UtilityMinimization

I recently got in a bike crash and separated my shoulder, and my trips to the emergency room and various doctors got me thinking about how difficult to navigate the US health care system really is. Going to the ER, in a great amount of pain required me to wait around for hours before before being seen by a doctor. They were quick to make sure I have insurance, and that opened up levels of care not afforded to the myriad of uninsured patients. After visiting the ER, I called my orthopedist, but he no longer accepts my insurance, so I had to go to the website, find a new orthopedist, make an appointment, realize I didn’t like him, find a new doctor, and so on.

Of course, life does not have to be this difficult. When I go buy a car, I don’t have to work nearly as hard, so why should buying healthcare be any different? In his brilliant book, The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor–and Why You Can Never Buy a Decent Used Car!, Tim Harford lays out the difficulties of health care policy as well as how to overcome many of the problems in the US system. This post recounts his solution with some comments of my own.

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A friend who is traveling to India recently received a flier from the Indian Consulate that stated that the Consulate would no longer be processing visa applications directly, but rather, all visa services have been outsourced to a company named Travisa Outsourcing, Inc of New York, NY. Despite the obvious irony that the Indians are choosing to outsource work to the US, the change serves to illustrate the long-term benefits of outsourcing to both the outsourcing country and the recipient of the work. In the end, outsourcing work will lift the economies of everybody involved–not to mention the economies of many countries not involved.

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The April 19th, edition of the Economist magazine gravely warns of an imminent worldwide food crisis. They warn of price increases of 20 percent for such staples as rice, grain, and rice. In some of the world’s poorest countries, Bangladesh and Malawi, for example, prices for everyday meals may even double.

Without a doubt, bad government is partially to blame for the price increases. When oppressive and unaccountable governments prevent markets from operating by stealing from their citizens, cheap food cannot be the norm. Indeed, Nobel Prize winning economist Amartya Sen has famously declared that famines do not occur in democracies.

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I have a request to look at Brazil’s ethanol fuel program, which, on the surface, seems unequivocally more successful than the US endeavors. In the US, ethanol is made from corn and large government subsidies. I cover some reasons for the current failure in this article. In Brazil, ethanol fuel is made from sugar cane, which is cheaper to grow than corn.

Brazil’s ethanol program began, not out of concern for the environment, but rather as a market response to the oil shocks of the 1970s. As gasoline prices reached all-time highs (and in real terms, still the all-time highs) in the late 70s and into the 1980s, Brazil began to look for alternatives to petroleum based fuels. Because they were the largest producer of sugar in the world, they figured that turning sugar into alcohol would be a good way to go. It also helped that at the time, sugar had a relatively low market value, so the chief input good was cheap. The program took off, and by 1986 about 75 percent of all new cars sold in Brazil were equipped to burn ethanol instead of gasoline.

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Gas prices are high, and we still need/want to drive a lot of places. This combination has us looking at alternative methods of fueling our vehicles. One method that has started to catch on is hybrid gas/electric cars, such as the Toyota Prius. These vehicles use gravity to charge a battery that assists the gasoline engine and reduce fuel consumption. Unfortunately, some studies show that these vehicles do not use any less fuel, and the battery is mostly used to give the vehicle more power. Since that is what the market really craves, auto manufacturers are only too happy to oblige.

A second ‘alternative’ method is the use of ethanol fuels made from corn. Since this is not a new technology, people schooled in economics should be extremely wary of such a solution. The reason is simple: if we could have used ethanol fuels all along, why have we stuck with gasoline? The likely answer is that ethanol, in the end, is still more expensive than gasoline. When, and if, gasoline becomes more scarce, that relationship may change, but the current incarnation of ethanol fuel, E-85, which is a blend of 85 percent ethanol and 15 percent gasoline, has yet to catch on. Let’s explore some of the reasons why.

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