There’s nothing special about free trade across international borders. The principles are the same whether I in Pacific Grove am trading with someone in neighboring Monterey or someone in Mexico, Myanmar, or Morocco. Free trade both within a country and across international borders is what has led to our huge standard of living. If that doesn’t seem obvious, think about how you would live if you could never trade. You could never buy wood, food, clothing, pharmaceuticals, or computers and, moreover, could never buy the inputs that are used in making those things. In such a situation, many of us would starve. We in the United States are lucky. Before the European Union was formed, we were the largest free trade zone in the world. With over 330 million people with a huge array of skills, with a lot of capital equipment, and with fairly decent mineral resources, we need to engage in less international trade than people in other countries. So if we couldn’t trade across borders, we would be worse off but not nearly as badly off as, say, Canadians if they couldn’t trade. Still, international trade makes us substantially better off. We can get coffee from Colombia instead of buying the limited supplies that Hawaii has to offer and building expensive hothouses in the lower forty-eight. We can get bananas from Central America rather than building hothouses to grow them domestically. And how would we get rubber for our tires? This is from David R. Henderson, “Globalization and Its Discontents,” Defining Ideas, March 2, 2023. Read the whole thing. (0 COMMENTS)

Most people view legal market activities, such as buying goods and services, as being in a very different category from illegal activities where violators face penalties.  But the distinction between these two categories is not always clear. My wife and I recent stayed just outside Pucón, Chile.  We drove into town for dinner and parked in what looked like a legal spot on the street.  (I don’t speak Spanish, so I’m not certain.)  After dinner, we found a parking ticket on our windshield. At first, I thought I’d wait and pay the ticket when I returned the rental car.  But I noticed that the fine was 25 pesos per minute (about 3 cents per minute.)  So I looked for one of the numerous men that were writing the tickets.  It turns out I was able to pay the modest fine on the spot, and get a receipt (shown below.). The next couple of nights we again got a parking ticket, and immediately paid it in a similar fashion. This experience got me thinking about the difference between ordinary market activity—such as parking in a garage and paying a fee of X dollars per minute on leaving, and parking in Pucón and paying a fine of X pesos per minute when leaving Pucón.  What is the essential difference between a crime and an ordinary market transaction? [BTW, the post title is a reference to the old joke about a sign that says “Fine for Parking”.  Does that sign mean parking is illegal, or that it’s perfectly fine to park your car in that spot?  That’s what I wondered about Pucón.] Society often scolds people for committing crimes.  But why is one set of activities (crimes) viewed as wrong, while another set (market transactions) is viewed as acceptable?  If the fine accurately reflects the social cost of your activity, why should we feel guilt about engaging in a crime and paying the price? I suspect that our feeling of outrage regarding some lawbreaking reflects a (correct) intuition that our criminal justice system frequently does not lead to efficient outcomes.  First consider an example of a law violation that is “efficient”: Suppose I value parking illegally in a specific place at $15.  Also assume that society views the violation as imposing a social cost of $10.  In that case, my breaking the law might be efficient.  The government might assume that there is a 50% chance I will get caught for this infraction, and impose a $20 fine for illegal parking.  In that case the expected penalty is (.50)*$20 = $10.  If I value the parking spot at $15, I’ll take the risk. Now consider a case where someone mugs a pedestrian and steals their wallet.  Common sense suggest that this is generally not an efficient outcome for society, even if the criminal is poorer than the victim.  Crime imposes all sort of other costs.  People devote resources to avoiding crime.  A mugging is physically and psychologically traumatic.  Because muggers are often poor, financial penalties must often be accompanied by prison.  And while paying a $20 parking ticket merely transfers funds from one person to the general public, prison is an expensive burden on taxpayers. A deadweight loss. To summarize, a parking violation is more akin to an ordinary transaction than it is to a typical felony.  That’s one of the reasons why we don’t feel the same sense of outrage toward a violator of parking rules as we feel for someone whose actions impose serious negative welfare effects on society. Parking violations feel a bit different from normal market transactions because the penalty is stochastic.  We might pay no penalty at all, or we might pay more than we expected.  After three nights in Pucón, I discovered that the tickets were not random.  Each time, a ticket was put on my windshield almost immediately after parking.  I came to see the little town of Pucon as being like one giant parking garage.  That removed the stress of thinking about whether I was likely to “get a ticket” or not.  I began viewing it as a normal market transaction. PS.  I suspect that the way we think about lawbreaking and penalties has an impact on how we choose to address problems such as externalities.  Economists tend to favor imposing a “pollution tax” set equal to the size of the external cost from pollution.  Some environmentalists prefer a more rigid regulatory approach, and are skeptical of ideas such as “paying to pollute” and the “optimal quantity of pollution”.   (0 COMMENTS)

Back in 1976—it was another word, wasn’t it?—I purchased a Ford Granada in California. I remember the salesman confidently asserting, as if he had a serious theory to back up his opinion, that all cars would soon come with an automatic transmission. But one does not fool an economist so easily. I remember thinking, and perhaps arguing, that this depends on consumers’ preferences. It also depends on budget constraints, the second factor in consumer choices. At that time, stick-shift cars cost less at purchase, in gasoline, and I think on long-term maintenance; trade-offs had to be made. According to an interesting Wall Street Journal story, the small demand for sticks is on the rise, even if their cost advantage has disappeared (Rachel Wolfe, “The 20-Somethings Fueling a Stick-Shift Renaissance,” March 1, 2023). The new appeal comes mainly from younger consumers intent on “taking control of their clutches” or looking cool. Remember that individual preferences are subjective. A mother gave a stick-shift to her son, reflecting that he was thus less likely to text while driving. The demand for stick-shift transmissions is also increasing in high-end cars. A few highlights from the WSJ: Following a decades long decline, three-pedaled vehicles are experiencing a modest but real resurgence. Manuals accounted for 1.7% of total new vehicle sales in 2023, according to data analytics company J.D. Power, up from 1.2% last year and a low of 0.9% in 2021. The Autotrader marketplace reports a 13% rise in page views for new manual cars in 2023 compared with this time last year. … “It’s not a statement against electric cars so much as I’m going to try to enjoy the type of driving that’s the most fun to me until I can’t anymore,” says 26-year-old Lucas Marcouiller, an engineering salesman in Warwick, R.I., who has purchased three manual vehicles. If my car old (or deceased) salesman forgives me for using him as a teaching scapegoat, we may imagine that his implicit and muddled theory was that decisions on which sorts of car to manufacture would soon be made by the government. As we know, politicians and bureaucrats are more rational than consumers. Perhaps the salesman, assuming he was also well versed in the history of economic thought, was envisioning the future advocated by Rexford Guy Tugwell, the socialist economist of FDR’s time? In a 1932 American Economic Review article, Tugwell wrote: New industries will not just happen as the automobile industry did; they will have to be foreseen, to be argued for, to seem probably desirable features of the whole economy before they can be entered upon. More seriously, compared with government apparatchiks, car salesmen are saints, as long as they don’t want to rule over others. Yet, there is an important feature of the world that still seems to escape many of our contemporaries: as long as some free market exists and a small minority of consumers are, whatever their reasons, willing to pay for stick-shift cars, they will continue to be produced. It’s called consumer sovereignty. (0 COMMENTS)

The Calculus of Consent by James M. Buchanan and Gordon Tullock is one of the Great Books in the Public Choice tradition, a scholarly tradition within economics and political science that uses tools of economics–rational choice, methodological individualism, and the notion of politics as exchange–to understand political decisions. Public choice has been criticized as cynical and depressing because it (allegedly) doesn’t see people as more than hedonistic lightning calculators of pleasure and pain who would run over their own mothers to pick up a nickel on the sidewalk. Like many economic theories, it has been criticized for being “reductionistic” and for having a narrow, “atomistic” view of the detached individual. People have argued that it is evil because it advises people to act that way (spoiler alert: it doesn’t). It has been called immoral because it refuses to look at people through aspirational lenses. But then again, what should we expect from what James M. Buchanan–one of the founders of Public Choice and 1986 Nobel Laureate for public choice ideas–calls “politics without romance”? Observers shouldn’t sell public choice theory or public choice economists short. There is more to the Public Choice tradition–and to economics more broadly–than getting and spending. Buchanan was keenly interested in ethical ideas over the course of his career, which shouldn’t be surprising given his mentor Frank Knight’s publication record. He includes a section on “Pigovian Economics and Christian Ethics” in his underappreciated book Cost and Choice. There are four entries in the index to The Calculus of Consent for “ethics” and one for “morals.”  Four of those references direct readers to Chapter 16, “Democratic Ethics and Economic Efficiency” (emphasis added), and another directs readers to a section titled “The Ethics of Pressure-Group Activity” at the end of Chapter 19. Buchanan and Tullock argue that their research agenda is optimistic rather than pessimistic because they “view collective decision-making (collective action) as a form of human activity through which mutual gains are made possible.” They continue: “Thus, in our conception, collective activity, like market activity, is a genuinely cooperative endeavor in which all parties, conceptually, stand to gain.” They contrast this against “much of orthodox political thought” which “seems to be based on the view that the collective-choice process reflects a partisan struggle in which the beneficiaries secure gains solely at the expense of the losers.” Following the economist Dennis Robertson, they argue that if their analysis is correct, “there need be less reliance on moral restraints of individuals.” In other words, we can get better political outcomes with people as we actually know them without waiting for a Great Leap Forward or a New Socialist Man. They recognize that people have standards: some people might think labor is OK but prostitution is “grossly immoral.” Turning to economists, “(a)n economist may consider it morally acceptable to sell his educational services to a university, but morally unacceptable to sell his professional services to a political party.” A little imagination brings up a lot of other examples. We generally agree that it is OK to buy houses and apartment complexes and rent them to strangers but that it isn’t OK to present one’s child with a bill for food, clothing, and shelter. Taboo foods and forbidden words appear in almost every culture. Just because people are methodological individualists does not mean they can’t be vegan. They go on to discuss vote-trading, which, they argue, is almost universally condemned when money is involved. A student at the University of Minnesota, for example, was charged for offering to sell his vote in the 2008 election on eBay. Things are different when no money changes hands but when people take advantage of “(t)he opportunity to trade votes on separate issues through logrolling,” which, as they point out, can have some advantages insofar as it can block discriminatory legislation. They go on to analyze arguments for and against vote-trading in different scenarios and to argue that pressure-group activity (later called rent seeking) and argue that it is “an inherent and predictable part of modern democratic process” that “is a predictable outcome of [their] fundamental behavioral assumptions.” At first, this looks depressing. However, the public choice approach gives us reasons for  hope because it shifts attention from moral reform to institutional or “structural” reform. There is a great deal of fault in ourselves, but at least with respect to public choices, they can be mitigated a great deal by addressing the faults in our incentives.   Art Carden is Professor of Economics & Medical Properties Trust Fellow at Samford University, and he is by his own admission as Koched up as they come: he has an award named for Charles G. Koch in his office, he does a lot of work for and is affiliated with an array of Koch-related organizations, and he has applied for and received money from the Charles Koch Foundation to host on-campus events. (0 COMMENTS)

In the 1980s, an intermediate microeconomics text that I was a big fan of was Donald N. McCloskey’s The Applied Theory of Price. It’s very “Chicagoan” in the best sense of that word. If you mastered that book–I mean really mastered it–you could plausibly call yourself a microeconomist and not just a student. Here’s a link to a pdf of the text, which McCloskey offers at a zero price. My friend Rick Geddes of Cornell University came across correspondence in 1988 between McCloskey and the president of Penn State University. I won’t quote the whole thing because McCloskey’s letter was lengthy. He showed more respect for the outrageous president than I would have. Here’s the relevant section of the text: it’s about racial discrimination in the labor market: Q: If employers, to a varying degree, have a distaste for hiring black workers rather than white workers at the same wage, then a rise in the proportion of blacks to whites will be accompanied by a fall in the relative wages of blacks. A: As the proportion rises, the blacks must be paid the same wages (assuming that blacks and whites are identical except for color), or else the low-wage person will undersell the high-wage one. So the black wage is determined by the wage differential that just compensates the most discriminatory employer hiring any black for hiring “the” marginal one. Therefore, true. On October 21, 1988, President Bryce Jordan of Penn State University wrote McCloskey, then a tenured professor at the University of Iowa, asking McCloskey to change the text. Jordan wrote: I am writing on behalf of concerned students at Penn State who are distressed about certain language in your text, The Applied Theory of Price. I understand that Jim Rodgers, head of Penn State’s Department of Economics, has discussed these concerns with you in that phrases exist in the text that are perceived to be offensive to students of African-American descent. We refer specifically to page 451 of the text where it cites: “(assuming that blacks and whites are identical except for color).” It would be my hope that you would work with your editors to see that this particular passage is deleted from forthcoming editions of the text. In McCloskey’s long answer, he tried to figure out what Jordan meant and responded to each potential meaning. In my view it was a good-faith effort. Then McCloskey turned to the wider issue, writing: Let me be perfectly clear that I am not going to accede to your demand. I would literally rather go to jail. I must resist of course any such request for censorship, however politely expressed–and yours is clumsily and insultingly expressed–or however influential the requestor–and you are very influential. I would have thought that the president of Penn State would know this, but these are bad times for free inquiry, when those who are supposed to defend it shirk. I won’t. Your request for revision is politically motivated and wholly unreasoned, and I must resist it with all my tiny strength. McCloskey ended the letter with the following: I have wider concerns. My concern is that you represent a new breed of administrators with a feeble understanding of academic freedom (which is not “bestowed” by anyone; it is a fragile social custom, easily taken away, by such actions as yours). My concern is that you and your students have somehow gotten the idea that democratic life is a matter of making demands and issuing orders. My concern is that your rhetoric of “sensitivity” is a cover for attacking the most vulnerable parts of the society, the conversations of serious people. Most of all my concern is that we college professors are somehow not educating people to what real sensitivity to moral issues is about, something beyond Dr. Feelgood “concerns” unarticulated and backed by threats of boycott and uses of authority. But I can’t threaten you in turn to get you to respond to my concerns. I can only reason with you. Note that second sentence in the above quote. Man, was McCloskey ever on to something. The rot was there at least 35 years ago. For more on labor market discrimination, see Linda Gorman, “Discrimination,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. (0 COMMENTS)

Last week, Tyler Cowen published a link to a recent study of the use of ivermectin in patients who had had Covid-19 for a median of 6 days. As is his wont, he doesn’t say much about the study (other than a quizzical comment about Scott Alexander) but simply links to it. Many of the commenters on that site, though, seem very sure that ivermectin is not beneficial for those in the early stages of Covid-19. Of course, as with most comments, it’s difficult to tell what bases they have for their views. Charley Hooper and I have written extensively about ivermectin (for example, here, here, here, and here) and have pointed out how poor some of the main studies and, in particular, the TOGETHER study, are. This latest study appears to be no exception. Here’s an extensive critique. The thing Charley and I noticed right way in that critique is what the evaluators label as Critical problem #13: Very late treatment. If you go to this page and scroll down a little to the graph of efficacy versus treatment delay in days, you see that most of the treatments studied need to be administered in the first 2 to 4 days. When was the treatment in this latest study administered? The median time was 6 days. Also, note the Critical problem #33: Extreme conflict of interest. “The ACTIV executive committee was chaired by employees of J&J and NIH, and is now chaired by employees of Pfizer and NIH. Other members of the committee are from NIAID (Dr. Fauci), FDA, and Pfizer.” If you want to find that ivermectin is ineffective, you can surely do so.   (0 COMMENTS)

The Economist has a graph that doesn’t seem to fit into the worldview of either of America’s political parties: On the left, pundits often bemoan the fact that America’s government doesn’t provide a generous health care program like those European countries.  On the right, the prevailing view seems to be something like, “Thank God we don’t have socialized medicine like those European countries.”  But what if they are both wrong?  What if our government actually spends more on health care than other developed economies?  What should we make of that fact? I find it interesting that neither political party seems willing to propose the following reform: Keep US government spending on health care at 8.5% of GDP, but use the money to cover the entire US population.  Set up a system analogous to Medicare Advantage, where the government funds various private insurers to provide coverage.  Insurers compete for customers by offering as generous a plan as they are able to given the funding provided by the government.  Under this sort of regime, the health care would presumably be rather bare bones.  People could purchases more extensive coverage out of pocket. I’m not at all convinced that this proposal is a good idea.  Nonetheless, I find it interesting that no one seems to be proposing this sort of system.  What can we infer from the fact that almost no one seems to advocate replicating the European system, despite the fact that lots of pundits claim that they like the European system? America currently spends roughly 17% of GDP on health care.  Under my proposed system, Americans could continue to purchase that much health care if they chose to do so.  (Real incomes would rise sharply once employers no longer had to provide health care to employees.)  But it seems overwhelmingly likely that most people would not choose to maintain current levels of spending on health care.  Spending at levels exceeding 8.5% of GDP would come out of pocket.  Many people would spend less, and settle for less health care consumption than they currently enjoy.   I suspect that my proposal would hurt people that work in health care, and also hurt people on Medicare and Medicaid.  It would help the rest of the public, and the net effect on welfare would probably be positive.  But I doubt whether either political party would support this sort of reform. People on the left say they want a European type system, but I don’t believe them.  I suspect they actually support a system where the government spends more like 17% of GDP on health care, not 8%.  People on the right say they want to spend less on health care, but I don’t believe that conservative politicians wish to lose the votes of doctors, nurses and Medicare recipients.  The status quo is very well entrenched, and would be difficult to reform. (0 COMMENTS)

In California, the state government is pushing us Californians away from gasoline and natural gas and towards electricity. The California Air Resources Board wants to ban the sale of gasoline-powered vehicles and even hybrid vehicles effective in 2035. I say “wants to” rather than “will” because I don’t think it will succeed. It also plans to mandate, in 2025, but effective in 2030, a ban on new purchases of natural gas-powered water heaters and space heaters. I guess CARB prefers that natural gas be used to produce electricity, with the attendant loss of efficiency in transmission, over the direct use in homes. I’m not sure why. What CARB is doing is gradually reducing diversity in energy usage. That makes us more vulnerable when the electric power goes out. My wife and I lost electric power 6 times between December 10 and today. Typically it was for a few hours. On New Year’s eve, it was for 9 hours. I remember when it came on after the 6th time, we commented to each other that electricity and light felt like a luxury. (Why did it go out? Heavy rain that uprooted trees that have shallow roots, causing the trees to fall on power lines.) A friend of mine in an apartment in San Francisco had a much worse experience on Friday. His power was out for many hours. He works from home on a desktop computer, not a laptop computer. So he couldn’t work. He thought, therefore, of driving somewhere in his car. But his car is parked in a garage attached to the apartment block and the gate to the garage opens electronically. So he couldn’t get his car out. How about, then, going for a walk? Surely he could do that. Two problems. First, because the power was out, there was no light in the hallway or the stairwell. Both have emergency lighting but because the outage lasted so long, were out of juice. I asked him if he could have used a flashlight to go down the 5 stories to the outside but he said that at his age, he didn’t feel safe doing so. Second, the door to get back into his apartment complex is attached to electric power. So yes, he could have gone for a walk. But he wouldn’t have been able to get back into his apartment. Oh, and because the water heating system in his apartment has an electric component, he couldn’t get a nice hot shower. This is electricity hell, and it’s what the state government is planning for millions of Californians. Note: My friend read this in advance to make sure I got the facts right. He wanted me to add that his cat didn’t like it either. (0 COMMENTS)

Our Virtual Reading Group on Bruno Leoni’s Freedom and the Law has been magnificent. The book is still capable of eliciting disagreement and suggesting new ideas. Several participants never read it before and were impressed, not least because of its style: Leoni’s lectures were reviewed and edited by Arthur Kemp, who perhaps also deserves some credit for streamlining his friend’s English. The last session is devoted to Leoni and libertarianism. To what extent did Leoni fit into this tradition? The readings are a review written by Murray N. Rothbard and published by the New Individualist Review and a more recent contribution by Todd Zywicki. The New Individualist Review was a short-lived but great publication, edited by a few brilliant scholars then PhD students at the University of Chicago, destined to become brilliant scholars. The book review editor was Ronald Hamowy (who published a brilliant, critical review of Hayek’s The Constitution of Liberty) and the editor-in-chief Ralph Raico, a brilliant historian much missed by his friends. In a sense, the two pieces were published so distant in time (Rothbard’s in 1962, Zywicki’s in 2014) that one may be tempted to see the different sensibilities between them as reflecting the time which has passed and the evolution in the libertarian movement. Or perhaps the difference results from the fact that Zywicki is a legal scholar, whereas Rothbard was mainly an economist. Rothbard is critical of Leoni in the following sense: he is dissatisfied with Leoni lacking a clear-cut idea of what makes the law legitimate (or illegitimate), which needs to be a strongly anchored criterion (like, Rothbard will later argue, anchored in natural law) in order to avoid leeway towards an interventionist position. Rothbard quotes Hamowy’s review of F. A. Hayek’s The Constitution of Liberty and sobs: the tragic puzzle is that so many quasi-libertarian thinkers have, over the years, failed to adopt this definition of constraint or have failed to limit violence to counteracting violence, and have instead opened the door to statism by using such vague, jumbled concepts as “harm,” “interference,” “feelings of constraint,” etc. Decree that no violence may be initiated against another man, and all the loopholes for tyranny which even such men as Leoni concede—blue laws, government lighthouses, taxation, etc.,—would be swept away I think, on that matter, Rothbard is a bit off the mark. Leoni was extremely wary of inadvertently opening the door to interventionism, and his very book testifies to that. Leoni was not an anarchist libertarian (or “anarcho-capitalist”) but one also needs to consider that he died in 1967. He admired the Austrian school, Mises and Hayek, but also Rothbard. His copy of Man, Economy and the State was well-worn and full of marginalia. We don’t know where more mature reflection by Leoni would have led him. We have some hint though by reading “The Law as Individual Claim”: an essay that (together with similar works on political exchange) suggests that Leoni was working on a broader, more general theory of law and politics. To quote from Zywicki’s paper: For Leoni, the idea of “law as individual claim” means that the law essentially leaves individuals alone, unless two private citizens seek intervention by a judge to resolve a dispute between them. … the whole point of common-law rules is that they are there for private parties to use to coordinate their affairs, but where the rules are not useful to that end, the parties are at liberty to ignore them and create their own rules by contracting around them. This explanation is the essence of his idea that the common law is a “spontaneous order” analogous to the market process: there is sort of back-and-forth collaboration between individuals asserting individual claims and judges resolving those claims and improving the law to better meet specific demands. In turn, those resolutions feed back into individuals’ decision-making and either promote or undermine private expectations and private ordering. Moreover, judges can be seen as entrepreneurs, proposing different rules in order to see which rules fit individual expectations most efficaciously. From this enterprise of private, uncoordinated litigants seeking to vindicate their individual claims, an entire legal system springs up. This has strong implications for libertarianism, perhaps it is a way of framing a libertarian order all together. I am eager to listen to our participants’ views. (0 COMMENTS)

When does it make sense to use an insurance model, and when is an insurance model less useful? After all, it clearly doesn’t make sense for most of our transactions to be done through an insurance model. We don’t make our food choices using grocery insurance, nor do we buy movie or concert tickets with an entertainment insurance policy. An initial answer one might give is that we should use insurance to cover highly expensive transactions. But this isn’t quite right. Something being expensive does not, in and of itself, make an insurance arrangement sensible. This is because many things which are expensive are also reasonably predictable. An insurance arrangement makes sense for events which are high cost, low probability, and not predictable at the individual level. To give it a pat description, insurance make sense for events that, individually, are a matter of if, not when, but at the population level, are a matter of when, not if. Consider homeowners insurance as an example. There are a lot of expenses that come with owning a home, but not all of them are typically covered with insurance. Depending on construction materials, most homes need to have their roof replaced every fifteen to twenty years or so. Replacing a roof is very expensive, but most homeowner insurance policies don’t cover this kind of repair. That’s because needing to replace the roof of your house isn’t a matter of if, it’s just a matter of when. These kinds of easily anticipated expenses are best met through savings, not insurance. This is in contrast to, say, a house burning down. Whether or not your house burns down isn’t a matter of when, it’s a matter of if. Statistically, your house probably won’t burn down. But from the point of view of the insurance company, covering many tens of thousands of houses or more, that somebody’s house will burn down isn’t a matter of if, it’s just a matter of when. This difference in predictability, rather than total expense, is what explains when it makes sense to use insurance or not. And it’s also why a relatively small house fire that causes $5,000 in damages will be covered by insurance, but a roof replacement costing $20,000 typically will not. Thinking about it in these terms, we can see places where comprehensive homeowners insurance doesn’t make sense – places where a home suffering major damage isn’t a matter of if, it’s a matter of when. There are areas in the United States where particular kinds of natural disasters are all but guaranteed to occur on a frequent basis – hurricanes, or major flooding. If you live on the Atlantic coast in Florida, your home getting hit by a hurricane isn’t really a matter of if, it’s just a matter of when. In a free market, we’d expect to see fairly little insurance for this, and instead people who choose to buy homes in areas with such well known and easily predictable risks would also be responsible for the repairs their homes will regularly and predictably need. Instead, areas with high risk levels see the insurance markets heavily distorted through subsidies that making living in high-risk areas artificially cheap by compelling others to foot a significant portion of the bill for the risks the residents choose to take. This creates a situation where the market is sending a clear signal saying “Hey, maybe don’t build lots of expensive infrastructure here” and legislators respond by saying “Counterpoint – maybe do build lots of expensive infrastructure there, and then when the inevitable and easily predictable results come about, you can just pass off the majority of the costs to your fellow citizens!” Health insurance, as it currently exists, also makes little sense when viewed through this lens. In a free market, we would expect health insurance to cover treatment for conditions that aren’t a matter of when, but a matter of if. It would be used for cases like car accidents, where you suddenly and unexpectedly have large injuries needing immediate care, or for someone who develops cancer or needs an organ transplant. But it wouldn’t (and doesn’t) make sense for ordinary, predictable health maintenance and routine care to be provided though an insurance model. Some people might think we need health insurance for this because even routine maintenance can be so expensive, but I would argue that causation goes the other way – routine, commonplace health maintenance is so expensive because so much of it is covered through an insurance model. Imagine if, due to subsidies and legal regulations, even the most routine car maintenance had to be covered by auto insurance. Need an oil change, or some new snow tires for the winter? Imagine having to check around to see which auto shop is in or out of network for your insurance company, trying to determine which sets of tires your policy covers and to what degree, working out what your deductible will be for the tire installation, and never even bothering to ask about the full price of the process, because you don’t ever pay the full price. And suppose you met your out-of-pocket maximum for auto insurance for the year! You’d have every reason to take your car into the shop as many times as you could for the rest of the year. This is one reason why health care reform that’s dedicated to making health insurance even more widespread and even more comprehensive is all but certain to make the problems with our health care system even worse. Insurance can be a great tool, but it’s just a means to an end, not an end in itself. Making insurance more widespread and more comprehensive is not automatically a good thing – but as a soundbite, it’s very politically popular, and unfortunately that tends to be what carries the day more often than not. (0 COMMENTS)