By Bryan Caplan
In a recent post on health care, Krugman writes:
[E]conomists have known for 45 years — ever since Kenneth Arrow’s seminal paper
— that the standard competitive market model just doesn’t work for
health care: adverse selection and moral hazard are so central to the
enterprise that nobody, nobody expects free-market principles to be
enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.
I guess that makes me nobody. But despite my non-existence I can still somehow make two points:
1. On moral hazard: Government regulation does virtually nothing to solve these problems. It doesn’t even try. Indeed, it often makes moral hazard worse by imposing regulations that make it harder for rates to reflect risk.
2. On adverse selection: As long as rates are legally allowed to reflect risk, there is a lot of evidence that selection is actually advantageous rather than adverse. Despite its massive citation count, Arrow’s paper is deeply wrong. But even if Arrow were right about the empirical importance of adverse selection, government regulation doesn’t do much about it. In fact, it often creates adverse selection problems that wouldn’t exist by imposing regulations that make it harder for rates to reflect risk.
Unlike Krugman, I not going to dismiss everyone who doesn’t know these facts as “remarkably ignorant or simply disingenuous.” What I will say, though, is that if you don’t know them, you have a lot to learn from nobody.