THE HAMBURGER STAND
By Mike Donald
There was a physicist by the name of Enrico Fermi. He was one of the scientists who helped begin the Manhattan Project, which developed the atomic bomb. When the first bomb was test detonated at Trinity Site, White Sands Missile Range, near Alamogordo, NM, Enrico Fermi was there. He tore a piece of paper up into confetti, and when the shock wave hit, he dropped the confetti. By watching how far the shock wave moved the bits of paper, he was able to do a quick mental calculation, and reasonably accurately come up with the power of the blast. Sophisticated equipment took readings that had to be analyzed for weeks. After this analysis, Fermi’s estimate was confirmed. How did he, with bits of paper and a few moments of thought, do what sophisticated equipment and a team of analysts took weeks to do?
Fermi’s approach was to take a difficult problem, simplify it into several smaller, easy to understand problems, solve the simple problems, then apply the solutions obtained to the difficult problem. While no one knows for sure, it is highly probable that Fermi estimated a measurement of the speed of the shock wave in the air (as demonstrated by the moving paper bits), and using that speed, estimated the kinetic energy of the moving air, and divided by the amount of energy in a 1 kiloton of TNT explosion. To the average person, this may seem very complicated, but Fermi was one of the greatest scientific minds in all of history, and the process described uses elementary physics from any college freshman physics course. The important point is not how much he had to simplify to do his calculation, the point is the process he used. This same process—simplifying a difficult problem into smaller, more manageable problems, developing solutions to the easy problems and applying those solutions to the difficult problem—is a process that can be applied to any difficult problems, not just physics problems and not just figuring out the power of atomic bomb explosions. And, if the process was used by, and worked for one of the greatest scientists in all of history, I’m not going to argue with it! By the way, it worked so well for him, that he taught his students to use this method by developing problems that were unsolvable unless this method was used.
That being the case, I have a few simplifications I would like to present. Draw whatever conclusions from them you think appropriate.
Chapter 1: Nationalized Hamburgers?
Joe owns a hamburger stand. It is the only restaurant in the city where Joe lives. One thing Joe knows is that there are always people out there who, for whatever reason, do not want to cook their own dinner. They will pay almost any price to have it done for them. Maybe they don’t have the time, maybe all of the dishes are dirty, maybe they just want a change of pace. Whatever the reason, there will always be people going out to a restaurant for dinner. Knowing this, and knowing that his is the only restaurant in town, Joe charges $10.00 for a hamburger. Fries and a drink are extra. The hamburgers that Joe serves are small, and of low quality because Joe’s customers have no where else to go, so he has no incentive to produce a better product. Joe is getting rich quickly!
Another thing Joe knows is that his employees really only know how to do one job: work in a restaurant. And since his restaurant is the only one, they have no choice but to work for him. So, Joe pays them next to nothing. He demands that they work long hours under difficult conditions. He treats them badly, and gets away with it because he can.
Tom moves into town and sees a golden opportunity. He opens a hamburger stand right across the street from Joe’s place. Tom knows that it really takes just under a dollar to produce a good hamburger—and even less to make a low quality burger. So he makes and sells hamburgers that are comparable to Joe’s hamburgers for $5.00, half the price that Joe charges. All of a sudden, the people of the city have a choice. They start going to Tom’s place, and Joe stops making money all together. Now, Tom is still making more than $4.00 profit from every hamburger he sells, so he is making money very quickly.
Something Tom knows is that if employees have a choice, the best ones will go to where they are treated the best. So, Tom pays his employees a fair wage, gives them a flexible schedule, and treats them well. He understands that the work they do is what earns him his money. When this happens, Joe sees his best employees leave, and go to Tom’s place to work. Joe has to respond, or go out of business.
Joe has now lost all of his business, and his best workers are leaving as well. He is in dire straits, and needs to do something drastic. He immediately lowers the price of his hamburgers to $4.00, gives his employees both a much deserved raise and a more reasonable schedule. As a result of these actions, Joe stops losing his best employees, and his customers come back to him.
Now it is Tom’s turn to respond. He has lost all of his business because Joe has taken it back. So, Tom does two things. First, he lowers the price of his hamburgers to $3.00, and second, he does everything he can to improve the quality of his product. Now he can tell the public that he has a better hamburger for a lower price. Of course, now the public is choosing to eat at Tom’s place.
This scenario continues to play out back and forth until both restaurants have lowered the price of a good quality hamburger to about a dollar. Both places pay their employees well, and have employee incentive programs. Even Joe, who started out as a real Ebenezer Scrooge is forced to treat his employees well in order to stay in business.
This is an example of how competition works in the marketplace. When competition exists, prices are driven down, quality and working conditions are driven up. When competition does not exist, prices are high, quality and working conditions are poor at best.
So, once the competition has had its effect, and the price and quality wars settle down, the city government is called on to worry about those poor individuals who are too destitute to buy a hamburger of their own. They say there must be a way to allow everyone to have a hamburger. So they develop laws that create hamburger insurance. It works like this, if an employee chooses to enroll in the program, they have one dollar taken out of their paycheck. Since food is a basic necessity of life, the city allows this deduction to be taken out on a pre-tax basis. The employee gets a hamburger insurance card. When he goes out to either Joe’s or Tom’s restaurant, he may get one free hamburger by presenting his card. Several things begin to happen all at once.
When this system is put into place, an insurance company called Hamburger Insurance Agency is created. This company has office space that requires rent payments. The lights need to be kept on, the place has to be heated in the winter and air conditioned in the summer, etc., all of which costs money. This company also has a president, a board of directors, agents, administrative assistants, janitors, adjusters, etc., all of whom need to be paid a salary. All of the money needed to keep Hamburger Insurance Agency in business is supposed to come from the hamburger premiums taken from paychecks.
The premiums are $1.00 per paycheck. Most employees are paid once every two weeks, so the deduction from their paycheck is about the same as if they ate out once every two weeks. There is a problem here. Now that they have hamburger insurance, they realize that they can go out every night and have a hamburger. Most people don’t go out that often, but on average, people start going out about three times a week. So now, their $1.00 is buying them six hamburgers. But that $1.00 is not supposed to even buy 1 hamburger. At least $0.50 is supposed to go to the administrative costs incurred by Hamburger Insurance Agency. Before hamburger insurance was developed, the people of this city went out to eat an average of three times a year. Hamburger insurance was supposed to allow them to go out once a month, not three times a week! The premiums being charged simply are not enough to handle this volume of business.
Processing the insurance claims causes Joe and Tom to both have to do extra work to get paid for the hamburgers they are selling. As a result, the cost of making a hamburger goes up. It is no longer economically feasible for either of them to sell a hamburger for about a dollar. Prices increase.
At the same time, Tom, being a shrewd businessman, realizes something. Since the insurance company is now paying for the hamburgers, the customer who comes into his restaurant to buy a hamburger no longer cares how much the burger costs. At this point, all the customer cares about is the quality of the burger he is getting. So, Tom spares no expense. He buys the highest quality, most expensive ingredients, and produces the best burgers this city has ever known. The cost of producing a burger this good is about $7.00. So, Tom charges $9.50 for the burger, and makes a little extra profit. Joe’s customers are attracted to the better tasting burger at Tom’s place, so Joe is forced to start producing just as high a quality burger, with the same increase in price.
With all of these factors going on, the insurance company is forced to do two things. First, it must increase premiums, and second, it must limit the number of hamburgers allowed per given time. So, in a short amount of time, premiums go way up, and covered services decrease. Not only are hamburger care premiums going up, but the price of hamburgers is skyrocketing. The city government sees this trend and decides to do something about it.
They create a Hamburger Maintenance Organization. This HMO seems like a great thing. It is designed to reduce administrative costs for both the hamburger stands and the insurance company. It requires those enrolled to select a primary hamburger giver, and only go to that location unless special permission is acquired. This way, neither hamburger stand needs to track everyone enrolled in hamburger insurance, but only the half of such people who choose each particular stand. The insurance company no longer needs to check to make sure a customer isn’t getting his quota of hamburgers at one stand, then going and getting more at the other one. This seems great in theory, but in actual practice it is a nightmare.
Several customers who selected Tom’s stand as their primary hamburger giver show up when Tom’s place is just swamped with customers. They look across the street to see that Joe’s place isn’t that busy right then, so they request a referral. Tom has to hire extra people to handle writing these referrals. The referrals need to be processed through Tom’s restaurant, and submitted to the insurance agency. The insurance agency now needs a whole new bureaucracy to deal with these referrals. Once the referrals are approved, the customers take the referral paperwork across the street to Joe’s place. Joe needs to have people on staff to process the referrals before he can actually sell these customers hamburgers. So, rather than simplifying things, these HMOs have created new departments in all three locations: Tom’s place, Joe’s place and the insurance agency. These new departments need office space in which to work, along with all the expenses of keeping an office open as well as employees to staff the offices, all of whom will need to be paid. The price of hamburgers has to go up again, and so does the cost of the insurance.
At this point, the rising cost of hamburgers seems unstoppable, as well as the rising cost of hamburger insurance. Now, only the rich can afford to eat hamburgers. Notice that before the government got involved, natural market forces drove the price of hamburgers down so that almost everybody could afford them. In an effort to allow those few who could not afford hamburgers to have them anyway, the government made changes that caused the prices to go up. When the cost of hamburgers was getting out of hand, the government stepped in again, and the result was that the prices went even higher. What has happened here is what is called the “third party payer” effect. When the customer will consider price before buying, the prices are naturally driven down. When a third party, such as an insurance company bears the burden of the price, the consumer quits caring about the cost of the purchase, and prices skyrocket.
Well, with the prices getting so high, there are those who believe that the government should “nationalize” the hamburger industry. That is, the government should buy the hamburgers for all the residents of the city. Government supplied hamburgers would cost the people nothing, they say. It would allow everyone to enjoy the best hamburgers available, without discriminating against the poor. After much debate on the issue, the city finally gives in and “nationalizes” hamburgers. Every resident of the city gets a hamburger ID card, and presents it when buying a hamburger. Joe and Tom must serve anyone showing a hamburger ID, then charge the city for the hamburger.
Joe, who started off as an Ebenezer Scrooge, and was forced by marketplace competition to improve his behavior, remembers the “good old days” when he could charge $10.00 for a $1.00 hamburger, and make a huge profit. As he sits in his office reminiscing about the build up of the bureaucracy that was necessary to deal with the insurance company, which now deals with government regulations, he starts to realize a new opportunity he now has. Back when he was charging the customers directly, he could not charge a customer for two hamburgers, but only supply one. The customer simply wouldn’t pay for more than he was getting. But now, how would anyone know? He could charge the government for two hamburgers every time he sold one, and no one would know!
So that is exactly what Joe does. Very soon, the city government begins to suspect something is up, but they don't know what exactly. Because the city has taken over paying for hamburgers, the city now runs a bureaucracy that most people assume is similar in size and scope to what the now defunct Hamburger Insurance Agency was. The reality is that since not everyone was insured but everyone is covered by the city’s program, the city’s bureaucracy is nearly double in size. This means increased costs for everybody in the form of taxes. Now everyone is forced to pay for hamburgers whether they want them or not. But that’s not all! Now that someone in this expansive bureaucracy has noticed that something is not right, the city has to hire a team of accountants to review every transaction to see if they can determine what is going on. They need to hire enforcement agents to make sure that they put a stop to whatever it is that someone in the system is doing. Since they don’t yet know that it is Joe, they have to police the entire system. So now, the city needs a bureaucracy to patrol the bureaucracy to keep everything legitimate. This new bureaucracy of accountants, enforcement agents, prosecutors, etc.—all of whom need to be paid—needs offices in which to work, which means huge expenses.
The city is forced to put together a mammoth network that dwarfs the scope of the Hamburger Insurance Agency. Taxes need to be raised to the point where the amount people are paying just to support the “free” hamburger infrastructure is on the order of twenty hamburgers a week, but they are limited by city law to only have one hamburger every other month. Even at that, the city is forced to only allow mustard and ketchup to be served on the hamburgers because the expense of additional condiments—such as pickles, onions, lettuce, tomato, mayonnaise, etc.—is just too much for the city to pay.
When the city pays for the hamburgers, they force both Tom and Joe to file a mountain of paperwork to “prove” the sale of the hamburgers. Hamburgers that are sold and eaten today are not paid for until the paperwork is processed, which at government speeds means sometime in the next three or four months. But, to get supplies to keep making hamburgers, Joe and Tom need to pay their suppliers up front. The money is going out, but no money is coming in. Both are forced to purchase the cheapest, lowest quality ingredients available to make the money stretch out until they get paid. They are forced to lay off workers because there is no money to pay the workers, and those who are not laid off must work much harder to keep production up. Even though he doesn’t want to, Tom is forced to make his employees work long hour in poor working conditions, and he is able to pay them next to nothing. Notice that this is how Joe started out treating his workers. This is called the “single payer effect,” which comes about when only one entity—such as the government—is responsible for paying for a product or service. More on that in a moment.
The lack of money doesn’t just come from the delay in payment. The city government’s “experts,” who have never run—or even worked in—a hamburger stand have told the city that they should pay no more than $0.75 per hamburger. Not having the experience of running a hamburger stand, they have calculated the theoretical cost of making hamburgers. What they did not consider is that pure theory is never put into practice without significant adjustment! Tom’s and Joe’s actual cost of making the lowest possible quality hamburger and dealing with the bureaucracy to get the hamburgers paid for is closer to $1.50 per hamburger if they don’t pay the workers.
So now, the people who want to eat hamburgers have more limits on what they can have than ever before while paying much more than ever before. The quality has been driven down as low as it can go, and the employee’s working conditions are deplorable, meaning that they are most decidedly NOT happy to serve you. This is what a single payer system produces.
Tom’s golden opportunity has long since vanished. He chooses to close up shop, leave town and move to a city where hamburgers can be freely bought and sold without government interference.