• Tag Archives crony capitalism

  • A Startup Designed a Cheap Alternative to Braces. Orthodontists (Naturally) Want It Regulated.

    Posted on by Azrael Comment

     

    I have an economist friend who nags me (appropriately) for not sufficiently discussing supply-side solutions to the high cost of medical care in the United States. Here’s one step in righting the balance.

    Kayla Stetzel, a Spring 2018 intern at Reason, writes in “Start-Ups Make Cheap Alternative to Braces, Dental Trade Groups Cry for Regulation,” May 3:

    Braces are a burden. People have to miss work, arrange for child care, and travel to the orthodontist office over the span of a two to three years. Teens have to cut classes and ditch those after-school events to make room for appointments. Then there’s the price. Traditional Braces cost on average $5,000. Invisalign—a clear, plastic alternative to braces that is available only through licensed dental care providers—runs around $8,000.

    SmileDirectClub’s aligners—clear plastic mouth guards designed to straighten teeth—cost $1,850. CandidCo., another dental startup, charges $1,900. The fitting and monitoring uses a telemedicine model. Customers who can’t or don’t want to get their teeth scanned in-store can have impression kits delivered straight to their door. “Aligners” based on those molds are then delivered to customers at home. It’s part of an emerging trend in dental care known as teledentistry, which uses alternative platforms like mobile apps, video chats, and dashboards to give people remote access to dental care.

    The stark difference in cost and convenience matters. Many insurance companies do not cover orthodontic work, which is cosmetic for 98 percent of consumers. Private plans typically have a small cap for orthodontic coverage, leaving most people on their own to foot the bill. The AAO states that roughly 80 percent of Americans could benefit from orthodontics, yet less than four million people receive orthodontic treatment each year. According to the ADA, high costs are the chief reason why one-third of Americans don’t receive adequate dental care.

    Notice the price difference between this new technology for orthodontics and the old. You can see why orthodontists are arguing against it: some of them would lose their jobs and many of them would lose income from this new Schumpeterian competition.

    Incentives Matter

    Also, as the third paragraph above implies, it shouldn’t be surprising that we see such cost-saving technologies in orthodontics. Just as with Lasik eye surgery or elective plastic surgery, when customers are paying a huge percent—in many cases, 100 percent—of the bill, they are quite sensitive to costs.

    IBy the way, this shows that my emphasis on reforming the demand side of health care—one of the main ways being by having the customer face more of the incremental cost—might be justified. If customers face more of the cost, they will be more open to, and many will advocate, reforms on the supply side.

    Aside: On the Hillsdale College website, Ms. Stetzel writes that she “plans on attending law school with the intent of becoming an entertainment attorney.” That could make sense. I hope she doesn’t too quickly reject being a writer on public policy. She has a knack.

    Reprinted from the Library of Economics and Liberty.


    David R. Henderson 65

    David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at econlib.org.

    This article was originally published on FEE.org. Read the original article.



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  • You Can’t Regulate Away Crony Capitalism

    Posted on by Azrael Comment

    In a time of political polarization, it can be reassuring when the left and the right agree on an issue. One such area of consensus is the recognition of crony capitalism where big business and government work together for their own interests through systems of reciprocal favors.

    The Taxi Industry Is a Prime Example of Crony Capitalism

    An example of crony capitalism can be seen in the conflict between rideshare companies, like Uber and Lyft, and the taxi industry. Because Uber poses a competitive threat to the taxi business, the taxi industry has pushed hard to ban Uber from cities across the country by lobbying local governments with varying degrees of success.

    The taxi industry has enjoyed a monopoly for a long time thanks to their close relationship with government. By creating occupational licenses and charging what is often several hundred thousand dollars for a medallion, the taxi industry posed massive barriers to entry on their competition. Now, this government-sanctioned monopoly is facing an inevitable dissolution because of the innovation of ridesharing companies.

    Although both sides of the political spectrum may agree that relationships like the one between the taxi industry and local governments are a problem, they often disagree on the solution.

    The Solution of Increased Regulation Is No Solution at All

    The solution usually proposed by the left is to give the government more power to regulate business. The theory is that if we can increase the scope of the government, then government can clamp down on big business. But although this may sound good initially, it ignores the incentives created by government regulations.

    When government has more power to regulate business, businesses will respond by shifting more of their resources towards influencing the government to intervene in their favor. Businesses are incentivized to twist the law to their own advantage. Put simply, when the government has the power to control businesses, businesses will end up controlling the government.

    Increasing the scope of government over business accelerates the problem of crony capitalism in a cyclical manner which resembles a positive feedback loop. The government is given more power to regulate business, so businesses shift more resources towards gaining advantages using government power, and on and on it goes. Although many people who want the government to regulate business may have good intentions, in reality, this proposal ends up contributing to the very problem it seeks to solve.

    Another costly effect of regulations is that they disproportionately harm small businesses. Bigger businesses often have the resources to deal with costs from regulations (or to twist regulations to their own advantage), but small businesses frequently do not. Regulations impose costs on businesses in the forms of both time and money, neither of which small businesses can afford to re-allocate if they want to remain competitive in their market.

    Zero-Sum, Rent-Seeking Behavior

    Regulations, then, decrease competition and shift the market towards monopoly in two ways. Not only do they incentivize companies to use government power to their own advantage and to the detriment of competitors, but regulations also bury small businesses in compliance costs.

    Government regulations lead to what economists call “rent-seeking.” Rent-seeking, in this case, is when businesses divert their resources towards capturing a bigger portion of the existing wealth in a market instead of using their resources to create new wealth.

    One of the defining characteristics of a free market is that it allows for the creation of wealth instead of merely the spread of existing wealth. In a free market, people can trade resources in a way that is mutually beneficial and produces a net gain for each party. But the introduction of government force into the equation shifts things towards a zero-sum game where one party benefits at the expense of another.

    Government force in the form of regulations incentivizes this zero-sum, rent-seeking behavior. What this then leads to in a market is inefficiency, corruption, and less competition.

    Economist Frederic Bastiat may have summed it up best when he said, “As long as it is admitted that the law may be diverted from its true purpose—that it may violate property instead of protecting it—then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder.”

    The solution to crony capitalism that logically follows from all of this is quite simple. The solution is to decrease and limit the scope of government power. The less power the government has to regulate businesses, the less incentive businesses have to get in bed with the government. If government intervention is decreased and limited to only what is absolutely necessary, we will see the problem of crony capitalism radically diminish in both frequency and severity.

    Proposals for government regulations are a classic case of why policies must be based on more than merely good intentions. If one wants to evaluate a proposed policy, one of the best ways to do so is to consider the incentives that it will produce and the effects those incentives will have. Government regulations are a case where, although unintended, the results are very often negative.


    Sam Dugan

    Sam Dugan is a fourth-year undergraduate student at West Chester University of PA, studying economics and philosophy.

    This article was originally published on FEE.org. Read the original article.


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  • The Hidden Costs of Saving Those Carrier Jobs

    Posted on by Azrael 1 Comment

    The Hidden Costs of Saving Those Carrier Jobs

    Donald Trump has not taken office and already he is delivering on his promise to keep manufacturing jobs in the United States. Yesterday, he visited Indiana to celebrate his part in persuading Carrier to keep 1,100 jobs slated to move to Mexico at its Indiana facility. Speculation of bullying, tax-funded quid pro quo (Carrier’s parent company, United Technologies, holds large defense contracts) and corporate welfare were plentiful.

    Today, Zero Hedge reports Carrier was persuaded by none of the above. Instead, the company received “$700,000 a year for a period of years in state tax incentives.” That means keeping the jobs cost the government about $636 per job annually in tax revenues.

    Those costs must be passed on to customers or taken out of profits, the latter resulting in either lower dividends or less money reinvested in production.

    It would seem a win-win. 1,100 Americans keep their jobs, Carrier gets lower taxes to avoid having to pass on the cost difference to its customers and all the local businesses in Indiana benefit from the purchasing power that remains there with the domestic Carrier employees instead of being exported to Mexico.

    That, as 19th century political economist Frederic Bastiat would say, “is what is seen.” What is not seen is all the consequences of Carrier not moving those jobs to Mexico, where they could produce their products at a lower cost. When those consequences are considered and the ledger is balanced, the deal will have made the United States as a whole poorer and will have cost it jobs.

    Let’s first consider the decision in a vacuum, without the tax incentive. Carrier was moving the jobs to Mexico because it could produce the same air conditioner there at a lower cost, which it could then pass on to its customers. Keeping the jobs in Indiana raises the cost of production above what it would be with the move. That forces Carrier to raise its prices.

    And we must assume Carrier would have saved more than $636 per worker per year in tax breaks had they moved those jobs to Mexico, or the move wouldn’t have made financial sense. With each worker on average producing many air conditioners per year, saving $636 per worker works out to a negligible cost savings per unit. So, Carrier is likely absorbing some of the higher costs of keeping the jobs in Indiana, over and above what they are receiving from the government. Those costs must be passed on to customers or taken out of profits, the latter resulting in either lower dividends or less money reinvested in future improvements to production.

    Wealth Destroyed

    “Ah,” says the supporter of this move, “but many people are willing to pay a little more to keep those jobs in America!” Perhaps, but the economic consequences remain. Assuming the price of an air conditioner would be $5,000.00 if produced in Mexico and keeping the jobs in America only raises prices by the $500, Americans are now paying $5,500.00 for an air conditioner instead of $5000.00. They get no more for their money than they would have paying $5,000.00. All they have in exchange for the $5,500.00 is the same air conditioner.

    The air conditioner customers who would have also bought a bicycle also created jobs. Those jobs were lost.

    Had the job moved to Mexico and that same air conditioner been available for $5,000.00, the customer would have been able to afford an air conditioner and a bicycle, or an air conditioner and a new carpet, or an air conditioner and a new suit, for the same $5,500.00 he now spends to get the air conditioner only. The consumer is poorer because of the deal. His standard of living is lower. And let’s not forget that for every one employee producing air conditioners, there are hundreds or thousands of people consuming what those employees produce.

    At the end of the day, the ledger balances to this: the same number of air conditioners are being produced, but at a higher cost. That difference in the cost of production is lost. The standard of living of everyone who consumes air conditioners is lowered by however much more it costs to produce air conditioners in Indiana instead of Mexico. We assume it is $500, but the exact figure is not important. They are poorer by whatever amount the diminished efficiency increases production costs.

    A Net Loss

    “But kind sir!” says the apologist, “you have missed something. You have forgotten the purchasing power of those 1,100 employees, which will help local businesses and keep that wealth in America. That creates jobs that otherwise would have been lost!”

    No, it is not forgotten. It is merely balanced against purchasing power lost by all those consumers of air conditioners and against all the jobs they would have created with the $500.00 they would have spent with local businesses, had they saved it in purchasing the air conditioner. The air conditioner customer who also bought a bicycle, a new carpet or a new suit also created jobs or supported existing jobs, which are now lost. And not one in a million knows where they went. The unseen killer of those jobs is the decision to make the same air conditioner at a higher cost in Indiana than at a lower cost in Mexico.

    It doesn’t end there. Let us not forget the 1,100 jobs lost in Mexico, the third largest importer of U.S. exports. Because of the lost purchasing power of Mexican consumers, U.S. companies who export to Mexico lose revenue and must lay off workers.

    When the whole ledger is balanced, the jobs lost in the U.S. at least equals those 1,100 retained and likely far exceeds them, as inefficiency grows exponentially as its effects ripple throughout the economy.

    What About the Tax Savings?

    Finally, the apologist for the deal makes his last stand. “Yes, good sir, you make many fine points. But this deal involved lowering taxes for Carrier, which bestows upon them the same savings they would have realized by moving the jobs to Mexico. And even you must agree that lowering taxes and paying productive workers is better than allowing the government to use it less efficiently!”

    Well, there is the rub. The government is doing with those lost taxes precisely what the apologist said. It is using them less efficiently than the market would have. The market would have moved those jobs to Mexico and lowered the cost of air conditioners. The government has used its taxing power to keep the jobs in Indiana and raise the cost of air conditioners above what it would otherwise be if the jobs moved to Mexico, with or without the tax incentive.By keeping those jobs in Indiana, the net effect is that United States is poorer.

    But even on the tax incentive there is more that is not seen. It is not as if the $700,000.00 in tax revenues were left in the hands of the taxpayers, who might use it productively. 100% of it went to subsidize the higher cost of producing an air conditioner in Indiana instead of Mexico. And the government went on spending the same amount as before, simply collecting the $700,000.00 Carrier doesn’t pay from others, now or in the future.

    So, while the cost of the tax break is not added to the sticker cost of the air conditioner, the public is still paying that additional $636 per worker per year in the additional taxes collected to make up the government’s loss on Carrier. The public is also poorer by whatever price increase or profit reduction is necessary to offset the additional costs the company agreed to absorb to make the deal work.

    No matter what defense the apologist offers, there is no escaping this. By keeping those jobs in Indiana instead of letting them move where the market is directing them, the net effect is the United States as a whole is at least $636 poorer per year for every employee kept in Indiana by the deal. It also loses jobs due to the higher prices it still pays for air conditioners, over and above what the tax break could alleviate, or the wealth lost in dividends or reinvestment Carrier sacrificed to absorb whatever additional cost savings it had to forego to keep the jobs in Indiana.  And this is one little company and just 1,100 jobs. Imagine if Trump delivers on his promise to keep or bring back millions?

    Republished from Tom Mullen’s blog.


    Tom Mullen

    Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America. For more information and more of Tom’s writing, visit www.tommullen.net.

    This article was originally published on FEE.org. Read the original article.


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