A Reflective Christian

All for God’s Kingdom

Reason for the high costs of health care

With the recent media attention on the costs of medical care and reforming of the health care system, I figured it would be a good idea to try to articulate some of the different factors in the US health care system that is causing the rise in health care costs.

1) Desire for profit – I am purposefully avoiding using a term such as greed, which has no real agreed upon qualifications (Is any profit greed? Is profit a certain amount greed? Or is greed performing certain types of behaviors to make a profit?). However, I will readily agree that there is greed in the system that helps raise prices, but that there is also a lot of “justifiable” profit.

For every person who has a part in the medical field, as with any other career field, the person expects to receive “more” (although no necessarily in money) than they put in. Otherwise, they would be recieving nothing for their time and effort, and with their own individuals needs cutting into what they have, they would eventually be left with nothing. Now, if society took it upon themselves to take care of all the needs of people working in the medical fields, they would not have to make a profit on their services and goods in order to continue to thrive.

There are also some practices that are made to ensure or increase the profit of a particular group, frequently at the monetary loss of another group (although, money is not everything, and there may still be a gain as whole). This becomes especially frequent when there is little resistance against rising prices, where there is relatively little competition in the field.

This is rather a generic observation, but because it is one that is true for all career fields and not just medical fields.

2) High costs of discovering medications – The costs of discovering new medications are enormous, sometimes reaching into the billions. The amount of employees, time, resources, machines, and knowledge needed to be able to produce a new medication is real high. Furthermore, many medications never make it to market and thus create costs that must be made up elsewhere if the company is to continue to thrive. Otherwise, one failed medication could potentially bankrupt a company.

3) Patenting – After a company develops a medication, in order to be able to regain the money they lost, they would need to be able to recieve a monopoly on the product for a number of years before generic pharmaceutical companies would be able to make it also, forcing the costs to go down. Without patenting, any company could immediately make a drug that another company discovered, increasing the risk that a pharmaceutical company would lose money on making a medication. Therefore, there would be the reduction in companies that actually discover medications because it would in fact be determental to the owners/shareholders of the company.

4) Socialized medicine in other countries – When other countries regulate the amount medications cost in their borders, it will naturally raise the costs for medication in countries where pharmaceuticals is part of a free market. For illustration, say it costs $1 billion dollars to discover and produce 100 million pills of a medicine. If half are sold in free markets and half are sold in regulated markets that average $2 a pill (meaning they make $200 million in those countries), it would require $800 millon dollars to be made from the free markets in order to ensure a break even point. That means that each pill would have to cost 300% more at $8 a pill.

Not that that illustration accurately conveys the actual costs and distributions for pharameceuticals, nor does it include profits, but it illustrates that where some countries regulate costs, others have to make up for it. But it still make financial sense for pharmaceutical to sell in regulated countries (so far as the costs of each indivudal pill is exceeded by the set price).

5) Barriers for corporations to enter into the medical field – The more regulated a particular field is, the more barriers there are to entering into the field. When it pertains to medical care, regulation is involved in many aspects by the US government. This insures a higher level of quality for medical care, as I am sure no one wants to go back to the day where you have snake oil salesmen, but it also decreases competition by creating greater overhead and continuing costs to enter into the field. So the higher costs get trasmitted to individuals, along with a lack of lowering force against the costs.

6) Barriers for individuals to enter into the medical field – This is related to the previous point, but it manifests itself is some subtly different ways. For instance, for people to become physicians, they have to spend nearly in a decade in school (when one takes in college, medical school, and residency) where the individuals have to incur enourmous debt and are unable to bring in substantial income (as opposed to an engineer, for instance, who can enter into the field after four years and make a substantial incomce relatively quickly). Firstly, this reduces the number of people willing/capable to enter into the field. However, it also raises prices of medical care by doctors who have to pay back their school loans and also are behind in accumulating wealth (not necessarily in a greedy sense, but other things such as funding retirement). Again though, these barriers to entering into the field insure that physicians as a whole can provide better quality care.

7) Medicare and Medicade – Medicare and Medicade do not agree with physician groups a rate of reimbursement (unlike insurance companies) but rather develop prices that are fixed. For instance, Medicare reimburses a fixed amount based upon the diagnoses, not the different things necessary to determine the diagnoses. For instance if a certain diagnoses can be generally be determined without using an MRI, but in certain instances it will require it, reimbursement that was determined without the costs of MRI will not cover that procedure. Thus doctors and hospitals either raise the severity of the diagnosis or they are left to cover the costs elsewhere, typically from other persons. That is just one instance where government reimbursements do not cover the costs of medical care.

8) Lack of payment of medical bills – This is a big factor that amplifies all the other factors to raise medical costs. In principle, for every dollar that a person is billed that is not paid for, another dollar is charged to other persons to make up for the lack of reimbursement.

To illustrate and assuming a minimim medical cost, for every $5 worth of billing, $1 is not paid. In order to make up for that, the people who would pay $4 actually would be billed $5 for a total billing of $6. That is a 20% markup. However, it doesn’t simply end there. Some of those persons who could afford medical care previously would not be able to afford it at the 20% markup. If default rate goes to 10%, then 50 cents would would have to be made up from the people who could pay, so then they would pay $5.50, with total billing reaching $6.50. And again, certain person who could pay couldn’t with the second increase. So in this hypothetical case (the percentages were determined for ease of illustration, not based upon any statistical data), in order for the hosptials and doctors to be reimbursed for every $5 of costs, they would have to bill $6.50, a 30% increase.

One this my illustration does not take into consideraton is population distributions tend to follow a bell shape curve, so wealth was presumably follow that curve. However, for every dollar you raise costs (up to the mid point of the bell curve), you get more people who could not pay than you had with the prevous dollar increase. Theoretically then, as you raise medical costs to make up for other’s inability to pay, you create more people who can not pay at a greater rate relative to rising costs. To put this simply, if true, this would mean rapidly escalating medical billing. This hurts particularly those who are already poor though, because people with greater wealth have medical insurance that is essentially a guarantee of payment. Guaranteed payment allows hosptials to bill less (hence why medical insurance becomes a bargain), but in doing that, they do not make up the losses from others as much from the insurance companies, thus placing the burden on those without medical insurance who can not guarantee payment.

9) Demand for high quality care – Whether it be accomplished through regulation or through market forces, Americans demand high quality care, which naturally increases medical costs. However, because there is not great amount of competition, most hospitals and medical care facilities move towards providing higher quality care, including things that are not directly related to medical care such as private rooms. That means that there are relatively few places that are geared towards less wealthy individuals. In the free market, universally demanded goods generally generate different sub industrties, some geared towards the wealthy (producing higher quality for high prices) and some geared towards those who have less (cheaper prices for less quality). A good example is the difference between Target (higher quality) and Wal-Mart (cheaper prices). But with the relative lack of organizations and corporations in the medical field, they tend to be move towards where profit is maximized, that is by providing higher cost, higher quality care. But there is little alternative for the less wealthy, so they have to use the medical systems that are geared to the wealthier, with the costs that come with it.

10) Stagnating economy – When insurance companies take a premium from people they insure, the premiums they take from all individuals do not necessarily cover the medical costs for all the medical costs they incur over the long haul. Medical insurance is in fact a bargain, as expensive as it might be. Insurance companies (and not just medical insurance) rely upon investing the insurance premiums into the market, in hopes that investment returns will make up in the difference in premiums and medical costs.

So, when the economy has been stagnating (as it really has over the past decade), you will naturally have a rise in insurance premiums to insure that medical costs, present and future, can be covered. While this creates volatility in insurance premiums, it means that people being insured do not have to bear all the costs themselves for medical insurance.

11) Increase in life expectancy – As people live longer, their bodies are more susceptible to health problems. Thus as age increases, so do medical costs to insure longevity and quality of life. So when a society as a whole is having higher life expectancy, they will naturally incur greater expenses as a whole later in life. However, if some do not reimburse (either out of pocket, government programs, or insurance) hosptials, doctors, etc. for their expenses, it has to made up elsewhere. So increase in life expectancy of a nation would tend towards an increase in medical costs across the board.

12) Low infant mortality rate and better pre-natal care – With the ability to save the lives of infants who would have otherwise died, you bring in a group of peoplewho on the average would not be as hardy as other persons might (though this is not true for ever individual case). By doing this, you raise the potential number of medical problems that have to be addressed in the future, along with the ensuing raising of costs of everyone. (To be clear, I am definitely NOT complaining about this, as I myself was a person who could have been still-born if not for the intervention of a physician).

13) Baby boomers – As the baby boomer populaton continues to age, they are having more and more medical issues that require more action. Again, this relates to higher costs across the board.

14) “Far-flung” medical infrastucture – In principle, it is cheaper for one hosptial to serve a certain population in one location than for two hosptials to serve the same number of people in two different locations. But in the US, you have a large number of people who live in rural areas that are being provided medical care. This requires an infrastructure that is wide spread, incurring greater costs. For instance, in Mississippi, every county has a hopstial, regardless of the population. But in more rural counties, it costs more per patient than it might in a more populous county. However, with regulation in health care, the billing costs tend to be equalized to some degree for more rural and more urban health care. Thus urbanites tend to pay a higher price than they would otherwise (but they also, as a whole, would tend to be wealthier).

I am not advocating necessarily what should and should not be done in order to address medical care in the US. Rather, my point is to try to show why health care is getting more expensive and to illustrate the trade-offs we have made and the potential trade-offs in the future.

In my own opinion, there is nothing that can be done on the governmental level that can actually reduce medical costs drastically. There are too many systematic difficulties that can not effectively be regulated, nor can market forces address the concerns either. I chalk this one up to inherent human limitation that we can not escape, as staving off death has always been diffcult and will always continue to be so.


August 22, 2009 Posted by | Uncategorized | , , | 4 Comments

The Kingdom of God and political, social, and economic ideologies

Jesus message of God’s Kingdom, especially in the Sermon on the Mount, is not focused around any ideology, but rather it is based upon relationship of person to person. More particularly, the Kingdom ethic is summed up in non-resistance, forgiving, love that does not seek to institute from the top-down, but from the bottom-up (servile love, rather than authoritarian force). It gives no mention of social institutions, political philosophies, economic theories, or anything else. It doesn’t give a comprehensive plan for the ushering in of God’s Kingdom. Jesus simply calls people to a particular form of relational ethics on the grounds that the reciprocating nature of humanity will lead to transformation of our enemies and the enemies of God’s Kingdom through love, compassion, and forgiveness directed towards them.

All attempts to subject Jesus’ relational ethic into a systematic thought on society, or any attempt to claim that Jesus’ message corresponds with a certain  ideology fails to see that Jesus gives no vision of society beyond the relationship between person with person and person with God.

Christians should not envision a society in a certain way and presume that God endorses such a system because there is some correspondance between Jesus’ message and the system. For there is likely some idea that also, perhaps in a subtle way, conflicts with Jesus’ relational ethic.

Who can envision the way that Jesus ideal relational behavior will manifest itself in God’s fully inaugurated Kingdom? To say one has a particular vision of how it should be is the height of human arrogance, presuming that they have a perfect understanding of human psychology, God’s involvement with the world, and a perfect understanding of Jesus’ message. All ideologies, at best, must be regarded as a method that could and probably should be discarded, as it spoils about as fast as milk. Communism, socialism, capitalism, liberalism, authoritarianism, democracy, etc. are all like milk that is good for a little while but then spoils quickly, and like a cubic zirconia that looks like a diamond, but upon further inspection it is structurally different and a cheap, falliable imitation.

January 14, 2009 Posted by | Uncategorized | , , | 3 Comments

Why the rich get richer (part 4)

In my previous post in this series, I described how the rich get richer because they have the ability, resources, and the motivation necessary to create wealth for themselves that those who are not as rich do not have. Now one of these resources is money, which isn’t necessary by itself nor is it sufficient. But it can take an important role in the accumulation of further wealth.

Now when generally people picture wealthy people, we imagine them as having all this wealth readily available to them. We might think them as simply being like the rich man who of Luke 12:16-21 who simply accumulates wealth and stores it away. But for the majority of the wealthy, this is not true. Most of the wealthy do some simply have loads of cash and goods that own by themsleves that are stored away. Much of their wealth is actually tied into businesses, whether it be the majority owner in a company of a realtively wealthy doctor who puts some of their money into the stock market.

This becomes the most effective way to create more money because investing one’s own wealth is more valuable than providing actual good or service. Money has a greater value than a good or service, because it can be turned almost immediately into a good or service which acquires more value because of the situation in which it is actually needed. Money can be exchanged for many things easily and quickly when they are needed, whereas an actual good or service can not. It generally must be sold first, and then the money can then be turned around for something else that is needed. In other words, money’s value is that it can be easily exchanged for what is needed. And it is for this reason that the quickest way to make money is to use money. Plus, it doesn’t have the restriction of energy that labor has in creating a good or providing a service. Money is only limited by itself, wheras actual labor is limited by ones own energy level.

But when this money is invested into a corporation, while it benefits the investor, they are not the only one who benefits from it. The corporation provides jobs to people for their labors and skills, which in turn provides money to the laborers. And as the corporation expands, the invested wealth of the individual expands and so does the amount of jobs that are provided.

So, whereas the rich man of Jesus’ parable is storing away his goods where it does not good, the rich man of American capitalism is not necessary doing the same thing with all that they own. Their wealth, in fact, is providing other people with goods, services, and jobs that they need or want.

And this leads us to one of the two primary reasons why the rich get richer at a faster rate than others do. What they provide is the most easily transferable “good” that can be quickly be transferred to what is needed at the right moment. The component of time makes money more valuable than itself, since its ease and quickness of use gives it a high potential to create wealth. So those who have money to spare can get richer quicker than other people can.

But as I said, money itself requires the knowledge necessary to turn it into more money. It requires knowing when, where, and how much to spend one’s money in order to down the road turn it into more money. Or it requires knowing those who have that capability to make money. Without either sets of knowledge, making money with money is like trying to hit a target blindfolded.

So, within a capitalist system, the rich will get richer, but only if they have the ability and knowledge necessary to turn it into money. And it is often times that knowledge and ability that is what provides them with the money needed to invest in the first place (not many millionaires inherit money that allows them to become rich). Their ability is reward because it provides a service or a good to others. And with the investment of money, it provides benefits for others in creating those services and goods AND jobs for other people.

The rich get richer, but their progress will benefit everyone below them also as time progresses. While the gap between the rich and the poor will grow, the amount of people who can not obtain basic necessities are reduced (the income of the 10th percentile in the US over time did increase, even after taking account inflation).

There are injustices that happen within a capitalist system, but is that because of the system itself or something other than the system. Capitalism is based upon basic economic freedom (although with some accountability such as through making financial records public so people can potentially know who can make money and who can’t), but itself espouses no particular action except that which the individuals who own a corporation and the group whom the corporation serves value. It does allow for corporations to perform injustices, but the majority of injustice is not a direct consequent of corporation action. Much of injustices is the result of a world with resources incapable of being utilized to help everyone and the way of the world that can not be easily affected, if at all, by human intervention (such as death, weather patterns that lead to famines, etc.).

The value of capitalism is that it is the most effective way for growth, which in turn allows for more resources that can capable be utilized for human good and desire. Other systems do not allow for this growth as easily. Other systems are more effective at distributing obtained wealth. But the problem comes down to whether there is enough created wealth (which in the end, is merely a valuation of goods, labor, and knowledge) that can provide for all needs of everyone effectively. The rich may get richer quicker than others do, but is this issue (which I would hesitate to call an injustice by itself) enough to necessitate a change of system? And do the benefits of another economic system that use more control being used in this present time outweigh the benefits of capitalism?

I would say this (and I know I have gotten off my main topic at this point): capitalism, with all its weaknesses, is best fit to provide the human race the knowledge and resources necessary to be able to provide for all the needs of all people. Once those knowledge and resources are actually obtained, then movement to another system would be better for all people (although it can not be forced through revolution like it was in Russia for it to be good). But to move to that point before then is an injustice to everyone now and in the in future as we can not possible provide everyone’s needs at this current point in time, and more regulated economics do not facilitate the growth necessary to obtain the needed knowledge and resources needed to reach that point.

October 17, 2008 Posted by | Uncategorized | , | Leave a comment

Politics, economics, and eschatology

If you have noticed, a few of the things I tend to blog about are politics and economics. But as my purpose of my blog states, it is centered around God’s Kingdom and as it is spreading and growing in the world. And many Christians have this vision and desire, but it is my opinion the methods they espouse, especially in the political and economic arena, are rather short sighted and antithetical to what God’s Kingdom is becoming.

The chief means people use to try to bring about their vision of good (whether the individual or the corporate good) is through control, whether it be through violence, manipulation, deceit, taking without permission, or any other means. People are by nature have some sort of ethics (whether, again, it is to benefit the individual or the community) that they live by. When they see a violation of that ethic, their first recourse if they feel they are confident enough is to attempt to forcibly change the behavior and/or the outcome.

And there are times where this is needed. For instance, the murderer who is put into jail. The criminal is forcibly removed from society so that he can not longer harm and terrorize people. In this case, a person is actually causing an injustice that is not otherwise present. It is not a victimless evil.

But there are times where control is used in other venues, where it isn’t as appropriate. For instance, the religious right would seek to control homosexuality by forcibly removing marriage as an option. While I agree morally that marriage is only between a man and a woman, the attempt as force for such an action is misplaced. There is no direct victim of this moral evil. There is much to be said about how the action changes the person, which in turn might result in other evil actions that have victims, but homosexuality itself brings about itself no further injustice.

Or take the tendency of the liberal side of religion and politics, where they seek to, in varying degrees, take the wealth of the richest in order to give to the poor, the Robin Hood mentality. While yes, greed is a sin, greed itself creates no victim directly (other actions, that may result from greed, are the problem). Certainly, they should give money to those who are in need, but failure to do something, while evil, isn’t the cause of injustice. Suffering and lack is many times the fault of no individual, and while it is our duty to help where we can, we can not forcibly place that ethic upon other individuals. Trying to take money from the rich (who are not always greedy!) itself is an attempt to force an outcome.

Why the distinction between victimizing evils and victimless evils? Before in the former, when one controls the situation, one is actually stopping the injustice. In the latter, one is not actually stopping injustice. Even if we take money from the rich, we must distribute it to the poor in a way that actually solves the problem. But this requires knowing all the situations of the poor, and effectively distributing it. It is an amount of knowledge that is not easily, if not impossible, to obtain.

Furthermore, when one uses force, no matter if the evil doer creates a victim or not, there is going to be the inevitable backlash. Most of people’s actions come because their own individual ethos that they value (And not necessarily an external ethic imposed or taught them) does not condemn what they have done. It is not as if they have done something they would otherwise not do (though those situations do occur) and will recognize the error of their ways. Instead, they will respond with aggression if they have any confidence in their own ability to act effectively.

So whenever control is used, you are creating a group of people who may potentially lash back. When one stops a victimizing evil, the benefits often times outweigh the costs. But when one stops a victimless evil, there will be the tendency for less good to be done, and as a result the backlash outweighs the benefits (if any).

In the end, it is rooted around confidence in the ability of ourselves or other humans to make the world a better place (as we would see it). Making the world a better place is a noble goal, but force tends to create unforeseen consequences that we would never have imagined. Furthermore, it offers false hope. In the end, it turns into a form of idolatry (although varying in degrees). Whether it is the “liberals” when it comes to things like the economy or “conservatives” when it comes to things like homosexuality or the “moderates” who merely play both sides but still attempt to forcibly create a better world, it is an idolatry, in which we view ourselves as humans as the source of “redemption”, instead of the God of Creation.

Here is what it comes down to. God doesn’t choose to use force as the primary means of transforming the world into a better place. Rather, he uses love. He doesn’t merely use love to as a motivation for what he does, but he shows love that then transforms the hearts of the object of his love. The love he shows us in turns leads us to show the same type of love he shows us.

There is some wisdom behind Jesus saying “Do to others as you would have them do to you.” It isn’t merely just a logical principle. Jesus is also showing how we can have others do what we want them to do when we do it ourselves for them. If we wish others to show love, we must ourselves act with love. But force is not an act of love, even if it is motivated by it. It is a disregard for the other.

Now God himself will use force, as in the judgment when he will remove the evil doers from those who seek good so as to have a people who will not harm one another and by that cause disorder. But there is a difference between God and us. We believe he knows all. We believe he is wise. So when he acts with power to forcibly remove others, he acts with the complete knowing of what will happen. We on the other hand are not omniscient and our attempts will often times create unintended consequences that we did not, and even could not, foresee. When we try to force about our vision of things, we are acting as if we are the omniscient ones, that we have taken every factor into consideration, and know that what we intend to happen will in fact happen.

Jesus nowhere endorses the call to force to change the world. And Paul himself says that he can not make judgments (of actions regarding) of the world. And many attempts have been made to try to create the world that people envision as best (for instance, communism). And yet many Christians continue to try to appeal to the same principle that is no where endorsed and has repeatedly failed when used to try to bring about a certain vision.

The Kingdom of God when it has fully come is not going to be, as we often times envision it, as entailing a master-servant relationship between Jesus and everyone else. Revelation 3:21 envisions people sitting in authority along side Jesus. In other words, there isn’t the subjection of others. And while we are not mature enough yet to live in such a world, it is counterproductive for us to appeal more and more to force, when that itself is not the way of those who live in God’s Kingdom.

Christians must first break this tendency. It offers at best short-term results when we use it to try to make the world a better place (instead of preventing it from going into further decay). In the end it is a false hope. Our true hope is centered around the work of God and the long-term goal he is working towards. We do play a role in that, but we must recognize our own limitations. But many of us act as if we are omniscient and omnipotent and people who will bring about the world we envision through our own forcing of it to occur, where it be through economic control, income redistribution, moral control, war, etc. Instead of letting love create love, we use force and it creates force in return.

October 15, 2008 Posted by | Uncategorized | , , | Leave a comment

The national deficit and the economy

Apologies for the lack of biblioblogging the past few days. I should get back to that more tomorrow.

Anyways, Wes asked a question to my previous post on how the US economy is not at seriously dangerous levels. I want to respond to it here, because I think it is a good question. But let me preface it with saying I am not an expert.

Wes wrote:

Does this take into account that our national deficit is $10 trillion, roughly our national GDP? I don’t know what the deficit was in 1930, if there was one. This also doesn’t take into account that our dollar is no longer backed by any material (e.g. gold or silver). I can imagine all of these will effect our situation much differently than the 1930s.

Well, actually, our current national GDP is $13.1 billion in current dollars (as of 2006. Probably around $14 trillion now). Also a national debt isn’t going to affect the economy directly, so far as it doesn’t balloon so much to cause high levels of inflation. And the lack of any backing for the dollar is not an issue, because gold and silver are just arbitrary standards. The main value of the dollar is not that it can obtain a specific product, but that it can be exchanged of something of value (but not necessarily any one thing).

As for the debt during the Great Depression, the debt was 17% of the GDP. And in between 1945-1947, the debt exceeded the GDP.

Not saying the debt couldn’t cause problems, but first there must be inflation. Basically, the US economy would have to not just go into recession, but tank. Then, the extra money supply out there would become devalued since the US economy wouldn’t be able to back it. So far as the economy of the whole is still productive, inflation shouldn’t rise to problematic levels. The real concern is if the economy does tank, the debt will then become a factor.

Basically, when the government goes into deficit spending it bets that the economy will do fine, and if it does, then it isn’t a major problem. Growth in the economy backs the deficit spending. If there is a minor recession, it hurts a little bit, but so far as there is the continued prospect of growth down the road, then things should be fine.

The debt is a mortgage. You don’t pay it all at one time when the one making the loan wants it, but you pay it gradually. The debt is financed by bonds that are payed over a period of years. For the sake of simpicity (and because I don’t have all the breakdown of the US bonds), say the $10 trillion is all in 10 year bonds at 5%. If I got the calcualations right, the US would have pay $106 billion over 10 years to pay it all back. So essentially, each year, the US is sending about $1.2 trillion to bond holders. That is less than 10% of the national economy.

And what frequently happens is the US to pay off the bonds sells more bonds. It is kind of like paying off one credit card with another. And so far as the economy has the prospects of being productive, the US can continue to sell bonds. Essentially the US asks other people then to pay off their bonds in exchange for a promise to get them money back plus interest.

Basically, the national deficit becomes a problem when the economy looks to be a long term slump. And right now, the US doesn’t appear to be there. And the US, considering it’s economy is more based upon knowledge (which technology fits under) and services than most economies, it won’t experience the volatility a manufacturing based economy might. Manufacturing requires more scarce physical resources which require constant searching to find, whereas knowledge and services rely more upon more ample and continuous supply of intellectual and physical labor. The former also requires greater infrastructure costs, whereas there isn’t the need as much for the latter.

The main point is this: the deficit isn’t a problem so far as the economy still has growth potential, and the blend of services with goods the US economy has makes it more likely to consistently grow (than say a 1920s US economy). But the deficit will become a problem and if and when the US economy decides to tank.

October 11, 2008 Posted by | Uncategorized | | Leave a comment

Why the rich get richer (part 3)

Yesterday, I asserted that part of the reason the get richer is because they have the abilities and motivation necessary to be able to succeed at making money as they do. But what specifically are these skills?

What is the primary reason between the difference of pay of a doctor and a nurse? Where are there different skills? Nurses primarily do menial tasks and aid the doctor in treating the patient. They will do things like take blood, perform basic tests, etc. at the doctor’s request. What does the does the doctor do? They primarily analyze the different symptoms of the patient and the test results and make a diagnosis. The primary difference is the fact that physicians requires more knowledge and more detailed technical knowledge in order to be able to perform their job, whereas a nurse needs less diverse and technical knowledge in order to perform their job. Being a doctor is more taxing on the intellect, and some can not do it. To be fair, being a nurse isn’t easy, as it requires a fair amount of education itself, but relative to physicians, it isn’t as much.

The reality is, despite what we sometimes tell our children, is that not everyone is cut out to perform every task, no matter the difficulty level. Being 6 foot tall and weighing 245 pounds, I am not cut out to be a world class sprinter. A person with brain damage is not cut out to be a scholar. A person with a very unsteady hand is not going to become a brain surgeon. There are different tasks that not everyone can employ. In part, the difference between higher pay and lower pay is the replicablity of the tasks needed to be performed for the occupation from person to person. The easier it is to duplicate, the higher the potential supply of workers in that field. The harder it is to duplicate, the lower the potential supply of workers in that field.

I mention potential for many reasons. First off, not everyone is going to work in a specific field, but yet it is possible for them to do so. But if a certain task is easily replicable, then the amount of money needed to obtain workers for said tasks is decreased. For instance, there may not be a lot of people who want to work in a fast food restaurant preparing food, but the fact that there are other people who can perform the task reduces the wage for said worker. So the importance is to realize that its not just how many people want to work in the field, but it is also affected by how many could. Pay is a combination of actual supply and potential supply.

And as one moves into fields that are increasingly difficult, the pay raise is not, abstractly speaking, linear. Take minor league baseball. The AAA requires less ability to be able to perform adequately than in the major leagues.  The minimum salary of a minor league player in AAA is $2150 a month (after the first year). If you spanned that pay over a year (which he doesn’t get, but for comparing money get for a specific unit of time) a AAA would hypothetically get $25,800. Whereas for this 2008 season, the minimum salary with $390,000 a year. That is 15 times the minimum pay of a AAA ball player, and yet it is only one level up. That is not to mention the money the star players will receive.

And many people ask how is that fair? But this gets at the notion of what is fair. If we measure fairness by how much “value” one adds to their employer, then we can not discount this as fair ever. If we consider fairness in terms of how much one adds to society, then one can not look at the system but the society as a whole that considers the value of an individual baseball player more so than an individual teacher. It isn’t the system that is result of the pay, but the society that places a value upon the field of work (notice I didn’t say the individual worker).

This gets us to two other factors that determine pay. The amount of perceived value by society, AND how much an individual can fulfill the demand for that field. A singer can easily touch the hearts of millions just through the distribution of CDs. 50 baseball players (25 for both teams) can gather a whole nation around the TV set in one night. But a teacher can only teach a very limited amount of students before their physical and mental resources are taxed or the quality of teaching does down.

And perceived value is extremely critical, because there many not be as many people who can run the 100 meter dash at a fast speed than can play baseball. American society finds a baseball game more exciting than a 100 meter dash, and a business can gain more money from commercials via a 3 hour game than a 10 second sprint. Whether it be because of personal entertainment or tangible gains, some jobs are given more perceived value than other fields.

What in the end we can say is this. The higher paid people tend to have the following characteristics:

1) In a field where their tasks are not easily duplicated by others. Intellectual tasks tend to be the main component of this.

2) In a field where the value is perceived to be high. This means they are paid more for the effort spent.

3) In a field where they can meet a greater amount of demand. This means they get paid more for what they do since there are more recipients of their work

Now, understand, my point here isn’t to say that the market is a moral system. But neither is it amoral. But point here is that while some of the pay is based upon ability, some of it is based upon the nature of the work itself, and some of it is based upon the value placed upon that work, whether it be a small select group or the whole nation, or even the whole world.

This doesn’t explain every way money is made, such as a burglar or a corrupt CEO, but it describes the bulk of pay. But in the end, what this leads us to learn is that the rich get richer more so because it is the system itself in which the society then places a certain value on certain things, that leads to more pay that doesn’t rise linearly the higher one moves up. But it is important to recognize, it is not the system that leads to higher pay in the end, but it is the percieved value placed upon it by all those who pay for the labor (either directly or indirectly). The system only allows society to pay what they do. The rich get richer in the end then because the rich as a whole provide what society values and can not easily recieve from other places.

October 9, 2008 Posted by | Uncategorized | , | 1 Comment

Why the rich get richer (part 2)

When we look at the statistics I made in my previous post in this series, we noted that the upper class (although keeping in mind that the class do not remain the same group of individuals) on average increase their income more on the yearly basis than the lower classes. Nothing earth shaking, and it is the focal point of the topic at hand. But when one asks the questions of why, this is the case, it is not as simple.

Many people might say “Well, the market favors those who are rich.” What is generally meant by that statement is that those who are rich are more capable of making money because they have that money, and that is generally what is implied by “the rich get richer while the poor get poorer.” But if that were the case, then rich people’s income would be expected to increase every, but it in fact did not. While having money may help one to make more money, money itself is neither necessary nor sufficient to make money.

It bears noting that the statistics provided do not indicate previous income of individuals who had money, only the income of the upper class. One can not assume the people in the 95th percentile in income are the same year to year (even though class warfare would imply that it does). But one can safely assume that there is fair amount of hold over year to year. But nevertheless, this is another reason one can not simply attribute to the higher income of the 95th percentile as due to having more money to begin with.

So going back to the original idea that the economy favors those who are rich. If the factor isn’t money, then what is it? One of the primary factors can be seen by simply living near a college campus. There are some people who go get an engineering degree and will make fifty or sixty thousands dollars a year starting out, and there are some people who drop out of engineering (like me!) and go get degrees like psychology, which would get a person maybe $20,000 to start out if they didn’t advance further in their education. What seperates those two groups of people? Two main things, ability and motivation to succeed at a certain field.

Lets generalize that principle to money making and not just to a specific career field. The reason why the rich get richer faster is because they may have more of an ability and a motivation to make wealth for themselves than other people do. More specifically, they have the knowledge and willingness to be able to find venues to make more money. And when you give the people time to practice that ability, the people who have more knowledge and willingness will naturally be part of the upper class. The upper class, in part, can be defined partially by their capability of making money. And being as that is, they would use their knowledge when they were rich to continue to increase their income.

And the higher up one goes, the better their ability would be. So when the economy may not be favorable for a lot of people to increase their income, they themselves would still be able to find ways to make money. And the statistics show the groups higher in the income percentile have that trend. But even they are not immune.

Now the rich person may use amoral means, such as many banks did by taking out subprime loans once the risk associated with them would essentially be mitigated by Fannie Mae and Freddie Mac. And while these examples might by at the forefront of our consciousness because of the media, that is by no means the only way money can be made.

And the rich person may use money to make more money, for instance by investing in companies. However, this can potentially serve for the public good as well as the individual investor, as I will talk later about when I get to how money can be used.

In summary, the rich get richer largely due to the fact that they have the capability to. And that capability is not restricted merely to amoral ways or rely upon usage of money to make more money. So when we think about corporations and rich individuals, we can not rush to judgment and generalize every one of them obtained unfair means (unless we go so far as to say having more ability and motivation than another person and then exercising it is unfair).

October 8, 2008 Posted by | Uncategorized | | 1 Comment

Why the rich get richer (Part 1)

Since Christians and Americans in general want to make the the world a better place, want to fight poverty, injustice, and other problems that ail our world, I think a series on the economics would be valuable. If we wish to combat injustice in the world, we first must learn how the system works and where there is truly injustice, instead of merely judging things by how they appear on the surface. Otherwise, we might in fact be advocating against something that is in fact helpful. This series will be focused around the disparity between the rich and poor.

One of the the complaints most often given against a the United States economy is that it is flawed because the richer continue to get rich, while the poor get poorer. There some truth to the statement, but as we will see, it is not true over the course of many years.

If one looks at year to year real household income (which means it is adjusted for inflation), the lowest 10 percentage of people are in fact getting richer. Year to year over a period of 37 years (from 1967-2003), the household income of the 10th percentile increased an average of .89% per year. For the 25th percentile, it was .73%. For the 50th percentile, it was .76%. The fact is, the poor are getting richer compared to their predecessors. Even more amazing, the lower class is in fact getting richer than the middle class is.

Now, if we look at the 80th, 90th, and 95th percentiles, the increase in income is great than for the lower and middle class. Their increase in incomes were 1.28%, 1.47%, and 1.57% respectively. So, it is more precise to say in America, the “rich” are getting richer at a faster rate than the “poor” are.

But is this unjust? Only if we consider money itself evil, in which case the upper class is obtaining more evil than the lower and middle class. But Biblical ethics does not condemn wealth itself, but the love of it and the hoarding of it (a symptom of the love of it). But do the rich need the money they obtain, or are they simply hoarding it away? A fair question but one I will address later in the series, but I will address by saying that the modern wealthy American is not “hoarding” as much as we think they may.

The point I want us to note first is that the poor are in fact better off than they were 30 years ago. However, the situation is a bit more complex than that. If we take the standard deviations of the yearly percent increase, the 10th percentile has the highest at 3.05%, with the 20th percentile at 2.65%. For the 50th, 80th, 90th, and 95th percentiles, the standard deviation is 2.36%, 2.03%, 2.25%, and 2.35% respectively.

To translate that into more laymen terms, when the income of the poor does increase, it increases at a faster pace than the rich do. However, on the flip side, when the income of the poor decreases, it also decreases as a faster rate than for the rich. In other words, the income of the poor is more volatile.

But the statistic that best define the rich from the poor other than the actual household data is the number of years where income increased:

10th percentile – 19 years of increase, 17 years of decrease

20th percentile – 22 years of increase, 14 years of decrease

50th percentile – 19 years of increase, 17 years of decrease

80th percentile – 25 years of increase, 11 years of decrease

90th percentile – 27 years of increase, 9 years of decrease

95th precentile – 29 years of increase, 7 years of decrease

What seems to define the rich in the end is that is they are more able to keep their income rising, even when the economy is causing decrease for other groups. Why? Another question that I will attempt to address.

In the end, the plight of the American “poor” (keeping in mind, they are well off compared to the rest of the world) isn’t that they are getting poorer. It is that they are more apt to feel the affects of a slower economy than the rich will be. While they also get a bigger increase when their income does rise, the psychological benefit the lower class obtains when their income increase does not match the stress, depression, and frustration that might occur when they are put into a tighter situation.

For the next few posts in the series, I will attempt to address the actual question that the series is named after, which will also attempt to make sense of the data we have in front of us.

BTW I have this data available in a spreadsheet that I created, if anyone is interested in the raw data.

October 7, 2008 Posted by | Uncategorized | | Leave a comment

The language of “class warfare”

Drew wrote a post yesterday discussing whether Palin is in fact middle class or not (which she is not by current statistics). And by judging her current income level, she is not. However, there is an assumption behind whether she is middle class or not and how that makes her qualified to be of the people. And it comes the “class warfare” ideology that has been latent sense Marxism.

The assumption is, the amount of money you have in the present is an  indicator of ones morals and ones understanding of the income bracket one is in, at the exclusion of other income brackets. The first one is easily refuted, but the second one is one I wish to focus upon.

First off, the majority of people do not stay within one classification their entire lives. A good percentage of lower class people will move up to be middle class, and a good (though lesser) percentage of middle class people will move up to be upper class. And then there is also a downward trend in that the reverse happens. This trend of non-static classes is in a large part due to age.

As people grow older and get more experience and training at their jobs, their pay rises. For instant a student fresh out of college will not garner the highest possible income, but as they get into the job, their pay will rise as their experience rises. A resident in medical school will be in the lower class, but once they complete their training and gain more experience they will move into the middle or upper class.

And as people being to get older, work part time, work easier less taxing jobs, or retire, their income will decrease.

The fact is, many people who are upper class were not always upper class. They worked their way up the ladder, not had it handed to them or did amoral things to get up there. And so, being upper class doesn’t mean one is “elite”, as Drew seemed so quick to tag to Palin, and have no understanding and empathy for the working class. Current status is not an indicator of past experiences or status, nor is it of the future.

But this derives back from class warfare, that sees only current status as the important indicator, because it requires too much work to look into people’s pasts. And it also doesn’t fit into the conclusion often times also, so one would suppress and not be as prone to look at the rest of the story. Not saying everyone is guilty of it, but society has been.

October 4, 2008 Posted by | Uncategorized | , , | Leave a comment

The FDIC coverage hike and government involvement

Just proof that I am not a raging libertarian, the FDIC’s request for increased premiums would be a good thing for the economy in my opinion (keeping in mind, I think an economy based upon interest bearing loans is ultimately flawed). The proposal is to raise the insurance from $100K to $250K. The original reason for the insurance was to maintain confidence in keeping money in the banks if there is a risk of them closing. If people start to go to banks to take their money out, then the financial crisis we have would be ever more dire. By doing this, small businesses (the majority of entities that have savings greater than 100K) will have more confidence to keep there money in one bank, instead of dispersing it amongst many banks.

Why is this significant? Because, if people and small businesses start to take money out of one bank and put them into others, it is likely that the bigger banks will lose some of the deposits (since by its very definition, that is where the money is put) and move it to other banks, likely smaller banks. But this begins to put a burden on the bigger banks as they begin to lose money and the risk not being able to sustain themselves. Furthermore, from what I do of the financial industry, the bigger banks are what help the smaller banks work. If the bigger banks fall, the smaller ones then are on a shaky foundation.

Before this, I still thought the FDIC needed to increase the coverage (although not necessarily up to $250K).

And this is one of the few areas where government involvement in the economy is a good thing. The government should not be making proactive choices to institute certain financial policies. In doing that, it creates large entities that naturally will have a tremendous role in the economy. But do the politicians know the potential effects of their policies, how they could be counterproductive? No. Not even economists catch them all, much less will politicians. When one affects the actual workings of the economy, one is playing with a system that one does not understand.

But when one does something like raising FDIC coverage, one affects the economy, albeit indirectly. It is risk-reducing of the right kind (and not like that of Fannie Mae and Freddie Mac). It is the protection from drastic negative changes, and it is protection for the smaller business and individuals. It doesn’t artificially and directly affect the flow of money, which the Federal Treasury, the Community Reinvestment Act, and Fannie and Freddie did. It only maintains the security of the entities of the nation that they can feel then feel free to do something that might also be good for the economy without the concerns of the risk that might be associated with it.

The government can not be involved in the direct dealings of the economy, because it places the power in a few people who are:

A) not trained in economics and do not understand all the factors in play (not even economists do that, really)

B) can not know all the possible repercussions from the combination of different factors

C) have no incentives when it comes to their positions of power to make sure their policies are good past the time of their office

D) elected by people who have a short memory and do not really know what caused certain things except for what the politicians tell them

October 1, 2008 Posted by | Uncategorized | , | Leave a comment