Well, now we know the answer for New York State. By slightly increasing their standards, proficiency in English went statewide dropped from 77% to 53%.
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The first approach is counting on government to do it from the center, as reported a few weeks back:
Don’t laugh, but Uncle Sam wants to teach you how to manage your money.
Tucked into the new financial-overhaul bill that Congress is working to finish is a new Office of Financial Literacy to help consumers learn about savings, debt and credit scores.
There is an obvious irony in a debt-laden, budget-challenged government offering financial education. But there is a deeper problem: While nearly everyone agrees that Americans of all ages and income levels could be more financially astute, no one has a good plan for making it happen.
(Raising my hand.) Oh, I have a great idea! Choose me! Choose me!
Why not just ask all those government run schools to teach financial literacy alongside reading, writing, and math, and before inorganic chemistry and trigonometry. If a school really wants to go whole hog, they have only to look at a great example of what works.
They don’t just work directly for the government.
My new, provisional test for credibility is this: If your conclusions go against, or at least are neutral with respect to the interests of your funding source, you’re credible. For instance, if you are being paid by the government, you are credible only if you come up with conclusions that imply less government intervention. Sloppy, I admit, but it would cull a lot of questionable research.
Elizabeth Warren is discouraged. Not with regards to her job of overseeing TARP spending, on which the Harvard professor has done a decent job. Instead, she is “speechless” at the prospects that certain bankers may get record bonuses this year.
“I do not understand how financial institutions could think they could take taxpayer money and turn around and act like it’s business as usual,” Warren says. “I don’t understand how they can’t see that the world has changed in a fundamental way – it’s not business as usual. All I can say right now is they seem to be winning this argument.”
It’s not an argument, Liz; it’s a business model. The financial services business model is actually quite simple: employees get 50 percent of net revenues. The stable portion of this net revenue is paid out in “salaries” and the uncertain, variable portion of this net revenue is paid out in “bonuses.” The “bonus” portion gets split in rough proportion to who brought in the revenues. All this goes on regardless of how “the world has changed.” Last year, net revenue was lower, and bankers on average got much less. This year, net revenues are higher, and bankers (the ones who survived the carnage, anyway) get more. What’s not to understand?
Warren’s block is not the arithmetic. Warren’s block is that she hates bankers. Her real problem is that the world has not changed the way she wishes it would have changed, where the money that a bank makes flows to someone other than the bankers.
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Here is one of the best articles I have ever read about health care. It probably could have only been written by a doctor.
The article basically asks why the average cost per patient could be twice as high in one town versus another town in the same state with similar demographics and culture, as well as similar medical outcomes. The author looked at all the usual suspects: treatments, technologies, and torts. The culprit turns out to be all three–overutilization of expensive treatments. This is not necessarily driven by fear of torts, but that doesn’t help. The more expensive places that prescribe more tests and treatments don’t tend to have better patient outcomes. In fact, they tend to be worse because every treatment has risks as well as benefits, and it’s quite possible for unwarranted treatments to have a net cost in public health.
When he asked why certain places were more expensive, it unsurprisingly came down to the prevailing incentives of different models of health care practiced in different towns. In the high-cost model, physicians focused on revenue maximization by looking at the patient as a revenue source. In these environments, which evolved over time to become the culture of medicine as it’s practiced in that area, doctors tended to over-prescribe tests and treatments where judgment allowed (which covers a lot of illnesses), often referring patients to facilities in which the doctors had a financial interest. The lower cost, higher quality models were less individualistic. The doctors worked as a team, easily shared information, and got paid salaries in (generally) non-profit organizations. They were content to not maximize their personal profits as long as they were comfortably paid and allowed to act as professionals.
The author was agnostic about most of the things bandied about in today’s health care debate. It doesn’t matter if the government or private insurers are paying for treatments. The doctors are (properly) in control. If they are intent on gaming the system, they can game it regardless of who is paying. Doctors in systems built around putting their patient’s interests first can work quite well with any payers, although they will actually save more money by being given the discretion to spend what they think is appropriate. The idea of having the patients bear more of their own costs was pooh-poohed as nonsense. As one doctor asked:
“I’ll do three vessels for thirty thousand, but if you take four I’ll throw in an extra night in the I.C.U.”—that sort of thing?
The bottom line is that the current level of waste in the high cost portion of our health care system is unsustainable. Worse yet, communities are migrating from the more effective, efficient, collaborative system toward the more individualistic, wasteful, and profitable model. The key (and this may be my conclusion more than the author’s) is to figure out a way to reward the more collaborative, higher quality, lower cost, model so that it is actually the more profitable as well.
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...it is based entirely...
When it comes to “global warming scientists” Freeman Dyson puts lays it out so beautifully:
The whole livelihood of all these people depends on people being scared.
Really, just psychologically, it would be very difficult for them to come out and say, “Don’t worry, there isn’t a problem.” It’s sort of natural, since their whole life depends on it being a problem. I don’t say that they’re dishonest. But I think it’s just a normal human reaction. It’s true of the military also. They always magnify the threat. Not because they are dishonest; they really believe that there is a threat and it is their job to take care of it. I think it’s the same as the climate community, that they do in a way have a tremendous vested interest in the problem being taken more seriously than it is.
If someone is paid to say something, that doesn’t necessarily mean they’re lying–not by a long shot. But it does color what they say, because you know they couldn’t possibly say otherwise, even if that were the truth. I don’t expect an advocate to be balanced. But I never confuse an advocate for a scientist, even if one could be both.
Peter Orszag, White House OMB director, published an editorial about the importance of containing health care costs, and how to do it. The portion of our health care that is nationalized, i.e., Medicare and Medicaid, indeed threatens to bankrupt the country. From this, Mr. Orszag concludes that “we” are in big fiscal trouble and “we” need to do something about it, “we” being code for “the government.”
Mr. Orszag is optimistic about what “we” can do:
Representatives from some of the most important parts of the health-care sector — doctors, pharmaceutical companies, hospitals, insurers and medical-device manufacturers — confirmed that major efficiency improvements in health-care are possible. They met with the president and pledged to take aggressive steps to cut the currently projected growth rate of national health-care spending by an average of 1.5 percentage points in each of the next 10 years. By making this pledge, the providers and insurers made clear that they agreed the system could remove significant costs without harming quality.
This kind of reminds me of Stalin’s optimism:
A Bolshevik’s word is his bond. Bolsheviks are in the habit of fulfilling promises made by them. But what does the pledge to fulfil the control figures for 1931 mean? It means ensuring a total increase of industrial output by 45 per cent.
Like Stalin’s central planners, Orszag is using this faith in government-led change to make us all into guinea pigs of centrally planned reform. Orszag ignores the 800 lb. gorilla standing next to the guinea pig, i.e., the virtue of competition.
When one casually looks at the areas of our economy, they can judge the relative availability, variety, quality, and cost of different parts:
More competitive … More regulated/socialized
Private/Charter schools Public schools
UPS, FedEx Post Office
Private railroads Amtrak
Phone service post-1984 Phone service pre-1984
Anything pop out?
Imagine what restaurants would look like if their menus, prices, and policies were dictated by central planners.
Never mind what they would look like if they were actually owned and operated by the government.
Unfortunately, most people can’t visualize a free market in health care because they’ve been told, and appear to believe, that our current health care system is “free market.” To others of us, it appears as if the government is heavily involved in nearly all areas of health care, especially insurance, and that the more it has gotten involved, the worse things have gotten.