Making a Law Against Adverse Selection
One of the books I'm reading now is The Logic of Life by Tim Harford, one of the latest in a string of Freakanomics-type breezy treatises on what the subject of economics is really about. I enjoy them, and I admit there are some nifty insights to be gleaned from someone looking at life from a key principle Harford addresses.
It is a point that I've made before, but one which I believe most people chafe at. That point is
Everything anyone does is rational.
Yes, that's right. Harford says it in pretty basic econ terms: People make a decision when the benefits derived from that decision equal or exceed the costs required. Even the looniest decisions are made this way.
Another point Harford makes is that it is very difficult to value things, a fact that was a linchpin of my webzine's latest home page piece.
The reason I bring up these two laws of economics is because this week George Bush signed into law a bill passed overwhelmingly by Congress called the Genetic Information Nondiscrimination Act. It prohibits any discrimination in providing services or employment based on knowledge of an individual's genetic history.
It pretty much shakes down like this. You have a family history of early heart disease--every one of your ancestors, from dad and mom to the great grandpas and grandmas died early and had truckloads of medical bills. An insurance company now cannot refuse you a policy for fear you'll break their bank, and a firm cannot use your genetic history as a reason to deny you a job because the years they would've invested in you won't pay off in the long run.
The problem here comes with one of the more advanced economic laws, and makes compliance with this federal law quite difficult. It is the law of adverse selection, the idea that we generally do not willingly select options that are very costly when it is likely the benefits will be minimal. Insurance companies only insure people because statistically they can afford to make huge payouts to some customers but not all, and if they knew they were going to pay out too much to too many, they'll just make the decision not to do it at all for anyone.
After all, the law of opportunity cost says an individual always has another option, an option that always pays more when the thing he is doing now becomes too costly.
Now, could an insurance company simply charge way more for the premium of a very risky client? If so then there should be no problem economically. It gets dicey whenever government gets involved, and that's not necessarily a bad thing. If the government forces others to pay for the premiums of risky and costly beneficiaries, then okay, fine. Most people, in fact, are resigned to do that.
Thing is, the significant corollary to the Everything someone does is rational rule is this:
Not all things, however, are righteous.
It is very good that we care for those who are less fortunate, and that includes people with unfavorable genetic histories. This does not mean, though, that we must enable them by dismissing behavior that aggravates risk. This also means something else that is critical in this.
Congress and the President and whatever other coercive World institution can rationally force people to be nice and help out. This still does not solve the cost-benefit problem of adverse selection.
What does help it out is increasing the size of the benefit, and the only way the benefit can equal or exceed the cost is for a large enough group of people--a community? Perhaps even a nation?--to actually truly really
Love the genetically risky.
And God has made it quite clear. The only way they can do that is through the Son.
"Perfect love drives out fear."
That perfect love was demonstrated by Christ on the cross. Those who allow themselves to be crucified with Christ as holy and living sacrifices will go bananas providing for the genetically risky. What's more, they'll do it with a hundred times more resources than the World has.
I like Harford's book, and all the others I've peeked at that talk insightfully about economic matters. When someone brings the only really meaningful Answer to all the issues brought up by those pesky economic laws, then I'll really like them.
It is a point that I've made before, but one which I believe most people chafe at. That point is
Everything anyone does is rational.
Yes, that's right. Harford says it in pretty basic econ terms: People make a decision when the benefits derived from that decision equal or exceed the costs required. Even the looniest decisions are made this way.
Another point Harford makes is that it is very difficult to value things, a fact that was a linchpin of my webzine's latest home page piece.
The reason I bring up these two laws of economics is because this week George Bush signed into law a bill passed overwhelmingly by Congress called the Genetic Information Nondiscrimination Act. It prohibits any discrimination in providing services or employment based on knowledge of an individual's genetic history.
It pretty much shakes down like this. You have a family history of early heart disease--every one of your ancestors, from dad and mom to the great grandpas and grandmas died early and had truckloads of medical bills. An insurance company now cannot refuse you a policy for fear you'll break their bank, and a firm cannot use your genetic history as a reason to deny you a job because the years they would've invested in you won't pay off in the long run.
The problem here comes with one of the more advanced economic laws, and makes compliance with this federal law quite difficult. It is the law of adverse selection, the idea that we generally do not willingly select options that are very costly when it is likely the benefits will be minimal. Insurance companies only insure people because statistically they can afford to make huge payouts to some customers but not all, and if they knew they were going to pay out too much to too many, they'll just make the decision not to do it at all for anyone.
After all, the law of opportunity cost says an individual always has another option, an option that always pays more when the thing he is doing now becomes too costly.
Now, could an insurance company simply charge way more for the premium of a very risky client? If so then there should be no problem economically. It gets dicey whenever government gets involved, and that's not necessarily a bad thing. If the government forces others to pay for the premiums of risky and costly beneficiaries, then okay, fine. Most people, in fact, are resigned to do that.
Thing is, the significant corollary to the Everything someone does is rational rule is this:
Not all things, however, are righteous.
It is very good that we care for those who are less fortunate, and that includes people with unfavorable genetic histories. This does not mean, though, that we must enable them by dismissing behavior that aggravates risk. This also means something else that is critical in this.
Congress and the President and whatever other coercive World institution can rationally force people to be nice and help out. This still does not solve the cost-benefit problem of adverse selection.
What does help it out is increasing the size of the benefit, and the only way the benefit can equal or exceed the cost is for a large enough group of people--a community? Perhaps even a nation?--to actually truly really
Love the genetically risky.
And God has made it quite clear. The only way they can do that is through the Son.
"Perfect love drives out fear."
That perfect love was demonstrated by Christ on the cross. Those who allow themselves to be crucified with Christ as holy and living sacrifices will go bananas providing for the genetically risky. What's more, they'll do it with a hundred times more resources than the World has.
I like Harford's book, and all the others I've peeked at that talk insightfully about economic matters. When someone brings the only really meaningful Answer to all the issues brought up by those pesky economic laws, then I'll really like them.
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