According to The Economist, customer service in America is getting worse, and that matches my own experience. For instance, I recently had trouble with my dental insurance, which was accidentally cut off at the beginning of the year. My wife and I had numerous phone conversations with the multiple layers of bureaucracy that handle this policy, but it’s like talking to a brick wall.

[If you are interested, my former employer has a company called Voya manage their employee benefits, and they were supposed to instruct CareFirst dental to re-instate my insurance.  Voya insisted they sent the information, CareFirst denied getting it.  Even a three way phone call failed to resolve the issue.]

I looked online, and Voya’s Los Angeles office seems to have a horrible record with customers, so we are not alone.  In addition, the exact same problem happened last year, and it was a hassle to get the issue resolved.

Although these are all private companies, I blame the government for our distress.  To see why, consider the market for auto repair insurance.  You could buy insurance for auto repairs, to cover the cost when you need a transmission overhaul, a brake job or a replacement of calipers.  But these insurance policies are typically not a very good deal, and I have no interest in purchasing one.  The same is true of home repair policies.  

So what makes dental insurance different?  The answer is simple; these policies are heavily subsidized by the federal government, whereas home and auto repair policies are typically not subsidized.  Dental insurance is a very inefficient system, which would have trouble surviving in a free market.  But if a third party is going to pay 40% of the cost (via tax breaks), that’s enough to induce many firms to offer dental insurance as a “fringe benefit”, part of their total compensation package.

In this particular case, I would have opted to avoid dental insurance even with the subsidy if I had known how incompetent the firms would be.  But when making a decision, one can only form an estimate of the quality of the output.  With large government subsidies, a product can be highly wasteful to society and yet still be privately beneficial to the buyer.  Note that even if the companies had not screwed up the delivery of my dental insurance, I’d still be paying the salaries of all the people who work for the dental insurance companies, and the companies that manage the benefit plans of my employer.  That’s economic waste, as these people could be doing much more productive things with their time.

Dental insurance is only one of many problems with the dentistry industry.  In a new post, Matt Yglesias explains how dentists often prescribe unneeded treatments.  That’s also my experience.  I’ve known of numerous cases where dentists said extensive work was needed, and a second opinion showed the person’s teeth were in fine shape.  This is an example of the principal-agent problem.  The agent (the dentist) has a strong financial incentive to overprescribe dental work.

Although dentists are private companies, I also blame the government for this problem.  Yglesias explains the underlying problem:

One might think that since the work of a routine dental appointment is done by a hygienist rather than a dentist, a standard oral health appointment would simply be with a hygienist who lets you know if you need more specialized dental care. In reality, however, “scope of practice” rules pretty strictly limit which services a hygienist can provide, and only in Colorado and Oregon can hygienists perform diagnostic work.

In a free market, I’d try my best to avoid dentists and instead go to a dental hygienist that did not do actual dental repair.  I would want my “agent” to have no financial interest in overprescribing dental work.  If anything, I’d be more likely to go to a hygienists that under-prescribed dental work, as I’d feel happier leaving the office if told my teeth were in fine shape.  Unfortunately, that sort of rational dental industry is only available in two states.  

There are many industries where I have few problems, including grocery stores, hair salons, dry cleaners, clothing stores, etc.  When I do have bad experiences, it’s generally with industries that are heavily distorted by bad regulations and subsidies.  These include health care, insurance, travel, pharmacies, housing, and auto dealers.  The problems fall into several categories:

1. Government subsidies that push customers toward inefficient and annoying firms, such as dental insurance.

2.  Government regulations that prevent efficient ways of delivering a good or service, such as direct sales from a manufacturer to the consumer (as in the auto industry.)

3.  Government regulations that dramatically increase costs and reduce quality by restricting supply, especially in health care and housing.

4.  Government regulations that prevent people from signing contracts promising not to sue over certain issues.

Can’t find an effective painkiller for that toothache?  Blame government rules requiring a prescription.  Can’t find a Boston apartment that will rent to families with small children?  Blame government regulations that ban contracts waving your right to sue over lead paint.  Frustrated that US airlines don’t offer the good service you had on Singapore Airlines?  Blame government regulations that ban foreign airlines from serving domestic markets.  Frustrated that your children cannot afford to live where you grew up?  Blame zoning regulations that restrict the supply of housing.

People who are ignorant of the role of government often blame “capitalism” for problems they have in various sectors of the economy.  In some cases, that simple explanation is true.  But in most cases I’ve seen, the ultimate problem is government subsidy and regulation.

PS.  After writing this post I read the transcript of a Tyler Cowen interview of Patrick McKenzie.  McKenzie was asked why fees for Western Union transfers are so high, and responded:

Due to anti–money laundering and know-your-customer requirements, the amount of compliance drag on small transfers of value in the world is very, very large.

Again, look closely enough and it’s almost always bad government policies.