I’ve been on a bloggingheads kick lately. One of the most enjoyable that I’ve seen was between Will Wilkinson and Joseph Heath. It is about Heath’s new book Filthy Lucre. It is an economics book for the general reader from a slightly left-leaning perspective. Heath ultimately champions what Wilkinson himself has called a laissez-fair welfare state. The “Nordic Tigers” like Iceland and Denmark do have high taxes and lots of social insurance. But they have low corporate income and capital gains taxes and minimal regulation so they actually score quite high in the Heritage Foundation’s index of economic freedom. They would actually have even freer markets than Hong Kong if you exclude taxes and social insurance.
There were two interesting points about this bloggingheads. The first was that Heath is a warm, intelligent, and engaging speaker. One of the tastes that I’ve recently been acquiring as an appreciation for idiosyncratic but effective speech. Heath uses some unusual rhythms and intonations but they, at least to me, engaging and effective. I’d take it over the smooth-talking robots on TV any day.
The second interesting point was that Heath effectively crystallized how to defend a welfare state in terms of insurance and adverse selection. The gist comes down to George Akerlof’s famous point about the market for lemons. Imagine dividing usedcars into two categories: peaches and lemons. Peaches are worth $15,000 and lemons are worth $10,000. Let’s suppose that half the cars for sale are peaches and the other half are lemons. Then consumers would be willing to spend $12,500 for a used car. They come out ahead if they get a peach and behind if they get a lemon, but the gamble is fair. But that means that people who own a lemon would not want to sell it. No one wants to sell a car worth $15,000 for only $12,500. Thus people only sell lemons and you can’t buy a used peach. Peaches are driven out of the market. That is adverse selection.
The same principle applies to health care (although with some important caveats). Suppose peaches only need $5,000 of health insurance (or have a 1 in 100 chance of needing $500,000), and lemons need $10,000 in health insurance. And let’s also suppose that half the insured are peaches and the other half are lemons. Then the insurance company would charge its customers about $7,500 per year (plus profit) for insurance. The means that peaches would be paying $7,500 to get $5,000 in insurance. Some other insurance company would come along and “cream-skim” the peaches by charging them only $1,000 (plus profit). In the real world people are simply peaches or lemons so what this effectively does is destroy the concept of insurance. People are no longer pooling risk but are being charged for their exact condition. This is the crucial argument for government health care. If you force everyone to go into the same risk pool then the premiums will go down for most people because private firms can’t “cream skim” the healthy people with lower premiums.
Social Insurance
And that takes us to the welfare state. Welfare is basically insurance against ‘being female and getting pregnant before you finish your education’ (interestingly enough, no modern welfare state provides child support social insurance). It would be nice to provide insurance against that condition. Unemployment insurance is insurance against losing your job. Disability programs like Supplemental Security Income are basically insurance against getting a disability. Once upon a time these forms of insurance were provided by extended families, churches, and mutual aid societies. But they fell victim to modern statistics as profit-seeking insurance companies began to cream skim (well, at least for health and unemployment insurance. I don’t think that was ever the case with welfare). Heath argues that personal responsibility is a red herring. What we need is the government to create society-wide risk pools. The proper way to think of the government is as “insurer of last resort”.
Wilkinson makes few important points in response. The first is that government welfare programs crowd out private insurance. The second is more important. He points out that some societies are more cohesive than others. The research on trust and social capital supports this. Where social cohesion is high you can have either public or private social insurance. Conversely, where it is low you can’t have either. Heath is claiming that welfare states are necessary but his real claim should be that cohesive societies with lots of social capital are necessary. Thirdly, private insurance can be more effectively monitored. Churches have better “ground level” knowledge of those who are down on their luck than government bureaucrats. Moreover, churches align the incentives of those who receive charity with the monitors of the charity and the congregation which funds it. They all want the person back on their feet as soon as possible. By contrast, government bureaucracies become special interest groups which benefit from increasing the number of enrollees. I wish Wilkinson pushed this point a little harder. It was an agreeable bloggingheads and I think he could have had a couple of hardnosed followups without pushing the bounds of good taste.
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