Is "Moral Hazard" a Myth?

This was actually addressed (and answered in the affirmative) in a 2005 piece in The New Yorker, titled “The Moral Hazard Myth,” in which author Malcolm Gladwell noted that people with health insurance don't go into hospitals for their enjoyment (unless maybe they are One percenters in the "amenities units"), and that people without medical insurance often forgo preventive care that could save thousands of dollars. So how is that "moral hazard"?

Conveniently, when the pundits and elites bloviate about moral hazard, they overlook the noneconomic costs of risky actions like smoking, e.g. costs from lung cancer, the attendant suffering and death. Nor is gobbling giant burgers and fries every day (or even once every week) at Mickey D's deemed a "moral hazard". We are informed instead by the pundits that to try to regulate such behaviors is tantamount to intrusion by a "Nanny state", never mind our costs from obesity and diabetes will soon bannkrupt us if our military overstretch doesn't!

One law professor at the University of Pennsylvania, a Tom Baker, once wrote a historical account (1996) entitled On the Genealogy of Moral Hazard,” that: “Moral hazard signifies the perverse consequences of well-intentioned efforts to share the burdens of life, and it also helps deny that refusing to share those burdens is mean-spirited or self-interested.”

Again, convenient. But the question that occurs is why is this attribution and designation so selective? Tending to focus on the missteps, benefits or foibles of ordinary people as opposed to those of hedge funds, giant banks or bankers? Notably here, Baker also adds (ibid.):

"The economics of moral hazard work to convince us that, however well intentioned, social responsibility is a bad thing,”

Now where have we seen this before? Give up? It is in Vilfredo Pareto's Pareto distribution. See, e.g.

http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto.html

and

http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto_13.html

As noted in the top-linked blog, at the heart of "Pareto efficiency" is what's called the reservation price for a given object or service. This is just the maximum price a person is willing to pay. (Or more often, can pay....given financial circumstances!)

Example: say a new apartment complex opens up and is selling apts. (1-3 bedrooms) ranging from $1,500/month (for single Bdr) to $2,400 for 2 Bdr, to $3,600, and people want to buy. Obviously, a relatively poorer couple will have a reservation price probably lower (e.g. $1,000) than any of the apartments, and hence need a Section 8 HUD rental subsidy to offset costs, while the rich couples or families can move into any of them.

But, according to modern economics and the Pareto distribution, offering a rent subsidy on the order of $1,000 (for the single Bdr apt.) effectivly removes it from the actual competitive market . Because this exerts a price below reservation, though offering the apt IS sociall responsible, the Pareto economist regards it as "moral hazard".

This is exactly where and how the discussion was evolved to reject any economic actions that confer such social responsibility, because it is believed the recipients will not then exercise self- initiative and instead become dependent on "government handouts". The same arguments are often used against providing food stamps for any length of time. People - never mind jobs are unavailable- become too dependent on them and get "addicted" to handouts.

Thus, to these economists, "moral hazard" came to be equated with "Pareto inefficient".

Obviously, this was also the basis for Fed Chairman Alan Greenspan going on record in an appearance before congress (in 2003) and asserting that "Social Security benefits need to be cut to pay for Bush’s tax cuts." Social Security payments, especially with COLAs, do everything the Fed Chairman detested. They poured more money into the economy, but not via productive labor or market indices, or investment returns. People received their checks on the basis of a social insurtance contract....thus, merely by existing and breathing day to day, and having paid into the system with FICA deductions.

In effect, providing Social Security benefits, especially with COLAs that kept pace with inflation, was a "moral hazard". Socially responsible, yes, okay. But a hazard morally because those elderly people were now making haste to collect on the government dime (often as soon as they hit 62) instead of getting their butts out there and working longer ....earning on their own. (Never mind most employers won't hire them ...other than maybe as Walmart greeters!)

What about health insurance? Let's say the productive cost of the typical primary care physician's visit is $150. This is what she charges, or what her Affiliated Primary Care center does. The non-wealthy person (having shelled out $250 for an insurance deductible) is then happy to pay only $15 for a co-pay. But this "skews the system" and makes it Pareto INEFFICIENT while introducing "moral hazard" - because the patient will then likely come to underestimate ongoing real medical expenses.

If one therefore takes the difference ($150 - $15 = $135) it makes more sense to just give the unwealthy person say $134 NOT to visit the doctor and consume resources. This then, also avoids feeding the moral hazard. With Medicare and Medicaid it's even worse, because the moral hazard -Pareto poppets argue that medical services are even more undervalued by those government-served populations.

I noted as a special example getting a preventive test, like a colonoscopy which normally would run $3,500. But there's no way the insured regular patient can afford that total cost, most of which his or her insurance picks up. Meanwhile, calculations- based on Pareto Efficiency- show if the insurance paid part is $2,000 (while the patient's reservation price is $1.500) it makes more sense to give the prospective testee $1,499 NOT to get the colonoscopy, than to let her get the test and consume valuable specialist time and resources via $2,000 subsidy.

Their argument is that not getting the colonoscopy avoids moral hazard! (Never mind that if the patient then gets colon cancer much larger health costs will be imposed on the system)

In effect, to grasp the reasons for selective assignment of "moral hazard" in our society it is important to grasp the perverted basis of our economic system which rests on Pareto's distribution. This basis will always disfavor social benefit or social responsibility, when lined up against economic advantage.

The obverse is that the true villains who unjustly profit and display real moral hazard, get away with murder. Thus with the S&L crisis in 1989, massive public bailouts were made. Private entities collected massive public rewards. Same with the bailout of Long Term Capital Management in 1997, and more recently, AIG and the banks in 2008. The latter, especially, were guilty of using public money - put into the banks on trust - to speculate in the securities markets via credit default swaps. (See the movie, 'Inside Job', if you haven't already!)

According to Elyse D. Cherry, the C.E.O. of a community development group, Boston Community Capital, "moral hazard is hogwash.” Why would she say such a thing given her company is putatively a live laboratory for active moral hazard? (It buys homes that have gone into foreclosure, then sells them back to the original owner at a price they can afford).

Her response is insightful and discloses she can see through the moral hazard smokescreen and rubbish of the Elites and realize that people aren't just toddling toward endless and limitless benefits! Thus, the ruined credit of milliions - say who declare personal bankruptcy- makes it harder to borrow money, or get an apartment. Moreover, given nosy employers are increasingly doing credit checks on prospective hires, it makes it damnably difficult to find a job to escape their existing economic morass. Meanwhile, to even search for a job in greener pastures far away is hard on families because they may not be able to get the selling price they need for a home ...and moving is often a logistical and timing nightmare. Then there are the larger social costs when desperate people - like the subprime mortgage purchasers in 2007-08 - aren't assisted: pockmarked neighborhoods and declining property values.

So, in effect, while using the moral hazard PR weapon may temporarily save some economic costs it exacts profound social costs. This, of course, is for the average person in our society, not the big hotshot investment banker who maybe used millions in public money but lost it all in the risky credit derivatives markets. He can usually expect to get bailed out in some way with the usual modus operandi: "private rewards- public costs".

Meanwhile, the "moral hazard" evoked by the Pareto optimality fetishists always ensures the public square, the common good and the little guys.....inevitably get screwed.

Economists "doing something right"? Hardly!

Sylvia Nasar's superb book on mathematician John Nash ('A Beautiful Mind') was the basis for an excellent movie and provided an extraordinary insight into game theory as well. However, her latest book Grand Pursuit: The Story of Economic Genius, gives way too much credit to a bunch of over-valued wonks who've actually contributed very little to society. But this may be an understandable misperception given that Ms. Nasar is herself an economist.

One of the grossest characterizations is that economics is a "science", say like physics. This is total hogwash. About a year ago (April 26, 2010) a letter of mine published in The Financial Times drew attention to the abysmal failure of modern macro-economics (touted as a “science”) to predict the 2008 market meltdown and financial crisis. I pointedly noted that economics omitted too many “externalities” which included aspects like environmental costs and resources, as well as lacking any consistent empirical basis analogous to physics.

One respondent, a Sanjay Bissessur (April 29, FT) made an effort to critique my earlier letter – but he fell flat and ended up merely exposing a lack of physics knowledge. For example, he complained that physics’ failure to forge a unified field theory parallels economists’ failure to predict the 2008 credit-mortgage crisis. In fact, as I pointed out in a subsequent response, though quantum theory and relativity haven’t been formally unified they’ve made accurate predictions in their respective domains of inquiry. Thus, the threshold for theory success is what a given theory specifically predicts from its particular domain, not whether it can be “unified”. Bisseur’s error was in picking at a failure of unification, but then I never said the failure of modern economics to predict the credit crisis was a failure of unification (e.g. to integrate micro-economics and macro-economics) but a failure of macro-economics overall.

In the particular case of the failure in predicting the credit crisis and meltdown, academic economics erred by assuming a putatively poorly regulated system was capable of sustaining massive risk entrenched in obscure, poorly understood credit derivatives created by Wall Street “quants” , most of whom had forsaken bright careers in science or mathematics to invent these devious financial instruments for investment banks. The assumption saw all the hinges come loose when the credit default swaps were immersed in securities purported to be safe, since they were given AAA ratings by credit agencies like Moody’s and Standard and Poor’s. Thus, the failure was predicated on a three-way collapse of the paradigm: 1) commercial banks taking on the risk of investment banks by leveraging their assets to preposterous ratios (sometimes as high as 33:1), 2) credit derivatives designed using the Gaussian Copula Formula which enabled them to be sliced, and spread throughout ordinary securities such as collateralized mortgage obligations, and 3) a failure of the credit rating agencies to take proper note of (2) and in effect, be blinded while assigning bond ratings the securities didn’t deserve.

By contrast, physics as a true science, not a faux one, succeeded remarkably well in its individual theories. The well-known muon experiments, for example, validated the predictions of time dilation (e.g. that moving clocks run slower) from special relativity, while quantum mechanics has successfully predicted the energy levels and spectral line series for the hydrogen atom.

Most telling and insightful to me was an article, ‘Why Economists Still Stubbornly stick to Their Guns’. FT, April 16-17, p. 7). The author, John Kay, noted:

“In economics, the academic realm ought to be the home of pluralist discourse but the growth of peer review and journal publication has undermined this. University economists…are now under relentless pressure to conform to a narrow, established paradigm.”

As I noted in two comprehensive earlier blogs:

1) http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto.html

2) http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto_13.html


The high priests of modern Economic theory base their foolish paradigm and political program on the "Pareto Distribution" and a belief called “Pareto optimality or Pareto efficiency.” Pareto optimality isn't scientific because it is not defined in a way that can be falsified. In other words, “Pareto optimality” is a belief like “Christ died for our sins” is a belief — neither can be falsified.

However, when one examines carefully the effects, one can conclude that at least any Economics based on Pareto optimality or the distribution is fraudulent. Understand the Pareto, and you grok why the richest always get more tax cuts they don't need (e.g. because their dollars are deemed to have "higher Pareto efficiency") and why Social Security benefits must be cut (e.g. people receiving the monies from Social Security aren't productive nor do they usually partake in stock markets).

And the "piece-de-resistance" of this asinine economics (as per Libertarian Martin Feldstein's calculations based on Pareto Efficiency or optimality) is that if a health insurance Company pays $2,000 toward a colonoscopy (while the patient's reservation price is $1, 500, i.e. the maximum she'd pay on her own) then it makes more sense to PAY HER $1,499 NOT to get the colonoscopy, than to let her get the test and consume valuable specialist time and resources via $2,000 subsidy!

Thus, one can fully embrace Jay Hanson't take that:

"Economists proselytize for their religious beliefs like Christian missionaries proselytize for theirs. The belief that “Pareto optimality” actually occurs in the real world is the linchpin of economics. If one accepts that “Pareto optimality” is true, then contemporary economic models are true by definition. "

But then, this isn't any real economics, but what I call ersatz economics or maybe better, "Potemkin" economics. Build a spurious straw man (straw "house" of cards) and sell it to every manjack as the real thing - and which everyone must, must believe in! But the last true genuine economist, before the perpetual mind-fuck of Pareto crept in, was likely Adam Smith.

Interestingly, the capitalist Smith - in his 'Inquiry into the Wealth Of Nations' - evoked a more rational attitude when he noted there are:

"needs in a civilized society that a barbaric one refuses to address."

He also pointedly stated (Vol. II, p. 648):

"What improves the circumstances of the greater part can never be regarded as an inconvenience to the whole "

Smith recognized, unlike the modern high priests like Glen Hubbard (who devised Bush's Zombie tax cuts that still infiltrate the land past their expiration date), Martin Feldstein, and Milton Friedmann, that any economics that is devised to create more inequity can't be sustained. Eventually, as Lenin predicted in his essay on Imperialism, it must consume its seed corn and also its raison d'etre.

Echoing Smith, Charles Reich poignantly notes in his book, Opposing the System, Crown Books, p. 103:

"When society itself comes to be modeled on economic and organizational principles, all of the forces that bind people together are torn apart in the struggle for survival. Community is destroyed because we are no longer 'in this together' because everyone is a threat to everyone else. "


In such a capitalist-driven, consumerist organizational economic model, wherein the resource “pie” for the non-wealthy elite grows ever smaller, the young are threats to us oldsters, as we are threats to them, as neighbor is to neighbor. It can't be otherwise. This capitalist model has seen fit, in other words, to destroy our areas of commonality and common cause, replacing neutral civic space with demeaning commercial space and commercialist, market values.Reich then describes the visceral 'dog-eat-dog', endless economic warfare that ensues between people in the never ending quest to 'make it' and not be left behind. A tragic game wherein every one, every man, woman and child has a 'market value' and all abiding principles, social or moral, are reduced to economics. Alas, the cost resides in devastated marriages, families and communities.

Thus, in returning to Sylvia Nasar after this lengthy digression, it is odd she could write such codswallop (op. cit.) as:

"Economists must be doing something right, because the lives of nine-tenths of humanity have changed more in the century in which modern economics was born than in the 20 centuries before."

Not so fast! The change wasn't due so much to "modern economics" - though they might be deluded enough to believe so, but because during that century she references the planet went from the ebbing energy intensity and inefficiency of whale oil (used almost everywhere, from lighting to fuel, to heating) to the energy jolt delivered by OIL, as in petroleum! People need to read A Thousand Barrels a Day, which covers the energy transition nicely and what it meant for energy utility and lifting the human race to another level. The key catalyst in all this is EROEI or "energy returned on energy invested". In the case of oil, one could - fifty years ago - get back the equivalent of 30 barrels of oil for every barrel needed to do the drilling to extract it. Thus EROEI = 30:1. Today that is down to about 8:1 but still better than the 1/2:1 in the waning days of whale oil!

Meanwhile, TIME essayist Rana Forhoohar compounds this misperception by writing ('When the Dismal Science was Brilliant', Sept. 12, p. 18):

"While more than a billion people still live in poverty, it's safe to say the majority of humanity now enjoys levels of prosperity and choice - in food, living conditions and employment - undreamed of by the typical laborer in 19th century England"

But again, this is because the energy foundations for the two civilizations are different. 19th century England still depended largely on whale oil, a poor, tiny sister compared to mighty oil and its prodigious bang for the buck. The reason so many are so much better off today is 95% due to the discovery of oil resources, and 5% due to the labor and ingenuity employed in extracting, refining and distributing them for wider use.

At the same time- to test this claim - we shall see that as the Oil runs out, or features oil quality with much lower EROEI (see diagram) in the coming years, life quality will degrade across the board - irrespective of whatever new economic thinking or theories arise. We are already getting a taste of it now, with ever lower GDPs, more unemployment in the developed world, and costlier resources - reflected in higher priced commodities. Ultimately, there will come a time we revert to the lowest ratio of EROEI and billions die, simply because there will not be the energy basis or intensity to support the life sustenance needs of billions, their calories or their offspring. Indeed, there won't even be enough energy to get clean water, if we contaminate what we have now, that's all that''ll be left.

Most people don't understand or grasp in the slightest that we enjoy our computers, i-pads, X-boxes, ipods, HDTVs, food choices, autos, air conditioning etc. only at the behest and availability of relatively cheap oil. Once those EROEIs hit 1:1 or less the jig is up and we will see the first indicators with $250/bl. oil and $7.50 a gallon gasoline. Then food will be too expensive for even middle class people, and energy costs (say $150 or so a month now) will reach highs that will force most people to do without.....a/c or heating.

In this sense, the modern Economic high priest is no different from the "wizard of OZ" hiding behind the curtain and telling any spectators, "Pay No attention to the man behind that curtain!"

Ah, but we who know better, do! And so should Ms. Nasar and Ms. Foroohar.

Meanwhile, all the casual reader needs to know is that the American economics factory and schools continue to perform a vital role in maintaining - via myth and balderdash- this unique system of corporate socialism, American style. Economists instead are assigned the task of dispensing unproven dogmas that permit business to operate independent of damaging political manipulation. (While making politicians the whores of business by virtue of our bribery system). They accomplished this task by means of their faux message of “laissez faire", based on a fictitious conception of a society composed of competing individuals. In fact, we inhabit a controlled economy where meeting needs is less important than confecting "wants", via vast corporate monopolies that answer to no one. (As a note: most multi-nationals are now more powerful than most nation states! No wonder citizens can expect zero help from their governments against these predators.)

Robert Nelson informs us that the goal of the economics profession is to prevent the American public from achieving a correct understanding the American economic system, thereby throwing a “mantele of protection over corporate government”. In this take, he is absolutely correct!

Modern Economics & Its Evil Basis: The Pareto Distribution(1)

"Assume a collectivity made up of a wolf and a sheep. The happiness of the wolf consists in eating the sheep, that of the sheep in not being eaten. How is this collectivity to be made happy?" - Vilfredo Pareto


For years I pondered the inverse logic of markets and economics and why in the hell they made no sense. Even my sole course in Economics, taken in high school, never addressed this, preferring merely to examine stock answers (and stock questions!) Even now, the stand on your head "logic" seemingly implicit in capitalist markets boggles the mind. For example, U.S. health insurers are judged on their competence not by how many people they treat but how many they don't have to treat. At the same time nearly $1 in every $3 goes to administrative paper pushing, not health care. Meanwhile, the unemployed are probably the biggest potential users of any federal dollar, so why are they not given more extended benefits to spend that money (especially in a poor demand market) while the rich are given more tax cuts they don't need? WHY are employers now putting out notices that: "the unemployed NEED not apply, only the ALREADY employed". And finally, if natural resources like forests and water make up our natural wealth base, WHY are they not counted as costs or at least liabilities once chopped down, used up or polluted?

Not until I uncovered the "Rosetta stone" of modern economic theory was I able to look on and see the inherent problems, then it all made sense....including the disgusting extension of the Bush tax cuts which merely explodes the deficits further. People will want to first read Vilfredo Pareto's description of the wolf-sheep "collectivity" at the top. Pareto is the one who basically put forward the Pareto distribution, and also the form of economic efficiency known as Pareto efficiency. As I will show, this perverse meme underlies nearly all modern economic theory and governs nearly the whole universe of economic behavior from whether people should have rent subsidies, to whether higher deductible and co-pays ought to be implemented for medical care.

The basic insights may be derived from the Cumulative form of the Pareto distribution which is shown. This is hlghly simplified to try to make it more understandable. Basically, we are graphing "utils" or nominal units of "utility" on the vertical axis, vs. value of dollars used or consumed along the horizontal. The curves are displayed for two populations, one "rich" (say earning in the top 1% or $340,000/yr.) and the other "poor" (earning about $14,000/yr.). The key aspect to note is the width corresponding to the "delta x" portion of the gradient (delta U over delta x) which translates into the net dollar's worth for each population. As readers can see from inspection, the width of $1 for the rich is significantly longer than the one for the poor. This translates into the argument that the buck is worth more to the rich man, and hence, any transfer from the rich to the poor hurts the rich more than it helps the poor (especially as the 'utils' for the poor man is also rather smaller by comparison).

Thus, by Pareto's original example (in quotes): Allowing the wolf in the wolf-sheep combo to EAT the sheep expresses less overall "hurt" or pain on it than permitting the sheep to remain unscathed, thereby merrily prancing away eating its grass while the poor wolf starves.

Of course, let me hasten to add here, that nowhere is Pareto's original quote on the wolf-sheep combo given in any standard university economics texts. God forbid any students draw the wrong conclusion and infer that modern economics is consigning the poor to be sheep for the rich wolves. But, as a matter of fact, that's fairly close to the truth! Hence, my use of the term "evil" - which, believe me I don't use very often.

Now, the next section is mainly for technical wonks or statistics junkies and may be skipped by others. In the case of the Pareto, one simply requires that the probability density function and the distribution function are, respectively:

i) P(x) = ab^a/ (x^(a+1))

ii) D(x) = 1 - (b/x)^a

defined over the interval x>= b

One then ensures that the mean, variance and kurtosis obey:

m = ab / (a - 1)

v = ab^2/ [(a - 1)^2 * (a - 2)]

k = [6(a^3 + a^2 - 6a - 2)]/ [a(a - 3)(a-4)]

Once an assembly of data comports with the above it will be a Pareto distribution!

Thus, to get a Pareto one need only manipulate the data so that the a's, b's etc. of the datasets fall into mathematical line. This isn't rocket science. The point is the distribution need not be any intrinsic feature of reality of all, and we have no way of knowing unless genuine empirical tests get at the underlying numbers. My suggestion is that the Pareto is of such benefit to the wealthy and justifying zero redistribution of their wealth and assets that it's almost incomprehensible economists wouldn't "jigger" it in their assorted papers. (Especially if they're being funded by the same wealthy!)

But let's move on to cases. One other important concept in this mix is what's called the reservation price for a given object or service. Ultimately, along with the Pareto distribution, this factors into what is called the Pareto efficiency. This is just the maximum price a person is will to pay. So, if I have a 1954 Henry Aaron TOPPS baseball card (now with a very high book price) and I offer it to you for sale, and ask what the top price is that you'd pay, if you respond "one hundred dollars" then that is your reservation price.

The same may apply for rent. So let's say a new apartment complex opens up and is selling apts. (1-3 bedrooms) ranging from $1,500/month (for single Bdr) to $2,400 for 2 Bdr, to $3,600, and people want to buy. Obviously, a relatively poorer couple will have a reservation price probably lower (e.g. $500) than any of the apartments, and hence need a Section 8 HUD rental subsidy to offset costs, while the rich couples or families can move into any of them.

But, according to modern economics and the Pareto distribution, offering a rent subsidy on the order of $1,000 (for the single Bdr apt.) effectivly removes it from the actual competitive market and say, a rich couple that can pay the full price of $1,500. Hence, the loss of $1,000 rent makes it Pareto inefficient. Thus it is that modern economics frowns on rent subsidies. (Another way to say this is that the poor couple receives a "consumer surplus" of $1,000 which they didn't earn).

Now, moving along with these Pareto efficiency examples, some readers may recall that former Fed Chairman Alan Greenspan went on record in an appearance before congress (in 2003) as asserting that "Social Security benefits need to be cut to pay for Bush’s tax cuts." what on Earth was the man thinking? Well, he's thinking on the basis of Pareto efficiency!

Social Security payments, especially with COLAs, do everything the Fed Chairman didn’t want. They pour more money into the economy, but not via productive labor or market indices, returns. People receive their checks merely by existing and breathing day to day, and having paid into the system with FICA deductions. Even then, they receive far more in benefits than actually paid in, making a total mess of "utils" earned. In a way, the Social security recipient (in the eyes of this Pareto-riguer bunch) are like the rent subsidized couple with their "consumer surplus". Worse, the S.S. COLAs increase the non-productive payments each year, one reason why – back in 1997 – Greenspan demanded an artificially much lower COLA increase than had originally been proposed. (And which certainly doesn’t reflect seniors’ increased costs for medical treatments and prescription drugs).

Greenspan had surmised – correctly in terms of Pareto Efficiency – that the Bush tax cuts accomplished the same for the well off. The cuts poured more money into their hands each year, but actually allowed them to keep more of their higher valued dollars and the associated utility. Greenspan obviously reasoned, based on his 2003 Senate Banking Committee testimony, that it made more fiscal sense to let these wealthy keep their ill-gotten gains from the tax cuts, than to preserve Social Security and reward the unproductive (and mostly non-investors) with unearned compensation. In terms of both magnitude of the wealthy's "utils" and greater worth of each $1 they got, it was more Pareto Efficient!

What about health care? How does it work there? The clue was revealed by Academic Economist (and former Reagan Advisor) Martin Feldstein, after being awarded the presidency of the American Economic Association in 2004. A large part of his address was devoted to the issue of health insurance. Feldstein made the case that health care is in trouble in this country because deductibles and co-payments are too low, and as a result people (mainly the non-wealthy partially subsidized by health insurance) over use the system and go to the doctor too many times.

From a reservation cost perspective, let's say the productive cost of the typical primary care physician's visit is $150. This is what she charges, or what her affiliated Care center does. The non-wealthy person (having shelled out $250 for an insurance deductible) is then happy to pay only $15 for a co-pay. But this skews the system and makes it Pareto INEFFICIENT. If one therefore takes the difference ($150 - $15 = $135) it makes more sense to just give the unwealthy person say $134 NOT to visit the doctor and consume resources. Those resources are better left to the rich who can afford to pay the full reservation cost with no problem.

Same thing here in getting a preventive test, say a colonoscopy which normally would run $3,500. But there's no way the insured regular patient can afford that total cost, most of which his or her insurance picks up. But, in Feldstein's calculation - based on Pareto Efficiency- if the insurance paid part is $2,000 (while the patient's reservation price is $1.500) it makes more sense to give the prospective testee $1,499 NOT to get the colonoscopy, than to let her get the test and consume valuable specialist time and resources via $2,000 subsidy.

The same scheme can be carried over to environmental considerations, especially say, in implementing global warming regulations or altering behavior - say to cut carbon emissions. Since the lives of all the poorer segments of the populace are worth less in terms of their $ capacity-dollar use (as well as their "utils") it makes more sense to allow more of them to perish from climate-caused catastrophes (say more flooding, twisters or hurricanes) than it does to cause harm to the rich by exacting carbon costs which will upset their commodities markets. Thus, having 1,000 - 10,000 average Joes and Janes die each year is still more tolerable than having oil speculation losses for the rich, because then they will also pull back on their investments in ETFs (exchange traded funds), hedge funds, and all the rest ....ultimately ending in less investment banking profits and perhaps another financial collapse.

By a similar line of perverse Pareto reasoning, it makes more sense for the impoverished billions in the third world to breathe filthy, polluted air than clean air. The reason is obvious: it is inefficient because if they had to pay for it, they couldn't afford it. By the same token, it makes more sense to dump the toxic wastes from advanced nations in poor nations than vice versa, because the same reasons apply: the 3rd worlders would never be able to afford their own clean up costs, so what's an extra five million gigatonnes of waste in the overall scheme of things? Analogously, it makes more sense to ship cheap factory jobs with collateral health issues, e.g. producing toxic, carcinogenic fumes etc. to poor third world nations where there are few environmental or health standards than keep them in the U.S. where the regulatory costs would be punishing, OSHA's looking just around the corner....and hence, Pareto inefficient.

As I said, the basis of an evil economic system. Next, we look at the Laffer curve!