Welcome to another edition of the Mueller Report!
Well, I took a longer hiatus from writing this newsletter than I expected. I plan on resuming my weekly schedule of newsletters sometime on Fridays.
Summer has ended. I’m back in the NYC area teaching three courses at King’s and one at New York University this fall.
Thoughts on car insurance
There are three basic kinds of car insurance: liability, comprehensive, and collision.
Liability - States tend to require some level of liability insurance to drive legally. Generally liability insurance means your insurance company will cover damage you cause (i. e. when you are at fault) to others’ property (whether car, fences, houses, etc.) as well as medical expenses of the other party (and perhaps lost wages or legal fees if the other party sues you). It often also covers medical costs for you and those in your vehicle as well.
Comprehensive - covers basically any kind of damage to your vehicle while it is stationary. Tree limbs, hail, vandalism, flooding, being hit by other cars, etc. are usually covered.
Collision - covers damage to your vehicle that occurs while you are driving it and are at fault.
I learned with the recent flooding, for example, that comprehensive will cover water damage to you car if it is parked but not if you drive it through water and happen to get water sucked into the engine (there is short sad story here I won’t bore you with…) If your car is damaged by water while you are driving it, insurance will only cover repairs if you have collision insurance.
Lessons - be sure to have comprehensive, especially because it does not add that much to your premium. Collision generally quite a bit more and you have to assess your risk tolerance and how careful/wise of a driver you are. You might also be able to save a decent amount (many hundreds of dollars) on car/house insurance if you shop around without sacrificing coverage.
And don’t ever drive through deep water, especially if you don’t have collision insurance…
Thoughts on investment
I’ve dipped my toe into writing options (puts specifically). I will write about this more in a few weeks as I have some lessons or experience to share. My hope is that this is a way to put extra cash to work rather than having it sit in a bank account earning nothing.
From the classroom
In my course on Economic Policy, we have been examining the relationship between economic theory, the recommendations of economists, and tangible public policy. In our first week we read three great articles by James Buchanan:
“Politics Without Romance”
Do not assume that public officials are especially concerned about the public good. Buchanan talks about having a parity of assumptions: we should assume similar motives and responsiveness to incentives for political actors as we do for economic actors. They are all people after all. As such, economists should not assume that their policy proposal recommendations to increase efficiency or to advance the public good are likely to be adopted wholesale. Instead, they should expect their proposals, theories, and recommendations to be used to further the existing goals and interests of political actors.
“What Should Economists Do”
Economists should study exchange and the conditions under which it occurs. Rather than focusing on abstract mathematical models about market efficiency or personal utility, Buchanan thinks economists’ time is better spent understanding the institutions and rules under which people make exchanges and how those institutions and rules can promote or hinder greater exchange.
“The Constitution of Economic Policy”
Buchanan argues here that there are three criteria we should use when assessing political economy
We should understand politics as exchange. Bureaucrats, elected officials, judges, lobbyists, public interest firms, etc. all have various goals they want to accomplish. In order to accomplish their varied aims, they have to engage in give and take as well as compromise.
Buchanan says we should operate under the assumption of “homo economicus.” This assumption does not mean that people engaged in politics only care about money or their personal wealth. Instead, it means that they all respond to incentives. If you raise the cost of certain behavior (whether through sanctions, penalties, legal restrictions, etc.), people will tend to engage in that behavior less. Similarly, if you increase the reward or benefit from certain kinds of behavior, people will tend to engage in that behavior more.
Buchanan stresses the importance of “methodological individualism” in our analysis. Instead of talking about what the “EPA” does or what “Congress” wants or “America’s” foreign policy, we should examine the motives, constraints, and decisions of individual actors, even if they are acting in the name of a particular agency or of the American people.
In my course on the history of economic thought (ETAP), we have been discussing just price theory. While seemingly archaic from a modern economic perspective, the discussion of just price theory can help us assess issues relevant our modern society like price gouging or sweatshop labor. Most people have unexamined feelings or assumptions about what is just or fair when it comes to the price of a good or someone’s wages and work conditions. They rarely take into account the relevant realities in each situation or the dynamics of how these situations can change over time.
Let me conclude with a note I sent to my students:
Dear students,
I mentioned a video during the discussions this week about price gouging.
As you can imagine, conversations about whether prices can be just or not, and where economic value comes from, are directly related to issues today in terms of price gouging.
Is it wrong to charge higher prices for bottled water or gasoline or plywood after a hurricane or tornado blows through an area? Should we have laws banning or penalizing such actions?
While your initial inclination is probably that it is wrong to raise prices, especially after many people have likely suffered from a disaster, you should ask yourself what that inclination is based upon. Why should prices remain the same after a storm as before? Are market conditions the same? Do people have the exact same desires (demand) for things as before? Is there no change in available supply or supply chains?
If the answer to those questions is "no," then we are in a different world, a different reality, after the storm. We may not like that reality (a lot of people are worse off - perhaps a lot worse off), but we cannot simply change that reality by denying it. In the new reality, demand is greater and supply is less. This means most things have become relatively more scarce than before. This means that the equilibrium price has risen, perhaps significantly.
We can refuse to accept reality and pass laws preventing prices from rising - but we are not changing the underlying shifts in supply and demand by doing this. Instead, we are creating disequilibrium in the market where demand far outpaces supply at the pre-storm legally mandated price.
As a result, shortages occur and people are not able to find many goods at any price. And instead of encouraging resources to flow to the damaged area with the allure of high prices and potential profit, we send signals to the rest of the market (unintentionally) that there is no unique or higher need in a storm damaged area than in an unaffected area.
You may also be interested in a short essay I co-authored with recent King's alum Jan Gerber about just price theory.
Have a good weekend!
Dr. Mueller
Talk to you next week!