Thomas Sowell on Obama (Uncommon Knowledge

“Obama has an absolute talent for saying things that make no sense, but not only sound plausible but inspiring”-Thomas Sowell 

Jordan Flynn: The Case for Bone Marrow Compensation

On Rock Center with Brian Williams there was a story about a young girl named Jordan Flynn who suffers from fanconi anemia an incurable disease that requires the patient to have a bone marrow transplant. People like Jordan not only suffer but thousands of people die every year because they can’t find a bone marrow donor.

Currently due to a 1984 law (National Organ Transplant Law) it is against the law to be compensated for organs. “Do-gooders” like Michael Boo of the National Marrow Donor Program worry that compensation would make donating bone marrow unsafe because people may not disclose all their information. Mr. Boo needs to first take an economics course to realize that compensation will not only lead to more bone marrow but higher quality bone marrow. If people were paid for bone marrow based on the quality they would have every incentive to make sure they were donating the highest quality so they could get the most money (being self interested can work wonders). Also companies could be created to check the quality of the bone marrow before it was used. In addition to this the process would improve which over time would reduce the risk and make it safer. Also this could lead to new discoveries in other areas as well given most things are discovered by accident.

Data shows that only 2% of the entire population is on the national registry for bone marrow. One problem is that people can back out at any time and face no penalty. If people were paid a few thousand dollars they might be more willing to roll up their sleeves and let the blood flow out and money flow into their bank account.

It is bizarre why people would object to selling bone marrow when people sell things like sperm, hair, eggs, and essentially rent other body parts. Of course politicians and “do-gooders” pay no price for the harm done. Innocent people are in pain and may die because of a law that essentially doesn’t even benefit anyone. Is there anyone who has been saved or helped because of the 1984 National Organ Transplant Act?

End The FDA Monopoly

As I have mentioned here here and here about much of the FDA does not only stifle innovation but more people die because the FDA does not allow drugs on the market that could save lives. What is interesting is today there is even more drug regulation than ever before despite we now know more than ever about the human body and how it operates.

Writer Doug Bandow echoes this same message. The FDA nor politicians pay no price if a drug fails to get passed that may save lives. There might be outrage from people who could benefit from the drug like in the case of Avastin where people were outraged when the FDA panel ruled that the drug was not effective for breast cancer. I wonder how many individuals on the FDA panel currently have a family member, friend, or loved one with breast cancer. Perspective of course matters. People who often have serious illnesses are not only informed about their particular illness but have more knowledge than politicians and in some cases more knowledge than individual doctors. The time people and family members have to wait to get approves comes at a cost. The length of time to approve drugs has increased from 7 months in 1962 to 10 years by 1970. Now it takes between 10 to 20 years. Waiting a decade or so for a drug that could help people with life threatening and chronic illnesses is undue pain that no one should go through. By the FDA waiting to approve drugs people not only suffer in pain but some die. The Competitive Enterprise Institute found that when the FDA waited to approve beta-blockers cost 100,000 lives. This was because the drug was already approved in other countries yet the FDA waited three years to approve the drug.

Getting rid of the underlying monopoly would do a wonder of good. I think there might be an analogy to the FDA and financial services industry. If the FDA were in the financial services industry it would like something like this...An investor wants to purchase a new security, however  first the individual has to go to an individual certified by the state to practice financial advising (parallel to AMA). Once with the financial advisor the financial advisor can only recommend products that the (FPA-Financial Products Agency or FDA equal) approves. However, not only does the security have to be approved, but the security has to be related to the risk tolerance of the individual client. Clearly, as you can see people would be up in arms if this process were true. More choices, means more freedom, which means better outcomes whether it is in medicine or financial services.

It would be best to abolish the FDA all together and allow the underwriting laboratories or third parties to independently test the drugs. There would even be competition because drug companies could use more than one lab to test whether or not their drug was effective and to run the experiments. By the FDA limiting how many drugs are on the market limits the choices. Not only does it limit choices it leads to few drug companies since so much money is required to create just one drug. Drug companies have so many failures that the only drugs people talk about are the blockbuster ones. This is why drug prices are so high because consumers pay for the drugs that the FDA doesn’t approve (company passes along costs to consumer). More drugs will lead to more experimentation which is a good thing because no two people are alike. Not even the greatest scientist possesses 1/10^th of 1% of the total knowledge of the human body.  What makes us believe politicians will do any better?

Fuzzy’s: The Story of Chuck Bush and Capitalism

During my undergraduate years I went to Fuzzy’s at least once a week. Usually, I went on Saturday nights after a long day of studying. I use to switch off between Fuzzy’s and Whataburger for fast food followed by 7-11 for a brownie. Anyways I was always impressed by how well run Fuzzy’s was run. Fuzzy’s opened a store in Jersey Village (outside of Houston) but was only open for a short time before it closed. This was surprising considering how great Fuzzy’s food is and how popular it is.

Fuzzy’s offers low cost high quality Mexican food with the original store being located on Berry Street right next to the TCU campus. If you go to Fuzzy’s on a Friday or Saturday night it will be packed. Even during lunch time it is fairly busy.

Originally Fuzzy’s was not profitable in 2003. However, Chuck Bush saw something different and realized what Fuzzy’s could be. Bush paid $90,000 in July 2003 from the original owner. By 2007 there were close to forty Fuzzy’s stores. The total cost of running a restaurant can run from more than $300,000 to less than $700,000. Another positive thing is that prices for things on Fuzzy’s menu have not increased since 2003 which is rare considering inflation does exist even today. The company also gives workers .5% of sales as their bonus. Fuzzy’s typically opens in college towns. Hopefully, now they seem to be opening more locations in larger cities. I attended Texas Tech and I believe the year before I attended (2008) the first Fuzzy’s store was open. Fuzzy’s was just as popular in Lubbock, Texas as Fort Worth, Texas.

Chuck Busch himself had experience in the restaurant industry. He started out at a restaurant in Abilene and went from server to running become the general manager after he graduated college. He then worked at Hooters for a while and then eventually decided to get into Fuzzy’s. Fuzzy’s just on the franchise sales (food not included) has made $1 million in 2010 which was up $800,000 from the prior year. This past January Fuzzy’s opened its 50^th store near Love Field Airport.

Fuzzy’s illustrates the story of how one man with a vision to improve and expand on what existed. Even though Fuzzy’s expanded the quality has not seemed to suffer. You can’t really recommend anything to order anything since everything at Fuzzy’s is great.

Inspiration for this article:

http://www.star-telegram.com/2011/07/29/3257185/how-fuzzys-taco-shop-built-an.html

The Case for Legalized Organ Sales: Kidneys

    

Something I have been thinking recently about is the organ transplant market which limits the amount of organs that can get to people. More than 92,000 people are waiting for a kidney in the United States but there are less than 17,000 that were made available for transplant last year. In the world there were less than 65,000 kidney transplant operations in 2007. More than 5,000 people die waiting every year waiting for a kidney. The chance that people will get a kidney has also been decreasing over time. In 1992, there was a 50% chance of getting a kidney on the waiting list. These days that percentage is down to only 20%. People who have to wait have to be placed on dialysis which is not only time consuming but also usually have to go three times a week for many hours. People who have a kidney transplant live on average 10 to 15 years longer than if they were on dialysis.  The cost of dialysis is not cheap either. Dialysis alone consumes 10% ($17 billion per year) of the Medicare budget.

Due to the 1984 law entitled the National Organ Transplant Act (NOTA) it is illegal to except payment for organs. This is interesting because people accept payment for donations like blood, sperm, and we all sell our brains on a daily basis. Due to this act it has lead to the underground system of illegal organ donations. According to Havoscope the average price paid for a kidney buyer is $150,000. This recent article talks about how in China, India, and Pakistan people are paying $200,000 for kidney even though they only offer the donor $5,000. The high price of what someone would pay for a kidney signals that there are not enough kidneys to go around. Economist Gary Becker has done some work on this subject and in this paper estimates that at a price of $15,200 per donor there would be a large supply of available kidney donors. Iran has actually paid people $1,200 along with some health insurance and no longer have a shortage. 

In a market system people who donated their kidneys would be rewarded if they kept their kidneys in pristine condition. This would allow them to get a premium which would increase the quality of the kidney that was donated which I would predict increase the quality of life the donee would have. The risk of dying in a kidney transplant is 0.1% and if we legalized it would decrease even further as transplant surgeons figured out how to make it not only better but safer. People who are against organ sales or “do-gooders” argue that people who want to donate their kidney  are of course not rational, have no idea what the consequences are, and left to their own devices would not be able to make a decision unless a bureaucrat decided for them.  If someone regardless of their financial position wants to sell something that they own who are we to tell them what they can or can’t do? If a person is offered $20,000 for their kidney which they could use to pay down debt, go to college, or start an investment fund what is the harm in that?

Allowing people to sell their kidneys would work wonders for all the people that have to suffer and worrying about waiting for a kidney. What do politicians tell to the families of the 5,000 people that died waiting for a kidney?  The donors will be better off because they will be compensated and the donee will be better off because they will not have to go on dialysis which is time consuming and expensive. By doing this the amount of government support for dialysis would be reduced which I think is highly desirable. As Walter E. Williams would say the true test of whether one owns something is whether or not he can sell it. By definition according to the government individuals do not own their own kidneys. 

The Case for For-Profit Hospitals: Why We Need More

With the Supreme Court expected to make a decision about Obamacare this summer it will be interesting to see how healthcare unfolds in this country.  One of the major problems is that the government has intervened so much with the practice of medicine that real free market solutions are not possible. For instance, we all see McDonalds, Starbucks, and Wal-Marts on every corner but it takes a little while to see a hospital.

The number of U.S. registered hospitals is 5,754. The number of nongovernment not for profit community hospitals is around 50% of the total. Less than 18% are for profit community hospitals. Why don’t we have more of a percentage of for profit hospitals? Why don’t we have hospitals on every corner like other for profit institutions like Wal-Mart and McDonalds. The average hospital doesn’t make any money. One of the most profitable hospitals according to Forbes is Flowers Hospital in Dothan, Alabama which brings in around $389 million in revenue with a 53% operating margin. One of the problems is that there are only a few for profit healthcare hospitals. For example, the three major companies in the industry are Health Corporation for America, Tenet, and HealthSouth. I think it is desirable to have more of the companies opening up hospitals to increase access. Also trying to move away from the third-party payer system and moving to a single-payer system (people paying out of their own pockets is always desirable). 

                As I have mentioned one of the problems with health care is that health insurance covers too many things. It would be if we bought insurance for groceries and only had a $30 co-pay every time we went to the store. As consumers we have no incentive to care about what the prices are and are encouraged to consume more.  Insurance should be for catastrophic circumstances (cancer, chronic illness, or something live threatening). The idea of insurance is to protect against unforeseen events that will cost a lot of money. Another large problem is too little competition from insurance companies. The insurance companies are regulated by states which is ridiculous. Could you imagine if the food industry was regulated by each state how many more limited choices we would get? The idea is to get away from insurance companies, Medicare, and Medicaid paying and allowing individuals to pay for their own healthcare. At the same time it would be wise to break the American Medical Association cartel of deciding who can practice medicine and allowing anyone to practice medicine including nurses. Also limiting drugs to only Phase I testing just to check the safety of a drug would dramatically bring down drug prices since in essence consumers pay indirectly for all drug companies failures when the FDA fails to allow a drug on the market. This in addition to this, I would also let anyone open a hospital without regulation. Heck there is even a trend in at home hospitalization as mentioned here. All of these things would reduce the overall costs of healthcare while at the same time increasing quality. Remember the Peter Rule: If over time prices increase while quality decreases look to government intervention as the culprit. 

Koch Brothers Wealth: Historical Net Worth 1984-2012

Being the researcher that I am I was curious to know what the Koch brother’s net worth has been historically. Through some painstaking research via library databases (NewsBank, Forbes, and USA Today) I found the net worth of both Charles and David Koch dating back to 1984. The chart shows the net worth of each Charles and David Koch individually and not there combined net worth. The scale is in billions. Since they own the same percentage of Koch Industries their net worth is equal every year.

The growth in net worth is astonishing. In 1984, the net worth was only $375 million each. Brothers William and Frederick also had the same net worth as well. However, over time David and Charles seemed to increase their net worth at a faster rate than their brothers. The last year I could find for both William and Fredrick Koch was 1990 when William was worth $650 million and Frederick was worth $500 million. William didn’t appear back on the charts until 2007 when his net worth was $2 billion (his net worth is around $4 billion these days). What is interesting is that William actually worked for Koch Industries from 1968-1980 and was fired. William went to go on to start his own company The Oxbow Group in 1983 and this is what helped him become wealthy. Frederick on the other hand likes to buy castles, villas, and estates which doesn’t seem like a cheap hobby.

There is no doubt that Charles and David have been superstars with increasing their net worth. On a compound annual rate the Koch brothers have increased their net worth at a rate of close to 17% per year which would outperform the S&P 500 or Dow Jones Industrial Average. What is interesting however is the standard deviation or risk of their net worth is 44%. People often talk about how well off the rich are. However, the only way they can get that way is by taking risk. In fact, I would argue they have to take above average risk in order to the place they are.  The Koch’s have a substantial part of their net worth within Koch Industries which leaves little room for diversification. On the spending side the Koch’s don’t really seem to spend that much personally.  David Koch did own a Ferrari in the late 1980’s according to this article. The Koch brothers have supported their own charitable foundations which primarily try to spread free markets and the message of limited government.

Personally, I hope the Koch brothers reach 1 and 2 on the Forbes list. Given Charles Koch is 76 and his brother David is 72 it can be said that the Koch brothers are getting up there in age. Hopefully they will continue to live a long time to continue to spread the ideas of free markets and liberty and also serve their fellow man to increase their net worth. 

War on Drugs and Increasing Prison Population

From this chart it is clear that the since President Nixon launched the war on drugs it has been an utter failure. Not only are we locking up more people for non-violent behavior but preventing them from being productive members of society. It is really sad to lock people up who are really going about their own business and not harming anyone else. If anything I would argue that Twinkies are much more dangerous than drugs. I remember going through the now defunct D.A.R.E. program in elementary school and learning about alcohol and just saying no. However, I honestly believe this program made people want to try alcohol and drugs more. People forget that alcohol is much more dangerous than most if not all drugs. Every day people die in car accident from drunk driving. I have yet to see an epidemic of people dying from using illegal drugs. Also what about the medical benefits. Many people suffer from chronic illnesses could be using these drugs to help their symptoms. Making the drugs illegal makes it harder to study the very drugs that can help people. The true test of whether people own their own bodies is if they can do with it as they please (as long as they don't harm other people). 

CEO Compensation in Options 1965-2011

The following chart shows the relationship between CEO-worker compensation in the form of options (H/T Greg Mankiw). Usually executives and sometimes employees are granted stock options so the company can tie performance to how well the company is doing. The idea is that if that people are given stock options they will want to work hard to increase the value of the company thereby increasing their own compensation.

Options are granted by the company to the employee. However, the employee must wait a period of time before they can actually exercise or have the right to buy the options. I have a feeling many people think executives can just cash out there options whenever they want however the board of directors and shareholders are not stupid. The employee has to wait until the vesting period is over. The vesting period is the amount of time the employee has to wait before he or she sells their options. Typically the average amount of time is between 4-5 years. So really management or employees can’t have a short term view since they can’t even cash out their options until the 4 or 5 year period is over.

The blue line in the graph shows the ratio between the options that were granted and when the options were actually exercised by the employee. What is interesting is nearly every year from 1998 to around 2003 the options or the money that employees got was actually worth less than when they were granted. One reason for this is because the stock could actually decrease in value which decreases the value of the shares. Also the relative pay of CEOs increased dramatically in the 90’s and then fell by half. I have a feeling though people will point out the factor of how much CEOs make compared to workers. There are a couple of points I would bring up. The first is that employees often times don’t in the same position forever. Especially early on in their career they are trying to move up and get a higher paying job. By moving up this would decrease the factor of what CEO’s make compared to employees. Some people who start at the bottom of the company reach an executive level position before their career is over. Other people may get promotions however not want to take them due to family responsibilities, illness, or may not want the increased responsibility and pressure. Executives have extremely stressful jobs. They essentially spend their whole life at the company (or many different companies). Another point that is important to point out is that executives often pay ordinary income on their options which in places like New York City (city, state, and federal taxes) can easily exceed 50%.

I honestly believe only a few people really want to be executives. Everyone claims they want to get to the top but when you look at who wants to and actually can make it to the top it is only a very small percentage of people. Maybe next time when people complain about CEO compensation they should first understand what it is like to be a CEO.

Mark Holden General Counsel for Koch Industries on MSNBC

General counsel for Koch Industries Mark Holden recently went on MSNBC and talked to Martin Bashir and was asked questions by Bashir about Charles and David Koch’s involvement about ALEC’s involvement in the Trayvon Martin shooting. Did Bashir think Charles and David Koch were spokesmen for the organization simply because they donated money? I thought Holden handled the questions pretty well. Bashir really did seem to have many loaded questions with false premises.

Many people in the media seem to blame ALEC for the Trayvon Martin shooting when in fact. The Florida “Stand Your Ground” law was passed in 2005  yet I don’t remember hearing a mention of the Koch brothers from the mainstream media until 2008. What is really curious is how is when private citizens donate to money to a charity or organization they somehow have to agree with every single principal that the organization or charity stands for. The same could be said for politicians. When people vote for politicians essentially they are voting for a basket of goods. What is also interesting is that somehow people seem to think that the Koch brothers run ALEC, Americans for Prosperity, and Club for Growth, when in fact these gentlemen spend the majority of their time running the company. Yes, the Koch brothers donate money however my question would be what percent of their money makes up all donations? Americans for Prosperity has 1.9 million members. Club for Growth also has Thousands of Members.

I wouldn’t mind seeing Charles Koch or/and David Koch on television for an interview to really explain their belief in free markets and freedom. Also a autobiography would be great and really settle many of the misconceptions people have about the Koch brothers. Of course, both of these gentlemen are very busy. As Holden pointed out the Koch brothers work basically every day of the work. As Walter E. Williams would say “The rich didn’t get rich by being stupid”.