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Tuesday, November 04, 2008

"Trapped in the New 'You're on Your Own' World"

This is the start of a long essay by Robert Solow on the need for social insurance that is disguised as a book review:

Review of Peter Gosselin's High Wire: The Precarious Financial Lives of American Families, by Robert M. Solow, NYRB: When the Bush-Cheney administration proposed to replace Social Security with a system of individually accumulated, individually owned, and individually invested accounts, my first thought was that its goal was to take the Social out of Social Security. It took a few minutes longer to realize that it also intended to take the Security out of Social Security.

That attempt failed. In recent years, however, a mixture of public and private policy decisions and impersonal market developments has had the broad effect of shifting many financial risks from established institutions, including even society at large, to individuals who are unable to cope with them in an adequate way. Information may be impossibly difficult for citizens to process; or else the basic information may not be available to individuals or private groups. Sometimes the scale of the possible bad outcomes may be overwhelming. Sometimes the appropriate insurance market cannot function or just does not exist. The result is that individuals and families can be the casualties of situations that once would have been handled by a more centralized and more bearable allocation of risks.

The current turmoil in credit markets and the recession that is sure to follow are likely to drive this trend further. Banks, insurance companies, and other financial institutions have seen too many risks go sour. They will be more determined than ever to push further risks onto those needy borrowers who are too weak and too ignorant to bargain hard. Families, small businesses, and other borrowers of last resort will be under great pressure. ...

He ends with:

The standard argument for leaving all the responsibility and decisions to the individual in the free market is that, in appropriate circumstances, that is the route, and maybe the only practical route, to economic "efficiency." Any interference is a "distortion," and the consequence of such distortion is that the economy produces less than it could. (A more up-to-date version is that messing with the atomistic market tends to cripple "innovation," but we actually know little about how that works, in either direction.)

One standard counterargument is that the circumstances are not always appropriate. The classic example is that private economic activity, for instance, the burning of coal or oil in furnaces or cars, may damage everyone's environment by emitting carbon dioxide and changing the climate. In those cases, and there are many, market prices give the wrong signals; regulation or taxation or subsidization is justified precisely to restore efficiency. ...

But efficiency is not the issue here, at least not the main issue. The transfer of risk from social and private institutions to individuals transfers a burden, mainly from the strong to the weak. That is primarily an issue of equity. It will surely become more urgent in current circumstances, perhaps urgent enough to be seen as a central political issue. Suppose that the best way to relieve that burden is by sharing the risk through universal social insurance. The premium then has to be a tax, a tax on work or enterprise, or some productive activity, and such a tax is a distortion, a source of inefficiency, a true cost to society. What then? I know what Gosselin would say: a society that won't pay a small cost to preserve equitable and fair treatment of, among others, the sick, the old, the unemployed, and the victims of natural disaster is not much of a society. Is that a minority view? [...read more...]

    Posted by on Tuesday, November 4, 2008 at 01:44 AM in Economics, Social Insurance | Permalink  TrackBack (1)  Comments (78)


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    » Insurance or Mass Delusion? from EconLog

    Robert Solow writes, It is plausible that a state-run universal social insurance system would be better able than a private company to detect and prevent exploitation of the system by malingerers. Maybe success would depend on the creation of a... [Read More]

    Tracked on Tuesday, November 04, 2008 at 11:31 AM


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