Sunday, July 1, 2012

'Curing' Addiction with ever larger doses

Robert Trascinski makes a point that is easily understood by the average American, but not by our educated, so-called elites in DC.  Stimulus always fails because stimulus always becomes permanent.  And it always becomes permanent because all the incentives work that way.

The economy is hooked on stimulus, and it keeps needing just one more fix, not to thrive, but to keep from crashing.
 And it's not just that stimulus is permanent. It also becomes all-encompassing. Consider the pattern of the growth of the welfare state-again, this is a permanent, standing form of stimulus spending-to encompass every economic need experience by everyone. James DeLong has a good summary of this process.
"[T]he concept of 'welfare' has become an open, bottomless vessel into which every desire can be poured: Government takeover of the entire health and retirement systems; detailed regulation of employment; manipulation of money; subsidies for housing, education, energy, food; or anything else that strikes the fancy of some segment of the public.
"The 'some segment' part is crucial, because today's welfare has ceased to be limited to that of the public generally, or to the welfare of any group that has a serious claim to special deserts. Instead, it is the welfare of some special interest that is able to capture the policy process."
He writes, "So we've gone from stimulus as the exception to stimulus as the rule, from government assistance as the exception to government assistance as the rule."   And yet our idiot 'leaders' in DC can see only the power that comes to them from giving away the special interest goodies.  Giving everybody everything they want supposedly paid for by someone else makes everybody happy -- 'til, as Margaret Thatcher noted, we run out of other people's money.

He lauds Megan McArdle for pointing out that the economic principle involved is marginal cost pricing that is higher than marginal cost, but lower than average cost.  [my note -- in order for this to work, the seller has to be able to price discrimate.] It works fine as long as the bulk of the costs are taken care of because the marginal customer is just that, at the margin:

"You can get a sweet deal if you are the customer who gets marginal cost pricing. Medicare does this-reimburses hospitals at above their marginal cost, but below their average cost, so that private insurers have to pick up most of the hospital overhead. European countries do this with prescription drugs: reimburse above the marginal cost of producing the pills, but below the total cost of developing the pills, so that the US has to pick up most of the tab for drug development.

"The problem is that as voters and as customers, we often get the notion that this can be extrapolated to everyone. So liberal policy wonks want to save money by putting everyone on Medicare, or some equivalent program that uses the government's monopsony pricing power to get lower prices for everyone; thrifty customers think that everyone should drop cable and just pay $14.95 for streaming plus DVDs.

"But everyone cannot be the marginal cost consumer."

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