Thursday, September 17, 2009

No Returning to GEICO

This is a consumer alert for Americans considering GEICO after watching those brilliant and funny ads featuring the gecko lizard and cavemen.

We carried GEICO auto insurance for several years till they heavily jacked up rates when we changed one of our cars for a new one. That's apparently a common way for insurers to reward loyal customers that they figure will stick around no matter what. So we switched to AllState that offered much lower rates.

If we do want to switch again some time we'll probably steer clear of GEICO even if they offer low premium rates. This is because of their ineptness and questionable practices that we experienced at first hand. Some instances:
  • Our car driven by daughter Sheena was lightly hit in the rear side by a car jumping a red light. That other driver was deemed at fault and ticketed by the investigating police officer. We reported the incident to GEICO and were assured this wouldn't reflect adversely on our record. The operator advised us to let GEICO fix our car in their own workshop and they'd recover expenses from the other driver's insurer. The car was repaired all right at a cost of $700. We then received a letter that GEICO had decided not to pursue the claim with the other insurer as the amount involved was too small and billed us the deductible of $100. Years later we learned that GEICO had without our knowledge recorded this claim in the insurers' common database, showing our daughter to be at fault. Why? Because this way we would get higher rate quotes from competing insurers.
  • GEICO has its claims adjusters who assess damages and then offer the claimant the choice of a cash settlement , or proceeding to a GEICO designated workshop for getting the repair done. The problem I saw is that adjusters typically offer a very low cash settlement, forcing the car owner to go to the designated workshop that vastly inflates the claim after the drop-off, which the GEICO adjuster then readily allows. The workshop obviously has a kickback arrangement with the adjuster. This is corruption remniscent of practices in a third world country. The inflated repair charges adversely affect the claims history of the policy holder. They also affect GEICO's bottom line since the amount paid out may be far higher than claimants would have agreed to receive in fairer settlements.
  • We saw a surprising number of clerical errors (e.g., in recording VINs, coverage and billing) in the policies issued. When I called to seek correction we'd typically get a lot of duplicate and contradictory mailings. It sometimes took multiple iterations for them to get things right, only to have the process repeated when even minor changes were required to be made.
GEICO is a subsidiary of Berkshire Hathaway which is founded by the legendary and admirable Warren Buffett. Improving GEICO's operational structure and execution to match its marketing and advertising creativity shouldn't be so hard. For example they can compile data on cost escalations for their designated and third party workshops that will help flag their crooked claims assessors / adjusters. They can track the numbers and cost of mailings and compare it to industry averages to improve efficiency, and also track the average number of customer calls made to resolve an issue. These measures are almost so easy that even a caveman can do it.

Thursday, September 10, 2009

How Did He Get It So (Largely) Right?

Paul Krugman's article last week in the Times "How Did Economists Get It So Wrong" was remarkable in two ways.

First, it neatly captured the essence of how two schools of economists (which includes finance academics) differ in their approach to markets. Krugman presented this so skillfully that it can be grasped by readers without a background in economics. At the same time it was immensely useful and interesting as a recap and to put issues in perspective even for practitioners in the field.

Second, the article is fully eight pages long - much longer than his Op-Eds, and I thought it would be too "heavy" for most readers. Yet to my surprise it was the most popular and emailed article for a couple of days. That's as much of a tribute to the caliber of the Times' readership as to Krugman's writing. I strongly recommend this piece to anyone who wants to get an insightful overview (admittedly from Krugman's eyes) of the rival schools of thought and of the issues separating them.

Though I studied at Chicago, I find myself agreeing with much of what Krugman says. This is particularly so in regard to the Keynesian belief in helping the economy through temporary stimulus spending, and events showing markets can be grossly inefficient for long periods of time. In fact, in my post back on Feb. 10 I had voiced strong misgivings about the statements of some prominent Chicago professors who opposed the fiscal stimulus plans.

However, Krugman is still a little unfair to the Chicago school by painting them as largely unified against Keynesian beliefs, firmly believing in efficient markets, and lumping them all as "freshwater" economists. Krugman did acknowledge that the danger of a financial market meltdown was first pointed out by another Chicago economist, Raghuram Rajan. But Krugman didn't mention that a leading academic of the theory of "behavioral economics" (rival to efficient markets theory) also belongs to the Chicago school. That professor is Richard Thaler who is at least as well known as the other proponent of behavioral economics, Robert Shiller, whom Krugman repeatedly mentioned.

In fact, during my time there I had found it great about Chicago that rival theories could be freely and vigorously debated in the weekly finance workshops and other academic forums. I remember how Eugene Fama (dubbed "the father of the efficient market theory") in his highly popular fnance class had included Thaler's papers as required reading. And though a lot of friendly riffs about opposing beliefs were exchanged, Thaler used to be invited to Chicago's finance workshops to discuss his papers even when he taught at MIT or Cornell. Then about 10 years ago he was welcomed into Chicago as a tenured professor.

But apart from setting the record straight about Chicago and other other schools (about their not having monolithic, misplaced beliefs) I really like and commend Krugman's article.

Thursday, September 3, 2009

Changing Our Criminal Justice System

I am unhappy with several aspects of our US criminal justice. But I'm on the left or the right depending on the practice in question. Broadly speaking, I'm with the left when it comes to presumption of innocence and treating those not yet convicted of crimes with dignity. And I'm with the right for more powers for investigating crimes, treatment of convicted offenders and lowering the taxpayer tab on prison inmates.

This is where I'd want a more liberal shift:
  • Avoid handcuffing non-violent suspects before they obtain bail. Why did Martha Stewart, Michael Jackson, or the two Bear Stearns fund managers have to be handcuffed and confined before appearing in court when (a) they seem highly unlikely to pose physical danger to the arresting officers, and (b) had ample advance notice of impending charges, so they could be allowed to do something about it? Being handcuffed would be very humiliating and an affront to our dignity for most of us - something that can't be undone even if we're subsequently cleared. Since 1980 the Indian Supreme Court has barred handcuffing of suspects who are not likely to be violent or dangerous. There is also a clear provision for anyone to approach the court and seek anticipatory bail to avoid needless humiliation and inconvenience. If a developing country like India can have these safeguards, why not the US?
  • Have much stricter gun control. What age are we living in? The 2nd Amendment giving the right to bear arms is an anachronism, though this will be hard to repeal because of entrenched beliefs. It's almost inconceivable for someone coming from India (and I'm sure most developed countries) to see how easily any punk in the US can acquire a firearm. Even assault weapons can be bought, with the NRA and the loony gun-toting fringe vigorously defending this right in the name of self-protection. And there should be strict background checks and stringent penalties for disqualified applicants possessing illegal firearms. Thanks to guns the US has a much higher homicide rate than other first world countries. With shootings at Columbine, Virginia Tech, Washington Beltway sniping, "going postal" and other workplace violence, perhaps the average American is now ready for more Europe style arms restrictions.
  • Freely let DNA evidence and new techniques be used to revisit old cases of conviction to reassess guilt. Some of these convictions have been successfully challenged, DNA tests allowed and convictions reversed. But we know how jury verdicts can be so flawed and arbitrary - why assign a false sanctity to such verdicts and not allow DNA tests in all such cases?
  • Decriminalize victimless crimes like acts between consenting adults, or using (as opposed to dealing with) drugs. What former NY Gov. Elliott Spitzer did in hiring a call girl may be bad for his family life, but shouldn't have been a crime.
Here's where I favor a marked shift to the right:
  • Much stiffer penalties for criminals. True to our sense of fair play, justice should be retributive, not just reformative or a deterrent as liberals maintain. There's no reason to take capital punishment off the table for egregious murders so long as guilt is established beyond all lingering doubt (say with 99.99% certainty), not just reasonable doubt. There also shouldn't be a blanket minimum age or intelligence threshold for capital punishment. After all, a juvenile showing extreme cruelty or sadism while knowingly committing crimes is more, not less, likely to become an even bigger monster as he grows older.
  • A tougher and lower cost jail environment. There's something wrong about criminals (especially hardened ones) sentenced to punishment spending their time watching TV, pumping iron, eating well and enjoying better medical care than many people outside the prison. Criminals should repay their debt to society through work and depending on the gravity of their offenses (think Dahmer, Bundy, the Beltway snipers, or the killers of my childhood friend Aasha) as a resource for medical testing and organ donation against payment to the state. These measures will at least lower the taxpayer burden, and if they act as some kind of a deterrent against crime, that's a bonus. (The Chinese till recently were harvesting and selling organs of executed prisoners. That disturbed many of us because we weren't sure if (a) those people had actually committed crimes deserving of the death penalty, and (b) if the profit from organ sales was itself an incentive for executing prisoners.)
  • Close monitoring of inmates and strict punishments for offenses committed in jails. I've don't understand how prison rapes and inmate on inmate violence can still go undetected given our advances in technology. We can cheaply video monitor (and record) every cell, every square foot of prison space, and every movement by every inmate. Any offenses can be easily proved by playing back the recordings and inmates severely punished, preferably in a revenue positive fashion (see point above.) Guards who fail to act can also be identified and disciplined. This will also crimp in-prison gang activity and prevent the worst and most dangerous inmates from victimizing weaker ones.
  • Further limiting or completely eliminating trials by jury. The US is one of the few countries where jury trials, which are highly wasteful with often arbitrary verdicts, are still widely prevalent. Other countries use just judges, whose verdicts can be appealed to superior judges and panels of judges. Given our multicultural society with ethnic divides and loyalties, jury trials are even more vulnerable to unfair outcomes, especially when the alleged crimes cross racial boundaries. Remember how O.J. Simpson was let off for double murder by a mostly black jury in 1994, and lost in the subsequent civil case decided by a mainly white jury (though this case admittedly required a lower burden of proof.)
  • Requiring every US resident to submit a DNA sample and to carry a national ID card. Objections by the ACLU to maintain privacy have little merit, since safeguards can be imposed to ensure the information is used only to detect or prevent major crimes. Besides, consider the huge upside of such measures. Any DNA on a crime scene can be matched against a national database of the entire populace to solve crimes. Terrorism can be severely limited with a national ID, possibly combined with biometrics. The system can be carefully designed of course to protect most privacy, but this exercise to guard against "Big Brother" excesses should be very feasible.
There may be nuances, but a majority of Americans likely agree with my thinking.