This is odd. And it is wrong.

Do critics of markets actually understand what axiomatic principles are? Do critics of markets actually understand what the term “institutions” means? For those of us who are classically liberally oriented and prefer a much more market oriented economy, THE very fundamental premise of our economic and political worldview is the non-aggression axiom. Individuals may contract with one another and otherwise behave in ways that pursue their own interests so long as in doing so the property of others is not violated. If individuals violate the property of others, there is just cause for the situation to be rectified (let’s ignore how). In other words, the default “anarchist” position on things like pollution is, “no pollution allowed.”  And that position derives from the axiom that the rest of the classical liberal framework evolves from. For our utilitarian friends, upon what such axiomatic foundation does “environmental externalities are bad” derive? Keep searching … keep searching … keep searching … there is, of course, no such foundational reason outside of expediency.

Seriously, go ask someone what they think the default position of “free-marketers” is on pollution and I guarantee they’ll argue that “people who support free-markets are enemies of the environment.” But the default position of true market proponents is that injunctions against and damages for all forms of contamination of land, water and air are required when actual nuisance and damage occurs. Sure, there are cases when relying on the body of common-law and tort to deal with these intrusions will be costly or impossible, but the basic market approach provides a framework for understanding when this is likely and also a way to think about when those barriers to such implementation are likely to fall.

The ignorance, the almost proud ignorance, of anti-capitalists on this matter would be laughable if they didn’t have guns. The Keystone issue would be a good application. Does the fact that a pipeline exists mean that pollution is inevitable (ignoring the fact that there are already dozens of pipelines across the same area, and that pipeline safety is far better than transporting fuel in other ways)? Does the current body of environmental law, and the record of torts on environmental issue suggest that builders of the pipeline are going to be more or less sensitive to potential damages today than in the past? In this case too, you might think the conditions upon which market transactions can occur effectively would be violated – but it is clear where the pipeline would be travelling, and it is not hard to imagine that with today’s computing and communication technology that the pipeline owners could negotiate with all potential damaged parties to make it clear what might happen should a leak or explosion occur. Where in the entire discussion was the public made aware of what typically happens if a pipeline has an issue? Where in the entire discussion was the public made aware of tools they might have to become involved in the negotiations? Where in the entire discussion was the fact that Ogallala aquifer is a common-pool resources that is as much the source of the problem as the pipeline itself? Do you think if Warren Buffet owned the entire aquifer we’d have the same issues?

Finally, the existence of pollution and so-called externalities presents an opportunity for profit-seeking entrepreneurs to solve the problem. And while I understand that we don’t really want the problems to emerge in the first place, it is usually because of our problems that we are able to advance. For example, without copper prices skyrocketing, maybe we never stumble upon fiber optics.

But beyond that, and really the reason I wanted to write this post, is to remember that there are people in the current intellectual environment who believe that smart regulation creates jobs. Let’s not dispute that. Then the same exact argument can be applied to the spurring of market solutions to externality problems. The same … exact … argument. Do anti-capitalists think that market forces harness greed only when it comes to doing damage and not preventing or cleaning damage? So we are only greedy when it wrecks the lives of others and wrecks the planet. Under what model are you operating if that is in fact your worldview?  So you may want to argue for regulation, but you really ought not do so on the premise that it creates jobs first because it obviously doesn’t, and second, if it does, it doesn’t appear that it would create ‘em any differently than would emerge otherwise particularly if the legal system works well.

If the government leaves the health-insurance market to voluntary choice, the costs of administering coverage are sure to be higher for small groups and individuals than for big employers. Individual consumers and small businesses also lack the knowledge and purchasing leverage of a large firm. Not unreasonably, insurers worry that in individual and small-group markets, those who sign up for insurance are likely to be at risk of high health costs (a problem known as “adverse selection”). In a voluntary market, insurers have every incentive to avoid covering the sick and instead to cherry-pick the healthy from among the individuals and small groups that apply for coverage. But if they do so, millions of people will remain uninsured.

The bolded section is the origin of the offense. You might be thinking, “it sounds right.” And you’d be right. In that sentence, he partially summarizes what the adverse selection problem is – but it would have been nice to see more detail. In a situation when the individuals purchasing insurance know more about their own health status than the insurers, we have what is called an “asymmetric information” problem. In this case, we are likely to see insurers charging premiums to all comers that reflect the average health status of all customers – since they cannot determine which customers are healthy and which are sick. In this case, insurance is a bad deal for healthy individuals since their expected medical expenses over the course of their lifetimes will be lower than the present value of the premiums they will pay over their lives. Insurance would be a good deal for the sick. In this case the premiums they would be paying would be a fraction of the expected value of their lifetime medical expenses.

The problem, you see, arises not from the fact that we have markets per se, but from the fact that we have an information asymmetry. If health insurers knew as much about your health status as you did, then everyone would have insurance for things that are insurable (more on that below). In this case, insurers would charge different premiums to difference classes of customers – with the healthier patients paying lower premiums than sicker ones (I am simplifying). But our author above is claiming that health insurers know, at least closely enough, who is sick and who is healthy. In other words, the fundamental condition for adverse selection to be present has been violated – he says so. Now to be fair, he says, “has the incentive” he does not say “they can actually do this.” But read the rest of the book and you will see that I am being generous.

OK, so even being fair, our author is confused (to be fair) or outright disingenuous and misleading. Why would I say that? Well, I think that Starr would agree that private insurance companies want to make money. Let me ask a rhetorical question. Do you think before dropping people entirely they would try to figure out a way to make money from them? It is really bad policy that prevents insurers from charging different premiums to different people – and it was the Progressives who pushed for these policies. Remember what I said about situations like this? Only when premiums cannot be adjusted to account for the higher costs of actually covering people would dropping them become a desirable option.

Before continuing, let me interject a decent idea for a policy proposal that includes government. If folks are not willing to allow insurance companies to charge for the higher cost of insuring the unhealthy, a reasonable proposal would either be for the federal government to step in as a reinsurer, or to provide subsidies to the unhealthy to purchase insurance, or better yet for the government to fully insure the sick for their chronic conditions. Why? If the condition has been fully-insured, then when a “sick” customer approaches an insurance company, that pre-existing condition has already been “taken care of.”  I see objections from many angles here: first that we should just have a full-blown free market and if anything just provide cash grants to people who need them. I see them from also coming from the camp that says that when a person has one condition it probably correlates with other negative health outcomes, so that pre-existing conditions could never be fully insured away. Note that the ObamaCare law tries to get at some of this issue. OK, back to the post.

If health insurers are cherry-picking health customers, that is the opposite of adverse selection. Starr seems to know this, but he could have been clearer. But onto the main point of the post. I cannot tell you how many times I have had discussions with students, parents and acquaintances about insurance and have heard them comment something to the effect of, “insurance companies have no right to charge the sick more, or to drop coverage” and they defend things like Obamacare ostensibly because “everyone needs to pay into an insurance pool in order for it to work.” But that is not right. Insurance cannot work for things that are not insurable. More on that in a future post.

Typically when I emphasize this point people like at me like I am some kind of a moral beast and this would truly puzzle me, since there is no moral position in making this seemingly analytic point. But now I see what is going on. The rhetoric of redistribution has taken over. I sense that a good portion of people view health insurance (and medical treatment) not as insurance, but as another form of redistribution. How else would they reject my observation above? By their thinking, “everyone” should pay into insurance so that people who “need” more will have the funds while people who “need” less don’t need as much. But real insurance has nothing at all to do with redistribution. It is NOT meant to redistribute resources from low-risk people to high-risk people. That is a political question of redistribution. Insurance is a way to pool like risks and that is all. So how could people be so confused? Again I lay the blame at the feet of FDR and the New Deal legacy. “Social insurance” programs emanated in the second New Deal as part of a grand political strategy by FDR to win votes. It worked. But he was extremely anxious about giving Social Security the appearance of being redistributive (read Amity Shlaes’ great book to learn more about this episode). So what is clearly a program that redistributes income from current workers to older non-workers is repackaged as “insurance.” And I wholly believe that using the rhetoric of “social insurance” to characterize a set of clearly redistributive policies has changed the psychology of how Americans think of insurance. Hence the utter contempt with which I am held by people when I suggest that some people are uninsurable. According to the redistributive vision of the world, that concept simply cannot exist.

There’s much more to say, in particular on the implication of administrative costs and a few other doozies from his book. They’ll come in due time.

1. That you wished you had a real macro course in college, or knew a way to begin learning it properly now.
2. That the arguments very rapidly devolve into nasty, vituperative, uncharitable, ad hominem attacks, and they come from both sides.

The nature of the discourse is seriously discouraging. If the stakes were not so high I would probably just turn off my computer and focus on the one or two issues that are most important to me. But these are important issues. The problem as I see it is that many debates get tied into one. Implicit in almost any of these debates is an argument about how big government should be, what the empirical evidence in economics says, and the personal preferences of those engaging in the argument. The arguments get contentious because these are all conflated, and also because there is a lot of mistrust out there. Not only do people not trust one another, I am not sure they understand one another.

I’ve seen libertarians, classical liberals, conservatives and Republicans all make comments like, “Krugman is left of Obama,” Krugman is a Marxist” and so forth. He is not. Nor was Keynes. What Krugman and Keynes see is that there may be structural problems in market economies that may be hard to resolve themselves, and they also know that an institution with the power of a government does, theoretically, have the ability to remedy some macroeconomic problems. Neither Keynes nor Krugman is saying that government ought to employ all 150 million people who are currently in the labor force. Neither Keynes nor Krugman, to the best of my knowledge disavows the role that prices play or the importance of property rights for organizing economic activity. What they are saying is that when there is persistent unemployment and that which exceeds some “natural rate” (google the term NAIRU for some information) then it is possible for policy to improve things. If 15 million people are unemployed solely because of a coordination error or some inexplicable fall in “aggregate demand” then they see it as a moral responsibility for something to be done. They view the unemployment of 15 million and the falling wages of others as a tragedy, a needless tragedy and I suspect they are completely unglued at the idea that some people do not see things that way.

By making that observation above I am not subscribing to their moral view, nor to the prescriptions they are proposing. But those views do not imply ipso facto that they are anti-market statists. Now, I have my own view on why so many people are unemployed, on what appropriate public policy would be, whether said unemployment is a national tragedy, on the implications for liberty in all of this and so forth. But this is not the point of the post.

Let me be clear here. What Krugman and others nominally on the left are arguing right now is that we have an aggregate demand problem. Now, I abhor the entire notion of aggregate demand as a meaningful concept, but be that as it may, they are talking about policies that would largely be consistent with what Hayek himself would have permitted in Constitution of Liberty. As a way of stimulating the economy they are not suggesting a nationalization of farms, grocery stores, and the like. They may be discussing higher taxes on the rich – but that is a byproduct of other awful policy, some of which the right is responsible for. They are talking largely about a new direction for monetary policy that would have central bankers target nominal Gross Domestic Product. This is something Milton Friedman would have advocated, and while I can make a strong Austrian case for why this is offensive to me and my liberty, it is not exactly what one conjures up when they think of leftism. Indeed, a nominal GDP targeting policy would be a move toward greater liberty than what we have today. The other thing that Krugman is talking about is whether fiscal policy expansion makes sense right now. This does seem to have a more statist twinge to it. But fiscal and monetary policy are now closely related and one does not have to be a left wing zealot to argue that the fiscal policy moves being proposed are really monetary policy tools in disguise. And to be quite honest, had we had a massive targeting of nominal GDP starting in 2008, we would have avoided even having the debate today, and we probably would have had a better chance of getting other micro-policy right. But, those on the right generally conflate all kinds of government actions. Look, I want everyone to read Human Action, I want everyone to read the Road to Serfdom, and so on, but that does not imply that knee-jerk anti-government sentiment is the right way politically to get to a freer, safer and better world. I could tell a long story about the health care debate to illustrate my point. And no, I am not “caving” in to giving up a little liberty now, not at all. So here we are having massive, nasty and wasteful food-fights. Any good ideas held by any political opponents will never be uttered or considered seriously by opponents, and we end up grafting new public policy onto an already Frankenstein-freakish array of existing policies which make future reform even more difficult.

It is almost nauseating to have to be called an economist today. I want a new name. It is even worse that because I happen to cherish my liberty, and because I do not believe that everything out there today is a cosmic national tragedy, that I am a reactionary zealot that is in the pocket of some nefarious force. If I didn’t know better I think we’d all be matrix programmed into a really bad movie.

1. If you use this as your justification for having higher marginal tax rates on higher income, then it follows that when income is taken from the wealthier then it must be distributed, dollar-for-dollar, to the poorest on up. Why? Because it must follow from this observation that the poorest people benefit the most from a dollar of income – so taxation for this reason requires us to increase the income of the poorest person up until their utility matches the utility of the next poorest person, then increase the incomes of the two poorest people until their utility equals that of the third poorest, and so on. This should continue until the politically chosen appropriate amount of redistribution has been met. Furthermore, when you hear folks argue that the rich ought to pay more in order to fund national health care, or social security, or corporate bailouts, I argue that you cannot use as justification that the rich value their marginal dollars less than the rest of us. You might have some other justification, but not that one. I bet the other justifications are uglier than the one under consideration.
2. How come I never see the same argument applied to political agencies? Seriously. If the rich value the next dollar less than the poor, then wouldn’t one have to argue that government “values” the 7 trillionth dollar less than the trillionth?
3. Some discussions of this topic invariably redound to saying that progressive taxation is justified because others’ utility is included in my utility function. Thus, if I am rich, and I get utility from the poor having increased utility, then there is a case for disproportionate taxation. Sure. But this raises two additional questions. First, do the rich experience diminishing marginal utility over other people’s utility? If so, it suggests that merely pointing to the lower overall utility of the poor, or higher marginal utility of the poor, is not justification enough to support progressive taxation on these grounds alone. Second, and this point is likely to have you uninvited from the upcoming National Championship Game cocktail parties … is it plausible that some lower income individuals obtain positive utility from someone else having more income? I completely understand the tendency to compare ourselves to others, that relative positioning is important, and that my dollars go a longer way when I don’t have much than when I have a lot, but to totally ignore that the possibility that wealthy folks’ income can have a positive coefficient in a poorer person’s utility function is a bit more than tomfoolery. If I am a middle income blind person, I sure as sh*t get a lot of pleasure knowing that some rich eye doctor may obtain more income by working on cures for blindness. In a world solely characterized by poor blind people and rich eye doctors it would not at all be obvious that anyone would prefer to live in a world of progressive taxation. Yet that is totally presumed away in casual discussions (and some professional ones) of the topic.

How much oil has been spilled?

2000: 1.43 million gallons

2005: 2.36 million gallons

2008: 777,000 gallons

2009: 196,000 gallons

While 10x less oil spilled in waters since 2005, spills from (water-located) pipelines have sent out 64 times less oil and constitute less than 1% of oil that spills into US waterways. Now, that’s not exactly the data you’d need me to cite for pipeline safety (really you want to know how likely it is, at the margin, for the next gallon of oil to spill from various sources), but it’s not like all of our oil spills from pipelines. Take a look at the data for yourself. Now, I also do not care about whether building pipelines creates jobs and I also do not care about the politics of this. What I DO care about is cheap energy. And yes, I do worry about what may happen to the climate, but the more I study, the more energy data I look at, the more macro data I look at, the more climate science I look at, the more I am convinced that the best thing for the entire planet is extremely abundant and cheap energy. If it has to come from fossil fuels, then so be it. If it comes from carbon-free sources, that’s all the better. Keep a few thoughts in mind:

(1) It is virtually impossible to think that we can transition to any meaningful amount of carbon-free energy production in the next 25-40 years, and certainly not for any reasonable cost. This is both because of chemical/physical reasons but also for political reasons.

(2) Cheap energy has been a boom to human health and well-being for a very long time, and energy crises are serious, serious, serious drags on economic well-being.

(3) Our energy production seems to be decarbonizing all on its own.

(4) If you take climate models seriously, then a lot of warming is already baked into the cake, and there is a reasonably good probability that we cannot do much to prevent it.

(5) Getting CO2 reduction in any meaningful way is going to require a very concerted global effort to do so. That will not happen.

(6) Having cheap and abundant energy better equips us to deal with any problem that may arise.

(7) The energy intensity of our economy, and the world economy (not as much as ours by a longshot) has improved dramatically.

(8) It’s not clear that “doing something” is going to help. That idea includes with it an entirely panglossian assumption that doing something is the same as doing something right. And that idea is simply wrong. It is entirely plausible that some/much/all of the spending we are doing now on green energy initiatives is making things worse. Extra credit to anyone who can identify what that is the case, why it should be obvious to anyone who has stopped to think about it, and why pronouncing such a thing will have you removed from polite company.

There can be more to be added to this list, but I’m running low on laptop power and I don’t have an Eco-bench nearby to charge it up.