| Number 119 | August 3, 2001 |
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This Week:
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Greetings, The nature of taxes and the importance of choice are the subjects of this week's Nygaard Notes. Both of them, while interesting enough on their own, are mainly intended as a sort of "warm-up" for a discussion about Social Security, the first part of which I intend to send your way next week. The study about "choice," which I discuss in this week's "feature" piece, is something I've been meaning to talk about since it came out a couple of years ago, but you know how that goes. Right now, with the Social Security debate shifting into high gear, it seems like the perfect time to go into it a little, since the reverence for "choice" lies so close to the heart of the attack on that most-popular of government programs. This week's piece on taxes may be misunderstood by some, especially on the heels of last week's suggestion that we should (voluntarily!) increase our taxes to pay for pharmaceutical research. Readers may be starting to think I'm some sort of "pro-tax" maniac! Not really. Talking about taxes in a positive tone is just one way of making the larger point that some things may be better funded and managed by an entity that is accountable to the general population, rather than by a self-selecting group of investors or managers. At the moment that would most likely be government (as unaccountable as it often is in its current state), but that is certainly not the only way to do it. More on that in a future Nygaard Notes. Until next week, Nygaard |
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The World of Private Insurance: Deductibles
My partner has an insurance policy with a $5,000.00 deductible. At one point she had paid, out of pocket, $2,766.88. The next bill that came due was for $3,201.01. Since the payment of that bill would have resulted in paying more than $5,000.00, I thought I would call the "Customer Service" number at Blue Cross to ask them how to proceed. After one-half hour on the phone, I had still failed to get across the point that the payment of this bill would put us over the deductible amount. I have learned to ask, at this point, to speak to a supervisor. The supervisor had gone home for the day. As of this writing, I have yet to receive an answer to this (seemingly simple) question. Surely we are not the first to have bills that fail to exactly total out at our deductible limit? The World of Private Insurance: Prescriptions My partner was given a prescription medication upon her discharge from the hospital 10 weeks ago. Due to a billing error (I think; I'm still trying to get a straight answer on this) we have not yet paid for this prescription. The most recent bill we got for this medication stated that it was our "FINAL NOTICE," and that the hospital (the very same hospital to which we owe the $3,201.01 mentioned above) would "be forced TO PLACE YOUR ACCOUNT WITH A COLLECTION AGENCY if payment is not received at once." The total bill in question comes to $6.88. |
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Last week I proposed that we eliminate the patent protection on prescription drugs in favor of publicly-funded medical research, which would be funded by taxes. "Taxes" being something of a dirty word these days, allow me to introduce a fellow by the name of Sam Fleischacker. Sam is an associate professor of philosophy at the University of Illinois at Chicago. He is the author of "A Third Concept of Liberty: Judgment and Freedom in Kant and Adam Smith" (Princeton 1999). I ran across article by Mr. Fleischacker in the most recent edition of "Solidarity," the newsletter of the United Auto Workers union, of which my union, the National Writers Union, is an affiliate. In his essay, entitled "Adam Smith vs. George Bush on Taxes," Sam takes exception to the common anti-tax argument that "The government has no right to my hard-earned money!" He points out that the money I pay in taxes is not really just "my" money. I'll let him take it from there:
Mr. Fleischacker goes on to point out that this idea of taxes as a form of payment for services or benefits received is not his idea, but was the thinking of Adam Smith (the virtual "father of capitalism") himself. Let me make perfectly clear that I am not saying that I think Adam Smith had it right. I think that capitalism is flawed in its very conception, and no amount of tinkering—with taxes or anything else—will really make it work. I just thought it was interesting to see what the old man had to say on the subject. To read Sam's entire essay (it's not that long, really) visit www.uaw.org/solidarity/01/0701/feature09.html. |
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The idea that more choice is always better is at the heart of the individualistic and competitive ideology that is so dominant these days. While it may seem difficult to argue that Americans, or anyone, might sometimes want to have fewer choices rather than more, that is precisely my intention this week. Choice is good when there are big differences between wants and needs among individuals. Different people like different movies, for example, or the same person may like different movies at different times. As another example, I am glad there are a variety of restaurants to choose from in my city. Choice can also be good if citizens are well-informed enough about price and quality to force different providers to compete, since such competition will tend to lower prices and raise quality. In order for this second criteria to be met, the characteristics that make the various versions of the object of choice different from each other must have be easily understood and easy to compare. Also, the people doing the choosing must have the time and capacity to learn about and understand those things. If people do not understand those things, then the competition among the suppliers will focus on manipulating that ignorance rather than improving quality or reducing price. (Even then, the lowering of prices under capitalism is often accomplished by increasing the degree of exploitation of the workers, but that's another story.) While more choice is often desirable, increased choice often has a variety of costs associated with it. These costs have been studied by psychologists and other academics, and they have come up with some pretty interesting stuff. Much of what I am about to say I learned by reading an important paper published a couple of years ago by the National Academy of Social Insurance. The paper is called "Is More Choice Always Better?" by George Loewenstein, professor of economics and psychology at Carnegie Mellon University. (Find the report itself on the NASI website at www.nasi.org.) The costs associated with increased choice can be placed in four categories: Error Costs, Time Costs, Psychic Costs, and Social Costs. Let's start with... Error Costs People who are asked to make choices without sufficient knowledge or expertise often make bad decisions. A 1998 study published by Columbia University indicated that there is a big difference between offering people a few choices (six or fewer) and offering them unlimited choices. The authors of the study found that fewer choices tended to be, in their words, "psychologically manageable," while more choices got to be "psychologically excessive." When things got to be "excessive," they found that "people tended to consider fewer choices and process smaller percentages of the overall information regarding their choices." Many people, when faced with such decision overload (as I like to call it), choose to simplify their decision-making rules, for example by picking the cheapest in hopes that it is the best bargain, or the most expensive in hopes that it is the highest quality. Few would argue that these are good criteria, but that's apparently what people do. Other studies show that many people faced with decision overload use the old standby: deciding not to decide. They go with the "default option," which is the one that you get stuck with if you don't say something else. As Loewenstein describes it, "A natural experiment illustrates the attraction of default options. Buyers of auto insurance in New Jersey and Pennsylvania were given a choice of whether to pay lower insurance rates in exchange for a reduced right to sue for pain and suffering. In Pennsylvania, the default was the full right to sue, with a rebate for accepting reduced rights. In New Jersey, the default was a limited right to sue with a surcharge to get the full rights. In both states, about 75-80 percent of drivers took the default option. While consumers had a choice in both states, the popularity of the default suggests that most were deciding not to decide." There are plenty more studies on the things that make for errors in decision-making, but suffice it to say that people make a lot of errors when they are asked to make decisions about things about which they do not know enough. Time Costs Exercising choice in an intelligent way requires time, which people may prefer to spend doing other things. For many people, taking the time to learn about whether and how to properly annuitize their 401(k), for example, might mean that they have to sacrifice some time with their kids, or leave some of that yard work undone. People with money can hire an "expert" to advise them, but even then, one must research a bit to find an "expert" one can trust, a process that has its own time costs (plus, many "experts" are corrupt or incompetent, but that, too, is another story.) Psychic Costs People forced to make choices when they don't know enough to make good ones will not only feel anxious in the process of making the choice, but will likely suffer from regret if they make a choice that turns out badly. When forced to make decisions about which one feels (or actually is) unprepared, people tend to feel worse than they do if they think there was nothing they could have done differently. Psychologist Baruch Fischhoff refers to what he calls "hindsight bias" — the tendency to view outcomes, after the fact, as having been more predictable than they actually were when the decision was made. Even before the outcome of one's decisions are known, some real psychic costs are associated with the actual process of making decisions. When people feel like they are making decisions without sufficient information, or when the choices they are forced to make involve difficult tradeoffs, anxiety is often the result. Social Costs Some choices cause very little harm to the society when chosen by only a few, but have a far more harmful effect if chosen by many people. For example, if one or two people decide to relieve themselves in the street, it will not likely do much harm. But if thousands of people decide to do so, it would be a threat to the public health (and the public nose). In practice, society has removed many decisions from the individual level to the social level. Buyers of automobiles, for instance, can choose among a variety of colors, body styles, sizes, and so forth. But no choices are offered on the types of internal seat belt mechanisms that are used. Why not? Because everyone understands that citizens don't know enough about them, we don't want to learn (even if we could), we would feel terrible if we had an accident and had chosen badly, and because society has an interest in reducing avoidable death and injury to its citizens. The question that comes up as we ponder the value of ever-more choice should be: when is it better for individuals to decide for themselves, and when is it better for individuals to defer a decision to others? I'll return to this question next week. |