Friday, November 14, 2008

Socialization and Privatization

We've already discussed the current economic crisis before. Everyone's discussed the economic crisis before and they are still discussing the economic crisis. The government is desperately trying to restore the public's faith in the financial system, which has resisted rate cuts and cash infusions. And now we have the 700B bailout plan that has people up in arms because intuitively they know that much of it will be misspent and that skepticism and anger erodes what little faith the well spent money will build. If only 1% of the bailout is misappropriated to CEOs, that is $7 billion dollars. And we know the government has a poor track record in keeping accounting errors to less than 1%, or even 0.1%, which would, or course, still be $700 million. This explains only some of the outrage over the bailout plan. While in pure economic sense the bailout plan can help to restore the financial system by allowing more lending and spending, in a societal sense it does not help everyone equally. In fact, it helps those who are in default much more than those who are not in default--bailing out the people who are largely responsible for this mess with respect to the majority of the public, who were more careful with their money. If this financial crisis had not occurred, and had the housing bubble continued to grow, the risk takers would have turned a very tidy profit. And would they have shared that profit with the rest of us? Of course not. It is not public profit. The profits are privatized. That is how free markets work and why businesses exist. But the housing bubble burst along with the credit bubble. And now these risk takers (we will refer to homebuyers to simplify thing) lost a lot of money. And with this bailout we are paying off that loss. The loss becomes a public loss. The loss is socialized. With the bailout we have positively reinforced high risk financial deals--homebuying when you cannot afford it, credit swaps, CDOs, and SIVs, all by removing any accountability for possible losses. What a fantastic system for the gambler! Imagine going to Vegas and being able to keep all your winnings, but splitting the losses with all of Nevada!

What if we flipped the scenario? What if losses were privatized and profits were socialized? What if you went to Vegas and had to split all your winnings with the state of Nevada and eat all your own losses? Well, for starters, you would not be gambling in Vegas. But what if instead of eating your own losses, you lost only a proportion equal to your earned income? That might not sound so bad to about 80% to 90% of you, especially considering that only 10% of Americans earn over $200,000 a year. For most of us, we might actually make money in this scenario. And what if instead of gambling with cards and dice we gambled with heart disease, diabetes, cancer, and other ailments? Why, we would have the American healthcare system! The popular view on how the American healthcare system should work is that everyone should be covered, but not everyone should have to pay for it. Medical care should be socialized, but the cost should be privatized. This system works well for the sick poor and the sick wealthy. It may also work for the healthy poor. It does not work for the healthy wealthy. Apparently the reward for doing well in life is some sort of Harrison Bergeronian penalty. The state of healthcare in America today tells you how well a socialization of care with privatization of cost model works for healthcare. This system has managed to stay afloat for so long because when it began the majority of the wealth was held by 1% of Americans. Over time that percentage has grown, and now we have wealthier people. But because the population as a whole has also grown and healthcare spending has multiplied, the cost has outstripped the contribution of the wealthy. Does this mean that reducing healthcare spending we can make this reverse bailout system viable again? Perhaps it can, but I doubt that spending can be curbed quickly enough before the system becomes bankrupt and costs become socialized as well.

Is there a solution to healthcare and the financial crisis? I do not have such an answer, but I would suggest that we keep socialism and privatization separate in a broad sense. If we want privatized profits from risky financial deals, we need to accept privatized losses from those same deals. I should not have to pay for Joe the Idiot's mortgage default because he was too ignorant about his own finances. Likewise, if we want socialized medicine then we should socialize the costs. I should not have to pay for Joe the Idiot's triple coronary bypass with my higher premiums because he refuses to stop smoking and eating at Applebee's every other night. Socializing the financial world will never work--it will lead to stagnation because no one will invest since there would no incentive to do so. Privatizing healthcare could work, but would lead to massive numbers of uninsured and likely an increase in prevalence of chronic illnesses. One possibility is to privatize medical care but socialize preventative medicine. That is, medical care of existing illnesses is available to those who can afford the insurance, but preventative care is available to everyone and is subsidized proportionally by everyone. Or for the financial world privatize investment profits and losses but socialize counseling and oversight for transparency.

Or we can revert to a bartering system and scrap the financials.