by Karl Denninger, Market Ticker:
Three years ago I published a short article in the science journal Nature. I pointed out that several leading indicators of political instability look set to peak around 2020. In other words, we are rapidly approaching a historical cusp, at which the US will be particularly vulnerable to violent upheaval. This prediction is not a ‘prophecy’. I don’t believe that disaster is pre-ordained, no matter what we do. On the contrary, if we understand the causes, we have a chance to prevent it from happening. But the first thing we will have to do is reverse the trend of ever-growing inequality.
And the first thing you to have to to accomplish that is to get the insane ramp job in things that are not measured as “inflation”, driven by monopolist interests, out of the economy.
That begins with Health Care but by no means is it limited to health care.
As I have noted before nearly all of those on the Forbes 400 list, that is the wealthiest Americans, didn’t get their money through their “own effort” per-se. Oh sure, people like Bloomberg didn’t inherit most of it — but they hardly made their fortunes in a freely operating market with dozens or hundreds of competitors.
Likewise, Amazon’s Bezos didn’t either. He is one of the shining examples of arbitrage of the legal system to an astounding degree. Just the sales tax games he has pulled alone are arguably the reason the firm turned into a retailing powerhouse; having a 6-10% advantage in the “at the customer’s door” price as a result of not collecting sales taxes is enormous while at the same time it shifts those taxes to other businesses and the residents via other means — such as property, income and excise tax levies. This has, in aggregate, amounted to tens of billions of dollars a year that others have had to pay and bankrupted tens of thousands of businesses across the nation.
Indeed Amazon has never challenged and beaten a single state on sales tax. They have instead folded every time, often negotiating some sort of deferment or delay when threatened with a lawsuit or worse but have never once disgorged any of the advantage that inured to the company and its stock price over the time between selling goods in that state and when they started collecting tax. While the former Quill Supreme Court decision certainly did bear on some of this there was also an extremely aggressive set of practices involved as well, including setting up LLCs to own distribution centers and other facilities. Contrast this with other firms that merely lease space in a given state which triggers Nexus and thus tax collection requirements. Those other firms played by the rules that Amazon literally erected a middle finger toward until the states individually threatened to sue or worse.
Over time Amazon has been forced to whittle down the “exception list”, if you will, but even after they started collecting and remitting for products sold by Amazon they continued to not do so for third party listed products despite being the advertising, order processing, payment processor and even the dispute resolution arbiter for these transactions — in other words, all but the supplier of the physical product and in some cases they have even been the fulfillment center that hands the product to the shipping company!
Now it’s even worse in that they cross-subsidize their product sales with the “Web Services” component, which originally was sold to investors (and anti-trust watchdogs) as “selling surplus capacity” on their internal network. Cross-subsidization like this, while not strictly unlawful, should trigger strong anti-trust scrutiny as to the extent it is used to harm competition it indeed is an illegal practice — but hasn’t.
The net negative impact on the economy all-in is likely larger than Amazon’s market cap. That’s right — not only did the firm steal all of its “value” from others it actually lit the nation on fire and destroyed even more.
They’re hardly alone in this regard. The number of firms that have operated on this general business model has exploded over the last decade or two. Indeed, virtually all of the so-called “gig economy” companies have extractive and abusive elements, dodging employment taxes and the protections traditionally afforded employees. Some have gone even further (such as Uber) and set up “captive” arrangements to screw their “contractors” even more-severely (e.g. car “buying” services with insane interest rates, fees and similar.) I dare you to name the so-called “successful” firms from the 2000 tech crash forward that don’t feature some sort of hidden or even brazenly-open (e.g. AirBNB) arbitrage or extractive (e.g. any of the “social media” firms) element.
The 900lb Gorilla in the room is of course the medical and so-called “health insurance” industry generally. I have been sent over the years several invoices from the 1960s for ordinary, uncomplicated vaginal births. They typically included the epidural, room for mother and infant, care for both, doctor and nurse fees and three days stay in the hospital.
Inflating those prices by the CPI to today’s values shows that you should be able to have a child in the hospital and spend that same three days there for just over $1,000. There is literally nowhere in the United States where this is possible and yet the process of routine, uncomplicated vaginal childbirth hasn’t changed in the entire time the human species has existed. The provision of an epidural is exactly the same as when it was invented, and further in many cases you’re lucky if you get one day in the hospital now as a new Mom — at a price anywhere from 8-10x or more the CPI-inflated price from the 1960s.
Now if things go wrong can it get horrifyingly expensive? Yes, but a huge percentage of the time they don’t. But whether they do or don’t you pay an extortionate amount — every time.
Then there are egregious examples like the albuterol inhalers used by asthmatics. They were almost too cheap to charge for a number of years ago. Long off-patent, the US and other nations were convinced to ban the propellants, and did, due to a lobbying campaign by the manufacturers. The government obediently did so as it was in the same class as CFC refrigerants and allegedly an ozone destroyer, never mind that only a minuscule amount was released by those using it for this purpose. The companies changed the propellants, re-filed new patents despite the actual medication not changing one bit and suddenly what was a nearly-free off-patent medication went from a few dollars to a cripplingly-expensive and necessary medication.
If you have asthma, have an attack and don’t have an inhaler you might literally die. This is similar to the Epipen situation; if you’re allergic to something (e.g. nuts) and are accidentally exposed you either have a means to get epinephrine in your system on a near-immediate basis or the reaction can kill you. Epipens used to be dirt cheap and in fact a vial of epinephrine costs a few bucks. That plus an insulin syringe will do the job if you know how to use it. So why does a spring and a plastic case cost hundreds of dollars? Because they can.
Now some of this impact in the inhaler market has faded as some generics have shown up when patents expired. But remember: What happened here was that the drug companies actually lobbied to ban the original formulations. That is, they screwed you directly and intentionally.
Never mind “PBMs” which have secret contracts, operate as a pseudo-monopoly and add exactly zero value to the customer. How can you insert more pieces in a distribution and payment chain and lower costs? You cannot. Why haven’t these schemes been banned outright and their executives tossed in prison for concocting this nonsense?
Back in the 1960s and into the 1970s most people didn’t have this sort of problem. You likely had health insurance, frequently employer-provided, but in most cases for routine stuff you went into the doctor’s office and wrote a check.
If you needed a drug you went to the pharmacy and got it; if you didn’t like the price in one, which you were told before you filled the prescription, you might go to a different drug store.