9/30/2009

A Life Lesson in Income Elasticity

Income elasticity has always interested me because of its true to life applications. It’s very remarkable how one can actually see how their demand curves shift to the left and right as our income fluctuates. When I lived at home and my parents subsidized a great deal of my expenses, normal goods made up a good deal of my consumption. This is because the quantity demanded for normal goods increases as income increases. After high school, I left to Mexico on a 2-year mission for the LDS Church. We received 200 pesos a week (roughly $20) for food and living expenses. That’s when inferior goods such as rice, beans, and tortillas became a normal part of my diet. When I returned home, my parents helped me get on my feet and I had somewhat of a cross between normal and inferior goods at my disposal. Now, I am a married college student with a baby girl and inferior goods seem to have raided my house and built a permanent establishment in most locations.

The article I found says that “[in] many cases, income elasticity has a direct impact on the dietary habits of households.” That hit home for me because as I look back on the past, it’s the part of my life that has been affected most. Two of the inferior goods it presents as inferior goods are on my table with me as I’m writing this (Ramen and store brand food). Knowing the effects of income elasticity can help people and companies forecast demand of goods depending on current economic conditions and other factors. Right now, for example, in our own economic state, I think it would be a good guess in saying that the quantity demanded of inferior goods has gone up and inversely for normal goods.

http://mbaecon.wikispaces.com/income+elasticity

Price Elasticity of Healthcare

Yesterday’s Senate rejection of the public option for healthcare is bringing the issue into sharper focus. Whether you are pro or con healthcare reform, it is an interesting topic to apply to economic theory.

When discussing price elasticity, or rather, own price elasticity of demand in healthcare we are looking for the change in demand, i.e. will people seek less or more healthcare, as the price of obtaining healthcare changes incrementally.

Now there are some externalities that affect the concept. For example, some people go to the doctor all the time because they have really great health insurance and are either very sick, or have m√ľnchausen syndrome. Others never go to the doctor unless something is falling off or they run out of blood. So removing these outliers from the argument and focusing on those utilizing essential services only (and I recognize that the in-between population is a big piece of the whole healthcare debate but for purposes of this academic exercise, please bear with me) basic economic theory indicates that when the price of a widget goes up, demand for the widget goes down. Over time as demand drops, prices will adjust downward in search of equilibrium. That type of consumer behavior would be said to have high price elasticity.

However, healthcare is not widgets and there are several clues that indicate the elasticity of healthcare. For bona-fide health issues the question is whether consumers will seek healthcare at approximately the same rate as before, regardless of change in cost. In other words, if a person is dying, will that person pay whatever price is asked for healthcare? If the answer is yes meaning the percentage change in demand does not follow a percent change in the cost then the service is price inelastic. Another clue is that inelastic products never go on sale (Tufte Chapter 3 lecture). So in the example of healthcare, I would say that healthcare is price inelastic and the demand curve would be curved due to unequal percentage changes in slope.

The elasticity of a commodity is always changing because of natural behavior of market forces. So let’s re-introduce the outlier population, those who would purchase more healthcare when it is cheaper and less when it is more expensive. What that produces is a demand curve with two inflection points and inverse elasticities at the extremes. What would the demand curve look like that included non-essential healthcare consumers in the model?

Demand and the holidays

As far as supply and demand I think a great example is the holidays more specifically Christmas. Toys R Us has announced that it will be hiring 35,000 for the holiday season. Toys R Us will also be opening 350 pop up stores in malls around the country. Toys R Us also bought FAO Schwarz earlier this year. All the preceding things lead to great positioning to lead the market for toy sales. They seem to be creating a monopoly if not control over the majority of the market by purchasing FAO Schwarz and the opening of the “pop up” stores in malls.

I think the main idea behind all of this is to increase demand and increase supply at the same time to make it hard for competitors to compete with their prices and convenient supply of products available all over during the holiday season. Concerning the increase in employees for the season, I believe that is a clear indicator that there are forecasting a large increase in demand for the holidays and they want to be prepared.

I kind of got off track from what my original thoughts. The point is as the holiday’s approach many stores are ramping up on employees to deal with the imminent increase in demand. This might seem like a simplistic post but I thought it was the perfect example of demand and some of its effects on business. Many articles inspired this topic but one I mentioned throughout was “Toys R Us Will Hire 35,000 Holiday Workers”.

Demand for Alternative Pharmaceuticals on the Rise

The latest Fortune magazine to hit the stands contains an article dealing with the legalization of marijuana for medicinal purposes. Among many of the pros and cons discussed in this article, one common topic is the demand increase for medical marijuana, specifically in the state of California. "There are an estimated 300,000 to 400,000 medical marijuana patients in the state now, and the figure is rapidly growing." Being that this is currently an illegal drug, it is hard to rid ourselves of the notion that this is a heavily sought after drug solely to relish the legal aspect of "smoking weed." Other than legal issues, marijuana has always been frowned upon because of the method of intake; the form of smoke. But with safer ways of consumption, such as foods, capsules, lozenges, butters, and even drinks, the demand will continue to rise. A key factor in determining demand is acceptance and tolerance for marijuana. The acceptance rate nation-wide has substantially grown.

A poll taken shows the percent opposed to marijuana drop from approximately 82% in the 90's to nearly 50% today. Many factors for this include health risks (or the lack thereof), pain relief, and economic recovery (much like the effects of the 21st Amendment). The article states, "It's even possible that legalization would reduce national health-care costs, by easing demand for costly pharmaceuticals." As the substance is tolerated more at a federal level, the 'non-pothead' demographic will be more willing to seek out this alternative, making marijuana a clear substitute for many forms of drugs prescribed today. One doctor reported "...that his cannabis patients had either stopped or cut back their use of...Tylenol, aspirin,.., anti-depressants, anti-panic, [and] obsessive compulsive [medications]..." The positive cross price elasticity of demand for marijuana will force high-priced drug products to reduce prices. The determining factor is just a matter of whether or not the alternative gets legal on the open market.

For further information, see:
Parloff, Roger. "How Pot Became Legal." Fortune 28 September 2009: 140-62. Print.

9/29/2009

Demand, Supply, and Elasticities at British Airways

A recent New York Times article (“British Airways Tries Premium New York Flights”) gives insights into how demand, supply, and elasticities work together in the market.

Let’s first consider the demand for flights. On routes where alternatives exist, such as the London-Paris route which competes with the Eurostar, demand is relatively elastic. In fact, demand for flights on this route has decreased to the point that British Airways is considering closing the route. However, most flight routes do not have acceptable alternative methods of travel. Where this is the case, there are two types of customers: leisure travelers for whom demand is relatively elastic (consider the increasingly popular “stay-cations”) and business travelers for whom demand is relatively inelastic. As the article puts it, “there’ll still be bankers flying all over the place.”

Next let’s consider the supply of flights. In the short-run, the supply of flights is relatively inelastic: flights have been scheduled, customers have purchased seats, and British Airways has little leeway to cancel flights. In the long-run, however, British Airways is free to cancel flights and adjust routes in order to maximize their profits. Consider the following quote from the article, “This is an airline that really has to bite the bullet on short-haul, looking long and hard at what it’s costing and whether they can ever get a decent margin out of it. Some U.K. and European routes have a very limited future.” This is a classic case of a relatively inelastic supply in the short-run and a very elastic supply in the long-run.

So how does a company like British Airways use elasticities of demand and supply to try to remain profitable? British Airways has chosen to begin a business-class-only service from London to New York while closing some shorter routes. In effect, they are altering their supply in an effort to cater to the market segment whose demand is most inelastic. Do you think it’s going to work for them?

9/26/2009

Elasticity of Soda

This article discusses, among other things, the debate of whether the government should impose steep taxes on soda to reduce consumption and thus weight gain. Some argue that because there are so many substitutes for soda that can be just as harmful and not lead to weight loss that it would not be effective. While I am not discussing the effectiveness of the policy, I feel that soda is fairly elastic so I do think that more and more people will consume less soda. I don’t know what they will turn to, but if they were drinking soda I can’t imagine that they would switch to something that would help with weight loss. At any rate, I feel that soda will show to be elastic and if prices rise, then people will look to other options that may be substitutes, such as energy drinks, or high calorie juices. On the flip side though, I do know people who would go crazy if they didn’t have their daily fix. To these people, I don’t think it really matters what the price is, they want their fix so to them, soda is very inelastic.

9/25/2009

Supply and Demand During the Holidays

On page 129 in our textbook, there is an example of "real world" elasticity that caught my eye. It explains that as Valentine's Day comes, roses become a necessity (well, a necessity to any man that doesn't want to sleep on the couch for a while). In the example it makes the point that greeting cards are more elastic than roses because roses are perishables. Nobody wants to give their significant other a bouquet of dead roses, therefore, floral shops can charge more to increase the quantity supplied on Valentine's Day. From this we can see that supply is relatively inelastic and because of that, the increase in demand causes the price to increase substantially.

So here's what I don't understand fully. I think that pumpkins would be classified as a "perishable" just like roses. Well maybe not just like roses but you know what I mean. How come on October 31st we don't see a spike in the price of pumpkins? Is it because supply outweighs demand? Are there too many pumpkin farmers relative to the amount of consumers purchasing pumpkins? It's been a while since I had to purchase a pumpkin but it seems like if my memory is right, pumpkins are more expensive a few weeks before Halloween and then the price of pumkins actually goes down as it gets closer to Halloween. Why can't roses work that same way? It would sure help my checkbook out because now days it seems like I'm spending my tax refund just to get a Valentine's gift.

Although, I may be wrong because according to this article, http://www.freshplaza.com/news_detail.asp?id=29734 it sounds like the pumpkin farmers may have caught on to what the rose farmers are up to and they are raising the price of pumpkins.

9/22/2009

Current Income Elasticity of Consumers

According to the article on msnbc.com, Shoppers of All Incomes Are Changing Habits, the recession has induced consumers to rethink their shopping strategies and impulse purchases. This article indicates that many people have reduced the amount of money they spend, especially those who have incomes of under $45,000.

"New" (I quote this because it's not really new... just more noticeable now than a few years' prior) strategies include finding the lowest priced items, quality products, and using coupons. The article also indicates that there are certain items that consumers won't go without: "Topping that list is animal protein: 10 percent [of consumers] said they refuse to give up meat, poultry, fish and seafood. Four categories came in right behind that, with 8 percent saying they're not eliminating alcohol and tobacco; coffee and tea; milk and juice, or household and laundry supplies."

Predictably, the most frequently forgone commodity is clothing. The article indicates, "38 percent say they're purchasing less clothing and 20 percent said they're buying less expensive brands. Clothing is also the category most often chosen — by 29 percent — when asked what they would most likely spend more on as the economy improves."

Therefore, items such as proteins, alcohol, tobacco, coffee, tea, milk, juice, and household supplies are relatively inelastic goods with regard to income. On the other hand, clothing is an inelastic good with regard to income during this recession.

I can see these elasticities in my own home. One thing I won't cut out is food and household supplies. Can others relate to these products? Are you cutting back? What items are you cutting back on?

9/20/2009

Healthcare Supply and Demand -- Chapter 2

The 2008 census report reported that 15.3% of people in the United States are without health insurance, a decrease of 45.7 million people from the 2007 study claiming 15.8%.

Using a simple supply and demand model, if universal health care is implemented and the 15.3% of the population that was not covered before would now have access to the health care system, then demand for health care related services will increase.

Supply is currently based on number of practicing physicians (MD and DO), number of students in medical school, number of medical professionals (NP and PA) current medical school graduation rates, number of physicians retiring, taking leave of absence, sabbaticals, etc. Taking this into consideration, supply, will at most, stay the same, though the additional patients merged into the system will likely create a shortage with rural areas suffering the most from the shortage.

With an increasing demand and stagnant/decreasing supply the price will increase until supply catches up with demand (so much for controlling health care costs).

This may seem a simple fix, graduate more physicians into healthcare, but physicians are not the only piece of the health care puzzle.

Nurses (Registered Nurses and Licensed Practical Nurses) are required to run/staff hospitals, surgery centers, Intensive Care Units, Emergency and Accident Centers, clinics, quick-care centers, school health, telephone referral programs, community wellness centers, and health care in general. Nursing has long been known to have a shortage. Currently the average age of a Registered Nurse is more than 46 years old, and the retirement planned age is 55. With an aging workforce and forecasted shortage of more than one million nurses through 2020, the supply side of healthcare is quickly diminishing. (This estimate did not include implementation of universal health care and the additional 45.7 million currently uncovered individuals which will greatly affect the number of nurses needed to staff current facilities, let alone increase the number of staffed facilities.)

"If 46 million more people are added to the demand side of the health-care equation without optimistic productivity gains in providing health care, we likely will see a trade-off between quality and quantity, particularly as services are rationed."

Case loads per provider will increase, wait times will increase, quality will decrease. Yes, healthcare reform is necessary, however, the 85% of the population that has care should not have to lose access to care to provide for those that have not secured health care coverage for themselves.

Chmura, C., Supply and demand may hinder health-care reform. Richmond Times-Dispatch. September 7, 2009.

9/15/2009

Print Media Gone Before Too Long

According to a recent article on FT.com, (Financial Times.com) the method in which we receive our news will no longer exist as a paper organism. What is happening with this method of receiving our news? It is being taken over my other forms. This has been happening for many years and will continue to happen until there are no more news paper companies that exist.

The demand for this form of media is dwindling at a rapid pace. Subscribers might still be using the news paper company for their information source but they are no longer purchasing the paper itself. They are sifting through the news online and they are downloading the newspaper on to their electronic devices. This has caused, and will continue to cause, a demand shift to the left.

What does that shift mean? In the short run, the supply will remain somewhat the same until those companies that cannot afford to be in business, will be long gone. Those that do stay in business will have to raise their prices for the ads that are being placed by other businesses, they will have to charge more the physical paper itself, and they will also need to charge more for the online subscription. The online subscription has been free to utilize for most newspapers around the country but all that will change in the future. The author feels like that future will be within the next twenty years or less.

In the long run, the supply curve will shift as well and the supply will be less. This means that the prices will go up because the demand has shifted and the supply has shifted. There is nothing else the newspapers can do except charge more for the services that they are offering. It is a vicious cycle that might be a downward spiral for them in the near future. If subscription base falls, then so will advertisement. If advertisement falls, where is the revenue?

Some of the variables for these rising costs in the past year or so have been that newspaper subscription has been falling and so has the ad revenue from businesses advertising with the newspapers. People have been able to find the same news somewhere else on the internet. This has caused many of the newspapers to start charging for the online subscription already. I feel that most people will even opt out of paying for their online subscription because there are so many places from where one can get news that is from a reliable source. Newspapers will have to come up with some ways to entice people to keep their subscriptions or they will be asking for bailouts and they might even become run by the government.

Although this was not the meat of the article, the demand shift can very easily be taken from this article because of what has been said in it.

Blog Topics and Style

I am not happy with a lot of the posts. There is too much focus on policy proposals, and poorly supported opinions about policy. Managerial Economics is not a class where national policies often have a role. In particular, I am concerned about posts and comments about Obama's healthcare, environmental, and stimulus policies.

Having said that, there is fertile ground to discuss specific aspects of these policies in the context of the chapters we are currently covering that is being completely missed. Here are some examples:
  • Demand and supply diagrams show revenue in a certain way. If we are concerned about healthcare because of the amount we spend on it, how do demand and supply have to shift to make that larger (Chapter 2)?
  • What are the demand shift variables for healthcare (Chapter 2)?
  • Is the fact that, for those with insurance, office visits are cheap shown with a shift of demand or movement along it (Chapter 2)?
  • Why do we have to subsidize environmental measures? What does this tell us about demand and preferences for them (Chapter 2)?
  • What is the market for healthcare, environmental, and stimulus measures (Chapter 1)? Where does it start and end? How is this related to national borders, illegal immigration, and organized (drug trade) crime?
  • How elastic is healthcare demand (Chapter 3)? Why?
  • How income elastic is healthcare demand (Chapter 3)? Why?
  • How elastic is energy demand (Chapter 3)? Why?
  • How income elastic is energy demand (Chapter 3)? Why?
  • How elastic is environmental policy demand (Chapter 3)? Why?
  • How income elastic is environmental policy demand (Chapter 3)? Why?
  • If elasticities have these patterns, what can that tell us about whether or not policies will work as advertised?
These are examples, not suggestions. You have great tools available in this class and text, and an open forum to practice using them.


You made your SUV now lie in it

I came across an article on the "Big 3" automakers and their trip to the bailout buffet at the end of last year. The pathetic arguments on the collective part of the Ford, GM and Chrysler is because they cannot guarantee that they will be able to attract consumers who will purchase their products, they need help.

Well duh. Automakers have been on notice since the 70's energy crisis that the day would come when fuel efficient vehicles and durable goods, like cars, would dominate the industry. Just as our financial industry role-models were lured by easy credit and the opacity of accounting systems, automakers greedily sold high margin SUVs instead of developing needed technologies to compete in the next age of business.

Having given up their once magnificent market power, and influence toward better vehicles, this industry is now cowering instead of thriving. Imagine if Big 3 had developed sustainable, efficient vehicles in the 80's and 90's. Wouldn't present day income shrinkage spur demand for its products currently? As economic recovery begins and incomes rise I think we may see the demand for american automobiles drop as evidence that our auto industry produces an inferior product. Foreign made vehicles will be substituted at a much higher rate because they match up better with complimentary things like fuel prices.

Now I understand the well publicized argument that certain industries are too large to fail. Certainly the auto industry is in there with insurance and finance and the demise of automakers would send shockwaves through our labor markets and affect our domestic and world economic outlook.

However, at what point do we stop inflating our national debt in favor of a few bloated industries that have brought problems upon themselves? The ever-widening deficit will have economic consequences that no one wants and the truth is the economic consequences of more debt are unknown. What we do know is that the future is gonna suck when we, as a nation, are unresponsive to future crisis because we are overdrawn.


Just as the Federal Reserve regulates monetary policy, a regulating body that would require a scalable amount of capital, insurance and/or surety bonding in gigantic industries would decrease federal government/taxpayer exposure in the future.


http://www.economist.com/businessfinance/displayStory.cfm?story_id=12754289

9/14/2009

Transformational Outsourcing?

For many years the word outsourcing has brought a sense of fear to employees in industrialized nations. Outsourcing has been a way for employers to decrease their labor costs by taking advantage of the low cost of employees in developing nations, and is often accompanied by many lost jobs of employees demanding higher pay. Transformational outsourcing may slowly take the place of traditional outsourcing.

Transformational outsourcing is helping executives realize that outsourcing should not be focusing solely on cheap wages, but recognizing that corporate growth is more essential. Executives are finding that although it is beneficial to a company to maintain cheaper labor costs, there are other benefits from outsourcing that can help to achieve this goal of corporate growth and continue to create more jobs within the U.S. as well. If companies become more aware of the potential offered by offshore talent and choose to take full advantage, they may find they will be able to improve quality, efficiency, productivity, and revenues. Successful companies of the future may find the idea of leveraging offshore talent essential, and in turn will create better jobs for everyone.

http://www.businessweek.com/magazine/content/06_05/b3969401.htm

9/13/2009

What is the Long Term Economic Impact of the Bailouts and other Federal Spending?

Several months ago, the United States economy struggled through weeks of turmoil as corporate giant Lehman Brothers followed Bear Stearns in closing shop due to ill advised investment strategies. Mammoth organizations, once thought unshakable, were suddenly becoming unviable as they became insolvent. But when organizations seen as critical to the U.S. economy began to buckle, such as AIG and The Hartford, panic set in.

In response to this crisis the federal government issued over a trillion dollars to banks, insurance companies and other qualified institutions within specific industries. The rational behind the feds effort to “inject liquidity” into the economy was to solidify institutions that were “too big to fail.” In other words: let’s delay painful economic consequences by engaging in the same activity which caused the problems. The crisis was caused by pretending value exists when in fact it didn’t – printing more dollar bills at the Fed doesn’t create value, it only dilutes the dollar and creates inflation.

As the national debt’s stratospheric amount equals near a dollar amount close to the entire US gross domestic product, it’s apparently a “perfect” time to initiate health reform which carries a price tag in the trillions of dollars. Like the opinion reflected in the article sets forth below – this spending is not only economically irresponsible, it’s reckless. Perhaps somebody can give me hope that notwithstanding the aforementioned facts that America can remain an economic power going forward. The article referred to in this blog can be found here: www.americanbankingnews.com/2009/08/30/will-business-and-banking-bailouts-kill-the-american-economy/

Wall street goes to Washington

I recently read an article called "In Shift, Wall Street goes to Washington" which brought many interesting facts to light for me. It mentions the fact that the federal government is now a key player in every major decision that comes up in the financial markets today. A lot of information that would have never before been shared with the federal government is now readily available. Information regarding members of the board, compensation executives receive, and even how companies value their investments.

The above being said what does this mean for companies dealing with mortgages, finance, or insurance? I think when government regulation meant just worrying about taxes and some minor regulations they were a little further down the totem pole as far as effect on the business but now things have changed and government has gotten involved on a whole new level. This means you’re going to have to keep a fixed eye on what the government is up to, in other words you need to get close to Washington and that law makers who are bound to be involved in the day to day decisions of your organization.

This demand for knowledge of lawmakers’ insight into what is going on in the recovery process and how they think things should be done makes it necessary for any organization with a lot vested in the financial markets to move to Washington and get involved. Many companies are either beefing up offices in the Washington area or even creating new offices just to be close to the action. Many organizations even take it one step further and actively recruit for ex- government officials to fill positions on their board to gain further insight into the minds of lawmakers to prepare for the next move by Washington.

I think this whole shift in Wall street to Washington will have a profound impact on the way business is run at least until the bailout money has been paid back if not forever.

9/12/2009

In Defense of Capitalism

Right now, capitalism is a hot topic in the political sphere. But capitalism is about economics, not politics. It is an economic theory, or system, or whatever, that operates on a set of loose rules: if more people want iPods than Apple can make, the prices go up; if consumers are knowledgeable then a merchant who sells crappy goods won't last very long... etc.


It bothers me when I hear about how capitalism is evil, or that the poverty in this country is due to "the free market." Capitalism isn't a faith, or a lifestyle, or a person--it's a description of how a system works. Capitalism isn't bad; greed and selfishness are bad. And for some reason, people who support some sort of hybrid socialistic capitalism think that greed and selfishness will go away if we have enough regulation. Does that really make any sense to anyone? Greed and selfishness only go away if people learn to be kind and loving, and if everyone in the world was kind and loving, it really wouldn't matter what economic system a country used.


Okay, I'll admit it: capitalism doesn't make everyone rich. I'll also admit that "poor" has to exist in order for "rich" to exist. Honestly, "rich" is always defined in relation to something else. And what we consider to be poor now would have been a luxurious lifestyle a few centuries ago. Capitalists generally understand that results aren't going to be even... but capitalists also understand most people would give up guaranteed mediocrity in exchange for nearly endless opportunity. And so we enter the classic debate of free markets vs. government.


Those who oppose free markets are quick to point out the underprivileged people who are left behind. The rich have better schools and better health care. Millions of Americans are uninsured, and millions more lost half of their retirement because of the free market. "If we just provide proper regulation and more government support, millions of Americans will have better lives." Well I think that's fantastic. I think everyone should have health care and everyone should have a great education. We can argue all day over whether the government or consumers would do a better job of deciding where money should go, but that's really not the point. The true issue concerns the future status of all of the amazing things the markets and capitalism have done. Almost every modern convenience you have in your lives was brought about by competing companies fighting for dollars. Universities in this country are generally regarded as the best in this world, and that is largely due to the fact that they have to compete for prestige and the best students. We need to address the 10% of the economy that isn't working very well, but we cannot do it at the expense of the other 90%.


Now, this isn't an argument against redistribution of wealth, this is an argument against the government getting in the way of freedom, innovation, and creativity. Every dollar the government spends is one dollar that someone else doesn't get to decide how to spend.

Demand Increasing?

According to an article in BusinessWeek published back in July the global demand for commodities is on the rise. Foreign countries such as China and India are "snapping up" commodities as they see signs of global economic improvement. The article also states that companies are adjusting their inventories of raw materials because even though there may be signs of improvements there is still a great deal of uncertainty. The article infers that a recovery in commodities is a first step in economic recovery.

What are your thoughts? Has the global economy begun to recover? Were there signs of recovery as early as July? Is it smart for companies to re-stock their inventories based upon these signs of recovery?

In small town Southern Utah I sure don't see signs of recovery. I work in an industry where it would definately be nice to be recovering. Based on the latest economic data the current White House sure preaches the recovery has begun. I hope demand is on the rise in all sectors and that the recovery will take place in the near future.

http://www.businessweek.com/globalbiz/content/jul2009/gb20090723_961619.htm

9/11/2009

Socialized Health Care

We’ve all heard the ongoing news of healthcare reform and by now I think we’re all getting sick of it (no pun intended). Although there are many aspects to this issue, I would only like to mention one to keep it brief. If healthcare becomes socialized, it will kill competition in the industry. Competition is the driving force behind innovation and quality. Without it, firms will no longer be worried about losing business because they are guaranteed being paid. They will receive their annual salary regardless of how many lives they save, or how many diseases they cure. There is no incentive to excel or do better than the next doctor.

There are two examples that will help illustrate this point. The first comes from my brother. He graduated from the Air Force Academy and is now serving in the Air Force. Military personnel are given free healthcare from the healthcare institution on their respective bases. However, my brother has stated many times that he doesn’t even try to go there unless he’s “dying;” and on other occasions he’s said that if he ever did have a serious injury or illness he’d prefer going to a regular hospital. This is because the military doctors are paid on a biweekly basis rather than on performance. He said it creates an environment that “breeds mediocrity.”

The other example comes from one of my friends, who we will call Julie, hails from Albania. Albania was one of the last European countries to do away with communism. As a result, many of the communist practices are still in effect until the new government decides what to do. Julie’s dad has a very bad heart and had to have heart surgery a few years ago. Since doctors are paid a wage by the government, they feel as though they are not being paid enough. So instead of trying to reform it through the government, they request that the families pay them extra to save their loved ones. The family is then stuck with another bill that usually measures in the tens of thousands. Hardly anyone has that kind of money. Since Julie’s family was unable to pay the bribe, the doctor did not do his best to save Julie’s dad and he slipped into a coma for months. He has since recovered somewhat but he is forbidden to do any work, chores, or anything else to exert himself.