More Profitable Health Care Is the Solution (2009-08-31)

More Profitable Health Care Is the Solution

(2009-08-31) by David John Marotta

Americans enjoy the best medical care in the world. When judged by nothing other than the ability to provide quality care, no country does better than we do. Every ranking that puts the United States less than first includes some other measurement.

We don't give it to everyone, however. And what we do provide is expensive. As a result, the quality of care is proportional to a patient's ability to pay. Every state doesn't provide insurance as a right of residence either. Americans also don't have the healthiest lifestyles. Too many people are overweight or drink too much.

Sexual promiscuity, lack of exercise and smoking are also increasing the costs of health care. For all of these choices, we bear personal responsibility. The inevitable result of using public funds to pay for health care will be all of us battling to restrict freedom of choice and forcing our idea of morality on each other.

Because of the expense and hassles associated with our current insurance coverage, Americans are not satisfied with the system as a whole. But we need to define which problem we're trying to solve before we can evaluate any prospective change. Some of the economic forces in place provide us with top-of-the-line care. Irreversible damage could be done by snake oil medicines.

First, we must acknowledge the limits of what is possible. No elixir of life, no amount of hopeful change can alter the fact that we are mortal. The cost of keeping us alive is asymptotically infinite. And every citizen's concern for the well-being of his or her loved ones translates to an unlimited incentive to override a dispassionate rationing of medical resources. No system can work fighting love, economics and the survival instinct.

The high cost of medical care is part of the reason why we offer the best. So many innovative techniques have developed here because patients are willing to pay enormous sums for them. But if you fix the price and ration who gets it, you only cause shortages. Unchecked by cost, rampant demand will overwhelm supply.

Some liberals advocate rationing. They argue it's what we have now because care is only given to the rich. They claim that in a rational system, care would be apportioned specifically where it would do the most good. For example, it would be spent on preventive medicine or on young people. Economically, this is foolishness.

We should not equate economic demand with rationing. Rationing is controlling the distribution by some method other than price and supply and demand. But when economic demand is used, it increases the supply. Patients who are willing to pay motivate more people to provide services at those prices.

In contrast, no doctor wants to treat patients on Medicaid. Reimbursement is both difficult to get and inadequate. The failure of the program represents all that is wrong with a government-run option.

According to its champions, when we all get together under a single-payer system, the government will have the leverage to negotiate lower costs for pharmaceuticals and medical services. They argue that this scenario will contain health-care costs without any negative side effects. This quackery ignores the proven effects of supply and demand.

Healthy competition requires both supply and demand. Think of a single-payer system as a government monopoly of demand with no competition. You may want health care and be willing to pay, but you are not allowed to pay. As a result, demand dries up.

Imagine the government was the only customer. They could tighten the screws on companies and fix the prices. Workers could either accept a pay cut or take a hike. Quality would certainly suffer. Worse yet, fewer of the best and brightest would attend medical schools if the outcome was working for reduced wages as government employees.

Other suggestions, such as information technology, are proposed to reduce medical costs. Whatever the merit of these ideas, the ability to implement them lies completely in the hands of the health-care industry. Government incentives to speed up automation will have unintended consequences. We should remember that if proposed systems are cost effective, they will stand on their own merits and be implemented like any other innovation in the free marketplace.

Attempting to circumvent economics is always a losing proposition. And trying to make the industry less profitable only defeats the industry's quality. It may sound strange to people not versed in economics, but the best way to reduce the cost of something is to find ways of making it more profitable. If you can do that, doctors won't have to charge as much to make the same profit and more people will pursue careers in the field.

The irony is that government could make medical care more profitable. For example, every doctor starts the year $250,000 in debt because of malpractice insurance premiums. That expense has made the cost of health care more expensive than it needs to be.

Anyone who claims that U.S. health care is expensive should compare malpractice insurance in the United States with other countries. Not only is the insurance added directly to the costs of health care, but to avoid lawsuits, doctors practice not necessarily the best medicine but certainly the most defensible. Tort reform is the solution to expensive malpractice insurance.

Another huge cost savings could be gained if it was easier for physicians to get paid. About half the cost of running a medical practice is paying support staff to handle insurance collections. Making it easy for a doctor to get paid would slash health-care costs.

If it were legal, patients who paid up front in cash could get their health care at half price. But because the government is the largest consumer of health services, by law preferential treatment can't be given to those who don't have government insurance. It doesn't matter that it costs more to try to collect from the government. They write the laws, so they get preferential treatment.

And when a doctor does submit an insurance claim for services rendered, keep in mind the great financial incentive to deny the claim. It doesn't matter why. Delaying payments is almost as lucrative as denying them entirely. Insufficient coding does the trick. If anyone complains, just say you are eliminating insurance fraud and protecting public funds. All the while, those willing to pay in cash subsidize those whose public insurance bloats a doctor's office with medical coding specialists trying to maximize minuscule government payments.

You may frown at this comparison because your employer-sponsored medical insurance acts the same way. Exactly! Employer-sponsored insurance looks and acts more like a government program than the free market. And private payers are forced to use a system shaped largely by government purchasing.

Great inefficiencies occur when the one who benefits from the services, the one who pays for the services and the one who evaluates the services are different. Half of the expense is wasted fighting competing interests. That's why health-care payments and decisions should remain in the hands of consumers.

Only consumers can balance their own competing values and make those tough decisions regarding what to purchase. And once they have made a choice, only they will be willing to pay for the services they receive without reams of bureaucratic red tape.

Reduce a doctor's malpractice insurance and collections staff, and you will get less expensive health care. In both of these cases, the laws on the books have costly consequences. Reducing these roadblocks for health-care providers could reduce costs in some doctors' offices by half.

Pushing doctors toward cheaper health care is too expensive. Only if we can make health care more profitable will competition naturally reduce the cost. Next week I examine the desire for universal coverage and the economics associated with that worthy goal.

from http://www.emarotta.com/article.php?ID=352

Avoiding a Civil War over Health Care (2009-08-24)

Avoiding a Civil War over Health Care

(2009-08-24) by David John Marotta

Advocates of small government are justifiably angry. And their anger is creating a new and genuine political activism. These citizens are deeply frustrated, and they don't know where to channel their dissatisfaction.

Liberals aren't very understanding or empathetic. They brand all conservatives as mean or stupid. They discount the sincerity. They say conservatives don't represent the real America.

So our American family is more polarized than ever. But we are still a family. Siblings can drive us crazy. They tap repeatedly on the annoy button. Their rhetoric runs hyperbolic. But for many people, it has gotten to the point that everything is maddening.

Our only civil war was inevitable, as Shelby Foote said in Ken Burns's classic film, because we failed to do what we Americans do best: compromise. "We like to think of ourselves as uncompromising people," he said, "but our genius is for compromise, and when that broke down, we started killing each other."

Let's be grateful that we are still just yelling at each other. Or perhaps yelling past each other. The two very different views take the opposite sides of nearly everything debatable. If you are quick to assume the other side is ignorant or selfish, you will never understand enough to make peace. You are part of the problem.

Power breeds condescension and arrogance. Whether it is justified because "Elections have consequences" or a simple "We won," there has been a rush to ignore the 47% who didn't support the liberal view. Both parties tend to whine about bipartisanship when they aren't in power and then completely ignore it when they are. With one party holding a super majority, every pretense of being bipartisan has been dropped. But we can't afford four years of writing blank checks.

Compromise is not capitulation. It need not be more costly than either alternative. Every act of the free market is a compromise. Public policy ought to wait for a consensus. We must understand the two views well enough to safeguard the fundamentals of both.

Cognitive psychologist Steven Pinker labels the conservative view the "Tragic Vision" and the liberal view the "Utopian Vision." In his book "The Blank Slate," he describes these two perspectives in a very balanced and evenhanded way.

Pinker comments that the "sciences of human nature really do vindicate some version of the Tragic Vision and undermine the Utopian outlook." Studies also suggest that those who share the Tragic Vision understand the Utopians better than the reverse. Liberal ignorance, especially of economics, is a leading cause of political unrest.

Although I acknowledge the dangers of political simplification and my own lack of neutrality, I believe the current anger stems from an overreaching on the part of Utopian liberals. Those who are irate can't believe the speed with which liberals have run roughshod over the family and the family's finances.

Most disturbing is the use of economic spoils to win democratic majorities.

Half the people in America don't pay any taxes. All the compassionate empathy and good intentions count for nothing when you are being generous with other people's money. Any good that government does is the result of the rich who actually pay, not the liberals who vote for it. It is like telling Dad you will mow the lawn and then threatening to beat up your brother unless he does the job. Later, as if to add insult to injury, you boast to Dad that you got the job done and your brother didn't want to help.

Liberals often quote Oliver Wendell Holmes Jr., who said, "Taxes are the price we pay for civilization." If that is true, they demonize the very people who make civilization possible. The other half are political Vikings who pay their taxes by raiding and pillaging the productive.

Even though 50% of Americans pay some taxes, the top 2.5% who make more than $250,000 pay half the total tax revenues. This hardworking minority are mostly small business owners to whom we are indebted for nearly all of America's economic and job growth. Rather than receiving our recognition and gratitude, however, this group has been vilified as though their productivity is somehow shameful. Entrepreneurs are saddled with the highest marginal rate of taxes, and every new program pushes their rates higher.

You can understand the top marginal tax rate by this simple metaphor: Government spending burns and pillages half of every new field that an entrepreneur plants. People are weary of planting fruits that others eat and building villages that others raid. They are angry because every citizen's first responsibility is to take care of himself or herself and not burden the rest of society. Although they are charitable, they know it isn't charity when strangers claim an entitlement, seize it by force and then resent it.

My grandmother Florence and her brother Frank used to get a nickel for candy for the week. She would spend a penny and save the rest for later. Frank would spend his entire nickel the first day. At the end of the week when Florence still had some money, her mother would make her share her candy with her brother. Florence didn't see why she was obligated to share with her brother just because he was broke as a result of his own actions. My sympathies are with my grandmother.

Similarly, every policy this year rewards irresponsibility and punishes prudence. We have allowed government, which should be the referee who keeps the game fair, to influence the game or even compete on the field. And at the same time, Congress is writing rules that specifically favor the economic success of the government and its allies. So what should be orderly markets degenerates into a train wreck.

The Community Reinvestment Act forces banks to make risky loans while Fannie Mae and Freddy Mac collect 80% of all the country's loans because of their favored status as a pseudo-governmental agency. The government takes over irresponsible financial institutions and then floods them with liquidity so they can maintain their market dominance. The government seizes all the equity in GM and then provides cash incentives to boost their business. It's no wonder that people are worried about the government underwriting health insurance.

The Utopian Vision has left a trail of disappointment and broken promises. Failed government programs with bloated wasteful budgets litter the political landscape. Despite enjoying every political advantage, they still fail miserably. Given the cost of Social Security, every senior should retire as a millionaire. Medicare/Medicaid and the Veterans Administration are among the poorest run of the country's health-care options.

Conservatives are just as empathic and compassionate as liberals. In fact, although liberal families earn 6% more, conservative-headed households give 30% more to charity. Conservatives have many of the same ideals, but they have a different view of human nature. As Pinker puts it, they believe "humans are inherently limited in knowledge, wisdom, and virtue, and all social arrangements must acknowledge those limits." Only when those limitations are respected can programs go beyond mere good intentions and actually produce beneficial results.

Liberals need to heed the Tragic Vision if they actually want to implement fiscally responsible and economically viable ways to improve people's lives. I've tried to refrain from adding to the rhetoric without softening the critique. In your replies, respect these grievances the way you would a family member.

It may seem counterintuitive, but the government that governs best, governs least. The most fiscally responsible periods in recent history occurred when the two political parties split the executive and legislative branches. Ronald Reagan with a Democratic Congress broke the back of inflation and reduced the top marginal tax rate from 70% to 28% in seven years. This limited government produced the economic boom of the 1980s.

Part of the cost was congressional deficit spending that raised the national debt from $700 billion to $3 trillion. But even after adjusting for inflation or viewed as a percentage of gross domestic product, this amount is paltry compared with our current deficit spending.

The second period of fiscal responsibility was Bill Clinton's presidency with a Republican Congress. This combination held back on spending increases and actually began to run a surplus and pay down the deficit. America's system of checks and balances was based on the Tragic Vision of human nature. The rush to get it done, unfortunately, is a Utopian failing.

Next week to continue the spirit of compromise, I will lay out a plan for what type of health-care reform might actually satisfy the core values of the two competing visions.

from http://www.emarotta.com/article.php?ID=351

Cash for Clunkers: A Bad Idea (2009-08-17)

Cash for Clunkers: A Bad Idea

(2009-08-17) by David John Marotta

Ten days ago President Obama signed an additional $2 billion into law, tripling the original expense of the "cash for clunkers" program. The president describes the program as a "proven success" because it is stimulating the economy and will reduce carbon emissions. You should examine such economic claims carefully regardless of your politics.

Most of our public officials evidently are willing to opt for the expedient solution, slapping a Band-Aid over a fracture and calling it healed. Unfortunately for the American people, these same politicians do not understand they are responsible not only to their present constituents but to future generations.

Henry Hazlitt's classic book "Economics in One Lesson" should be required reading. Politicians, especially those too busy to read the legislation they are voting on, could take Hazlitt's thesis to heart. He writes, "The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

To evaluate the long-term effects of the cash for clunkers program, consider the real-world example of Jerry and Janny. They have two children and are expecting a third. The couple owns a Ford Expedition with 144,000 miles that gets 14 miles to the gallon (mpg). They've been interested in getting a replacement and are taking advantage of the cash for clunkers program to subsidize it.

Thus the government handout is merely accelerating Jerry and Janny's plans to purchase a new car. But this small acceleration in new car spending won't last. Compare it to the energy levels of a college student who drinks caffeinated beverages all night cramming for an exam. The immediate stimulus is followed by the inevitable slump.

Neither is the cash for clunkers initiative truly green. The Ford Expedition still has value as a used vehicle. It may not be shiny new, but it could continue to serve Jerry and Janny or another family for several more years. Instead, the regulations require it to be completely stripped and destroyed within 180 days. To measure the true carbon offset from this program, you would need to compare the increased gas efficiency of a new vehicle against the energy it takes to scrap old cars and build new ones.

Jerry and Janny's car is usually full of kids. So the small hybrid vehicles that Obama touts when praising this program are too small for them. They are deciding between the GMC Acadia and the Saturn Outlook, which both average 19 mpg. They could probably help the environment more by just inflating their tires.

As a result of this misguided program, the price for used cars will increase both unnecessarily and artificially. Many cars worth less than the offered bailout will be traded in to be scrapped. Charities will receive fewer automobiles as donations. And people who are struggling financially won't be able to find a clunker that costs less than $4,500. The program seems to encourage new car ownership at the expense of the used car market. The rationale behind it is neither economically nor environmentally sound.

When considering the entire carbon footprint of this program, you will find that continuing to drive your current used car for as long as possible is one of the most green-friendly things you can do.

On one hand, the price of scrap metal may go down, and the price of used parts may go up. On the other, scrap yards may ignore the rules and salvage usable parts anyway. The more useless and wasteful the government rules, the more people learn to break them. Maybe that's why the Soviet Union developed such a large black market and the country today has such thuggery and disregard for the rule of law. A loophole exists when the government hasn't tied you down enough to remove your free will completely. A black market is simply the result when the government tries to remove all the loopholes.

A country can't prosper destroying perfectly good used cars. At the end of the day we still have increased taxpayer spending to pay for destroying a perfectly good car. Hazlitt describes the fallacy behind thinking that when a hoodlum breaks a baker's window it will stimulate the economy. The glazier may make a simple argument in favor of broken windows, but he overlooks the secondary consequences.

Bad economics is easier to present in a sound bite, but that doesn't mean we should heed the glazier. We must be willing to think holistically or else the hoodlums and glaziers will win and the breaking glass will continue. Only in this case, the government is the hoodlum and the automobile unions are the glaziers.

Consider who gains from the cash for clunkers program. Follow the money. General Motors (GM) makes both of Jerry and Janny's prospective cars. The three largest stakeholders in GM are the U.S. Treasury (61%), the United Auto Workers Union (18%) and the Canadian government (12%).

Any earnings that cash for clunkers generates for GM will not create additional profit and growth for the American people. It will be recycled back into government and union coffers. But like all government programs, it is an inefficient method of graft. Foreign automakers will benefit from many of the stimulated new car sales. Essentially, our taxpayers are also subsidizing the economies of Japan and South Korea.

The government chose the auto industry as deserving of such a redistribution of resources because it essentially belongs to them now, and it is failing. The cash for clunkers program surreptitiously serves to benefit their supporters to the detriment of others.

So should Jerry and Janny not purchase the car they want for a $4,500 discount? Of course not. If their children will have to pay the interest on the money we are borrowing from China and Japan to pay for this program, they can at least receive some of the inefficient benefit.

The great illusion of success in the cash for clunkers program comes from its visibility. You will inevitably know someone who appears to have benefited from the program, and it our elected officials will cite it as a reason for their reelection. Vote the bums out! Good economics requires us to consider what this $3 billion could have accomplished if we had never removed it from the wallets of American citizens or mortgaged against our children's future. Some people could have started a business or hired more employees. Some might have been able to buy a clunker for $3,400 and then been able to travel to a better job across town. Some might have paid off their mortgage or just paid down some of their debts. However they would have spent it, it would have been better spent.

from http://www.emarotta.com/article.php?ID=350

Investment Strategies Part 5: In Defense of Diversification (2009-08-10)

Investment Strategies Part 5: In Defense of Diversification

(2009-08-10) by David John Marotta

Diversifying your asset allocation among investments with a low correlation can and should reduce your portfolio's volatility and boost your returns. But critics are claiming this strategy is no longer valid. That's because they don't understand the nature of what happened in 2008.

Fickle followers of asset allocation point to the market drop in the fourth quarter of 2008 as evidence that diversification has been discredited. Every investment philosophy and asset class moved downward at the same time. They point out that asset classes are more highly correlated when stocks move down than when they move up. In other words, they complain that just when diversification was supposed to help, it failed.

So does modern portfolio theory need to go back to the drawing board? In many cases critics are not suggesting alternatives, but they are sure something else is needed. They see the trees but are missing the forest.

Correlation is measured mathematically and does not necessarily reflect a causal explanation. It is a fact that every investment class moved down at the same time. But you must understand why in order to evaluate ways to defend against it in the future.

Everything went down in sync because it is all denominated in dollars. The markets moved not because the markets changed but because the value of the dollar changed.

When all the financial institutions either had to deleverage or go bankrupt, they needed dollars for their very existence. The demand for dollars naturally went up. When the credit markets froze and financial institutions would not lend to each other because they suspected their collateral was toxic, the velocity of money went to zero. As a result the demand for dollars went up.

When the value of the dollar doubles, everything else denominated in dollars drops in half. Deflation sinks all ships equally. Everything consequently moves in sync, and correlations approach 1.0.

For example, take investments A and B. Imagine that A would have gone up 2% while B would have gone down 2%. These two investments would have had a correlation of −1.0. They would have been perfectly negatively correlated and provided diversification. But when the demand for dollars skyrockets and both investments are denominated in dollars, the result is very different.

In that case, investment A goes down 48% and investment B goes down 52%. The movement of the dollar swamps the relative movement of the underlying asset, and all correlations approach 1.0.

In my December 2008 article, "When Will the Markets Stop Dropping?" I wrote, "It is as though your next-door neighbor got into credit card debt and is now trying to pay it off. On his front lawn he is having a yard sale. His couch is going for $10, his good china for $20 and his plasma TV for $25. And you think to yourself, "That's the exact same couch I just paid $200 for, and my neighbor is selling it for $10!" In fact, you are amazed that the entire contents of your house have dropped in value.

"Diversification among household contents did not help because the financial institutions that are deleveraging also owned a nice diversified portfolio. Nothing is fundamentally wrong with couches, china and plasma TVs. The problem is that when a nation is deleveraging, everyone wants cash to pay off their debts."

No one wanted shares of stock because they needed cash to deleverage and survive. Financial companies wanted barrels of oil even less as oil dropped from $140 to $32 a barrel. The downward slide in oil and other commodities provides further evidence that the movement was a movement in the value of the dollar.

In other words, if you measure the market's return in dollars, it dropped roughly in half. But if you measure the market's return in barrels of oil, it doubled in value.

You can see additional evidence as the federal government began pouring trillions of dollars of bailout money first into the financial institutions and then salted liberally through government largess. The primary purpose was to devalue the dollar and therefore revalue stock prices. They wanted to stop deflation and reinflate stock market values.

So, assuming my analysis is correct, how could investor portfolios that are valued in dollars have been protected against a sudden and sharp demand for dollars? Well, the short answer is that with a few exceptions, they couldn't. It wasn't just a failure of diversification. Most other strategies failed worse. So-called balanced funds or target funds have seen a decade of losses. Because they have fewer equities, they didn't have enough growth in the decade before 2008 to remain positive. Only the diversification into small value, foreign, emerging markets and hard assets gave well-diversified portfolios a positive 10-year return. And ironically, the categories with the best 10-year returns are the same ones that dropped the most at the end of 2008.

We could liken searching for a viable strategy when the dollar suddenly doubles in value to looking for a safe location when the sun goes supernova. But in our case, what would have been trying to be safe in 2008 would only be extremely foolish in 2009. What is safe when the dollar suddenly doubles in value is extremely foolish when the government is relentlessly pouring out dollars to devalue it.

A recent Wall Street Journal article quoted Ibbotson Associates chief economist Michele Gambera about what he deemed safe in the event of such a nova. Gambera concluded that only a few asset classes other than cash proved helpful. They were gold, intermediate-term government bonds and Treasury Inflation-Protected Securities (TIPS). Well, there are few surprises in that list. Cash and cash equivalents are always a good investment when the demand for cash suddenly increases.

But sometimes cash and fixed-income investments are as equally risky as they were prudent this past fall. Now that the dollar is being devalued, cash is a risky investment. We recommend that at least half of your portfolio be protected against the risk of a falling dollar. You can do so with investments in foreign bonds, foreign stocks and hard asset stocks. One of the best ways to protect your portfolio, hard asset stocks as a class have also provided one of the best returns since 2002.

Gold is a strange category for Gambera to include in his recommendations. Investments in gold did not fare well in the last half of 2008. Gold prices topped $1,000 an ounce in the summer of 2008 and dropped to a low of about $700 at the bottom of the markets in November. It is true that during times of market turmoil many investors flee to gold and push the demand for gold higher. In the recent situation, however, crisis gold did not correct as much as the markets and has still not rebounded well. Although on average, gold doesn't appreciate more than inflation, it is still normally a safe store of value. Just not in the fall of 2008.

So how much of your investments should you allocate to cash, treasuries and other stable investments? Always keep five to seven years of spending in relatively stable investments. That will help you sleep well during a dollar crisis--at least for the next five to seven years! The remainder of your portfolio should be able to weather the duration of even this tsunami.

So is asset allocation dead? By no means. No better way exists to protect your investments. But all these events remind us that monetary policy, deficit spending and the actions of the Federal Reserve do impact currency stability.

The markets are inherently volatile, including the financial markets that trade loans. It was government intervention in the credit markets that helped put all our eggs in one basket. The Community Reinvestment Act (CRA) and government-run Fannie Mae and Freddie Mac contributed to the lending crisis. Their policies encouraged or even required financial institutions to make loans to those with little ability to repay. The unintended consequence was the shock of the imminent failure of our financial system and the sudden dive in the value of the dollar.

Recently, monetary policy is moving in the other direction. The markets are going up partly because massive government deficit spending is devaluating the dollar. Now is not the time to protect your assets against deflation. That tsunami has passed. The current danger is a backwash flowing in the opposite direction. Now is the time to protect your assets against inflation, and cash again may be the most dangerous asset category.

from http://www.emarotta.com/article.php?ID=349

The False Lure of Multi-Level Marketing (2009-08-03)

The False Lure of Multi-Level Marketing

(2009-08-03) by David John Marotta

Multi-level marketing (MLM), or network marketing, is a nonsustainable business model because it does not provide a valuable service but simply a product that has been marked up in price.

MLM is based on the faulty premise that as you network with people, all you have to do is find a few individuals who are excited about the idea and want to join the pyramid. You will get paid not only for your own sales but also for sales in your downline, those under you in the pyramid, all the way to the seventh level.

So theoretically, even if you only recruit two people and they only recruit two people, by the time you reach the seventh level, you will have 255 people in your downline supplying you with commissions. Sadly, nothing could be further from the truth.

First of all, only a limited number of people will be attracted to MLM. Think of fishing for recruits to join your downline like offending all of your friends, neighbors and relatives and seeing who can tolerate it. Most people can't take the constant rejection. The few who can stand being rebuffed can only handle it from someone who is not a close friend or family. Building a relational business model with acquaintances and strangers is not possible.

The few who do respond will be more motivated by the money-making opportunity than the product. And when the hose doesn't flow with cash, the average recruit opts out of the scheme after three months.

With half of your people dropping every quarter, you can't build a business. No matter how hard you work, you'll spend all your energy looking for new people and training them. Burnout is pervasive. Although some MLM participants try to automate the process through audio and video pitches, this strategy simply removes the personal touch required to persuade newcomers. Million who have tried are shamefully quiet about their lack of success. It is like trying to fill a bucket with no bottom.

Even if you could draft sufficient numbers of people, you still would not be actually running a business. True businesses add value to people's lives. If you leave the pyramid, it is irrelevant. Everyone still gets the product. Your presence in the pyramid doesn't add any value, either to the company or to those buying from it.

You don't actually take orders, which typically are transacted online. And you don't actually sell a product or services. People are lured into MLM schemes because supposedly they won't be required to sell. They're told they can simply cash the check, which sounds like a very attractive option. Unfortunately, many people inexperienced in business believe that's what business owners do.

Nothing could be further from the truth, however. Real businesses sustain themselves by making a genuine contribution to society. The more real value they can offer, the more people are willing to pay for it. Every successful business owner knows that to stay competitive, you have to be thinking all the time about how to add more value.

Most MLM participants gross very little. In many cases, the money they earn doesn't even cover their own use of the product. It certainly is not enough to compensate them for their time and expenses even at the minimum wage. Many lose substantial amounts by purchasing additional tools that promise to boost sales and numbers of recruits.

Because it requires more of your time and effort, MLM is even less sustainable than buying lottery tickets. The few successes are simply those positioned at the top of the pyramid who collect from the endless recruiting hopefuls churning at the bottom.

True entrepreneurship, in contrast, is decidedly worthwhile. Many people with a high net worth made their money by starting and running a business. Along with the satisfaction of hard work well done, successful business owners enjoy a plethora of financial and tax-planning opportunities as well as the satisfaction of seeing their vision made real.

Hundreds of legitimate business opportunities are available for entrepreneurs who want to build companies that provide real value. But entrepreneurship is for those who feel empowered by hard work, not those trying to escape it. There are ways to find the right business adventure to sustain a lifetime of hard work, but MLM will always be a distraction from a genuine vocational calling.

from http://www.emarotta.com/article.php?ID=348