no third solution

Blogging about liberty, anarchy, economics and politics

Inflation and Insurance

February 1st, 2008

I read part of an article in Property & Casualty Insurance News (December 24/31, 2007), the “Top 10 Stories of 2007.” The California wildfires are number 10 on the list.

Iin the wake of other mega-catastrophes like hurricane Katrina, the bad publicity surrounding the CA wildfires doesn’t help the reputation that insurers have. Who knows, someday we might even see a class-action suit against P&C insurers in California, exceeding the $3 Quadrillion settlement demanded by some of the Katrina victims.

I will take a brief moment to remind my readers that insuring against some of these perils, in certain locations, is actuarially impossible. People respond to incentives. This much is elementary. Legislation however, often with large subsidies, has been crafted in defiance of the laws of probability and economics in order to combat the problem of people who want to have their cakes and eat them, too. The end result is a moral hazard of epic proportions, and one which is to an extent, self-reinforcing. Also, it’s communism.

Anyways, when legislation perverts the incentives in such a manner as to transfer the risks associated with certain geographies*, the laws of economics take hold: when behavior is subsidized, we get more of it. The increased demand causes either the construction of more homes in the risky locations, or raises the market values of existing homes. Or both.

These factors exacerbate the losses incurred by disasters like hurricanes and wildfires.

To the point, the article cites a contributing factor: a large number of underinsured homes, citing an 11/13 NYT article reporting that nearly 40 percent of California homeowners lack adequate (replacement cost) coverage. The industry of course, “rejects the notion that large number of underinsured homes is their fault.” Some go so far as to call such a notion “a figment of… political imagination.”

The article cites “failure to report improvements to the insurance company” as the principle cause of underinsurance. Aside from the fact that most people, in most places, are simply idiots when it comes to their financial security, I think that government manipulation of the market has been a contributing factor, as well. In some of the fire-prone counties in California, property values doubled in the 5 or 6 years prior. If the value of your property rises, and you do not have a guaranteed replacement cost policy, you’ll quickly find yourself up Shit Creek, sans paddle, when you try to file a claim. And it does not matter whether the property increases in value because of improvements you’ve made, or because of inflation. The latter is arguably more difficult for the lay person to recognize as a problem.

The moral hazard created by the regulatory agencies is, to be sure, part of the problem. Excessively loose monetary policy, which caused the run-up in housing prices and the mortgage bubble and the current “economic downturn,” was simply (no pun intended) adding fuel to the fire.

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* The risk, of course, doesn’t disappear. It is simply transferred from those people who want to live in pristine (but risky) areas, to those who don’t. Hardly fair, by any notion.

A Good Way to Get Rid of Private Schools

January 28th, 2008

President Bush’s latest, we’ve been given the recipe for destroying private schools:

White House counselor Ed Gillespie, describing Bush’s plans for a new school initiative, said it would be called “Pell Grants for Kids.” If approved by Congress, it would provide money for poor kids in struggling schools so they could shift to private schools or a better public school outside their district.

Federal assistance for private schooling will do (for private schools) exactly what federal assistance did to higher education. As more students strive for a limited number of seats, costs will increase. And as long as the federal government continues to subsidize the expense, the costs will increase without bounds. Rising costs will crowd out some of the non-poor who were previously able to afford private education without assistance, adding them to the queue of poor-folk no longer able to afford a way out of the shitty public schools they had previously worked so hard to avoid — even going so far as to continue paying for them in addition to the private school tuition. Their children will then be forced to compete for “need-based” assistance…

The thin end of the wedge argument is that federal funds tend to come with strings attached (e.g., military recruiters on college campuses which accept public financing, the creation v. evolution curricula debate, etc.) Is there any valid reason to suppose public financing of private schools won’t suffer the same politicization?

In any event, the problem is poverty. And any policy needs to be directed towards the eradication of the problem, not it’s symptoms. End the war on drugs, which disproportionately destroys the family structure of the urban poor and minorities (who are, disproportionately, the urban poor). End the Social Security/OASDI fraud which reduces by 1/8 the incomes of all people, a tax-scheme that disproportionately affects the poor who by definition are under the contribution cap.

The more radical solution is to eradicate the entire, rotten infrastructure of public schooling, severing the ties between local governments, property taxes, and education — freeing up more money to be used for educational purposes, and setting the poor free from the arbitrary and oppressive school district boundaries that are part-and-parcel to the government system. When the entire system is broken, and even the proposed solution mirrors another system which is also demonstrably broken, the proper course of action is to allow a new system (or systems) to take its place.

A free-market is the superior means of providing all goods and services, at the lowest cost and highest quality, to all — wealthy and poor, alike.

Unintended Consequences and Seasonal Drinks

December 21st, 2007

A few weeks back, the Washington Post had an article about what drinks you should enjoy in the winter months, or rather, how to stock a bar so as to not embarrass yourself in front of seasonal guests.

The writer recommends Maker’s Mark bourbon, and although enjoyable, I’d prefer the (slightly) more expensive Knob Creek. Of course, I’m no expert on these things — but the experts will always tell you to go with what works for you. It’s always a good idea to stock a few bottles of wine, perhaps some Cabernets which go well by the fireside. A few sparkling wines or champagnes for aperitifs or dessert wines are nice to have, too. In the after-dinner drink category, Port wines and Scotch (I’m partial to Laphroaig) should always be included.

The diversity of tastes and preferences among beer lovers knows no rival, so despite our beer-snobbery, keep a few Bud Lights on hand for the less adventurous. Rogue Ales makes a robust Christmas ale which reminds me of something else I’ve had before, although I can’t place my finger on it. Samuel Adams also makes a very interesting and complex Christmas seasonal, Old Fezziwig which I’d also recommend for those seeking something richer than the typical American-style light lager beers, which I try to avoid at all cost. Local to Michigan, the Third Coast Old Ale brewed by Bell’s, might be a little (or a lot) harder to find throughout the rest of the country, but if you see it on tap at your local brewpub, or in the aisle of your favorite purveyor of fine spirits, give it a try.

In related news, The Economist is reporting that Law of Unintended Consequences, Federal Farm Subsidies, and the common thread among them: Energy Independence, for your inconvenience.

no third solution

Blogging about liberty, anarchy, economics and politics