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August 15, 2015

Fundamental Concepts - Opportunity Lost [Weirddave]

I had nothin' for this week. Usually I start thinking about what to write for these posts, and after sorting through a couple ideas one grabs my imagination, and I sit down and write it. This week....nada. I had only a small ideas, it's really important but it seems so self evident to me that I can't think of a lot to say about it. I'll give it a shot.

There's a concept in economics that seems to be completely alien to most people advocating left wing political and economic ideas. That concept is called “opportunity cost”. Basically, the opportunity cost of something is what you could have done with money and resources instead of what you did. Opportunity cost is all about the efficient use of resources. In a market based system, opportunity cost is the primary mechanism that makes the system work. With any two competing businesses, the market will reward the one that does the best job of conceiving of, producing and marketing its product. Let's look at a real life example.

Suppose you have a society where 45 million people don't have health insurance (a ludicrous number, BTW, it was really more like 6-8 million) and you determine that your number one priority is going to be to get them insured. To that end you spend a trillion dollars to institute a clumsy, burdensome, stupid “Affordable Care Act”. Two years later you announce that you've now covered 12 million people through your ACA, and you call it a success. Is it?

Well, that depends. Let's look at the opportunity cost, and we can do so in a real simple way. They spent a trillion dollars to insure 12 million people (I'm not even considering factors such as quality of coverage or how many of those 12 million came from the pool of uninsured people as opposed to losing previous plans, I'm assuming they were all previously insured). That's roughly $83,000 per person. At the time the ACA was implemented, a guaranteed issue (no underwriting, meaning that people with pre existing conditions would be covered), highly mandated (things that many people don't want covered, like maternity or abortion are required to be included) major medical insurance plan cost about $12000 for a single individual. (I know that because that's exactly what small business plans, which had such no underwriting and contained such mandates, did cost). Multiplying your 12 million uninsured by the $12000 per policy cost, you could have achieved your stated aims for only $144 billion. Instead you spent a trillion. That's $856 billion more.

And that's how opportunity costs work.

ETA I forgot to tie it all together. If left wing people don't look at opportunity costs, and they don't, then every left wing venture must be a success - "Why, look what we did!". If it's to spend a million dollars to buy a tricycle, without knowing that tricycles can be had for $50, there is no way to criticize the policy. "You got the tricycle, didn't you? What more do you want?". Understanding opportunity cost lets you answer "The 20,000 tricycles that that $1 million should have bought".

Now, I just want to say that the math and figures I've used above are atrocious. I really did have writer's block, I didn't start writing this until 9:45 AM Saturday. All of the above figures are estimates and “best remembered” because I didn't have time to look them all up. I'm sure about the 45 million uninsured number from the administration, and the 6-8 million that that number should be. I also know that an individual guaranteed issue plan cost $12000 (national average) in 2014. I believe that “12 million” is the number the administration most consistently cites as “people covered through Obamacare”, although they say any damn thing any day. The $1 trillion is over several years (2-3) I think, but it's really hard to pin down because of the revenue/expense tricks the administration pulled when passing this thing and costs are much higher than estimated (this is my shocked face) but what that actual number is I don't know. Even if it is 2 or 3 times too high, it still would have been cheaper just to buy every “uninsured” person who has been “helped” by the ACA a plan from Blue Cross Blue Shield. So...illustrative of the concept, but this is me freely admitting that the numbers are loose.

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posted by Open Blogger at 10:29 AM

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