Free Markets

Does anyone else find it ironic that our entering government is basically saying: "The free market system has shown that it can't work so we are going to implement policies designed to mimic the free markets so that we can control the outcome."

The idea that the free market system has failed us is outright incorrect. We haven't had a true free market in a long while. I also think its funny when it is insenuated that Bush invented the free market system. While in a way he was at the helm when the current market system was developed, he most certainly did not invent a system that had been around for centuries.

A free market is where a buyer and seller can transact business without any interference from each other and the government. When was the last time we had that throughout our economy? I can think of one prime example where this interference has caused huge problems throughout our country and economy: The Health Care System. Costs are rising at twice the rate of inflation, there is not enough money going into Medicare to cover costs, companies are passing more and more of the costs of insurance on to employees and things appear to be getting worse.

The biggest cause of our problems with the health care industry today is the moral hazard (and thereby cancelation of a free market) of having insurance, in particular Medicare, pay for the transaction taking place between doctors and patients. Why is this moral hazard? Since we, as consumers, don’t pay the full bill that we incur when visiting the doctor, since we pay a fixed deductible regardless of actual cost, we tend to not shop for the best, least expensive care and we don’t hold our doctor’s visits to emergencies. In other words, instead of purchasing a cheap mp3 player because we only have $25 to spend, we are going for the most expensive "do-it-all" mp3 player available because someone else is paying for the difference.

Think of it like our recent oil problems. The price of oil went from an average of $64 a barrel in 2007 to its peak this year at above $147 a barrel. One big reason for that 130% increase was the subsidies that many governments placed on the cost of oil. Meaning the consumer wasn’t feeling the full impact of the price and continued to demand more. The price dropped when consumers finally felt the price and demand dropped.

It really is supply and demand at its purest form. The problem has been that doctors are in short supply and costs of producing new drugs that we all demand are higher again limiting supply. Demand, on the other hand, has only increased and will steadily increase while the baby boomer generation goes through their peak medical spending years and they don't feel the full effect of the costs. Because of this disconnect the drug companies feel that they can spend outrageous amounts on R&D and of course pad their own coffers quite a bit and doctors feel that they can charge good amounts to cover their costs (which I understand are a lot higher than many think especially given malpractice insurance) and still pay themselves a salary worthy of someone with such high education.

Insurance companies have been taking the brunt of these increases but they can't keep doing it, hence the costs are finally being passed on to the actual consumers a little bit. At some point, however, something has to give even more.

Unfortunately it is almost political suicide to even suggest real, plausible solutions to the problems in our health care system. It seems, that like deer in the headlights, we all know something is coming, but we can’t seem to decide or agree on how to get out of the way.Our political leaders have proposed some possible solutions to our problems, but as of yet none of them address the moral hazard and limit to free market theory currently involved in the health care industry. We’ve heard President-Elect Obama’s plan, or at least what his plan was while on the campaign trail. What plan will be implemented? How can you allow the consumer to “feel” the costs associated with health care, while not refusing care to those who just can’t afford it? I am not sure, and I don’t think our leaders are either.

The real question is: How can we protect ourselves against the unknown future of health care costs, no matter what government does?

For starters, we can use the vast resources available to us for our health care advice. With resources like http://www.webmd.com/ and others, doctor’s visits could be cut back. Of course you should never rely completely on these sources when and if there is a major concern. We can also start our own savings plan for our future emergency health care costs.

One of those methods is through a Health Savings Account (HSA). HSA’s were signed into law in December of 2003 and can be a little confusing. A great resource, which does explain in a very detailed way what HSAs are and what they do, is http://www.hsaresourcecenter.com/ and I encourage you to visit their site. In particular their site describes what an HSA is and how it could help with health care costs for you as an individual and quite possibly, if participation is good enough, lower costs in general.

The second possible solution comes through purchasing Long Term Care or Life Insurance policies with benefits that give the possibility of using your death benefit for qualified medical expenses. There are restrictions and rules on how it can be used, but could help.

The main idea is that, relying on our political leaders to fix the issues is not going to work because our current leaders are bound and determined to take over the free markets and try to mimic it through their own manipulations.

Some Thoughts and Perspective

Given the recent economic activity and volatility in the market, I thought I would provide some perspective on some of the recent news.

On November 28th the National Bureau of Economic Research (NBER, the group primarily responsible for cataloguing economic cycles) agreed as a committee that in December 2007 we reached a peak in Economic expansion*. When a peak is identified it means that we have entered into recession. They define a recession as a significant decline in economic activity that is spread broadly throughout the economy that lasts more than a few months.

The committee measures the economic activity by looking at production, employment, and real income (and other factors at their discretion to determine when the majority of the economy is in decline). While employment clearly peaked in December 2007, other indicators showed a flat to low growth from December 2007 through June 2008. As Brian Wesbury, Chief Economist at First Trust has said, “…it appears that the NBER has said a strong enough decline in one sector of the economy can actually lead to a recession, even if the rest of the economy seems to be doing relatively well.”

I believe they could have, and perhaps should have, called the peak anywhere between January and June of 08 because it was somewhere in that range that the peak of the majority (ie., GDP which didn’t go negative, signifying growth, until the 3rd quarter*; and Sales which reached a peak in the 2nd quarter*) of economic activity occurred.

Despite the interesting call of recession starting at the end of last year, real issues seem to have begun in September, when risk aversion hit an irrational high.

These issues have significantly slowed and almost stopped the velocity at which money is moving through the economy. This is where the credit crisis really began to peak. The government is pumping in money at the fastest rate in history, but as it is being pumped in, it hasn’t been moving. Now we might be seeing some changes to that. Here are comments from Bob Doll, Vice Chairman at BlackRock.

“The next step for the markets is to determine the depth and duration of the economic downturn. Once this happens, we believe investors in riskier assets such as equities and corporate bonds will look over the valley and ignore bad news, helping those assets to post sustainable rallies – but not until the deterioration in the economy stops. The data needs to get better to spark such a rally and we are nowhere close to that, so it seems.

“We believe that, in the coming weeks, global depression fears will begin to peak and confidence will emerge that the deflation-fighting initiatives will have a positive effect on economic conditions. That said, no one knows for sure how the economy, or the stock market for that matter, will behave. However, we reiterate that the October 10 and November 19 bottoms look like a basing process.

“All of the variables to date – fiscal and monetary policy initiatives, the price of oil, lower government bond yields, political change in Washington and now quantitative easing by the Federal Reserve – seem to be working together to arrest the credit crisis, bolster economic activity and put a floor under deeply distressed stock prices. Confidence is the key. If confidence can be rebuilt, stock markets will perhaps anticipate a recovery. Although we are not making a case for it yet, a lot of ingredients seem to be falling into place.”

Like Mr. Doll, I believe that if, and that’s a big if, confidence can be restored throughout our economy and most especially with small businesses and consumers, we can get out of this mess. The money is there, and policy is in place. We just need that money to begin moving.

*www.nber.org *www.bea.gov *www.census.gov