Wednesday, June 17, 2009

Smart Health Care Industry

What is good for the electric utility industry is good for the health care industry. As part of the Energy Independence and Security Act of 2007 and the American Recovery and Reinvestment Act of 2009, the federal government has undertaken to encourage the development of what has been labeled the "Smart Grid." The Smart Grid is a euphemism for technology that will enable a utility to communicate its time of day price for electricity to its customers and thereby introduce price signals into the retail energy market. Presently, in most retail electricity markets, price does not vary depending on the time of use. Therefore, there is no disincentive to use electricity when prices are high. Smart Grid would allow a customer to see a utility's price that varies with the time of day and load demand. The theory is that it would allow a customer to see the price and to shift his use of electricity away from the system peak to a time when prices are cheaper. Price signals are good, to allow a customer to tailor his conduct based on the value of the service provided.

However, in the health care debate, the federal government is doing exactly the opposite. There are very few price signals in the health care industry today because of Federal Income Tax policy. Federal Income Tax policy encourages employers to provide health insurance to their employees. Broad health care policies to large groups of individuals mask price signals, thereby limiting a customer in his ability to make judgements about the value of the service provided. Pricing does not create a disincentive to use service when costs are high rather than when prices are low. The federal health care proposals would further these distortions. With federally subsidized (subsidized through federal taxes) there would be distorted price signals making them artificially low, further reducing the disincentive to use services when prices are high. You think health care costs are expensive now. Wait until health care is free.

Friday, June 12, 2009

Government Motors

You thought the auto industry was in trouble. Just wait until GM becomes Government Motors. Robert Farago provides helpful insight into the running of GM in an editorial today in the Wall Street Journal.

There is an old adage that “power corrupts and absolute power corrupts absolutely.” This adage has typically been reserved for its application to government. There is nowhere where power and corruption can do so much damage as in the government. Government has the power of the sword and the power to imprison. No other institution on earth has been given this extreme power. Therefore, government must be limited in the exercise of its power. Only when tightly constrained to limits of executing minimum justice can government’s propensity to tyranny be constrained.

We have lost the sense of this warning in our culture. In our culture, government has become god, righting every wrong and capable of managing everything. Government Motors, as shown by Mr. Farago, reminds us that this is a flawed perspective. Remember, what government grants, government can take away.

There are two reasons why Government Motors will be more corrupt than General Motors. First, Government Motors will have more power than General Motors. In the hands of private industry, if General Motors commits a crime, a limited government has the ability to correct that crime. If Government Motors commits a crime, there is no earthly institution over Government Motors to correct that crime. Second, General Motors, in the hands of private industry is motivated by profit. This is a legitimate goal for a business. However, Government Motors will be motivated by competing desires for reelection as Mr. Farago has pointed out. Decisions are no longer made by what is most profitable or in the best economic interest of the business and the market but on which political campaign will receive the biggest boost.

This has serious implications for our economy. Just wait until government takes over all control of our health care.