2003 January

Solidarity

While we are all equal, it has been observed that "some are more equal than others". In other words: fortunes like capabilities, smarts, and ultimately monies are unevenly distributed. Solidarity has been a main principle to redistribute the nation's assets and revenues through the vehicle of taxes and entitlements.

While some will never tire warning that the rich get richer all the time, it is prudent to look at the other side of the coin: 10% of the top in California paid 90% of the state's income tax before the dotcom implosion. The federal income tax is also skewed: the top 10% pays nearly 2/3 of it.

The tax monies are used for all kind of free services like schools, health care for the uninsured, social services for the disadvantaged, etc.

An unpleasant side effect of solidarity manifests itself in an economic down turn: free services that were taken for granted must suddenly be rationed.

The private sector is not as vulnerable to swings in the economy: the pricing mechanism helps to match rationally demand and supply.

It is time to question some of the free services that the society provides and thereby make the economy of the society as a whole less vulnerable to these large swings. For example, if parents would have to contribute to schooling costs (currently at least $5K/child/year) they may think twice getting yet another child. Immigrants may also think twice about migrating in.

Health care is another area in which subsidies play a major role. The population is by and large fairly healthy in the sense that 20% of the population consumes 80% of the health care expenses. While many bemoan that 15% of the population is not insured, many of those have figured out that they belong to the 80% and they decline subsidizing the others.

Reducing health care expenses in the US should have a high priority. Its costs are out of hand: it is twice as expensive - in terms of percentage of GNP - as the other developed countries. For starters, patients could be made responsible for the treatment of diseases that are the result of life style choices. Even if a public discussion would not reach a consensus on this topic, it would raise the awareness of an out of control situation.

Home insurance is another segment in the society where the market is not functioning properly. In 80% or more regions of the country the home insurance premiums are not in proportion to the claims in those regions. A back of the envelope calculation shows that claims are typically way less than 1%; i.e. the profit margin for insurance companies in those regions is over 99%, which is quite amazing for such a commodity service.
Here a typical example. The insured value/ premium ratio is often around 300. Is 1 in 300 houses burning down in a year? No. Is 1 in 3,000 houses burning down? No. Is 1 in 30,000 houses burning down. Still very unlikely. Just look at the local newspapers.
The only explanation is that there are quite a few regions where the premiums are way too low in proportion to the actual risks. The Florida coast, if not all of Florida, if not all of the Atlantic coast is a good example. The Gulf Coast is another example. Corpus Christi was, for example, totally wiped out 100 years ago, but, against good commensense, has been lavishly rebuild. Yet another example where solidarity has gone haywire.