Tuesday, June 12, 2007

Credit and insurance

It is quite frustrating to buy insurance without ever needing it. When the cost and the benefits balance on a short-term basis, this frustration is tolerable: you pay premiums for the next month to cover your risks for that same period.

Some types of insurance balance out over longer periods, such as life insurance: you pay too much for life insurance initially and too little for it at the end of your life. At least you know that you will collect on this insurance at some point.

But what about insuring a punctual risk with borrowed money? In this case, you know early on if you are going to benefit from the insurance (usually you don't benefit), and you have to pay for it for years to come. Those are some mighty miserable years, paying a loan that did not actually buy you anything!

Welfare and non-regressive taxes systems are exactly this type of insurance. Your capability and willingness to work are basically constant through-out your tax paying life.

Some types of insurance are bound to make the bulk of us miserable. I don't see how I can fix this one, other than eliminating the credit part. This would require really cheap insurance or really rich parents.

Laissez-faire or cost-plus?

Competition leads to fair pricing. Price reduction comes both from innovation and taming the greed of incumbents. The fair market value of a good or a service is composed of the cost of offering it, plus a reasonable profit margin.

Monopolies, might they be states or corporations, feel little need to innovate and little price pressure. Watchdog organizations must put this pressure on them artificially. This is often poorly accomplished.

A major problem is fairness. Why should phone services cost the same amount in rural areas as cities? Why are there any corporate taxes? Why isn't income tax head based? These are the real costs: they would appear naturally in the absence of a monopoly. Fairness has no place in the market, and should not be promoted by the state through economic manipulation.

Though both are necessary for a viable civilization, socialism and free market economics make awkward bedfellows. They should be kept apart with constitutional rigor, like religion and state.