Archives: 11/2008

Blocking Obama’s Health Plan Is Key to the GOP’s Survival

Ditto Baucus’ health plan. And Kennedy’s. And Wyden’s.

Why? Norman Markowitz, a contributing editor at (motto: “Marxist Thought Online”), makes an interesting point about how making citizens dependent on the government for their medical care can change the fates of political parties:

A “single payer” national health system – known as “socialized medicine” in the rest of the developed world – should be an essential part of the change that the core constituencies which elected Obama desperately need. Britain serves as an important political lesson for strategists. After the Labor Party established the National Health Service after World War II, supposedly conservative workers and low-income people under religious and other influences who tended to support the Conservatives were much more likely to vote for the Labor Party

I’m no student of British history, but that sounds about right. Markowitz continues:

The best way to win over the the portion of the working class in the South or the West that supported McCain and the Republicans is to create important new public programs and improve the social safety net. National health care [and other measures] will bring reluctant voters into the Obama coalition. That is how progress works.

Republicans might want to take note.

(Anyone who thinks that Obama’s plan is not socialized medicine should read this.)


Pelosi Power

Politico declares Speaker of the House Nancy Pelosi “the most powerful woman in U.S. political history.” I once suggested that White House aide Karen Hughes, “the most powerful shaper of the words and message of a president of the United States whose own command of the language seems weaker than average,” held that position and got altogether too little attention for her accomplishment.

But Politico is probably right these days. And along with the breakthrough campaigns of Hillary Clinton and Sarah Palin, it’s the sign of a new era in American politics. Women are going to be major players. But it remains to be seen whether that will make much substantive difference. Pelosi seems to wield her power in much the same way that male speakers did, on behalf of policy positions that match the center-left of the Democratic party.

P.S. One of the best moments capturing the rise of Clinton and Palin this year was this exchange between Tina Fey (Palin) and Amy Poehler (Clinton) on Saturday Night Live:

Sarah Palin: Just look at how far we’ve come. Hillary Clinton, who came so close to the White House… and me, Sarah Palin, who is even closer. Can you believe it, Hillary?

Hillary Clinton: [ forcing a hard smile ] I cannot!

Maybe Gates Is Starting to Get It

Yesterday, I wondered aloud why Bill Gates keeps banging his bucks and head into the public-schooling brick wall rather than backing reforms that go around it. I noted that no matter what he does—as his efforts to date have borne out—he will never be able to turn the immovable teachers unions, administrators, and politicians.

Mr. Gates might be starting to see what I’ve been writing about. As reported in Education Week’s Campaign K-12 blog, at the event in which Gates unveiled his plans to create and promote national standards (obviously, he hasn’t completely learned his lesson), Gates admitted that his reforms haven’t worked because they wouldn’t help influential people, and that his very establishment Strong American Schools effort (which also went by the moniker “ED in 08”) just did what tweak-the-beast reforms always do: cause people to “mouth platitudes,” and little more.

At the risk of repeating myself, there is a better way: Universal school choice—like, say, universal tax credits—will get a lot more people on board than a small school here, or a new test there, because it would offer tangible benefits to everyone. That’s how you get broad-based support. And as far as getting past platitudes, the only way to do that is to get around the system in which nice rhetoric, not education, is what’s most important. Again, I give you school choice.

Diseconomies of Scale vs. Network Effects

I was very interested to read Roderick Long’s opening essay for this month’s Cato Unbound. Long draws a distinction between genuine free markets and policies such as corporate welfare and protectionism that favor the interests of incumbent businesses at the expense of the general public. Almost all libertarians draw this distinction, of course, but Long suggests that many libertarians too readily classify as “free market” policies that are more properly regarded as corporate welfare.

What caught my eye about Long’s article was his claim that in a genuinely free market, businesses would be significantly smaller than they are today. He points out that large, hierarchical businesses are subject to many of the same inefficiencies that plague government bureaucracies. The executives of the largest corporations cannot possibly have enough knowledge to make good decisions about the thousands of different projects various parts of their companies are undertaking, and so it’s inevitable that large companies will suffer from inefficiencies greater than those that afflict smaller firms.

I think this is an important point, and indeed is a theme that runs through my own work. For example, one of the key arguments of my Policy Analysis on network neutrality, which Cato released on Wednesday, is that the Internet’s success depends on the fact that it isn’t owned or managed by any single entity. Back in the 1990s, when the Internet was competing with proprietary online services like AOL and Compuserve, the Internet’s lack of centralized control turned out to be its most important strength. The hierarchical decision-making processes of the AOL and Compuserve companies simply couldn’t keep up with the spontaneous order of millions of Internet users acting without central direction.

Indeed, one of the fun things about writing about technology is that thanks to the rapid pace of change, Silicon Valley is one of the few places where very large and very small companies compete on a roughly equal footing. And I think the experience of Silicon Valley bears out Long’s observations. The most innovative ideas almost never come from large, established firms. Silicon Valley is full of firms like HP, Digital (now part of HP), Microsoft, AOL (now part of Time Warner), Yahoo!, Netscape (now part of Time Warner) that began their lives as nimble startups selling highly innovative, disruptive technologies and wound up as large, bureaucratic companies struggling to keep up with the efforts of smaller competitors with a tiny fraction of their R&D budgets.

Central planning doesn’t work very well. And Long is right to point out that this is true of large companies as much as it is of the federal government. But having found a theoretical hammer he likes, Long seems to see public policy nails everywhere he looks. He puts forward the even stronger claim that large firms are so inefficient that only government interference in the economy could explain their existence. Not only does this conclusion not follow from his premises, it’s not difficult to come up with counterexamples.

Google, for example. Google’s success certainly can’t be attributed to a sweetheart deal from the city of Mountain View. Nor does Google particularly benefit from low wages or government-funded roads. Even if we grant Long’s premise that copyright and patent law are unjustified interference with the free market, these can’t explain Google’s wealth either. Google’s products are available for free, and Google has yet to assert any of its patents against competitors.

The reason Google is so profitable, in a nutshell, is network effects. Google sits at the center of a vast network of users, website operators, and advertisers who are locked in a virtuous circle. More advertisers prompt the creation of new websites, which attracts more users, which in turn attracts more advertisers. As the matchmaker between these parties, Google is able to capture a small fraction of the social surplus created by the virtuous circle.

Now over time, Google will succumb to the same diseconomies of scale that have been dragging Yahoo!, Microsoft, and other companies down. Already, if you talk to people who have worked at Google, they will tell you that the company is slowly losing the freewheeling spirit of its early days. It’s gradually becoming more bureaucratic, risk-averse, and strategically incoherent. But it will take a long, long time for Google’s bureaucracy to become so inefficient that it will cease to be a profitable company in the absence of government favors. If Google simply rests on its laurels, its existing customer base will continue generating a healthy revenue stream for the foreseeable future.

I think the same thing is true in other sectors of the economy. The choice of Wal-Mart as a poster boy strikes me as particularly ill-considered. To be sure, Wal-Mart is far from a paragon of libertarian virtue. I will be (and have been) the first to condemn them for their abuse of protectionist policies such as eminent domain at the local level. But blaming Wal-Mart for policies such as publicly-funded roads and labor market regulations that have nothing in particular to do with it strikes me as grasping at straws. Wal-Mart happens to be extremely good at logistics, and have managed to wring larger economies of scale out of the retail industry than anyone had previously been able to do. Wal-Mart, like Google, benefits from the network effects that come from bringing together tens of millions of consumers with hundreds of manufacturers.

Of course, we don’t know precisely how much of Sam Walton’s profits are attributable to these economic forces and how much are attributable to government favoritism. No doubt, Wal-Mart would be a somewhat less profitable company in a world without eminent domain abuse. But it’s simply not plausible that none of Walton’s profits were attributable to his savvy business decisions. And it’s certainly overstating the case that Hayekian considerations dictate that Walton’s profits must be attributable to government favoritism because a company of Wal-Mart’s size could not exist in a free market.

A Cancer on the Big Three

If you’ve followed developments in the auto industry at any time during the past couple couple decades, you’ve probably heard of GM’s “Jobs Bank.” This nausea-inducing scam was the concoction of the UAW in the 1980s. Rather than allow GM to layoff workers when conditions warranted, the UAW had GM assign workers to the Jobs Bank, where they were paid almost full wages and benefits NOT to work. The Jobs Bank was pitched nominally as a retraining program, where workers would acquire the skills and train themselves in the technologies and techniques of the future, or where “workers” could perform community services.

Alas, the Jobs Bank became little more than a casino and lounge, where workers would report for a full day of leisure, reading newspapers, playing cards, and generally not adding value to GM’s vehicles. (Sounds a bit like my job description, actually.) Now you know why a handle falls off or you hear a tinny sound when you slam your Chevy’s door.

Understandably, GM and the UAW generally don’t like to talk about the jobs bank. It sort of undermines the credibility of the argument that a bailout would save hard working Americans’ jobs. But it still exists and estimates are that thousands of workers report there for duty every day.

Mark Perry over at Carpe Diem is an economics professor at the University of Michigan, Flint. Among other issues, he covers the auto industry with a rightful dose of skepticism. Although he has lots of good data and links, this chart explains it all. Why is GM (and Ford and Chrysler) seeking taxpayer subsidies when Toyota, Honda, Nissan, Kia, BMW, Daimler, Hyundai and other foreign nameplate producers, who are facing the same contracting demand and credit crunch quietly weathering the storm, are not? Because the latter have costs structures that haven’t been made obsolete and uneconomic by ludicrous union demands.  And, of course, they make cars that Americans want to buy.

If Obama’s Plan Is Not Socialized Medicine, Then What Is?

Over at TPM Cafe, Ed Kilgore writes about conservatives’ attitude toward president-elect Barack Obama:

it’s hard to avoid the impression that they truly think this temperate man pursuing Clinton-style centrist policies is determined to enact “socialized medicine”

Not being a conservative myself, I’ll not try to explain any of the actually wacky things they might think about the man.

However, if conservatives believe that Barack Obama is determined to enact socialized medicine, they are spot-on.

In fact, I challenge Kilgore (or anyone else) to read this paper and then argue that Obama does not support socialized medicine.