Your Zip Code or Yourself

This look like a very politically explosive issue to me.

If the rates of all the people in the suburbs increase, I think their state congressmen and state senators will hear about it…

I can’t belive he would wade into this can of worms…

Brian, Insurance here is California is so over-regulated that of course the insurance companies don’t try to gain advantage by making better predictions of who will be more likely to have an accident and who will be less likely. About the only thing the industry ever could get behind was no-fault, which was a horrible idea.

Although auto insurance is mandatory in CA, there is an out… you can have a secured bond in a minimum amount. A very interesting and practical piece of academic work would be to determine who should go the secured bond route. Might it be less expensive for a good driver to move general savings or borrow money to secure that bond than to purchase auto insurance?

Oh yeah, I forgot. I give the author of this post an incomplete. It’s not worth an F. There isn’t even an argument in it. Just a smattering of disconnected ideas.

So run off back home, do a little more work, and we’ll take another look. And while doing so, please consider the following issues as well:

Should people across the street one another pay different rates simply because they have a different zip code?

Should the guy who lives in Rancho Sante Fe (my neighborhood) and drives his BMW 740 into downtown San Diego every day pay rates similar to the bloke who lives in downtown San Diego?

More generally, since you are against regulation, what is your approach to solving the problem of a person with a prexisting condition who loses his job and his insurance. In an unregulated market, who will want to pick up this person with a prexisting condition?

James: my point is that human society is a complex system. The argument often made by libertarians is that if there is a common good, it is best achieved by the so called invisible hand. That unregulated markets are the most efficient way to allocate resources. They cannot prove that. The assumptions that must be made to prove it have been demonstrated to not be true in practice. Every economist with even a grain of honesty will admit that.

So then we are left with the details. What to regulate. What not to regulate. Because on a theoretical level, one cannot demonstrate the optimality of regulation one way or another, it becomes a matter of deciding on a case by case basis, with due analysis.

The point of insurance is to distribute risk across a large population. Given the opportunity, insurance companies would love to (a) provide insurance to those who will not need it and (b) withhold insurance from those who will need it. It makes sense, similar to the way it makes sense for a farmer adjacent to the commons to sneak a few extra sheep onto it for grazing.

The insurance commissioner has instead decided that insurance costs should be averaged or pooled across the state.

These guys seem to provide a reasonable analysis of the issues in Los Angeles:
http://www.uctc.net/papers/654.pdf

Yes, per mile risks are higher in the inner city. Which means the BMW driving lawyer, who lives in the Palisades, should (a) pay more when he drives into the center of LA? or (b) less because he’s in the less congested area?

I’ve got a better idea. Spread the risks across the entire state. Gee. What a concept. That’s exactly what the insurnace commissioner is doing.

T.R. Elliot,

The purpose of insurance is to provide coverage for a low probability event whose cost is high.

Insurance companies are very good at pricing risk (and getting better). As Bryan noted, they have NO incentive to miss price risk. A miss priced risk opens the opportunity for competitors to take the business. Given the cost to acquire a customer is substantial and the breakeven time is typically a few years this would not be good business.

It is also worth noting that insurance companies pay on average 98 cents in claims for every dollar they take in premiums. Thus, as you increase risk you increase the pay out on average and thus push up the average everyone pays for insurance.

States like California and NJ that “protect” their drivers pay higher insurance rates than states where consumers are not as well protected. This should be a clue to you and others that the “protection” you allege is no such thing. It is fact at tax on STUPIDITY leveled on consumers of these states who blindly follow state regulators. The sad fact about this regulation is that it hurts everyone – consumer, insurance company, shareholder, humanity.

Expanding on the second point – your ZIP code reveals things about other relevant risks, not just how good others are at driving. For instance, health care costs, and how likely others are to sue after an accident.

Why is it that we accept price fixing by the state. Insurance price regulation is a remnant of the type of Central Planning and Control that has been abandoned by the champions of such — the Communist nations. It leads to shortages and misallocation of resources.

Coverage rules and availability rules are good consumer protections that provide balance to the market. But price controls (rate regulation) is a disaster for everyone.

Insurance companies can tell with statistical certainty how much they -should- charge customers but the municifent State prohibits such transactions precisely because they result in optimum outcomes.

Oh come on. If insurance companies *really* were that uber-knowledgable then why would we need insurance agents? Prices can vary by a factor of three or four between different companies for the identical case (and Lord help you if you don’t have a good agent who’s willing to optimize for insurance companies).

Why the differences? Well, according to the agents I’ve talked to: statistics heavily leavened with dartboards and executive whim.

This is not to say the statistical models are inaccurate, but anyone who believes that most business decisions are not two parts executive guesstimate to one part numbers hasn’t actually worked with real businesses.

Tom West,

Are you protesting insurance companies having differing price structures?

The old joke (or dogma for many) is that when prices are high, that’s gouging and price manipulation. When prices are low, that’s cutthroat competition and predatory dumping. When prices are the same, that indicates collusion and price fixing.

That always seemed incomplete, but it seems you’ve showed how to round it out: When prices are different, that indicates executives are using dartboards to make business decisions.

So there you have it. Any prices at all indicate that there is something wrong with the market that requires the passage of regulatory legislation.

Bernard,
You write, “Because they [libertarians] make that claim [that unregulated markets lead to the common good] in every imaginable situation.”

I’m not sure what to think about such a remark. If you actually believe that libertarians make such a claim about unregulated markets leading to the common good in every imaginable situation, even after reading the libertarian views on regulation expressed here and elsewhere, well, I’m shocked. Very few, if any, libertarians make such a claim, at least since the 1700s. In fact, very few libertarians even refer to such a thing as “the common good” when arguing against regulation. Rather, the common libertarian arguments against regulation are that:

1. Regulation involves the initiation of force against innocent people to prevent voluntary exchanges or mandate involuntary exchanges.
2. It would be a crime if any agent in society other than the state were to implement a regulation, so the reasons that justify forbidding others to implement the regulation should also apply when the state wants to implement it.
3. Regulation benefits some at the expense of others despite being dishonestly touted as a way to advance the common good.
4. Regulations create a set of incentives and constraints that bring about new problems which are often as bad or even worse than the problem the regulation was supposed to solve, and policy makers faced with the choice of repealing the initial regulation or implementing still more regulation will tend to choose the latter to deal with the new problems, causing the cycle to repeat.
5. Regulations, due to compliance costs, increase the fixed cost of entry into regulated industries which results in cartelization, ultimately hurting the parties that the regulation is supposed to protect.
6. Markets, while not perfectly allocatively efficient, cannot be made more efficient through regulation because the public good of ensuring that the state is only implementing good regulations, like any other public good, will be underproduced and bad regulation, like any other private good with negative externalities, will tend to be overproduced.
7. Politicians, concerned with getting (re)elected, will propose regulations that they expect will intimidate firms into making political donations in exchange for scrapping of the proposed regulation.

There are supporting arguments for all of these, both empirical and theoretical. I don’t mention them here both for the sake of brevity and because my only purpose in listing them was to demonstrate the blatant falsity of your charge that libertarians claim that unregulated markets lead to the common good in every imaginable circumstance.

Regardless, I think you missed the point of my initial question. Either sellers can be presumed in need of regulation until proved innocent of such a charge, or they can be presumed not in need of regulation until proved guilty. Since bad regulations can generate consequences worse than the worst market failures but the best regulation cannot have consequences any better than the best markets, I find it wiser to err on the side of caution and presume innocence.

James,

You cite a number of things that libertarians believe about regulation, some of which, if true, would lead one to conclude that regulation is almost always a bad idea. To me that means that libertarians believe the absence of regulation – hence “unregulated markets” – is beneficial to society, that is, it leads to the common good. To interpret your assertions otherwise requires playing some word games that don’t interest me.

Now you claim that there are arguments in support of your propositions. No doubt there are. But there are also arguments against them. You cannot simply assert that those who hold to your views have no obligation to present supporting arguments, while those who disagree are under such an obligation.

And of course some of your propositions are meaningless, in that they establish nothing but are either faith-based(4,5,7), simply assume the libertarian conclusion(1,2,3), or are outright gobbledy-gook (#6).

As one example, consider your third point:

3. Regulation benefits some at the expense of others despite being dishonestly touted as a way to advance the common good.

Suppose I say,

“Free trade benefits some at the expense of others despite being dishonestly touted as a way to advance the common good.”

Do you agree with this statement? If not, why not? If so, do you think we should increase restrictions on imports?

I urge you to re-examine your other points as well.

James,

We are perhaps talking past each other. You refer to a well-understood and well-defined meaning of the term “common good.” Fine.

I did not intend the term in this technical sense, but rather more vaguely to mean “generally beneficial.” In that sense my point about free trade was to show that policies can be generally beneficial while being costly to some group. Regulations sometimes fall into that category. My fault for misunderstanding, I suppose, but I don’t feel too bad about it.

To be more precise, I think that libertarians do take the position that economic regulation is virtually always a bad idea, in that leaving economic activity unregulated leads to better results overall than the regulation.

I do not think that this is valid. I agree with T.R. Elliott that human society, including economic activity, is complex. I think that following simple ideologies, whether libertarian, Marxist, or other, in an attempt to generate universal rules about how the economy should operate is foolish.

To clarify what I mean by “assuming the libertarian conclusion,” consider your first proposition:

1. Regulation involves the initiation of force against innocent people to prevent voluntary exchanges or mandate involuntary exchanges.

Often true, but so what? Apparently you regard interference with exchanges as automatically bad. I disagree.

I see nothing wrong with environmental regulation, for example, that in some cases forces people or companies to buy things they would rather not buy. I see nothing wrong with mandatory liability insurance for drivers. I see nothing wrong with zoning rules that keep someone from opening a paper factory in a residential neighborhood. In other words, I do not accept that forcing people into “involuntary transactions” or preventing voluntary ones is automatically a bad idea.

As for “faith-based:”

4. Regulations create a set of incentives and constraints that bring about new problems which are often as bad or even worse than the problem the regulation was supposed to solve, and policy makers faced with the choice of repealing the initial regulation or implementing still more regulation will tend to choose the latter to deal with the new problems, causing the cycle to repeat.

This begs the question. Regulation undoubtedly often changes incentives and constraints, though you make no case as to why these new conditions are necessarily worse as a matter of principle. I’m sure you can cite examples of regulations that had bad consequences. I can probably do it myself. That is not proof of a broader proposition.

James,

You are being evasive and not addressing the issues here. It is very clear that when I wrote that you regard interference with exchanges as bad that I was talking about government blocking voluntary exchanges or forcing involutary ones. I cited some examples of cases where I consider this appropriate behavior by government, none of which you address, choosing to go off on a discussion of criminal activity instead.

You regard the use of force against innocent people as undesirable, but that is not at issue. The issue is what sorts of behavior the government may induce by the threat of force. Potential bank robbers who are deterred by the threat of force are innocent, kept that way by the threat. Closer to home, I make my mortgage payment every month because if I don’t the government will use force to take my house away. Surely these are legitimate threats, and they are directed against people who have done nothing wrong.

The other example is equally unpersuasive. It is a major libertarian argument that regulations sometimes turn out badly? Who disagrees with that? Of course they do. That is why it is necessary to evaluate them on an individual basis, rather than by invoking ill-considered general principles.

I’m certainly not trying to be evasive.

You are doing an awfully good job for someone who is not trying. You have yet to respond to my comments about your very first argument. When you do I’ll discuss things with you further. Meanwhile, enjoy your game, if you can find someone else to play it with.

A reasonable compromise would be to charge people based on the population density of the zipcode.

The difficulty is that economically the difference between charging someone more for an item and slapping them with a fine is non-existent. The insurance and credit markets fine people not for what they did, but the probability of them doing something. Most people would find it reasonable to charge someone more because they chose to live in a high population density area; they would not find it reasonable to charge people more because they could not afford to move away from a poor area.

BTW: The claim that one of means can circumvent the law by posting “bond” does not fly. If you have the financial means to post the bond, you have much more than the bond at risk and will want the insurance!

Bernard,

I’ve enjoyed your posts on this blog because counter-views are necessary for intellectual honesty. But go back and re-read James’ #6, what you term “gobbledy-gook.” Think about it in plain english – regulation potentially produces bad outcomes because a regulatory body has its own bias, myopia, and set of perverse incentives. If you can’t accept this as possible, I’ll have to chalk it up to your *faith* in human nature.

Bob,

Here is James’ #6:

6. Markets, while not perfectly allocatively efficient, cannot be made more efficient through regulation because the public good of ensuring that the state is only implementing good regulations, like any other public good, will be underproduced and bad regulation, like any other private good with negative externalities, will tend to be overproduced.

What can this mean? Your interpretation is:

regulation potentially produces bad outcomes because a regulatory body has its own bias, myopia, and set of perverse incentives.

This is common sense, and no one should disagree with it. Regulations sometimes produce bad results. But that is not what James said. He claims that regulations never produce good results, can never improve efficiency.

And what is his reason? Not that the rule-makers have their own agendas that sometimes lead to bad rules. Rather he uses economic terminology, “public goods,” “externalities,” in referring to things that are not economic goods at all. Why? I don’t know. But it obscures rather than clarifies. Ultimately what #6 says is that regulations can never do any good. James is entitled to believe that, but that doesn’t mean his alleged logic demonstrates it.

You ask me to think about it in plain English. Perhaps you should ask James to write it in plain English.

Ensuring that the state only implement good regulations most certainly is an economic good. The characteristic that defines an economic good is that it is available in some quantity too small to satisfy the desires of all those who would gain utility from it. The service of ensuring that the state only implements good regulations absolutely is not available in sufficient quantity to satisfy those who want this service to be performed.

It is also a public good. The two characteristics of a public good are that it be nonrivalrous and nonexcludeable. Ensuring that the state only implement good regulations is nonrivalrous, in that if anyone uses their resources to ensure that the state only implements good regulation, everyone benefits. It’s nonexcludable in that the people who do not contribute to their resources toward ensuring that the state only enacts good regulation still enjoy the benefits from the provision of this service.

That bad regulation is a private good is demonstrated by the fact that there are people willing to pay to ensure that bad regulation is implemented. That bad regulations have negative externalities is tautologically true in that the negative externalities are what makes them bad.

Since there is apparently some confusion regarding what constitutes an externality, it is when the costs or benefits associated with some allocative decision accrue to some party other than whoever made that decision. Since the costs of bad regulation do not fall entirely on the parties responsible for the implementation of bad regulation, there are negative externalities associated with bad regulation.