- Health Insurance
- Oil Company Profits
- Financial Regulation
- Private Equity
Armchair critics are always quick to point out flaws in someone else's work. They usually have little more than a superficial understanding of actual problems or their practical solutions. Quick with advice but never willing to do any of the work, they are always ready to flaunt moral superiority. They draw on a wealth of theorizing but rarely on real experience.
The term "armchairist" describes the sufferers of this malady. I don't claim that it is solely a disease of the left, but surely armchairism is epidemic among all critics of capitalism. Here are a few examples.
- Health Insurance
- Oil Company Profits
- Financial Regulation
- Private Equity
The common thread in these examples of armchairism is a disdain for profits and a religious certainty that profits are a result of ignoring the interests of other people. This is despite the dependence of capitalists on the voluntary choices of their customers. Typically, the armchairists believe they could do it better (no matter what "it" is) but are too busy with more important matters. They are sure that the government can do it better. The four cases cited above are worth examining.
1. Health Insurance:
a. According to the armchairists, for-profit insurance companies gouge their customers by overcharging for premiums and unfairly denying coverage. All the evidence shows that profits hover around 5% of premiums. Administrative costs add another 10% to 20%. That suggests that premiums can't be cut by ten percent without bankrupting the companies. They certainly aren't gouging anyone.
b. Many health insurance policies are written by not-for-profit companies or (my favorite) mutual companies. These should have a natural advantage in the marketplace over for-profit companies. At one time, nearly all health insurance was provided by nonprofits. Yet the for-profit companies flourish. I have not seen a detailed comparison of premiums or benefits among the different types of insurance companies, but how can government-sponsored insurance do better? There are several union-owned insurance companies. If they do better, why haven't we heard about that?
c. Nobody has put forth a serious explanation of why government insurance should save money. That is the kind of calculation the left fears. But there is room for another type of insurance. There are plenty of rich liberals. There are even some who actually have some business experience. If the for-profit companies have a secret goldmine, why can't a few of these liberals form their own company and earn a "fair" profit without gouging anybody? This should destroy the gougers. In the car insurance game, you have Progressive, with its annoying spokeswoman and über-left owner. Yet Progressive is not the low-cost provider.
d. Capitalism works. If a decent profit can be made by cutting prices, somebody will cut them. Unless the government creates high barriers to entry through regulations. Either way, it is simply a lie that more regulation can improve things.
2. Oil Company Profits:
a. According to the armchairists, the oil companies are gouging the public for "obscene" profits. This, they say, is made worse by unreasonable government subsidies. These subsidies, they say, amount to some $4B annually. The tax code is too screwy to really evaluate whether this is unfair compared to other industries, but it is an insignificant part of energy costs. The truth is that for every dollar in profit for all of the private energy sector, more than two dollars is paid in taxes. Who is doing the gouging?
b. Where are the not-for-profit oil companies? Could it be that running a business for profit leads to lower prices for consumers? The only nonprofit energy companies are ones which are trying to make a profit but whose losses exceed even the generous government subsidies.
c. But if profits are just too high, then why don't Bill Gates and Warren Buffett start an oil company?
3. Financial Regulation:
a. According to the armchairists, the banks are gouging the public for every service they provide. The armchairists may have a point here. The banking industry, especially the big banks, enjoys all kinds of protection from competition in the form of onerous regulations. Even Gates and Buffett might be daunted by those barriers.
b. There are nonprofit banks in the form of credit unions or mutual companies (owned by depositors). These have a nice niche, but they clearly can't compete with behemoths that have to show a profit.
c. There is no small group with the resources to create a new competitor to the big banks. Even the big banks themselves can't seem to compete very well without risking failure.
d. The banks, far from being pillars of capitalism, have become a port in the storm for closet socialists. They can make a lot of money by keeping competition at bay via government regulation.
4. Private Equity: My favorite example.
a. This is capitalism at its finest. All over America, thousands of businesses fail every month. A few lucky ones manage to attract the attention of someone who believes in them enough to either lend them money or buy some share of them. If that someone also knows his or her business well enough, he or she might be able to inject some expertise and good management. But how often can you find a single person with money to invest in the business, the right set of skills, and the time to turn the company around? Rarely, at best.
b. Enter the private equity firm. Put together a team of good businessmen, savvy investors, and some ambition and greed. They may be approached by a failing company, or they may find one themselves. With no outside help, bankruptcy is certain, all the workers will lose their jobs, the owners will lose their investment, and pensions will be forfeited. Not a pretty picture. The greedy capitalists study the situation and think they can inject some capital and knowledge to turn the firm around. If they succeed, everyone benefits. If they fail, they usually lose some money or time, and the workers and former owners are no worse off than if they had gone bankrupt in the first place.
c. But don't these greedy capitalists manage to drain all the assets from the firm and come out ahead even if the company fails? That is easier said than done. Where are these assets? Why couldn't the original owners deploy those assets profitably? Each case is different in that respect. The one common thread is that in every case, the firm would go under without an infusion of capital.
d. The armchairists skewer the private equity firms. They accuse them of not caring about the plight of workers or the community. Perhaps they don't care. But they do care about making money by restoring the firm to profitability.
e. But don't they invest a little money, and then borrow a lot of money from unsuspecting third parties? Next they drain that borrowed money into their own undeserving pockets and abandon the corpse, screwing workers, owners, and lenders alike. Too bad for the greedy ones that the people with money to lend aren't stupid. They need to be convinced that it is a safe loan. They put conditions on the loan to prevent siphoning it off.
f. Maybe I'm wrong. Maybe the private equity firms are just thugs out to destroy companies that could be saved. So in that case, where are the rich liberals? Do they put their own money in? Are they willing to keep more money pouring in even if the company can't be turned around in five years? It is just so easy to expect other people to risk their money and then take just a small return for their trouble.
The common theme to all four examples is that there are always armchairists willing to tell you that they could do it better, or that others are too greedy, or too uncaring. Instead of actually doing it better, though, they attack firms like Bain Capital which saved some companies and lost some. Like physicians who take on nearly hopeless cases, their failures are all too frequent. Yet all those patients would have died without them. The few they succeed with are lucky to have found them.
There must be trillions of dollars controlled by liberals. Where do they put it? Certainly they don't invest in risky bailout attempts. Well, Mitt Romney did just that. Liberals who don't lead by example should just shut up.