Be Careful What You Incentivize . . .

LA: A Cautionary Tale on Death Spirals and Insurance Wastelands

Once upon a time . . . Pittsburgh’s dominance in Steel production earned them the nicknames “Steel City” and “Arsenal of Democracy”. Once upon a time, companies like MetLife, UnitedHealth Group, and Wells Fargo had tens of thousands more U.S. based employees in IT and Customer service. Once upon a time, Walmart actually existed in Portland.

Today: the steel capital has fallen, hundreds of thousands of U.S. jobs at MetLife and co. have disappeared, and you have to drive 50 miles outside of Portland to hit a Walmart.

So what changed? Incentives.

Over time, failure to modernize with alternative production methods, increased foreign competition, and regulatory overload effectively shuttered Pittsburgh’s steel production. Now, there are approximately three steel mills left in Steel City. Due to the enormous cost-cutting potential of outsourcing to developing countries, MetLife and Other companies quietly gutted their domestic customer service branches, offshoring hundreds of thousands of jobs to countries like India and the Philippines. As liberal cities increasingly refuse to prosecute crimes, businesses like Walmart have realized they cannot remain profitable in such locations (Walmart closed all stores in cities like Seattle and Portland).

Incentive structures are all around us, constructed by acts and omissions in legislation and public policy, law enforcement, and political and cultural norms.

Today, Newson and Trump are in a pissing match wherein Newsom argues that California has neither want nor need of the National Guard or ICE, nor will it enforce immigration law. As LA burns and Mexican flags waive proudly among the smoke, sirens, and liberal screams—the persistent question is: what incentive structure is Newsom creating?

First and foremost: if you build Sanctuary City Utopias, illegal aliens will pour in en masse.

Benefits which await illegal aliens in California include but are not limited to: In-state tuition and state-based financial aid for college (which comes with free immigration legal services for DACA and naturalization applications); Full-scope ‘Medi-Cali’ (free emergency, pre-natal and pregnancy, primary, behavioral health, long-term, dental and vision healthcare); early breast cancer detection and care services; prostate cancer counseling and treatment; ‘Women with Infants and Children’ program for food and nutrition assistance and free or reduced school means; and the CalFresh food assistance and CalWORKs cash assistance programs for legal children of illegal aliens. Further, California has CAPI and CAAP, programs which provide cash assistance and extend emergency disaster relief to illegal aliens.

A self-described “sanctuary city”, LA also offers various law enforcement ‘protections’ to illegal aliens: LAPD mandates its officers not inquire about immigration status or make arrests related to legal status; since 2017, California has prevented city resources from being used for immigration enforcement and prohibited federal immigration agents from obtaining access to city facilities; and LAPD further does not cooperate with ICE to enforce civil immigration law.

Just for good measure, as riots and violence erupt in LA, and the ‘revolutionaries’ of the modern day Left make it a mission to disrupt and resist ICE officers’ enforcement of immigration law, Newsom spoke out—not to defend the ICE officers or to acknowledge ICE’s federal authority, but to announce that war had been declared, the First Amendment was under attack, and that “it’s time for all of us to stand up”. As LA became a days-long cacophony of riots, injuries, burning cars, and blocked roadways, LAPD was taking a questionably long time to respond to ICE officers’ pleas for back-up while they were being harassed and attacked for doing their jobs. Yet, somehow, Newsom insisted there was no need for the National Guard to be deployed.

To do some very simple cause and effect’ mental exercises: Does state-funded educational, medical, food assistance, and cash assistance programs, with state sanctioned protections from deportation, make swathes of welfare-seeking foreigners more or less likely to come? And will that burden the average tax-paying Californian more or less? Further, does state-sanctioned shielding of illegal aliens from the enforcement of federal immigration law, and a general refusal to prosecute misdemeanors—from shoplifting and looting to drug possession to resisting arrest to making criminal threats—make those criminally-disposed illegal aliens more or less likely to call LA home?

Even if, against all reason, those looking to engage in criminal activity were not most likely to flock to cities with the aforementioned benefits and minimal risk of arrest/prosecution . . . they will soon change their tune after seeing that LA’s liberal majority would sooner assault federal officers and burn their own city than allow immigration law to be enforced. After all, it’s no coincidence that the LA population is somewhere between 1/10 and 1/5 illegal aliens.

In other words, given the soft-on-crime, Sanctuary City governance: what future are we incentivizing for California?

Secondly, if you become a city flooded with criminally involved individuals and/or generally fail to have robust and firm responses to vandalism, violence, and looting, you will create an Insurance Death Spiral and consequential wasteland.

The concept of an Insurance Death Spiral is foreign to many people, though it illustrates an important, broadly applicable point. Essentially, an Insurance Death Spiral is a situation in which rising premiums, driven by adverse selection, cause healthy individuals to drop their insurance, which forces further increasing of premiums for the remaining individuals in the insurance pool, leading to a cycle of decline and potentially a market collapse.

Consider the broad goal of insurance: Out of the many people going about life susceptible to any number of insurable tragedies (car accidents, house burning down, expensive medical costs, etc.), a statistically-predictable few are likely to actually experience the costly tragedy they can all being insured against. Through insurance, everyone can eliminate the risk of being bankrupted by one of these tragedies occurring: by chipping in a fraction of the costs of the tragedy (insurance premiums) to a reserves account that will cover those costs for the few insured individuals whom the tragedy actually befalls. The insurance pool is essentially a sophisticated, pre-crisis go-fund-me.

But naturally, this only works if the majority of premium-paying participants in the insurance pool never actually need large sums of coverage. Take the following example:

If 1000 people pay $400 a year for flood insurance, a reserve of $400k is available to cover the 4-odd people that do experience a flood. When flooding occurs, those 4 people get 100k each, and the other 996 merely paid $400 for peace of mind from knowing they wouldn’t be homeless if they were the ones hit.

As premiums rise, those least at risk in any given insurance pool will prefer to “roll the dice” on whether they’ll need coverage that year, causing fewer reserves funds for those that choose not to “roll the dice”. This causes something called “adverse selection”—when the percentage of individuals left in the insurance pool, who are “higher risk” individuals with a high probability of taking from the reserves, continues to increase over time. Consider the facts from the previous example:

If flood insurance from the previous example shot up to $500 a year, 500 of the 1000 in the insurance pool that live in drier areas might “roll the dice,” and leave the insurance pool. This means the 500-remaining people in wetter/coastal areas, each chipping in $500, would only have $250k to cover the 3-4 people that actually experience a flood. That’s only about $60-80k a person—much less than before, when the premiums were $400. So maybe they raise premiums to $800 so they can still pay out $100k per flood claim. But then, of course, another slew of people might “roll the dice” and leave, requiring more premium raises . . . and so on. Eventually, even high-risk individuals will stop paying premiums because they can’t afford them—they’re forced to “roll the dice”.

This, ladies and gentlemen, is the Death Spiral.

Every insurance market is vulnerable to it, and once the Death Spiral takes hold, those most in need of insurance will be left with premiums that (at best) cover the eventual out-of-pocket cost of whatever they had insured—that is when insurance becomes unviable and unaffordable, and that insurance market dies.

What does this have to do with the LA riots? Well, insurance is everywhere: all the businesses and private properties in LA being looted, damaged, and burnt had liability policies to reimburse them for exactly that. If looting and vandalism goes unpunished/unprosecuted, or if the amount in insurance claims sharply increase, the value and numerosity of business owners’ insurance claims will grow—resulting in increasing premiums, and the start of a Death Spiral.

As small businesses and property owners stop being able to afford the increased premiums, they’ll inevitably be forced to “roll the dice” . . . or close shop.

And the downstream effects are just as predictable. As renters, commuters and homeowners in riot prone regions suffer fire and smoke damage, public nuisances, unavoidable road blockages and protester/car collisions—their homeowners’ insurance premiums, rent prices (due to increased homeowners’ insurance), and auto insurances will increase as a result. This will lead to more homelessness, migrations, and more and more “dice-rolling”, all of which are a drain on the individuals that remain.

Ironically, for homeowners’ insurance, only the wealthy (who likely have paid off their mortgage) will even be able to “roll the dice” and opt out: for those of us that need a mortgage in order to afford buying a home, mortgage companies will not give out mortgages to those that do not have (Death-Spiraling, increasingly costly) homeowners’ insurance—so, protesters who bemoan the “rich getting richer” . . . yeah, you’re the problem.

And bear in mind: Death Spirals are not limited to insurance markets. If you try to overtax the wealthy in your neighborhood (in a sense, ask for higher premiums to pad the reserves of your state welfare programs)—they will “opt out” by taking their wealth elsewhere, leaving a district with fewer and shallower pockets to reach into for more funds. Similarly, if you try to overtax greedy corporations in your district, they too will “opt out” by taking their corporate base to another area—taking their much deeper pockets, and your ability to reach them, with them. But, sure, keep blindly protesting to tax the wealthy . . . right out of existence . . . and see how much poorer the poor can get.

Ladies and Gentleman, learn what a Death Spiral is.

In sum: If the failure to establish law and order makes insurance markets unprofitable or unviable in LA, what’s to stop them from going the way of Walmart’s in Portland? Further, what’s to stop all wealthy people and wealthy corporations from going the same way as further Death Spirals ensue?

Remember: You get what you incentivize, NOT what you protest for . . . So what future are you incentivizing, California? What kind of cautionary tale will you be for similar Sanctuary Cities, and other places where “Death Spirals” (of various kinds) are initiated and then conveniently ignored by trendy, naïve socialists?

In other (related) news, congrats to the winner of the Democratic primary for the Mayor of New York City.