Why “Obamacare” Is Failing, and How to Make It Work

[It must have been the New Year’s champagne, but the original second post below made one of the worst and most obvious errors since I confused Jackie Robinson with Mickey Mantle. No one pays $6,800 per month for health insurance. That would be $81,600 per year—enough to pay for medical care, not just insurance, for all but the sickest insureds. (The most expensive minor surgery that I’ve had so far produced an initial bill of $30,000, which the insurance company negotiated down to around $10,000.)

I’m letting the erroneous parts stand, albeit in italics, to highlight the error, and as an exercise in humility. This blog prides itself on making occasional insights using simple arithmetic. So when my own simple arithmetic is badly in error, I ought to grovel a little. Anyway, health insurance is too important an issue to let big errors stand. We’ve done that for a century now, and it’s about time to start being accurate.

To that end, I’ve also added some more detailed (and more accurate) analysis to show why single payer would still be a very good deal for all insureds. You can find that analysis here.]

[For a simple, arithmetical explanation why a single-payer system will lower premiums, and how to get there from where we are, click here.]

Introduction
Insurance
Economics
Politics
Can we make it work?
The weak case for mandates
Conclusion

Introduction

The President is happy that 500,000 people reportedly signed up for health insurance on the healthcare.gov website, even before the last “extra” day. But as I wrote in my Thanksgiving message, tech is the easy part. People are the hard part.

Health insurance is hard because it involves three wildly separate fields, all involving people and math: insurance, economics, and politics. As far as I know, no one, including the President or his advisers, has put all three together in a way that makes sense.

This post tries to do that. Because it’s based on a number of my earlier posts, dating back to 2007, I’m going to make it as short and simple as I can.

Insurance

In concept, insurance is a relatively simple business. You just spread the risk as broadly as possible. The larger the pool of insureds (sometimes called the “risk pool”), the lower the premiums. The more people you insure, the lower the proportionate chance of any insured person incurring an insured loss—in this case getting sick or injured. So the lower the premiums insured folks in the pool have to pay.

After a point, increasing the pool size even further may provide only diminishing reductions of premiums. But I don’t think we Yanks are anywhere near that optimal pool size yet.

Why? As compared to single-payer systems, we balkanize our insurance pools in three ways: state by state, employer by employer, and insurer by insurer (or plan by plan). (Once we balkanized in yet another way, but “Obamacare” outlawed cherry picking.)

Nothing in the theory or practice of insurance requires this balkanization. State-by-state balkanization is an artifact of our law and history, including our tradition of regulating insurance at the state level. Employer-by-employer balkanization is an artifact of our immediate postwar history, during which big firms provided stable, lifetime employment with stable benefits. That short-lived “tradition” is rapidly waning and soon will be almost entirely gone. Finally, insurer-by-insurer balkanization is an artifact of our private, for-profit insurance system, in which many private firms offer closely similar “products” (each with its own special “gotchas” buried in fine print) in a ghastly caricature of competitive private “industry.”

Each step in balkanizing the pool cuts down its size, raising premiums. The effect is automatic and arithmetic. It has nothing to do with insurers’ greed or inefficiency. An insurance pool of only ten people, three of whom need heart or kidney transplants, would be unsustainable, no matter how efficient and well-intentioned the insurer.

We Yanks have only four states whose populations compare to those of the smallest of our successful single-payer allies, namely, Australia and Canada (with 2012 populations of 22.7 million and 34.9 million, respectively). In decreasing order of population, they are: California (38 million), Texas (26 million), New York (19.6 million), and Florida (19.3 million). The rest of our states run from about half of Australia’s population (Illinois, Pennsylvania and Ohio), down to about one-fortieth (Wyoming).

Think these facts might have some effect on health-insurance premiums? Our larger states seem to sense the answer. All four of them, even Texas, are trying hard to make “Obamacare” work, some with direct enrollment, bypassing the federal website. They might actually make it work because they have large enough populations to create large enough risk pools.

Having taken all three grossly balkanizing steps, we Yanks in general have an average pool size wildly smaller than the populations of the larger single-payer nations, such as Britain (63 million) and France (65.7 million). Since the administrative costs of our thrice-balkanized system add no more than 25% to 30% to our premiums, most of our double cost, as compared to single-payer systems’, comes from our small average pool size. The rest comes from paying our doctors and hospitals more.

Insurers’ private profit contributes an insignificant fraction to our exorbitant health-care bill. Accounting for all that private profit takes a much bigger toll.

When I go to the medical lab, for example, there are four or five technicians taking or testing blood or urine samples, and three clerks out front checking and verifying insurance and filing claims. So at least three-eighths (37.5%) of the visible employees do nothing but account for private profit and handle balkanized claims processing, with its differing and often incompatible computer systems, claim procedures, forms and rules. Next to that effect—let alone the effect of suboptimal risk pools and higher payments to doctors and hospitals—insurers’ private profit is inconsequential, however much it may float stock prices and bonuses and anger the left wing.

Economics

Enter economics. Economists for presidential candidate Hillary Clinton, and later for the President, were not unaware of the benefits of increasing pool size. But none of them appears to have addressed the primary problem: risk-pool balkanization and consequent wildly suboptimal pools.

Instead, they all—including Nobel Prize winner Paul Krugman—focused on increasing the pool size by forcing younger, healthier and usually lower paid workers, who don’t want and don’t think they need health insurance, to buy it.

Thus our economic experts leaned hard toward “mandates.” Most still do.

There were (and still are) two problems with this approach. Both I outlined in 2007 and 2008, when candidate Clinton was for mandates and candidate Obama against them. (See 1, 2, and 3)

First, as an economic matter, mandates are like a regressive tax. They force younger and generally lower-paid workers to pay for the care of older and unhealthier workers, who generally make more money. (Retired seniors are on Medicare or Medicaid, perhaps with private supplements; older people who still work, and who therefore are still covered by private insurance, are at or near their peak earning years.)

Not only does this regressiveness seem unfair on its face. It’s nothing like the single-payer systems in Europe and elsewhere, which our right wing insists (inaccurately) on calling “socialized medicine.” (The vital distinction between insurance and medicine gets lost in demagoguery.)

In single-payer systems, everyone pays, through taxes. But because those taxes are highly progressive, not everyone pays the same “premium.” The more highly paid (in income-tax systems) or the ones who consume more (in VAT systems) pay more taxes and hence higher “premiums.” This approach leaves the young, healthy and worse paid (or less consuming) in a fairer situation: they pay less, and the older, better-paid and likely sicker workers who need more care pay more.

Politics

The second problem with mandates fades into our third topic: politics. We Yanks hate mandates. We don’t want anyone, least of all government, telling us what to do.

This is not a recent phenomenon. Alexis de Tocqueville noticed it when he came to our country in 1830. In multiple blog posts, I pointed out this huge problem in 2007 and 2008, to no avail. (See 1, 2, and 3)

The President, who firmly opposed mandates in his primary campaign against Hillary Clinton, pulled a classic bait-and-switch and supported them once elected president. (I write this as an avid Obama supporter, who thank God every day that he’s our President, especially considering the alternatives. But facts are facts.)

The political result was entirely predictable, and in fact I predicted it. Our right-wing demagoguery juggernaut, which had aimed its big guns at Hillary’s mandates even before the primary campaign had ended (assuming she would win), quickly re-trained them on Obama and so-called “Obamacare.”

That juggernaut has never let up, not for one microsecond. It continued to demagogue long after the Affordable Care Act passed Congress. Likely it will continue forever, even after the law and websites, as many expect, settle down and start to work well for millions of Americans.

The President has a big problem with racism, especially the unconscious variety. But this particular political problem has little or nothing to do with racism. It reflects a deep strain of American culture going back to our earliest days as British colonies.

Colonists and later immigrants came to this country for one reason above all: they wanted to be free, unfettered and independent. Their motives were various, including religion, politics, making money, and just general principles. But the desire to be let be was universal among them. It remains universal among us Yanks today.

Remember that famous colonial-Revolutionary slogan, “Don’t Tread on Me”? It came with a cartoon drawing of a snake. That’s the essence of our Yankee culture.

Step on that snake and you get venom. With his unexpected switch to mandates, Obama got it in abundance. For a man whose empathy, emotional intelligence and political skill are all off the charts, it was an uncharacteristic lapse. Apparently, the President let the economic “experts” subvert his superb political instincts. (That wasn’t the only time. It happened with the bankers, too.)

In response to a thoroughly predictable uproar, the President has now delayed small-business mandates for a whole year, and individual mandates for those who lost policies they liked. And he had to do so long after his once-in-a-century solution already had passed Congress, in order to quell the relentless demagoguery just temporarily and foster a decent chance of the new law’s eventual political success.

In light of all this, Chief Justice Roberts’ decisive opinion on the mandates was not just a neat piece of legal legerdemain worthy of Benjamin Cardozo. It was also politically inspired.

Roberts kicked the policy issue out of the courts and back into the political arena, where it belongs. But by calling the mandates a “tax” for purposes of constitutional analysis, he also subtly reminded us how they do things in Europe, Canada and Down Under, and how much more sense their approach makes, both economically and politically. His judicial restraint, his legerdemain and his subtle suggestion will mark his opinion as one of our all-time greatest on a hugely controversial issue.

Perhaps inadvertently, Roberts’ opinion on “Obamacare” was brilliant for yet another reason: simple arithmetic. If we had a single-payer system based on taxes, as Roberts subtly suggested, we would have a medical-insurance risk pool of 307 million people. With the exception of China and India, no other nation would have a larger pool. (The EU, although it has taken the leadership [last paragraph] in new entries into a society based on the values of the Western Enlightenment, has not yet included health insurance in its transnational portfolio.)

We Yanks lack good data on a vital number: the average risk-pool size that private insurance companies use in their actuarial calculations to determine premiums for their balkanized and multifarious health plans. My guess is that it would be somewhere in the range of ten thousand to a few hundred thousand. If you don’t think raising that number to 307 million would lower premiums, you have trouble with arithmetic.

Can we make it work?

Mandates are a big political problem. They always have been, and they always will be. We Yanks will pay taxes, albeit grumblingly and reluctantly. But we just don’t like being told what to do.

Reckoning with that essential and durable truth of our nature as a people, can we make “Obamacare” work? And, if so, how? The project is worth some thought and effort, if only because we’ve tried as a people to do something about health insurance for a century, since Grover Cleveland.

In all that time, “Obamacare” is the best we’ve been able to do. I don’t think we want to let another century go by without offering our people the security and freedom from fear and suffering that every other developed nation enjoys.

The best solution I can see is to chain the dog that never barked: market and risk-pool balkanization. Don’t just let insurers sell the same health insurance across state lines: encourage or require them to do so, under uniform federal regulation. That regulation could hardly impose greater “mandates” on insurers than “Obamacare” already does, with its specific minimum requirements for bronze, silver, gold and platinum policies.

Anyway, mandates on big corporations aren’t politically incendiary like those on individuals. Corporations deal with mandates and regulation all the time. In a complex and interdependent society, it’s part of what they do.

Only individual mandates provoke the snake to spew its venom. As individual Yanks, we all cherish the illusion that we are wholly free and independent, while we enjoy the most complex and interdependent human society that ever existed. (Contradictions, too, can be part of human culture. Just recall Communism.)

If the President wants to avoid another disastrous Reagan “revolution” and keep young people in the Democratic Party, he’s going to have to reduce or soften the individual mandates. His recent delay in implementing them suggests he finally gets this point.

But mandates are just the political problem. There’s still the rest of the premium math. Even with interstate insurance sales, we would still have the problem of risk-pool balkanization by employer and plan. That’s yet another fundamental economic problem that our insurance system’s unfortunate history foists on us.

Very few employers, if any, have a large enough pool of employees to optimize the size of the risk pool for health insurance, let alone with multiple separate plans. But by encouraging (or requiring) insurers to offer the same plans across state lines, and to combine or create multi-employer plans, the law could increase the sizes of risk pools significantly, and maybe lower premiums. It’s never been done here, and it’s worth a try.

As for mandates, even Nobel Prize winners are not infallible. The key study Krugman relied on to support mandates (at least in his columns) had an obvious alternative explanation: simple supply and demand. As Krugman himself honestly reported, a plan like Obama’s then-proposed plan (without mandates) would have insured 23 million people at a premium of $4,400, while one like Hillary Clinton’s then-proposed plan (with mandates) would have insured 45 million at a premium of $2,700.

So more people would have bought the cheaper plan than the plan with a 63% higher premium. Isn’t that just what the law of supply and demand predicts: the cheaper the product, the more people buy it? It sure looked (and still looked) that way to me.

The other salient question is whether the aggregate premium payments would have covered the aggregate costs of health care. For reasons explained below, I doubt that anyone had the necessary data—including accurate differences in aggregate health-care costs by age—to answer that question reliably.

If you just lop off the pool’s lower age quadrant, or 25%, you get a premium increase of about the same amount, not 63%. So the study self-evidently assumed a much higher medical bill for older people. And it did so, apparently, without considering the fact that youth might buy (and in the real world would buy), cheaper policies with catastrophic coverage only, possibly including low caps and high deductibles for routine care.

What’s more, the actual premiums in that study didn’t make much sense. You can’t buy much health insurance for $4,400, let alone $2,700 a year. Around the same time, my own health insurance cost over $6,800 a year. And that was just for myself; my wife had her own insurance.

This discrepancy reveals another possible improvement. Apparently, even the “bronze” plan under “Obamacare” is priced over $2,700. If so, the reason is obvious. The law doesn’t allow young, healthy people to buy cheap insurance against just catastrophic loss. It wants everyone to have fully comprehensive insurance, although it costs more.

That’s another unfortunate aspect of the law’s politically problematic mandates: not only forcing people to buy insurance in the first place, but telling them what kind they must buy. It’s a kind of paternalism wholly gratuitous to “Obamacare’s” primary purpose, namely, getting more people who want insurance but can’t find or afford it insured.

In this aspect, as in others, “Obamacare’s” striving for the best became the enemy of the good. Bare-bones policies that cover only catastrophic risk (perhaps with some prevention and acute care) are probably no good for families and seniors. But for young, single, healthy people, why not?

Get healthy youngsters into the system and upgrade them later. Isn’t that the entry-level strategy used by every business that sells anything, from cars to computers and software?

The weak case for mandates

During the big debates of 2007-2009, I read every column that Paul Krugman wrote. I never read anything approaching convincing proof that the system would collapse unless we forced young, healthy blue-collar workers to pay for older, sicker, better-paid people’s health care. I saw a lot of conclusions and assertions, but no credible numerical evidence. Not even a credible outline.

I did see credible evidence that we needed to make health insurance better and more affordable for people who actually wanted it. As I wrote at the time, the lesser and more politically freighted problem of young, healthy insurance “refuseniks” could wait for another day. As it turns out, that analysis appears to have been right, at least insofar as concerns “Obamacare’s” immediate chances for political success. Without mandates, the right-wing propaganda juggernaut would have a lot less ammunition.

Not every older person gets sick or injured. Many people live to a ripe old age and die suddenly of a heart attack or stroke, or less suddenly of a bout with pneumonia or the flu. Many die quietly in their sleep for no obvious reason. All those people don’t stress our health-care system much, although they have paid premiums or (for Medicare and Medicaid) taxes for most or all of their long lives.

My stepfather was like that. He never got so much as a flu until he was over 90. When he died, he went quickly, at the age of 92, with little fuss or expense. He was a net contributor to our health-care system, big time.

So maybe the whole idea of having to coerce young, healthy, mostly blue-collar workers to make “Obamacare” work is nothing more than a sophisticated urban myth, promoted by credible experts (like Krugman) on the basis of obscure studies made by others, not themselves. Maybe Krugman just lent his Nobel-Prize credibility on trust, not verification.

More to the point, I can’t see today, and I didn’t see in 2007, how the detailed and highly structured data needed to prove or disprove the case reliably could even exist.

In order to prove or disprove the point conclusively, you would have to have detailed data on all 307 million of us, and on what illnesses and injuries occurred to each at every age. Not only that. You would have to have detailed data on the cost of diagnosing and treating each such illness and injury, and who paid it.

Just collecting that vast data would make the NSA’s much-lamented phone-call-record collection look like child’s play. After all, each NSA record is just two phone numbers and two times (call initiation and duration). The necessary medical data would cover each citizen’s entire lifetime health history, with a detailed and itemized cost accounting.

Do those data even exist for people over 50, whose medical histories began long before the digital revolution? Or did their paper records, must less detailed and specific than today’s, long ago decompose in trash heaps somewhere? And even if these old data still existed, did they adequately reflect the cost impact of the recent technological revolution in medicine?

Even if this vast mass of data existed, were current, and could be collected, you would have to analyze it with a series of mathematical correlations that, in permutation and combination, would be nearly endless. Good luck.

So for me, the assertion that economic math requires mandates on the young recalls Alan Greenspan’s recanted insistence that sick markets cure themselves. That wrong idea, too, was based largely on faith, not sound math. However would you prove it mathematically, anyway? We Yanks must learn to be especially skeptical of quantitative experts when they make assertions incapable of sound quantitative proof.

Conclusion

Simple arithmetic suggests that youthful refuseniks, if important at all, are just the tip of the insurance-pool-size iceberg. Cut off the entire lower-fifth cohort of the age spectrum, or even a fourth, and you reduce the pool size by just 20% to 25%. In comparison, state-by-state balkanization, all by itself, decreases pool size, on the average, by 98%, because we divide our national pool among fifty states, reducing the average pool to 2% of our nation’s.

The quantitative effect of employer-by-employer balkanization is similar, although less dramatic. Just count the number of participating employers in any state. Suppose ten is a reasonable minimum. If each has its own insurance plan, you have cut average pool size to 10% of the whole, for a reduction, on the average, of 90%. Insurer-by-insurer balkanization has a similar effect.

If refuseniks’ 20% to 25% reduction of pool size raises premiums, what do you think these factor-of-fifty and factor-of-ten average reductions do? Shouldn’t we work on the arithmetically bigger problem before the little one? Older folks’ probably greater need for health care certainly factors in, but do you think it compensates for these huge arithmetic differences? Only detailed analysis of non-existent detailed data could prove that point, and valid proof seems unlikely.

Anyway, the real proof of the pudding will be in the eating. Right now, only the grand experiment of “Obamacare” can prove or disprove the alleged economic need for mandates. And even that experiment might not be conclusive, depending on how long it runs.

While we wait for the experiment to finish, or to succumb to political angst, we can improve its chances for survival by simple, common-sense measures. We can reduce risk-pool balkanization, thereby increasing pool size and reducing premiums directly.

The effect will be similar to mandates’, but without the individual coercion and with a greater numerical chance of success. Corporate insurers probably won’t need coercion to increase their customer bases.

And we can encourage now-mandated insureds not to become refuseniks by offering them cheaper policies covering only catastrophic risk, prevention and maybe acute care. After all, we don’t want those young, healthy people becoming vectors for the next pandemic, do we?

Longer term, we can reduce the huge administrative expense of accounting for all of our multiply balkanized system’s private profit. We can do so using simple common-sense measures: standardizing computer-system interfaces and claim forms and procedures. Let separate private insurers compete on their actuarial prognostication, their pricing, and their plans’ special benefits above basic requirements. There is no need to let our exorbitantly inefficient Tower of Babel in claims processing continue—let alone on cumbersome paper—in the digital/Internet age.

Just cutting this Gordian knot alone could save around 25%. Doctors and hospitals would welcome the cutting, just as they welcomed our government providing a lingua franca of standardized codes for various diseases, diagnoses and treatments. Insurers would grumble at first; but they would soon see the light as their administrative expenses dropped dramatically.

“Obamacare’s” mandates have produced far more heat than light for far longer than any recent political issue, including immigration reform. There’s a good reason: mandates touch a political nerve native to our Founding and our culture. When you consider also that their necessity is at best unproven and at worst doubtful, you come to a simple conclusion.

“Obamacare” can increase its chances of working well by softening, reducing or even eliminating mandates and instead enticing insurance refuseniks into the system with a greater variety of lower-cost insurance plans. To avoid more vulnerable people taking unnecessary risks, the system could limit the barer-bones plans to healthy young people, by age or even by gross health history.

At the same time, pols can increase the likelihood of reducing premiums by focusing on means of broadening risk pools far more effective than just forcing young people in. They can begin to break down the historical balkanization barriers that split risk pools by state, employer and plan and therefore by big whole integers, not just the small fraction of healthy youth.

These are common-sense, bipartisan expedients for which both parties might take credit. If our pols support them, they just might improve their dismal and well-deserved reputations for yelling at each other, in incomplete ignorance of real chances for improvement, while letting their constituents’ lives, health and hopes languish.

A Yankee Path to Single Payer

Will we ever have single-payer health insurance in this country? Or will we continue to pay twice, on the average, what our single-payer developed-country allies pay, with statistical health-care outcomes near the bottom of the pack? In other words, will we continue to have the best health-care system in the developed world for the very rich, and the worst for the rest of us?

Oddly enough, there is hope. Even more oddly, “Obamacare” might be a step on the path to success. But before we can see how, we have to understand one vital fact. Health insurance is a natural monopoly, much like home-to-home distribution of water and electrical energy or the “last mile” of telephone landline service.

A natural monopoly

What’s a natural monopoly? It’s an industry or economic sector in which—contrary to the usual rules of market economics—competition is counterproductive. The more competitors you have, the less efficient and more wasteful such an industry or sector gets. That’s natural monopoly.

Consider getting water to homes. Would it be efficient for several competitors to build and maintain separate water mains and supply lines to each home? Of course not. So home water distribution is a natural monopoly. So are electric-energy distribution and cable TV distribution.

Don’t believe it for health insurance? Well, consider the following bit of simple arithmetic. It’s well known that our entire health-care sector accounts for about 14% of our national economy. Since our national economy runs about $15 trillion, health care accounts for 14% of that, or about $2.1 trillion.

Now suppose every single American paid health-insurance premiums to a single insurer. What would the tab be? Just divide the $2.1 trillion tab by our population, 307 million, and you get the answer: less than $7,000.

That’s an annual bill. [Note: as explained above, the following material, now italicized, was in error when originally posted. The bold-faced material that follows provides the correct analysis.] When I last had private health insurance, my bill, for myself alone, was over $6,800 per month. So a single-payer health-insurance system would reduce our health-care premiums by nearly a factor of twelve. A family of four would pay four individual premiums, for an annual total of $28,000, or $2,333 per month.

Most families of four today would kill for that low a premium. It’s even lower than the $2,700 per year individual premium that Paul Krugman proudly cited (back in 2009) as a projected product of Hillary Clinton’s proposed mandates.

The italicized (and erroneous) material above was based on the absurd notion that I once paid more than $6,800 per month for health insurance. The actual figure was over $6,800 per year, or just $567 per month, and my employer paid part of that figure. That’s not much more than many people pay per month to finance cars.

But here’s why single-payer, with its slightly higher $7,000 annual tab, would be a better deal still. My insurance then was the best available from my employer, but it paid only 80% of most medical claims. The other 20% was a co-pay, which came out of my pocket. In addition, there were annual and lifetime caps on benefits, as most health insurance had at the time, before “Obamacare” outlawed them.

So I had another, excess major medical policy, which cost an additional $1,400 per year. It had a $3 million lifetime cap and a $25,000 deductible. With these two policies, I felt secure. Even if I needed multiple heart transplants (as long as the total tab was less than $3 million), I would be out of pocket, at most, $25,000. But my total annual insurance bill was $6,800 + $1,400 = $8,200, or 17% higher than the putative single-payer bill.

But that’s not all. The single-payer plan would be all-inclusive and all encompassing, since it divides our total national health-care bill among all of us. It would have no 20% co-pays and no deductibles, in addition to none of the “gotchas” that “Obamacare” now outlaws: annual and lifetime caps and pre-existing condition exclusions.

So not only would single-payer provide (automatically) all the benefits that “Obamacare” now provides by regulation, including outlawing pre-existing condition exclusions. It would also eliminate deductibles and co-pays, which the regulatory requirements for “Obamacare’s” bronze, silver, gold and platinum policies still have. In other words, it would provide real, total security, not just reduce the possible tab.

For a family of four, that $2,333 per month tab would still hold. But that’s where progressive taxation comes in. Through it, older, generally sicker, and higher-earning families would subsidize the younger and lower-earning families, rather than vice-versa, as under the current system (and even under “Obamacare,” with its mandates).

So which system would be fairer and more efficient? You decide. And we haven’t even mentioned the 25%-plus extra that single payer would save by eliminating the Tower of Babel in claims processing among dozens of separate insurance companies, all using different computer systems, interfaces and plans, rules and procedures for processing claims.

Why does competition in health insurance raise premiums, rather than lower them? The primary reason is that it splits the risk pool, lowering the number of insureds in the pool that each insurer covers. It thereby raises the average premium, automatically and arithmetically. A secondary reason is that having multiple, differing computer systems, interfaces and forms, rules and procedures for claims processing is incredibly inefficient. In fact, it’s much like having duplicate water mains or copper telephone wires to each home—reasons why home water distribution and “last mile” landline telephone service are natural monopolies.

As I’ve outlined in another post (and as is a noncontroversial conclusion of classical economics), competition can’t improve natural monopolies because competition in natural-monopoly sectors is wasteful. The only ways to handle a natural monopoly properly are to nationalize it (a bad idea because politics and economics don’t mix well) or to keep it private but regulate it. These are the sole solutions to making natural monopolies work that capitalist economics has come up with in the three-plus centuries since Adam Smith.

Whether you nationalize or regulate the natural monopoly in health insurance, it’s still single payer. As our bit of simple arithmetic shows, it could lower our health-insurance premiums by something between a factor of four and a factor of twelve. There’s no magic or sleight of hand in that reduction, just simple arithmetic.

Getting there from here

So how do we get there from here? Paradoxically, we open our thrice-balkanized health-insurance markets to competition. We allow and even promote interstate, Internet sales of health insurance. We encourage, if not require, insurers to offer multi-employer plans. We give them every incentive to broaden their risk pools as much as possible, whether by seeking new customers directly or by acquiring other insurers.

Then we sit back and watch. As usual in a capitalist system, winners and losers will emerge. The winners will acquire the losers, and the game will go on.

If we don’t intervene and stop the mergers (remember, in this game, competition is bad!), eventually one or just a handful of insurers will emerge. We will have achieved single-payer system, or a close approximation of one. And we will have gotten there naturally, through market forces, without coercion or “mandates.” In fact, we will have gotten there by encouraging free competition (and free acquisition!) among insurers, in a uniformly regulated national market.

How “Obamacare” can help

The trouble with any natural monopoly is that it’s a monopoly just like any other. And as classical economics tells us, monopolies (in general) produce higher prices, lower output, less product variety, lower rates of innovation, and less customer satisfaction than competition.

If you have only one seller, there are no alternatives. So you have to take whatever price and terms it offers. In theory, a private single-payer health insurer could charge $15,000 per month for individual insurance and make an astronomical profit.

Enter regulation. Whenever a monopoly is “natural,” and competition would be inefficient and unwise, we regulate it so that (1) it won’t price gouge, but will accept a “normal” profit and (2) won’t do socially undesirable things. That’s what we do right now with non-municipal water and power distribution and cable TV.

The only known alternative to regulating natural monopolies is government ownership, or (at the federal level) nationalization. Many municipalities do this with their water and electric-power distribution. But government ownership is generally undesirable because even the best politicians are not good business people. Politics and business are two different skills. (Do we need a reminder after healthcare.gov? Even its name is inapt: it should be “healthinsurance.gov.” No one gets medical care from a Website, at least not yet.)

The Affordable Care Act already outlaws most of the socially undesirable things that private insurers have done. It outlaws cherry picking, pre-existing condition exclusions, annual and lifetime caps on claims, and dropping health insurance or raising premiums when people get sick. It even outlaws dropping kids from family policies until the age of 26.

With these “no-nos” for insurers and its minimum requirements for bronze, silver, gold and platinum policies, “Obamacare” already has the structure of national qualitative regulation needed to keep health insurance rational and socially acceptable as the industry consolidates into its natural monopolistic form. So we’ve already got a good start.

Only two things would need adding. First, as the health-insurance sector consolidated and winning competitors achieved greater and greater market power, regulators would have to introduce price regulation, just as they have done for water, electric-power and cable TV companies, to prevent gouging. They would have to have rate-making hearings that ultimately allowed the single payer (or an oligopolistic handful of firms) a reasonable profit, but no more.

Second, to reduce the exorbitant cost of accounting for private profit in a balkanized and consolidating system, the regulators would have to standardize computer-system interfaces and forms, rules and procedures for claims processing. As my simple medical-laboratory example above suggests, such a uniform system and rules could save from a quarter to three-eighths of our premium expenses as soon as implemented, compared to the present sheer economic waste of our present Tower of Babel in claims processing.

permalink

A Christmas Message of Love

[For a very short update on Germany, click here.]

“Love” is a funny word to use in politics, let alone international relations. Most diplomats prefer a more neutral, professional term, like “cooperation.” In their bad, old Soviet days, even the Russians spoke of “mir i druzhba,” peace and friendship.

But Jesus knew his stuff. When he advised us to “love thy enemy” and “love thy neighbor as thyself,” he used just the right word.

“Love” is the term we humans use to describe our most important relations: the ones with our spouses and children and broader families, without which our species could not survive. After them, what could be more important than enemies and neighbors? An angry enemy or neighbor can make life even more miserable than angry in-laws.

Seven decades ago, we were suffering human history’s most terrible conflict, with Germany and Japan. If the nuclear age had begun a little earlier, our species might have extinguished itself. Yet today, Germany and Japan are our friends and allies and the world’s fourth and third most productive economies.

What made the difference? Love. Our pols gave it a bureaucratic name—“the Marshall Plan.” They named it after a former general who may have been our greatest statesman ever, George Marshall.

But forget the name. What we did was remarkable. After history’s most horrible and exhausting war, many of us Yanks just wanted to crawl back into our pre-war isolation. We wanted most to tend our neglected farms and gardens and beat our swords into plowshares, in order to live well. Instead, we worked hard, paid our taxes, and spent “our own money” to rebuild our devastated enemies.

Just half a century ago (51 years, to be exact), we and Soviet Russia nearly extinguished our species in a gratuitous nuclear holocaust. Our mutual reluctance to do so marked a turning point in human history. Although wide recognition is just now dawning, that may may have been our species’ most important historical inflection point. Both sides stepped back from the brink and began to talk to each other.

Not only did we Yanks refuse to leap over the cliff. We treated the fearsome Soviets as fellow human beings. We showed another kind of love: patience, vigilance, deterrence, and perseverance. That’s a kind with which parents of difficult children are all too familiar.

We set up a “hot line” to avoid misunderstandings. We spoke and dealt with our enemies. We worked with them, day after day, year after year, though good times and bad. The result? A prolonged peace and eventual nuclear disarmament, still ongoing today.

With the pressure of several centuries of foreign invasions gone, the Russians could relax, breathe a bit, and think. Soon Stalin’s Evil Empire and its gulags collapsed of their own weight. Today Russia is awakening as a more or less normal country, albeit still gradually shaking off the twin nightmares of Communism and Stalin’s Terror.

Back in the 1930s, Stalin’s Russia was hardly full of love. It crushed Ukraine, first with two engineered famines that killed eight million Ukrainians. Then, in the Great War that followed, it and the Nazis killed another eight million. They treated the entire nation as nothing more than a battlefield, its people as dispensable pawns.

The resulting sixteen million deaths were over half of Ukraine’s 1930 population. That would be like 153 million Americans dying in famine and war today. Ukraine’s was probably the single most horrendous experience of national suffering in modern times.

Yet today Russia is loving its neighbor. It has just pledged $15 billion in financial support and a 30% reduction in Russian natural-gas prices for Ukraine’s hard-pressed consumers and industry. Russia is still a relatively poor country, so this love is all the more impressive. (Whether Russia has the vigilance to see that most of the benefits go to Ukrainians, and not into the pockets of Yanukovych and his cronies, is another issue.)

Cynics will say this is all just self-interest. That’s partly true. Russia wants Ukraine to remain in its commercial orbit, whatever that means. (Trade is an equal-opportunity phenomenon, best enjoyed by all.) But just so, our Marshall plan helped make our former enemies allies and so contain the menace of Stalin’s Soviet Russia.

What of it? Motives don’t matter. Acts do. In love, motives are often complex. Every spouse, parent and lover knows that. What matters is the nurturing. Our species lurches forward, step by step, regardless of motive, whenever we help each other.

Anyway, this time the self-interest is enlightened. Our fire-bombing of Dresden and Tokyo and our nuking of Hiroshima and Nagasaki were self-interested. So was our Marshall Plan. Stalin’s starving and trampling of Ukraine was self-interested. So are Putin’s trade blandishments. Most observers can discern an important difference.

Call it all self-interest if you like. But today’s better acts look a lot like love. After two millennia—and after exhausting all the alternatives but self-extinction—our species may finally be taking Jesus’ advice to heart.

And so we come to Jesus’ other compelling message: loving the poor.

We Yanks appear to be convalescing from a thirty-year-long disease of harshness. In recent years, we have disdained the poor, damned them with false racial epithets, and disparaged them as shirkers, scofflaws, freeloaders, criminals, and “takers.” In the process, we renounced the sort of love and generosity that had gotten us through the Great Depression.

Our motives were ignoble: selfishness and self-righteousness. We wanted to keep “our own money.” Our captains of industry wanted to lower their taxes, even on the backs of the poor.

But we Yanks, too, can become enlightened again. Loving, rather than despising, our disadvantaged can improve our own lots in life, if only by clearing the streets in our big cities of the homeless and mentally ill. Even now, we can see a glimmer of the vast improvement in our national psyche and economic performance that might come from once again having a socially cohesive workforce driven by hope and promise, rather than fear of losing jobs or not having them at all.

And so, city by city and state by state, we are starting to raise the minimum wage. We want those who work hard at the bottom of our society to have a chance at a decent life and the hope, pride, confidence and industry that come from the American dream.

Over half a century ago, we Yanks understood Jesus’ words well. PBS recently retold the tale of our “Candy Bomber”, as part of a Christmas gala featuring the Mormon Tabernacle Choir.

One of our Berlin-Airlift pilots, while flying supplies into besieged West Berlin, got the idea of giving watching German children candy. His small act of generosity soon blossomed into a massive and regular airdrop of candy to West Berliners, under tiny, makeshift parachutes. First his colleagues, then our Air Force, and eventually our private sector supported the drop.

The story doesn’t end there. Our generals later made this pilot the commanding officer of Tempelhof Air Base. After history’s most terrible war, and at the height of the Cold War, our hardened military leaders understood the power of love.

If the Russians can evolve from crushing and starving Ukraine to subsidizing it, and if we Yanks can “bomb” our erstwhile fiercest enemies with candy, we can also cure our pathological disdain for the unfortunate among us. With care and caution, we can end our Little Cold War with Iran and begin to stabilize the Middle East. We might even bring some love into Congress.

Those are our hopes. And today they are more and more realistic. Slowly but inexorably, hardened and practical pols and military leaders are coming around to Jesus’ way of thinking. It’s about time.

Personal gift giving is not, as some claim, incompatible with Jesus’ message. It’s an expression of love for family and friends, and it supports 40% of our Yankee consumer economy. So buy and give. Even enlightened parents see gift giving as an expression of love, albeit only one of many.

But if we can just extend our love to our enemies and neighbors, and to the poor, more frequently and more reliably, we can build our own Paradise right here on Earth—all of it. And we can do so without divine intervention.

The last twenty years of peaceful, self-interested love already have lifted nearly a billion of us out of extreme poverty. Jesus would approve.

Postcript: Germany, Too!

Seven decades ago, Nazi Germany was busy conquering its neighbors by the most efficient and brutal means imaginable. In the process, it threw millions of its presumed “enemies”—mostly Jews, but lots of others, too—into the charnel house of a deliberate and gratuitous Holocaust. It would be hard to conceive of a starker antithesis of love.

But our species’ capacity for constructive change is infinite. Today, under the enlightened leadership of Angela Merkel, Germany is doing much the same thing as we Yanks did with our Marshall Plan. Its citizens are working hard and paying taxes so that Europe can remain whole, peaceful and prosperous.

The effort is, of course, self-interested. But what a difference from seven decades ago! Germany today is loving its neighbors and former enemies, just as Jesus advised.

A united and peaceful Europe is the most extraordinary creation of political love since our own Founding and our Marshall Plan. (See 1 and 2) (That’s why Ukrainians and Turks want in.) Now it’s on the mend, from what might have been a shadow of the Weimar Hyperinflation that started the Great War off.

The cure has been Germany’s love: Christian love, human love. It’s no accident that united Europe’s anthem is Beethoven’s “Ode to Joy.”

Jesus would approve of that, too. Merry Christmas!

permalink

Comparative Energy Costs of Driving, Updated: Cents per Mile

[For my personal award to Apple Computer, click here. For recent posts on upheavals in Ukraine, click here.]

Almost two years ago, I published a table giving the comparative costs per mile of driving on various sources of energy. It was a popular post, but it’s time to update it.

As investors and drivers both know, energy prices can change. To quote legal boilerplate, “past performance is no assurance of future results.” Some things get cheaper, and some get dearer.

So I’ve revised my table to show late-2013 figures, side by side with early 2012’s. (The precise month in late 2013 varies with the type of energy. See the notes below.) Juxtaposing the two figures provides a sense of change, trends and volatility for each source.

The comments to this table also make a point I should have made in early 2012. Unless you generate your own electricity—for example, using a solar array—the technology used to generate it doesn’t make much difference in the price you pay as a consumer, and therefore in your energy cost per mile if you drive an electric car. Electricity is fungible, and power companies don’t provide discounts when they use cheaper means of generating it in your area. So you pay the market price, which today is still set mainly by the cost of burning natural gas or coal, even if your power company generates much of its energy portfolio with the sun or the atom.

When you put this point together with the high cost of energy from new nuclear plants and the now-lower cost of solar PV energy, you get some surprising results. Read on.

Here are the comparative results for March 2012 and December 2013, with the categories re-ordered to reflect decreasing per-mile costs today:

Energy Cost of Driving, in Cents per Mile,
for Various Automotive Energy Sources

Energy Source	Underlying Price Parameter		Cents per Mile Driven
	March 2012	Late 2013	March 2012	Late 2013
Gasoline	$3.78 per gallon	$3.35 per gallon	12.6	11.2
Natural Gas (Residential)	$1.28 per gal. equiv.	$1.89 per gal. equiv.	4.3	6.3
Nuclear Electricity	4.4 ¢ per kWh	15 ¢ per kWh	1.5	5.1*
Conventional Electricity (Residential)	11.6 ¢ per kWh	12.5 ¢ per kWh	4	4.3
Conventional Electricity (Industrial)	6.8 ¢ per kWh	7.23 ¢ per kWh	2.3	2.4
Natural Gas (Industrial)	$0.55 per gal. equiv.	$0.53 per gal. equiv.	2.2**	2.0**
Solar Photovoltaic Electricity (Residential)	N/A	4.6 ¢ per kWh	N/A	1.5
Solar Photovoltaic Electricity (Commercial)	5.1 ¢ per kWh	2.4 ¢ per kWh	1.8	0.8

* For new plants
** Assuming that service station’s retail sale of industrial gas would add only 20% for operating expenses and profit.

Comments: Three points jump out from this table. First, the cost per mile of driving on nuclear electricity increased dramatically from early 2012 to late 2013, by more than a factor of three. The reason is that the 2013 number is for new plants and the 2012 factor for old, fully depreciated plants, which in my view are obsolete and therefore dangerous.

The 2012 figure came from a Morninstar investor report on Excelon Corp., a partially-nuclear power company. That report is no longer available. The figure for new nuclear plants comes from a statement by David Crane, as reported in The Economist [subscription required]. Crane is the CEO of NRG Energy, which dumped plans to build two new nuclear plants in Texas after spending $331 million. His reported figure was 10 cents per kWh for generation cost, which I increased by 40% for distribution and 10% for profit (the average in early 2012 over all generation technologies) to get a residential retail price.

The moral of this story is that we can have cheap nuclear electricity, but only if we risk another Chernobyl or Fukushima. If we build new, safer nuclear plants, the cost of nuclear electricity will go up, higher even than for conventional (non-nuclear, non-renewable) electricity today.

In any event, I’m not aware of any power company that actually charges anything like 5 ¢ per kWh or below at residential retail. One could, in theory, if it had only obsolete nuclear plants. But in practice power companies use a variety of generation technologies and tend to charge the going market price for output, which today is north of 12 ¢ per kWh at residential retail. So insofar as concerns consumers, nuclear power differs little from the conventional electricity reported lower in the table.

This second salient point is that, in a bit more than a year and a half, the per-mile driving cost of all sources of energy went up, except for three: (1) gasoline, (2) natural gas at industrial rates (not at residential rates), and solar photovoltaic energy. Except for the last, the cost per-mile decreases were within the margin of error of this table: 11% for gasoline, and 6% for industrial natural gas.

The only driving cost that decreased substantially was that of commercial solar PV energy, which dropped by more than a factor of two. The reason was real, not mere price volatility. During that time both the purchase price per watt of solar cells and the “turnkey cost” of making a working array from them went down substantially. This post explains the phenomenon and its future prospects.

The final point surprised even me. The cost per mile of driving energy from our own small-scale residential solar array, installed this August (and described and pictured here), beat the cost of every other form of driving energy, except for commercial solar photovoltaic energy.

This point is real. It’s based on the actual price we paid for our array, before considering federal and state tax credits, but amortizing that cost over the array’s projected energy output. The resultant figure is only 1.5/11.2 = 13% of the cost of driving on gasoline. (There is no adjustment for distribution or profit because the array is ours; we paid for it and own, maintain and operate it.)

There is no comparable residential solar figure for 2012. Until we installed our array this last August, we had no accurate idea what residential solar PV energy would cost.

Unfortunately, since electricity is fungible, regardless of source, no consumer is likely to see the benefit of the extremely low cost of commercial solar photovoltaic energy until that source produces a lot higher fraction of our nation’s electric energy than it does today. So right now, today, installing your own solar array gives you the lowest cost of any means of moving a car forward, other than pushing it.

A close second is natural gas at industrial rates, resold at retail rates by commercial service stations. But unless you are a large organization that can negotiate industrial rates for your natural gas, you have to go to a service station to enjoy the substantial price advantage over residential rates. You can’t “gas up” at home, as you can if you have your own solar array.

Installing your own solar array also has a decisive medium-term (and long-term) advantage over converting your car to run on natural gas, or buying a new natural-gas or dual-fuel car. That’s price stability. Because solar PV energy requires no fuel and has very low maintenance expense, the energy cost of driving on the sun depends almost entirely on the cost of installing your solar array. That energy cost will therefore be stable for the array’s working lifetime, probably a century. But natural gas will get more and more expensive as power companies use more of it as a cleaner substitute for coal and drivers use more of it as a cheaper and cleaner substitute for gasoline. If you want assurance that your driving energy costs won’t jump in ten years, invest in driving on the sun.

My wife and I will be long dead before the solar panels in our array have to be replaced (barring accident or other insured loss). So we’ll also be long dead before the amortization of the array’s cost ends. But our heirs or future owners our house will have essentially free energy for driving, for about a century. (Our realtor tells us that we (or our estate) won’t recover the array’s full cost when the house sells; instead, the array will be a selling point making the property easier to sell, at least to educated buyers.)

So the key “takeaway” from the table is simple. Right now, today, you can cut your energy cost per mile of driving by installing a solar PV array and using it to power an electric car. In fact, you can cut that cost by a factor of 11.2/1.5 = 7, as compared to gasoline in a 30 MPG car. And once your array is paid off, you can drive for free, at least as far as concerns energy.

You’ll still have to buy an electric car and maintain it. But maintenance promises to be much cheaper for electrics than for gasoline cars, with the possible exception of the batteries. Once electric cars become true mass-market vehicles, car companies will no doubt reduce this expense with warranties, battery swaps, and/or battery replacement programs (with prorated expenses for use, as for used tires). (There are lots of ways for car makers to do this. For a complete analysis of one, click here.)

The driving cost of energy from your own solar array is more real than that from a commercial array. As noted above for nuclear energy, power companies mix and match energy sources and charge the going all-means rate for solar energy regardless of its low generating cost.

But if you have your own solar array, you can recharge your car’s batteries directly, an act that also solves the solar intermittency problem. If you use your car during the day, as most people do, you can avoid the entire cost of charging at night if your power company has “net metering,” which many do. (“Net metering” means charging you only for the difference between energy you use and energy you generate, regardless of timing and intermittency.)

Notes: The methods of calculation are precisely as described in my earlier post (after the table). The only differences are in the underlying cost parameters, which are mostly taken or derived from data from our own Energy Information Administrations website, as follows:

Gasoline: EIA Weekly Gasoline and Diesel Retail Prices, All Grades, for 12/09/13

Natural Gas (Residential and Industrial): EIA US Natural Gas Prices, Monthly, for September 2013

Conventional Electricity (Residential and Industrial): EIA Total Energy, Data, Monthly Energy Review, Table 9.8 Average Retail Prices of Electricity, August 2013

Solar Photovoltiac Electricity (Residential): The projected cost of energy from our own solar array, with a turnkey capacity price of $5.98 per Watt, based on this table, which converts turnkey array (capacity) prices to output energy prices. (There is no distribution or profit factor for residential arrays.)

Solar Photovoltaic Electricity (Commercial): The cost of generation using a large-scale commercial array with a state-of-the art turnkey price of $2 per Watt capacity, amortized over the lifetime of the array, plus a 50% distribution and profit adjustment, as explained here. [Scroll down to notes on “Solar Photovoltaic Electricity.”]

As noted above, no power company is likely actually to offer energy at this rate, for two reasons. First, power companies mix and match power sources and charge the going rate for energy generally, regardless of source. Second, solar power is intermittent, so power companies need a method of storage or other methods of generation to use it efficiently. This gives them a reasonable excuse never to sell solar PV energy, with its world-beating low generation cost, by itself. But if you have your own solar array, your car’s batteries, or your power company’s net metering, solves the intermittency problem for you, transparently and with no extra effort or additional investment on your part.

Erratum: An earlier version of this post calculated the advantage of our small-scale solar array over gasoline as 11.2/0.8 = 14, or only 7% of the energy operating cost. Those figures, of course, are for a large-scale commercial solar array, not for our small-scale residential retail array. Big firms that install their own large-scale arrays to run a fleet of electric cars could realize that advantage, but consumers like us cannot, yet. I regret the error.

An Award to Apple

Congratulations Apple! For 2013, you win my Gratuitous Customer Screwing Award. Hands down.

Whatever possessed your programmers to mangle your file-handling commands and demolish longstanding industry standards so? Whatever executive-cretin approved the mindless, makework changes?

Wasn’t it enough that the venerable “Save As” command disappeared from your recent O/S updates without a trace? In your new “Mavericks” operating system, did you really have to change “Close” to mean “save and close”?

Now inadvertent changes to a forgotten document sitting on a desktop for days or weeks become permanent on closing it. The next time a user opens it, he or she has to scan through and look for damage. What a colossal waste of time!

If you want to create a new version of an old document and keep the original, you have to open it, copy it, open a new blank page, and copy the document in. If you open it, change it, and close it, just out of habit, there goes the old document. Without a “Save As” command, there’s no simple way to preserve the original and put the modified file in a new place.

And God help you if you happen to cut, rather than copy, the original document and then overwrite the cut-page memory buffer. When you close the file, you get a blank page in storage, and your backup file disappears. Bye, bye hard work!

All this needless churning gives the term “maverick” a whole new meaning. For the personal-computer industry’s entire history, file-handling commands have had simple, intuitive, universally accepted meanings. “Close” meant, simply, close the file without saving. “Save”—not surprisingly—meant “save the file.” “Save as” meant save the file with another name and/or in another storage location.

So simple and intuitive. So longstanding. So venerable. So well established in the habits and cerebella of all who didn’t buy their first computing device yesterday.

But tradition and customers’ habits mean nothing to computer programmers who think they own the world, or at least its virtual reflection. Who do they think they are? bankers?

Now I look forward to equally destructive and gratuitous new initiatives by Apple. Why not have its corporate vehicles drive on the left hand side of the road, out of solidarity with the Brits and Japanese? Why not use “left-handed” nuts and bolts that open clockwise and close counter-clockwise? Why not put car doors on the roof of the car, so that the sides can be free of obtrusions and dings? Why not change every command on the menu? After a few years of total confusion, won’t that give Apple a lock on users’ habits?

Why not just go the Full Monty and make products out of anti-matter, then watch customers explode?

The cloud is the excuse, you say. Well, would “Save in Cloud” and “Save Locally” be too hard to understand? Must customers like me, who’ve used computers for decades, adapt to cell phone and tablet users who are too lazy or forgetful to save before closing a file? Why not add new commands, rather than change ones customers have been using for decades? Or at least why not give customers not raised on smart phones a choice of command regimes?

Apple’s programmers, we are told, are among the industry’s most “innovative.” So we can assume that they were thinking about something when they made this mess. Whatever it was, it certainly wasn’t existing customers.

It’s never too late to change back. Remember Coca Cola’s misshapen bottle!

New customers in their teens may laugh at an old geezer like me. But after a few years of constant, gratuitous turmoil and churning in their online work and social environments, they won’t be laughing any more. They’ll be looking for providers that change only what’s absolutely necessary to add useful new features but leave the basics alone.

I don’t know whether Apple will respond to this online complaint. But I do know one thing. Unless it does, I’ll be using Google, not Apple, for cloud services. Google’s programmers think of existing customers first, and they usually leave at least an optional path back.

Footnote: I know, I know. The title “Mavericks,” plural, comes from the name of a surfing spot in California, not the word. But there’s an obvious double entendre: Apple prides itself on being an industry maverick and therefore (in its mind) an industry leader. Since when does a leader slam existing customers to attract new ones or sell new things?

permalink

Understanding Ukraine

[For comment on the leading personalities in Ukrainian politics, click here.]

What’s going on in Ukraine? Whatever it is, our media have done a terrible job reporting it. We know little, mostly because our media know little. And they seem to care less.

That’s a shame. Ukraine is worth attention. According to our own CIA Factbook, besides Russia itself, Ukraine “was the most important economic component of the former Soviet Union, producing about four times the output of the next-ranking republic.” It’s a country of 44.5 million people, with an area slightly smaller than Texas’. A millennium ago, as Kyivan Rus, it “was the largest and most powerful state in Europe.”

But geography is Ukraine’s misfortune. It’s stuck in a continent across which armies have marched for all of recorded history. It’s been part of others’ empires for most of the last millennium, except for brief bouts of independence. After the Soviet Union’s collapse in 1991, it found itself independent again, maybe for good this time.

To say that Ukraine’s relationship with Russia is complex would be Obamanian understatement. Culturally, the two nations are close. As part of Kyivan Rus, Ukraine was the “center of the first eastern Slavic state.” So its national civilization and culture are older than Russia’s. In a strange way, you could think of Ukraine as Russia’s “mother country,” although Russia has dominated it for the last two centuries.

Ukrainian is once again the nation’s official language. It’s similar to Russian, a bit like Portuguese to Spanish. People speaking either language can understand the other, although sometimes with difficulty. Both languages use the Cyrillic alphabet (unlike Polish).

The two peoples are almost as mixed as the languages. Ethnic Russians are the largest Ukrainian minority (17.3%). But nearly one-quarter of Ukrainians speak Russian, partly because they are immigrants from places with less popular native tongues.

With all this commonality, you might think that Ukraine would relate to Russia as we Yanks to Britain. But you would be wrong. The primary reason is Stalin’s gratuitous brutality during the Soviet period.

The CIA’s spare prose tells the awful story:

“Following the collapse of czarist Russia in 1917, Ukraine was able to achieve a short-lived period of independence (1917-20), but was reconquered and forced to endure a brutal Soviet rule that engineered two forced famines (1921-22 and 1932-33) in which over 8 million died. In World War II, German and Soviet armies were responsible for some 7 to 8 million more deaths.”

In other words, Ukraine was Soviet Russia’s breadbasket, and Stalin stole the bread, sometimes even the seed corn. This was not just a matter of Russian need. Stalin in his paranoia believed in having weak neighbors and, if necessary, making them weak.

Stalin was no fan of Jesus’ advice, “love thy neighbor as thyself.” He did much the same thing to Poland. That’s one reason reason why Poland is now such an enthusiastic (and generally anti-Russian) EU member.

When the Great War came, many Ukrainians welcomed the Nazi troops and fought with them against Russian Communists. But they soon learned that the Nazis considered them inferior, not much better than Jews, and had scheduled them for liquidation and their territory for annexation. So the starved and largely unarmed Ukrainians got crushed between the great armies of two evil empires. The result was probably the second most dire wartime tragedy in Eastern Europe, after Russia’s own suffering in its “Great Patriotic War.”

Today, Russia is Ukraine’s largest trading partner, by far. It supplies about a fifth of Ukraine’s imports (worth 17.5 billion 2012 dollars). And it buys almost a quarter of Ukraine’s exports (worth 16.5 billion 2012 dollars). Thus Ukraine’s trade balance with Russia is negative, but not by much. It’s a pretty equal economic match.

Most of what Ukraine buys from Russia is energy. In 2009, it imported almost twice as much oil as it produced, mostly from Russia. It exported a negligible amount. In the same year, its imports of natural gas were 188% of its production, although it was able to export about 7% of its imports, mostly to Europe.

After 1991, the newly independent Ukraine and ex-Soviet Russia both struggled to convert their economies from Soviet-style command and control to free markets. Both incurred considerable hardship in doing so.

In 2009, their separate hardships collided in a dispute over natural-gas pricing. One result was a two-week cutoff of Russian natural-gas exports to Ukraine, and through Ukraine to Europe, in the middle of winter.

Ukraine and Russia soon resolved their dispute with a ten-year contract for natural gas supply and transit, which brought prices to market levels. Later, Ukraine won some price relief in exchange for extending the lease on Russia’s Black-Sea naval base.

As this brief summary shows, Russia’s relationship with its smaller “mother country” is far more fraught than ours with Britain. This is no result of national schizophrenia on Ukraine’s part. It’s a direct result of geography, demographics, economics, and a history of suffering and hardship the likes of which we Yanks have never experienced, except (for a much briefer time) during our Civil War.

Today Ukraine values its independence, as it always has. It still bears the painful scars of Stalin’s brutality. Its people want to be part of Europe so they can be freer from the Russian bear’s not-always-friendly embrace. They also want Ukraine to be the strong and independent European power that it was a millennium ago.

But how realistic are those dreams? How much hard work and hardship must precede their realization?

Aye, there’s the rub. Today, “Ukraine depends on imports to meet about three-fourths of its annual oil and natural gas requirements and 100% of its nuclear fuel needs.” Most of those imports come from Russia.

As of 2012, none of Ukraine’s largest export partners was in Europe. Turkey, which may some day become an EU member, took 6% of Ukraine’s exports. In comparison, China took 4.1% and Russia nearly a quarter.

The EU was more important for Ukraine’s imports. Germany and Poland collectively supplied 16.7%, not far behind Russia’s 19.4%. China was third, with 10.2%. Even considering imports, Ukraine’s trade relationship with Russia today is far more important to its economic prosperity and survival than the EU’s.

We need just one more fact to understand Ukrainian President Viktor Yanukovych’s recent pirouette. Trade pacts generally don’t reduce the prices of goods imported from abroad. Import tariffs may increase them, but that’s the importing country’s business.

In other words, Ukraine’s imports from Europe won’t get any cheaper when and if Ukraine joins the EU. They could get cheaper if Ukraine now imposes tariffs on them and dropped those tariffs to join the EU. But Ukraine could drop its tariffs unilaterally, right now. Nothing stops it (if it has tariffs), other than a potential loss of government tariff revenue and possible hardship for domestic competitors.

The main advantage of joining a trade pact is not reducing your own tariffs, which you could do by yourself. It’s improving the competitiveness of your own domestic industries by reducing or eliminating others’ tariffs on your exports.

Yet, right now, Ukraine exports little or nothing to Europe. And anyway, could Ukraine’s industries compete with Germany’s now, even on a level playing field?

So what benefit would EU membership, even if available now, offer Ukrainians? It wouldn’t make imported European products any cheaper than Ukraine could make them on its own by reducing or eliminating its own tariffs, if any. And Ukraine has few exports to Europe to promote.

There is only one answer that makes sense: jobs. The CIA cites Ukraine’s unemployment rate as 7.5%, not much higher than ours. But it also notes dryly, “official registered; large number of unregistered or underemployed workers.”

Apparently, official figures lie, and Ukraine has a big unemployment problem. Many of those people demonstrating in the streets, at the onset of a cold winter, might want jobs, or at least better jobs. If Ukraine were an EU member, they could go anywhere in Europe to get them, just like the Poles recently and the Irish and Spanish now.

So the large public demonstrations may be as much a vote of “no confidence” in the Ukrainian economy as in Mr. Yanukovych. Unemployed Ukrainians may want to vote with their feet. But without visas and special work permits from Europe, they have nowhere to go.

If they could get jobs in the EU, they might be willing to endure the hardship of temporary exile, like all “guest workers,” the better to support themselves and their families. And like all guest workers, they would send money back home.

These workers’ dreams make sense. But Yanukovych has done nothing to thwart them. In fact, he may have made brought them closer. By “pivoting” toward Russia, he got the EU to reduce its demands for entry. Maybe less austerity now will harm Ukraine’s economy in the long term. But in the short term, it might reduce ordinary Ukrainians’ hardship. Austerity is not easy; just ask Greeks, Irish, or Spaniards today.

It’s a good bet that Yanukovich knows his own economy, with all its warts and discontents, better than Europeans, let alone Yanks. So he was right to bargain with the IMF, and the IMF is right to be flexible.

In any event, there is no dilemma. This is not an either-or choice. There is no reason why Ukraine cannot be a member of both Russia’s Customs Union and the EU.

Customs Union membership would give Ukraine immediate, as well as long-term, benefits. While EU membership may offer better employment prospects for individual Ukrainians, it’s going to be a while before Ukraine’s industries can compete with France’s or Britain’s, let alone Germany’s. So EU membership is properly a longer-term Ukrainian goal.

To my knowledge, EU membership (like membership in any modern trade pact) does not require breaking earlier trade pacts. All it requires is so-called “most favored nation” treatment. If Ukraine gives Russia special trade concessions, it must give the same concessions to all the EU’s members when it joins. But no requirement of EU membership should force Ukraine to break a pact with Russia’s Customs Union or decrease its trade with Russia. Trade is not a zero-sum game.

So Yanukovych’s goal may be membership in both the Customs Union and the EU. If it’s not, it should be. That would be a global first and a win-win-win for the Ukraine, Russia and the EU. It would also be a fitting goal for a nation that once was the heart of Eastern Europe, and may some day be again.

Footnote: Most facts and figures in this post, and all direct quotes, come from the CIA’s online Factbook page on Ukraine.

Coda: Ukrainian Pols

Let me begin by saying that I know none of the people involved in Ukrainian politics personally. I haven’t even studied them. All I know is the bare, big facts about them, the headlines.

But I do know how the world works, and I try not to view it through rose-colored glasses. Like most Ukrainians, I suspect that Yanukovych was complicit in, or at least aware of, the dioxin poisoning of Viktor Yushchenko, which former members of the Ukrainian branch of the KGB probably perpetrated. Whether they did it on their own initiative or on orders from Yanukovych or Moscow I have no idea.

Like most Ukrainians, I suspect that the corruption charges against Yulia Timoshchenko are either trumped up or exaggerated. Lining their own pockets is seldom the goal of people who lead movements for freedom and democratic change. And if that’s true for men, it’s doubly true for women.

So like most Ukrainians, I suspect that Timoshenko sits in jail not because she’s a criminal, but because she’s a political threat. For a Yank, Ukrainian “politics” gives the term “hardball” a whole new meaning. It’s not just a contact sport. It’s mortal combat.

That said, I can’t help but return to a fundamental principle of democracy. Voting for the lesser of evils is not just a necessity, but a duty.

This was certainly true for us Yanks. If a few more people had voted for Hubert Humphrey in 1968, rather than Richard Nixon, our Yankee misadventure in Vietnam would have ended years earlier, tens of thousands of dead Americans might still be alive, and we would never have had the Watergate scandal or possibly Nixon’s racist “Southern Strategy,” which has prolonged dysfunctional government for yet another generation. If a few more people had voted for John Kerry in 2004, Dubya’s and Cheney’s imbecile regime might have ended four years earlier, and we Yanks (and the Afghans) all might be better off.

You can see how much better a president Kerry would have been from the superb job he’s now doing as our Secretary of State. How much could we Yanks have benefited from four less years of rule by an idiot and four more by an intelligent, diligent, good-hearted man?

But I digress. My point is very simple. I doubt Viktor Yanukovych is as good-hearted as Kerry. But he appears to be intelligent and experienced, perhaps the most of any Ukrainian pol. He appears to know something about the world outside Ukraine, and he has had some success in dealing with it.

The proof is in the facts of recent history. A few years ago, Yanukovych negotiated some natural-gas-price relief for Ukraine in exchange for extending the lease on a Russian Black-Sea naval base. Today, he is (albeit somewhat awkwardly) using Russia’s and the EU’s mutual desire to trade with Ukraine to negotiate a better deal from both.

Are these the acts of a Ukrainian patriot or of a tool of Moscow? Ukrainians have to judge, each for himself or herself. But these acts are least consistent with the patriotism of a man who knows that, today, military might means little because it is unlikely to be used, except to keep the peace. Trade and economics are all.

As far as I can see, Yanukovych’s main failing is the same as that of all pols who cut their teeth in the Soviet era. He doesn’t communicate well with his people, and he has a penchant for secrecy. True democracy comes to him (and to all his ilk) uneasily.

That may be changing. His recent decision to negotiate with the opposition is healthy and proper.

But it’s a brief opportunity. He must seize it quickly and well. He must negotiate with his own country’s skeptics honestly and flexibly, just as he did recently with the IMF.

Here his old Soviet love of secrecy can hurt him badly. What he’s doing appears obvious, even to this Yank watching from halfway around the globe. He’s playing off Russia and the EU against each other in order to get the best deal for Ukraine.

In the long run, Ukraine will probably be a member of both Russia’s Customs Union and the EU. As I explain above, it should be.

But which comes first is a matter of some interest not only to Ukrainians, but to the EU, and especially to Russia. Including its Soviet days, Russia has dumped unholy amounts of money into countries like Cuba and Syria, with very little economic return.

Ukraine is different. It’s been a breadbasket and a trading crossroads of Eastern Europe for a millennium. Russia knows that Ukraine, as a trading partner, is a big commercial prize.

That fact alone lends force to the suspicions about Yushchenko and Timoshenko. But Putin now appears to be going slowly and carefully. He knows the whole world is watching, including Ukraine. If his own considerable intelligence did not tell him that strong-arm tactics would be counterproductive, the recent massive protests undoubtedly did. Those protests were invaluable, if only for that reason.

So Yanukovych is putting the priority of Ukrainian trade concessions on the block to the highest bidder. What’s wrong with that?

What’s wrong (so far) is that he’s not explained to his people what he’s doing. And perhaps he’s not considered his people’s lust for jobs and easier travel in Europe in the near term.

Here his old Soviet penchant for secrecy is hurting him, badly. There is nothing secret about what he’s doing. It’s obvious. If I, a Yank, can see it from half a world away, you can bet his countrymen and negotiating partners can see it. But in the absence of any clear explanation from Yanukovych, his people credit all kinds of conspiracy theories.

Yanukovych needn’t give away all the details of his bargaining strategy. But he’s got to convince his people that he’s on their side, not Russia’s, and that he has a strategy to make their lives better. And if they want European jobs sooner, rather than later, he’s got to listen and respond.

If he can do that, perhaps he can release Timoshenko and still win free and fair elections. If he did that, even I, if Ukrainian, might hold my nose and vote for him.

permalink

Mandela’s “Miracle”: Empathy and Perseverance

[For a brief eulogy to Mandela, and an essay on a friend of Islam, click here.]

Mandela’s “Miracle”
How the “Miracle” Worked
The Nuclear Dawning
Mandela’s Deal
Conclusion

When a universally admired leader dies, our task as his survivors is not to mourn his passing, although mourning comes naturally. Nor is it to praise him, who can no longer hear. Incessant praise can come to resemble undeserved self-congratulation: we seek to claim the fallen leader’s mantle by praising him.

Our real tasks are to discover the leader’s secrets and emulate them. Not only is emulation the sincerest form of praise. Our age of trade, pollution and nuclear weapons demands no less.

Apotheosis would be the worst we could do. Nelson Mandela was not a god. He was an immensely wise and practical leader. We made Jesus the Son of God, and it took us two millennia to put his wisdom into practice. Our species simply doesn’t have that kind of time any more.

If we cannot decipher Mandela’s wisdom and put it quickly into practice, we could lose the earthly paradise that modern technology and our global economy now promise. We could re-wage the last century’s horrible wars, this time with nuclear weapons. We could poison ourselves and ruin our planet with unchecked pollution. In the worst case, we could extinguish ourselves, as we almost did in October 1962.

So, like the primate-mimics from whom we all descended, we must emulate Mandela and spread his “miracle” and his wisdom worldwide. There is little time to spare.

Mandela’s “Miracle”

At first glance, what Nelson Mandela achieved does seem like a miracle. From inside a prison cell, he liberated his people—the vast majority of South Africans. In the process, he averted what could have been humanity’s most terrible race war. Just look at Zimbabwe or even Syria today, and you have an idea of what South Africa could have become without Mandela’s leadership.

While incarcerated, Mandela had no weapons. He had no direct communication with the outside world. The Apartheid regime forbade media in his country to mention his name or show his image. Every physical object available to him, including books and newspapers, had to be approved by his enemies. He was potentially under surveillance twenty-four hours a day. For nearly all of his time behind bars, his jailers and the rulers of his country hated and feared him.

Mandela’s only tools were his mind and his character. His only support was from his own sorely pressed people and a distant and sometimes indifferent international community. His roots in African tribal royalty helped, for he had a confident, patrician bearing that impressed all who met him.

Most of us would consider his circumstances helpless and hopeless. Yet with these tools alone, Mandela made his “miracle.”

By the time the regime released him in 1990, Apartheid’s end, his presidency, and South Africa’s democracy were all foreordained. Four years of secret negotiation, which preceded his release, had set the course of history. This remarkable man had negotiated his people’s freedom and “regime change” from inside a prison cell.

How the “Miracle” Worked

Is there a detailed account of the negotiations? I don’t know. But there should be. Before they are forgotten, someone should transcribe them, translate them into simple language and publish them. They might become a new New Testament for our age.

But however stunning his achievements, Mandela was no god. Nor was his strategy any miracle. He was a mortal man of immense wisdom and talent. Most of all, he was a clear thinker. We may not all be able to reach his heights. But we can all try to emulate him, learn and grow.

In retrospect, Mandela’s strategy was simple. Its primary ingredients were empathy and perseverance.

He had courage and toughness, too, in abundance. But they are not especially rare qualities. Every soldier who goes into battle has courage. So does every general who leads his troops into battle. And Mandela’s enemies—South Africa’s Apartheid oppressors—were as tough as tough can be.

What made Mandela special was neither courage nor toughness, although both helped. The primary reasons for his stunning success were his clarity of vision and his empathy. It’s hard to know which was more important. The two qualities blended, intertwined and reinforced each other. Perhaps they are indistinguishable.

Perseverance was also important. He he never lost sight of his goals and their rightness. In his darkest nights in prison, he saw the lights of fairness and freedom shining bright as day. He kept at it when most of us, under his circumstances, might have given up in despair.

As our own Yankee history shows, perseverance is vital in bringing oppressed people justice. It is even more vital for bringing change peacefully. Mandela’s extraordinary patience and perseverance averted what might have been a terrible race war.

So the secret of Mandela’s success was no miracle. It was his special combination of empathy and perseverance. He understood that his white enemies were not irredeemably evil. They were just afraid. He built his success on the clarity of that understanding.

The white progenitors of Apartheid had come to a strange land uninvited. They were a tiny minority, but they had better technology and better weapons than the natives. So they settled, prospered, multiplied and grew to dominate. As they did so, they made South Africa their home.

After several generations, the uninvited settlers had nowhere else to go. South Africa had become their ancestral homeland.

But they considered themselves and their civilization superior. So they drew themselves apart. They created Apartheid, with its stringent anti-miscegenation laws, to maintain their racial and cultural purity. They built a small, isolated cultural island in a sea of native people and non-white immigrants, especially Indians.

The result was unsustainable. The ruling pure whites kept all the others in subjugation and mostly in poverty. They were surrounded by a vast majority of restless and increasingly impatient others.

Not only were they surrounded. They depended upon the ones they oppressed for labor and therefore for sustenance. The 10% or so of pure whites could hardly have operated or supplied the whole nation. And as much as the whites tried to hold themselves apart, they had to deal with all the others. They let them into their businesses and (as servants and contractors) into their homes every day.

So the white minority was afraid, and rightly so. Nothing provokes fear more than knowing that people you have wronged are all around you, and that you depend on them. Mandela understood this, even while physically helpless in prison. Instead of getting angry or frustrated, he empathized.

There were only three logically possible outcomes. First, there might be a race war. If the whites lost, they would be dispossessed, expelled or extinguished. If they won, the tension would only get worse, and so would the fear. They and their nation would become global pariahs. Neither outcome was especially attractive.

Second, the then-current situation could continue. But so would the insecurity and the fear, and the others’ impatience would only grow.

Finally, the whites could make a deal. We’ll relent, they could say, if you won’t take revenge for the wrongs we’ve done you.

The Nuclear Dawning

I think the light dawned for South Africa’s white leaders when they looked at their nuclear-weapons program with clear eyes. The expense and terrible implications of their joint nuclear program with Israel startled them.

Nuclear weapons were the logical conclusion of the oppressive course they had set. Nukes were (and still are) the ultimate in weapons. In abstract theory, their awesome power could counterbalance the tremendous disparity in numbers that white South Africans faced.

But practical questions undermined that simplistic analysis. The whites’ potential enemies lived all around them and among them. How would they use their nukes if that awful choice ever came? On themselves?

Even if they could localize nukes’ use, for example, on a rampaging inimical army, what of the land? The radioactive fallout would spread unpredictably. Parts of the land that the whites, too, loved would become radioactive and uninhabitable for decades or centuries, just like Fukushima and its environs today.

So white South Africa abandoned its nuclear weapons program for a simple, logical reason. The end result of using nukes to maintain Apartheid would have been nuclear seppuku for South Africa, including its whites.

That stark choice was the reductio ad absurdum that woke the white leadership up. The white rulers abandoned their nuclear program and joined the Nuclear Nonproliferation Treaty in 1991.

After that, they could fight a race war with conventional weapons or continue as they were, foregoing Mandela’s fairness and wisdom as he aged and died. Another South African wise enough to contain their oppressed people’s justified rage might never appear.

So they wised up and made a deal while they could. Apartheid ended, and Nelson Mandela became president in 1994, at the age of 71.

Mandela’s Deal

It’s unclear whether Mandela knew about the nuclear program. Probably he didn’t. The program was a closely-guarded secret, and the imprisoned Mandela barely had access to general news.

Mandela just pursued his dream with his trademark empathy and perseverance. Through four years of negotiation, from his lonely prison cell, he never wavered from his goals: the end of Apartheid, freedom for his people (and all South Africans), and a true democracy.

In retrospect, the final bargain was absurdly simple. No revenge and freedom from fear, in exchange for freedom and justice for the majority. Both sides gained, and both won freedom, although of different kinds.

As President of South Africa, Mandela kept his part of the bargain assiduously. He used his Truth and Reconciliation Commission to give his people a national catharsis and blunt their thirst for revenge. Although few whites came forward to confess their sins, Mandela and his people cried, forgave, and kept their side of the bargain.

Now it’s up to Mandela’s South African successors to continue that bargain and keep the peace. Their task is somewhat different today, for democracy is not enough. Apartheid is history, but economic inequality is still rampant.

Now all South Africans—including the black leadership—must fulfill the other side of Mandela’s bargain: justice for his people and all South Africans. Persistent poverty is not justice, especially if it derives from past discrimination. And it could lead to the type of unrest and revenge that Mandela worked so hard to forestall. Oddly enough, working hard for economic justice is now the best guarantee for whites against revenge and for blacks of continued support for their leadership.

Social cohesion matters. Indeed, it may be the ultimate social good. South Africa’s task today is to build it on the strong foundation that Mandela poured. Our own task here at home is much the same.

Conclusion

Stripped to its essence, Mandela’s secret was simple. Fear has no logic. It is our species’ strongest emotion . It can make us do terrible, irrational things, to others and to ourselves. Lessen the fear, and “miracles” become possible.

It took Mandela four long years, negotiating from inside his prison cell, to assuage white South Africans’ fears without abandoning his goals. That partial success was just enough to get him released from prison and his opponents really thinking. It took another four years for him to negotiate real democracy and an end to Apartheid. Once free and democratic elections were declared, his leadership became inevitable.

Mandela’s extraordinary perseverance and toughness of mind helped. But empathy was his most powerful tool. He could see what drove his worst enemies, empathize with them, and assuage their fears.

His achievements were remarkable and admirable. But they were neither miracles nor godlike. They are reproducible by others—especially by leaders who don’t have to work from an isolated prison cell.

Our task, as Mandela’s survivors, is to reproduce those miracles and make this new century far better than the last. The best praise and respect we can pay him is to spread his empathy, wisdom and peace.

We have carrots, and we have sticks. The carrots are the paradise that global trade, communication and cooperation could bring in geopolitics, the economy and the arts. The sticks are the threats of horrible wars—and even species self-extinction—deriving from struggles over resources, the spread of nuclear weapons, the pollution of our planet, and runaway global warming.

Mandela gave us a plan and a template for resolving large-scale human conflict. His problem and his solution have surprising analogies in the South China Sea, in Israel and Palestine, and in the Little Cold War between the US and Iran, which already has lasted longer than the Big Cold War with the Soviets.

We can resolve those conflicts by following Mandela’s path. Empathy is the key, and peaceful perseverance the engine. Future essays will discuss how.

permalink