Politics & Policy

Back to Reality

(Photo: Wollertz/Dreamstime)
Mortgages aren’t houses, and insurance isn’t medicine.

In California, you hear the same lament, constantly: The people who live there cannot afford to live there.

There are taxes, sure, but that isn’t what Californians complain about, mostly. And if you’re not in technology or entertainment, there might be more opportunity elsewhere: The gentleman sitting next to me on the flight home from Los Angeles to Houston had left his native California to take a position in Texas, and like many Californian refugees, he has been plotting his return ever since.

What Californians complain most about is housing.

It is a pretty straightforward supply-and-demand proposition: Lots of people want to live in California. Many of those people are very rich people, and a large share of them come from other countries with tax rates and horrifying misgovernment that make California look perfectly reasonable. Demand is strong, and supply is constricted. Part of the constrain on supply is geography — a mobile home in Malibu was on the market for $1 million a few years back; there is only so much Pacific waterfront — but mostly it is politics, crazy planning-and-zoning regulations, and super-aggressive environmental regimes that make it hard to build housing and very hard to build affordable housing.

State governments have their own affordable-housing programs, but the big player in housing policy for years has been the federal government, which has approached the question of housing indirectly, through financial services. Basically, Washington’s answer has been to make it easier and less expensive to get a mortgage. That has not always worked out very well — there was a big hiccup in 2008–09, you may recall — but the general theory is defensible: Spur demand for housing with easy money, and the market will respond with building, development, and redevelopment. That has happened in a lot of places, but not in California. Instead, California has seen growing demand for housing in its most desirable areas amplified by relatively high-income immigration (domestic and international) and empowered by cheap-money mortgage banking. More money chasing the same supply of goods means higher prices.

Indeed, while the people at the Academy Awards (and the people protesting outside) were talking about the president, refugees, immigration, and the like, the political conversation in Los Angeles among the non-celebrities who live there was all about the March 7 vote on Measure S, which would add new barriers to construction projects — opponents call it a “housing ban.”

Financial regulation is no substitute for bricks and mortar.

You’d think that President Donald Trump, who has been involved in the development of housing over the years, would understand that. But he does not seem to. A few days ago, he tweeted about having a “great meeting with CEOs of leading U.S. health-insurance companies, who provide great health care to the American people.”

But health-insurance companies do not provide great health care to the American people. They do not provide health care to the American people at all. Doctors, nurses, pharmacists, physical therapists, drug researchers, and nerds who design superior artificial joints provide great health care to the American people. Insurance companies provide financial services. That’s what insurance companies are: financial-services companies.

There is no proposal under serious consideration that would return to treating insurance as what it is: a financial service.

In the same way that Washington has tried to manage housing by regulating and subsidizing mortgages, politicians have long tried to manage health care by regulating and subsidizing health insurance. It does not work. It has not worked, and it is not going to work.

Insurance companies estimate risk and charge a fee for insuring against it. They are awfully good at what they do. Bob the Actuary doesn’t know whether you are going to have a heart attack this year, but give him a little bit of information about 1 million people and he can tell you to a high degree of accuracy how many of them will have a heart attack this year. Building large pools allows us to average out the probabilities and handle them in a more orderly fashion. That’s what insurance is good for.

Government misunderstands insurance. Politicians believe that creating large pools of health-care consumers will make health care more affordable for individuals and families. It doesn’t. If Smith can’t afford his medical expenses and Jones can’t afford his medical expenses and Brown can’t afford his medical expenses, then Smith + Jones + Brown can’t afford their collective medical expenses, either. The large pools built by insurance companies help with this by exploiting the fact that not everybody is going to get sick at the same time; the payment of benefits out of insurance premiums can reduce the amount of financial disruption illness or accident causes to an individual or family at any given time, but insurance does not make the medical services they consume less expensive. In fact, medical benefits may make those services more expensive, for instance by creating new record-keeping costs for medical practices, or by simply driving up demand by pumping money into the market through poorly managed, low-accountability entitlement programs such as Medicaid.

Easy mortgage money helps keep housing prices high. Easy medical money probably helps keep medical prices high.

The Affordable Care Act made this worse, for example by limiting “price discrimination,” by which is meant the practice of charging those more likely to have heavy medical expenses higher premiums than those less likely to have them. The ACA replacement bill being developed in the House addresses some of that, for example by loosening the rule governing how much more older insurance customers can be charged than younger ones.

But nothing under serious consideration by Republicans or Democrats gets much beyond trying to manage medicine through insurance regulation; no proposal deals with the underlying question of why it is that medical care — as opposed to medical insurance — is so expensive. There is no proposal under serious consideration that would return to treating insurance as what it is: a financial service.

You can play with mortgage rates all you like, but if you don’t build new houses in Los Angeles and San Francisco, housing is going to be scarce and expensive. Likewise, if you have only so many hospital beds, pharmaceutical factories, physicians, nurses, dentists, and medical-device manufacturers, the underlying physical realities of health care are not going to change very much, irrespective of what sorts of carrots and sticks you use on financial-services companies.

Critics on the left, especially those who support British-style government monopolies on health care, insist that because demand for medical services is relatively inelastic — because you aren’t comparison shopping after a traumatic car accident — ordinary market operations cannot handle health care. But demand for food is inelastic, too, at the hungry margin. It’s just that we rarely get to that margin because food is plentiful, thanks to massive investment in its production, distribution, and improvement. Ultimately, that is what has to happen with health care, too.

But first we’ll have to liberate ourselves from the superstition that we can trick or bully the financial-services sector into solving the problem for us.

— Kevin D. Williamson is National Review’s roving correspondent.


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