No more executive bonuses!

I very much like the article in today's Wall Street Journal by Henry Mintzberg. I think he has the right idea. He sees the business firm as a community of people, and executives as leaders and members of that community. He also argues that the success or failure of a business can not be attributed to one or a few individuals with exalted titles. Under these conditions, bonuses can not be justified as in any sense deserved. Bonuses send the wrong message to employees, namely that their contributions to the firm don't matter. And bonuses create incentives for excessive risk-taking and short-term decision-making. It's better to loot the firm's intangible assets for short-term profit gains than to tend the business for a sustainable future.

Economists have a lot to answer for here, too. Once we began teaching that workers were interchangeable parts like machines, and just as replaceable, we opened the way for the idea that there is really only one person who counts in a business, and that's the CEO. While it may be a convenient way to model labor markets for some purposes, the unintended effects on business behavior, especially compensation practices, have been devastating. Not only the growing inequality of the American income distribution and American society, but also the modern wave of business scandals and the financial collapse of 2008 have their roots in this type of thinking. We need more people to say it out loud, as Prof. Mintzberg has.

I liked David Brook's framing of the health care debate as "The Values Question." He sums up the dilemma succinctly:

The bottom line is that we face a brutal choice.

Reform would make us a more decent society, but also a less vibrant one. It would ease the anxiety of millions at the cost of future growth. It would heal a wound in the social fabric while piling another expensive and untouchable promise on top of the many such promises we’ve already made. America would be a less youthful, ragged and unforgiving nation, and a more middle-aged, civilized and sedate one. [emphasis added]

I agree (mostly). He makes a strong assumption concerning the disastrous level of costs and drag on the economy from a revised health care approach. That may actually be the case, or it may turn out to be overstated. However, have we not also overestimated the boost to the economy of supply-side economics, and for that matter, underestimated the drag on the economy from the disparity in income and opportunity (e.g. lost H.C.)? I wonder, since we have erred on the side of allocation for so long, might it be time to err on the side of distribution and see what that might do for the well-being, and even productivity, of the nation? Is the choice between decency and vibrancy truly a zero-sum game?

A Dialogue on James K.A. Smith’s Account of Markets and Christian Desire

After reading James K.A. Smith's latest book: Desiring the Kingdom: Worship, Worldview, and Cultural Formation
I made some favorable comments about Jamie's argument that market participation may shape a set of desires which are contrary to, and in competition with, the desire for God. As is often the case, John was able to help me think through some of the issues, in the ensuing exchange (posted here with permission).

First, a summary of Smiths argument: modern consumer capitalism, by providing a set of practices, routines (or even liturgies) and images of an ideal life, is able to shape people's ultimate desires in harmful ways. People devote a large part of their life engaged in market activity at work and at the mall, and thus spend hours practicing consumption and profit maximization. Moreover, the most powerful media messages are ones focused creating the desire for a set of consumption goods that are necessary to achieve a certain lifestyle. In the end, this lifestyle, with all of the profiting and consuming that goes with it, becomes the ultimate vision of the good life that people adopt.

Now, John's comment:

My view on this radical orthodox approach to markets, values, and Christianity is that they have a mistaken understanding of how people operate in markets. They believe that people learn to maximize utility or profits or standard of living or something similar in the economy, and then bring that home. My view is that people have a set of beliefs that is their functional religion, and they operate out of that in all areas of their life. In my view, most businesses do not maximize profits. Many of them these days have a mission statement in which they describe a whole set of values that they try to fulfill. Same with individuals. We have plenty of evidence from behavioral economics that people are not "rational" in their economic behavior. You can find me advocating this position as early as "Stories Economists Tell" in 1988. It is also in my review essay on the Wealth, Poverty, and Human Destiny book that appeared in Faith and Economics: http://www.gordon.edu/ace/pdf/noelEtAlF04.pdf . (It starts around p. 67.)

My response:

I had read essay you linked to here about a year ago, but I had not connected those arguments to Jamie's work. I think that your response to this line of argument provides a nice dose of reality to a theory that over-simplifies the human condition. In my reading of Jamie's book, I kept thinking "this does not sound quite right" but could not put my finger on it. For that I thank you.

I do think that his argument might have merit in the following way: I do buy that the market system, and specifically the wealth of consumption options available to us today, makes a certain form of consumption-based idolatry especially easy to adopt. This, I think, is Jamie's main argument when he states that the market (or the mall) is the primary competitor with the church today for people's hearts. Part of what makes this type of idolatry easy to adopt is that consumption and shopping are increasingly a form of entertainment, but also because modern marketing really is pretty good at shaping people's desires.

One open question in my mind is whether all of this amounts to a re-shaping of people's "ultimate desires" or if we are simply moving around people's preferences for one set of goods/services over another. Jamie claims the former, if the latter is true, then modern consumer capitalism is much less pernicious.

John's response:

I used to be a follower of Galbraith on the issue of the effects of advertising, thinking that it really did shape preferences. Now I'm more inclined to think that the bulk of our purchases follow from a few very basic "lifestyle" decisions, and that advertising mainly influences teenagers who have a lot of discretionary income and are unduly sensitive to what is "cool." There's so much advertising now, especially on TV, that I don't even understand. It's not aimed at folks my age.

 

The CBO and Preventative Care

The Congressional Budget Office has a way of ruining a good party. Today they came out with the depressing argument that:

the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

My understanding of the history of the NHS in the UK backs this argument up. I believe that the cost of the service ended up being far higher than they anticipated due to increased demand swamping the benefits of preventative care. I could be wrong though.

That said, we need to figure out how to provide care for everyone, and it may be the spending more on preventative care is still the right thing to do. After all, if you can avoid ever getting sick, that is worth paying for, but if they are right, we will have to think more carefully about the financing of a public health plan.

More on health care

Several other reasons for high health care costs: *Consumers have limited information about prices charged by different providers, and about quality of different providers. *There is high concentration in some of these markets, particularly hospital care, insurance, and in some cases physician services (especially for specialties). The result is non-price competition which drives up costs. *Consumers receive their info about costs and benefits from providers, who often have an incentive to provide more procedures and visits. *Providers are required to provide uncompensated care, the costs of which are shifted onto paying customers. *The incentives are for uninsured individuals to skimp on preventative care and wait until they need high-cost catastrophic care. *The industry has been slow to adopt advances in information technology that have increased productivity everywhere else they have been applied. I think this has less to do with lack of cost-consciousness than with problems small providers have raising capital. I think the reform is aimed at addressing many of these problems. Some are directly addressed by, e.g., subsidizing info tech for providers, and doing more effectiveness research. But by getting everybody insured, the problems of uncompensated care and lack of prevention are reduced. My instincts are that this is a cost-saver, but as Steve says, it's an open question. I think you can buy a lot of generic statin for what a coronary-artery bypass costs. A universal mandate with limited community rating means much reduced administrative costs, which are ongoing. Competition is encouraged among insurers, who in turn use their market power to deal with the providers. We know this stuff works in other countries. We have by far the world's worst health care system, measured by cost-effectiveness. The only thing that prevents reform is our pride in refusing to learn from others who do it better. John Tiemstra

Health Care Costs and Reform

Here is my attempt to organize my thoughts about this health care reform debate.

As far as I can tell, the following are the main arguments for why health care prices are at current high levels. I am not certain each of them is true. Though all five arguments explain why the standard market forces that would normally exert downward pressure on prices do work as well in this context.

1. 1) Most consumers are insulated from the cost, true of those in most traditional insurance plans and government insurance.
   
2. 2) Consumers are unable to discern small variations in quality, so prices do not reflect marginal benefit.
   
3. 3) Due to lack of price-consciousness R&D is new-product focused not efficiency focused.
   
4. 4) Due to the lifecycle of medical procedures and drugs, a large portion of the best medical treatments are under patent, and thus subject to monopoly pricing.
   
5. 5) The government is unwilling to use its monopoly power in some market segments (medicare) to substantially limit prices. This is probably due to politics, the two main parties interested in medicare are health care providers and patients, providers care a lot about prices, patients do not care, because of #1.
   

Are there other major reasons for high prices that I have missed?

Total health care expenditures are a function of both price and quantity. Here are some reasons why quantity may be higher than optimal:

1. 6) We are rich, health care is a normal good.
   
2. 7) Americans are relatively unhealthy.
   
3. 8) Consumers are unable to discern small variations in quality, so they over-buy.
   
4. 9) Primary buyers (insurance companies) are not able to make choices about which treatments to pay for. I am not sure whether this is the result of regulation, competitive pressure, or some combination.
   
5. 10) The government is unwilling to use its monopoly power in some market segments (medicare) to substantially limit procedures. Again, this is due to politics, both providers and patients prefer that the government is less discerning.
   

The current major health care reform proposal has provisions to address #10 and #5, which is supposed to substitute for a solution to #8 and #2, by giving some government body (medicare advisory council) a mandate to make tough choices about care, and give them a tool called "comparative effectiveness review." It is not clear if this will change #9. If public and private insurance are supposed to compete, and it is competitive pressure that keeps private insurance from making tough choices, I suspect that the government's mandate to do so will only hinder its competitiveness, leaving us with rationing only for those in the Gov. insurance plan who cannot get private insurance.

Another argument is that providing care for everyone will result in healthier people, thus fixing #7 through preventative care. I suspect that the increase in cheap preventative care will be larger than the care that is prevented. This is an open question though.

Finally, there is hope that a government plan will be more efficient than a privately run plan because they don't waste money turning people away. I have seen a lot of debate go back and forth on this one and don't know what to think.

Bottom line: administrative cost savings may be a one-time decrease in expenses, and so this plan places all of our hopes for cheaper health care in the ability of the government to effectively ration treatment. It does nothing to address many of the root causes of the price increases.

The Case for Industrial Farming?

Blake Hurst, a farmer from Missouri, has written an interesting response to critics of industrial farming techniques. Michael Pollen's The Omnivore's Dillemma receives most of his criticism, and in the process he defends the farming practices, both for livestock and plants, that are widely condemned in a slew of recent books. I am not quite ready to give up on organic food altogether, but his arguments are good enough to make me highly uncertain – which, for me, is familiar territory.