Browsing the blog archives for February, 2010.

Here Come the Price Controls

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It’s been leaked that Obama’s new healthcare initiative seeks to grant Washington the authority to veto price increases on health insurance premiums. This “get even with your insurance company” scheme might sound attractive to the masses, but it is another in a series of bad ideas from the left.

Whether on gas or healthcare, price controls ALWAYS reduce quality and/or create shortages. Businesses in competitive markets raise prices primarily because they seek more revenue to cover their expenses. The profit motive is there as well, but when other providers offer competing services, no single firm can unilaterally raise its prices just to make more money, lest its’ customers migrate to the competition. Increased profits come from innovation—new ways of doing things that are preferred by customers and/or cut costs. In other words, when buyers have choices, the market itself already maximizes quality and keeps prices as low as possible. Buyers can choose the combination of quality and price that they prefer.

If businesses in a competitive market seek to raise prices to cover increases in expenses, then not allowing them to do so will force them to reduce expenses by cutting quality or by offering their services to fewer customers. Cutting quality means that co-pays could rise or benefits could be restricted. Offering services to fewer customers means that providers must find ways to restrict access to their most costly customers, usually those who need coverage the most. Magically complying with the government mandate without these changes is not an option. There is no free lunch.

Needless to say, the response to price controls I just described would initiate a response from Washington that would force firms to offer more for less. In the end, providers would be required by law to offer consumers exactly what Washington wanted at a price Washington sets. In other words, we’d get the rationing of a single payer system through government control of private insurance companies.

Government control is not the solution here, but the problem. More competition is the key. If Obama wants better quality at lower prices, then he should keep government OUT of the equation. Instead, he should work with Republicans to allow providers more flexibility in their insurance offerings and enable consumers to purchase across state lines. More flexibility for providers will foster innovations that deliver more “bang for the buck.” More choices for consumers will force companies to innovate. None of this can happen because of government mandate.

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Capitalists & Opportunists

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There is a common misconception that CEOs are, by definition, capitalists. But this is not always the case. Executives—especially those in large firms—often welcome government intervention when it serves their own purposes. A recent example illustrates this principle well.

The CEOs of two large financial institutions—Deutche Bank and Barclays—recently announced support for a global bank levy to help cover the cost of any future “too big to fail” bank bailouts. Why would these executives support another tax? The answer is quite simple.

These executives are not being “socially responsible” by volunteering to pay more taxes. They are looking out for their own interests. Note that they are asking for a GLOBAL tax, which means no banks would be exempt based on nation. Everyone must pay, so no bank would get any cost advantage relative to any other. This means each bank could simply pass along the tax to its customers through higher fees of its own, knowing that its competitors must do the same. The net cost to the banks would be minimal, and its customers would pay the freight. Hence, they are really arguing for a tax on their customers.

But this is not the end of the story. In exchange for the tax, banks would obtain access to a rescue fund if they find themselves on the verge of bankruptcy. Such a plan actually encourages banks to make risky decisions without a fear of failure. Under such an arrangement, bank customers would finance a system that covers banks in the event that their risky decisions fail. All of this would be done in the name of stability and responsibility. No wonder bank executives are excited about this scheme.

There is a better approach. Banks should seek PRIVATE INSURANCE to cover their losses in the event of financial hardship. Private insurance companies would have a financial incentive to monitor bank activity more closely. A bank could disclose its private insurance to prospective customers, who would consider details of the arrangement and make informed banking decisions accordingly. In the end, only the most efficient approaches to limiting bank losses would survive. It is wasteful and counterproductive for governments to offer special protection to banks or other firms that are supposedly “too big to fail.” They should seek their own private protection—if they think they need it—and let their potential customers make their own decisions.

The truth is that corporate executives often act more like opportunists than capitalists. They appreciate free and unfettered access to markets and limited intervention while establishing their firms, but welcome government intervention that creates competitive barriers for up-and-coming rivals. We should not blindly support the interests of business per se. When executives stray from the tenets of capitalism, we must insist that they play fair. We should argue for liberty for buyers and sellers, and for the limited, rational governmental role in the process. Nobody should get special favors from the government.

Source: Financial Times, 30 January 2010 (page 1). “Bankers in favour of paying global tax.”

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The Toyota Crisis

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Commenting Tuesday (February 5) on the Toyota gas pedal situation, Transportation Secretary Ray LaHood used an interesting choice of words: “We’re not finished with Toyota…” Herein lies the heart of the matter.

We are familiar with the problems Toyota is having. The company is struggling to replace defective gas pedals on several of its models as fast as it can. As will most company crises of this magnitude, facts detailing how the crisis occurred and how it could have been avoided will disseminate in the coming weeks and months. For now, we must focus on the basics.

Toyota clearly erred in producing cars with the defective gas pedal. This is a serious problem, and Toyota bears the responsibility for resolving it as soon as possible. By all indications, the company is taking drastic steps to do just that. Offering no excuses, Toyota halted sales of affected vehicles while its engineers rapidly developed a solution. In Asian fashion, the company hesitates to defend itself and even apologized to its customers and asked for a second chance. Toyota’s crisis response appears to be responsive and appropriate.

Secretary LaHood’s response to Toyota, however, is suspect. Although it is LaHood’s responsibility to investigate the situation and take appropriate action, talking down the company is clearly inappropriate. In Tuesday’s statement, he added that DOT officials flew to Japan in December to remind the company “about its legal obligations,” as if Toyota was not keenly aware already. Meanwhile, a Congressional hearing is planning to investigate whether Toyota’s U.S. President Jim Lentz misrepresented the recall remedy. Expect CNN to cover this grilling intently. Like LaHood, the Democrats are seizing this opportunity to pile on. As Rahm Emaneul advised, one should “never let a good crisis go to waste.”

There are several reasons why this is happening. First and foremost, because the U.S. government has a controlling interest of GM, it also has the perverse incentive to use government power to beat down its competitors whenever it can. As I warned in a previous blog, the government will do whatever it has to do to make GM profitable again. The Toyota crisis also represents a golden opportunity to remind the public that corporations will cheat them whenever possible if the government doesn’t regulate them heavily. We’ve heard the “capitalism bad-government good” mantra ad infinitum for over a year now.

As we watch this crisis run its course, it’s worth considering two key questions. First, given the fact that vehicle recalls are commonplace, while do Democrats and the DOT feel the need to demonize Toyota in this particular case? Second, if the DOT (or more specifically, the NHTSA) is charged with protecting the safety of the general public, then why is the agency only taking aggressive action now, six model years after the earliest reported problem? Be careful…if your answer to the first question is that Toyota is getting what it deserves because its negligence was so gross and this particular problem is so widespread, then our government should have been on top of this a long time ago. Will the DOT be investigated for delaying action to “save the public?” Certainly not.

Early indications suggest that the problem is primarily with vehicles built in the U.S., not Japan. Regardless, rest assured that interesting facts will emerge in the next few months that shed light on the crisis. Some might not bode well for Toyota, but others will likely detail problems with federal regulators. You can also rest assured that the DOT will blame any shortcomings related to its response on Bush and/or budgetary problems, and will simply ask for more of your tax money to do a better job controlling the evil capitalists in the future.

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