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Thursday, August 31, 2006

Whigs and wigs.

Ezra Klein has a brilliant post in which he argues that it is a bad idea to make most people pay medical expenses out of pocket, because most people will skimp irrationally. As an aside, he even argues that people should not be free to buy health insurance that doesn't pay for wigs (if they have chemotherapy).

Klein's main target is Aaron (update: Arnold) Kling who represented the pro-market right in a debate, but he spares a barb for Sebastian Mallaby in the role of hypoteneuse.

"A good example of this came from Mallaby, who mocked Minnesota's insurance climate for mandating coverage of massage and wigs. (Minnesota, incidentally, has the lowest uninsured rate in the nation.) Ho, Ho, Ho. He had a good laugh over that one, I'm sure. Except the wigs are for chemotherapy survivors..."

Klein's claim is that no rational woman would risk having to go around bald in order to save the expected cost of a wig should she need chemotherapy (he is quite explicit on the gender dimension). However, real world women will not think of that (who wants to think of that) and so their future scalps must be protected from their present selves.

To me it is obvious that health insurance should be regulated so that insurance companies are required to pay for reasonable care (which certainly includes wigs for chemotherapy patients who want them). Why do some people disagree ? I present possible explanations in reverse order of respectfulness

0) They don't really and are being dishonest. The wig and massage line is effective. Even people who understand the issues might use it to trick those who don't.

1) They think it is right and just for foolish people to suffer. I strongly suspect that this is true of many libertarians. I don't have proof. Obviously this has nothing to do with Mallaby.

3) They are clueless. It is possible that Mr Mallaby has never thought of how desperately he might want a wig if all his hair fell out (judging by his photo this is extremely extremely unlikely for reasons which have nothing to do with chemotherapy, which Klein is too young to have experienced and which are all too clear as the sight of my scalp in the mirror to me). Thus he thinks that the choice imposed by Minnesota is the wrong choice and he is against it. This is cluelesness because I'm sure he thinks it is reasonable for women who have had chemotherapy to wear wigs and that economic risk is, other things equal, bad. This is the most likely explanation.

4) They assume people have rational expectations. If one assumes that everyone makes perfect choices, limiting their feasible set can only reduce their welfare. This assumption is so crazy that no one takes it literally (I met one guy named Adriano once who claimed to but I think he was joking). Professional economists take it seriously when at work, but Mallaby, for all his faults, is not one of us.

5) they are liberals and hold by the creed that we should always act as if we believe that people are the best judges of their own interests.

Here I refer to liberalism it's own self. Not the modern English usage in which it means left of center but right of socialism. Not "classical liberalism" which means "libertarianism" which means pro-market rightism.

Another way of putting 5 is that some people are opposed to paternalism on principle even if they recognise that it can sometimes be a useful means towards the end of maximising pleasure minus pain.

I have some respect for 5, so I want to understand why I find it unconvincing. As for me, I am not reliably anti paternalistic (and I wasn't even before I became a pater).
I think we should protect peoples' future selfs from their present selfs. I have always thought this. I will try to pretend to be a more reliable liberal and think more.

I think that a liberal argument for all sorts of regulations is adverse selection. Generous medical insurance which is good for everyone is very good for those in ill health. All economists know why the market will provide less generous insurance than is optimal. This holds even if people have rational expectations, that is, know and understand everything that is knowable.

I also think that if people are free, they are free to delegate responsibility. I don't want to have to read the fine print on an insurance policy. I certainly don't want to have to demand to read the fine print on an insurance policy during a job interview. I don't want to learn enough epidemiology to know which treatments are cost effective (I personally haven't bothered to get a medical check up which was not mandatory since I became an adult but I am trying to pretend I am a good liberal). Once one chooses to delegate responsibility one has to worry about the self interest of the delegate. It is optimal to choose a delegate who does not have compelling interests competing with the desire to honestly serve you (always weak).

Legislators and bureaucrats are such delegates. They are not to be trusted, but they are obviously easier to discipline than insurance companies who are on the other side of a market transaction. We can trust them to handle the paper work (for a huge cost) but it would be crazy to trust their advice on what policy to buy. We can verify by checking what has happened to clients of various companies, but I just assumed that we are too busy to do stuff like that.

There is a key case for public sector involvement when all private sector agents have strong incentives to act badly.

This point is due to Nancy Zimmerman who asked the question with only one possible answer "do you want a private cost minimizing profit maximizing contractor to service Air Force One" (this was when Clinton was president).

Her husband and a friend made an economics article out of it.

Why can't the market handle this ? Well first of all adverse selection.

Anonymous has left a new comment on your post "8/31/2006 05:38:00 AM":

Can you provide a link or citation to the econ article by that Zimmerman feller?

Nancy Zimmerman is not a professional economist. The article was written by her husband Andrei Shleifer and two friends. It is modestly titled "The Proper Scope of Government: Theory and an Application to Prisons" with O. Hart, A. Shleifer and R. Vishny). Quarterly Journal of Economics, November, 1997. pdf here

The authors are each well known for being very smart.

Max has left a new comment on your post "8/31/2006 05:38:00 AM":

Arnold Kling.

Thanks Max. Sorry Arnold.

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