An Economic Perpetual Motion Machine

Professor Alan Blinder, in an oped in the Wall Street Journal Monday, continued to defend the Affordable Care Act, saying that the roll-out (especially the website) was a disaster but that the law was good.  He did point out the next two revelations we’ll see once we get over the shock of people losing their coverage – that young, healthy people will not sign up, leaving only older, sicker people in the insurance pools and that employers will send their employees to the exchanges and pay the $2000 fine instead of paying $10,000 or more a year for an insurance policy for them.  Still, he thought the law was financially sound and would work if these issues could be addressed.

Reading the oped reminded me of the inventor of a perpetual motion machine, explaining that with just a little more work he could get his invention humming along.  A perpetual motion machine, for those who don’t know, is a device that trades back and forth between two or more forms of energy, each one recharging the other, so that the device could go on moving forever.  For example, picture a weight on a ramp.  The weight has a rope tied around it which loops over a pulley and is attached to a spool on a motor connected to a battery.  When the weight is released it slides down the ramp, causing the battery-powered motor to spin and act like a generator.  The generator recharges the battery, such that it is charged by the time the weight reaches the bottom of the ramp.  At that point, a switch is thrown that turns the motor on, winding up the rope and pulling the weight back to the top of the ramp.  The process is then ready to start all over again and continue forever.

On paper it sounds great.  You assume a frictionless ramp, a rope that does not stretch, a frictionless, lossless motor and a perfect battery that can be recharged forever without losing any energy.  The trouble is that when you try it in the real world you find that there is friction on the ramp and you lose energy to heat.  The rope stretches and energy is used up deforming the rope.  The battery loses energy as it is charged.  And finally, the motor heats up and loses energy as it is pulling the weight back up the ramp.  If you are lucky, the weight makes it half way up the ramp the first time and then quickly settles at the bottom.

The inventor of this device might think that all he needs to do is lubricate the ramp and the motor well, find a stiffer rope, and develop a more efficient battery charger and it would work great.  The trouble is that, unlike in theory, in the real world there is friction, and there is heat losses.  Processes are irreversible because some of the energy is always lost to heating up something you don’t particularly want to heat up.  The First Law of Thermodynamics, which describes how energy is transferred from one form to another, has no problem with perpetual motion machines.  The Second Law, which describes the irreversability of all real processes, says there can be no perpetual motion machines.

The healthcare law was conceived by professors like Professor Blinder.  It is true that the law would work fine if young people would go ahead and pay $10,000 per year for health insurance despite the fact that they will likely pay less than $100 per year for care.  It would also require that people would work hard to establish a business, then spend 10-12 hours per day running the business, dealing with rude customers and grumpy employees, even though they knew they would take home no more than one of their employees despite working twice as hard and taking all of the risk.

Unfortunately, in the real world, young “invincibles” look at the cost they would be paying and what they would receive and make the wise economic choice to pay the fine and not to participate in the exchanges.  If you raise the fine they will just stop working and get their insurance fully subsidized.  Why would they work hard and see all of their pay taken to pay for others’ healthcare when they could sit at home (or become a musician or an artist, as Nancy Pelosi proposed) and receive the same take-home pay with no hard work.

In the real world people aren’t going to work hard to establish a business, deal with all of the logistics of getting funding, finding a location, filling out all of the paperwork and tax forms, and go through the trouble of hiring people if they will do no better than they would just going in to a regular job, doing what they were told for eight hours, and then head home.  If they wanted independence, they would just run a one-person business, doing all of the work themselves, and never hire anyone  since doing so would bring the burdens of providing healthcare for them and filling out all of the tax forms without any additional gain.

It is great to think of a world where everyone works hard for the good of others and of society, but in the real world, there is friction.  Some people may work a little for charity and for others, and a rare person will devote most of their work for others for minimal return, but most people have self-interest.  Most will do enough to at leats take care of themselves, but many others will not even do that if they can have their needs met for free.

The trick is to align people’s self-interest with the good of others.  This is best done in a free enterprise system where people are rewarded in proportion to the number of people’s needs they meet and how efficiently those needs are met.   Give some people the ability to become rich doing so and they will spend every night and weekend figuring out how they can create a business that best meets the needs of others.  Limit what they can make and those same individuals will do just enough to get by and take up hobbies instead.   Give most people a reasonable paycheck and they will come to work on time and prepared and spend their whole day doing things that meet the needs of other people.  Just give them enough money to pay for necessities and a few luxuries wtithout working and they will stay home instead and not do anything for anyone.

Like a perpetual motion machine, a healthcare system that expects people to go against their own self-interest will never work.  Instead, make it in their interest to save money for their own healthcare, and remove the middlemen who distort prices and drive up costs.  Do this, and healthcare will never be an issue again.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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