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Explaining the Past

They say “hindsight is 20/20.”

But I’d like to see more explanations of past events (for instance, “Why did Youtube (or Twitter, or Facebook) become so successful, when similar services failed before?”) that have the following property:

If presented with the explanation prior to the event, it would have convinced me that the event would indeed occur.

E.g., presented with an argument why Twitter would succeed, prior to Twitter becoming so popular, would I have been convinced (by that argument) that Twitter would indeed eventually become popular, even when mixed in with all the other contradictory opinions and analyses of that time?

Most explanations of past events I see, across the spectrum of interesting topics, don’t have this property. In general, “hindsight is 20/20” seems more apropos of the way we tend to be more accepting of arguments and explanations when we already know the underlying premise is true. It’s easy to nod along when reading an article describing why Google or Amazon or Facebook became so successful, after the fact. It’s much harder to accept as truth those same arguments when we don’t already know the final outcome. And that’s what I think they really mean by “hindsight is 20/20.”

Health Care

Obama ran for office on a reform platform with 3 major themes: health care, energy/climate-change, and education.  The recent cap-and trade-legislation that passed in the House, and will be considered by the Senate later this year, addresses the energy/climate-change theme.  The issue currently dominating the headlines is health care.  (No doubt education will be next in the public spotlight.)

All 3 reform efforts involve addressing problems that at their root are caused by well known and long-studied economic problems.  Health care is no exception.  Perverse incentives, information asymmetry, moral hazard,  special interests, externalities… the whole gamut of market-destroying forces seem to be at work in distorting the modern health-care system from its ideal form.

Furthermore, the push for health-care reform is revealing in classic fashion the failings of the political system itself that I discussed in my previous post.  The “town hall meetings” that were supposed to add to the debate have instead devolved into circus acts.  Active misinformation campaigns about supposed “death panels” and a media complicit in giving airtime and weight to totally illegitimate claims have made a reasoned national debate on the very pressing issues facing us nearly impossible.

Without understanding in detail the economic principles in play, there is no hope for any kind of sensible solution.  Everyone knows and admits that health-care costs are gobbling up an ever-increasing share of our resources, with nearly 20% of GDP currently going to medical expenses.  But in today’s climate,  it is difficult to see how we will collectively be able to engage in a rational, subtle, and detailed discussion on the issues at hand, much less implement rational reform.

A recent article in The Atlantic by David Goldhill covers many of the problems underlying the health-care system from an economic and business perspective; an excerpt follows:

Indeed, I suspect that our collective search for villains—for someone to blame—has distracted us and our political leaders from addressing the fundamental causes of our nation’s health-care crisis. All of the actors in health care—from doctors to insurers to pharmaceutical companies—work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also all behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity, and discourage transparent competition based on price or quality. That result in a generational pyramid scheme rather than sustainable financing. And that—most important—remove consumers from our irreplaceable role as the ultimate ensurer of value.

via How American Health Care Killed My Father – The Atlantic September 2009.

The article highlights a number of issues plaguing health care today, and traces most of them back to market failures caused by the current setup in which medical providers cater to insurers and Medicare, rather than to the patient.  Most of the participants in the system are genuinely trying to fulfill their role in providing us with quality care.  But the system itself in this case is horrendously flawed.  A few of the points raised in the article follow (along with some of my own thoughts):

  • Health care is emphasized over health: The incentives in the current system reward treatments and care, not promotion of health itself.  Your doctor might suggest you exercise or you lose weight, but at the end of the day, the financial incentives at least don’t promote overall health.
  • The concept of insurance has been misappropriated: Insurance is not the proper vehicle for delivering routine, expected care.  The author makes an analogy with car insurance: would it be sensible to have a system where car insurance is expected to pay for our gas?  What would happen to gas prices in that scenario?
  • The patient is not the customer: Market forces drive industries to cater to the customer.  That is why Walmart is cheap, why everyone is nice to you at Disney World, and why your car has a cupholder.  But in the modern health care system, the patient is not the customer, and keeping the patient happy (or healthy) is not what helps the industry’s bottom line.  There is virtually no transparency in the health-care system with respect to quality and costs, so there is no in-built mechanism nudging the system towards a state of greater efficiency.
  • The cost of the uninsured is hidden by bookkeeping tricks: What people often forget is that we already have a universal health care system, albeit highly inefficient.  Ever seen anyone critical get turned away at the ER?  Of course by the time someone makes it to the ER with a preventable condition, the cost of care becomes much higher.  Many other distortions take place in the health-care system because of the constant need to hide and shuffle around costs to keep the whole system politically palatable.  For instance, many hospitals are subsidized in a highly inefficient manner (through anti-competitive regulations and other means) because they are the only place it is politically expedient to provide health care to the uninsured (via the ER).  Hospitals get regulatory favors, and in turn they treat everyone who walks through the ER door.  If we were simply explicit about providing universal coverage, instead of burying it into ER costs with bookkeeping tricks (ever wonder why a Tylenol should cost $10 on a hospital bill?), the health-care system could be be greatly streamlined, increasing quality and decreasing costs.

Goldhill discusses several other problems underlying health care in a way that avoids the simple-minded, purely emotional reasoning so many in the debate are engaging in. “Intuitive,” feel-good proposals will help no one.  A hard look at the facts and figures, and the incentives at work, are necessary to make headway. I don’t necessarily agree with all of Goldhill’s specific proposals for reforming health care, but I do agree with his approach to thinking about the issue.

Health care reform is a vexing problem, and it remains to be seen whether the modern political system is capable of solving it.  But unlike ignoring climate-change (where we are shortchanging our unborn great-grandchildren), in ignoring the problems underlying health care, we are shortchanging ourselves.  Perhaps our instinctive need to act in our own self-interest will finally kick in and we can all get the health care we could so easily afford.


The Banker Who Said No –

A recent article in Forbes talks about a banker, Andrew Beal, who played it safe while the rest of the financial industry was taking on billions of risky loans that at the time, seemed wildly profitable:

For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank’s assets because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about “stupid loans.” His odd behavior puzzled regulators, credit agencies and even his own board. […]

But he wants to exploit their recklessness to amass his own fortune. Not much next to the trillion-dollar balance sheets of the nation’s troubled banks, but the lesson here might be revealed in the fact that this billionaire is not playing with other people’s money–he owns 100% of the bank and is acting accordingly.

via The Banker Who Said No –

The key here is that Beal owns 100% of his bank — the principal-agent problem we discussed in a previous post does not apply. Because he wasn’t subject to the same kind of perverse incentives as other bankers, he made significantly different decisions than his peers.  His decisions were based on long term profits, not short term gain that relied on passing the buck to some future chump.  Not to downplay Beal, but it was the incentives of his situation more than anything else that led to his seemingly prophetic decisions.

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