The Professor's Notes

Well, an era has ended.  I have done my last HS sports team video.

This time it was for Matthew’s Swim Team.  I had fun with this one, including playing with some 3D effects, but most importantly it was a chance for me to help the kids highlight the fun and excitement that was their Swim Season.

I would like to thank Mike Singletary for giving us the GREAT “Formula” quote, and the good folks Crackpot and Buzzkill at The No Agenda Show for the mix of the Formula quote.  It’s a great way to start a slide show–especially if we watch it “In the Morning.”

For the sound track I used:
Ladies and Gentlemen by Saliva

There’s A Party (Feat. George Clinton & Chali 2na) by N.A.S.A.

Those Magnificent Men in Their Flying Machines by US Air Force Band and Singing Sergeants

Just A Friend by Biz Markie

Lord, Guard and Guide (The U.S. Air Force Hymn) by US Air Force Band and Singing Sergeants

Nota Bene:

There are two hidden audio jewels.  At the end of the first song, there is a faint voice over, with a certain person saying “I was told that, that suit is illegal.”  And then, before “Just a Friend” the audio is, in classic “no one likes to be a video star” mode being told “Brady, Go Away.”

Podcast: Play in new window | Download

In the last post I wrote about the perversions of incentives that cause the problems in the health care system.  Let me point out that it’s not that we are behaving irrationally.  We are behaving completely rationally–given the situation we face.  It’s that the situation (the “help” we are getting) encourages bad decisions that drive up costs.

So now we face  the BIG PROBLEM.

By shifting to a policy where everyone is now to be insured, we open the floodgates of demand (okay, a bit much. But we certainly will allow millions more in.) Demand for services will increase. So it would make sense that prices would increase to balance out the demand (remember Econ 101, all else equal, in the near term an increase in demand will result in an increase in price. In the long term it should result in an increase in supply, as the market responds to the increased demand for the product).

Will we see prices increase? Not for the consumer–they are capped at the Co-pay. And now we are seeing pressures to not raise prices from the supply side (and the insurance companies will be SHOT if they raise rates significantly).

So what happens now? If prices cannot go up, then demand will remain (unrealisticly) high. Unrealistic in that demand is acting free of the market place.

With demand high, and the inability to increase prices we will see no real “benefit” to more providers entering the marketplace.

More to the point, even if we could see more providers enter the market there are significant barriers to entry. Consider the medical field:

1. Doctors must go through extensive training, and then licensing (not to mention the fact that they never really get it right–so must keep “practicing”)

2. medicines must be approved after rigorous testing, and their labs must be approved, and so forth.

3. Various other licensing and authorizing are in place for therapists, assistants, nurses, and the like.

Supply cannot respond quickly, and with a rising demand and supply unable to keep up, and with no pricing mechanism to regulate the demand we will face:

Shortages of service resulting in long waiting lines/delays.

And how do you deal with shortages? Since the market forces are not allowed to work, we are left with the government stepping in, once again, to fix the mess of it’s own making. They will have to “ration” care.

Sorry–it’s a fact. In every nation that has shifted to “socialized” they have faced shortages, lines and rationing.

It’s not something we can “do better.”

It’s economics.

Okay, here’s another problem, since spend way too much time talking about the mandate… let’s talk basic economics.

The whole initiative is predicated on a few arguments:

1. Costs (prices) are too high.
2. Insurance companies are “making too much money”
3. Millions of people don’t have access to care
4. The Health Care people are receiving is poor (oh, wait, it’s not about the actual care…)

So let’s tackle this. The basic problem now comes down to a discussion of supply and demand/economics.

As the system currently works we have two sets of perverse incentives fighting against the consumer (and one of these incentives takes place with the willing, yet unknowing, assistance of the patient)

First, the perverse incentives of the patient:

Currently, the “cost of entry” into the health care system is high (monthly “Insurance” rates) but thanks to low, or no, co-pays, the marginal costs of most health care transactions are quite low.

Given the low costs incurred per visit, and the high “sunk” costs incurred to enter the system, the insureds (patients) who HAVE insurance are incented to go to the doctors more frequently, and to go ahead and get the prescriptions (Hey, it’s only $3 copay at Wal*Mart!)

Of course, this is a mirage. The actual costs of each visit and each prescription are borne by the insurance companies, which then have to recover their costs through increased premiums, which of course has everyone screaming that the insurance companies are “gouging” the customers.

On the other hand, we have a set of pricing incentives that also conspire against the consumer. The ‘care providers” are aware that the patient/customer doesn’t see the actual costs–they only pay the co-pay. So given this we have a series of perversions that are at play:

1. Doctors are more able to prescribe tests/medicines, and the like, since they will receive little if any push-back from the patients because of costs. More services with a low marginal cost to the consumer/patient, but a higher total cost, paid by the insurance companies.
2. Insurance companies work to lower their costs by negotiating to pay health care providers a fraction (some value less than 1) of the billable rate. Thus the providers are incented to increase their prices the maintain their revenue stream. This increases the costs once again.

So these two twists to the problem work once again to force the insurance companies to have to raise the rates (really on everyone) to cover the payments they are having to make.

Now–as consumers, we see that we are paying a high “sunk cost” as a monthly fee and, rather than view this as traditional insurance (where I am betting against myself) the consumer wants to try to get at least that benefit back out of the “system” (and is encouraged to do so, by “low co-pays”)

Sadly, the whole mess was brought on by our desire to protect everyone and provide some level planning to health care. The “free market” actually would provide better incentives here, placing limits/governors not only on how much people are willing to spend on services, but the prices that people would have to pay. If service providers want to stay in business then they would be forced to price competitively based on the market, and the market would be making the decisions based on the consumers. As it stands now, with the “same co-pay regardless” the consumer has no indication of value, and the market cannot respond. Viagra is as valued as Interferon and as Motrin.

What to do when everything costs the same?

Let the experiment begin.

I am not alone in my expectation that the Health Care (insurance) reform will not improve Health Care (it won’t make bad doctors good ones, for instance) and it won’t improve access since lower prices have that pesky effect of increasing demand–in a field where the barriers to entry for suppliers are significant.

I will say this:  Welcome to the new “Grand Experiment.”  If it succeeds, then by all means celebrate (but could we get a good solid definition of success on which we can all agree?)  But (and this is significant) if it fails, how many will have died as part of the experiment, and will we ever be able to recover?

One final note:  As researchers we have to seek, and get, informed consent from human subjects before we can experiment on them.  Did you get the forms?

Writing as an academic, I desperately want to get my hands on (the demand data for) the iPad.  Specifically,  I wonder about the “pre-order” demands that have been placed.

I am not writing this as a “hater” or critic of the iPad.  I just would love to see if the demand spiked on the first day and dropped precipitously, or whether the demand over the 21 days prior to shipping stayed relatively constant, or even ramped up as we approached the 3rd of April.

Here’s what I wonder:  people who are early adopters, and the first to get in line and wait for days for a new product, are by all anecdotal evidence I have heard the ones who pre-order, and pre-ordered on the first day they could.  And in the case of my brother, ordered it as soon as the Apple Store made it available.

If my supposition is true, then the demand for pre-ordered items would have been heavily front-loaded.  Conversely,  I would find it quite interesting if demand for the iPad through pre-ordering had any sort of ramping to the demand pattern.  If the demand was increasing, then the big question of the day would be:  Why?

The next question is are the people who would normally stand in line to get the next “really cool product” the same who would want to pre-order right away (and thus reduce or eliminate lines at the stores) or is the psychology of waiting in line for a “cool new product” palpably different from the psychology of “getting” it?

Anyone have any thoughts or insights into this?

I caught in Twitter today a “retweet” from @MacsFuture where they said that the Nexus 1 isn’t selling well. There was a link to the full comment on posterous, where the author writes:

I wanted to tackle this for a minute.¹  I would have to agree that the NEXUS is not selling as well as, well, most other smart phones on the market right now, but on the other hand let’s balance the assessment by pointing out a couple things contained in the short post above.

1.  The forecast anticipates selling 1 million units by the end of 2010.   This is actually quite a  significant figure for a phone that really only works best (for now) with T-Mobile.

2.  The Nexus is only “sold directly by Google.”  In fact, let’s be more pointed with this: it’s only sold by Google, through an online purchase.  Imagine if the only way to get an iPhone was through the Apple Store site.  Would they still have sold millions? Yes, undoubtedly, but one cannot discount the tremendous boost Apple received by having their products in the hands of thousands of people nationwide, simultaneously.  Not to mention the tremendous press coverage of the “long lines waiting to get their hands on their first iPhone” that we saw in every news media market.

Now, a million units sold in 1 year is relatively trivial compared to the numbers of even the iPhone 1st generation phone.  That said, consider the deck that Google has elected to stack against itself.

T-Mobile is a good and worthy network, so I am told.  But more often than not, people talk about it as if it is the little sibling of the  ”big 3″ when people talk about their cell-carriers.  I think I can count on one hand (without resorting to binary)  the number of friends and colleagues that use T-Mobile.  Selling a million units for a phone that is, out of the box, tied to a company with http://en.wikipedia.org/wiki/T-Mobile_USA is “not too shabby.”  (This compares right now with AT&T having approximately 85 million wireless customers.)  Given the large numbers of people who are locked in to their existing contracts, I don’t see many people switching carriers, especially since they are not afforded the opportunity to “try before they buy.”  (See next point)

Additionally, the decision by Google to only sell the Nexus online, through their website, has to hamstring their sales.  I may like tech, but when it comes to dropping $500 or more on a phone (and/or getting a long term contract) I want to be able to touch it first, see how it feels and responds in my hands, and feel like I was an informed consumer when  I make  my decision.  I suspect I am not alone.  More than once I have driven past our local T-Mobile store thinking that, if only they had a Nexus in the store, I would stop and at least test the waters.  I suspect that, if I could go in to a T-Mobile and not only play with the phone a bit, but talk with them about the affordability of switching from AT&T to T-Mobile, I would make the switch.  And again, I suspect I am not alone.

Finally, early reports of lack-luster customer support by Google has most likely scared off a number of would-be consumers.  Take away the store front/salesperson access, and market your phone on a network that would require me to switch carriers, and I am going to want, nay expect, a rather significant online and “on phone” support structure.   Unfortunately, Google has grown a culture based around offering “free” and “Beta” services.  Expectations of support for “free” services are far lower than expectations when one spends a significant amount of cash.

And make no mistake–$500 is significant.

In the final (as of today) analysis, I would say that 1 million units sold is actually a remarkable number given that Google has left the confines of their “core competency” (which I will describe as creating free and innovative software-based experiences) and ventured in to the world of offering “for sale” hardware products.²  Additionally, they seem to be wanting to “play by the rules” of traditional retailing instead of breaking new ground in the cellphone industry (as was speculated prior to the offering of the Nexus).

What does the future really hold for the Nexus line?  It is now a waiting game, I suppose.  Imagine Google addressing even 1 of the issues above. An expansion to another network (such as a Verizon or AT&T) or even the opening of sales at T-Mobile stores could make a significant difference for the phone.  Or, perhaps they utimately will rewrite the rules for cell-phones, offering free phones to those that actively use Google services, extending the Ad Revenue model to a whole new domain.

Considering the mis-steps one can only conclude that the Nexus succeeds, despite itself.

A colleague of mine is a great friend. He would do anything for me, or for anyone for that matter. He honestly (and rightly) believes that we should do unto our neighbors as we would want them to do for us. My friend is a great man. I truly admire him and the heart he has for those around him.

He is also a self-professed liberal. This is not surprising. He believes that we need to look out for our neighbors, and his view of neighbor is expansive. So understandably (I hop) I found myself pondering if I am missing something. Is there something “great” about liberalism as we know it today? And if it is “great” does that mean conservatism somehow misses the boat?

After much reflection, I realized that we have two problems facing us. First, the liberal ideal of caring for those around you is not only a good one, it’s Biblical. We are called on by Christ to love our neighbors. And Christ didn’t draw any neighborhood boundaries, either. On the other hand, we are faced with an ever-enlarging government that, despite all the best intentions and heartfelt goodwill, never seems to deliver on the “big promises.”

My conclusion? Liberalism doesn’t scale–and it wasn’t ever intended to. For us to love our neighbor we must be in contact with our neighbors. We can care best for those we touch. I suspect this was designed into our nature.

There have been many articles and books written, speeches given, and studies done, identifying that we respond more positively, and give more freely, to concerns closer to home. So we are hard-wired to care for those around us. This “local giving” may not be motivated from a pure heart, but at least we know it happens. Superfreakonomics gives us a perspective on this altruism: ‘Most giving is, as economists call it, impure altruism or warm-glow altruism. You give not only because you want to help but because it makes you look good, or feel good, or perhaps feel less bad.”]

So we, for whatever reasons or motivations, generally want to help our neighbors. Surely that extends to those we cannot see, correct? Well, the authors of the book SuperFreakonomics would perhaps argue no. Not only do they essentially argue that liberalism doesn’t scale, they go a step further and discusses research that indicates that, when given an opportunity, people will not only fail to behave benevolently towards their neighbor, they will in fact, cheat them. But what is most interesting here, is that, in the research they discussed, the cheating occurred most often between people who were not neighbors. “In the data, List found an interesting split: the out-of-town dealers cheated more often than the locals.”

So here is where I believe liberalism, or altruism, fails. When we ask the government to step in and perform altruistic acts, we ask the government to do a few things on our behalf:
1. We want an non-person to demonstrate humanity. We ask that the government “care.”
2. We want the government to make the “right” choices about what and whom to care for. Of course, we find that often that means bringing the “bacon” (or “Pork”) back to our own districts, where we “see the need.”
3. We want the government to do all this, without actually requiring that we pay for it, and simultaneously wanting the government to make sure someone else pays for it (“raise the taxes on the wealthy.”)

So over time, we find that government is called on less to be altruistic on a grand scale, and becomes for nearly all a way to force others to give money to causes and people they otherwise might not support, while simultaneously bringing resources to bear on my own local problems. Government then takes on the roll of proxy for the same local concerns we used to care for ourselves!

This is, of course, simply a blog. I make no pretense of conducting large scale research myself on this topic. I am simply tying together my readings, and my observations of the world around me. It seems to me that most people want to help those close to them, and most when presented with true and compelling need or tragedy, will give. But when we rely on our government to function on our behalf we become disconnected. We no longer have those “feel good” moments that cause us to practice “warm glow altruism.” Government

And then, over time, we stop caring.