The Conservative Cat

Loved the slides; only question is that you make the causal connection between subsidies and a higher price level; but the accompanying text claims that the analysis makes a link to inflation as well (changes in the price level).

I think you can make a very strong argument for an empirical link between subsidies and inflation; but so far no one seems to have a good theoretical explanation for the phenomenon.

The point here is that the cobwebbing causes inflation. Because the supply is less than the demand, the price goes up to attract more providers. In a normal economic situation, the price increase is slowed by a reduction in demand. When subsidies are present, the reduction in demand doesn't happen, so it rises at full speed. Hence, a subsidized good will experience a higher inflation rate than a normal good, which is what we have been observing for several decades now.

Capitalism is a law of nature?

Do the laws of nature apply to automobiles purchased by consumers?

Do those automobiles depreciate with use and time?

Our capitalist economists don't think so!

do a search on "Economic Wargames"

Dal Timgar

A search for "Economic Wargames" pulled up a list of posts by somebody named "Dal Timgar" telling people to search for "Economic Wargames". I think you need to slow down or something.

Automobiles do depreciate with time, as do televisions. The depreciation on automobiles and televisions used for a business purpose are reported to the government, whether the taxpayer involved is a guy building plastic joysticks in his basement or Exxon/Mobil Corporation. The removal of depreciation from the GNP to create the NNP is a recognition of the fact that the depreciated capital goods must eventually be replaced in order to maintain the current level of production.

What a great presentation! Now if you could just show it to lawmakers and bureaucrats (although I think you'd need the aid of a big guy with a pointed stick to get them to pay attention).

You made a great point here that is new to this economist. That is that most of the problems with this sort of system go away in the (unlikely) event that demand is perfectly inelastic.

I have two suggestions:

1) The phenomenon you are describing has a name that is in many textbooks - a third party payer system. You may be able to get more hits if you get those words in your keywords.
2) You can also show that a system like this will lead to more spending. The total amount spent in a conventional supply and demand diagram is the area of the rectangle with one corner at the equilbrium and the two opposite sides along the axes. In a third party payer system the amount spend is the area of the rectangle bounded by the higher quantity point on your supply and the two opposite sides along the axes. This implies that this sort of system will have more stuff exchanged, at a higher price, and of course for more money in total.

I have a post showing how the problems outlined here are what killed UTAD - a program for the "free" delivery of journal articles to patrons of libraries across Utah:

http://voluntaryxchange.typepad.com/voluntaryxchange/2005/02/utad_killed_by_.html

Law of nature? Not to deride capitalism, but capitalism is as "natural" as two bears trading beaver pelts. Yes, it can obey mathematical models, but to say it's "a law of nature" is like saying that Ford trucks are "born and bred in America" - they don't actually go out in the fields and *breed* (thank god, I couldn't -imagine- the noise) and markets don't spring from the soil in the springtime - they are made by human beings, theoretically to -serve- human beings.

A Ford truck is planned from the ground up. Markets are not planned-- they evolve. Philosophers like More and Mabley were attempting to design a better world. To use your analogy, they were developing the blueprints of a Ford while Smith and Ricardo were trying to explain the way bears lived.

When you tamper with the free market, the market evolves in response to the tampering much as insects in the wild evolve a resistance to insecticides. As a result, the amount spent in a third-party payer system is always dramatically more than the projections (as Dave points out in his comments). I call this "The Law of Stupid Politicians", but unfortunately the major economic journals have refused to adopt the terminolofy.

I fail to understand how you didn't find it.

http://www.spectacle.org/1199/wargame.html

Dal Timgar

I found it. You may have noticed I refuted your thesis rather nicely in my comment.

What happened is you had spent several days wandering around the Internet posting comments and messages telling people to look at your article. These comments and messages percolated to the top of the Google results list, so finding your original article proved more complicated than you let on.

If depreciation is only what is reported to the IRS then that would mean that depreciation did not exist before the creation of the Internal Revenue Service. The concept of GNP wasn't developed until the 1930's so depreciation couldn't have been subtracted until then. All this means that accounting books written before creation of the IRS shouldn't say anything about depreciation.

Do you suppose that CAPITALIST railroad tycoons in the late 1800's knew that their steam engines wore out and DEPRECIATED?

Dal Timgar

I'm just curious. Where in my statement did you find anything to imply that depreciation is only what is reported to the IRS?

"The removal of depreciation from the GNP to create the NNP is a recognition of the fact that the depreciated capital goods must eventually be replaced in order to maintain the current level of production."

Where do the economists get the value of depreciation they do subtract?

They define depreciation as capital goods only.

Cars purchased by consumers wear out therefore depreciate. Those cars got added to GDP when they were purchased but don't get subtracted, therefore our capitalist economists are doing BAD ALGEBRA.

Dal Timgar

A couple of points:

Firstly, you have not demonstrated that capitalism is a law of nature, but that market forces are natural. Market forces also exist in non-capitalist societies; these 'forces of nature' have never been successfully suppressed. So capitalism is not defined by the presence of market forces, but by the fact that capital is in private hands.

Secondly, you're in danger of submitting to the naturalistic fallacy that holds that just because something is natural, it must also be good. This simply doesn't hold up because there are plenty of natural things that are bad.

As you've demonstrated, market outcomes are not particularly hard to predict. So when we see a market outcome is likely to produce an outcome we feel is bad, we are right to intervene. Of course these are value judgements. You've pointed out that subsidising healthcare is likely to inflate the price of that care. And that's bad. It's also easy to see that without subsidies many people won't be able to afford healthcare. And that's bad too. So we have to choose the lesser of the two evils.

Another fundamental error:

Ferry says; 'People who support socialised medicine do so because that think there's no choice involved. They view the demand as a vertical line.' And then offers a graph with demand as a vertical line. In this graph the quantity of healthcare provided is exactly the same whatever the price point. To believe this is to believe that socialised medicine delivers the same level of healthcare as unsocialised medicine i.e. that it makes no difference.

However, supporters of socialised medicine do believe it makes a difference. They follow the earlier graph headed, 'The lower price enables people to get more medical care' and are prepared to take the hit of higher prices to deliver that goal. Supporters of socialised medicine believe that the more expensive healthcare is, the lower demand (because some people won't be able to afford it) and that's shown by a demand line that slopes down from left to right.

I'm not saying that something is good because it is natural, I'm saying that you can't make policy as if laws of nature do not apply.

In particular, if the demand curve slopes, socialized medicine is going to be much more expensive than a market system. The only way to control costs will be to impose price caps, and price caps means there will be shortages in the short term and rationing in the long term.

I'm pleased you've confirmed your rejection of the naturalistic fallacy. But there's no need to be fatalistic either. Having accepted that some market outcomes are bad (imagine what would happen if child pornography, drugs or slavery were left to market forces) we need to examine what can be done about that.

Of course the demand curve slopes (the only way it couldn't would be if everyone could afford all the healthcare they wanted) and if you subsidise it you increase demand and so the price, as well as the amount of healthcare supplied, goes up. Your slide headed 'The lower [subsidised] price enables people to get more medical care' shows this. The question for policy makers is, 'are we prepared to pay more in order to ensure more people get healthcare?' Few conservatives would refuse to pay something towards stopping children born into poverty, say, from getting some healthcare. Liberals tend to be more generous.

Sorry to hark on, but I just spotted something. You say a subsidy will lead to the need to impose price caps, but there is no reason for this to be the case.

The market will find a new equilibrium at which prices will stabilise.

For example, if the state guarantees a price for aspirin below the market rate, demand for aspirin will rise as more people can afford it. The total cost of aspirin (i.e. cost to patient plus cost to state) will also rise, as will the amount of aspirin sold. However, demand for aspirin will not continue to rise indefinitely, instead it will quickly find a new level and stabilise. When this happens the cost of aspirin will stabilise also. Policy makers can then review the situation and decide whether they want to lower the price to patients again, so more people can afford aspirin, or raise the price to patients, so as to save money.

The fact of the price stabilizing at the higher level is what is shown by the cobwebbing. Nonetheless, in every proposal for subsidized health care, we are told it will decrease costs, not increase them. (The decrease is allegedly from the effect of removing the profit margin.) In fact, they will increase dramatically, which is all I'm saying.

The problems with rationing and price caps only come as a result of trying to deal with the dramatic increase. The alternative to rationing and price caps is to spread the cost in the form of a tax increase.

There's nothing even remotely "generous" about that, and you're a very naughty boy for trying to slip that in. If you want to be generous, donate your own money to a hospital.

I'm pleased you now agree prices will stabilise, when previously you claimed ongoing inflation (not just a one-off price hike). The size of the price hike depends on the size of the subsidy. It need not be dramatic and is easily controlled. If costs get out of hand, simply choke-off demand by increasing the cost to the patient.

So talk of rationing and price caps is greatly exaggerated.

And of course subsidy comes from taxation. Do you take the view that taxation is greater evil than a failure to provide healthcare to those who would not otherwise be able to afford it, children born into poverty, say?

Children born into poverty already get free care from Medicaid. We're talking about socialized medicine, which is a middle-class benefit.

Your assertion that I'm exaggerating would carry more weight if it weren't for the fact that there is hyperinflation for medical expenses these days and the price caps and rationing are already happening for Medicare. I suspect the problem is that medical care is a moving target. By the time aspirin stabilizes we're getting a subsidy price spike for the purple pill.

The relevance of taxation is that it contradicts your claim to generosity. It has nothing to do with my feelings on socialized medicine. What truly scares me (and I'm talking real, wake-up-screaming fear here) is that a public health system will do for medicine what the public education system has done for spelling.

At the risk of being terribly patronising (but then all teaching is patronising) I'm going to suggest that your fear is brought on by your poor understanding of market economics. Your own charts show that prices stabilise immediately upon subsidy (how could it be any other way). You almost get this; suggesting 'a subsidy price spike for the purple pill'. The markets for purple pills and aspirin are independent of each other.

Lets look at some key learnings:

* Capitalism is not a law of nature
* But market forces can be said to operate within laws of nature
* Not all market outcomes are good
* But market forces are easily understood
* Markets can be manipulated to create better outcomes, so long as you work within and respect their 'laws of nature'

Here's another shock to your system: unrestricted, Capitalism always works against the free market. Capitalism is the biggest threat to free markets in the Western World.

Capital has a tendency to consolidate and Capitalists a tendency to co-operate in search of economies of scale. Yet markets are most efficient when there are a multitude of players. So to enjoy the benefits of the free market it's necessary to regulate, and occasionally break-up, capital through anti-trust laws and the like.

Drat. We were having a very nice discussion here and you have to wreck it by trying to snow me with a bunch of bald assertions.

Regulation only makes sense to you because you believe markets are easily understood. But if they were, you wouldn't talk about economies of scale without taking into account the opposing force of diminishing marginal returns.

The weak link in my chain of reasoning is that my diagram only shows a price spike, when in the real world we see continuing hyperinflation. My hypothesis is that the hyperinflation is caused by the dynamics of new technology. You are welcome to disagree with that hypothesis, but you can't get me to deny the existence of hyperinflation when all I have to do to see it is look out the window.

I can't comment on your hypothesis, because you've not explained it. So go ahead... how do the dynamics of new technology cause hyperinflation in subsidised markets (but not in unsubsidised ones)?

Dal Timgar has been trying to peddle this document through the internet for years now. He has been to every econ web site and has been proven incorrect. On the Dead Economist Society Dal Timgar was basically proven incorrect on every post. What we see with Economic Wargames is an individual with no Economics background attempting to use Macro principles to explain Micro events. Drawing conclusion without basis is the common thread of Dal Timgar analysis of theorems and his constants trivial annoyances of accounting being the holy grail of thought. It you decide to read the text of his argument, you will quickly see that it is not only a waste of time but also a lassitude of a cretin.

I would not be quite so harsh about Dal. He does come across as somebody who thinks he has a great idea and can't understand why other people don't see it. Nonetheless, I felt I should take the time to address his points in another post (http://www.conservativecat.com/mt/archives/2005/04/economics_and_c_1.html), because one of the goals of this site is to give conservatives examples of how to deal with goofy liberal ideas.

As to the new-technology thing. In an environment where profits are regulated by government subsidy, there is very little economic advantage to reducing the cost of an existing product. The 10% profit the government thinks you should have on tooth extractions is going to get smaller if you come up with a cheaper way to extract a tooth, and you can't count on an increase in business from price-conscious consumers because they're only paying the $10 co-pay no matter what.

But if you come up with a new, more expensive solution to toothaches, you get your 10% on a larger base cost, and again, you don't need to worry about people choosing the cheaper alternative procedure because, as before, they don't see the price.

I have held back on presenting this hypothesis because I can't substantiate it with actual statistics. But eventually the facts I need will appear somewhere on the Internet and I'LL BE READY.

http://www.avataravenue.com/account/mmspock/gnpequat.jpg

The purchase of capital goods, like automobiles by car rental companies, increases GNP and is represented by arrow A. This increases NNP as indicated by arrow A'. The B and B' arrows show the same effects resulting from the purchase of durable goods by consumers. Things are a bit more complicated for the C arrow. Since depreciation is subtracted from GNP, C' points down reducing NNP. This results in an equation with two arrows pointing up but only one arrow pointing down. These arrows on the equation make it obvious that something is missing. Since Depreciation in the upper equation refers to CAPital goods it is represented by Dcap in the lower equation with the same C arrow. The variable Dcon is added to represent Depreciation of CONsumer goods. The D arrow represents increases to Dcon which is inside the parentheses with Dcap so it is also subtracted. D' points downward with C' resulting in two down arrows to balance the two up arrows A' and B'.

Dal Timgar

ps1 - Oh poor deluded Dal Timgar, BOO HOO. LOL!

ps2 - I have had one person with a PhD in economics say I am correct and that the text books are wrong. A professor at the University of Calgary sent me an email calling me a LOONEY. I sent back, "You will never know how much it pains me to be called a looney by a member of a profession that can't do grammar school algebra." I never heard from him again.

You still have not adequately explained why anyone should care that consumer good depreciation is not included in the NNP. Rather than posting a link to a picture, link us to an example of an economist using the NNP and then explain why your formula would produce a better result.

Here is a website where the writer argues that NDP should be used instead of GDP.

http://66.102.7.104/search?q=cache:Da41gLHsbRYJ:www.csls.ca/ipm/7/spant-e.pdf+%22net+domestic+product%22+ndp&hl=en

He says that due to the fact that depreciation of CAPITAL GOODS nas been increasing in relation to GDP, due to things like computers and software, then GDP alone no longer accurately reflects economic growth.

Now as the the URL I provided where he emphasizes increased depreciation due to things like computers. Consumers buy computers and software too, so their depreciation should be increasing also. That is why i am typing this on a used 1.3 GHz computer that I purchased for $300. Whoever bought it new back in 2001 probably paid around $1500. I suspect it was purchased by a business considering the tags and inventory number that are still on it, so deprecitation was probably filed on it. But plenty of consumers could have bought this identical machine. Their machines got added to GDP but not subtracted to compute NDP.

The funny thing is the computer is a Gateway. I was at a Gateway presentation years ago where the company rep said machines should be upgraded every 3 years. Maybe I agree with him, but upgrade your 6 year old machine with a USED 3 year old machine. And run Linux.

Dal Timgar

The author states that an increase in capital goods depreciation means that the economy must work harder to maintain the same output. A consumer's computers do not participate in the production of output, so the author does not include them.

Consumer depreciation affects the demand side of the equation. If my computer wears out faster, I will want to buy more computers. Capital depreciation affects the supply side. If the computers used by Gateway's accounting department wear out faster, Gateway needs more computers in order to maintain the existing level of production.

I deleted the section of your comment where you argue that consumer depreciation exists. We all know that consumer depreciation exists. The question is, why should we care? The fact that something can be measured does not mean we have to measure it.

Would you be so kind as to delete all of my posts. If you are going to be my editor I want nothing on here.

If you need AUTHORITY to tell you how to do algebra there is no point in communicating with you.

Dal Timgar

That's too bad, Dal. As far as I can tell, I'm the only person who's ever taken you seriously.

Apparently you have as much trouble reading as you do thinking.

http://www.totse.com/
http://www.spectacle.org/1199/letters.html

Dal Timgar