Another problem is that economists use the term ”market failure” to describe a situation where one or more features of a free market cause that market to fall short of the efficiency-maximizing outcome. Feldman misuses it to mean, “This market isn’t doing what I want.” That is not market failure. Nor is it much of a limiting principle. If the Commerce Clause empowered Congress to force people to buy things to correct every perceived shortcoming in every market, Congress’ powers would be without limit. Even worse, Feldman doesn’t even bother identify whether the outcome he deplores is caused by some feature of a free market or government intervention (see below).
But that was just preface to Feldman’s supposed limiting principle. Here’s the meat of it:
The government can penalize inaction only when that inaction deprives everyone else of a public good…There must be an asymmetry of information about the relevant facts governing insurance — like the difference between my knowledge of how healthy I am and the insurance company’s ability to suss it out. And the market must be one in which that information asymmetry leads to adverse selection.
Though Feldman begins by stating government can force you to purchase any public good – another economic concept he seems to misunderstand — by the end of the paragraph he narrows his limiting principle to situations where asymmetric information causes market failures in insurance. Sorry, but that’s still not much of a limiting principle. For one thing, it would enable Congress to force Americans to purchase basically any type of insurance.
Asymmetries of information, in the absence of regulation, lead to adverse selection in all insurance markets. Insurers typically remedy this problem by adjusting premiums to reflect the risk posed by the purchaser, but there will always be situations where some purchasers know they pose a greater risk of filing claims than carriers realize. Fortunately, the risk-aversion of other purchasers acts as a counterweight and prevents those markets from collapsing. But since all adverse selection causes at least some mutually beneficial insurance purchases not to occur — the sort of welfare loss that constitutes an actual market failure — Feldman’s so-called limiting principle would allow Congress to force you to buy any type of insurance it wants, so long as Congress finds even a sliver of adverse selection. That opens to door for Congress to mandate that everyone purchase life, auto, disability, flood, mortgage, renter’s, terrorism, earthquake, deposit, pet, earthquake, divorce, and long-term care insurance. Congress could even require you to purchase reinsurance — i.e., insurance against the that risk that your other insurance policies won’t pay. No doubt adverse selection prevents some unfortunate professional athletes and performers from insuring against the failure of their hair, legs, hands, teeth, vocal chords, fingers, ankles, tongues, and entire bodies. Ditto the threat of a paternity suit. If so, then Feldman’s “limiting principle” would let Congress mandate that everyone purchase those insurance policies, too.
Feldman’s limiting principle would even allow Congress to force Americans to purchase types of insurance that currently don’t exist. What if adverse selection so bedevils the markets for BAC-level insurance, positive-drug-test insurance, short-term-suicide insurance, overgrown-grass insurance, and oversleeping insurance that no carriers even offer such policies? Under Feldman’s rule, Congress could fix that by forcing carriers to offer such insurance and forcing you to buy it.
And that’s only what Congress could do in the presence of whatever scant adverse selection exists in unregulated insurance markets. But regulation typically encourages adverse selection–a point that Feldman elides, as if the catastrophic adverse selection that ObamaCare’s “community rating” price controls will cause were the market’s fault rather than Congress’. So what Feldman is actually saying is that Congress can force you to purchase insurance even if Congress itself caused the adverse selection. Which brings us back to broccoli.
Remember broccoli? Feldman writes, “If I choose not to buy broccoli, others can still buy it at a market price.” Perhaps that is true today. But let’s assume Feldman subscribes to the Obama administration’s argument that the Commerce Power enables Congress to regulate the timing and method of payment for a good that moves in interstate commerce. That would mean that Feldman believes Congress could pass a law stating that all broccoli purchasers must henceforth purchase it through a new method of payment called “broccoli insurance,” where all purchasers pay broccoli insurers a flat fee based on average broccoli consumption within the insurer’s pool of customers, regardless of how much broccoli an individual customer may consume. What would happen if Congress did that?
Well, those who consume the most broccoli would be thrilled. They could eat as much broccoli as they want — they could even stucco or decorate their houses with it — while paying much less than they did before. Those who rarely buy broccoli, on the other hand, would see their broccoli bills skyrocket. They may decide not to buy broccoli at all. When they leave the broccoli market, average consumption by those in the market will rise, as will broccoli premiums. That will cause more low-end broccoli consumers to leave the market, and the cycle will repeat itself.
Feldman will recognize this process as — you guessed it — adverse selection caused by asymmetric information. Which, under his limiting principle, means that Congress can swoop down and mandate that Americans purchase broccoli insurance. After all, those people choosing not to buy broccoli are “depriving everyone of [what Feldman calls] a public good.” In sum, Feldman’s limiting principle would allow Congress to force all Americans to buy broccoli. Which is to say, it’s not a limiting principle at all.
Like every other so-called limiting principle offered by ObamaCare’s defenders, Feldman’s has no basis in the Constitution or any other law. It is a post hoc rationalization, made by people who are shocked to find themselves before the Supreme Court, defending the constitutionality of their desire to bully others into submission.
Lord only knows where these guys get all their self-assuredness. Maybe it’s part of Harvard’s employee benefits package.
Update: Prof. Feldman commits another error that I did not initially catch, and therefore perpetuated. It is not asymmetric information that leads to adverse selection in the markets for health/broccoli insurance and causes those markets to collapse. It is the fact that the government’s “community rating” price controls prevent insurance carriers from using information they possess to set premiums in a way that prevents adverse selection. HT: Me.