The Problem of (Some) Profits
Yale law professor Stephen Carter has a puzzling op-ed this morning defending the general concept of...profits. Of people making money. You might wonder whether anyone has actually gone so old school as to actually question whether it is good when Safeway posts a healthy margin or a laundromat stays open for another year or General Electric can repay its shareholders. Sadly, Carter's op-ed doesn't have any examples of such a generalized distaste for the basic mechanics of capitalism. Instead, his op-ed is a generalized response -- and thus not much of a response at all -- to those who question the specific business models of certain industries.
Carter responds to unrest over massive insurance industry profits, for instance, by offering the sort of cutting rejoinder I once associated with Introduction to Economics classes. "The only way a firm can make money is to sell people what they want at a price they are willing to pay," he explains. "If a firm makes lots of money, lots of people are getting what they want."
Maybe. Or maybe not. This is a bit like saying that people walk outside in freezing cold temperatures and thus lots of people want to take walks in the freezing cold. Health insurance isn't something that people decide they "want" so much as something people feel they "need." As such, they're pretty much stuck with the rules of whatever insurance market they happen to be able to participate in.
But one way that insurers amp up profits is by developing clever models and methods to discriminate against the sick and the ill. Is that what people "want?" If insurance margins go up because insurers have managed to separate the sick from the well and only offer coverage to the latter group, is that evidence that "people are getting what they want?" If an insurance firm sees its stock price rise because it managed to make its "medical-loss ratio" -- the percent of every premium dollar they spend on health care -- fall, is that what people "want?" I sort of doubt it. People "want" insurers to cover their medical costs. Insurers that are very good at not covering their medical costs, however, often post the biggest profits.
Or to use another example, is the fact that financial firms managed to post incredible profits during the early years of this century evidence that people "wanted" concentration of tail risk and a land mine placed at the center of the economy? Strange thing for them to want. Or is it evidence that firms often make money by focusing on the short-term to the exclusion of the long-term?
These are hard issues. The profit-incentive can be a wonderful thing, but it can also be a terrible one. And if you want to see the ways in which it can be terrible, you can look at the uninsured, or the rise in health-care costs, or the state of AIG. And pretending these downsides don't exist -- pretending that the profit incentive is perfectly aligned with the public interest -- is exactly the sort of blinkered thinking that got us here.
July 30, 2009; 10:06 AM ET
Categories: Economic Policy
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