In this case, though, I appear to be in good company:
The standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough.
Whenever I see such nonsense, I have to keep reminding myself that the trade theories for which Krugman won his Nobel Prize were explanatory and predictive. Krugman did not win a prize for mechanism design; he could not have predicted E-bay.
The idea of people bidding for stuff they can’t really see from people that they’ve never met is fraught with asymmetrical information. Honest sellers could not hope to compete with liars selling competitive products. Honest bidders could not hope to compete with fraudulent bids that may not be honored. Such a market, failing as it does the test of a “standard competitive market model” could never exist.
Except that it does.
E-bay exists because they managed to attach a credibility mechanism to their bidding process. This mechanism rewards people for neither understating nor overstating the qualities of the items they have put up for bid. It encourages honest bidding.
Krugman, like many Nobel-prize winning economists, won his fame by debunking a “standard competitive market model” of trade. “Standard models” often have a way of becoming obsolete by advances in theory or practice. Adam Smith took it for granted that roads and bridges would have to exist as “public works.” Half a century later, many regions of the United States were laced with private roads and bridges. Markets have evolved competitive models for postal service and telephone, once thought to be public goods.
Krugman pretends that insurance plans are doomed by the existence of adverse selection and moral hazard. Yet we see thriving markets in insurance products of all sorts, including our huge private market in health insurance. One can argue their imperfections, and perhaps blame them on the “free market,” although a free market does not exist for most insurance products, least of all health insurance. But widely-used, competitive insurance products can clearly exist without government–something that ordinary people might one day forget some decades after our health care has become socialized.
To the extent that insurance companies earn a competitive return on selling insurance, everyone is paying a little extra for adverse selection. Krugman might have a problem with that, but I suspect that his real problem regards those people who cannot take advantage of adverse selection, rather than adverse selection per se. Such people with obviously preexisting conditions would simply be prepaying for treatment of those conditions in any kind of market-based insurance plan. I can see how someone might consider that a problem, but it’s not necessarily an insurance problem.
Even real-world markets, unlike the straw man “free market” that Krugman attacks, deal with adverse selection and moral hazard in insuring for every conceivable risk. Mechanisms like deductibles or co-insurance go a long way toward rationalizing insurance economics. Other mechanisms could certainly be developed if the insurance markets weren’t so regulated as to severely curtail such innovation. Why does Krugman suppose that “free markets” cannot evolve more elaborate mechanisms? More importantly, why does he suppose that the government mechanisms will be any more efficient?
The real answer is that Krugman doesn’t have to answer these questions. He can, instead, get away with engaging in name-calling and attacking straw men in advocating for his collectivist vision of a world where the moral hazards of government-run systems are invisible to him.