Monday, August 28, 2006

A Naderite eats Crow

Residents of New Jersey are discovering something amazing – markets work. New Jersey used to have a market for auto insurance that was one of the most strictly regulated in the country. Insurers were forbidden from differentiating to any great extent on the basis of known risk factors. Premiums were also regulated by the state. Lo and behold, insurers fled in droves (State Farm was dropping 4000 customers a month) and drivers were left with among if not the highest premiums in the country. Three years after these restrictions were repealed, the insurance market functions much better. Better drivers (who are most of the population) pay lower premiums, the worst drivers pay higher ones. The New York Times has the story (password required).

Here is the money quote:
"There have to be winners and losers," said Dena Mottola, the executive director of the New Jersey Public Interest Research Group.

But, so far, she said, "we couldn’t find any data to back up that concern."

The New Jersey PIRG, like all PIRGs, is an organization founded at the inspiration of Ralph Nader and fellow consumer crusaders in the late 1960s and 1970s. My college had one, and I remember it best not for any achievements but because it used (and bitterly fought repeal of) the negative checkoff, in which all students “donate” one dollar to the group each term as part of their registration unless they specifically check off a box indicating that they don’t wish to pay that money. Unsurprisingly, they get more money this way. Despite all their high-blown rhetoric, they are every bit as self- (as opposed to “public-”) interested as everyone else.

But I digress. Ms Mottola displays the classic zero-sum view of the world that is so much a part of modern leftist thought, especially among anti-corporate and “consumer” groups. If someone is doing better, the rest of us must be doing worse. The idea – familiar to anyone who has passed basic microeconomics – that freeing restrictions on competition usually enhances total welfare to consumers and producers – is completely unfamiliar to (or disbelieved, despite centuries of historical evidence, by) her. In failing to see any losers (apart from really bad drivers), she sounds like a 14th century astronomer failing to see how the sun does not rotate around the Earth.

But some people never learn. Also from the article:
Consumer advocates, among the most vocal critics of state officials and auto insurers as the insurance situation worsened, have cautiously welcomed most of the changes.

"Over all, insurance is more available," said Phyllis Salowe-Kaye, the executive director of New Jersey Citizen Action. But she is concerned that the state now permits insurers to use credit ratings, occupation and education in evaluating risk and she fears that this might increase costs for low-income people.

If credit ratings, occupation and education are correlated with risk (and why would insurers use them otherwise?) then prohibiting their use will once again cause lower-risk drivers to subsidize higher-risk ones, cultivating the same problems all over again. The current, perhaps temporary victory of common sense is welcome, but eternal vigilance is the price of economic sanity.


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