Sunday, August 9, 2009
Here is a fine example of how regulation instead of market forces absolutely destroy the effectiveness and quality of a good or service.
For those of you who haven't heard, many of the areas of the US where the first wave of the Greatest Depression has hit the hardest (i.e. where the housing boom and subsequent/necessary bust has wiped out the most equity and associated jobs/services) have so many people underwater they CANNOT AFFORD TO CLAIM AND BURY THEIR DEAD RELATIVES.
No joke. Bodies are literally stacked on top of each other in various morgues around the country.
So what do you think will happen as a result? Most likely the morgues will lobby for bailout money and get some hundreds of millions or a few billion dollars to deal with this issue.
I mean, sure. We can go way back to the fact that such huge monetary distortions by the Federal Reserve cause massive sections of the economy to be reallocated toward economic operations that would NOT BE PROFITABLE if the market determined the cost of the money to start those operations. In plain speak, when money is cheap people are a lot stupider with it. Hence the bubble. Eventually way too much of the economy is devoted to these "stupid" or non-economical (not to pun or anything) operations. The shift becomes unsustainable and the market tries to self-correct.
This is the process of creative-destruction.
This is the part where the market takes all of those resources that are not maximizing their output and liquidates them. The resources are then naturally put to where they will be most efficiently productive and offer the greatest return on investment by entrepreneurs seeking profits from their investments.
But the problem is that the government and Federal Reserve have put a stop to this VERY NECESSARY process. What they have essentially done is take all of those misallocated resources (Interest Rate Swaps, CODs, Commercial Property-backed Debt Paper, etc) and locked them in a box. That box being the Federal Reserve's balance sheet. The total of guarantees (and this is completely aside from the despicable and sickening deficit our governments are running) is at around $13,000,000,000,000.00 ($13 Trillion). This is an unfathomable amount of money and basically equals EVERY good and service produces in an entire year by the American Economy!
Until these assets are allowed to be naturally reallocated to their proper place by the Invisible Hand of the market (See Adam Smith for this explanation), this recession will not end. It will only deepen, because not only are governments stopping this process, they are encouraging MORE money to chase these bad assets with housing credits, forced lowering of standards for Freddie Mac and Fannie Mae loans, etc etc.
But anyway, back to my original topic - mass unclaimed dead bodies.
Sounds kind of gross, right? A bunch of dead bodies stacked on top of each other in a cold room. No one to pick them up because nobody has the money to do it.
Here is another example of how the government RUINS something that could be so simple and effective. Because the government regulates the hell out of the practice of burying the dead (i.e. certain coffin types, buried so deep, cement casings in many states, etc), it drives up the minimum cost of a funeral.
On top of that there are so many regulatory conditions, mandated by the state, that must be met just to operate in the business.
Now, if the free market and the free market alone were left to make all of the choices and developments for burial, this most assuredly would not be a problem. Here's why:
If there is a need, there will always be an entrepreneur out there willing to meet that need. People need to be buried, ergo we have funeral homes and Funeral Directors (as they now prefer to be called).
In a totally free market system, these companies offering this service and its accompanying products are in constant competition with each other. Competition causes price fluctuations. It also causes the quality of goods and services to fluctuate. See, if my business' operations are the only thing that can get me clients whose family member I am to bury, you had better believe I am going to have great prices on my services and products, and great quality. I have to beat the other guys offering my service.
This also improves innovation - if I can come out with a better way to bury a body than my competitors I have a unique advantage and will have much more clientelle. If I can streamline the process somehow to make my operations more cost-effective I can lower my prices in turn attracting clients whose budget is smaller and still make a profit.
The shoddy operations would be quickly weeded out by consumers who would be much more intelligent and critically inclined in their choices as the would not have to rely on the "Nanny" (government) to make regulations to ensure things were done a certain way. They best way would win anyway.
The prices would be cheaper overall as the market would adjust to increased demand or supply. This may sound strange in this context but the current oversupply of bodies would cause prices to fall as their is a surplus of goods and services relative to demand.
Then the bodies could be respectfully (and affordably) buried by their families. Then we would have no problem. But because of all of this government regulation and oversight, the minimum price of burial is drive up up up and average people can not afford it, the bodies are left untended and end up getting the "John Doe" treatment. (Cremation with no ceremony and ashes stuffed into a sealed jar). Needless to say their are other effects such as emotional damage (imagine if your husband or wife said the only thing they cared about for when they died was being buried in a certain place and you got a jar of ashes instead!).
In the end, the principles of supply and demand and free markets bridging that gap to a level of perfect efficiency and then innovating above and beyond to improve their competitive position can be applied to any business. Funerals or Popsicles, it does not matter.
Happy trading this week to all! Be prepared to be surprised soon enough....