The Illusion of Cost Control

Just as people are starting to notice that both the Republicans and the Democrats are off in never-never land about the fiscal deficit, so Robert Samuelson thinks that the Obama administration is dealing in illusions about cost savings in the health care reform package.

Here's the thing, and I've said this before (and I'll probably say it again), you can't reduce prices by increasing demand. According to the fundamental rules of economics, increasing demand (all other things being equal) causes increased prices. One of the reasons that health cares costs are as high as they are is that Medicare, Medicaid, and various employer-paid insurance plans have increased the demand for medical services. Providing another 30 million people with health insurance will increase demand that much more, and that means higher prices. Samuelson goes into this at a more detailed level.

In an article in the Atlantic I recently read (November 2009 issue, I believe), the author pointed out that the insured and the uninsured spent about the same amount of their own money on health care each year. The insured, however, spent about three times as much of other peoples' money than the uninsured. So, you can expect spending by those 30 million to quadruple once they have insurance, and that, together with the provisions disallowing "pre-existing conditions" clauses is going to push up costs.

The Old Passeth Away

Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: The Penguin Press, 2008. 442 pages. Acknowledgements. Notes. List of Illustration. Index. $29.95. ISBN: 0-793-67093-4. Read 19 September-15 October 2009.

I reviewed this book back on November 7. It's a good book, and I'm sure it's out there in paperback now for your reading pleasure.

Since I finished it in October, and posted the review six weeks ago, I think it's time to remove it from the Current Reading list.

Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: The Penguin Press, 2008. 442 pages. Acknowledgments. Notes. List of Illustrations. Index. $29.95. ISBN: 978-1-59420-192-9.

Niall Ferguson has become a very popular, very well-known, and probably quite wealthy historian. He has gotten into the business of writing television documentary scripts, which he converts into books that can ride the wave of publicity from the TV version. The Ascent of Money is one such, and I should say now that I did not see the television series. In fact, until I read the Acknowledgements at the end of this book, I was unaware that such a program existed. Its origin as a Ken Burnsian voiceover for a television audience helps to explain the simplicity and clarity of the narrative of The Ascent of Money. This is a very readable book, and it contains some charming and well-told stories.

The basic structure of this book is indicated by the title; Niall Ferguson portrays the development of our financial institutions as a matter of increasing complexity and hierarchical evolution. That’s fair enough, although, just as in biology, there are plenty of simple forms being created today, along with the complicated financial products that triggered the recent crisis. It is, by the way, a good thing, I think, that Ferguson wrote this book in early 2008, before the full dimensions of the crisis were known, and before its impact on the “real economy” was apparent.

The chapters reflect Ferguson’s structural assumptions. “Dreams of Avarice” is about the invention of money and the evolution of banking. While one of Ferguson’s first stories is about a mountain of silver, he makes it clear that, even in Sumerian times, money was as much a matter of accounting and marks on paper as of precious metal. A lesson that is clear throughout The Ascent of Money is that money is trust: credit really does depend upon credo. And that is true whether we’re talking about cash, bank accounts, bonds, stocks, real estate, or derivatives.

“Of Human Bondage” is about the development of bonds and the markets for them. “Blowing Bubbles” concerns stock markets and investment bubbles, primarily the grand-daddy of them all: The Mississippi Bubble. “The Return of Risk” takes up the story of the insurance business. “Safe as Houses” is about the real estate market, and the development of securities based on real property. The last chapter, “From Empire to Chimerica,” is the most speculative, but it does give a clear portrait of the interdependent relationship between Chinese productivity and American debt.

This is a very painless way to learn a lot about finance and something about economics. It may also serve to help some of us to understand some of the events that have shaken the banking system over the past two years. How was it that big insurance companies were so vulnerable to the machinations of supposedly private deals among wealthy investor? Why did the banks’ strategy of passing their mortgage risks off to other people through debt-based securities backfire? Why is it that we still do not know the full extent of exposure of American banks to these problems? And why has 2009 seen 99 bank failures, some of them of very large banks, when the government “rescued” the system a year ago?

I’ll recommend The Ascent of Money to those of you who don’t know much about finance. One of the things I have been learning is that you can’t know too much about the stuff that may determine whether you spend your golden years living in a refrigerator box under a bridge. Another is that most of us casual investors don’t have the time, energy, training, or instincts to understand finance on more than a very superficial level. Reading The Ascent of Money is an enjoyable way to get an overview of a subject that many people think of as dull. But the understanding it provides is, of necessity, less than profound.

Catching Up with Health Care

Tomorrow is the first day of Autumn, officially, which means that today is the last day of summer. I've had a good summer, generally speaking, including two very good vacation trips - one to Tennessee and one to the Four Corners region. But I have been neglecting my blog, and my e-mail, periodical, and other reading has piled up. So I've been playing catch-up here in September. Earlier today I posted on a column by Daniel Gross, who writes for Slate and Newsweek. Today I have Mr. Gross's column from September 10, which is only (only!!!) eleven days ago.

This column should be a sobering reminder to those of us who rely on employer-provided health care programs that change is coming, with or without the reforms being pressed by President Obama and the Democrats in Congress.