A pretty good economist
On the other hand ... . Take a look at his Slate piece on the American health care system. It takes the form of a critique of Michael Moore's proposals but includes Goolsbee's own views of what is wrong and what should be done about it. He writes:
Economists call this "adverse selection" and when there is too much adverse selection—when the health of the people in the uninsured pool is extremely different from the average person in the country—the market may fail completely. Insurance companies may just deny people coverage entirely.
This is a problem at the core of our health care woes. Moore finds scores of examples—people with tumors, heart problems, lost limbs and digits, you name it. And in each case the insurance company finds a way to deny paying for people's illness even though the people actually have health insurance. He also shows people who simply cannot get insurance because they have pre-existing conditions, are too heavy, are too light, and on and on.
This confuses several different issues. One is the failure to enforce insurance contracts, with the result that the insurer who has lost his bet fails to pay off. That may be a serious problem but it has nothing to do with adverse selection or cream skimming.
That case aside, the argument is simply wrong. Insurance companies free to set the price of what they sell have no incentive to avoid insuring people who are bad risks. They can make money insuring good risks at good risk prices and bad risks at bad risk prices.
Adverse selection, as Goolsbee surely knows, requires asymmetric information—a situation where one party to a transaction has information the other does not. If the customer knows more about his health than the insurance company then the decision to buy insurance will be taken as a signal that the purchaser is a worse than average risk, insurance companies will price accordingly, and people who know they are good risks but cannot prove it will be unwilling to buy good risk insurance at a bad risk price. That is the standard problem of adverse selection in insurance and it is the precise opposite of cream skimming. The bad risks end up insured—at a bad risk price—and the good risks uninsured. In Ackerlof's famous sketch of the problem, set in the used car market, lemons sell, cream puffs don't.
All of this assumes that insurers are free to set their prices. Suppose instead that they are required to charge the same price to everyone, or at least restricted in ways that prevent them from charging bad risks the true cost of insuring them. In that situation it will indeed be in the interest of the insurance companies to try to avoid insuring bad risks—to skim the cream off the top. But the problem there is produced not by the market but by price control. The solution is to eliminate the restriction.
What does Goolsbee propose?
Addressing cream-skimming is at the heart of every responsible program for U.S. health-care reform .... These plans take aim at "pooling," for example, by allowing insurance companies to insure an entire state or region as a whole in exchange for serving everyone in that pool—no dropping, no denials, no shenanigans.
For the requirement that the insurance company serve everyone in the pool to have any teeth, it must include restrictions on the prices insurance companies can charge to those they serve. So Goolsbee's solution to a problem created by price control is—unless I badly misread him—price control.
There is, of course, another problem in the background—but one that has nothing to do with adverse selection. Someone with bad health will, on a free market, end up paying more for health care, directly or through insurance, than someone with good health. Many people, quite possibly including Goolsbee, see that as a bad thing that we should do something about. But it is not a problem that insurance can be expected to solve. Once the dice—for bad health or anything else—have been rolled, it is too late to bet on them.
Unless I am missing something, the analysis in that particular piece is simply bad economics, including the misuse of a technical term that the author surely understands. Nonetheless, my reading of Goolsbee's work leaves me more, not less, favorably inclined to Obama. His economic advisor may get some things wrong, but overall he is an economist and one inclined to favor the market.
Rather like Alfred Kahn, another Democratic economist, to whom we owe airline deregulation.
[Readers interested in a more detailed explanation of adverse selection may want to go to the relevant chapter of my webbed Law's Order and search for "adverse selection."]