Economics II

Economists speak of the velocity of money, the number of transactions that money passes through in a given time.  I believe it is better to consider the recirculation time, the amount of time it takes money when spent to move through the economy and return to the original user.  Obviously, there is a relation between velocity and recirculation time, if there are ten steps through which the money passes before returning to the first user, the faster those steps occur, the velocity of money, the shorter the recirculation time.  The recirculation is important because it establishes the value of money.  The fact that the same value of money is used to purchase different goods and services links the value of those goods and establishes what the given monetary value can purchase, establishes the actual value of money.
   I use recirculation for the simple reason that on the scale of an economy money is a fluid.  It is a peculiar fluid as it has strange sticky resistances to flow, but it is still a fluid.  Movements of money through an economy are better thought of as flows of a similar substance rather than discrete movements of particles, such as dollars.

   In calculus there is the Theorem of the Mean, for any continuous graph, one which can be drawn without lifting the pencil from the paper, the curve must at some point equal its average value.  The concept of average can be convoluted, but for any definition of average there must be a point on the curve equal to its average value.
   There is a corollary to that theorem, if a curve has the same value at its endpoints, the curve must; be equal everywhere or have at least one maximum or minimum point.  A curve could have an enormous number of both maximums and minimums.
  I will now construct such a function.   If a person has no money, they have no economic activity, clearly they cannot, at least in the cash economy.   If a person had all the money in an economy, that economy could be a country or the entire world, that person also has no economic activity.  Economic activity is the transfer of money from one entity to another, if one entity has all the money, there can be no transfer and therefore no activity.
Interestingly, that argument holds for both holding all the money value, which is static, and if that entity intercepts the flow of money through the economy, which is dynamic.  In either case, there is a zero value at zero and another zero value at 100% of the money.  Because of this, since it makes no sense that there is never any economic activity, zero everywhere, and there can be no activity below zero, there must be a maximum point.
    That point has to be at less than the 50% point if the flow, gross product is the measure being used.  At greater than 50% more money is being withdrawn by the entity than is being recirculated, eventually the flow must decrease and cease as the entity must turn a portion of the flow into a static holding.   If the entity absorbs 60% of the flow, only 40% can be returned to circulation, the remaining 20% has to be statically held, reducing the flow of the economy.  Unless there is a reduction to the intercept of money, eventually the economy will spiral down to zero.
   The upper curve above illustrates this maximizing and then flow back to zero.  The lower curve is actually more interesting, it is the normalized curve.  It consists of the ordinate, vertical measure, of the upper curve, divided by the abscissa, horizontal measurement, or the upper curve rise divided by run.  It is the tangent of the angle measured form the origin to a point on the curve and the x axis.  Because the curve must flatten, after its initial rise,  in its slope, the tangent will rise to a maximum value and then fall eventually back to zero.  I believe that maximum value occurs at about $75 000 / yr, the same point at which choice starts to become inefficient (see post Economics).   This is the most efficient pint of economic activity, it represents the minimum recirculation time.  At its lower point, at point zero-zero, the curve is flattened before steepening.  If this were not true then the most rapid growth of the economy would occur with the the slightest, initial, insertion of money into the economy, historically that is not true, the economy only growing rapidly after significant money is already in the economy.
   The reason for why the two values of choice and total economic efficiency should coincide is that they ae both ultimately tied to the same variable, time.  The reason why economic activity becomes less efficient with increasing money is that there is not enough time to spend the money.
   An economy, at any given time, is constrained in the amount of service it can provide at any given level.  Some levels are capable of meeting much higher demand than others.  An economy can meet a demand for 50 million
$10 lunches but could not meet a demand for 50 million $500 lunches.  If there is a constant level of demand eventually the economy will meet it.  But that requires both time and capital expenditure.  This means that for an economy to be effective, people's demands must roughly coincide with available production.
   Most people could spend $100 per day if it were given to them, they could buy an expensive lunch with a couple of overpriced drinks.  If given $1 000 per day they might be able to invite they might be able to invite their friends to lunch.  At   $10 000 per day most people would be lost.  For every spending decision, no matter how small, time must be spent in making that decision, otherwise it is not a decision but a random purchase.  A random purchase does not increase choice and is therefore economically worthless.  The only way to increase the amount of money spent is to make increasingly expensive purchases.  At some point the amount of money overwhelms even that and the economy can only adjust to a certain number of expensive purchases until it jams with an inability to meet demand.  At some point the money cannot be spent rationally and it accumulates and is economically inefficient.   That leaves the point at which people can make the maximum of smooth decisions that match current economic output at around $75 000 / year.  It is the highest point of economic efficiency.  It will shift with increasing gross product, but that shifting takes time.  It might be somewhat higher than $75 000/yr, maybe $100 000/yr, but it will be relatively close.
   In the lower curve, m, is the maximal point.  Most likely the curve above m will look like b and not d, the curve will change slowly in a decreasing manner creating a plateau of high efficiency.  Anywhere on that plateau would be almost equally good for the economy, however, the number of people at the lowest point can be increased most quickly, since it requires the least amount of money to create them, so it is the point at which one would focus to increase economic activity.
   On the lower end, a represents a curve recommending free trade, since the loss of efficiency from jobs created at these lower levels does not seriously impede activity.  Curve c would make free trade stupid.  It would mean that jobs created at lower wages would significantly slow activity.  Before free trade agreements are created, it would be a good idea to know what the shape of the lower curve is.  If the money under trade with a developing country creates comparable rates of recirculation, the trade would be a guaranteed positive since it would increase choice in the form of lower prices for a given product.  If the curve has a sudden drop the choice would be reduced since part of choice is making a next choice.  The saving of money on a given product has to be considered in terms of the out years.
   As a simplistic  example:  say that a person has a recirculation time of one year.  That person makes a $100 purchase once a year, assume the choice is 100 george.  Every year, for five years, that person has the $100, he makes a purchase, the money recirculates in one year, he makes another purchase.  Five purchases at 100 george each equals 500 george.  Now, let us say that person buys the same product for $50, for $50 he has 100 george of choice and another $50.  He makes another 50 george purchase.  But assume it takes three years for the money to recirculate.  That would mean in year 1; 150 george of choice, year 2, 50 george, year 3, 50 george, year four, the money finally returns, 100 george, year 5, 100 george., total = 150 + 50 + 50 + 100 + 100 = 450 george, which is less than 500.
    It is more complicated than that since a choice made today is worth more than a choice made tomorrow.  But the point is that it is not just the price it is the return of the money.
     The reason why recirculation is so important is that it allows for the economy to function without continuously printing money, all money that does not recirculate drains the money available and requires the printing of more money to maintain economic activity.  That is potentially inflationary and inflation reduces choice by denying people the ability to save and plan.   The potential for inflation is the danger of the money sloshing back into the economy, particularly all at once.  With China the recirculation is in Chines purchase of debt which is hardly ideal as that is a debt which must be repaid instead of a credit in terms of purchase.

Competitive service districts II

   The process of competitive service districts can be applied to health care.  The manager would be responsible for creating operating agreements with medical providers.  This would allow for premium care, but those institutions who wish to provide premium care would have to give something in return.  The availability of premium care would make some consumers happy and would help the manager in terms of rating but the manger could withhold an operating license unless they provide some general service as well.  It is a system of mutual blackmail.  There does need to be auditing to ensure there is only limited abuse.
   Any fees assessed by the manage, such as five dollars for an appointment would also be included in the rating.
   The rating does not have to be by only the consumers, it can also have ratings by doctors, nurses, other medical staff and pharmacists.  They can be weighted in the rating in different ways.  The manager would have to determine the best way of keeping them all relatively happy.
   In addition to the ratings an additional factor could be actual outcomes.  There would have to be thorough auditing of medical records for the ratings to be meaningful and to avoid fraud.
   By holding managers responsible for both cost and outcome money can be saved.  Studies have shown that performing a high rate of any given operation, such as heart transplants, increases the success rate of those operations.  Currently there are too many heart transplant centers.  Each center adds its fixed cost to the national health bill while actually killing patients through lowering success rates, because too many of the centers are performing too few operations to have the highest success rates.  Under competitive service districts, there is no bonus given for vanity, each district must reduce costs, which means consolidating certain procedures with other districts benefits the manager through reduction in costs and improvement in outcomes.
   Nationally, there is the question of adjusting costs between largely rural and largely urban districts.  It would probably be sensible to do so, but any adjustment will produce an anomaly somewhere, the rules will have a poor match with reality in some area.
   The other advantage is that by just taxing and setting up competitive districts nationally there is a workable system that provides effective service and is not unconstitutional by doing something like having the government order people to buy health insurance from private business, which is the kind of abuse the constitution was specifically written to prevent.
    In government services, the service has to be one with which people have constant enough contact that they can actually accurately state the quality of service provided.  Road repair, sanitation, street lighting, parks and policing may fall within those limits; schools and courts do not, since most people have no idea of the amount of nonsense occurring in either of the last two.  People just do not see enough of them to have a legitimate opinion.
Parks, too, are problematic because unlike street maintenance and policing , they are not evenly distributed.  Parks are often large facilities spaced at random and do not admit of smoothly divided boundaries of responsibility.
   In sanitation an additional rating can be made of recycling, encouraging managers to experiment and try to find the best means of encouraging people to cooperate in recycling.  In policing, it forces the police to respond to the people of the district, if the police are viewed as abusive, the manager will be gone.
   Positively electing people, as is done in commission forms of government which Louisiana used to have, are disasters because as soon as political parties are introduced, people get stupid and crazy and will actually defend the incompetent to  prevent the opposing party from winning.  Competitive service districts rate people after they have actual performance so there is no question of promoting one group over another.  And, once again, it removes the perverse incentive to spend the full budget, instead promoting people who manage savings.
    With private sector utilities, there is the need to arrange for capital transfer in on orderly yet quick manner, it may bog down legally.  Cell phone companies recently agreed to notify customers when excess charges are initiated.  If they had been under threat of being fired, they would have done it years ago.  The setting up of two cell phone companies in each area doubled the capital costs without improving service.  Companies only actively compete when there is a high enough introduction of new businesses to threaten their profits.  Established companies eventually inevitably come to accept their market share and make no effort to compete, which would entail at least a short term loss of profits.  With the district system they have to compete against their customers expectations and are under threat of losing their entire profit base, it promotes companies who improve management even if they do it accidentally or at random because anyone with bad management will be removed.
    Wire phones, cable and internet are best consolidated into a single wire company.  No one knows haw cable companies got their franchises anyway.  The three separate wires represent three sets of capital costs, it is wasteful. The company would have three ratings which can be combined.  There could be one rating of multiplying all three ratings together, three of combing the ratings two at a time, and three individual ratings.  The triple rating could have a limit of 1.5 standard deviations, the doubles 1.75 deviations and the singles 2 deviations or something like that.
    In private utilities there would be no distribution of equal budgets, the costs they charge would be part of the ratings.
   Banks and credit cards could be separated.  In urban areas, the proliferation of bank branches does not improve economic production.  Each branch drives up overall banking costs without improving service, certainly not in an area where there are five banks in three blocks.  Having one bank per district would eliminate that.  If banks want to impose nuisance charges people can fire them, the costs and services will equilibrate at some point, although it might not be ideal for the customers.  Credit cards would be a separate entity from the banks and would be held accountable by the failure rate of payments.  The credit card company would have to be a little more selective in issuing credit cards, which could reduce some abuse.
   Airports would constitute competitive districts.  They would be responsible for scheduling and pricing between airports, the origin airport would be held accountable.  The airlines would be service providers.  An airport would order a two hundred fifty seat airplane with a fifteen hundred  mile range every weekday morning at eight o'clock, an airline would provide it.  It is the rare person who cares what airline they fly on, they want to, on a given day, fly from one city to another.  By making the airports the units of competition that service can be improved.  Instead of ten airplanes from six different airlines each of two hundred fifty passengers flying form New York to LA every morning between  eight and ten o'clock, the airport could schedule five five hundred seat aircraft.  The flight could be more comfortable, having fewer aircraft would reduce delays and costs could be less.  Similarly, there might be a market for two hundred fifty people to fly between New York and Kansas city every day, but because it is divided among airlines there are no direct flights and passengers have to fly into Dallas or Chicago and wait around and accumulate before there are enough passengers to fly on to Kansas City.  It can improve customer service.
  The airports would rate each other to prevent one duping its problems on another.  It would  encourage coordination on aircraft usage, a five hundred seat aircraft might make sense for the origin airport, but there might be no use for it at the destination.
   Passengers can down rate for any reason, such as uncomfortable seats,lost luggage or bad peanuts.  To encourage people filling in the rating card a deposit between twenty and fifty dollars could be paid.  After arrival the passenger would fill out the card and insert it into what would b e similar to an ATM.  After the card is inserted, the deposit would be repaid.
   Air traffic control would be handed over to the airports to run, but strong government oversight should be maintained.  Pilots could also rate the airport on scheduling and control.
 

Competitive service districts

   There are two ways to generate competition; through selection and through comparison.  Selection is the usual one of a having a variety of products and choosing between them.  Comparison can be effective for goods and services which are generic and lack flavor.
   The idea of comparison is to create a monopoly and then divide the customer base geographically into units of roughly even size and then have the customers vote annually, rating the service on a scale of 0 to 10.  Each service district, for government services, would receive an equal amount of money, the amount actually spent would be divided by the average rating then the highest cost areas would have their management change.
   Let us say that each district is budgeted $10 000 000 for a given service.  The manager could spend as much or as little as he wants.  Let us say that a manager spends $9 000 000 and has an average rating of 6.  That would be $9 000 000/ 6 = $1 500 000.   If another manager spends $8 500 000 and also gets a rating of 5.8, it would be $1 466 000, the second manager wins.  This method eliminates the perverse incentive to spend the full budget while holding the manager accountable for performance.
   There are a variety of statistical methods for determining the cut-off for dismissal, one is the standard deviation. For a normally distribution about 0.17 would be 1 deviation below average.  That would mean a change in management, on average every 6 years.   That might be a good rate of turn over.  The turn over must be high enough that each manage feels an urgent need to perform and improve but it should not be so often that management continuity is reduced to shambles. The other need that should be addressed is the manager gaming the system by, for instance, only spending $1 000 000 and getting a rating of 1 and winning at $1 000 000.  The goal is to get good quality service at the minimal cost.  To prevent gaming a second criterion could be established on just the rating.  1 deviation is 16%, 2 deviations is 3% and 1.5 deviations is 7%, setting the rating cut-off at 1.5 or 2 deviations should prevent a manager deliberately providing low service.
   Managers below the cut-offs would be removed and those empty slots transferred, with maybe 1/2 going to new managers and the others being offered to the best managers.  The more districts a manager manages, the higher his pay.
   Neighboring, or proximate, districts could also rate each other to force cooperation, eventually , the chain of district groups would stretch across the country, interlocking all districts to some extent,  The rating could be done by either the senior managers of each district, or by all employees in that district.  There could also be a rating within each district of the different services within that district, again, forcing cooperation.
   Elected government could then provide the money and do  audits to ensure compliance, letting the district residents fire people when they are unhappy with services.  The one stumbling block is trying to allow for people within a given district who want to put more money into a given service.  The rating could then be done on percentage of spending, unspent moneys being returned in proportion to there source.  If the state allotment is
$10 000 000 and the district gives another $4 000 000 for a total of $14 000 000 and the manager spends
$12 000 000 for a rating of 7, then $12 000 000/ $14 000 000 = 86% / 7 = 12.2%.  He would then compete with other managers based on their percentages.   The $2 000 000 unspent would be divided $2 000 000 X 4/14= $570 000 to the district, and the remainder $1 430 000 to the state.
   If the manager has more money, he clearly has an advantage over other managers, but people in his district would most likely expect better service for the more money and may very well rate him lower for the same performance.  So, it might work out evenly, this system would have to be set up and run to be sure.
   The managers could also be rated by their own employees to insure they are working with them.  There are different ways of averaging the different ratings of customers, neighboring districts, groups in the district and employees.  The two easiest are the arithmetic average which is just adding and averaging them, and the geometric average which is multiplying them together and taking the fourth root.  The geometric average is more responsive to a single bad rating and is therefore probably the better,
   The overall idea is to promote competence and force managers to adopt the best methjods of others at the most cost effective rate.