Insurance and Redistribution of Wealth

I don't usually read the comments of the SLTrib when I write something for them or when I'm quoted there. I did see one comment on my article from a few months ago that I wanted to touch upon. The comment had something to do with how the current health reform plan was all about redistribution of wealth, and questioned whether that was a good idea.

Before I get into this, let me say first that economists don't have a lot to say about income redistribution generally. Economics doesn't offer much guidance on whether taxing the rich to help the poor is a good idea or a bad idea. Different societies make different decisions on how much redistribution to do, and that's usually accomplished through the ballot box.

But there is one important sense in which any sort of insurance is a wealth-redistribution plan. And it's a form of weath redistribution that, for the most part, people engage in willingly.

Insurance redistributes wealth from the lucky to the unlucky.

How does this work? Think about your homeowner's insurance. If your house burns down, that's unlucky. But if you have homeowners' insurance, the insurance company is going to pay a big part of the replacement cost. Wealth has been redistributed (from somewhere) to you. And where does that wealth come from? People usually figure it's coming from an insurance company. And this is right, sort of, except for the fact that corporations are just legal shells that allow people to transact. The corporation's wealth has to come from somewhere. So where does the wealth come from?

Now think what happens if your house doesn't burn down. That's lucky, right?. But you still had to pay your insurance premium. And it's the premiums from the lucky that are transferred to the unlucky.

It's wealth redistribution, pure and simple.

So why do the lucky put up with it? Wouldn't they be better off refusing to subsidize the unlucky? Well, yes, and that's why we don't allow people to decide whether to buy insurance after they know whether they're lucky or unlucky. You can't go to Allstate and say "Hey, my house burned down last night. So how about a buy a policy that covered me starting yesterday?"

Lawyers: Who Got Laid Off?

I don't usually publicize my working papers. Prefer to wait until they're published so I'm (reasonably) certain that all the kinks are worked out.

But if others are going to publicize for me, I guess I should at least link to it. Paul Oyer and I have a new working paper on which lawyers lost their jobs at the top 300 law firms during the recent recession. Here are three blog links to it:

Blog of the Legal Times

Above the Law

Business Insider

I'm happy people found the study interesting, but the authors of these posts didn't summarize entirely right. A couple of quibbles/clarifications: First, it's not at all the case that people at fancy law schools are worse off than those who went to lower-ranked schools. You're much more likely to end up working for a big, fancy law firm making a lot of money if you go to a top school. (And Paul and I have another working paper that showing that.) It's just that conditional on making it to a big, fancy firm, it seems you were a bit more likely to get laid off (at least early in your career).

Second, it's not the case that hiring networks are associated with the likelihood of being laid off, just the likelihood of turnover. That is, an associate is less likely to leave a job voluntarily if there are partners from the same school at the firm. But an associate is no less likely to be laid off when there are partners from the same school.

We don't exactly know why the patterns in lawyer firings look like they do, but we're working on some models that might explain it.

Another Reason to be Bullish on Utah

Check the map about halfway down the page....

Utah's projected employment growth through 2018 is 27.8%, second in the nation to Nevada. The Great Basin is the place to be for sure.

As an aside, I have no idea how The Daily Beast is coming up with these "rankings." Utah is 12th, but if you compare to #11 New Mexico, you'll see we had stronger 2006-09 job growth, lower current unemployment, stronger projected employment growth and higher median salaries. Since we top NM on all four of the reported dimensions of the ranking, it's hard to see how we're ranked lower overall.

Are they giving extra points based on a state's overall level of "Enchantment"?

(And if so, I would put two feet of Alta powder up against a chile ristra on the enchant-o-meter any day.)

Does Capital Punishment Work?

Does capital punishment deter potential murderers? Or are people simply not thinking about the consequences when they commit homicide?

New evidence came to my mailbox last week in the form of the lead article (by Franklin Zimring (Berkeley), Jeffrey Fagan (Columbia) and David Johnson (Hawaii)) in this month's Journal of Empirical Legal Studies.

(You can download a working-paper version of the article here. )

The paper looks at differences in the homicide rates in Hong Kong and Singapore between 1973 and 2008. Notably, Hong Kong had very few executions over this period (and made capital punishment illegal in 1993). Singapore, on the other hand, went from 2-3 executions per year in the 1980s to 21 in 1992 and 76 in 1994, before dropping back down to 17 in 2003 and just 2 in 2007.

This setting is a good one (but of course not perfect) for testing the deterrence effect of capital punishment. Hong Kong and Singapore are similar (though not identical) in terms of demographics and ethnicity. Both are small, urban enclaves with a British colonial history. Both had rapidly growing capitalist economies over this period.

If capital punishment deters homicide, then we might expect rates of homicide in Singapore to fall (relative to those in Hong Kong) around the time that Singapore became so execution-happy. So what do the data say? Homicide rates were slowly falling in both Hong Kong and Singapore throughout the entire sample period. But there's no noticeable reduction in Singapore homicide rates (relative to Hong Kong) at the time that Singapore starting executing a lot of people in the early 90s. Nor is there an increase in the Singapore homicide rate (again relative to Hong Kong) around when Singapore stopped executing folks so much around 2005.

So what does it all mean? It's pretty hard (though not impossible) to reconcile this evidence with the view that capital punishment deters homicide. Proponents of the deterrent effect will need a story for why the Singapore murder rate didn't follow a very different pattern from the Hong Kong rate, given the very different patterns in capital punishment rates.

Individual Mandates in Health Insurance

See this weekend's SLTrib for some thoughts on individual mandates in Health Insurance.

Airport Security

So there's a lot of new concern about airport security after the recent incident on the Amsterdam/Detroit flight Christmas Eve.

Here's what I don't get about airport security --- Why aren't we using the good ol' fashioned profit motive to try to improve things?

I'm not a "privatize all government services" kind of guy (as many readers know), but airport security seems to me to be something that's extremely privatizable (if that's a word).

Here's my quick and easy plan for fixing our nation's airports without forcing travelers to arrive four hours early for their flights.

1. Auction the right to perform airport security checks to private firms.

2. Make the payments to these private firms a function of how effectively they prevent prohibited materials from getting inside our airports.

3. And how do we measure whether they're doing a good job? Have the government employ a staff of auditors. And what do the auditors do? They try to smuggle stuff into airports. That's right... government agents with liquids zipped into their underwear trying to get through security checkpoints. Every time the private firm stops a government agent... Boom $10,000, straight to bottom line.

I see a few problems with this system --- specifically, some ratchet effect issues once the security firms get really good at detecting liquids in somebody's shorts, and also some potential issues with getting the security agents to actually be nice to people. But in the meantime , don't you think that having money-motivated security agents would make our air travel safer?

Thoughts?