Wednesday, August 19, 2009
Michael Vick’s “Mistake”
As a proponent of individual freedom and individual responsibility, I think we are responsible for our mistakes and crimes. And I also think that people should be allowed to try to have a normal life when they complete serving their sentences. So in principle, I suppose that Mike Vick should have a chance to play in the NFL again, although I would have liked to see the NFL suspend him for one full season after he completed his prison sentence. But the annoying aspect of the Vick coverage over the past week has been people referring to the “mistake” he made, and how he should now be allowed to resume his career. If you read the Federal indictment against him two years ago, you know he was in the dog fighting business for six years. Excuse me, but active participation in an enterprise for six years is not a “mistake.” Missing your exit on the freeway is a mistake. Running over a sprinkler head with the lawnmower is a mistake. Vick might deserve a second chance, but he made a whole bunch of mistakes over six years, not one little mistake.
Really Hiding Insurance Subsidies (Originally posted on danielsutter.com on August 17, 2009)
Really Hiding Insurance Subsidies
The U.S. House of Representatives is considering again this session the Homeowner’s Defense Act which would create a Federal backstop for catastrophe risk through Federal reinsurance for catastrophes like hurricanes. Many coastal states currently subsidize wind insurance through state run wind, hurricane or beach pools. The subsidies are troublesome because they are hidden: policy holders pay premiums for wind insurance each year that might seem high and look on their face to be similar to regular insurance. But because the wind pools can impose assessments (or taxes) on other insurance policies in a state, the rates do not have to be high enough to build up a sufficient reserve to cover losses from a major (or sometimes even minor) hurricane. States subsidize coastal property owners each year (they pay less than they would if buying insurance on a free market), but the subsidy is hidden from view until the losses occur. In the meantime, supporters can claim that since the pool hasn’t imposed assessments since the last hurricane, the pool really doesn’t subsidize residents. Unless you are an actuary or have access to a pretty sophisticated catastrophe model, you will have difficulty “proving” that the current rates are too low.
The Homeowner’s Defense Act would get the Federal government into the reinsurance business, as the state of Florida has with their Hurricane Catastrophe Fund, or the Cat Fund. Government run reinsurance provides another level of cover for coastal insurance subsidies. When reinsurance (or insurance for insurers) is sold a subsidized rates say to state wind pools, supporters of the wind pool can now claim with a relatively straight face that the pool does not subsidize homeowners. The pool now purchases sufficient reinsurance to cover their losses. Of course the reinsurance is being offered at below market rates, but citizens would need to dig past the initial level of insurance to find the subsidy. In the mean time, claims that wind pools are no longer subsidizing coastal property insurance obscure the truth more effectively than before.
The Competitive Enterprise Institute has set up a website to combat a Federal bailout of state wind pools which I highly recommend. It can be found at http://nobeachhousebailouts.org/
The U.S. House of Representatives is considering again this session the Homeowner’s Defense Act which would create a Federal backstop for catastrophe risk through Federal reinsurance for catastrophes like hurricanes. Many coastal states currently subsidize wind insurance through state run wind, hurricane or beach pools. The subsidies are troublesome because they are hidden: policy holders pay premiums for wind insurance each year that might seem high and look on their face to be similar to regular insurance. But because the wind pools can impose assessments (or taxes) on other insurance policies in a state, the rates do not have to be high enough to build up a sufficient reserve to cover losses from a major (or sometimes even minor) hurricane. States subsidize coastal property owners each year (they pay less than they would if buying insurance on a free market), but the subsidy is hidden from view until the losses occur. In the meantime, supporters can claim that since the pool hasn’t imposed assessments since the last hurricane, the pool really doesn’t subsidize residents. Unless you are an actuary or have access to a pretty sophisticated catastrophe model, you will have difficulty “proving” that the current rates are too low.
The Homeowner’s Defense Act would get the Federal government into the reinsurance business, as the state of Florida has with their Hurricane Catastrophe Fund, or the Cat Fund. Government run reinsurance provides another level of cover for coastal insurance subsidies. When reinsurance (or insurance for insurers) is sold a subsidized rates say to state wind pools, supporters of the wind pool can now claim with a relatively straight face that the pool does not subsidize homeowners. The pool now purchases sufficient reinsurance to cover their losses. Of course the reinsurance is being offered at below market rates, but citizens would need to dig past the initial level of insurance to find the subsidy. In the mean time, claims that wind pools are no longer subsidizing coastal property insurance obscure the truth more effectively than before.
The Competitive Enterprise Institute has set up a website to combat a Federal bailout of state wind pools which I highly recommend. It can be found at http://nobeachhousebailouts.org/
Who Saw the Ideological Shift Coming? (Originally posted on danielsutter.com on March 17, 2009)
Who Saw the Ideological Shift Coming?
Why has there been such a dramatic shift in the public intellectual climate in the past few months? Government spending has increased by more than 10% of GDP. There has been a dramatic extension of political decision making in the economy – manipulating real estate values comes close to price controls for homes, the Federal government has assumed an ownership position in leading banks, bailouts have been provided for automakers and others, Congress seems likely to take over setting executive salaries, and the nationalization of banks certainly seems to be on the agenda as a real possibility. This is a massive shift in the relationship between government and the private sector. People talk about economists not letting us know in advance about the impending financial crisis and recession. But who foresaw this ideological shift? Less than twenty years ago Francis Fukuyama wrote that we had reached the end of history, that there were no intellectual challenges to market democracy. Apparently the support might have been there for a sudden socialization of the economy. What might be behind this sudden ideological collapse for the market economy? Here is some speculation.
The economics profession was never as pro-free market as publicly portrayed. Dan Klein’s work I think convincingly shows that the median economist was certainly not a free market economist. Theoretical models of asymmetric information and network externalities (among others) provide the basis for considering much of a market economy to be inefficient. There was probably substantial preference falsification among economists in the 1990s who felt that they had to follow the consensus about markets.
Economists in the socialization vanguard probably have a very inaccurate vision of what politicized decision making is going to be like. Many of these people probably naively think that they will call the shots when the government is running much more of the economy, but history shows that this is unlikely to happen. The economists providing the academic cover for the growth of government will find themselves being pawns.
Intellectual hubris is probably at work here as well. If you have read any of Joseph Stiglitz’ book Whither Socialism?, do you think that he thinks that he could centrally plan the economy. Stiglitz, Krugman and these folks are very smart, but they suffer from the fatal conceit of all planners.
The compromised status of the opposition party. Republicans engaged in extensive spending and the expansion of the power of the Federal government for the war on terror, and the invasion of Iraq was based on a right to engage in preemptive war. The Bush administration seemed there should be no constraints on their power, which should include the power to hold American citizens as enemy combatants and to torture alleged terror suspects at will. The Republicans expanded discretionary spending during their control of government; the party of Alaska’s bridge to nowhere cannot take a principled stand against government spending. George Bush began much of the socialization at the end of his term in office. The inability of the opposition party to offer meaningful opposition could lead to a temporary dramatic shift in the public intellectual spectrum.
Why has there been such a dramatic shift in the public intellectual climate in the past few months? Government spending has increased by more than 10% of GDP. There has been a dramatic extension of political decision making in the economy – manipulating real estate values comes close to price controls for homes, the Federal government has assumed an ownership position in leading banks, bailouts have been provided for automakers and others, Congress seems likely to take over setting executive salaries, and the nationalization of banks certainly seems to be on the agenda as a real possibility. This is a massive shift in the relationship between government and the private sector. People talk about economists not letting us know in advance about the impending financial crisis and recession. But who foresaw this ideological shift? Less than twenty years ago Francis Fukuyama wrote that we had reached the end of history, that there were no intellectual challenges to market democracy. Apparently the support might have been there for a sudden socialization of the economy. What might be behind this sudden ideological collapse for the market economy? Here is some speculation.
The economics profession was never as pro-free market as publicly portrayed. Dan Klein’s work I think convincingly shows that the median economist was certainly not a free market economist. Theoretical models of asymmetric information and network externalities (among others) provide the basis for considering much of a market economy to be inefficient. There was probably substantial preference falsification among economists in the 1990s who felt that they had to follow the consensus about markets.
Economists in the socialization vanguard probably have a very inaccurate vision of what politicized decision making is going to be like. Many of these people probably naively think that they will call the shots when the government is running much more of the economy, but history shows that this is unlikely to happen. The economists providing the academic cover for the growth of government will find themselves being pawns.
Intellectual hubris is probably at work here as well. If you have read any of Joseph Stiglitz’ book Whither Socialism?, do you think that he thinks that he could centrally plan the economy. Stiglitz, Krugman and these folks are very smart, but they suffer from the fatal conceit of all planners.
The compromised status of the opposition party. Republicans engaged in extensive spending and the expansion of the power of the Federal government for the war on terror, and the invasion of Iraq was based on a right to engage in preemptive war. The Bush administration seemed there should be no constraints on their power, which should include the power to hold American citizens as enemy combatants and to torture alleged terror suspects at will. The Republicans expanded discretionary spending during their control of government; the party of Alaska’s bridge to nowhere cannot take a principled stand against government spending. George Bush began much of the socialization at the end of his term in office. The inability of the opposition party to offer meaningful opposition could lead to a temporary dramatic shift in the public intellectual spectrum.
Catching Corrupt Politicians is a Good Thing, Right? (Originally posted on danielsutter.com on December 12, 2008)
Catching Corrupt Politicians is a Good Thing, Right?
The big political news this week has been the arrest of Illinois Governor Rod Blagojevich on corruption charges for attempting to “sell” the U.S. Senate seat being vacated by Barack Obama. The FBI began wiretaps before Obama’s election to the presidency, which clearly suggests that this was not Blagojevich’s first corrupt act. Although some economists and political scientists will debate whether political corruption is necessarily bad (the tough case is when corruption allows evasion of a wealth reducing law), let’s suppose that this corruption is definitely bad. Certainly then the FBI should be saluted for rooting out such bad acts and likely removing a corrupt politician from office, right?
Not necessarily. Tolerating corruption may play a beneficial role within the political system, as I explore in a paper with Marc Poitras published earlier this year in the Journal of Economic Behavior and Organization. Suppose there are two types of politicians, angels and knaves, compete in a political hierarchy, with say the presidency as the top prize. Only knavish politicians will behave badly, but knaves will behave to opportunistically pursue higher office. In this framework a knavish politician reveals his or her type by engaging in corruption. This may disqualify him from advancing to higher office. Corruption benefits the political system by allowing citizens screen out knaves before they reach higher office and can really cause harm. But how do we induce knaves to reveal their type? In part by ensuring that low office corruption pays. Quickly detecting corruption by governors reduces the payoff, and may induce the knavish politician to behave in hopes of reaching a higher office where the benefits of corrupt acts are even greater. Indeed it may even be beneficial to ensure that knavish politicians who engage in corruption are returned to their local office.
The big political news this week has been the arrest of Illinois Governor Rod Blagojevich on corruption charges for attempting to “sell” the U.S. Senate seat being vacated by Barack Obama. The FBI began wiretaps before Obama’s election to the presidency, which clearly suggests that this was not Blagojevich’s first corrupt act. Although some economists and political scientists will debate whether political corruption is necessarily bad (the tough case is when corruption allows evasion of a wealth reducing law), let’s suppose that this corruption is definitely bad. Certainly then the FBI should be saluted for rooting out such bad acts and likely removing a corrupt politician from office, right?
Not necessarily. Tolerating corruption may play a beneficial role within the political system, as I explore in a paper with Marc Poitras published earlier this year in the Journal of Economic Behavior and Organization. Suppose there are two types of politicians, angels and knaves, compete in a political hierarchy, with say the presidency as the top prize. Only knavish politicians will behave badly, but knaves will behave to opportunistically pursue higher office. In this framework a knavish politician reveals his or her type by engaging in corruption. This may disqualify him from advancing to higher office. Corruption benefits the political system by allowing citizens screen out knaves before they reach higher office and can really cause harm. But how do we induce knaves to reveal their type? In part by ensuring that low office corruption pays. Quickly detecting corruption by governors reduces the payoff, and may induce the knavish politician to behave in hopes of reaching a higher office where the benefits of corrupt acts are even greater. Indeed it may even be beneficial to ensure that knavish politicians who engage in corruption are returned to their local office.
After the Flood (Originally posted on danielsutter.com on August 17, 2008)
This column was originally published in the Guardian's online American edition.
After the flood
Without comprehensive homeowners insurance, Hurricane Katrina and other flood victims are left footing the bill
By Daniel Sutter
Recently Nationwide Insurance proposed that it and other insurers be allowed to sell comprehensive insurance for homeowners that would protect them against all manner of hazards, natural and manmade. Most homeowners probably think this is nothing new, but the fact is that virtually no US homeowners insurance policies cover flood damage, making Nationwide's proposal nothing short of revolutionary.In the United States, homeowners and flood insurance are regulated and sold under two completely different schemes. Homeowners insurance is regulated by states and sold by different competing companies. Flood insurance, by contrast, is regulated exclusively by the federal government and sold through the National Flood Insurance Program (NFIP). Instead of one point of contact for all damages suffered, homeowners with flood insurance must file claims with both the NFIP and their homeowners insurance company and wait for adjusters to determine how much damage came from wind and what percentage came from flood. When the roof has been ripped off your home by 150 mph winds, figuring out what water came in through windows and doors and what water came in from the sky is clearly absurd. It might even be comical if it didn't destroy peoples' lives. Mercatus Centre Scholar Emily Chamlee-Wright refers to this as the "flood-no flood tango", and the result is major delays in rebuilding as policyholders wait for their insurance payment. Homeowners who don't have flood insurance must wait to see if they will receive any insurance payment.A dual system of insurance creates two other problems. First, it creates an incentive for insurance companies to try to shift losses to the NFIP by attributing them to flooding when they were really caused by wind. Second, it increases uncertainty for insurance companies because federal policy on proving that damage was indeed caused by flood waters can vary over time. Insurers may still end up having to reimburse the NFIP for damage from Katrina that was initially categorised as flood damage if future investigation proves the damage resulted from wind and rain before the levees broke. The NFIP has its own problems as well. The program was created in 1968 as a means to reduce the nation's vulnerability to floods. However, per capita flood losses in the US, adjusted for inflation, are now twice their pre-1968 levels. And despite the fact that NFIP policies are priced below actuarially sound rates, surprisingly few people in flood plains actually buy insurance. The NFIP has just over 10,000 policies in force in all of Iowa, and Mississippi had some of the lowest rates of purchase of insurance of any areas along the Gulf or Atlantic coast prior to Katrina.To some degree, this is the fault of poor communication about the likelihood of flooding. Residents who live behind levees, like many homeowners in New Orleans' Lower Ninth Ward, are told that they are outside of the 100-year floodplain and do not need to buy insurance. But this determination depends on the assumption - foolish in retrospect - that levees and floodworks were built up to specifications and would therefore protect the area. Clearly, this was not the case.But, more importantly, insurance agents don't have an incentive to sell appropriate flood policies. All mortgage companies require mortgaged properties to carry homeowners insurance, but few require flood insurance for homes outside what FEMA designates as "A" zones - the 100-year floodplain.The NFIP has, by most measures, been a failure. Not only has it not reduced flood losses, but it has created uncertainty for both homeowners and insurers, slowed down recovery efforts after disasters and left the taxpayers holding the bag. Lawmakers should seriously consider Nationwide's proposal as a means toward moving flood insurance out of the public sector and towards more sensible, single-policy hazard coverage for homeowners. In order to move to an insurance system that works - one that provides actuarially fair rates, gives homeowners the peace of mind they want and doesn't leave taxpayers on the hook - policymakers would be well-advised to consider Nationwide's proposal. Just as we don't have health insurance that covers everything besides, say, broken limbs, or auto insurance that excludes collisions with red cars, it makes no sense to separate flood damage from other damage.
After the flood
Without comprehensive homeowners insurance, Hurricane Katrina and other flood victims are left footing the bill
By Daniel Sutter
Recently Nationwide Insurance proposed that it and other insurers be allowed to sell comprehensive insurance for homeowners that would protect them against all manner of hazards, natural and manmade. Most homeowners probably think this is nothing new, but the fact is that virtually no US homeowners insurance policies cover flood damage, making Nationwide's proposal nothing short of revolutionary.In the United States, homeowners and flood insurance are regulated and sold under two completely different schemes. Homeowners insurance is regulated by states and sold by different competing companies. Flood insurance, by contrast, is regulated exclusively by the federal government and sold through the National Flood Insurance Program (NFIP). Instead of one point of contact for all damages suffered, homeowners with flood insurance must file claims with both the NFIP and their homeowners insurance company and wait for adjusters to determine how much damage came from wind and what percentage came from flood. When the roof has been ripped off your home by 150 mph winds, figuring out what water came in through windows and doors and what water came in from the sky is clearly absurd. It might even be comical if it didn't destroy peoples' lives. Mercatus Centre Scholar Emily Chamlee-Wright refers to this as the "flood-no flood tango", and the result is major delays in rebuilding as policyholders wait for their insurance payment. Homeowners who don't have flood insurance must wait to see if they will receive any insurance payment.A dual system of insurance creates two other problems. First, it creates an incentive for insurance companies to try to shift losses to the NFIP by attributing them to flooding when they were really caused by wind. Second, it increases uncertainty for insurance companies because federal policy on proving that damage was indeed caused by flood waters can vary over time. Insurers may still end up having to reimburse the NFIP for damage from Katrina that was initially categorised as flood damage if future investigation proves the damage resulted from wind and rain before the levees broke. The NFIP has its own problems as well. The program was created in 1968 as a means to reduce the nation's vulnerability to floods. However, per capita flood losses in the US, adjusted for inflation, are now twice their pre-1968 levels. And despite the fact that NFIP policies are priced below actuarially sound rates, surprisingly few people in flood plains actually buy insurance. The NFIP has just over 10,000 policies in force in all of Iowa, and Mississippi had some of the lowest rates of purchase of insurance of any areas along the Gulf or Atlantic coast prior to Katrina.To some degree, this is the fault of poor communication about the likelihood of flooding. Residents who live behind levees, like many homeowners in New Orleans' Lower Ninth Ward, are told that they are outside of the 100-year floodplain and do not need to buy insurance. But this determination depends on the assumption - foolish in retrospect - that levees and floodworks were built up to specifications and would therefore protect the area. Clearly, this was not the case.But, more importantly, insurance agents don't have an incentive to sell appropriate flood policies. All mortgage companies require mortgaged properties to carry homeowners insurance, but few require flood insurance for homes outside what FEMA designates as "A" zones - the 100-year floodplain.The NFIP has, by most measures, been a failure. Not only has it not reduced flood losses, but it has created uncertainty for both homeowners and insurers, slowed down recovery efforts after disasters and left the taxpayers holding the bag. Lawmakers should seriously consider Nationwide's proposal as a means toward moving flood insurance out of the public sector and towards more sensible, single-policy hazard coverage for homeowners. In order to move to an insurance system that works - one that provides actuarially fair rates, gives homeowners the peace of mind they want and doesn't leave taxpayers on the hook - policymakers would be well-advised to consider Nationwide's proposal. Just as we don't have health insurance that covers everything besides, say, broken limbs, or auto insurance that excludes collisions with red cars, it makes no sense to separate flood damage from other damage.
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