Rapid Rise of Healthcare Costs

Rapid Rise of Healthcare Costs

I just returned to the Boston area from a couple of weeks in South Carolina and was amazed by how much advertising for medical services there was on TV. I happen to hook up with a local lawyer on the golf course and he suggested that the costs started rising disproportionately (labor rates in higher end healthcare grew much faster than others) in the 60s and 70s when privatization of healthcare started. Though it sounds reasonable, I wonder if is not related to the issue discussed in a previous post “Exorbitant Salaries Revisited”.
“ Gladwell pointed out that there was a surge in the salaries of athletes, entertainers, lawyers and CEOs starting in the 70s. He correlates this with availability of capital. Prior to that time capital was scarce, but in the 70s there started to develop an overabundance. With a shortage of capital, when it came to bargaining for wages with talent, capital had the upper hand. The balance of power shifted in the 70s and instead of talent competing for capital, now capital was competing for talent and gave in to the demands for higher wages.”

Over the last several decades there has been a rise in average wages in the US. But when one looks at the numbers, the middle and lower wages have stagnated while the upper range has increased dramatically. (Doctors wages went up by a factor of two to three) though the argument for increase in availability of capital is plausible, I wonder if there are not other factors and explanations and how they relate to the widening gap between the very rich and the “not so rich”. Certainly different rates of change in wages explain the widening of the gap. But what are the underlying causes? If it is access of capital, then what brought about the access? Is the underlying cause related to government policies and if so, which? Or is it globalization where wages for the high-end skills are competing on a global scale where there is a strong demand and not much availability?

I will give this topic more thought, both as it relates to healthcare and in general and would appreciate hearing others. It would still be interesting to see statistics on increase in healthcare cost vs. degree of privatization in the industry over the last 40 or 50 years. Navigio, you are very good with facts and statistics. Maybe you can find some time to explore this. (I have the time but not the skill)

Free Market Forces as a Part of Nature

I saw an interview of a group of young men from North Africa who had entered Italy illegally and were now on their way to Northern Europe in search of work. This got me thinking about the free market forces at work drawing labor from lower paying to higher paying locations and how these forces are not dissimilar to forces in nature.

There is a scene in an old movie “Network” that supports this notion. The story line is as follows: A TV newscaster goes off the deep end and starts ranting and raving against the corporate establishment and as a result gains a large following. (There is a scene that is often repeated where his audience is asked to open their windows and shout ,“I’m mad as hell and I am not going to take it any more”). The ratings are skyrocketing and the network management is delighted but the company that owns the network is displeased with the attack on corporations. The chairman of the board calls the newscaster into a meeting, sits him down at the end of a long table in a darkened board room and after a few polite exchanges, assumes a very loud and angry “preachers” tone and scolds him. The chairman’s point is that economics follows the laws of nature, which the corporations adhere to and how dare he interfere with nature. The newscaster is convinced and tones down the rhetoric and starts arguing the corporate case. His rating plummet and the network management wants to take him off the air but corporate refuses. At a network meeting the management was beside themselves searching for a solution when someone in passing suggest killing him. The suggestion gains traction and they arrange to have the newscaster shot on air by a radical.

As forces in nature seek equilibrium so do market forces. The entire system is based on the premise that like liquids and gasses that are drawn toward regions of lower pressure until equilibrium is achieved so are labor and capital. Capital seeks the greatest potential for profit and as more is drawn in competition rises, profits decrease and capital looks for better opportunity. The same can be said for labor. In a particular region or industry where labor is scarce, prices are high and people are drawn into them. The young North Africans demonstrated an expression of true free market capitalism. They were drawn from poor areas into wealthier ones. The problem for the wealthier areas is that this influx can bring down demand and subsequently wages. The exodus of labor from an area reduces the supply and given there is a demand, causes an increase in wages. Left undisrupted, there is an equilibrium reached unless there is a growth in demand in the rich areas not sufficiently satisfied by the influx.

Man can and does intervene both in the case of “nature” and markets. Dams are built to constrain the natural flow of water. The larger the difference in the levels of water on either side of the dam, the greater the pressure differential and the larger needs be the dam. As in the case of water where larger differences in levels require larger dams, greater differential in standards of living require higher fences and greater number of border guards. As the gap grows, eventually the force becomes so strong that there are no fences high enough to stem the flow and as in ancient history, the hoards from the north attack Rome. Outside martial conflict or very high fences, the options are to either improve the lot of the poorer areas or lower the standard in the wealthier ones.

The free market unconstrained, knows no boundaries, ethnicities or religions. Governments in their role as custodians of the “well being” of their societies, much as they construct dams for their constituencies benefit so they enact policies restricting the flow of labor. I find it interesting that the conservatives, with the exception of Libertarians, supposedly the guardians of free markets, are the biggest proponents of tough immigration laws. This certainly is a call for more government intervention. Ultimately the difference between liberals and conservatives is not more or less government but the “sacred cows” the different constituencies want government to enhance, protect or eliminate. A good government is one that institutes policies that benefit its society as a whole while doing so within the guidelines set forth by its constitution and not sub-optimize the whim of a segment even if it is a majority.

Inconsequential People

My Dad was born in 1904 in Belarus and lived through the Russian Revolution and several other wars working in a slave factory in Germany toward the end of WW2 and with his wife and little kids spent seven years as a refugee after the war. He was a gentle man which led to great difficulties working in factories here in the States. He was a hard worker and looked for every opportunity to work extra hours to better care for his family. This angered his coworkers and they created a hell for him at work, teasing him and sabotaging the machines he worked with. He wasn’t a complainer and when recalling the past, he would talk about the better experiences but sometimes he allowed himself to remember the painful parts.
There was one story he told often with more pain on his face than I saw with any of the other recollections. When he was a young man he worked as a clerk in the office of the President of Belarus. After the end of one of the wars, I think it was with Poland, the army was demobilized and men returned to peacetime jobs. Returning from the war were also political operatives, members of the NKVD (the Soviet equivalent of the CIA), who were getting jobs in the government. A senior NKVD officer took over as Chief of Staff and brought with him his cronies. One day my Dad found himself with an assignment to train one of them and it was obvious that this was an end to his job. Unlike him, he got very angry and refused to do this, the new Chief of Staff fired him (the only time he was ever fired) and in his document wrote “you are not a clerk, you are an inconsequential person”. Under the totalitarian Soviet Regime, documents were required for everything. You couldn’t move from one place to another or job to job without them. One of the things I love about our Country is that, unless you drive you can live your whole life without needing any kind of papers though today there are people trying to change this. I believe of all his great pains he suffered (some of which were caused by me) being designated an “inconsequential person” bothered him the most.
I don’t believe my father was unique in his feelings. Every day through our actions and words, intentionally or unintentionally, we make people feel inconsequential. We do this when people become instruments for our agenda. A cabby is indistinguishable from the cab and just a way to get to the airport instead of a person who is driving us there. Employees are just hands used to achieve the corporate goals. Apparently insignificant words or actions by a parent can make children feel inconsequential and it may take a lifetime, if ever to reverse this. I remember a number of years ago I toured the Astor Mansion in Newport RI where the guide explained that the Astor family had a large number of servants. The inside male servants wore the same uniforms and were all called Jives, while the outside servants were called James. The same held for the female staff. All inside maids were Mary and outside help were named something else. To the Asters, these people were inconsequential. How sad for the Astors.

Pakistan Hiding Osama Bin Laden?

The “Arab Spring” for all intents and purposes has totally de-legitimized al-Qaida. So I am not sure of the significance of the death of Osama Bin Laden in terms of terrorism and fundamentalist Islamist international aspirations. However the attack on his compound demonstrates our ability and willingness to conduct surgical strikes in questionable areas with great sophistication, minimum loss of life and success. (Remember our rescue, also using Seals, of the Captain from the Somali pirates?)

Since the killing of Osama Bin Laden, there has been much debate about the competence or complicity of Pakistan. The suspicion is that someone in their government must have known of Bin Laden’s whereabouts. I heard a commentator on BBC say that with the corruption in Pakistan, Bin Laden would have never trusted anyone in that government with his whereabouts. I tend to agree with this observation.

Back in the 70s, France sent a communiqué to our government complaining about our recruitment of their military officers stating that one half of the senior military staff was on the CIA’s payroll. I suspect that one half was a gross exaggeration but nevertheless, if a significant number of France’s senior military staff was working for the CIA, the portion of a third world country’s must be much larger. Surely Bin Laden was aware of this and would expect that the probability was very high that any information in the hands of any Pakistani official would get to the US. So in hiding from us, he would not dare enlist the aid of Pakistan. “Hiding in plain sight” is a risky but sound strategy.

As with a number of Pakistani officials working for us, I suspect that a number are also working for al-Qaida. Because of this, both sides are very cautious in their dealings with Pakistani officials. We demonstrated this clearly by not including Pakistan in the loop regarding this operation and Bin Laden would have by not allowing them to hide him.

Exorbitant Wages Revisited

Last Sunday I was listening to Fereed Zakharia’s GPS on CNN where he was discussing the rapid and dramatic rise in salaries with Malcolm Gladwell, writer of books like Blink, Turning point etc. Gladwell’s basic thesis in much of his writing is that, whereas common wisdom attributes great success and failure to mainly individual attributes, much of it is really influenced by circumstance along with familial and cultural factors. His classic example is one of the professional Canadian hockey players whose birthdays are almost exclusively in January, February and March. This is because, in Canada, at a very early age kids are grouped according to age with the cut-off being the end of the calendar year. So the kids born in January are almost a year older than those born in December and at the very early age there is a tremendous difference in their development. The more capable kids (read the older kids) are moved into an elite league the following season and get more than 5 times as much ice-time and better coaching than the kids left behind. Not having the time to develop their skills, the kids left behind never catch up. (But I digress)

In the discussion, Gladwell pointed out that there was a surge in the salaries of athletes, entertainers, lawyers and CEOs starting in the 70s. He correlates this with availability of capital. Prior to that time capital was scarce, but in the 70s there started to develop an overabundance. With a shortage of capital, when it came to bargaining for wages with talent, capital had the upper hand. The balance of power shifted in the 70s and instead of talent competing for capital, now capital was competing for talent and gave in to the demands for higher wages. In the case of CEO’s he also pointed out that added to this, institutional investors “rolled over” further tipping the playing field in favor of the CEOs.

I think the above is an interesting insight into why large salaries started to be paid but it does not address the issue raised in the previous posting on the topic. Why are these jobs deemed to be worth the exorbitant pay? How much one is paid depends on two things, the value and availability of the talent and the competition between the buyers. Gladwell’s argument addresses the specifics of why the change now. In “the Wealth of Nations”, Adam Smith addresses the underlying issues relating to both.