Thursday, August 23, 2012

Is Profit Theft ?

Profit is theft is the core methodogical basis of Levinism

That's not a typo.  I am not discussing the thought of Vladimir Lenin but the thought of Yuval Levin who claims that private insurance is more efficient than Medicare because private firms profit from Medicare Advantage.

Profit is not theft.  Therefore the lower estimated costs are not higher efficiency.  Rather the estimates are nonsense.  Private insurance companies must have equity -- this is required by law and the laws are clearly necessary (indeed not strict enough as is shown by the case of AIG).   Investors demand huge returns on equity.   That means that they require firms to earn profits -- otherwise the firms can't function (by law but also by logic -- an insurance company with no wealth to spare can't insure).

But the required return on stock is not counted as a cost.  Standard accounting aims to estimate profits and the standard is that revenues equal costs if profits are zero.  But you just can't have insurance without profits.  So the social cost of privately firm provided insurance is greater than the number described as "cost" by accountants.

The result of ignoring this is to think that private insurance is more efficient but that more than all of the efficiency gain is stolen as profits.  Basically the analysis of James Capretta and Yuval Levin absolutely relies on the core assumption that profit is theft.

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