Monopsony

I realize that I used the term "monopsony" the other day.

At the risk of sounding pedantic, a monopoly is a market situation where there is only one seller. When there is only one seller, there is no price control over what the seller can charge and the seller maintains all bargaining power.

A monopsony is a market situation where there is only one buyer. In that situation, the buyer retains all of the bargaining power and can drive the price down.

By way of example, IPL is a monopoly. We don't have the choice to buy electricity from anywhere else. Were IPL unregulated, it could charge 10X what it currently does for electricity. What are we, the buyer, going to do? Go without?

Contrarily, Amazon and WalMart are often considered monopsonies (though they are not TRUE monopsonies, in that there are other retailers who might buy from their suppliers, but they still retain enormous bargaining/market power). If a factory that makes plastic sleds decides to raise the price on WalMart, they go to a different factory and undercut the first one. WalMart and Amazon, if not the sole purchasers of a particular good (you name it . . . windshield wipers, rubber gloves, light bulbs, etc.) from their suppliers, retain enormous bargaining power. WalMart or Amazon can easily tell Factory X, "If you raise the price on your widget, we'll buy the widget from Factory Y." As long as Factory X doesn't go out of business, this works swimmingly for WalMart or Amazon.

Just think of it this way: Is it easier to sell water in the Sahara Desert when you're the only seller, or in the middle of a lake full of fresh water where there are 1,000 other vendors selling water? Who has the bargaining power in each situation?

Market power matters.

About Those Millions of Unfilled Jobs

I heard it again during the Governor's "State of the State" address: Indiana has a million unfilled jobs and those poor employers just can't find the right employee with the necessary skills to fill the position.

What a crock.

I have long believed that if you can't find something at the price you're willing to pay, the logical response is to either adjust what you're willing to pay or adjust what you're looking for.

Indulge an example: 

My law firm presently has an opening for a senior-partner level attorney who has a book of business that all but guarantees $2,000,000 in billable collections per year; who has litigated no fewer than 100 cases from start to end;  who has argued at least a dozen times before the U.S. Supreme Court; and who has a winning record before the Supreme Court. My law firm will pay this person $4,000/year. We have an unfilled job opening, right?

I can't help but feel that this is what so many employers are doing. It is the equivalent of me saying that I would like to buy a Ferrari for $50 and when I can't find a willing seller, I then lament that "we just don't have enough luxury cars."

Well, I read this in Slate today and would like to share some excerpts.

Articles in which executives moan about their inability to find qualified workers for job openings are business pressperennials, typically focusing on “middle skill” industries like manufacturing and constructionthat don’t require a bachelor’s degree. In the years immediately following the Great Recession, there seemed to be an entire cottage industry devoted to blaming America’s stubbornly high unemployment rate on the notion that workers just lacked the specific talents employers needed, rather than, say, the hangover from a housing bust and financial crisis that had crippled the economy.

It is so tiring to listen to MBA types talk about how the "real problem" with American workers is that they get paid too much. 

If good workers were really in short supply, you’d expect pay to rise quickly as companies tried to outbid each other for talent. Instead, employers spent years carping about a lack of good job applicants while letting pay stagnate.

Another thing that is tiring is listening to beneficiaries of current injustices dissemble and create reasons why the current injustices are indeed just.

 In the years following the Great Recession, the U.S. labor market was incredibly concentrated, with a relatively small number of businesses posting help-wanted ads across different industries and cities. That appeared to put downward pressure on wages; the more concentrated the local market, the lower pay tended to be, the study’s authors found. This, the study’s author’s argued, was a sign that U.S. employers had an enormous amount of monopsony power—meaning they were essentially free to set low wages, because few other businesses were around or hiring. 

An example of how this works:

Let’s say you manage a small construction company, and you’ve been getting away with paying your crew relatively little because there aren’t that many other contractors posting help-wanted ads in your town. You need a new carpenter. But you don’t want to tick off the rest of your men by offering this new potential employee a more generous wage. So you post the job with the same mediocre hourly rate you’ve offered for the past three years. Nobody good responds, and to you, this looks like there aren’t enough talented carpenters out there. But in reality, there’s only a shortage of people willing to work at the artificially low wage you’ve set your heart on paying. The real problem isn’t a skills shortage, it’s that you aren’t offering market wages, because the market isn’t functioning.

 I've written previously about monopsony power. The idea is that when there is only one buyer, that buyer maintains considerable bargaining leverage with any and all sellers. Anyway, I would encourage anyone who wants to know more about this dynamic to go read the Slate article. It's really good.

The High Cost of Health Insurance - An Idea

I am not in the healthcare field. I do, however, work somewhat closely to the insurance field. I know, in a broad and general sense, how insurance contracts are written. I can't discuss a lot of the particulars of health insurance contracts because, let's face it, human health is probably the most complicated subject going. Nonetheless, I think that the healthcare problems we have in this country are economic and not medical in nature.

Nobody doubts that the technical abilities and expertise of American healthcare providers are top notch. Where we have problems is in the cost of insurance, particularly for those who work at small businesses and/or for low wages. Before I get to my proposal, I want to talk about two specific state-run insurance programs in Indiana, hardly a bastion of wild-eyed progressive ideas.

The first publicly funded Hoosier insurance program is called the Excess Liability Trust Fund. This is for underground storage tank operators, including farms, gas stations, and the like. The policy decision was made, at the state level, that the potential liability for the owners of pre-existing and yet-to-be-built underground storage tanks was so great that to not offer some  help would cause untold economic damage, with various unpredictable consequences. Thus, the ELTF pays for remediation and liability associated with underground storage tanks, beyond a certain amount. Stated another way, the tank owner is liable for the first $XXXXX, and the state insurance fund picks up the rest of the cost. It is not a simple program, but it has been very effective at staving off bankruptcy for some small businesses and unremediated, polluted sites where USTs had leaked a bunch of nasty chemicals into the ground. ELTF is funded with a user fee on the operators, owners, etc., of storage tanks.

The second publicly funded Hoosier insurance program is associated with medical malpractice liability. I think it is called the Patient's Care Fund, but I'm not entirely sure. Indiana has a host of "tort reform" things in place to discourage medical malpractice litigation (probably for good reason, but that's a discussion for another day). Included in Indiana's "tort reform" is a law that caps private liability for medical malpractice at $300,000 (with a host of exceptions . . . please do not take legal advice from my blog; contact an attorney). After the $300,000 is paid by the doctor's malpractice insurance, the State of Indiana is liable to pay the remaining damages resulting from any such malpractice out of the patient's Care Fund. This saves doctors from having to purchase liability policies that insure up to $10m or some such figure. I have heard that a surgeon presently shells out about $35,000/year in malpractice insurance premiums. That's no chump change, and that is for a policy that only has to indemnify up to $300,000. Imagine the premiums otherwise and what that would do to the availability of doctors to treat Hoosiers; not to mention those on whom medicine was indeed negligently practiced . . . they would continue to not be made whole in large numbers. My point is that the Patient's Care Fund is the result of an idea to place a publicly funded "umbrella" over the insurance required to do this, because not doing so would have deleterious social consequences, i.e. doctor shortage and injustice.

The point of both of these publicly funded insurance programs is not to destroy the entire insurance market, but to better aggregate the risk associated with these two activities that we find to be economically and socially useful.

Health insurance seems like a good place to try something like this, essentially an "umbrella" insurance policy that covers the cost of one's healthcare beyond, say, $1m/year and $10m/lifetime, adjusted for inflation.

It occurs to me that a large percentage of healthcare resources are routinely consumed by a rather small slice of the populace. This is a common lament I hear from those I know who work in that industry.

Perhaps it would be a better idea, relative to the way we finance healthcare, to institute a public excess liability insurance fund. The funding would of course be relatively tricky, but assuming it has the desired effect of controlling costs by having a monopsony for the "good" or "cost" that is healthcare beyond $1m, it is possible that it could have a diminishing public investment in the trust fund, and the cost be increasingly borne by surcharges on insurance policies. As the premiums go from $400/month to $300/month, perhaps the excess liability fund captures some of those savings and aggregates them into an umbrella risk pool.

I can't be the first person to have thought of this, and I wonder why it is not discussed more often.