Be Your Own Boss: Libertarian ideas to escape the grind

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There is little love lost between progressives and Big Corporations. Many Big Corporations, such as Wal-Mart and about a thousand others, are burnt at the rhetorical stake for their failure, inter alia, to provide great (or any) medical and dental benefits or a high-growth 401(k). Progressives generally believe that the market is to blame for this undesirable deprivation of basic freedoms, and that the only solution is more progressive regulation.

The problem with these objections is that businesses should never have been expected to be interested in offering such benefits in the first place. One wonders, why should your boss tell you how to dictate your future, stifle your independence, and peremptorily decide what kind of relaxing, leisure life is good for you? Expecting company-centric benefits smacks of Quasi-Government Bureaucracy, Inc., hearkening back to the Good 'Ol Days of the company town, the lifetime employer, and the 80-hour work week. Who wants that?

As William F. Buckley once wisely said, "I will not cede more power to the state. I will not willingly cede more power to anyone, not to the state, not to General Motors, not to the CIO. I will hoard my power like a miser, resisting every effort to drain it away from me." The man speaks the truth.

The choice of health insurance - and a doctor, for that matter - should always be a patient's, and never an employer's. Likewise, the choice of a financial strategy for retirement should be between the investor and his advisor, and this relationship is not most effectively dictated by a supposedly omniscient corporation.

The provision of health and retirement benefits is also a complex, cost-ineffective endeavor for the company. Certainly, no reputable economist has ever predicted that businesses would be efficient at providing services that have absolutely nothing to do with the corporation's core business purpose.

It's really ironic that progressives blame the market itself for the failures of Corporate America. First, they expect the market to function like a government, providing health care, retirement, and other goodies without regard for market efficiency. Then, they harp on the market when it performs these tasks like...well, an inefficient, bureaucratic government. Surprised?

 

The Solution

The libertarian, of course, is not surprised, and has a market-based policy solution for this so-called market failure. It's called: Stop expecting your employer to act like a government, and give employees free choice to let the benefits market actually function. How do we do this? Glad you asked, grasshopper.

First, privately-controlled and nationally-implemented Health Savings Accounts should be the source for every American's health care spending. The accounts should be independent of one's employer. Employees should also be able to choose the insurer of their choice and retain insurers when they change jobs. This process would cause insurance companies to compete to attract individual patients, instead of businesses looking to minimize costs and increase efficiency. This so-called "de-linking" of health benefits and employment would also open up the insurance market to greater consumer demand and competition. Employers would pay a specific percentage of an employee's salary into this savings account, but employees would be able to modify the contribution percentage as necessary to cover any insurance premiums, expected co-pays, and other expenses. The insurers could then access the account to collect premiums as well as contribute immediate financial coverage for various treatments and procedures. The accounts should be secured and regulated in order that the transactions between patient and doctor, insurer and insured, and employee and employer are as efficient, open, and as free as possible.

Second, private retirement accounts should be implemented for pension funds, along the same principles. Social Security (FICA) taxes should be paid directly into the account, as well as any other retirement contributions requested by an employee. The funds in the account should be able to be invested in any stock, bond, or other investment fund, as determined by the employee. Retirement funding is an employee's choice, and any investment in that process is simply a market exchange between the employee and his fund manager and/or investment advisor. The choice should be open and unfettered. In other words, your boss should have nothing to do with it.

Now, imagine if such an intelligent market-based policy were implemented. Employees would be free to shop around to find the best health insurance, doctors, retirement funds, and more. Most importantly, they wouldn't even have to leave their jobs to do so. Or, even if they chose to change jobs, they could take their benefits with them.

Let's examine some case studies to observe how such a brilliant policy could solve so many of the "crises" that are "created" by corporations.

Case Study 1: Wal-Mart (The non-existent benefit)

Among being pilloried for saving poor people money on basic goods, Wal-Mart is also subject to heaping progressive ridicule for not "providing" health insurance to many of its employees. How dare you, Sam!

Of course, our friendly proposal would solve this little difficulty. Under it, Wal-Mart employees could purchase health insurance as they please, without the permission or sanction of Wal-Mart. This makes so much sense it's difficult to take the progressive line seriously. Why should an employee have to work for benevolent employer - or lobby for some proposed legislation forcing benevolence - before he can get decent health insurance? If a Wal-Mart employee wants to spend a third of his lilliputian paycheck on comprehensive health insurance, shouldn't he be allowed to?

Everyone nods. But what about those who can't afford health insurance, you ask? To this, there are two solutions. The first is the natural lowering of health insurance costs that will result from market demand and consumer choice both increasing. Competition is the best-known and time-proven method of lowering prices for consumers, and it can do so in health care as well. Such competition is hardly achieved now - by forcing an employee to quit his job before he can easily find new insurance.

The second solution is through the negative income tax. States should be able to provide supplemental income to their low-income citizens in order to help with health insurance costs. Such subsidies could be paid right into the health savings accounts, allowing low-income individuals the same opportunity to participate in the health insurance market. The unfortunate truth is that the labor market is not the place to expect welfare - if you want the labor market to be efficient. The dirty truth of economics is that markets work efficiently when they pay their employees what they should be worth on the market. The safety net beyond an employee's fair market value is important - and it should provided by the government, not forced through employment.

Google employees, for example, get wonderful benefits, simply because they also make obscene amounts of money. Wal-Mart employees, by contrast, get minimum wage because Wal-Mart's competitive advantage is cost-cutting. That's life, and that's why there's no Olympic-size employee swimming pool at your local Wal-Mart. But the policy effort shouldn't be to force Wal-Mart to act like Google; the two companies have opposite purposes and strategies. Instead, the effort should be to let the Google and Wal-Mart employees use their compensation in the same way - for the purpose of securing health and retirement benefits on the open market - and thus drink from the same fountain.

Case Study 2: Enron (The disappearing pension)

Enron is perhaps the favorite progressive case study. Howard Dean, for one, once famously objected to Social Security private accounts by saying it was "run by the same people who gave us Enron." Apart from such a blubbering logical fallacy (is the Congress run by the same people who gave us Manzanar? The Fugitive Slave Act?), Mr. Dean clearly missed the point in another way. The market could have mitigated the Enron disaster.

Think about it. Businesses come and go; markets change and companies become bankrupt. Even without wanton accounting malfeasance, any company can go bust at any time. Why then, would you want to rely on one company for your retirement? (Insert sound of crickets.)

The secure appeal of Social Security private accounts is that the money can be invested anywhere in the market, separately from the company, controlled by a separate investment firm, overseen directly by the employee, diversified into several different markets, and also backed by the Social Security Administration. In other words, with Social Security private accounts, Enron wouldn't have been nearly the disaster it was. Its employees may have lost their jobs, but they never would have lost their retirement pensions.

It's certainly better than the current system, controlled by the same people that gave us Howard Dean. Seriously.

Case Study 3: GM (The inefficient benefit)

If anyone needed more confirmation of my earlier point that businesses are horrendously inefficient at providing health benefits, one only needs to look to GM. Aside from the decades-long insistence of quantity over quality, another competitive disadvantage of theirs is working (surprise) to sink the American carmaker - with excessive health benefits. These benefits were procured at the behest of the United Auto Workers, an extortionate labor union, and they did much to prove the fact that businesses shouldn't be in the business of choosing health benefits for all of their employees at once. When they do, the company goes down in flames.

By contrast, our health savings accounts are immune to the collectivist wrangling of labor unions, and they also aren't guaranteed in perpetuity. As your health contributions are always merely a function of your paycheck (and the percentage you choose to contribute), health insurance costs can never sink a company. When labor costs are too much, wages can be reduced.

Moreover, private accounts help to level the playing field. Rather than relying on GM to provide medicine and doctor visits, GM's employees could find such benefits on the open market, even through a competing company. Now, as we've noted, GM has enough problems building quality cars - it's unlikely that their health insurance crisis is the sole cause of their disaster. But it's undeniable that a private accounts system, with employees allocating their individual compensation to health and retirement benefits as they see fit, is superior to the current Marxist nightmare of hundreds of thousands of unionized employees all demanding a fat piece of a non-existent future pie.

Case Study 4: Dunder-Mifflin/Initech (The death of the American dream)

Our final case study is probably the most common. It's not corporate exploitation - it's corporate tedium. Either an employee wants to leave a boring, unsatisfying job but is afraid to lose his valuable benefits, or an employee likes the job okay but wishes he could get some better benefits to make his current misery a better long-term welfare investment. Or maybe he hates both.

Many employees feel "stuck" in their jobs, as red tape abounds to limit mobility, and entry costs into new industries or new jobs are too high. The corporate bureaucracy, from the perspective of the employee, can often be at Soviet levels.

The solution to this menial Corporate Drone existence is thankfully provided by our friendly market-based proposal. Personal accounts allow employees to "shop around," in effect, both for jobs and for benefits. Since the two are disconnected, the market can be truly effective. Jobs are chosen because the person likes the job, and the benefits are chosen because the person likes the benefits.

It's so simple, even a progressive could support it.

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Greg Southworth said:

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Have you heard of the proposals of the Center for Economic and Social Justice? Before the gag reflex kicks in, this is not your daddy's social justice group. Among their proposals includes modifying the Fed rules to allow for capital accounts for all Americans which can be used to buy stock in the owners corporation, local community development corporations and some other ways which would take too much space here. While these ideas are not specifically libertarain in origin, it does address the only limitation I have seen to libertarian thought..how do you address past economic and social injustices in the current time without the massive disruption of redistributionist schemes which would be logistical nightmares...if not the source of revolt.
 
March 20, 2008 | url
Votes: +0

spiker said:

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The argument for free market solutions to the inefficient health insurance market has a very serious flaw--the health insurance market is plagued by market failure.

“Markets are generally more efficient (a) the better is consumer information, (b) the more cheaply and effectively it can be improved…, (c) the easier it is for consumer to understand the available information, (d) the lower are the costs of the choosing badly, and (e) the more diverse are consumer tastes."

Health care fails to conform to these five factors. Consumers are often uninformed, or have only partial or poor information regarding health care diagnosis and treatments. The information required is highly unique to the individual patient. Health care professional are typically required to personally examine the patient and then communicate the diagnosis and possible treatments to the patient. Thus, the information gathering process is costly both in terms of time and money. Furthermore, the information gathered by the health care professional may not be easily communicated to and understood by the patient. Much the information is technical, and requires at least some understanding of science. Finally, patients often face extremely high costs of choosing incorrectly. If the patient chooses the wrong treatment, she may suffer pain, disability, or even death. These information problems make it difficult for individuals to contract for health care services. Imperfect consumer information should stand as “a caution against uncritical reliance on the ability of individual purchasers to make medical choices.”

“Rational choice requires that consumers have well defined preferences and a well defined budget constraint.” Imperfect information regarding the quality of health care products hampers consumers’ ability to rationally form preferences. Unable to rationally form preference, it is difficult for consumers to contract for health insurance services. If individuals were able to rationally choose health care treatments, they could exclude from insurance coverage any benefits that cost more than the individual values them. However, individuals are not able to easily distinguish valuable care from exceedingly costly care because of imperfect consumer information. It is difficult for an individual to know if expensive care is worth its cost, especially when health outcomes and treatment effectiveness are uncertain and variable. Thus, imperfect consumer information can thus distort an individual’s ability to rationally choose optimum insurance coverage.

Kenneth Arrow, a world renowned economist, was among the first to recognize that health insurance markets are plagued by inherent, efficiency hampering, producer information asymmetries. Arrow recognized that insurance markets are faced with various information problems which could lead to market failure. The most important of these include high administrative costs and the mal effects of pooling individuals facing different relative health risks creating. These problems would become the bases for future analysis of a problem known as adverse selection. Despite these inherent problems, Arrow concluded, that “[t]he welfare case for insurance policies of all sorts is overwhelming. It follows that the government should undertake insurance in those cases where this market, for whatever reason, has failed to emerge. Nevertheless, there are a number of significant practical limitations on the use of insurance. It is important to understand them, though I do not believe that they alter the case for the creation of much wider class of insurance policies than now exist.”

 
November 10, 2008
Votes: -1

spiker said:

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Economists quickly expanded on Arrow’s analysis of how informational asymmetries can cause insurance markets to fail. George A. Akerlof theorized that information asymmetries were responsible for elderly individuals’ inability to purchase health insurance prior to Medicare. Only those individuals whose expected health care expenditures are equal to, or higher than, the health insurance premium price will purchase health insurance. Thus relatively healthier individuals, low-risks, with low expected health expenditures may find insurance premiums exceed their expected health care expenditures and will choose to forego health insurance. Meanwhile the less healthy, high-risk, individuals remain. This further causes the insurance premium to increase further. As the premium increases, another round of relatively lower-risks drop out, leaving only higher-risks in the insurance pool."

Michael Rothschild and Joseph Stiglitz then proposed a general model of equilibrium in insurance markets (the R-S model).Those who face a high-risk of health problems impose higher expected losses on insurers. Those who face low-risks of health problems impose low expected losses on insurers. However, insurers are unable to differentiate between high and low-risks because high-risks conceal the fact that they pose a greater expected loss to the insurer. This leads insurance companies to pool its insured, creating a risk pool, and to offer insurance at premiums based on the risk pool’s average expected health care expenditure. In other words, the premium price will be based on the average, or expected, health risk of the entire insurance risk pool. All individuals in this risk pool will be charged this same insurance premium, regardless of their relative risk level.
Premiums charged based on average risk create unstable risk pools. Premiums based on expected risk are priced above low-risk individuals’ expected health care expenditure.

In a competitive market, firms compete to insure individuals. Competitive insurers will offer insurance policies with lower premiums in an attempt to appeal to low-risks, and adverse selection ensues. Low-risks then face the incentive to accept this new insurance offer. Low-risks opt into the lower cost insurance plan, but insurers are unable to differentiate between high and low-risk individuals and high-risks follow. This increases the average risk of the new risk pool and thus the premium charged. Again, low-risks face the incentive to find a less costly plan, or to opt out of the health market completely. In effect, competitive behavior between insurance firms leads to an unstable equilibrium in which low-risks continuously change health insurance plans or simply choose to no longer purchase health insurance. Thus, adverse selection may make it impossible to achieve equilibrium through risk pooling and causes some low risk individuals to purchase insurance.

 
November 10, 2008
Votes: +0

spiker said:

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The only stable equilibrium that may exist under the R-S model is a separating equilibrium (equilibrium reached only by offering low-risks and high-risks separate plans). Insurers must offer contracts that are attractive to low-risks, but unattractive to high-risks. The amount of coverage offered must be low enough to be appealing to low-risks, but not to high-risks, who typically prefer more coverage because of their higher expected health care expenditures. If too much coverage is extended, both high-risks and low-risks may prefer it, and no equilibrium will be possible.
Under, the R-S model, adverse selection makes only sub-optimal insurance consumption possible. “The presence of the high-risk individuals exerts a negative externality on the low-risk individuals.” Low-risks are forced to purchase less insurance than they would otherwise prefer, or are completely unable to purchase insurance. Also, adverse selection may make it impossible for high-risks to purchase all the insurance they would prefer. Thus, adverse selection results in a social welfare loss.

Following the R-S model, Charles Wilson proposed an alternative equilibrium model for insurance markets characterized by adverse selection. Wilson called this equilibrium E2. Under this model, the type of equilibrium achieved depends upon low-risk individuals’ level of risk aversion. If low-risks are relatively less risk averse, then equilibrium may be achieved through offering low-risks a policy that does not appeal to high-risks, just as in the R-S model. However, if low-risks are relatively more risk averse, it may be impossible to offer low-risks a policy that does not also appeal to high risks. Relatively risk averse low-risks prefer the same insurance policy that high-risks prefer, and insurers place them in the same risk pool as the high risks. Because low-risks receive less health benefits per premium dollar spent, low risks cross subsidize high-risk individuals’ consumption of health insurance. Thus, low-risk will prefer to subsidize the health care consumption of the high-risks to any lower coverage policy if they are relatively risk averse..
In this case, insurers will pool all the insured into a single risk pool, and offer them a premium based on the risk pool’s expected health care costs. An equilibrium in which low-risks prefer to be pooled with high-risk will “result when the costs of cross subsidization are less than the transaction and information costs of achieving a separating equilibrium and the gain in utility for the low risks derived through risk reduction exceeds the cost of cross subsidization.”

 
November 10, 2008
Votes: +0

spiker said:

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These models demonstrate the efficiency hampering effects adverse selection can have on the health insurance market. However, all three ignore the effects of administration costs on premium price. Insurers face administrative costs, including marketing, underwriting, and other business expenses. Thus, the premium insurers charge is based on expected health care expenditure plus administrative costs. Administrative costs necessarily increase premiums above the actuarially fail amount. High administrative costs thus exacerbate the adverse selection problem by further incentivizing low-risk individuals to drop out of the insurance market.

Uncompensated care pools may also lead to increased adverse selection. The Emergency Medical Treatment and Active Labor Act (EMTALA) requires hospitals receiving federal funds to extend emergency health care to all individuals regardless of ability to pay. EMTALA essentially offer a bare bones insurance policy to all Americans free of charge. Much of this care is never paid; instead “much of this care is ‘uncompensated,’ written off by the provider as bad debt or charity care.” The availability of uncompensated care pools lowers the likelihood of individuals purchasing health insurance.
Rising premiums were responsible for two-thirds of the total decline in health insurance coverage during the 1990s. Approximately half of premium induced drop of coverage is due to the availability of uncompensated care. Essentially the availability of free emergency care reduces the utility associated with health insurance, making individuals, especially lower income or lower-risk individuals, more likely to opt out of the health insurance market. Evidence suggests that young individuals are especially susceptible to opting out of health insurance markets in favor of uncompensated care pools. That the young disproportionately drop out of health insurance pools and into uncompensated care pools is consistent with adverse selection theory because the young are typically low-risk individuals. Thus, the availability of uncompensated care pools may in fact intensify adverse selection in the private health insurance market.
In sum, economic theory clearly predicts the existence of adverse selection in the health insurance market. Adverse selection makes it economically unfeasible to offer all persons full coverage, can drive some policies from the market, incentivizes some low-risk individuals to go without insurance, and makes only sub-optimal insurance possible. “In the face of adverse selection the market is inefficient or fails entirely, the ultimate outcome depending on the precise behavior of the insurer and the insured. Next, I will show that empirical evidence proves that adverse selection is present in the current health insurance market.

Empirical evidence supports the existence of adverse selection in the health insurance market. There are two different markets for private health insurance in the United States. The larger private health insurance market is the employer based group insurance market. Nearly sixty percent of Americans are covered by employment based group insurance. Only nine percent of Americans choose to purchase their own insurance through the individual health insurance market.

Empirical evidence suggests that adverse selection plays a significant role in the individual health insurance market. Evidence suggests that adverse selection is more prevalent in the individual health insurance market than in the employer based group health insurance market. Furthermore, empirical evidence is consistent with the Wilson equilibrium model.

A study by Mark J. Browne tested for adverse selection in the individual market by comparing the amount of insurance low-risk families purchased in the individual market to the predicted amount they would have purchased in a group market. Group health insurance markets are thought to be less prone to adverse selection because they are typified by large risk pools and the insurance is provided in connection with employment. Because employer contributions to health insurance are not taxed as individual income and are incidental to employment, employees can leave the group insurance pool only by forgoing a subsidy of their insurance purchase or by terminating employment Thus, low-risks face less incentive to flee the insurance pool to avoid subsidizing the high-risks, resulting in less adverse selection in the group market than in the individual market.

 
November 10, 2008
Votes: +0

spiker said:

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The results of Browne’s empirical analysis are consistent with the existence of adverse selection in the individual health insurance market. Low-risk families in the individual market consume less insurance in the individual market than they would in the group market. Furthermore, Browne found that the low-risk families in fact subsidize the health insurance consumption of high-risk families in the individual health insurance market. Both these findings are consistent with the Wilson and Miyazaki models of equilibrium in markets characterized by adverse selection. When taken together, this evidence strongly suggests the existence of adverse selection in the individual health insurance market.

Further research then provided evidence not only that adverse selection existed in the individual market, but that the Wilson model may correctly characterize the individual health insurance market. Regression analysis revealed no evidence that high-risks purchased insurance policies entailing less cost sharing than low-risk individuals. This suggests that low-risk and high-risk individuals are placed in the same risk pool and charged the same premium. Also, high-risk individuals received “more indemnity benefits per dollar of premium than do lower risks. The evidence is consistent with cross-subsidization from low risk to high risk insureds.” Thus, the evidence suggests not only that adverse selection is present, but that the Wilson equilibrium model describes the individual health insurance market. Adverse selection in the individual health insurance market is resulting in sub-optimal insurance consumption.
These studies are essential to understanding how adverse selection affects the insurance market. They demonstrate that adverse selection is more rampant in the individual market than in the group market. They also demonstrate that individuals value insurance highly. These studies also demonstrate that at least some individuals are sufficiently risk averse as to prefer paying higher than actuarial fair premiums, and to cross-subsidize the consumption of higher-risk individuals, to foregoing health insurance.

These studies indicate that low-risk individuals’ value health insurance highly. That low-risks are willing to cross-subsidize high-risk individuals’ consumption of insurance shows that preferences for insurance are not vastly different for low and high-risk individuals. Similarity in preferences is necessary for efficiency enhancing insurance mandates. Furthermore, these findings suggest that by expanding group insurance pools we may be able to reduce adverse selection. However, while group insurance may be less affected by adverse selection than individual insurance, group insurance is not immune from adverse selection.

Because the individual insurance market is more prone to adverse selection, any policy proposal that encourages movement from group insurance to individual insurance is probably a bad idea. Such a policy will increase price and reduce coverage. These problems cannot be addressed by free-market solutions--they are inherent in individual health insurance market







 
November 10, 2008
Votes: +0

M. Harrison said:

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Dear Spyker,

Please give your high school essay to your economics teacher who cares to read it.

As to your rambling post(s), their entire content is relevant only to neoclassical economists who persist in the delusions of perfect rationality and efficiently profit-maximizing individuals.

But nowhere do I share that crucial assumption. Not only is it not in this post, but you can stay tuned for my book in which I comprehensively obliterate it.

That being said, we can boil your 6 (!) posts into one rather mundane observation, that people can make bad decisions when selecting insurance. But surely this point, however indulgently phrased with copious references to numerous economic titans, has little or no weight against my point, namely, that you will probably make that admittedly difficult decision better than your boss.

And that's what matters. I read your posts and I see a lot of references to sundry regression analyses which are purported to equate to an accurate grasp on the black box of human decision making.

But I and the rest of thinking humanity are not convinced by your belief that you can design a superior health insurance package for me, my friends, and millions of Americans any more than we are convinced than Barack Obama, Nancy Pelosi, Paul Krugman or the CEO of General Motors can.

Yes, I might be overpaying for my health insurance. I'm also overpaying for my car, but that doesn't mean I want the Department of Auto Finance Planning - headed, presumably, by Spiker and his happy myrmidons armed with regression analyses galore - making all of my finance decisions for me in the future. You're like a hater who deplores other people for making mistakes. Yeah, so what? It doesn't mean you can do any better.

Stop putting the work of the Prometheus Institute into your silly little box, and stop fighting straw men that don't exist. Accept the work on the merits, and accept the fact that your periphrastic economic theorizing does not even dent the foundations of this article. Go play with your models somewhere else.

Goodbye.
 
November 15, 2008
Votes: +2

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