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November 20, 1988
"Some Modest Proposals for Following Up on Prop. 103"
San Jose Mercury News
By Timothy Taylor
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IN the triumphant aftermath of Proposition 103, a blow struck by virtuous drivers against the wicked auto insurance companies that have oppressed them for so long, I have a few more propositions. These follow naturally, I think, from the innovative approach to public policy used in Proposition 103.

I am appalled by how many people have difficulty buying a home in the inflated California market. I propose an immediate 20 percent cut in all mortgage interest rates, to be followed by an additional 20 percent cut for all good borrowers. This plan should go a long way toward making housing more affordable.

I am appalled that sick and injured Californians are forced to weigh money against medical treatment. I propose an immediate 20 percent cut in all charges for medical expenses, to be followed by an additional 20 percent cut in medical insurance rates for all people who have been in relatively good health. These cuts should make medical care much more affordable and lead to a healthier California.

I am appalled by the high cost of day care in California. The days when dad worked and mom provided free day care are gone forever. In today's world, day care is truly a necessity. I propose an immediate 20 percent cut in all charges for day care, to be followed by an additional 20 percent cut for all families with well-behaved, easy-to-care-for children. I am confident that these lower prices will go a long way toward addressing the California day care crisis.

OK. Enough already. In case you haven't figured it out, these proposals are a joke. Do not rush down to your local initiative manufacturer and start collecting signatures.

These proposals would be a disaster. If mortgage rates or health charges or day care charges or prices for rental apartments or food or anything else were chopped by one-fifth or two-fifths, banks and doctors and day care professionals or any other business would not just sit still and suffer. They would react either by withdrawing from business, by trying to find a way around the rules, or by reducing the quality of the product.

Auto insurance is no different. Bashing the insurance companies is good populist fun, but it's not a serious answer to the high cost of auto insurance. If high insurance company profits are the cause of high auto insurance rates, then why isn't a not-for-profit insurer like the California State Automobile Association undercutting the competition by one- fifth or more? Why didn't some profit-hungry insurance company offer lower rates and take over the market? Why don't the consumer advocates start their own not-for-profit insurance company and solve the state's auto insurance problem directly?

The answer is that Proposition 103, with its requirement for a 20 percent cut in auto insurance rates and an additional 20 percent cut for "good" drivers, is no more than a constitutional tantrum. A 20-40 percent cut is ludicrously excessive. Californians apparently felt that their righteous wrath was enough justification to lash out and vote for something foolish. Of course, now the self-styled "consumer advocates" are whining that insurance companies have the gall to act in self-preservation.

But auto insurance companies are not owned by the state of California; they are reacting in the way any business was bound to react. Some are threatening to leave the state or to refuse to write new policies. Others are trying to find a way around the rules by going to the California courts and Legislature.

Over time, those auto insurance companies that remain in California will adopt new rules and procedures to reduce the claims they need to pay. They will try to insure only extremely safe drivers, who will pay the lower rates and never make a claim. Eventually, the Legislature will probably need to create a government fund for insuring the drivers that private insurance is no longer willing to insure. As has happened in states like New Jersey, more and more drivers will need state insurance as private insurance contracts.

Proposition 103 avoids a basic lesson of economics. A high price, for auto insurance or anything else, is only a messenger: It tells something about supply and demand. Californians can pass laws to kill the messenger and cut the price, but the underlying causes of high insurance rates -- high payments to those who make claims and high legal and administrative costs for the system -- are not about to disappear.

If Californians want the auto insurance system to pay out as much as it currently does, using the methods and procedures that it currently does, Californians will have to pay the bills.

It is ostrich economics, head-in-the sand silliness, to pretend otherwise. Even the ill-considered will of the people can't nullify the basic economic law that when you pass a law to cut prices and make a product more "affordable," it will also become less available.

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