no third solution

Blogging about liberty, anarchy, economics and politics

Category Archives: Subsidize This!

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.

Massachusetts: The Control Group

February 1st, 2008

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[NOTE: I had written this on or about January 25, and for some reason it had been posted as “Private,” meaning that nobody could read it.  Anyways, here I am about a week late.]

In economics, there rarely exists anything even approaching a control group for an experiment. Every so
often, however, we’re graced with examples like East and West Germany, or North and South Korea (insert).

At the Liberty Papers, Doug Mataconis explains the problem with socialized health care, using Mitt Romney’s Massachusetts plan as an example. Massachusetts’ dalliance in socialized health care is a wonderful control group – side by side with the existing (albeit) imperfect system. And although I’ll be the first to argue that the current market for health care, medical care, medicine, and general wellness is anything but free, it is still more free than any system of socialized care, which by necessity (i.e., lacking the coordinative nature of the price mechanism) rely on longer wait times or arbitrary limiting of service — essentially, shortages in one or several areas — to perform the rationing function.

Doug asks, rhetorically:

Why should employers provide health insurance to their employees when they know that those employees will be able to take advantage of a taxpayer subsidized alternative ? Why should individuals make the effort to find cost-effective health insurance when they know the state will provide it for them ? When you subsidize something, in this case uninsured citizens, you get more of it, and that’s exactly what’s going on here.

An article Doug cites notes that “State and Federal taxpayers are expected to bear nearly all of the additional cost.”

Taking this to its logical conclusion, it is abundantly clear that such a system cannot conceivably work on a grander scale. At some point, the costs incurred by the volume of dependents exceeds what can be extracted (by whatever means) from the remainder of society.

Repeating the lie doesn’t make it true: socialism doesn’t work. It never has, and it never will. And promising otherwise will cause a great deal of suffering, both to those who believe it (and later find out it’s a sham) and to others, like myself, who reject it, and are forced to suffer it, anyways. In Massachusetts, as in the U.K., we can see the consequences with blinding clarity. Clearly, theirs is not the way.

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.

no third solution

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