Random Nonsense

I have a good friend, who’s a very smart and very well-educated person, indisputably better educated than I am. And yet he sometimes makes the most nonsensical arguments.

Example 1: Cell Phones are Worse than Landlines.
My friend likes to complain about how crappy his cell phone service is. Every time a call gets dropped he goes on his well-polished rant about how we used to have this perfectly good technology that always worked, then we went and replaced it with this crappy technology that so often doesn’t work well. After the third time hearing it, I realized it wasn’t just overwrought frustration with dropped calls, but that he really believed landline technology wa superior. So I asked him why he didn’t get rid of his cell phone and install a landline. I also pointed out that of course landlines don’t work all the time–they don’t work when you’re in your car, away on vacation, at a conference, out to lunch with friends, etc. (Although, admittedly, some of those non-working moments might be a point in land-line’s favor.

Here’s the kicker. He actually understands the concept of revealed preference. And yet he had never connected it to his choice of phone service.

Example 2: National Health Care Service Is Great Because You Get all the Medical Care You Want for Free
My friend loves Europe. Politically he is very much more at home in Europe than in the U.S., and he much prefers European cities and culture to American cities and culture. That’s just background, and I have no problem with it; subjective preferences and all that. So he spent a year in Europe and loved his country’s national health care system because it meant he got all the medical care he wanted for free. When I suggested that maybe this was part of the problem national health care systems face, his response was, yeah, yeah, yeah, I don’t care, I didn’t have to pay for my health care.

He gets that “free” (e.g., no point-of-use payments) encourages overuse, which makes sustaining the system problematic. He gets that he is part of the problem. But it doesn’t matter because it’s how he really really wants it to be. He is, in fact, perfectly happy to have the costs entirely hidden from him through taxes, even if it means he actually spends more, because then he gets to enjoy the feeling of not having to pay for his medical care. That may actually be rational, but it’s still nonsense.

Advertisements

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
This entry was posted in Economical Musings. Bookmark the permalink.

9 Responses to Random Nonsense

  1. Not to belabor a point, but I do find landlines to be better, in terms of call quality, than cell phones, especially if I have to talk for more than a few minutes. For what it’s worth, when my cell phone when kepluey a couple months ago–now, it’s just a glorified watch that I have to recharge once a week–I wasn’t too upset (it was prepaid sort of thing, so I lost what I had paid into it, but otherwise was not on any contract). I know your point wasn’t so much about cell phones, but I just thought I’d make the point.

    About health care, I think I know what you mean. I would probably like a single payer system, or maybe some means-tested variant, but I do realize that there are real costs. When I did a research trip in Toronto a couple months ago, not only were prices generally high, but the sales tax was about 15%, whereas in Chicago, which I’ve heard has one of the highest rates in the U.S., it is “only” about 10% (with exceptions for such things as food, where the tax is either minimal or nonexistent). I don’t know how much the high prices and the sales tax–which I understand is both provincial and federal–goes to health care, but I wouldn’t be surprised if it does.

  2. Michael Heath says:

    I get your criticism of your friend’s flaw in logic regarding cell phones therefore my comment is tangential. I think what is justifiably frustrating is the perceived lack of progress getting the fundamentals of the basic level of service correct when it comes to both the mobile phone and Internet access provider industries. They have yet to deliver reliable service in spite of now having multiple decades to do so, they fail at basic ‘blocking and tackling’. Of course this is a mere perception where consumers are judging them relative to their experiences with other types of consumer technology products and services; I happen to share this perception.

    I don’t know what the constraints are regarding the mobile phone industries inability to deliver reliable service with good sound quality, just that they suck. I was a player in the telecom meltdown in the very-early 2000s and understand what happened there. The bubble and crash resulted in the death of a massive amount of development projects focused on bringing affordable multi-gig access to neighborhoods. The start-up I worked for in 2001-2003 had a key component solution for the telecoms and even had pilots in place delivering 5 Gbps to streets with an easy technology roadmap to quickly get to 15 Gbps*. When the market crashed OEM’s mostly reverted to selling off their massive [over-built] inventories of older technology and promptly shut-down new product development projects. We have yet to recover from this bubble and the reaction. From my perspective it’s like the Dark Ages after encountering the Greek and Roman period. What’s particularly ironic is the growth of bandwidth consumed never faltered, instead we observed an over-reaction and under-reaction to what’s been a relatively easy to predict rise in demand for bandwidth.

    *True optical switching using nanotechnology; tiny mirrors placed on a semiconductor. Back then fiber switching required a transformation from optical to electrical, switch the signal packets, and then back to optical. OMM’s technology (and others) used simple software algorithms to move mirrors to direct fiber in-signals to fiber-out signals. This solution was far faster and was relatively cheap since you could leverage semiconductor fabs to build the mirrors on a semiconductor. However this technology temporarily lost out given a drop in demand to build more infrastructure coupled to competing with an excess of old inventory. Companies instead laid-off their new product development teams to ride this recession out by depending on their abundance of inventory. Obviously profit margins rose with such a reaction since it’s far more cost-effective to sell and service old inventory than develop, build, sell, and service new products. But such a reaction comes at the price of stifling future growth and providing superior solutions to the market.

  3. wrt national healthcare, are there any empirical studies that show that the revenue lost to overuse is greater than the savings generated by economies of scale? Or that it has to be? I’m still convinced that a national system, even if it’s overused, could generate significant savings over a system where a third or more of the cost goes towards billing and people pay massive amounts for services that they don’t need and that will not help them (i.e. ours).

    My second question would be, how far up on the list of goal for a national health care system would saving money even be? There are moral reasons why we should spend more on health care. And, there are savings that would be difficult to measure with a national system but seem rationally plausible (i.e. revenue generated by having healthier and thereby more-productive workers.)

  4. D. C. Sessions says:

    He gets that “free” (e.g., no point-of-use payments) encourages overuse, which makes sustaining the system problematic.

    And yet they have lower costs and lower cost growth than the USA.

    Could it be that in healthcare, the expensive part is in the later stages, which nobody does willingly (says /me, who put off a knee replacement until I was losing the ability to do daily activities) and the “encouraged by low costs” part is upfront and mostly preventive — resulting in lower net costs.

    You can pay for a whole lot of dental floss for the cost of one root canal, and I don’t know of anyone who decides that they’ll have that root canal because it’s on special this week.

  5. AMW says:

    D.C.,

    National health services typically achieve lower costs (and lower cost growth) through restricted access. It’s not that difficult to restrain cost to 5% of GDP when you have a single payer. The single payer just says, “we’re not going to pay out more than 5% of GDP this year.”

    None of this is to defend the ridiculous system we have in the U.S. (which is about 50% nationalized, fwiw). If I had to choose between our system and (what I’ve heard about) the nationalized system of Singapore, I’d choose the latter.

  6. James Hanley says:

    Re: cell phones. I don’t dispute any of the frustrations people have with cell phones. I only note that very few people choose landlines over cell phones. But I would have no criticism of anyone who chose a landline over a cell phone, either. (Since my friend lives in a basement apartment with very bad cell service, I would applaud him if he did–then I could understand our phone conversations.)

    Michael–that’s very interesting. I imagine we’ll get there eventually, as old equipment wears out? I’m curious, though, is it really the case that the bubble and recession causes us to be behind on this technology or are the bubble/recession a demonstration that the technology was before it’s time, in the sense of not yet being an economically efficient technology? Not an argument, just a thought, and possibly a wildly off-base one.

    Re: Health care. As to the cost-savings from economies of scale, it seems many countries are not really achieving economies of scale, but holding down costs, as AMW says, by controlled access, which seems to be necessary precisely because people act rationally, like my friend, in response to the no-point-of-care-payment structure.

    But the question makes me curious about how much economy of scale is available in health care, overall. Since economies of scale come from capital-intensive processes and not so much from labor-intensive processes, clearly there are economies of scale for things like MRI machines, but not so much in primary care physicians. How does the field work out across the board? I have no idea.

    As to how high on the priority list “saving money” should be, I say pretty high because that goes to the heart of a system’s ability to distribute its services efficiently. That is, the goal shouldn’t so much be to save money overall by cutting costs, but by saving money where savings are available so that the system can maximize the value it delivers (at whatever cost point the society sets).

    And to be clear, any criticisms I make are not necessarily defenses of the current American system.

  7. D. C. Sessions says:

    Since economies of scale come from capital-intensive processes and not so much from labor-intensive processes, clearly there are economies of scale for things like MRI machines, but not so much in primary care physicians. How does the field work out across the board?

    The USA has an amazing number of MRI systems (each with at least one technician) per capita. Being expensive, there’s a lot of pressure to use them so as to amortize the suckers. Thus, you translate capital expense into labor expense.

    And, yeah, being twitchy about liability doesn’t help. I have a story to tell on that if you like, but probably not for the board.

    And yet they have lower costs and lower cost growth than the USA.

    Could it be that in healthcare, the expensive part is in the later stages, which nobody does willingly (says /me, who put off a knee replacement until I was losing the ability to do daily activities) and the “encouraged by low costs” part is upfront and mostly preventive — resulting in lower net costs.

    You can pay for a whole lot of dental floss for the cost of one root canal, and I don’t know of anyone who decides that they’ll have that root canal because it’s on special this week.

  8. AMW says:

    The economies of scale argument strikes me as a red herring. If there are large economies of scale in an industry then long run average costs reach their minimum at a very large level of output (relative to the equilibrium level of output). This gives a cost advantage to firms that increase in size, so that one or a few large firms drive the remaining competitors out of the market.

    In other words, where there are large economies of scale, we expect the market to produce monopolies, duopolies or oligopolies on its own. If that isn’t the case in U.S. healthcare, it’s because 1) there aren’t very large economies of scale or 2) something is preventing consolidation in spite of large economies of scale. If #2 is the case, the most plausible cause of prevention (to me) is regulation of one form or another.

  9. AMW says:

    I’m still convinced that a national system, even if it’s overused, could generate significant savings over a system where a third or more of the cost goes towards billing and people pay massive amounts for services that they don’t need and that will not help them (i.e. ours).

    From my limited experience with the health care sector it seems to me that billing Medicare/Medicaid is much more onerous than dealing with private insurance companies. There are some providers who refuse to take Medicare/Medicaid patients. I’m unaware of providers who refuse to take privately insured patients. I suspect efficiencies in billing practices would be minimal if not negative.

    As to paying for unnecessary services, that is a problem indeed, but it’s largely driven by the facts that 1) a lot of health care is provided on a fee for service basis, incenting doctors to over medicate and 2) insured patients have minimal financial incentive to push back on costly procedures. A national system won’t change either of these facts. Instead, it will have to insert a government agency to push back on the provision of such procedures. This will be about as popular as cutting social security benefits.

Comments are closed.