Yeah, it’s starting to become obvious

Okay, so maybe it’s a little late to restate the obvious, but I found this little gem recently from the NY Times back in March.

In Health Bill, Obama Attacks Wealth Inequality

Finally, the bill will also reduce a different kind of inequality. In the broadest sense, insurance is meant to spread the costs of an individual’s misfortune — illness, death, fire, flood — across society. Since the late 1970s, though, the share of Americans with health insurance has shrunk. As a result, the gap between the economic well-being of the sick and the healthy has been growing, at virtually every level of the income distribution.

The health reform bill will reverse that trend. By 2019, 95 percent of people are projected to be covered, up from 85 percent today (and about 90 percent in the late 1970s). Even affluent families ineligible for subsidies will benefit if they lose their insurance, by being able to buy a plan that can no longer charge more for pre-existing conditions. In effect, healthy families will be picking up most of the bill — and their insurance will be somewhat more expensive than it otherwise would have been.

Well, good to see so called mainstream publications admit the obvious.  But is the first part really correct?  In short, no.

As I wrote previously (and before the NY Times article!!):

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.

No, insurance if it is truly insurance, is never spread across others, especially those not involved in the transaction.  Involving others can only occur through force.

But for the part about the healthy picking up the tab…

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.

I am not claiming some unique insight, just the basic economic understanding that is the necessary part of the discipline.  And it is those core fundamentals which the Austrian school is grounded upon.

Insurance is not theft, pooling always is.


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