JONATHAN CHAIT MAY 26, 2011
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The one health care proposal Republicans can agree on is to allow insurers to sell health insurance across state lines. Liberals object that this would create a regulatory race to the bottom. States would strip away requirements that insurers cover this or that condition, and the state with the most lax controls would end up as headquarters to most insurers, who would cherry-pick the market by peeling off healthy customers buying plans that don't cover chronic conditions.
Michael Cannon of the Cato Institute says no, that could never happen.
Opponents will claim that regulatory federalism will lead to a ‘‘race to the bottom,’’ with some states so eager to attract premium tax revenue that they will eliminate all regulatory protections or skimp on enforcement. In reality, both market and political forces would prevent a race to the bottom. As producers of regulatory protections, states are unlikely to attract or retain customers—insurers, employers, or individual purchasers—by offering an inferior product. Purchasers will avoid states whose regulations prove inadequate, and ultimately, so will insurers. Moreover, the first people to be harmed by inadequate regulatory protections will likely be residents of that state, who will demand that their legislators remedy the problem. The resulting level of regulation would not be zero regulation. Rather than a race to the bottom, regulatory federalism would spur a race to equilibrium—or multiple equilibria—between too much and too little regulation. That balance would be struck by consumers’ revealing their preferences.
Fellow libertarian Peter Suderman finds this persuasive. It's the kind of frictionless model that one might construct if you were starting from the unshakable premise that markets always self-correct. But of course, Cannon's argument would apply equally well to credit cards, right? Suppose you let credit cards set up in any state they want, operating under that state's laws, and sell across the country. Cannon's argument would suggest with equal force that the state's residents would object to any regulations that favored that industry's profit over the interests of consumers. In fact, we tried that experiment, and Cannon's model isn't how it worked out:
[I]n 1978, the Supreme Court said banks should follow the rate cap in their home states. This meant that as long as a credit-card company relocated to a state with a higher interest-rate limit, the company could lend to borrowers anywhere under that higher limit. Following the court's ruling, Citibank chairman Walter Wriston offered Gov. Bill Janklow a deal: If South Dakota lifted its rate cap altogether and formally invited Citibank to the state (as federal law required), the banking giant would move its credit-card operations to South Dakota—along with 400 good jobs.
The bill was introduced and passed in the space of a day. Soon after, Delaware lifted its cap, too. Voilà, South Dakota and Delaware became the hosts of most credit-card companies...
The problem is that without consumer protections, companies use pricing practices, like teaser rates, to attract cash-strapped families and then slap those families with interest rates of 35 percent or higher plus penalties of $35 a month. Rates can double or triple without notice, even if you never miss a payment. Credit-card use and bankruptcy rose together for years (until the 2005 federal bankruptcy legislation), and last year, banks made $40 billion in plastic profits.
Have the citizens of South Dakota and Delaware risen up in righteous anger at their state legislatures, demanding that they clamp down on misleading lending practices? No, they haven't. And the reason is very simple. Those states gain far more from being the headquarters of a large industry, which provides them jobs and a tax base, than they lose from their citizens being occasionally ripped off by credit cards. For a small population state, the attractions of a major industry setting up shop within state laws almost invariably outweigh the costs it would incur in poor regulation.
Indeed, those costs are virtually nil, since the poor regulation is likely to occur anyway. If you're South Dakota, your state legislature might decide it's tired of its citizens getting slammed with rates that skyrocket without warning or ridiculous fees. You might decide you want to tighten your regulations, and maybe you could buck the overwhelmingly powerful credit card industry, which owns all the state's politicians, to do so. But if you did, the industry would just shift on over to Delaware, and the jobs would be gone and your constituents would still be getting ripped off anyway.
Obviously this dynamic doesn't apply to large states -- California isn't going to let health insurers deny treatment for diabetes so it can boost its employment by trivial sum. But for small states, the calculation changes -- the lure of 400 jobs was enough for South Dakota to let the credit card industry write whatever regulations it wanted.
12 comments
Jon, Agreed. However, you're forgetting another part of this equation - Credit cards are a market where most information is easily discernible (rates, fees, etc.). Health insurance is a very complicated instrument where most people do not know just what coverage is adequate for them down the road. How many days of lifetime acute rehab will they need, which cancer drugs will it cover, etc. Further evidence that there needs to be regulation in place to ensure minimum standards everywhere.
- michapok
May 26, 2011 at 2:56pm
See also how states compete to create cozy domiciles for captive insurance companies.
- adsprung
May 26, 2011 at 3:14pm
The Cato institute scenarios are always so attractive -- if only the world was made up of sensitive markets, ethical players, and educated consumers who have the time and means to thoroughly examine the complexities of every purchase that they make.
- ironyroad
May 26, 2011 at 3:17pm
If the United States Government will cut taxes on the wealthiest Americans and give tax subsidies to successful businesses on the speculation that it is good for the economy and those same tax cuts contribute heavily to the national debt over which we are in a huge panic, what makes anyone think that consumer pressure will cause individual states to act in the interest of the consumer as opposed to in the interest of some other unseen and unproven diety?
- Nusholtz
May 26, 2011 at 3:56pm
As if we needed any more proof, but it's obvious that economic libertarianism is as utopian (and as in deep denial of basic human nature) as Marxism ever was.
- zardoz67
May 26, 2011 at 4:13pm
"Moreover, the first people to be harmed by inadequate regulatory protections will likely be residents of that state, who will demand that their legislators remedy the problem." Okay, I'll bite. Let's say that the people in the state rise up and demand action from their legislators. How would libertarians respond to this? My guess is that they'd say that the proposed regulations were an assault on freedom, that regulations always have unintended consequences, always lead to "regulatory capture" and that generally speaking the best way to prevent consumer rip-offs is not regulation, but informed consumers, who will drive unscrupulous insurers out of business by taking their business elsewhere. A more honest argument, from the libertarian perspective, isn't that people will demand freedom-crushing regulation (which libertarians will oppose), but rather that a race to the bottom is a good thing. States with lax regulations and weak safety nets are superior, in their view, to states that make some efforts to mitigate the harsh effects of unbridled capitalism. New York is a horror show, Mississippi is paradise. In fact, Cato should move their offices to Miss - I bet Suderman and Cannon would absolutely love it there.
- Geoff G
May 26, 2011 at 5:07pm
As producers of regulatory protections, states are unlikely to attract or retain customers—insurers, employers, or individual purchasers—by offering an inferior product. But it is not an inferior product for healthy people. That is the whole point of cherry picking. These states will allow insurers to deny care to whoever they want. For healthy people it can be a great deal. And as to what to do with sick people, well let them effing die already. Do people in the CATO institute know how evil they are or are they truly this deluded to not know the real world effects of their ridiculous policies? I really don't know what is worse.
- blackton
May 26, 2011 at 7:46pm
Chaitless -- you miss the point of markets don't you. And still don't know the difference between inductive and deductive arguments. The cognitive dissonance is worsening. A couple of facts: 1. We have a GNP of $14Trillion with the majority coming from products/services sold across state lines. 2. The sub-prime market for Credit Cards is very small -- net interest income about $10B. And your example is flawed in so many ways --- with freedom comes the freedom to consume. Take one econ course, followed up by a stint in the private sector selling something. Then maybe you would have a clue
- mr_rationale
May 26, 2011 at 7:52pm
Real world results don't matter to ideologues. That the credit card race to the bottom actually happened doesn't stop those at Cato from arguing that it couldn't possibly happen. Rand Paul can argue that markets will eventually put a stop to racial discrimination, even though decades of repression in the South (and the eventual need for federal intervention to stop it) demonstrate the exact opposite. Never does theory have to accommodate reality; therefore the theory never can be challenged, even when perfectly good reasons are provided as to why the theory doesn't work.
- dsimon
May 26, 2011 at 8:48pm
The Heritage program has gone haywire. It can't resist the leaden "Chaitless." Apparently, the program thinks this is clever. It is time to shut it down, Heritage.
- liberalref
May 26, 2011 at 9:16pm
What is "Chaitless" supposed to mean, anyway? To the best of my educated knowledge, "Chait" does not have real-world homonym (in contrast to, for example, Sen. Jeff Sessions' last name) that takes on a satirical meaning if "-less" is added to it. There's a linguistician's name for this -- a word that could exist in a language, but doesnt. As opposed to a word that couldn't exist. For example "plick" doesn't offend any rules of English, the combination of letters is simply not used, but "gwirq" does. Anyway, I've been curious.
- ironyroad
May 26, 2011 at 9:38pm
Hey Rat, Chait is selling something in the private sector you nitwit. He's selling his writings to a publication which in turn is sold in a pure free market. Apparently you're too stupid to understand that. How's the weather in your utopia, Somalia? If you haven't moved there yet you must. It is a paradise according to 'no government meddling' fetishists like you.
- tmmats
May 27, 2011 at 10:15am