Shot in the Foot by Prop. 103 : By Voting for Price Controls, Californians Have Ensured Chaos

There is no better way to get rid of a bad law than to enforce it. Led by the Pied Piper of governmental coercion, Ralph Nader, the voters of California have shot themselves in the foot with Proposition 103, a system of price controls on auto, homeowner and other kinds of insurance.

This law is of, by and against the people. As the 40 centuries of experience with price controls demonstrates, the end result cannot be other than a reduction in the availability of insurance and a degradation in its variety and quality. It is no accident, as Pravda would put it, that this effect emerged immediately when the insurance industry announced that it could not offer insurance at a price lower than the cost of providing it. The proponents of Proposition 103, along with allies such as state Sen. David Roberti (D-Los Angeles), promptly shrieked “collusion,” but the reaction of the industry is no more the result of collusion than is the inevitable stampede toward the exits in a theater suddenly filled with smoke.

Now the fun really begins. Competition and variety will be reduced as many insurance options now available disappear. Many people simply will not be able to obtain coverage. Others will face newly tightened criteria for eligibility. The price controls will force the industry to degrade the quality of its product; for example, limits on coverage will be frozen, and so will decline in real terms over time as inflation works its magic.

Notwithstanding all the hand-wringing over the poor and the downtrodden by Nader, the sad reality is that the price controls will favor those who appear relatively safe, from the viewpoint of the insurance industry. More often than not, it is those with higher incomes who appear less risky. Riskier--that is, poorer--individuals will be the ones left out in the cold. They will have to turn instead to new firms not affected by the price controls. Some of these will be fly-by-nights while others will be insufficiently capitalized. Sooner or later, the horror stories will begin. And sales in other sectors--autos, equipment and homes--will suffer as buyers find it difficult to find the insurance required by lenders. Nader, Proposition 103 campaign chairman Harvey Rosenfield and others love to pretend that it is only “rich” insurance companies that will suffer from these consequences. The truth is far more egalitarian: It is ordinary people in many sectors who will pay the price for this implementation of leftist ideology.

And do not be deluded by arguments that the law prohibits these adverse consequences. The effects might be delayed temporarily only if the government could control everything, as the Nixon and Carter Administrations learned to their sorrow when they attempted to maintain price controls in the energy market. If Nader tells you that insurance companies can be prevented from “evading the law,” bear in mind the story of the emperor who ordered his throne brought to the seashore, whereupon he climbed onto it and commanded the tides to stop. The companies already are operating through subsidiaries and are preparing defensive rate increases. It is impossible to prevent firms from finding ways to defend themselves.

Since the insurance companies bolted for the door immediately, it is not surprising that the politicians have demanded for themselves a place at the publicity trough. Accordingly, Roberti and others have announced their intention to force the presence of insurance company executives at a star chamber proceeding in Sacramento, to be held soon for the benefit of the television cameras. Let us hope that the businessmen can summon the courage to educate our honorable solons with respect to the following Eternal Truths:

Price controls do not reduce prices or help consumers and the poor. Controls reduce only reported prices, which exclude the costs caused by the unavailability of coverage, or those borne in attempts to find coverage at artificially low prices. By reducing the amount of insurance supplied by the industry, controls must raise the true cost of obtaining coverage. Moreover, the uniform 20% cut in rates will impose the greatest penalties on the most efficient companies. In short, the controls can only reduce the total productivity of the economy. Can anyone believe that lower aggregate wealth will serve consumers or the poor?

Price controls are not “fair.” The expansion in government regulatory power necessitated by price controls inevitably placates some existing consumers of insurance and other important interest groups whose voices are heard in the Legislature. In what sense can it be said that these interests are more deserving than others? The controls are “fair” from the viewpoint of those able to get “cheap” insurance; for others, numerous four-letter words could be used to describe the system of controls, but “fair” is not one of them.

Overall “profits” have nothing to do with the supply of insurance. Firms are in business to earn profits, not merely to avoid bankruptcy. Insurance companies cannot provide coverage if premiums do not cover costs, regardless of whether some accountant says that the company is “profitable” overall. Proposition 103 assumes that consumers of insurance not subject to controls will happily subsidize consumers in California. The world does not work that way. Nader is fond of arguing that insurance-industry profitability is unknown because the books are not part of the public record; and the rate roll-backs will not affect the availability of insurance because the companies are so profitable. Nader’s ability to take diametrically opposed positions and be wrong on both is nothing short of amazing.

Read the Constitution’s lips. “Nor shall private property be taken for public use without just compensation.” Translation: If the politicians want to subsidize consumers of insurance, they must use public funds rather than booty stolen from insurance company shareholders. “No state shall pass any law impairing the obligation of contracts.” Translation: If any individual and an insurance company choose to enter into a voluntary contract at some price, the government has no right to prevent them from doing so. “Neither slavery nor involuntary servitude . . . shall exist within the United States.” Translation: If insurance companies choose not to operate in California, no one has the right to force them to do so. The Founding Fathers understood that such restrictions on government are needed to prevent political majorities from violating the rights of unpopular minorities; insurance companies are an unpopular minority par excellence . Do we want a nation in which the unpopular are subject to the whims of lynch-mob majorities?

Roberti and others ought to ponder the possibility that judges appointed by conservative governors and Presidents might be inclined to believe that the Constitution means what it says. They ought also to consider the likelihood that if the private sector is prevented from providing insurance services, the voters might demand that the state government step into the void. Imagine for a moment the political pressures on insurance rates. Imagine the inefficiency with which government can be expected to operate such a firm. Imagine the horrors awaiting ordinary people forced to deal with a slow, cumbersome and indifferent bureaucracy. Imagine living in the Soviet Union.

Which brings us back to Nader. None of the predictable consequences of Proposition 103 is news to him. Ignore his propaganda--he is not interested in consumers or the poor or any other lofty ideal. He is interested in emasculation of the private sector and an increase in the coercive authority of government, which is to say, in his own political power. Proposition 103 serves that end beautifully. Alternative measures--such as ending the assigned-risk subsidy from good to bad drivers, and reform of the tort system--would reduce the impetus for government intrusion. Would Nader favor the market over government? Don’t bet on it.