« Climate Change and Hurricane Sandy | Main | The Science of New Monetarist Economics »

Wednesday, October 31, 2012

'The Insurer Of Last Resort'

Paul Krugman:

Disasters and Politics: ...let me just take a moment to flag an issue others have been writing about: the weird Republican obsession with killing FEMA. Kevin Drum has the goods: they just keep doing it. George Bush the elder turned the agency into a dumping ground for hacks, with bad results; Clinton revived the agency; Bush the younger ruined it again; Obama revived it again; and Romney — with everyone still remembering Brownie and Katrina! — said that he wants to block-grant and privatize it. (And as far as I can tell, even TV news isn’t letting him Etch-A-Sketch the comment away).
There’s something pathological here. It’s really hard to think of a public service less likely to be suitable for privatization, and given the massive inequality of impacts by state, it really really isn’t block-grantable. Does the right somehow imagine that only Those People need disaster relief? Is the whole idea of helping people as opposed to hurting them just anathema?
It’s a bit of a mystery, calling more for psychological inquiry than policy analysis. But something is going on here.

Some history from Tod Kelly (via):

One of the hard lessons one learns in risk management is that no one funds for catastrophic losses unless they are required by an outside agency to do so. In many cases this is because it is not feasible to do so; but even in those cases where it is feasible, no one does.

Were FEMA to be dismantled, for example, there would be no financial resources from which to quickly rebuild from disasters like Hurricane Sandy. Conservatives might argue that private insurers could provide such protection, and this is certainly correct – on paper. However, one of the axioms from my industry is that there is no such thing as an uninsurable risk, there are just risks people aren’t willing to pay enough premium for.

This is absolutely true for natural disasters. If your insurance provider offered you or your business coverage that would protect you from disasters like Sandy, you would not be willing to pay the premium required. You might disagree with that statement, but history shows that it is true. In fact, it is almost universally true. Governmental disaster insurance schemes didn’t appear magically in a vacuum; they were created because prior no one was willing to pay enough money in premiums to allow insurance companies to properly fund for them, and as a result the inevitable losses were uncovered.

That's true of government social insurance sprograms as well. They appeared for a reason, and generally the reason is the inability of the private market to provide adequate protection due to market failures or other causes. Pretending that those problems no longer exist -- that privatization would somehow be different this time -- is wishful thinking.

    Posted by on Wednesday, October 31, 2012 at 10:17 AM in Economics, Market Failure, Social Insurance | Permalink  Comments (24)


    Feed You can follow this conversation by subscribing to the comment feed for this post.