Vanilla finance and the public option
Steve Waldman has a great post about the Consumer Finance Protection Act, which has just had what’s known as the “vanilla” provisions taken out of it—these are the no-frills straightforward financial products (think 30-year fixed-rate mortgages and low-interest, low-fee credit cards) that banks would have been required to provide alongside of the complicated hidden-option-laden mortgages and the teaser rate cards and all that other junk for suckers who can’t understand financial trickery, i.e. just about everyone. As Waldman explains, the market for financial products is rife with information problems. Consumers don’t understand the market but are compelled to enter into anyway if they want to live “the American dream” of owning a house, just like the hegemonic ideology insists we should.
Consumers know they are at a disadvantage when transacting with banks, and do not believe that reputational constraints or internal controls offer sufficient guarantee of fair-dealing. Status quo financial services should be a classic “lemons” problem, a no-trade equilibrium. Unfortunately, those models of no-trade equilibria don’t take into account that people sometimes really need the products they cannot intelligently buy, and so tolerate large rent extractions if they must in order to transact.
The price of assuring that one is not taken advantage of by financial service providers is not participating in the modern economy. You cannot have a job, because payments are by check or direct deposit. You cannot buy a home or a car, because for the vast majority, those purchases require financing. Try travelling with only cash for plane tickets, hotel rooms, and car rentals. People will “voluntarily” participate in markets rigged against them for the privilege of being normal. And we do, every day.
This is a lot like the health care market, in which consumers are procuring a service about which they must defer to the expert they are procuring it from, trusting that their ethics are sound.
With a vanilla option in place, consumers would able to take some solace that they weren’t being exploited, that instead they would pay a fair, explicit cost for a loan rather than being taken advantage of. Waldman:
Instead of tolerating rent-extraction as a cost of participation, consumers put up with one-size-fits-all products in exchange for peace of mind. Most consumers benefit very little from exotic product features, and I suspect that many are made deeply nervous by the complex contracts they can neither negotiate nor understand, but nevertheless must sign. Vanilla financial products would be extensively vetted and and their characteristics would soon become widely known. Inevitable malfunctions would be loudly discussed in the halls of Congress, rather than hushed-up in rigged private arbitrations. Vanilla products would face discipline both from private markets (no one is suggesting we forbid other flavors) and from a very public political process. Politics and markets are both deeply flawed, but they are flawed in different ways, and we should take advantage of that.
The rationale for a public option in health care is similar—a simple insurance plan that sets a base line that assures that individuals are reasonably covered and won’t be denied coverage when they need it on a technicality. If you want more elaborate coverage, you can do the research and get it. But if you want what has been deemed the basic acceptable standard (with the government protecting you from exploitation) without wading into the intricacies of the insurance market, you can do that too. Of course, if you think government is always the villain and has some incentive in exploiting you, you might be wary of this. But you still have the ability to go the for-profit route if you believe that will guarantee better service.
As Waldman says about the vanilla financial products, “Rather than being anti-market, vanilla financial products would help correct very clear market failures that arise from imperfect information and high search costs. It is the status quo that is anti-market.” The status quo protects the information asymmetries that allow banks and insurance companies to extract rents—that is, earn money simply by being pitiless gate-keepers or by locking people into non-optimal contracts with hidden fees and options that can be exercised against them. With a vanilla option (or public option), as Waldman explains, there is a “commoditized” offering that forces more overt competition from providers (or more unmistakable collusion otherwise). It forces a market for “ostentatious simplicity” as Waldman calls it—forces banks to compete on providing the simplest product for customers craving simplicity. Currently banks have no incentive to do this; it’s more lucrative to take advantage of customers’ confusion. (The same is true of health insurance, and cell-phone service to some degree as well.)
Some might complain that vanilla options incentivize ignorance, or at least remove the penalties for it. It may remove advantages that savvy consumers might be able to take advantage of at the expense of their fellow citizens. But is that the kind of society we want? Personally, I don’t. I don’t want to save a few bucks on my check-ups while other people die of swine flu.
Comments
Hilarious rob. The government’s done such a great job handling the military, ecconomy, and education system. Let’s throw something else on their pile.
Comment by Dave-O from in yer face — September 28, 2009 @ 10:22 am
Dave-O, I’m glad you brought up the military because my friend who lost an eye in Iraq has been impressed and pleased by the care he received from the moment he was hit, to Walter Reed, and now in his continuing care. In fact, as I live in an area with a huge military presence, I routinely see families choose to use military health care over the spouse’s employer-based care. Anecdotes are not data, but I know few people who don’t use the military healthcare system when they can.
Undoubtedly, there is plenty of room for improvement, but the good thing is that the government can be held accountable the way the private sector cannot. The current focus on the inadequate mental health care veterans receive is a case in point in how a broken part of the system is more easily *exposed* and addressed in a publicly run system. There’s a good reason no one is suggesting we privatize military healthcare.
Also, the military does have its problems—no question. But at the end of the day, it’s the finest military on the planet. No question.
So yes, I do think we do a pretty good job on most government run systems and am hopeful the government can do the same for health care. It’s what I pay taxes for, after all. I’m not seeing individuals or churches come up with universal coverage out of the goodness of their hearts.
Comment by TJ Bailey from washington, dc — September 29, 2009 @ 9:08 am
One other thing Dave-O, you might be more persuasive if you used arguments that aren’t the logical equivalent of name-calling. After the initial snort over a crack at the government, I still have to deal with the reality of profit-driven health care.
The private sector had its chance and it failed. I’ll take a non-profit organization with accountability to the people any day.
Comment by TJ Bailey from washington, dc — September 29, 2009 @ 9:10 am
Alright TJ Bailey, you want a real response and not a curt one off? It’s on.
1.) Free clinics exist. There are places already set up to give people health care in our country to the poor and disenfranchised. I know. I’ve been to them. You may get a religious tract, but you’ll never get a bill.
2.) We have the best health care system in the world. Unfortunately that means we have the best health care system in the world. We have doctors who are very willing to put all their expensive equipment into use helping someone who should probably be dead. We have aftercare and doctors who actually follow the Hippocratic oath instead of turning away someone whos done something really stupid like get a overseas sex change or boob job. If someone’s bleeding on the emergency room floor, there’s very little chance that someone won’t take care of the individual, regardless of legal/criminal status.
3.) I feel like this is a backdoor program designed to make American businesses richer. As Rob’s said before: “make public the risk and private the profits”. Here we have a whole bunch of companies that now do not have to pay for health care for their employees because the government now does it. I know people who have worked crappy jobs just for the health care. Do you really think that those fresh new profits are going to “trickle down” after we’ve already seen the “trickle down” method fail? The rich get richer and the poor get poorer with this plan.
4.) The government does a poor job with the military. Wanna know how? They have one. They act as the police force for the entire world and no one asked them to. In America, if I kill someone I go to prison, but if I’m in the military it’s all good. A diolog between people and diplomacy are not as important as methods of torture. How far have we evolved from the middle ages? The government really has no accountability.
Look at Obama today. What’s changed since Bush? Troop levels haven’t really gone down, they’ve just been moved to Afghanistan. Gitmo Bay is still open and still will be. And heres this heath plan which means more debt and less solution. The private sector is entitled to make their profits. They run the risks of a free market unlike banks who are “too big to fail” which isn’t true. The government stepping in was the free market losing it’s power. And you want to talk about teaching? We have the worst schools in the world. Even penniless countries are doing better. Meanwhile our country feels the need to not pay teachers. We lost 54 teachers last year in our district and administration is looking to cut more. The kid level is going to be 26 to 1 in Kindergarten already, which means less individualized attention and no one gets ahead. We’re already nearly 40 to 1 in the upper grades. You think that’s good? You think that works? You think there’s accountability there? I think you’re delusional.
5. The government is doing this as a last ditch effort to save social security. I knew it wouldn’t be there and my parents knew it wouldnt be there and my kids know it wont be there. 95 percent of the americans have health insurance and are covered. With the baby boomers retiring, social security and the health system is in need of a drastic overhaul. I say let a bad program fail. Let all those old people who didn’t think to save money and thought social security will take care of everything die. Cos you know—you have to take the consequence of your inactions as well as your actions. Everytime a politician has been like: “we need to get care for seniors if SS is going to stay afloat” seniors have been all like: “well you dont get my vote”. It’s a lie. They’d rather believe a lie than have something good happen. Hell, let there be death panels, as long as I get to be on one. The time of the carousel is drawing nigh and you cannot be renewed. I am so sick of the dumb crap the baby boomers put on this earth. I am so sick of the game players.
Comment by Dave-O from in yer face — September 29, 2009 @ 11:17 am
“The government’s done such a great job handling the military, ecconomy, and education system. Let’s throw something else on their pile.”
It’s revealing that, in any rich industrialized country other than the United States, this heavy-handed attempt at irony would simply fall flat on its face. The reply would be: “See, even you yourself admit that the government does an excellent job handling these other public goods, so why do you persist in your bizarre denial that it cannot handle health care?”
“We have the best health care system in the world.”
By exactly which quantitative yardstick? Certainly none of those usually used in international comparisons.
“95 percent of the americans have health insurance and are covered.”
The most recent figure of the U.S. Census Bureau, from 2007 and generally quoted in the recent debates, says that 15.3 % do not have health insurance.
“Hell, let there be death panels, as long as I get to be on one. The time of the carousel is drawing nigh and you cannot be renewed. I am so sick of the dumb crap the baby boomers put on this earth. I am so sick of the game players.”
‘We are all sufferers from history, but the paranoid is a double sufferer, since he is afflicted not only by the real world, with the rest of us, but by his fantasies as well.’ (Richard Hofstadter, “The Paranoid Style in American Politics”, 1964)
Comment by T. P. Uschanov from Helsinki, Finland — September 30, 2009 @ 5:30 am
If you watched the debate recap on CNN last night
you’d see John Ensign say some a curious thing about those figures. Orrin Hatch said some good stuff too, about people flocking to America specifically for the health care. Now, I don’t think John Ensign argued it best, but he certainly argued it well. Lots of people have health insurance. And lots of people use the free clinics like I had to when I couldn’t get the vaccinations my daughter needed from my usual doctor. It’s not that these people aren’t getting health care somewhere.
“Just because you’re paranoid doesn’t mean people aren’t out to get you.”
Comment by Dave-O from in yer face — September 30, 2009 @ 10:30 am
The transformation of “95 percent of the (sic) americans (sic) have health insurance” into “Lots of people have health insurance” when confronted with the information that the correct figure is less than 85 per cent was truly a wondrous thing to behold. So wondrous indeed that I just couldn’t leave it to speak for itself.
Comment by T. P. Uschanov from Helsinki, Finland — October 2, 2009 @ 11:19 am