The Practical Realist

Fires are expensive to put out. I mean really expensive. You have to get brave, highly trained and physically fit men and women willing to endanger themselves in order to rapidly deploy sophisticated fire suppression equipment. The equipment itself is costly to begin with, and it has to be expertly maintained or else it may not work when property and lives are depending on it.

Right now, the local government is responsible for maintaining fire stations, with subsidies coming from the state. And to help pick up the excess, we have volunteers and community fundraisers. Essentially, we all pay for it through taxes (or donations), and we trust the government to run the whole system on our behalf.

It works to some extent, I guess. But maybe it’s not the best way. It may be time to harness the proven power of the free market to do things more efficiently.

First off, why do we pay to have fire houses even when there aren’t fires? Maybe we should only pay fire crews when they put out fires. The rest of the time, what good are they really? And instead of forcing everyone to pay for the stations, maybe we should move the burden to the individuals who need to be evacuated from a burning property, as well as the property’s owners. After all, who else really benefits from having the fire crews come out?

I can imagine it might be a little upsetting to have your home damaged or destroyed by fire, and then still have a $50,000 bill for the fire crew’s services, but how is it fair to ask anyone else to pay? And besides, you can always get fire insurance. There’d probably be a deductible - maybe you’d have to pay for the first couple thousand, and then the insurance company can pay for the rest.

Of course, there might be less emphasis on fire prevention then we have now. Maybe the fire marshall wouldn’t be quite as concerned about fire safety checks of new buildings, seeing as he and his crew make most of their money when they actually extinguish fires. And I suppose once a crew actually arrives to put out a fire, there might be some incentive to use more expensive fire suppression techniques then may actually be necessary, but then again, your fire insurance policy would pay for it, not you.

And sure, fire insurance premiums might be a little too expensive for everyone to afford, but most people could probably get a policy through their jobs. And as for the uninsured - well, they might have to face bankruptcy in the event of a fire, but ultimately the people who have insurance would make up the difference. That would raise costs further on them, but at least the market would be in charge of rates and not some incompetent government bureaucrat.

And on the up-side, if a for-profit fire crew accidentally fails to rescue a family member from your burning house, it would probably be a lot easier to sue them for malpractice than today’s legally unaccountable firemen - people who under the current system can’t even be sued unless they practically set the fire themselves. In fact, that might make a for-profit fire crew motivated to do a much more careful job than today’s government-run crews, even if the extra care meant slightly more expensive techniques. And hey, if they did get sued, they’d probably have fire-fighting malpractice insurance to pay their legal costs.

It’s a neat thought, right?

Right?

Ok…

So maybe you already guessed this is actually a satire on our health care system. But it brings up a point. Why is it that when you call 911 and the operator asks ‘fire, police, or ambulance?’ only one of those three presents you with a bill afterward?

Our system runs on a fee-for-service model. It makes money by treating the sick, and gets almost nothing from the healthy. In a publicly funded system, the government saves money by keeping people healthy and loses money when they get sick. In our system, instead of taxes, we pay for our care through insurance premiums and deductibles. Our insurance companies then try to avoid paying claims, or else pay as little on them as possible, in order to maximize profits for shareholders. A public system also tends to look for ways to keep costs low, but instead of investor profits, cutting costs means lower taxes.

The issue became more important for me personally when my wife had to be taken to the hospital for a gall bladder infection. It was serious illness, and she had to have surgery to get it removed. A few days later, she had to go back to the hospital, because of a common complication of the surgery called pancreatitis.  Now, theoretically, the doctors should have found the gall stone that, by getting lodged in a bile duct, led to the complication, and she could have had it dealt with during the first visit. And to be fair, they did try to find it.

But it brings up a question - what motivation does the hospital have to do a better job? In a publicly-run system, the hospitals don’t make more money when someone has to be admitted more than one time for the same condition. But according to my insurance statement, the hospital in question made almost $40,000 during my wife’s two subsequent trips (the first time the emergency room physician decided to send her home with some anti-nausea and painkiller meds - the condition was only found and treated on the following visit).

Essentially, the hospitals and doctors are motivated to do a good enough job to prevent getting sued. And there’s little incentive to treat cheaper, more minor conditions before they become serious. In a publicly-funded system, every health care provider is guaranteed the same salary regardless of how expensive the treatments are. And cheaper treatments that can avoid more serious complications later are going to be pursued at every level. In every industrialized country that has a universal public health care system, the result is a healthier citizenry that spends less money per capita on health care than we do. Click the image below to learn more about that.

One of the oldest laws of economics says that, if you want more of something, subsidize it. Our health system makes more money off sick people then healthy ones. Maybe there’s a reason we have so many.

But hey, maybe I’m missing something. If you think it makes sense to have a for-profit health system, but not a for-profit fire department, I’d like to hear your reasoning in the comments.

Somewhere in a back-room in DC, a small group of powerful men fretted about how they could possibly redirect the public outrage over the soon-to-be-revealed details about the final disposition of most of $180 billion taxpayer dollars.

The sum was staggering, but that was a point in their favor. Once people start stringing phenomenal-sounding numbers together, be it hundreds of millions or hundreds of billions, it all starts sounding the same. So yes, the billions sent to Goldman Sachs, Societe Generale, and assorted smaller players would surely make the news, but if they could manufacture a sufficiently noisy scandal, they figured they could redirect public rage against those whose only crime was asking the government to stop their firm from going out of business. The distraction was so brilliantly executed, and the media so willing to lap up every tidbit of mock outrage, that all public discussion of those irrevocably squandered billions now seems like so much silence.

Does no one else realize what happened? Banks who decided to make risky loans, covered by these exotic policies, absolutely should have been forced to face at least some of the consequences of those loans. We didn’t bail out AIG so much as we bailed out these banks whose fast and loose credit policies inflated the housing bubble and wrecked the global economy.

Obama was never outraged by bonuses. If he were, he could have said so last month back when Treasury was first alerted to the fact that they were about to be paid. But if the whole distraction engine hadn’t gone into high-gear when it did, we’d all still be talking about how incredibly stupid our government officials were (and former candidate Obama prominently among them) to spend so much money to prop up AIG, without so much as an assurance from the assorted policy-holders that they’d be willing to accept a reduction in their payouts. Prior to the bailout, we had the leverage. The insured were facing the risk of getting almost nothing if AIG were simply allowed to collapse. For some reason, we discarded that leverage in our rush to fill the ultimate money pit.

It’s an old saw that when the government has to bail out an institution for whatever reason, the investors and creditors are forced to take a major hit, and the taxpayers are always the first to be repaid once the business returns to profitability. Somehow I don’t imagine that many of those billions will ever be recovered, and I don’t think 80% of AIG is much compensation.

So why didn’t it happen this time? I don’t know anything for certain, but I don’t believe it’s mere coincidence that one of the largest holders of credit-default swaps was Goldman Sachs, and that prior to becoming Treasury Secretary, Hank Paulson was its CEO. He had to know how much his old firm was counting on those policies paying off, and if you think that wasn’t an ever-present thought in his head as he was negotiating the original AIG bailout, then I’ve got a sweet deal on a bridge just for you.

But while I’m mad as heck over finding out where the money went, I’m angrier over the crucifixion going on over those bonuses. A few key people came up with the idea for these exotic policies that ultimately tanked the entire capital position of the world’s largest insurer. For them, I have no sympathy. But they stopped selling them in 2006. The outrage over those key executives’ compensation is already 3 years out of date.

So who got the bonuses this year? Most of them are just regular employees. Some of them might have had a hand drawing up those credit default swaps a few years ago, but they were just doing their jobs. And even the executives who were present when AIG reported that $60 billion loss in the fourth quarter aren’t all responsible. They were simply at the helm when the federal government used their company as a conduit for passing money to assorted financial institutions.

In my book, $165 million dollars is so much less than $180 billion that I simply cannot fathom why people are even paying attention to it. Be mad, but not at the people who got paid for doing their jobs. Be mad at the ones who pissed away a trillion dollars (and counting) in Wall St bailouts.

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