Economics matters

First that and now this. First the Federal Reserve and now the federal government are taking steps that make it clear that they will not allow the housing market and the U.S. economy to correct itself. Unfortunately, with each row of bricks that raises the dam of the U.S. economy higher bankers and the government increase the economic pain that all will feel when the dam does break.

First, the Federal Reserve Bank sees that the housing market is correcting itself and responds by lowering its interest rate. Yes, it re-assures financial markets but it also sends a subtle but unambiguous message to every American. Borrow all you can because when the time comes to pay the money back the Fed may change the rules. It is no wonder that Americans have a negative savings rate.

Let's think about why Americans choose to borrow rather than save. Lowering the interest rate has two effects. First, lowering the interest rate encourages borrowing and discourages saving. Who wants to save his money at 1 or 2% interest? Much better to borrow at 5 or 6%.

Also, in today's economy lowering the interest rate will increase the rate of inflation. Inflation, of course, is the great adversary of savings. It is bad enough to only receive 1 or 2% on your savings; it is doubly bad when inflation is higher than the interest rate that you are receiving. If we want to raise the amount of savings in the United States, we should encourage savings and discourage borrowing.

The recent move by the Federal Reserve Board and the discussion by the federal government are steps in the opposite direction. By lowering the interest rate, the Fed has just said that it is more important to bail-out borrowers than safeguard savers. The banks will get their money either way. But what about those who have saved for years rather than upgrade to that new and bigger house? What about those who are planning to retire in the next few years rather than those who just got a "great rate" (that is scheduled to increase in the next year) on a new house?

Between the Federal Reserve Board injecting money into the economy and the federal government planning to help homeowners avoid foreclosure, the idea seems to be that Americans should not have to face the consequences of their acts if the consequences would be too painful. Every person who signed a mortgage to buy a home was a legal adult who was aware of the consequences

The real story is the incredible reversal of common sense. To me common sense says that borrowers who over-reached and took out loans that they cannot pay off should face the consequences even if it means moving in with friends or relatives. Savers who socked away money for a rainy day rather than upgrade to a McMansion should be entitled to not worrying. Instead the government is talking about taking taxpayer money and giving it to people who took a risk and lost.

Thinking in terms of real people, we should imagine two imaginary couples. Both couples are within ten years of retirement. As their children leave the house, marry, and move away, both couples consider what their financial goals should be. One couple decides to sell their home, downside to a smaller home, and use the profit to pay down their mortgage so that they can pay their home off by retirement. They also use the smaller mortgage payment to save for retirement.

The other couple decide to upgrade to a newer house in a better neighborhood and take out an ARM with a really low teaser rate. They can just afford the payments but figure that they will continue to get raises and interest rates will stay low. They convince themselves that they will always be able to refinance and if things get really bad they can sell the newer house and downgrade. After all, the loan officer tells them, home prices always rise.

Now think about both these two couples and their respective situation now. The couple that saved has fewer worries; in fact, they are poised for retirement. They have sacrificed their present enjoyment of a bigger and more prestigious house for their future enjoyment of a secure retirement. The second couple, on the other hand, is now in a desperate situation. They face a larger mortgage payment as their ARM is reset. Further, they find that they cannot sell their house at any price. They do not want the bank to foreclose on their house, but they do not have the financial resources to pay the higher payment. They sacrificed their future retirement for the temporary enjoyment of a nicer home.

Now the Federal Reserve is lowering interest rates and the government is talking about bailing out overstretched borrowers. If both these things happen, the couple that saved will see their hard-earned tax dollars going to pay for a home that they did not purchase and will not get to enjoy. The couple that saved will see their savings for future retirement diminished in buying power by the ravages of inflation.

What powerful lesson will this teach to the people of my generation? "Don't save, spend! Spend it all and borrow some more!" And some people wonder why the United States is not mentioned in prophecy ...

Don't Move That Office Chair

This article highlights what may be the next OSHA regulation. So be careful ... and move those chairs while you still can!

I will be back

I know that it's been some time since I posted to this blog. I haven't forgotten about it; I've just been off my schedule and unable to give this blog the attention that it deserves. Don't worry, I have several controversial ideas to share with you soon.

Medical costs in America

Americans seem to be shocked that medical costs continue to soar. Many companies are paying almost $1000 each month to pay insurance premiums for each employee. Medical costs have increased faster than inflation for some years now. With the upcoming presidential election, Americans are sure to hear more about medicine's spiraling costs and proposals to solve the problem.

Like everything else, the Bible gives us an explanation of the human reason why medical costs are exploding. In Job 2:4, God records for us that Satan says. "All that a man hath will he give for his life." In other words, when it comes to medical care people do not follow normal economic principles that keep down the cost of other things. Let me explain.

The first principles of economics revolve around supply and demand. When supply is higher than demand, prices fall. When demand is higher than supply, prices rise; and when demand and supply are equal, prices are stable. When this basic understanding of economic principles are applied to Americans' current medical situation, it may seem apparent that the price of medical care has exploded because demand has not kept up with supply.

In reality, it is not a constriction in supply that has raised prices, it is that Americans demand premium health care. Because a man is willing to give everything he has to preserve his life (and his health, if possible), it is not surprise us that medical costs are rising.

Let's take two examples: an older man with good health insurance buying a car and the same man facing cancer treatment. As the man goes out to buy a car, he examines his options and his budget. Even if he is willing to buy his car on credit, his choices are limited by his budget. If he is middle class, it is unlikely that he will try to buy an S-class Mercedes-Benz. He may want one, he may think that it is the best car for his money, but he remains financially constrained by his average budget.

Now let's imagine that his doctor tells him that he has lung cancer. If he has good health insurance, it is unlikely that as he looks at his options that he will consider the costs. Especially if the prognosis is grim, he will expect his insurance to spend any amount of money in an effort to save his life. In fact, one common complaint against medical insurance groups is that they refuse to pay for experimental (and usually expensive) medical treatments. In other words, most Americans do not think that cost should be a factor in choosing medical treatment. So it is now surprising that medical costs continue to increase.

But let's imagine a more interesting scenario. Two brothers both of whom developed diabetes in their late 40's. Both are overweight and do not eat right. Both go to their doctors and receive a prescription for medicine (not insulin) that will help their bodies control their blood sugar. The medicine is expensive (hundreds of dollars a month) but since much of the cost of the prescription is paid for by their insurance, they choose to go ahead and take the medicine. Because they do not lose weight and continue to eat poorly, their diabetes worsens. Eventually, their doctors suggest that they should just begin to take insulin. It is inexpensive and effective in controlling the worst effects of their disease. One begins to take insulin, and his insurance pays for the bulk of the cost. He really does not even consider the cost.

However, his brother does not want to be dependent on insulin for the rest of his life. Also, he is considering leaving his job and realizes that should he decide to buy his own health insurance being an insulin-dependent diabetic will raise his future insurance rates. So he sees a doctor who tells him that through proper diet, losing weight, and exercise, he can control his blood sugar without insulin. The brother makes major diet changes, begins to spend several hours a day walking, loses fifty pounds, and soon has his diabetes under control without drugs or insulin. Since his employer pays his medical insurance premiums, he only sees a small savings in his medical costs. His insurance company, however, will see significant savings over his lifetime - none of which the brother will realize unless he leaves his job and becomes self-insured.

Now imagine that the American government decides to provide universal health care for all of its citizens. The two brothers mentioned in the scenario above would have almost no financial incentive to control their diabetes through diet and exercise.

In such a scenario where the federal government with its supposedly deep pockets is paying for health care and removes most financial incentives to preserve one's health without the use of drugs or invasive surgery, there will be little reason why all Americans will not demand premium health care.

Since this is the case, our government will be faced with two basic choices to keep costs down. One possibility is that the government could try to introduce price controls. Americans do not realize that they subsidize medical research for the rest of the world. Most new drugs and most new medical procedures are developed in the United States. The drug companies, doctors, and hospitals try to recoup the costs of developing the drug or procedure in the United States before exporting it to other countries.

This means that Americans receive premium health care. Yes, other nations may have less disease and better overall health because the focus in those countries is on preventing disease rather than curing it. But when it comes to curing disease, America has the world's best - and most expensive - health care.

This means that American doctors also focus on supplying cures rather than controlling causes. The current system simply does not provide enough incentive to preventing disease. Smoking pay only marginally higher costs for health care, the obese do not have significantly higher costs, people with high cholesterol do not face daunting bills. As long as such a situation continues, Americans will continue to persist in unhealthy lifestyles and expect their doctors to treat their symptoms. While there will always be health conscious people who seek to avoid disease, the current reality is that too many of us expect to eat what we want, do what we want, and live without thinking about our future health. When diabetes, heart disease, cancer, and other illnesses occur, we expect that our medical system will go to extraordinary lengths to restore our health and prolong our lives.

The second way that the federal government could control costs is through rationing care. This is common in socialist countries where people often have to wait months for common surgical procedures such as hip replacements or heart surgery. While the such governments do not publish ration books or coupons, they ration care by only paying for a certain amount of such procedures.

So there are only three basic solutions to the health care funding crisis in America:

1. Financial incentives and disincentives to cause people to search for non-medical ways such as diet and exercise to preserve their health. I do not think that most Americans are willing to go this route. It seems unjust to Americans that they should have to consider the cost when choosing medical treatments. Should I undergo chemotherapy and spend my life savings or should I die "prematurely"? Such questions seem abhorrent to Americans.


2. Government or insurance company rationing of health care. This was tried back in the early 90's when HMO or health maintanence organizations tried to control costs by preventing illness and restricting patient access to expensive medical drugs and procedures. Americans found this to be "unreasonable" and health care costs soared from there. Some may point out that even during the zenith of HMOs health care costs continued to rise. This is true: but they continued to rise because Americans resisted having their health care rationed. The purpose of this post is not to support HMOs or their practices, but if Americans want cheaper health care they will have to make a decision to increase supply (and decrease quality) or decrease demand (which they have proven unwilling to do.


3. Government intervention to control health care costs. Obviously, as financial incentives for finding new drugs and procedures become more scarce, such research will slow significantly. Are Americans willing to wait decades for research into curing Alzheimers and other diseases to progress.

My advice is for Americans to begin to look for ways to prevent disease and cure causes rather then treat symptoms.

Quit pretending evolution doesn't threaten religion. - By Jacob Weisberg - Slate Magazine

Quit pretending evolution doesn't threaten religion. - By Jacob Weisberg - Slate Magazine

I found this article a long time ago. But recently I was reading Bones of Contention by Marvin Lubenow. In it he includes a humorous exchange in which an evolutionist and creationist discuss the evidence for evolution. The creationist wants the evolutionist to check out evidence that contradicts evolutionary theory. The evolutionist keeps repeating the mantra that scientists know evolution to be true and that creationists are allowing religion to cloud their thinking.

Intelligent design advocates want the same thing: they want evolution supporters to check out the evidence against evolution. But they want to present that evidence without reference to a mechanism to replace natural selection and random mutation. For this, they get beaten up by the atheist evolutionists and by the creationists. Interestingly, the atheists and creationists both beat them up for not stating what mechanism they think intelligent design uses. By definition, the atheists are looking for answers that exclude God and supernatural intervention. There are not fooled by intelligent design advocates because they know that intelligent design points to an intelligent designer, in other words, a god.

Creationists believe that intelligent design advocates should go farther and state the obvious: God is the intelligent designer. This seems to be exactly what most intelligent design proponents want to avoid - any mention of the word God.