Economic Illogic

Is the government losing its mind (collectively)? Or is the bureaucracy just trying to remain in power? This is a column about economics, not politics, so don't look for ideology here. Let's just look at the economic facts in two different situations.

The common theme is economic illogic. The government's actions may be appealing on the surface, but that appeal masks an unreality that is sustainable only under government pressure or government payments (essentially money-printing).

Health Insurance

The first challenge to economic logic is government interventions in the health insurance market, supposedly to help consumers. Recently, I wrote about the benefits of short-term health insurance policies. I suggested that recent college grads who were not on their parents' policies (they're allowed to stay until age 26, but it's expensive) might do better purchasing short-term health insurance policies.

These policies, such as the ones sold by AgileHealthInsurance.com, cover periods up to one year, and they can be renewed easily. They're designed to bridge the gap between graduation and employment, or between jobs when COBRA is too expensive. You can buy the coverage you need (for example, high-deductible or limited coverage), and the costs are far lower than signing up for Obamacare.

It was a good idea -- obviously, too good for government. This week the government announced it would move to curb what it calls a "loophole" in the Obamacare program by limiting short-term health policies to no more than three months. The goal is to drive more healthy young people, who typically opt for these short-term policies but use them less, into paying higher Obamacare premiums to prop up the money-losing government program.

Yes, Obamacare is a money-losing program, justified by many because it is helping people get medical coverage and care they need. But economically, the concept is self-defeating -- and that is becoming obvious. Insurers are dropping out of offering coverage or else they are raising premiums dramatically or limiting choice in services. Private insurers are losing billions -- and government can't force them to stay in the business and take the losses. Yet government can force people to buy unneeded and expensive coverage to subsidize others. Economic logic?

Banking Regulation

The other area of government interference is bank regulation -- again, pitched as a way to help consumers. Some banks made a mess of things. Most new regulations are making it worse! Or at least more expensive for consumers. Here are a few facts:

  • Before Dodd-Frank became law, 75 percent of banks offered free checking. By 2015, just 37 percent of banks offered free checking, according to Bankrate.
  • Since Dodd-Frank, there has been a 21 percent increase in checking account fees, according to a recent Javelin survey.
  • There are 15 percent fewer credit cards since 2008, and on average they cost 200 basis points more, a Goldman Sachs survey found.
Smaller community banks are exiting the mortgage market or merging with larger banks because of the cost of complying with new regulations. Seventy-three percent of community banks report mortgage lending has been restricted by costs of compliance. Similarly, credit to small businesses has been constricted. And small business creates jobs.

Meanwhile, the big banks just keep getting bigger. Technology is finding a way around this cost impact on individual consumers. The personal lending industry is being taken over by less-regulated online lending firms when it comes to personal loans or refinancing credit card debt. Consumers benefit from more choices and lower prices, absent the regulatory burdens designed to help them.

What justifies the economic illogic of regulation that is raising costs for consumers and moving them out of the regulated banking industry?

There is no defending the private sector decisions and abuses that led to these new, well-intended programs that were designed to help individuals. The problem with both is that they defy economic logic, relying on the power of government rules and regulation without regard for the costly reality of the results they create. And that's The Savage Truth.