Wednesday, July 8, 2009

Be very afraid of what you don't know...

Megan McArdle:
"Look at defense spending. Are F-22 raptors worth $138 million? It's a pretty meaningless question. Congress is willing to pay $138 million. But this bears only the haziest relationship to what the Americans who pay the bill want, or are willing to pay, for such a plane. And the procurement system pays at least as much attention to what congressional district things are built in as what makes the most effective military. That's why virtually everyone thinks defense procurement is an overpriced disaster, which gets innovation only at drastic cost. Unfortunately, there's no other way to go about it.

Right now, the US has a market--no matter how screwed up--for medical goods. It is not a good market. But no one in the market, except Medicare, has enough pricing power to totally undermine the market mechanism, so it grinds out an equilibrium that bears some resemblance to consumer demand. In turn, Europe can buy those market-produced products. But if you kill the last market, everything suddenly looks very different. What's the right price for innovation? What should we research? Those questions stop being decided on the basis of the number of consumers served, and start being decided on the basis of who has the best lobby."

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