The wrong argument

President Obama asks,

So why is it that people would prefer having insurance companies make those decisions, ... ?

He makes an excellent point that seems to be beyond the usual crowd found defending the status quo (aka Republicans). If you think bureaucracy is bad, why would you prefer the bureaucracy at Blue Cross Blue Shield over the federal bureaucracy? Don't give me, "free enterprise" and "competition": in this highly regulated industry, there is little of either, and that is largely by their own doing. As the President correctly points out,

Another way of putting this is right now insurance companies are rationing care. They are basically telling you what's covered and what's not. They're telling you: We'll cover this drug, but we won't cover that drug; you can have this procedure, or, you can't have that procedure.

The results are largely the same: impersonal decisions made on the basis of policy which is intended to maximize profit for the private company and self-propagation for the government (both of which come to the same thing).

Unfortunately for the President and the universal health care cheerleaders, this question cuts both ways. If bureaucracy is bad, bureaucracy is bad. Why should we favor a new one over the old one? But when you point this out about government bureaucracy and rationing, the President protests:

You will not be waiting in any lines. This is not about putting the government in charge of your health insurance. I don't believe anyone should be in charge of your health insurance decisions but you and your doctor. (Applause.) I don't think government bureaucrats should be meddling, but I also don't think insurance company bureaucrats should be meddling. That's the health care system I believe in. (Applause.)

So is he really saying that they're just going to issue checks for whatever you and your doctor want to call "healthcare"? I don't see how they're going to cut costs with a policy like that. But of course the President is either sadly confused or simply lying; if you pay attention, he will occasionally slip up and admit that you will get "help" from various decision-making bodies in the government. The full quote from the top of this post is

So why is it that people would prefer having insurance companies make those decisions, rather than medical experts and doctors figuring out what are good deals for care and providing that information to you as a consumer and your doctor so you can make the decisions? [emphasis added]

"Medical experts". This is a euphemism much like the "military advisors" sent by Kennedy and Johnson to Viet Nam.

In Who Shall Die?, Victor Fuchs asserts that the three goals of healthcare ought to be to insulate patients from costs, provide universal access, and to control total costs. He also notes that the cost of healthcare is equal to the amount of healthcare consumed times the cost of the inputs times the efficiency of those inputs. Put those two things together and it should be obvious that if we simultaneously increase the number of people covered by healthcare by 13%, remove all restrictions placed on their decisionmaking by cost-conscious bureaucrats (including rationing by ability to pay), then there is only one way that total costs (the amount of GDP spent on healthcare) cannot go up, and that is by an amazing increase in efficiency.

Unfortunately, this improvement is receiving nothing but lip service. There is some talk about eliminating the explicit profits and advertising, but this probably doesn't amount to more than 20-40% of the total. Since few are talking about eliminating private drug and health care providers, that "waste" isn't going away. However, to the extent that some people are talking about nationalizing those entities, I find it amazing that 100 years ago, anti-trust and anti-monopoly were all the rage among the Progressives of that era, but modern Progressives can't wait to set free the scale efficiency of monopoly. Where are the concerns about institutional failure that comes with monopoly? Market power, dead weight loss, rent-seeking, principal-agent, regulatory capture all evaporate in the rush to reform. I think that the inefficiency that will come with the reforms will be of the same magnitude as the "inefficiency" in the profit and advertising budgets. Coupled with the new-found freedom from interference by bureaucrats, I predict an explosion in health care costs not seen since the post-Medicare era.

Shorter me: I'm calling bullshit on this plan and the president.

For real improvements in the efficiency in health care delivery (within the limits of our current political economic system), I would suggest something along the lines of:

• Concentrate on making healthcare affordable to the poor, not everyone. If the healthy don't want it (and I don't believe this effect, called "adverse selection", is very strong), don't make them waste their money. If the wealthy want to self-insure, let them. Fuchs offers a strong discussion on why we insist on creating programs for the poor instead of just giving them money and letting them decide how to spend it. I think this is a discussion worth having: I am sympathetic to a wealth transfer (again, in the current system, not what I consider an ideal system) because while I think that perhaps the poor may lack not only money but the skills to navigate complex decisions, I am not willing to endorse the implicit paternalism of programs in which the money is spent on their behalf. I think Tyler once pointed out that higher minimum wages may mean less welfare, and I am likewise sympathetic to the thought that direct cash payment means less bureaucracy and deadweight loss.
  
• Stop pretending that employers are paying for any of our healthcare. They aren't; it comes out of our pocket. One way to help the public understand this would be to eliminate the special tax status of these kinds of benefits. Your employer does not pay for 20% of your healthcare nor do they "match" your FICA contribution: you pay 100% of both. One benefit to stopping this pretending will be to eliminate the conceptual ties between employment and insurance, a necessary step in eliminating the actual ties between those two things. You would think the Left would be all over this suggestion, since it would free workers from a source of artificial allegiance to bad employers (they would be more willing to quit a bad job if they knew they also would not lose their insurance). You would think the Right would be all over the separation because it would expose the lie that universal healthcare makes a country more competitive as a result of removing these costs from corporate overhead: it's a lie because corporations don't pay for taxes or for healthcare, workers do. All that is accomplished by shifting from private to public healthcare is to shift the payment from insurance companies to the government. Workers in countries with these programs pay significantly higher taxes. (Note that in light of my beliefs about the equality of corporate and government bureaucracy, I think that this is neither an argument for nor against universal healthcare, but simply an argument for being honest about who is paying for what)
  
• Eliminate mandatory, state-controlled -- and AMA-controlled! -- licensing. Fuchs suggests institutional licensing, wherein firms or individuals could be licensed, and it would be up to them to supervise employees working under the terms of that license. Among other things, this would reduce the role of doctor as gatekeeper to other therapies, including drugs and physical therapy. Personally, I would like to see competing private licensing, and in theory I would accept a voluntary state licensing system. However, I suspect that the voluntary state license would quickly devolve into a mandatory license again. Let the AMA and AAPA and other groups run their own endorsement programs, let consumers be as selective about those as they would be about, for example, buying new cars. They can choose someone because their parents and friends trust them, or because they spend hours looking over Consumer Reports, or because their insurer also endorses them the same way AAA endorses motels and car repair shops.
  
• Start scaling back IP protection on drugs. At this point, it seems safe to say that the costs of IP protection far exceed the benefits. Patent trolls have long since taken the field, and the protection is no longer (was never?) necessary. For one thing, they always had the protection of "trade secret" law, not to mention the difficulty of actually stealing all the knowledge necessary to synthesize a drug. For another, it seems that the combination of the FDA approval process and IP protection is redundant: if you can make a drug and get the FDA's approval for both the formula and the manufacturing process, that in itself is sufficient advantage for the R&D investment to pay off. It seems that we could eliminate one or the other, and of the two, the more feasible would seem to be the IP protection (the protection of profits) rather than the FDA protection (the ostensible protection of the consumers). As explained by Malcolm Gladwell, the US drug consumer has an enviable position relative to the supposedly superior universal health care countries when the IP protection runs out:
  

"The perception that the drug industry is profiteering at the expense of the American consumer has given pharmaceutical firms a reputation on a par with that of cigarette manufacturers.

"In fact, the complaint is only half true. The "intolerable" prices that Angell writes about are confined to the brand-name sector of the American drug marketplace. As the economists Patricia Danzon and Michael Furukawa recently pointed out in the journal Health Affairs, drugs still under patent protection are anywhere from twenty-five to forty per cent more expensive in the United States than in places like England, France, and Canada. Generic drugs are another story. Because there are so many companies in the United States that step in to make drugs once their patents expire, and because the price competition among those firms is so fierce, generic drugs here are among the cheapest in the world. And, according to Danzon and Furukawa's analysis, when prescription drugs are converted to over-the-counter status no other country even comes close to having prices as low as the United States." [emphasis added]

• Stop conflating "insurance" and "healthcare". Everyone needs insurance, which is the socialization of costs of rare diseases and events. Even the "healthy" need insurance because rare events can happen to anyone. Insurance does not cost very much; it is easily provided to the poor. "Healthcare", which includes aspects of insurance, is a system by which doctors are assured payment and consumers are insulated from sudden costs. Healthcare should be a way of spreading payment over time to avoid the shock of high costs at the time of consumption. Unfortunately, health care has become a way of making people believe they are getting something for nothing. It is a truism that average healthcare costs will be exactly equal to the average cost of healthcare received, but I am constantly amazed by people who don't get the connection. When I hear people complain about the size of their healthcare plan payments, I usually suggest that they would be better off paying for doctors visits and drugs out of their own pocket and spending a little on catastrophic insurance. Add up all of your healthcare payments in your lifetime, and compare that to the total amount of goods and services for which your healthcare has paid: in my case, I have paid out about twice what I have consumed. The usual response I get is that there is no way they could afford that, between their kids' visits, their blood pressure medication, and all of the other goods and services they receive at rock-bottom out-of-pocket prices. They seem to have no conception of the relationship between their actions (and presumably, similar actions taken by everyone else in their plan) and the amazing and completely inexplicable rise in the deduction from their paycheck. "I used $10,000 in goods and services last year, for which I paid $3600 in deductions and $150 in co-pays, and my employer paid another $720, and they have the gall to raise my deductions to $4800 this year?! Those bastards! This is a rip-off!! There ought to be a law ..."
  

Now, if we could change the political and economic system with, say, a complete elimination of incorporation, then I might have some other ideas. Meanwhile, beware the lies, innuendo, half-truths, contradictions, nonsense coming out in favor of this healthcare plan (by both sides). Change is needed, but we needn't fall into the trap of Caplan's Fallacy.

Rationalizing the Oldest Industry by Force

Alfred Chandler's best known book, The Visible Hand: The Managerial Revolution in American Business, describes the shift from the atomistic, entrepreneurial market described by Adam Smith to the modern economy dominated by small groups of integrated, managed firms. The references to the apparel industry can be summarized briefly since apparel is not one of the industries that became rationalized in the way he describes.

The first industrial use of non-animal energy was the water-powered automatic loom developed in England in the late 18th century and brought to New England in the early 19th century. This led to a concentration of the textile industry around water sources. There was only a slight shift in the industry when anthracite coal arrived and steam-drive replaced stream-drive.

The coal-fueled energy revolution led to the railroads becoming next big industry, not because they were using it but because they were hauling it (coal-driven locomotives didn't become widely used until the last quarter of the 19th century). Telegraphy followed the railroads in a symbiotic relationship that formed the foundation for what followed: use of all-weather, high-speed transportation and long distance communication to coordinate the flow of goods from production through distribution to consumers.

The next industries to rationalize were those that could either use heat, transportation, and/or communications. These included:

• metal working (steel, using coal)
• wholesale & retail (using telegraphy to coordinate, trains to streamline)
  
• meat packing (Swift's rail cars)
• oil (first railroads, then pipelines)

Aside that will become relevant later: Dry goods merchants protested the rise of the department store, then the rise of the mail order operation (like Sears). Today, they protest the rise of the Big Box Store (Wal-Mart). The small retailer, while less common than before, has survived each of these consolidations, so far.

Chandler returns to apparel later in the book while looking at the most heavily capitalized and concentrated industries. He asserts that the returns to scale and capital for apparel are very low because

[e]ssentially, the machines took the place of manual operations. A machine did a task comparable to that of a worker in spinning, weaving, sewing, cutting, and fabricating. The maximum speed of cutting or shaping wood, cloth, or textile products by machinery was quickly reached. Nor did the spinning and weaving of natural fibers or the tanning of natural leather lend itself to massive increase of throughput by a greater application of energy.

This is entirely consistent with Kathleen's point

Sewing will always be labor intensive because cut fabric pieces cannot be smelted out like metal rods. Garments cannot be cut like sheetmetal and welded by machines. Fabric is flimsy; it must be handled by hands. No amount of technology will ever change this.

So, despite being an early link between the entrepreneurial Smithian world and the managed Chandlerian world, apparel was not consolidated, streamlined, and "rationalized" when so many other goods have been.

Not content to simply make a living, some people become enamored with the idea of getting rid of the competitors who kept them from becoming fabulously wealthy. There are few mechanisms for doing so successfully. You can try undercutting them and then buying them out, but John McGee showed that was not a feasible strategy even for Rockefeller. You can try combining with them through a cartel or horizontal merger, but the former is known not to work and Chandler showed that horizontal integration also failed; you had to both vertically integrate and develop a successful management structure to make mergers work.

Gabriel Kolko has described a third alternative; get the legislature to pass legislation ostensibly designed to help the consumer but which actually serves the interests of industry (or specific groups within industry). When rate cartels failed, the railroads ultimately turned to the federal government to act as their cartelizing agent. This function was performed by the Interstate Commerce Commission (ICC), an agency ultimately charged with responsibility for setting both maximum and minimum rates for the railroads. In time they came to serve a similar function for over-the-road trucks and served as a model for the Civil Aviation Board (CAB), which oversaw the creation of no new interstate airlines from its inception in 1938 to its demise in 1978. Meatpackers also sought protection, which they received with the help of Upton Sinclair's The Jungle, the novel which aimed at Americans' hearts but managed to cover Congress' backside. Bankers also wanted protection and got it with the Federal Reserve Act, which gave them input to a quasi-public board of governors and the US Treasury.

The Kolko Thesis describes what is happening in the apparel industry today. No firms have been able to internalize the coordination of a significant portion of the industry, either from the production or the distribution end. Though not perfect, it is surprisingly atomistic given the enormous size of the world market.

If you try to produce something of superior value and charge premium prices, there is nothing preventing someone from "knocking off" an article that required no small amount of inspiration, engineering, costly fabric and accessories (buttons, zippers, doodads) to produce. Like the Red Queen who was running as fast as she could just to stay in place, you are forced to constantly innovate in order to stay ahead. That's not a very satisfying way to get rich. The other option is to produce a commodity -- t-shirts, jeans, hoodies -- on which you make pennies on every piece and try to make it up on volume. That also is not a very satisfying way to get rich. Rather than taking either of these losing paths, it looks like a group of designers has decided to enlist the state to eliminate competition by seeking patent protection for designs.

The standard argument for copyright or patent protection is that it will encourage innovation by securing to the innovator exclusive rights to the innovation long enough to extract some monopoly rents. While that is a superficially plausible argument in this case, I'd say that Kathleen's description of the outcome of HR 2033 is much more likely:

I realize that sounds like a dramatic and exaggerated claim but if this legislation passes, contractors, pattern makers and even retailers will be exposed to liability. Let's say you have this nifty design that you claim you made up all on your own, with no inspiration from anybody anywhere and you hire one of us to make it up for you and you sell it and make your pile. Then, somebody comes out of the woodwork and claims it is their design, they own it and now you owe them. Problem is, you likely don't have much money, they'll want to sue everyone in your production and retail chain. That means me, your contractor and the stores who bought your stuff. After all, we "enabled" you. So, in order to avoid exposure, any contractor, pattern maker, sales rep or store owner -in the interests of avoiding law suits or facing criminal prosecution for dealing in pirated goods- is going to require you to prove ownership of your concept before they'll have anything to do with it. Minimally, you'll have to hire a lawyer, pay for searches through a design database of all existing design registrations. I cannot even begin to imagine how long this would take. You thought a trademark or logo search was bad? I have no doubt there's over 10,000 clothing designs out there for every logo. This will cost a fortune. But, you'll have to do it. No one will take your work otherwise. And because we'll have to have our own lawyers to check up on you and draw up contracts, the prices we charge you will at least double. We operate on tiny margins. I charge $50 an hour for patterns. IP attorneys get $250+, I'll have to triple my prices just to break even. Even with proof in hand, you will have no recourse other than to produce your registered design exactly as sketched. No design changes or iterations in process are allowed, otherwise you'll have to start all over again. Forget shortening that sleeve, changing the shape of that neckline or tapering the pant leg of that prototype. So what if it ends up looking lame and you have to start all over? That's the new cost of doing business. Feeling protected yet?

But hasn't IP protection been good for those industries that use it most? Perhaps, but the temptation is to say, "Look at the cell phone industry: there seems to be no shortage of innovation there." Ah, yes, but compared to what, exactly? What does cell phone innovation look like in an atomistic, entrepreneurial economy instead of in the oligopolistic, state-capitalist economy we (and Japan and Finland and South Korea) have now? Indeed, there was lots of innovation in the industry: as Bell's original patents expired, there were something like 200 telephone companies operating in Illinois, Indiana, Iowa, Missouri, and Ohio alone (from Adam Thierer's "Unnatural Monopoly"), but AT&T appealed to the federal government in 1913 and had themselves set up as a protected monopoly. You might remember that we had one phone company for the next seventy years.

The cell phone market consists of a few companies (Nokia, Motorola, LG, Samsung) while apparel consists of thousands of producers and thousands of retailers. Recall that small retailers have repeatedly complained about and then survived the onslaught of department stores, then mail order houses, and now big box stores. There survival has remained possible because the small retailers can still purchase from small manufacturers. When IP protection comes along, the industry will get vertically integrated and the supply for the small retailers will dry up. The companies that secure patents first will hold something over on first their competitors. Retailers will not be able to sell something from a producer who doesn't have a copyright. There will be no more than a dozen producer/retailer companies in the end: Wal-Mart, Nike, The Gap, and Target may soon be integrated apparel retailer-producers.

But why now? IP was around 100 years ago; they were aware of it in the industry (you should see the number of patented fit systems from the 19th century). Here is my best guess at the relevant history (with help from my wife, who clearly understands this better than I and may not agree with all of what follows):

1) Regionalism: In the period in which Chandler describes the process of consolidation in many other industries (roughly 1880-1920), apparel was resistant to consolidation for a number of reasons.

• The returns to scale limited as Chandler asserts
  
• Regional weather differences - cold, wet, dry, hot, windy all require different dress schemes.
• Resistance to rail distribution for various practical reasons. You wouldn't want to get the clothing near a coal-fired steam locomotive because it would be filthy upon delivery. You also couldn't effectively fill the box cars. In the steam rail era, it would have been much better to ship stacked bolts of cloth (only the outsides would get dirty, you could fill a box car) and produce garments on site.
  
• Shipping cotton and cotton cloth had occurred since the late 18th century, but there were still regional resource differences. Wool, cotton, leather would not have been equally available everywhere.
  
• Regional preference differences based on, for example, what they did for a living. Cowboys don't dress like bankers.
• Foreign influences - Texans met different people than New Yorkers
  

2) The post-war era created several changes:

• Increased prosperity. Prior to 1950, people generally only had a limited wardrobe. More disposable income set the stage for change.
• The washing machine. Prior to the 1950s, you had to wash it all by hand. More appliances lowered the cost of ownership.
• War: The federal government became the single largest consumer of clothing both through WWII and the Cold War. This meant the government set certain design and production standards, and as the single largest consumer, the various related industries (sewing machine manufacturers, for example) followed orders (in both senses). Women started wearing pants.
• Television and the interstate highway system: Prior to that, there was more regionalism in speech, food, and clothing. The decline of those barriers through television allowed more mass distribution, and that meant shifting from catering to local tastes to catering to the lowest common denominator. The interstate system lowered the cost of trucking. Hats and dress gloves became passe.
  

3) Logos: Terry Agins' The End of Fashion describes how, as clothing all became similar, companies began to resort to logos and branding to distinguish themselves. Remember the Izod alligator?
4) Sloan Managerialism: As Bill Waddell has theorized, many manufacturing firms have been taken over by MBAs with little or no production experience and an education in an Ivy League school where they were all taught the Sloan/Dupont theory of management. Production is a cost, so keep the logo and IP, outsource the production, and rely on branding.
5) Piracy: Branding has led to the rise of piracy. If you knock off a generic piece of clothing, you make no money. Knock off a Polo shirt, you make a little less than what Ralph Lauren makes. Piracy has also proliferated as Chinese production has come onto the market.
7) Agency: Diane von Furstenburg is the new president of the Council of Fashion Designers of America (CFDA) and the perfect agent of change. Having achieved only one notable design success, she basically became a brand and now wants to take the concept to the next level: the corporation with the most lawyers gets to control fashion. The CFDA is pushing HR2033 with the help of several trial-lawyer-fueled congresspersons. She could be a character in an Ayn Rand novel.

Apparel manufacture is still one of the few manufacturing businesses that you can start in your garage and sustain profitably on a small scale. HR 2033 will effectively put an end to that.