Seeking common sense in 2015
I was going to try to write something positive at the end of the year, to balance out what a scold I’ve been almost all year long about the state of public policy in America.
I was hoping, for example, to find a situation where the government has drawn a line between helping people who suffer misfortune and those who clearly have made, and mostly continue to make, bad choices. I’ve searched the media for good news about government courage in pushing back against the erosion of personal responsibility, in areas from pensions and student loans to lawsuits and insurance.
Not much luck. One can only hope the new folks elected this year to represent us will make a difference on this score in the months and years ahead.
One of our favorite topics at R Street is insurance, where we stand up for the private market-oriented approaches and against the expansion of government-subsidized coverage for practically any predicament. If left to the market, insurers will charge people more for fire insurance protection if they live in log cabins and heat with a wood-burning stove. The government is adverse to charging people the expected cost of protection if they happen to live on a potential earthquake fault or a hurricane-exposed beach, or if they are better or worse drivers than average.
In fact, my colleague Ian Adams has just posted a piece detailing the California Earthquake Authority’s plan to tax virtually all of the state residents to pay for the next shift in the earth’s crust, since fewer than 10 percent of the Golden State property owners are buying its policies.
The state of North Carolina has been discussing elimination of its last-in-the-nation rate bureau for auto insurers, who are operating roughly a cost-plus business similar to electric utilities, and unable to file their own rates.
I say “roughly” because all insurance premiums are guesses – sophisticated guesses – but guesses nonetheless, since insurance is arguably the one business where the price is set before the costs of the product can be determined. Some companies operating in North Carolina actually don’t take any auto insurance business except what is underwritten by the state, which they are paid to service. This is not how a marketplace best functions.
The government doesn’t have to worry about its lack of expertise in predicting risk or costs, because if they miscalculate they don’t go out of business. In one of my favorite examples, the swine flu vaccinations of the 1970s were insured by the federal government for any liability. The Center for Disease Control did a study at the time suggesting that a statistical increase in the number of Guillain-Barré cases might have been related to a recent national round of vaccinations. The federal government eventually paid out around $72 million to settle more than 750 of 4,000 cases that were uncovered through the intense publicity that the project generated. The feds had reserved just $2 million for claims.
There are examples everywhere one looks. The City of Detroit has been paying out bonuses to every employee for years, even after when their finances sunk completely underwater. The perception is that there have been few lasting consequences to the largest municipal bankruptcy in history. Sure, the investors in city securities and bond insurers are still in court, but not the city’s retired employees. The California pension systems pay benefits on projected earnings of 7.5 percent, but actually earned just 1 percent last year. No big deal, the pension managers say. We’ll level it out in the long run.
When Union Carbide’s chemical plant blew up in Bophal, India in 1984 — the worst industrial accident in history — the chemical industry formed an international organization to promote business ethics, beyond those enhancements needed for worker safety. They once met in my hometown, with a three-day conference allocating one day each to issues in Europe, North America and Asia. One of the many programs on the “corruption” agenda was a brief study of compulsory government reinsurance in Argentina in the 1950s. As one might expect, when the government says they will cover anything over a certain amount, the normal market discipline completely vanished. The program didn’t last long, and was a disaster.
In the American savings & loan crisis of the 1980s, the federal government agency had, over several years, lowered the premium paid to insure the thrift’s reserves to one-twelfth of the original amount, and the provided coverage expanded from $2,500 to $250,000 for each account. This ended up forcing all of these institutions to compete with those who were pushing the envelope on risk, and to lean ever more heavily on the government to safeguard the deposits.
The taxpayers were let down by their political leadership, who were advised by President Reagan’s Grace Commission report that the resultant negative net earnings of these institutions could be fixed for about $20 billion. With no course correction, the numbers got a lot worse and we all had to cough up about $160 billion to resolve the mess.
It’s a situation many federal and state programs face today. If interest rates were to double over the next couple of years, more than $400 billion dollars would have to be be taken out of the federal budget to make the additional interest payments. Of course that would swallow nearly all discretionary spending by the federal government outside of defense, so that won’t happen. As long as we can get away with it, we will just print more money and pretend like we borrowed it. Our kids and theirs will pay in many ways.
The beloved humorist Will Rogers used to say that he would regularly ask his member of Congress “to please not do anything for me, because I can’t afford it.” Perhaps we will be forced to accept his famous common sense at some point.
