Joseph Heath on the benefits of risk-pooling and the social safety net

March 10, 2016 6:33 PM

Privatization and demutualization. A concise explanation of the efficiency gains of health insurance and public pensions, from Canadian philosopher Joseph Heath. Heath points out that the "social safety net" provides tremendous gains from risk-pooling, completely separate from redistribution or reduced inequality.

This still leaves us, the savvy health-care consumers [saving individually using proposed health savings accounts], with one very important decision. "How much should we save?" Well, let's see. Someday you may need a heart bypass. That will cost about $15,000, assuming you have no complications. You might need kidney dialysis. That costs $2500 a month, for the rest of your life. Or you might need a liver transplant. That costs between $30,000 and $690,000, plus a couple weeks -- maybe months -- in intensive care, which can easily cost upwards of $5000 a day. (These are all Canadian estimates, for American figures multiply by four or five.)

It all starts to add up pretty quickly. The problem is that we don’t know how many of these expenses we are going to incur. Furthermore, just knowing the background probabilities doesn’t help. Health care spending is characterized by extreme variability between persons, so if you try to save by looking at population averages you are almost guaranteed to save too much or too little. Thus a system in which everyone makes an individual decision regarding how much to save will generate massive inefficiencies.

This is precisely why we have health insurance. While no one individual has any idea whether she will need a coronary bypass or a liver transplant, thanks to the law of large numbers we know almost exactly what percentage of the population will require bypasses and transplants every year. We therefore know how much we, as a society, should set aside for such procedures. It is precisely because of the utility gains that can be achieved through risk-pooling that we pay for health care through insurance schemes.

(The supposedly "redistributive" character of our health care system is actually just a misleading way of describing this risk-pooling function. The tax system is redistributive, the social safety net is not.)

As a philosopher, Heath spends a lot of time reading and writing about economics and politics, thinking about how they all hang together. In particular, he's spent a lot of time thinking about the justification of the welfare state.

Trudeau Foundation profile:

Perhaps my most interesting [conceptual clarification] concerns the nature of risk-pooling and social insurance. Many people assume that the fundamental role of the "social safety net" is to redistribute wealth, in order to promote greater equality. Another way of looking at it, however, is to see them as essentially a set of insurance programs, which are run by the government because the private sector fails to provide that sort of insurance, either at all, or at an appropriate price. From this perspective, the reason that the government provides medicare, or employment insurance, is fundamentally the same as the reason that it provides roads and sewers.

Academic articles on this subject: Three Normative Models of the Welfare State. The Benefits of Cooperation (PDF).

For a book-length version of the argument, written for a popular audience, see The Efficient Society. Subsequent books include The Rebel Sell (with Andrew Potter, on consumerism), Economics without Illusions (on economic fallacies, Canadian title Filthy Lucre), and Enlightenment 2.0 (on limited rationality and politics).

Heath is quite prolific. He posts frequently to the In Due Course group blog. (Named after a Fabian slogan: "What do we want? GRADUAL CHANGE. When do we want it? IN DUE COURSE.")

On public vs. private spending: Why a Conservative government would be bad for Ontario.

... it's fairly clear what the PCs are planning. They are proposing a general shift in Ontario away from consumption of public goods towards increased consumption of private goods. ... They are proposing that we actually produce and consume less of the sort of goods that are best produced by government: in particular, less primary education, less environment protection, less public transit, and no provincial pensions. This will be done in order to lower taxes, so that people will have more disposable income, to buy various private goods.

Now I guess it's worth noting that the PCs have not even tried to make the case for this.... In other words, they haven’t said one thing about why they think that it would be good for us, as a society, to shift consumption away from public (or quasi-public, you know what I mean) toward private goods. And at first glance, I’m not sure what that case would be. I've spent a fair bit of time in middle-class suburban homes in Ontario, and when I look around there, I don't usually say to myself "you know what these people really need? ... more shit from Costco."

So if you were to put it in the form of a debating club proposition: "be it resolved, that what the people of Ontario need is more private goods and fewer public goods" I would be more than happy to take the negative. In fact, when I hear people complaining about their various work-life/financial woes, I find that a large fraction of them can be traced back to a chronic undersupply of public goods. For example, one of the major reasons that I spend so much time talking about transit is that bad transit (and brutal congestion) in the entire Hamilton-Oshawa corridor is the major factor driving real estate prices, and real estate prices are the major factor that is squeezing middle class budgets.

More: collective action problems, climate change, vaccination, consumerism, Rob Ford and demagoguery (part 2, part 3).

For more academic writing (procrastination and the extended will, catallactic bias in the 2008 financial crisis, why do people behave immorally when drunk?), see his home page.

One final academic article: methodological individualism, in the Stanford Encyclopedia of Philosophy.

... what made Elster's attack so forceful was not the accusation of objective teleology in Marxist theory, but rather the suggestion that much of Marxian “class analysis” overlooked the potential for collective action problems among the various world-historical actors. Consider, for example, the familiar claim that capitalists retain a “reserve army of the unemployed” in order to depress wages. This means that individual capitalists must stop hiring new workers at a point where marginal benefits still exceed the marginal costs. What is their incentive for doing so? They have an obvious free-rider incentive to keep hiring, since the benefits stemming from depressed wages would largely be enjoyed by rival firms, whereas the benefits of further hiring would flow to the bottom line. In other words, the mere fact that it is in the “interests of capital” to have a reserve army of the unemployed does not mean that individual capitalists have an incentive to take the steps necessary to maintain such a reserve army.

An even more disturbing consequence of the “rational choice” perspective is the observation that the working class faces a major collective action problem when it comes to carrying out the socialist revolution (Elster 1982, 467). Fomenting revolution can be dangerous business, and so absent some other incentive (such as class solidarity), even workers who were convinced that a communist economic order would offer them a superior quality of life might still fail to show up at the barricades. Yet these possibilities were largely overlooked, Elster suggests, because the failure to respect the precepts of methodological individualism, along with the promiscuous use of functional explanation, had led generations of Marxian theorists simply to ignore the actual incentives that individuals face in concrete social interactions.

posted by russilwvong (9 comments total)

Oops, I should have included another post: The bottleneck in U.S. higher education.
posted by russilwvong at 7:26 PM on March 10, 2016

This will be done in order to lower taxes, so that people will have more disposable income, to buy various private goods.

Sigh. Private goods are purchased out of discretionary income, and

disposable income – housing expense = discretionary income

Modern economics treats housing as any other good, but it is not, because real estate by definition is not mobile, and cannot be manufactured, imported, or taught to others like the capital of wealth-providing human skills are.

Housing rents are a cancer on the economy at this point.

http://blogs.wsj.com/economics/2015/07/28/where-rents-are-eating-up-a-bigger-share-of-income/

So a high-tax high-service public sphere is one way to counter-act this. I suspect this is why the nordic states do so well, but they also don't have their housing picture sorted out all that well I gather.

Canada and Australia are of course nightmares in the popular places to live.
posted by Heywood Mogroot III at 7:53 PM on March 10, 2016 [2 favorites]

My father worked for most of his adult life in the field of Liability Insurance, he was a conservative, pro-business, semi-racist lifelong Republican and he believed "Private For-Profit Health Insurance" was massively stupid in concept and in practice a massive fraud. And he told his son (me) that most people in the 'biz' he worked with agreed with him (if they had half a brain). I worked for 5 years for a Life Insurance company (that became insolvent) and I found that opinion pretty common with my co-workers (but we were all dumb enough to work for a company that went insolvent). Still, based on personal anecdotal evidence, I've found that people who work in Other Kinds of Insurance really do feel that the Health Insurance Business is a hive of scum and villainy that makes whole concept of Insurance look bad. Take that however you wish.
posted by oneswellfoop at 8:22 PM on March 10, 2016 [7 favorites]

From the vaccination link:

Finally, just a little story. Anyone who looks up the records on my children will see that I made a “conscientious objection” claim for my daughter. I can explain. She got her MMR booster three days before her birthday. Years later we got an official letter from the government saying that our child had not received the required shots at age 6 (or whatever, I can’t remember exactly what age), and so we had a week or so to get it done or she would be kicked out of school. Called to complain and spoke to an almost comically inflexible bureaucrat, who absolutely would not accept that getting a shot at age 5 years + 362 days was, for all intents and purposes, equivalent to getting one at age 6. She was completely committed to making us go out and get it done again. So we chose the course of least resistance, which was to file for an conscientious exemption. I had this awesome plan to write a letter, explaining that we subscribe to an unusual religion called “science,” and that according to our belief system, receiving a vaccine on a Monday is just as effective, overall, as receiving it later in the week, say on Thursday. We consulted with religious officials — known as “doctors” — and they confirmed our interpretation of the holy texts, etc. Sadly, the form didn’t require any sort of explanation or justification, you just had to state that you had some reason for not wanting your kid vaccinated and they took your word for it.

posted by russilwvong at 10:35 PM on March 10, 2016 [8 favorites]

...he believed "Private For-Profit Health Insurance" was massively stupid in concept and in practice a massive fraud.

I remember the first time I went to Toronto and saw the London Life building (? just west of city hall). The grass is like a golf green. Anybody with grass like that has more money than they know what to do with.
posted by sneebler at 7:30 AM on March 11, 2016 [1 favorite]

I remember the first time I went to Toronto and saw the London Life building (? just west of city hall).

I've always been a little freaked out by the columned area way up at the top of the Manulife building on Bloor. "This is where we do the human sacrifices," I imagine them saying, "though it's been a few decades since we've been able to get the regulatory approvals. Our lawyers are working on it."
posted by clawsoon at 7:48 AM on March 11, 2016 [1 favorite]

I once visited Lloyds of London, which my father occasionally did business with (he underwrote the liability for Dodger Stadium, among other 'special risks'). It was like the floor of the New York Stock Exchange, only classier. There are many Ornate Shrines to Insurance (see Monty Python's "The Crimson Permanent Assurance") but we always accepted them and yet the Health Insurers often don't even bother with them, they just have unmarked buildings containing Scrooge McDuck-style money bins.
posted by oneswellfoop at 1:38 PM on March 11, 2016

Fascinating! I always thought Reagan, Bush, etc., left huge deficits because of their economic magical thinking - trickle down, etc. This had not occurred to me; "Conservative governments have a strong incentive to leave behind large deficits, in order to bind the hands of subsequent governments."
posted by tizzie at 10:26 AM on March 17, 2016 [2 favorites]

Yep, tizzie, conservatives even have a name for it: Starve the beast.
posted by clawsoon at 9:18 AM on March 19, 2016 [1 favorite]