Problems with Expansion of Social Security, Medicare

In a previous post on a "New New Deal" for globalization I argued why this should be approached with a good deal of circumspection. The lessons of the 20th century, and the New Deal especially, may not be what they seem. Frankly, I would argue that the New Deal was appropriate in its time and national social insurance programs should probably now be considered only as the last line of defense against economic insecurity and non-systemic risk. This is contrary to what many pro-government advocates have been proposing for the twin problems of retirement and health care funding through employer mandates under centralized government control. Expanding such programs as Social Security and Medicare are probably the wrong way to go for the following reasons:

First, do we really want to treat retirement and health care as social goods? It seems to me these are private goods and demand can be mostly fulfilled by functioning, competitive markets. Our modern financial technology and the scale and breadth of financial markets is such that many of the reasons for socializing risk through government programs no longer apply. Want to insure against a weak North American economy? Buy an Asian mutual fund. Financial markets together with IT offers all kinds of solutions to manage and hedge risks across time and space. There is a role for government here, but it is not the provision of these goods—it’s to insure functioning, competitive asset markets and promote the completeness of private insurance markets.

Second, there are all sorts of disadvantages to national social insurance programs that should weigh in the debate:

1. Moral hazard – Moral hazard is a structural problem of insurance pooling where the economic incentives encourage the risky behavior insurance is attempting to manage. Does Social Security reduce private savings and encourage a “live for the day” mentality? Does easy or cheap medical care encourage people to abuse their health?

2. Regulatory costs – These include not only the excessive monitoring costs to counteract moral hazard, but also the introduction of all kinds of inefficient bureaucratic incentives. Think USPS. Regulatory promises, such as those that will supposedly police our financial markets and health providers, cannot manage the moral hazard problem. Moral hazard is a structural problem while regulatory oversight targets implementation. If we have rampant moral hazard, regulatory oversight can’t save us, but policy designs that reduce moral hazard mitigate the demand for regulatory oversight. Let’s get the cart before the horse here.

3. One-size-fits-all government policies – It seems to me that one sign of progress in a democratic capitalist society is greater freedom of choice. The demand for health care and pension plans is as varied as anything else in a market economy and I fail to see how universal mandatory policies will enhance efficiency or greater satisfaction. The added value of markets for individual choice is that costs and benefits are internalized and thus align with the desired economic incentives. It’s an age-old financial truth that if it’s your money, you tend to be more careful with it.

4. The imprisonment of employment – Who wants to be married to their job or corporation just for reasons of benefits? This is what occurs too often now – people who would be inclined to be entrepreneurs or career risk-takers fear losing their security. We should remember that the reason to enhance economic security is so that people can take on more socially desired risks, like innovation and creative endeavors.

5. Increasing direct labor costs in a competitive world economy – What good does it do to reduce business competitiveness in a global economy? The bottom line is that health care and retirement security are goods we must earn, individually and collectively. They cannot be granted by government fiat. The question is what policy design will maximize and distribute national wealth so we can afford all these necessary benefits?

6. Socializing a private good – Why? I would prefer policy that rewards my propensity to save and my desire to take good care of my own health. Then I can buy reasonably priced private insurance to cover unforeseen contingencies and catastrophic illness. Our government policies in many cases mitigate against private solutions to economic security; we should start by correcting these. How about rewarding savings and asset accumulation? How about health insurance that rewards diet and exercise?

Weighing the costs and benefits of big government solutions against alternatives makes me think we should be figuring out how to get out of the way of creative private solutions to our policy dilemmas. Government can then perhaps play the much more circumscribed role of being the umpire on the field, rather than trying to field the team and then make all the rules.