Blackout The blackout that left 50 million people without power is now one of those events that dominates the news and shapes our thinking in fundamental ways. The dust is still settling on the final costs, but it is clearly in the billions. We have a remarkably efficient economic system, but it is based on the premise of a highly effective infrastructure. We expect the boats to be unloaded, the trains to run on time, and the lights to come on when we flip a switch. Anything that interferes with the smooth flow of goods and services can quickly grind large chunks of business activity to a halt. We are quite fortunate that the disruption occurred toward the end of the week as the day was winding down. Just by sheer timing, things could have been much more difficult (and expensive).
The largest blackout in history has, not surprisingly, led to many questions and concerns. There is a massive effort underway to blame individual companies or even employees. Some are taking the opportunity to say it must be the result of electric competition. I can only say that the first one is irrelevant, and the second one—that opening up markets could have caused the problem—is ludicrously incorrect. Even if the specific circumstances that caused the breakdown are ultimately found to rest squarely on the shoulders of some poor soul, the bottom line is that the Northern US has not built and maintained the type of transmission system necessary to accommodate growing economic needs in a reliable manner.
Although the situation has somewhat improved in the West since the California crisis a few years back, similar risks remain a source of concern. The primary obstacle has typically been the resistance to locate facilities in areas of high demand due to environmental and aesthetic concerns. From a more global point of view, this overburdened mechanism is indicative of a general short-sightedness in our efforts to invest in the infrastructure required to support a growing economy and society.
In Texas, we are fortunate because the vast majority of the state is located in a self-contained power grid managed by the Electric Reliability Council of Texas (ERCOT). This largely independent system evolved out of security measures several decades ago and has remained intact through the integration efforts that began after the system failures in the 1980s. We also have an excessive supply of power in the state, with reserves running at 25% or so even with the very hot temperatures and record usage of the past few weeks. We are self-sufficient and do not import power from other regions (unlike most of the areas impacted by the blackout). These facts combine to make for a much more reliable electric power framework, with disruptions being infrequent and temporary.
The technical side of this issue stems from the fact that electricity supply and demand must be constantly balanced. For all practical purposes, power is produced and consumed at the same instant. From what my engineering friends tell me, the Texas grid looks a lot like a bowl of spaghetti, which is a good thing (no matter what your feeling is about Italian food). When one part malfunctions, it is relatively easy to find another path. Other regions of the country often have more of a loop system; when it’s broken, it’s broken. We have also had a more balanced attitude about constructing needed facilities, thus further promoting system integrity.
As to the role of competition in the recent blackout, I can only say the failure occurred in the “wires.” The transmission mechanism is fully regulated as a public conveyance. It was that way before retail electric competition, and it remains so now. The wire couldn’t care less whether the power traversing it is purchased in an open or restricted market. In fact, the impacted area has a variety of regulations and market mechanisms in place, as does the remainder of the country where no failure occurred. The attempts to blame competition for this problem are utterly void.
Despite our relatively strong situation in Texas, we can ill afford to be complacent. A growing economy has escalating power needs, and we must continually invest in our infrastructure to ensure safety and well-being and to take advantage of the comparative benefits inherent in our plentiful supply and effective transition to competition. The best thing that can occur as a result of this massive shutdown is a wakeup call to political leaders and their constituents regarding the need to restore and enhance all of our vital infrastructure. Although Texas fares better than most in this particular arena, ultimate economic success demands ongoing and increasing investment in our ability to move people, things, and power from where they are to where they need to be. Otherwise, our capacity for growth and prosperity is needlessly limited.
posted @ 08:23 AM CST [link]
Friday, August 15, 2003
Value As any of you who know me are well aware, I am an incurable baseball fan (particularly “old” baseball). I find it to be a metaphor for life. My kids often play a game where they name any topic, and my challenge is to relate it to baseball. My oldest child is 21, and I remain undefeated. My poor family has had to endure multiple trips to baseball’s museums and shrines, listening to me wax eloquently (in my opinion, at least) about everything from the heyday of the Negro Leagues to the origins of the sport in the mid-1800s.
Two events happened recently which caused me to turn my baseball lens toward economics (not the first time that has happened). When Gary Carter was inducted into the Baseball Hall of Fame, I noticed the price of his autograph went up by $15. (By the way, I subjected the family to a sweltering “Induction Sunday” in Cooperstown two years ago; I highly recommend it.) A few days later, ESPN did a story on the “10 Most Underrated Athletes,” and my personal hero, Stan Musial, topped the list. It has always bothered me that Stan’s autograph (I have a collection of them spanning 40 years) sells for less than those of his contemporaries and later players of far less ability, character, and class.
All of that to say that people are frequently confused about the “value” of things, and these misconceptions often cost them quite a bit of money. Thinkers have grappled with the concept of value for a long time. As early as the thirteenth century, some of the Scholastic writers tried to grapple with it. (Aristotle even offered one or two thoughts much earlier.) A few years later, their most prominent member, St. Thomas Aquinas, tried to define a “just price” to be paid for any good. He basically concluded that the value of a thing was equal to what it cost to make it. (His purpose, by the way, was a noble one indeed. He was instructing the monks and priests of the day on the proper restitution people must pay if they destroyed another’s property in order to avoid eternal damnation.) While this concept is remarkably close to what economists today call a long-term equilibrium price, it really tells us very little about value.
In the 1800s, many prominent minds (including David Ricardo and Karl Marx) concluded that the proper standard was a “Labor Theory of Value” in which the cost of worker input was the deciding (or at least most significant) factor. This approach is useful and helps to play a role in resource allocation, but it does not get to the essence of value.
When all is said and done, the value of any good or service (from an economic perspective) is merely what it can be sold for at any given moment in the market—nothing more and nothing less. Whether it is stocks, bonds, real estate, coins, Arabic horses, or baseball autographs, the answer is the same. A lot of things go into determining that number (some rational and some not), but that is the number. Gary Carter’s bump up in autograph value was because his induction into the Hall of Fame means people are willing to pay more. Whether it is sustained or not remains to be seen (although I wouldn’t bet on it). Stan Musial’s autograph value is relatively low because, for whatever reason, his achievements haven’t captured the imagination of consumers in the same manner as some less skilled, but more flamboyant players.
Never lose sight of this basic diction—the value of something is what you can get for it. After all, baseball is life.
posted @ 07:59 AM CST [link]
Friday, August 8, 2003
Medical Justice
A fair and balanced judicial process which treats all parties equitably is a prerequisite for a stable and prosperous society. That basic premise has guided a notable chunk of my career for the past 20 years, as I have worked on efforts to reform and improve the functioning of our tort system both nationally and in every state that would have me. Just in the last year, I have had the privilege of being a part of successful initiatives in five states.
This quest began for me in Texas and has resurfaced on several occasions, including now. The legislature recently passed a significant tort reform measure which, once fully implemented, will transform Texas from a state with one of the nation’s worst reputations as a “litigation lottery” to one with a model mechanism for the proper adjudication of legitimate disputes. An analysis by my firm indicates that this measure would (conservatively) add $36.1 billion per year to the Texas economy and create over 240,000 permanent jobs.
One significant element of the new system is a cap on the level of non-economic damages in medical malpractice cases. To ensure that this provision meets constitutional muster, it is included on the ballot as Proposition 12 in the upcoming September election. Because a lot of folks make a lot of money by gaming the current system, this item is generating a heated public relations campaign. I would like to strip away the emotional appeals from both sides and provide a few important and prudent facts.
First, there is a widely propagated myth that this measure prevents patients with legitimate injuries from being fully compensated. That assertion is just plain wrong. Nothing has changed in the ability to achieve full compensation for medical expenses, lost wages, ongoing care, and even interest. If the costs persist for decades and run into the millions of dollars, so be it. That is exactly as it should be. Proposition 12 deals with a different issue: the amount that can be added on top of that to “punish” a healthcare provider. It gives rational structure to the heart-wrenching task of reimbursing people for intangible (and inherently unmeasurable) suffering. This is the part where you might hear in a courtroom that “No amount of money can compensate for this loss, but a few million dollars (of which the attorney gets 30-40%) wouldn’t hurt!” Such non-economic damage awards have quadrupled in the past decade. A few years ago, only one-third of all damage awards were non-economic in nature. Today, the fraction is two-thirds.
Second, let’s peel the onion back a few layers and see what really happens. Because of the prospect of outlandish jury awards, an excessive number of frivolous lawsuits are filed as attorneys and plaintiffs find it worth their time to take a chance on a big judgment. I have seen advertisements, for example, encouraging you to call and potentially receive money if you have had a certain procedure done, irrespective of whether you were cared for properly. About 85% of all cases are unsuccessful (no harm is found), yet each one costs tens of thousands of dollars, (at a minimum) to defend. The result is that the risk of practicing medicine is dramatically increased. Because society as a whole pays for the few random “winners” in this lottery, malpractice insurance rates have skyrocketed, rising by more than 500% over the past 25 years, and 20-25% last year alone. Moreover, the number of medical liability insurance carriers currently in the Texas market has fallen from 17 to 4 in just three years.
As this process unfolds, doctors and hospitals no longer offer risky (but important) services. Patients don’t get treatment, nursing homes go without liability coverage, and practitioners leave the profession (or at least the state). The Texas Board of Insurance indicates that significant reductions in malpractice rates will occur with these caps, and a recent federal study indicates that, after adjusting for other factors, states with limits on non-economic damages have 12% more physicians per capita than those without such protection.
When all is said and done, we all pay more and get less in the way of healthcare because of the current situation. About half of all states now have limits, and those proposed in Texas are fair and the result of outstanding legislative work involving extensive input from all points of view and widespread, bipartisan support. As the other states with significant problems reform their approaches (and many of them have in the last year), it accelerates the volume of suits filed in more lucrative venues such as Texas, putting further pressure on our courtrooms, doctors, and insurance providers (the number of filings has doubled in the past decade). However, it’s the people of Texas who really suffer as treatment availability is compromised and cost is increased. The critical change outlined in Proposition 12 is a matter of basic economics and basic finance; voting for it is basic common sense. We can ill afford to do otherwise.
posted @ 07:43 AM CST [link]
Friday, August 1, 2003
Do It Right This past week was what my office refers to as a “Minus Ray Week.” I was in New Mexico, Missouri, Illinois, Tennessee, and New York, with four cities in Texas sandwiched in between. The flying faxes, calls, and emails as I seek to control my universe are dizzying—to say the least—and you haven’t really lived until you’ve had to decipher a fax of my messy, miniscule handwriting.
While on this sojourn, I noted that one small segment of the economy—that notable entity that I would like to (but can’t) control—was once again running amuck. First, the meeting of the World Trade Organization in Montreal was attracting its usual gaggle of protestors, but that’s nothing new. More disturbing, some of our well-intentioned but misguided leaders in Washington were seeking to enact measures to penalize US firms that moved jobs to other countries. Expressing legitimate concern over the “jobless recovery” amid layoffs in several key sectors, they were proposing a cure that was much worse than the disease.
Don’t get me wrong. I am all for generating new employment in the US. The long-term health of our economy depends on it. We cannot hope to achieve this critical goal, however, by artificial mechanisms. This notion of trying to force activity to occur where it doesn’t belong has been thoroughly discredited in both academic literature and the lessons of history for a couple of centuries, but that is nothing if not stubborn.
When we compel firms to make less-than-optimal decisions about where to produce goods and services, several things happen. First, the firm becomes less profitable and less competitive globally, thus limiting its long-term potential and quite often driving it out of business entirely. The end result is the essential loss of not only the “expected” jobs, but those that remained in the country and all of the supporting activity.
Second, we artificially divert our research into unproductive uses. As a result, we are unable to achieve our full potential in terms of both output and jobs. This practice constrains our future prosperity.
Third, we inhibit the potential of the global economy, as we prevent resources from seeking their highest and best use. This action both invites retaliation from other countries (thus eliminating even the illusions of short-term gains that drives this initiative) and restricts the capacity of our trading partners to purchase the goods from us that we should be producing. I could go on and on, but you get the picture.
The process of creating jobs is very simple in principle. Create taxing, spending, regulatory, and monetary policies and priorities at all levels of government that stimulate investment, innovation, and basic research. It is in this manner that the US enjoys its only true comparative advantage in the international economy. Complement these policies with the best education and training we can possibly provide at all levels (elementary, secondary, college, technical, and continuing). Finally, open up markets and get out of the way. These basic actions will ensure that we create jobs at a healthy rate and achieve sustainable prosperity doing what it is that we do best. All of the other policy matters we get so worked up about would just become “round off error” in the process.
In summary, constraining markets and breeding needless inefficiency is no way to run our economy, no matter how laudable the reasons may seem. It is a short-sighted, band-aid solution that is doomed to failure. The vulgarities of a sluggish period in business activity, despite the very real pain that comes with it, must not dictate policies that will only make it worse.
posted @ 07:42 AM CST [link]