Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

leaving government with a much larger role to play. The editorial concluded: “Indeed, genetic testing may become the most potent argument for state-financed universal health care.”4

Any health care reform that seeks to make health insurance both more accessible and more affordable, particularly for those who are sick or likely to get sick, will have devastating adverse selection problems. Think about it: If I promise that you can buy affordable insurance, regardless of whether or not you are already sick, then the optimal time to buy that insurance is in the ambulance on the way to the hospital. The only fix for this inherent problem is to combine guaranteed access to affordable insurance with a requirement that everyone buy insurance—healthy and sick, young and old—a so-called “personal mandate.” The insurance companies will still lose money on the policies that they are forced to sell to bad risks, but those losses can be offset by the profits earned from healthy people who are forced to buy insurance. (Any country with a national health care system effectively has a personal mandate; all citizens are forced to pay taxes, and in return they all get government-funded health care.)

This is the approach that Massachusetts took as part of a state plan to provide universal access to health insurance. State residents who can afford health insurance but don’t buy it are fined on their state tax return. Hillary Clinton supported a personal mandate in the 2008 Democratic presidential primaries; Barack Obama did not, though that arguably had more to do with distinguishing himself from his toughest Democratic opponent than it did with his analysis of adverse selection. Obviously, forcing healthy people to buy something that they would otherwise not buy is a heavy-handed use of government; it’s also the only way to pool risk (which is the purpose of insurance) when the distribution of risk is not random.

Here are the relevant economics: (1) We know who is sick; (2) increasingly we know who will become sick; (3) sick people can be extremely expensive; and (4) private insurance doesn’t work well under these circumstances. That’s all straightforward. The tough part is philosophical/ideological: To what extent do we want to share health care expenses anyway (if at all), and how should we do it? Those were the fundamental questions when Bill Clinton sought to overhaul health care in 1993, and again when the Obama administration took it up in 2009.

This chapter started with the most egregious information-related problems—cases in which missing information cripples markets and causes individuals to behave in ways that have serious social implications. Economists are also intrigued by more mundane examples of how markets react to missing information. We spend our lives shopping for products and services whose quality we cannot easily determine. (You had to pay for this book before you were able to read it.) In the vast majority of cases, consumers and firms create their own mechanisms to solve information problems. Indeed, therein lies the genius of McDonald’s that inspired the title of this chapter. The “golden arches” have as much to do with information as they do with hamburgers. Every McDonald’s hamburger tastes the same, whether it is sold in Moscow, Mexico City, or Cincinnati. That is not a mere curiosity; it is at the heart of the company’s success. Suppose you are driving along Interstate 80 outside of Omaha, having never been in the state of Nebraska, when you see a McDonald’s. Immediately you know all kinds of things about the restaurant. You know that it will be clean, safe, and inexpensive. You know that it will have a working bathroom. You know that it will be open seven days a week. You may even know how many pickles are on the double cheeseburger. You know all of these things before you get out of your car in a state you’ve never been in.

Compare that to the billboard advertising Chuck’s Big Burger. Chuck’s may offer one of the best burgers west of the Mississippi. Or it might be a likely spot for the nation’s next large E. coli out-break. How would you know? If you lived in Omaha, then you might be familiar with Chuck’s reputation. But you don’t; you are driving through Nebraska at nine o’clock at night. (What time does Chuck’s close, anyway?) If you are like millions of other people, even those who find fast food relatively unappealing, you will seek out the golden arches because you know what lies beneath them. McDonald’s sells hamburgers, fries, and, most important, predictability.

This idea underlies the concept of “branding,” whereby companies spend enormous sums of money to build an identity for their products. Branding solves a problem for consumers: How do you select products whose quality or safety you can determine only after you use them (and sometimes not even then)? Hamburgers are just one example. The same rule applies in everything from vacations to fashion. Will you have fun on your cruise? Yes, because it is Royal Caribbean—or Celebrity or Viking or Cunard. I have a poor sense of fashion, so I am reassured that when I buy a Tommy Hilfiger shirt I will look reasonably presentable when I leave the house. Michelin tire advertisements feature babies playing inside of Michelin tires with the tag line “Because so much is riding on your tires.” The implicit message is clear enough. Meanwhile, Firestone has most likely destroyed much of the value of its brand as the result of the link between faulty tires and deadly rollovers in Ford Explorers.

Branding has come under assault as a tool by which avaricious multinational corporations persuade us to pay extortionate premiums for goods that we don’t need. Economics tells a different story: Branding helps to provide an element of trust that is necessary for a complex economy to function. Modern business requires that we conduct major transactions with people whom we’ve never met before. I regularly mail off checks to Fidelity even though I do not know a single person at the company. Harried