It's Insurance, and There's Market Failure

In the comments to this post at Deinonychus antirrhopus people are taken to task for using the terms "safety-net" and "insurance" when discussing Social Security. It's insurance. See here, here, and here.  That debate should have ended long ago.

In addition, there is doubt expressed in the post as to the existence of market failure in the provision of poverty insurance. If there is no market failure, then why were so many people left without any means of support after the Great Depression? If the market worked, wouldn't everyone have insured against poverty, even those past working age? How do you explain the arguments and empirical evidence put forth by Krugman on market failure in healthcare? Are similar market failure mechanisms at work in poverty insurance markets? What about the moral hazard argument from DeLong that exists independent of any selection issues? Quoting DeLong:

The first thing that struck me is that the Cato Institute does not speak of "moral hazard." If we believe--as we do--that in the long run we will not allow significant numbers of the elderly to live in dire poverty, then giving future beneficiaries "more control and ownership" of their retirement funds is a very dangerous thing to do, for it creates a situation in which future beneficiaries have powerful incentives to pursue high-risk investment strategy: if the coin comes up heads, they win big; if the coin comes up tails, the government pays. As we saw in the late 1990s with the S&L crisis, such incentives create very dangerous and very costly situations.

Here's an account from the Library of Congress of life after the Great Depression and the level of self insurance that existed for Mr. George R. He worked until age 71 at which time the company he worked for let him go. He's been retired two years when this was written. His story illustrates the problems with self-insurance:

American Life Histories:  Manuscripts from the Federal Writers' Project, 1936-1940[Mr George R.--age 73, unmarried]

Interviews
Francis Donovan,
Thomaston, Conn.
Mr.George R -- age 73, unmarried 

"Sure, got plenty of time to talk. Got more time than money. It's gettin' so, I don't know what to do with an my time any more. Can't see to read. Got cataracts on both eyes. I can just about see to walk. People tell me I'm goin' to git smacked by a car crossin' the street one of these days. Well, I tell 'em, 'twon't be much loss. Not much loss. You get as old as I be, and no family nor close relations, and you ain't got much to look forward to but passin' on to the next world.

 

"Sure, I believe in it. Don't seem likely this here world is the best there is. Gits worse every year. When I was your age, 'twasn't a bad place to live Wa'n't no wars goin' on, everybody was workin' that wanted to work, folks were satisfied to live quiet and peaceful. Wa'n't no radios blastin' you out of the house, wa'n't no cars killin' thirty thousand people every year. That's what changed everything -- your automobile. Your automobile is what ruined this country, more ways than one. Every little squirt that makes as much as fifteen dollars a week has to have an car. And that's where most the fifteen dollars goes -- into the car. Who gits all the money? Why, the big gas companies. Big gas companies git all the money. Goes right out of circulation.

 

"Yes, I worked in the shop here 47 years. Retired me two years ago. They let a bunch of us old timers go all 'bout >the same time. Give us a little pension, but that's goin' to stop pretty soon now. And when it does I don't know how I'm goin' to git along. I could git me in old age pension, if I wanted to sign my life insurance away. Woman from the state come here some time ago I says, 'Nothin' doin'', I says. 'Think I'm goin' to sign away my chance for a decent burial?' I says 'That's all I got to look forward to.' She says, 'Well, I wouldn't look at it that way.' I says, 'Well, I would.'

"I don't know if I can come in on this Social Security or not. Seems to me I can, but I'll have to find out about it. I know they was takin' money out of my pay, down to the shop. Seems to me I ought to git somethin'.

 

"...I never seemed to be able to save any money either. Guess it just wa'n't in our family to save money I always made pretty good pay, but it just seemed to melt away. My sister kept house for me, up until she passed away six years ago She wa'n't extravagant, but she wa'n't the savin' kind either. Darned if I know where the money went. Only recreation we ever had was the movies, twice a week. That only come to a dollar.

 

"I don't know's you have to know what my politics, do you? What do you think they be? Yes, that's right -- Republican. Republican and proud of it That's what my father used to say, Republican and proud of it ... I never see any reason to change. I never see the Democrats get in yet, but what they didn't make a mess of everything. Now that's my opinion, you asked for it and I gave it to you ...

"Unions I do not believe in. Nossir' I hear they got one down to the shop now. Well, they got a lot of dummies down there that'll join it and expect to get a raise in pay right off the bat, and then after a year or two when they ain't gittin' any more'n they was before, they'll drop out Meantime the company's got every one or them down for troublemakers, don't you forgit it. Every time a union gits in, the company gits its back up, and in the end the ones that join ain't no better off than they was before. Worse off. Look at the money they paid out in dues."

Here's another account from a report about unemployment before the Great Depression and its effects on black and immigrant groups as well as other Americans. This account illustrates the need to insure against the risk of unemployment. Again, this was written before the Great Depression, so the conditions were much worse after the Great Depression hit:

Prosperity and Thrift: The Coolidge Era and the Consumer Economy, 1921-1929

Savings

Savings are the first cushion, cash savings first of all. Many of our families had small savings, but there is nothing in their experience to show that high wages are general enough or continuous enough to enable savings to give any general security. The economists tell us that for three-quarters of the population of the United States the margin between income and necessary outgo is so close as to allow little or no leeway for emergencies. In one out of five of our cases it is recorded that the families had used up whatever cash savings they had. When it has taken fifteen years to save $700, as it had the DiPesas of Boston, and you wipe it out in one winter of unemployment, you have lost something more than the $700. You do not start again with the same spirit. In one out of ten of the cases, especially those where the work had been seasonal or where there were a larger number of children or there had been previous sickness, the families had not been able to lay by for a "rainy day." Or, as one neighbor put it, it "rained too soon."

There is scarcely a family whose ideal is not to own their own home. A house is savings if you own it or are buying it bit by bit on instalments. This instinct for home ownership survives in spite of discouraging fluctuations in real estate values in our industrial neighborhoods. Many of our immigrant peoples come from countries where their families have lived for generations on the same little plot of ground. With them the instinct to own is deep-seated, and they are willing to put up a fierce struggle to have it satisfied. That struggle must be watched close at hand to understand its full significance. A dozen of our families had engaged in it, only to find the home they had worked for, which had stood for security to them, become a back-breaking load once their earning power was cut. They were in arrears in their payments, behind in their interest on mortgages, and some of them faced foreclosure. The LeFevres of Minneapolis had paid $2000 against $3500 on the house they lived in. The furniture had cost $1100 and was all paid for. When the LeFevres came to the attention of the settlement they had lost their house and sold their furniture and the five members of the family were all living in one room. It takes little imagination to guess what had happened to the morale of the family by the time they arrived in that single room.

   

Furniture is savings: and we find furniture sold or, more often, lost to the instalment collector. That was the way with the piano which the Morans in Boston had almost paid for. Then their parlor furniture went. The instalment house stripped the rooms of the De Macios of Pittsburgh and left only mattresses, broken chairs and a hot plate. It meant more than the actual loss when the young Greens had saved $1500 over five years to buy their furnishings and were forced to sell them for $200. These material things stand for steps along the line of respectability and progress. They mean not only parlor furniture, but the place you take in your community, your being able to have your friends in, your daughter's meeting her boy friend in her own home instead of on the corner.

      

And more intimate treasures are also lost. Dorothy Dohancy in Boston, in order to meet the rent, insurance, union dues, instalment payments, pawned her wedding ring. The Benders in Cleveland had no furniture they could sell, so it was the mother's engagement ring that was put in hock. The James family in Salt Lake City pawned both the mother's wedding ring and the father's watch. The Sapellis pawned their little girl's communion ring to pay for the mother's dental work. She was just thirty, but when they found it would cost more than the ring brought in, she had all her teeth pulled out...

There is market failure leading to the under provision of retirement and unemployment insurance by the private sector.

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