Self-Driving Vehicles: Transformational Technology

Posted on December 19, 2011 by

Feeling a little glum this holiday season? Despite the determined cheerfulness of the holiday music and lights that surround us, Americans are consistently telling pollsters that they are quite pessimistic about the future.

Their pessimism, of course, extends far beyond their feelings about the gridlock that plagues lawmakers in Washington DC. Technology itself, once perceived as a great enabler of social progress, appears to be incapable of capping oil spills, managing natural disasters, and solving countless other problems.

Indeed, even the great discoveries of our time appear to pale before the inventions of yesteryear. For instance, while some commentators compared Steve Jobs to Thomas Edison and Henry Ford at the time of his demise, others noted that the iPod, iPhone, and iPad failed to transform our lives in the same manner as did the light bulb and the automobile.

Every so often, though, American ingenuity has a sparkling way of glimmering through the darkest of concerns. In a sense, we witnessed such a situation last week, as an unusually gloomy recommendation by the National Transportation Safety Board (NTSB) appeared to be tailor-made for a potential solution that was recently patented by Google.

Ban All Electronic Devices!

The recommendation was presented by NTSB Chairwoman Deborah Hersman, who surprised the American public with some strikingly extreme policy advice. Namely, Ms. Hersman publicly announced that the NTSB now supports a comprehensive nation wide ban on the use of all portable electronic devices by drivers of all moving vehicles.

Yes, that ban would include “hands free” telephones. It would also include text messaging devices. And although not explicitly stated, it would presumably encompass hand held Garmin “satellite traffic” devices and other mobile Global Positioning System units as well.

Ms. Hersman supported her recommendation by presenting various case incidents of horrific accidents that recently occurred when distracted drivers, using such devices, took their eyes off the road.

Apparently, the bans on handheld mobile phones that are currently in place in several states would have done nothing to prevent these terrible events. According to Ms. Hersman, the NTSB has concluded that more extreme solutions are required to stop the carnage.

Eliminating The Driver

And what does Google propose to implement as a substitute solution to a nation wide ban on all electronic driving devices? Simply enough, Google actually proposes to produce moving vehicles that can drive themselves!

The concept itself has been circulating in the world of science fiction for many years. A robotic taxi driver was famously featured in the 1990 Arnold Schwarzenegger film Total Recall, which in turn was based on Philip K. Dick’s earlier 1966 novelette entitled We Can Remember It For You Wholesale.

And self-moving vehicles are already in limited commercial use. In 2006, for instance, the Lexus LS 460 sedan become the first automobile that could maneuver itself into parallel parking spots with little or no interference by its drivers. BMW, Ford, Lincoln, Mercedes, and Toyota are now offering similar systems in their own vehicles.

But nobody has yet developed a technology that can self-drive vehicles over extended distances. General Motors’ Vice President of Global Research and Development Alan Taub, though, recently predicted that autonomously driving vehicles will be in widespread use “within the next decade.”

Pros And Cons

What are the benefits of self-driving vehicles? Well, assuming that the software technology proves to be reliable, we would all be able to phone and text our friends — or even kick back and read a book! — while our automobiles drive us to our destinations.

That would certainly address the concerns raised by Ms. Hersman and the NTSB. It would also dramatically improve the quality of life of millions of commuters, who could redirect thousands of hours of driving time to other endeavors.

But on a longer term basis, such vehicles would impose numerous social costs as well. Imagine the increase in energy use and pollution costs if all commuters now utilizing mass transportation were to switch to self-driven automobiles instead!

The gridlock we now experience would undoubtedly worsen too. In cities like New York, where mass transportation options and road traffic already exist side by side, how much longer would it take us to drive across town?

Transformation and Hope

Even though the possible benefits of such technologies may be narrowed by the long term pitfalls and complications, we can nevertheless take hope from the fact that technology still possesses the potential to transform our society.

Centuries ago, diseases like smallpox and cholera seemed like unstoppable scourges until medical technologies developed vaccines to eradicate or control them. And during the past two decades, the internet has globalized knowledge and revolutionized communications.

Those technologies must have seemed impossibly clumsy and ineffective to citizens who were living through the early days of their genesis and development. Although videos of Google’s self driving prototype automobile similarly portray it as a slow and plodding vehicle, it is still possible to hope for a future when its technology can enhance our lives.

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The Indian Retail Economy: Foreigners, Keep Out!

Posted on December 12, 2011 by

More than three years have passed since the Lehman Brothers collapse shoved the United States economy to the brink of a second Great Depression. And today, with unemployment and home foreclosure rates still high, it’s easy to understand why Americans remain glum about their economic futures.

Indeed, the conventional wisdom stipulates that the BRIC nations of Brazil, Russia, India, and China collectively represent the rising economic powers of the 21st century. India, in particular, has been praised by many economists for its combination of political democracy, economic capitalism, and English-fluent western culture.

Before Americans permit themselves to feel too threatened by the Indian economy, though, they may wish to consider a watershed decision that was announced by government officials in New Delhi last week. Apparently, India is not as prepared to embrace the principles of free-market global capitalism as its government previously led us to believe. And as a result, India’s economic competitiveness may well suffer the consequences of domestic protectionism.

A Nation Of Shop Owners

Throughout history, the structure of India’s retail economy has remained rooted in community tradition. As was the case in the pre-industrial era of the United States, the vast majority of Indian citizens purchase merchandise from the owners of tiny, privately owned kirana shops.

Some Americans still bemoan the loss of traditional self-employed shop keepers; nevertheless, they have continually flocked to successively larger and more efficient retailers. Indeed, American shoppers themselves have accelerated the modernization of the consumer economy by gravitating from urban department stores (like Wanamaker’s and Macy’s) to suburban mall-based chains (like Sears and J.C. Penney), and then on to warehouse style superstores (like Walmart and Costco).

Late last month, Indian government representatives finally announced that they would permit foreign retailers to operate majority-owned supermarkets within their national borders. In fact, they explicitly acknowledged that they hoped this decision would trigger the modernization of their retail industry. However, after just a few weeks of protest by protectionist domestic forces, the Indian government suddenly decided to reverse course last week.

Economic Impact

Why does it matter whether consumers purchase merchandise from tiny shops or gigantic super-stores? How does it affect the economy of a nation?

To be sure, many pundits bewail the loss of traditional American downtowns, with their tiny privately owned shops, to large-scale suburban developments. To such traditionalists, American society would be far more prosperous if citizens shun the automobile culture and embrace “livable” communities, residing in homes that are located within walking distance of human scale business districts.

Although towns in states such as Oregon and Vermont have indeed prospered within such urban planning environments, the modern American economy has nevertheless reaped the benefits of expanding economies of scale. Walmart, for instance, has grown to become the largest employer in the United States, selling merchandise to American consumers at prices far cheaper than any one could possibly find at smaller stores.

Why Competition Matters

It is important to note that the Indian government hasn’t simply limited the size of newly proposed domestic retail projects. It also continues to protect Indian-owned businesses by prohibiting any retail projects, of any size, that are majority owned by foreign firms.

Such a decision clearly limits the amount of competition that can occur in the retail industry, a limitation that profoundly affects the market itself. That’s because competition, by its very nature, drives innovation in product characteristics, customer service, and other functions.

Consider, for instance, whether Microsoft would have been driven to improve its Windows software if not for the competitive challenges of firms like Apple and Google. And consider whether American, Delta, and United Airlines would have been similarly driven without competition from rivals like Southwest and JetBlue.

Does any one doubt that product and service innovation would slow if such competitive forces were to suddenly disappear? In the Indian retail industry, though, such forces have never been present at all.

Protectionism, American Style

The United States, of course, is hardly a pure bastion of free market capitalism. Insurance companies, for instance, are still restricted from selling certain types of policies across state lines. And many American farmers are still paid subsidies to help protect them from market price fluctuations.

The American retail industry, though, is continually challenged by foreign store chains at both ends of the economic spectrum. The Swedish mass market “fast fashion” retailer Hennes & Mauritz (H&M), for instance, has expanded from a single American location to almost two hundred in slightly over a decade. And in the automobile sector, numerous European and Asian manufacturers compete with America’s “Big Three” in the United States.

So despite its continuing economic doldrums, the American economy still maintains competitive advantages that do not exist in other nations. Such advantages may yet succeed in generating levels of economic activity that can return the nation to prosperity.


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Look Out, OPEC: America Is Exporting Fuel Again!

Posted on December 5, 2011 by

Was there anything about the condition of American society in the year 1949 that still exists today?

Very little actually comes to mind. There was, for instance, no interstate highway system in 1949; the government legislation that authorized its construction would not emerge until 1956. And the entire nation only owned two million television sets in 1949, with more than one third of them clustered in New York City. Furthermore, the minimum wage was a scant 75 cents an hour.

1949 was also the final year of a period of time in which the United States occupied a global role as a net exporter of fuel. Drilling wells in Pennsylvania, Texas, Oklahoma, and other states produced the crude oil that was then refined into fuel in the United States. The global economy, still rebuilding from the devastation of the Second World War, eagerly bought fuel from American suppliers.

Beginning in 1950, though, the American economy expanded to the point where the United States became a net importer of fuel. It then remained a net importer for the next six decades …

… until, surprisingly, this year.

Supply and Demand

Why is the total amount of American fuel exports suddenly exceeding its total imports for the first time in sixty two years? As is the case with most aspects of our capitalist economy, the answer to this question can be described as a function of supply and demand.

For starters, American demand for fuel has declined for a pair of noteworthy reasons. The debilitating economic recession, and subsequent tepid recovery, have depressed economic activity and thus suppressed natural levels of demand. And numerous technological innovations, such as the introduction of electric automobiles that utilize little or no gasoline, have decreased America’s thirst for imported fuel as well.

Perhaps more surprisingly, the American production of recoverable energy assets has increased markedly during the past few years. Oil and gas production remains high in the United States, despite environmental concerns that were raised during last year’s BP’s Deepwater Horizon catastrophe. And new technologies are allowing energy producers to extract natural gas from shale rock in such novel locations as Arkansas and Pennsylvania; even New York State expects to initiate extraction activities in the near future.

With fuel supply up and fuel demand down, and with developing nations like China thirsty for energy products, it was probably inevitable that the American fuel trade gap between imports and exports would shrink. Nevertheless, very few pundits had foreseen that the United States would quite literally become a net fuel exporter.

Upstream vs. Downstream

Should OPEC become worried? Is America about to challenge it for control of the energy markets?

Well … not quite. After all, there is a major difference between upstream energy production and downstream production. Upstream products are extracted from the earth in their natural states. Crude oil, for instance, is an upstream product. Natural gas, embedded in shale rock, is an upstream product as well.

Downstream products, on the other hand, are energy materials that have been refined and packaged for use by consumers. Motor vehicle gasoline, for example, is a downstream product. So is propane oil, and so is firewood, for that matter.

The distinction between upstream and downstream products is a bit murkier when our attention turns to renewable energy sources. One might be tempted to define the wind and the water itself as upstream products, and the electricity produced by wind mills and hydro power plants as downstream products.

So America’s shale gas production would indeed represent an upstream activity that competes directly with OPEC’s upstream crude oil production business. But fuel is a downstream product, and thus America’s re-emergence as a net fuel exporter is no direct threat to OPEC.

Why Can’t We Be Friends?

There must necessarily, of course, be a direct relationship between upstream and downstream firms. Namely, upstream firms must sell their extracted products to downstream firms, which in turn must refine and package them for sale at the retail level. In other words, downstream firms must function as the “middle men” who represent the customers of the upstream firms.

So, if that’s true, then downstream fuel producers in nations like the United States are still reliant on (and are thus vulnerable to) upstream suppliers like OPEC. Conversely, crude oil suppliers like Iran are still reliant on (and, again, are thus vulnerable to) downstream customers like the United States.

So the re-emergence of the United States as a net exporter of fuel does not, regrettably, imply that the goal of American energy independence — as initially defined by President Richard Nixon during the Arab oil embargo of the 1970s — is about to become a reality. Nevertheless, as long as American downstream producers can continue to secure deliveries from their upstream providers, the United States should be able to avoid the prospect of fuel shortages during the upcoming winter months.

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Goodbye, Black Friday!

Posted on November 28, 2011 by

Do you remember the Blue Laws? They were based on Christian religious doctrine, and were designed to prevent any retail business from operating on Sundays. Instead, Sundays were dedicated to attendance at church services and associated religious gatherings.

Prior to Henry Ford’s adoption of the five day work week in 1926, factory workers in sweatshops would work six days a week and then rush to their neighborhood stores (and saloons) to purchase merchandise (and libations) on Saturday evenings. They needed to do so because the establishments would be closed, by law, every Sunday.

Most stores now remain open seven days a week, and many operate 24 hours a day. But despite the abolition of Prohibition (i.e. the criminalization of liquor sales) in the United States during the early 1930s, certain states still outlaw the sale of liquor on Sundays, as well as any sales in supermarkets on any day of the week.

Interestingly, other relics of the Blue Law era have survived as American traditions, if not as legal restrictions. One such policy, though, is quickly coming to an end, and is taking the tradition of Black Friday down with it.

The Thanksgiving Tradition

Thanksgiving Day, for instance, has been viewed as a sacrosanct time for family gatherings since it was established as a national holiday by President Abraham Lincoln during the Civil War. Thanksgiving actually replaced an older holiday called Evacuation Day, celebrated in the northeastern United States on November 25, as the day when the British Army formally withdrew from New York City after their loss of the Colonies in the American Revolution.

It is not illegal to ask employees to work on Thanksgiving, or on other national holidays, in the United States. In fact, retail stores have always remained open on many national holidays throughout the year, such as Veterans Day on November 11. Nevertheless, to respect the tradition of Thanksgiving Day, most retailers have shut down in order to grant their employees time to spend with their families.

The unusual closure, quite conveniently, gave those very stores the opportunity to stage “grand re-openings” on each Friday after Thanksgiving  to kick off the Christmas shopping season. The weeks between Thanksgiving and Christmas were (and continue to be) so lucrative that the stores would willingly lose money during all of the weeks before Thanksgiving in order to gear up for the holiday sales season.

The Friday after Thanksgiving would thus represent the day when most stores “broke into the black” and began reaping profits for the year. And so the term “Black Friday” evolved as a connotation of profits and prosperity in the retail industry.

Now It’s Black Thursday!

During much of the twentieth century, retailers opened for business at their customary times on Black Fridays. But then, in order to beat the competition, many store chains opened earlier and earlier on those mornings. And the “grand opening” specials become more and more extravagant, with many stores offering customers prices on popular products that fell well below their wholesale costs.

Last year, several chains opened during the wee hours of Black Friday morning, well before sunrise. But only this year did two different retail chains actually cross the midnight hour and open for business before midnight on Thursday evening. Toys R Us decided to open at 9:00 pm and Walmart followed at 10:00 pm; Target and others followed by opening precisely at midnight.

Many citizens were aghast at this intrusion on the tradition of Thanksgiving dinner; 200,000 Target employees and other concerned citizens actually signed a public petition to protest their employer’s decision. But most simply considered the shift of Black Friday’s opening times to Thanksgiving evening to be an inevitable reflection of evolving social values.

It’s Always Money

The reason for these shifting values? It’s always a matter of money. And it’s not just a consideration for retail stores and supermarkets; many other industries are witnessing the decline of cultural traditions as well.

The Commonwealth of Massachusetts, for instance, has just passed legislation to legalize large-scale casino gambling projects; New York State is continuing to pursue similar projects too. And the tradition of prohibiting obscenity from broadcast television programming is continually eroding through court decisions and other causes.

Furthermore, although many online retailers promote Cyber Monday (i.e. the Monday after Thanksgiving, a regular business day) as a day of special offers, they all — including such titans as Amazon — routinely remain open in a virtual sense 365 days a year. In other words, they’ve never been constrained by any blue law limitations whatsoever.

With the tradition of special Friday offers now migrating to Thanksgiving Thursday in “real world” stores, and to Cyber Monday in online stores, it is difficult to expect that Black Friday will continue to exist in its historical form. For citizens who actually appreciate the support that such laws give to people of faith and to their family values, the tradition will be sorely missed indeed.

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The National Debt: $15 Trillion And Climbing

Posted on November 21, 2011 by

Do you remember the Great National Debt Ceiling Debate of July 2011? The United States government was approaching its self-imposed debt ceiling of $14.3 trillion, and Republicans in Congress were refusing to increase the limit. But Democratic President Barack Obama and his Congressional allies refused to slash government social service programs, and the entire national government lurched painfully towards a full scale default.

At the last moment, the parties compromised by passing a short term spending measure, along with legislation to create a bipartisan “super committee” of Congressional leaders to negotiate a long term solution to the crisis. They gave the committee until this week to reach an agreement on restoring fiscal sanity to the federal budget process.

Meantime, in just the last four months, the pile of debt has soared from $14.3 trillion to well past $15 trillion. And how much progress has the super committee made towards reaching an agreement on balancing the budget and paying down the debt?

Apparently, none whatsoever.

The Threat of Sequestration

The politicians all hit the Sunday morning talk shows this weekend, full of blame for the opposing parties. The Democrats continued to paint their opponents as the party of the wealthy, while the Republicans countered that the Dems would tax and spend the nation into oblivion.

Lurking in the background, though, is a fail-safe trap door called “sequestration.” In order to ensure that the financial markets would not panic at any hint of a super-committee failure, last July’s budget law arranged for discretionary spending to be slashed across the board in an automatic, indiscriminate manner if no agreement was in sight by this week.

That’s exactly where the process appears to be heading, although both parties seem to agree that indiscriminate slashing would harm the national interest. Democratic Defense Secretary Leon Panetta and Republican South Carolina Senator Lindsey Graham, for instance, appear to fully agree that such budget reductions would gut the nation’s military capabilities.

And what if the United States simply decided to continue spending its way into a larger debt burden? We can easily glance across the Atlantic Ocean, to a similar crisis unfolding in Europe, to foresee the consequences of such a choice.

Three Weeks, Three Fallen Governments

As in the United States, the nations of the European Union (EU) are attempting to address their own debt burdens. Although the EU itself is not in danger of default, several of its member nations are now unable to borrow money on the credit markets at reasonably affordable interest rates. Their response has been to resort to deeply unpopular austerity measures to conserve cash flow to pay down debt.

The public response, predictably, has been angry. Two weeks ago, the Greek government was swept out of office by a disgusted public that had been rioting in the streets of Athens. Last week, as protests grew in Rome and other Italian cities, Prime Minister Silvio Berlusconi resigned from office as well. And just last weekend, the conservative Popular Party of Spain swept back into power, dislodging a Socialist Party that had ruled since the early days of the deeply unpopular Iraq War.

Skeptics continue to raise concerns that the entire euro currency may be doomed if the EU fails to establish a process to bail out debt-burdened member nations.  Expecting the EU to do so is somewhat analogous to expecting the federal government of the United States to bail out bankrupt states like California … except that, unlike the EU, America’s federal government itself is drowning in debt.

Things To Come

So what can we expect to occur in the United States in the near future? It is indeed highly doubtful that the political parties will suddenly be seized by a spirit of compromise and achieve a comprehensive agreement on balancing the annual budget and then paying down the $15 trillion of accumulated debt. That is a particularly unlikely scenario, given that the presidential election campaign is about to shift into high gear with the Iowa Caucus and New Hampshire Primary in January 2012.

It is likely, though, that some last-moment stop-gap measure will be arranged before the process of sequestration begins to eviscerate the U.S. Defense budget and other discretionary funding programs. And as long as other regions of the world appear unstable, the global credit markets may continue to demand American debt, thereby bidding down the interest rate that America must pay to borrow funds.

But sooner or later, global investors will inevitably begin to grow nervous about American profligacy, and will finally look to other governments who wish to borrow money. That is when interest rates paid by the United States government may climb to unsustainable levels, and when the American debt bubble may finally burst.

In European nations, national governments tend to fall once their interest rates rise beyond 7%. Although the American government is still borrowing at rates below 1%, it should not assume that those rates will remain low indefinitely.

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Public Broadcasting: Hello, Britain!

Posted on November 14, 2011 by

The Public Broadcasting Service (PBS) of the United States is the national network that supports 354 American public television stations. Like CBS, NBC, ABC, and FOX, PBS is without doubt a quintessentially American institution.

Until two weeks ago, that is. On November 1st of this year, PBS launched a new service called PBS UK, bringing its lineup of educational shows to the British television audience. Now Americans will no longer need to worry about losing touch with their favorite Sesame Street characters, or losing track of the “hot” political stories on PBS News Hour, when they visit Britannia! Bert and Ernie, as well as Jim Lehrer, Gwen Ifill, and Judy Woodruff, will only be a click away from them.

But critics in the federal government have threatened to slash funding for public broadcasting programs for many years; how does this new trans-Atlantic business opportunity affect their views? Are these critics now more likely to seek to eliminate funding for PBS … or to expand it?

Public Television: A Brief History

Although some Americans believe that public television has been on the air since the initial emergence of the visual medium during the 1950s, that impression is actually not correct. Though nonprofit television has been broadcast on a nation-wide basis for almost sixty years, the federal government did not step in and begin funding educational television until the late 1960s.

From 1954 until 1966, the Ford Foundation funded a private nonprofit network called National Educational Television (NET), which gradually evolved from a broadcaster of adult education programs to a producer of socially conscious documentaries. In 1967, as the Ford Foundation began withdrawing its support because of fiscal constraints, the U.S. government established and began funding the Corporation for Public Broadcasting, which then assisted NET’s evolution into PBS in 1970.

Conservative critics initially began accusing NET of liberal bias in its documentary programming during the 1960s, and have continued accusing PBS of similar political bias in more recent times. Some critics have also accused nonprofit public television organizations of relying on federal government monies when they are capable of identifying their own private sector funding sources; the recent PBS UK arrangement may indeed serve as an apt illustration of their beliefs.

PBS: Pros and Cons

On the one hand, PBS supporters can easily argue that the network must be producing quality programming if European viewers are eager to gain access to it. Although iconic shows like Sesame Street had been aired in more than 140 countries before PBS’s recent expansion efforts, the network itself had remained focused on the American market until British market demand compelled it to expand into the United Kingdom.

PBS supporters can also argue that, in an era of diminishing foreign aid and cultural exchange budgets, the extension of existing PBS programming to foreign nations may help promote American diplomatic interests in a cost-effective manner. By showcasing American values, PBS may even be able to mitigate the negative impact of recent reductions in the geographic distribution of the Voice of America, America’s global radio broadcaster into remote geographic regions.

On the other hand, with contemporary conservative commentators like Bill O’Reilly continuing to heap criticism on liberal PBS icons like Bill Moyers, the UK distribution deal may lend credence to their assertions that PBS should be required to compete in the market for funding along with other nonprofit networks — as well as the many for-profit networks, for that matter. It’s easy to understand why many believe that PBS may not need to rely on federal funds if it is capable of earning broadcast fees in global markets far from home.

Global Competitors

Whether PBS is capable of thriving without the federal government’s assistance is a question that can only be answered by the accountants with access to its internal books and records. There is no question, however, that a global competition is now thriving among nations that seek to project their interests through television network programming.

Historically, of course, the United Kingdom has shared its culture, values, and traditions with the world through its continuing support of the British Broadcasting Corporation (BBC). But we have also witnessed the recent rise of France24, Japan’s NHK, Russia Today, and various government supported Arabic news networks. Even business news is now ripe for such competition, as evidenced by the recent agreement between Bloomberg LP and Saudi Arabia’s Prince Alwaleed bin Talal to launch Alarab in the Middle East.

We now live in an internet dominated media age when nations are waging wars for the “hearts and minds” of global populations through such television programming; it is thus easy to understand why many support the continued existence of a publicly funded American flagship network. Nevertheless, as the U.S. government’s financial resources continue to wane, PBS may have no choice but to continue identifying new funding opportunities to finance its growth plans.

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The Evolving Economics of Health Care

Posted on November 7, 2011 by

When President Obama and the Democratic Congress passed the Patient Protection and Affordable Care Act last year to reform the nation’s health system, they didn’t schedule all of the transformational regulations to take effect immediately. For instance, the central innovations of the plan — a legal mandate to purchase health insurance, paired with the development of state-based insurance exchanges — were assigned full implementation dates in the year 2014.

In the meantime, though, the economics of the American health care industry aren’t just sitting idly by, waiting for the legislation to take full effect. Instead, as economic conditions evolve, organizations are making plans and taking steps to position themselves to exploit the terms of the new law.

Regrettably, from the perspective of American consumers of medical services, these steps are driving the costs of health care into the stratosphere. And if the process continues to play out in accordance with current trends, there may not be much of a competitive, free market health care system left to regulate by the year 2014.

Fewer Insurers

Let’s begin by considering the number of insurance companies that are now competing with each other to offer health care policies to consumers. Because we allow these firms to eliminate their competitors by simply acquiring them, the competitive market continues to shrink into smaller and smaller clusters of firms.

Furthermore, these insurance companies are focusing more intensively on providing services to enrollees in federal government programs. That’s why Cigna paid $3.8 billion to buy Healthspring, for instance, and why Humana acquired MD Care. In each case, a huge insurer became even larger by purchasing a potential (or actual) competitor in the field of government services.

A health care industry with very few insurers simply doesn’t function in the same manner as a competitive market place. Firms in such industries are relatively less likely to compete based on factors like quality, innovation, and superior service; instead, they are relatively more likely to focus on strategies like maximizing prices and passing along the costs of medical care to customers. With fewer competitors to challenge them on the first set of factors, firms enjoy the freedom to focus instead on the second set of factors.

Fewer Payors

Of course, if the market were to be dominated by large numbers of strong payors — such as employers or trade associations, entities that purchase health care benefits on behalf of their employees or members — one could rely on the payors themselves to compel insurers into competing on the basis of quality. Unfortunately, though, the American health insurance industry is losing payors, not adding them.

Consider Walmart, for instance. The largest employer in the United States has shaken up many industries with its mammoth purchasing power, and could conceivably play the same role in the health insurance industry. But the firm appears to be more interested in driving employees out of its health plans than aggressively purchasing health insurance policies on their behalf, as evidenced by their recent increases in employee health premiums, as well as their refusal to cover certain part time employees.

Some commentators have voiced concern that the implementation of a national network of state-based health insurance exchanges, given its ability to serve as an alternative to employer based health insurance coverage, would result in employers dumping their health benefits benefits entirely and driving their employees onto the exchanges. In fact, some believe that Walmart is planning to execute that very strategy, and is now driving up the employee costs of health care to unaffordable levels in pursuit of this goal.

On Their Own

Even the most avid supporter of a single payor program, financed and managed by the federal government, would likely concede that a truly competitive free market health care system would be highly beneficial to consumers. Imagine a city filled with thousands of insurers and payors, of every conceivable shape and size, eagerly searching for any strategic advantage that could differentiate them from their competitors and help attract new consumers.

Now that’s a fairly compelling scenario, isn’t it? With thousands of competitors occupying each segment of the market, no single party could possibly exert control over the entire system. And consumers could continuously “go shopping” for coverage, forcing each organization to compete with multitudes of others for their loyalty and premium dollars.

The contrary scenario, though, is the one that currently exists, and that is becoming more and more entrenched with every large insurance acquisition and every dramatic employer decision to shift the costs of providing access to health care onto employees. Indeed, such actions provide consumers with fewer and fewer choices of payers, who in turn must choose from fewer and fewer choices of insurers.

The results? Ultimately, the economics of the industry will inevitably dictate the outcomes. Costs will continue rising, service levels will continue shrinking, and consumers will continue to be left on their own to fend for themselves.

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