Is all pooling theft?

January 23, 2010

A while back I wrote about pooling in regards to insurance and how it is theft.  I was asked by a colleague if all insurance pooling is theft.  The answer is no.

Insurance is something you don’t plan to use which is why health insurance, as most people view it and use it, isn’t insurance at all.  It is instead what is called cost shifting, whereby you are consuming at a lower price, more than you otherwise would given accurate market prices, while the rest of the price is picked up by others.  What makes this palatable, at the very least, is that presumably the costs are borne by many and the extra cost incurred is small.

This is truly a sucker’s game, one that has driven up health care expenditures while simultaneously driving down out-of-pocket contributions.

Or, as Homer Simpson says, “DOH!!”

So, is health insurance, or any insurance for that matter, a sucker’s game?  Hardly.  The problem is that pooling is done mostly through force which is why the market distortions occur.  And it is a very profitable venture for two of the three parties involved: the insurers (and is it ever profitable) and the over-consumer.  The third, who is forced into the system, who under-consumes, is the victim in every sense of the word.

Pooling done through choice however is not only valuable, but vital, for a free economy.

Any venture comes with a risk, even as mundane a task as driving to the store for groceries.  Economists know that the greater the risk, the less the chance of the action.  While this is similar to the concept of opportunity cost, it differs only in that the negative outcome or loss, is not certain.  Buying a $50 pair of shoes necessarily means that one forgoes a $50 pair of pants, with the same $50.   (For those who write for the NY Times, this is sometimes referred to as a basic principle of economics, which Austrians believe hold always.  For instance, “depression era economics” still means that scarcity exists.)

However, buying a pair of shoes comes with the risk that usage will cause painful blisters.  In other words, the cost would be actually higher than just the pants.  It would be pain and discomfort as well.  Of course, some women will consider that the price of fashion!!  Some stores have fairly liberal return policies regarding shoes and lest anyone think otherwise, that policy comes with a cost and it is figured into price of every pair of shoes.  It’s true.  But, it is why people prefer to buy shoes from a store with such a return policy.

So, assume one buys a pair of shoes from a store with a liberal return policy, and the shoes do not cause them pain.  They still paid the premium for the return policy but they did not get back their money spent on such.  What they actually bought was peace of mind, thus they remain equally satisfied.

As we can see, risk is a part of every transaction and the riskier the venture, the greater the risk premium.  For instance, let’s take a simple example.

Person A in January has a 50/50 chance of incurring a $5000 expense in July.  So, Person B says to A, “for a $1000 premium in January, I’ll pick up the $5000 bill in July.”  Person A is faced with a decision: forgo $1000 in January and all that could be purchased, never to see it again, or keep it and hope that he gets lucky in July.

Many factors are involved here, and as Austrians know, money, like any other good, has diminishing marginal utility.  So, much would be dependent upon the use of the $1000.  If for instance, A needed to fix their car as their job was traveling salesman, it might be worth the risk as losing the job would be far  more damaging.  The point is that one has to weigh the risks of present and future values.

That’s actually a pretty good bet, one most would take.  If the numbers were for instance, $1000 premium to protect against a $1500 July bill, most would probably decline.  Thus, a July bill somewhere between $5000 and $1500 would be the tipping point, though I’ve no idea exactly what that number would be.  This would be, could only be, determined in the market.

This is why it is vital for free economies to work that there be a free (as in truly free market, not forced consumers and over regulated and burdened insurers) functioning insurance market.  Entrepreneurs take risks, some greater than others.  People invest their capital in wealth creating activities with hopes of future reward.  If borrowing the money, they will have to pay a risk premium, usually in terms of a higher rate of interest.  And when the market sets that risk premium, that rate or interest and desired rate of return, then the risk/reward model is the great engine of economic growth.

It is the single reason why the most prosperous economies are ALWAYS the freest.

(Note: it might have written that the freest economies are the most prosperous, but this syntax is erroneous.  Austrian theory is grounded in the causal-realist approach, that there is cause and effect.  By this, I mean that if “free economies are prosperous” is synonymous with “prosperous economies are free” than I am denying that one causes the other.  This is false.  Economic freedom creates wealth and prosperity.  Prosperity doesn’t ever “just happen” nor would it be possible for prosperity to create freedom.  It is in considering it in that manner, prosperity creating freedom, where it becomes clear.  Thus, freedom is the required antecedent, and thus a casual relationship.)

There is another side to insurance, ameliorating unintended loss.  This is a perfect case for actual health insurance.  Oddly enough, there is a large and dynamic market for term life insurance, the most extreme example of loss.  This is exactly what the health care insurance market should very closely resemble as they are remarkably similar.  Quite simply, no one hopes to use their term life insurance, and I imagine, no one truly ever does!!  Let’s face it, the one(s) actually using the term life insurance isn’t going to be the person whose name is on the policy.

Although the one with their name on a health insurance policy would be using it, likewise, it would be something they would hope never to use.  A perfect example is catastrophic insurance such that s one were to be afflicted with a severe illness, instead of a million dollar hospital bill, one might only incur say a $10,000 bill.  You don’t ever plan on accruing a million dollar hospital stay, so any premiums paid towards such would be completely to avoid that risk.  And nothing else, period.

Returning to pooling, the original example is poor only in that no insurer would underwrite such a policy.  Here’s why: for every two people that pay into the plan, one is going to receive a $5000 payoff, or $2500 per person insured, while the premiums collected would be $1000 per person.  In other words, while collecting $2000, they are paying out $5000.  (for quick reference, that’s sort of how social security will work in a few years!)  What they need to do is collect more than $2500 per person.  Thus, for this example to work, the premiums would need be at the least, $2501.

This system works wonderfully as long as like risks are pooled together voluntarily.  Thus risks, premiums, and payouts truly and accurately reflect consumer desires.  Car insurance works in the fashion.

Using a simple numerical example will help.  For many drivers, the chance of a $100,000 liability in an accident is remote, say 1 in 1000.  Thus, all that is needed would be 1001 drivers to purchase a $100 policy, as 100,000/1000 = $1000 per driver payout.  (Yes, the additional driver adds a fraction to the per driver payout, but for this example, it is insignificant.)  It works wonderfully as a $100 premium is a pittance compared to a potential $100,000 bill.

Insurance companies do quite well because they charge in excess of $100 per person.  And they do this not because they are greedy and evil, but because the risk protection is worth far more than $100 to each driver.  In fact, it is probably worth several times that.  So, instead of collecting $101,000, they charge say $250 per driver for such a policy, and end up  collecting $250,000 total.  If that’s sufficient to lure others into the car insurance business (again, assuming a free market, no regulatory rent seeking firms blocking such), great.  More competition, better services, and lower prices.  If not, great.  Consumers are still purchasing exactly what they want at the market price.

And as such, voluntary pooling of similar risks represents a vital and extremely valuable tool for risk management.  It is not theft in any way, shape, or form.  But forced pooling of disimilar risks most certainly is.


Will the pilot’s license be renewed?

January 22, 2010

Helicopter Ben might not get his license renewed.

That’s good news, except that anyone else dear leader appoints is probably gonna turn on the spigots even more.

Love this quote:

“The American people are disgusted with the greed and recklessness of Wall Street,” Sen. Bernie Sanders, I-Vt., said in an interview with The Associated Press last month. “People are asking, ‘Why didn’t the Fed intervene at the appropriate time to stop the casino-type activities of large financial companies?'”

Bernie, got some news for you.  The Fed DID intervene.  It caused the casino-type activities.  Furthermore, it was sold as wealth creating.  Turns out, it was the opposite.

Now, don’t think Bernie is an Austrian or leans that way.  He’s a self-described socialist so wealth creation is only what comes from government spending, and wealth confiscation is the means.  But, at least he’s aware of the dangers of the Fed.  Is he aware of the dangers of fiat currency?

No glory in the bay state

January 21, 2010

Yes, the seat that belonged to a monstrous thief for half a century, the seat that stole more wealth, massively grew leviathan, expanded the evil hand of the state into every aspect of people’s lives and in general, was the avowed enemy of liberty lovers everywhere, was given to a man who will specifically vote against the takeover our our heath.  Good.  Even the people of Massachusetts, the most left leaning state in the Union, have reached the breaking point.

However, there is no glory in this “victory”.

State Senator Scott Brown’s campaign became national, attracting the money and support of million around the country.  Is that democracy?  Perhaps.  Is that good?  Hardly.

Perhaps it was in essence a referendum on the administration, and in that, if the verdict in Mass is 52-47 (not accounting for the ACORN factor which adds +5% to democrats), then nationally, one can figure that it’s it’s probably 3-1 against.  Okay, there’s “hope” for the nation.

Popular election of senators was a cornerstone of Progressive Era politics.  That Scott Brown relied on a nationalization of his election only serves to undermine constitutional republican ideals.  For does he not owe his seat to “the people” and thus his allegiance?

Senators were to be representatives of the states to the federal government.  A resident of California, Ohio, or even neighboring Rhode Island, ought to have no interest in who Massachusetts send to the senate.  Likewise, a senator from Massachusetts ought to have no impact to residents on California, Ohio, or Rhode Island.

In nationalizing a state election, it only expands the democratic goals of the progressives, and empowers Washington DC.  Every senator is in essence a national office holder, rather than a state representative making the Senate close to a national assembly.  And it’s safe to say the last “National Assembly” wasn’t too friendly to limited government or individual liberty.

My satisfaction that the takeover of health care might have been dealt a fatal blow is tempered by the means by which it occurred.

Economic ignorance never ceases

January 18, 2010

Part of the problem we face today is the unbelievable ignorance or basic economics.  You’d think, or at least hope, that such silly ideas as printing money and massive government debt would be seen as the great acts of destruction they are.  Nothing exemplifies this grand ignorance better than this:

The weakness over the year reflected the battering that consumers have taken from the worst recession since the Great Depression, a downturn that has cost 7.2 million jobs and left households trying to rebuild savings depleted by losses on Wall Street and a crash in housing prices.

I’ll wager $1 million that no econ major from any Ivy League school would see the terrible error in that passage.  But I’d wager $1 million that ANY student at Mises U would not only see it, but would harass me for such an easy question.

Now, where is the error?  “savings depleted by losses on Wall Street and a crash in housing prices”  NEITHER of those are savings.  And that is actually the root of our current mess.  People acted as though they were.

Look, it’s actually quite simple.  Savings is income not spent.

Now, let’s look at a practical reason why, for instance, housing prices are not real savings.  Forgetting for the moment how unbelievably stupid the actual notion is that housing prices equal savings.  In fact, that idea only serves to demonstrate a complete lack of any understanding of what prices really are.  Anyways…

If one buys a house for $250,000 in 2003 and following Alan and Ben’s dirty deeds done dirt cheap, it’s value appreciates to $500,000 in 2006 (and by the way, this was very much the case in many housing markets.  I can attest personally…).  Now, let’s say I decide to buy something with that “extra” $250,000.  Do I go to the bank and withdraw it, or do I have to borrow the money?

Well, the answer is so obvious that one would have to be a Princeton professor who moonlights for the NY Times…

So, that alone ought to end all debate on whether it’s actually savings.  Thus, no savings were lost, nothing to rebuild.  Same is true of course of 401k’s:  prices DO NOT equal savings.

Need more proof?  Okay.  If that “extra” $250,000 were really savings, then it would show up in banks’ balance sheets as excess reserves that could be lent.  Your home’s increased equity doesn’t show up in any bank ledgers.  It only records the appraised value at time of the loan.

But again, it is such terrible ignorance that helps begin to explain the catastrophe we’re in.

Can he really be that clueless

January 18, 2010

Well, he was an economic advisor for the previous president, not something I’d want to put on a resume’ !!

Greg Mankiw asks “IS galloping inflation around the corner?

It’s not only “around the corner”, it’s already here.  One, the doubling of the monetary base IS inflation.  And unless he missed it, foreign countries and investors are dumping the dollar as fast as possible.  The value of the dollar on international markets has plummeted, adding an inflation premium to imported and import dependent goods, most notably gasoline.

At least he can claim one thing: he isn’t an economic advisor for this administration.

Force, Force, and only Force

January 17, 2010

I’m not usually going to play the blog linking/analyzing game, but this one ought to be addressed as it is entirely what this administration is about.

Ann Althouse, law professor and blogger extraordinaire, writes in response to Martha Coakley’s abortion response:

She’s a lawyer, and she ought to know that Roe v. Wade — along with other abortion cases — does not require services. There is a world of difference between having a right to do something and having the power to make other people do things for you as you try to exercise that right. If you don’t know the difference between those two things, you don’t understand how rights work. Other people have rights too. Refusing to perform an abortion is not a violation of the constitutional right to privacy.

Now Ann I’m sure is a brilliant legal scholar and certainly (as she voted for the guy!!) was too smart to be deluded by dear leader’s eloquence and circumlocutions.

It’s always in those rare moments when one is caught off guard does the real truth become evident.  Dear leader’s “spread the wealth” was an obvious one.  This one too.

See, what this administration believes entirely in is force.  It’s a modern and gentler version of Rousseau’s “forced to be free” but nonetheless, force and compulsion.  If you choose not to have health insurance, you’ll be forced to anyways.  If you refuse to perform abortions, you’ll be forced to.

You “have a right” to a house, health care, a job, etc., and others will be forced to provide these for you.  So, unless she’s been living under a rock or is choosing to be willfully ignorant of dear leader’s intentions, then for them the right to abortion means forcing others to perform one, even if against their conscience.

There used to be a time when the left would have riled against such gross abuses of power.  Now they champion them.

And the carnage continues…

January 8, 2010

And the carnage continues…

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

This is the December 2009 report.

Unemployment remains “stuck” at 10.0%.  U6 is at 17.3%, up from 17.2 in November.  But there’s even more important news which most will miss…

CPI rose .4% and even more importantly than that, the PPI rose 1.8%.  In fact, here’s what is striking about the PPI report.

Change from the last 12 months: finished goods – 2.4%; intermediate goods – 1.4%; crude goods – 5.7%.

The rising prices in intermediate and especially crude goods will only increase in the coming months and will soon translate into higher finished goods prices.  In a recession, with a large surplus of labor, an economy that is weak, hemorrhaging jobs, with declining investment, we are seeing inflation (in the mainstream vernacular of course).

It ought to be clear by now that stimulus not only doesn’t, but actually does the opposite.

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