An Insurance Company with an Army

This post by Paul Krugman from a while back highlights the terrible issue we progressives have with framing issues and arguing.  He describes the US government as essentially an insurance company with an army, with the insurance company being the provider of Social Security, Medicare and Medicaid.  His point is that to understand government spending and how government spending will change over the next few decades, everything but these three (and defense) amount to a trivial portion of spending.  Any change in spending will be driven by these four parts of the budget. 

Now his point, regarding spending, is true enough, and I love Paul Krugman, he is a great voice of reason in these unreasoning times, but this, generally speaking, a terrible, terrible framing of what government does.  It is further distressing because, it seems to me, that this description is characteristic of the so called “Obama style of negotiation”, concede to your opponent his major claims and negotiate from there.  At time I defend Obama from criticisms, not because his technique is working, but because this really seems to be the “progressive style of negotiations.”  

How, you ask, is the characterization Krugman uses (I understand that he did not originate it, but he’s the first to use it to my knowledge) a concession to conservatives.  Well, the conservative anti-government argument is that the whole, dreaded expansion of government started with the New Deal, is taking over our lives and the economy and is just a bunch of social spending to help people who, in there opinion, ought to be taking care of themselves, the way people not depending upon these programs do.  They agree that the government is a social insurance company with an army and we will all be better off if we get rid of all but the army. 

But, as I said, this is a horrible description of what the government is and does.  First off, its major insurance program is a massive system of insurance to protect investors against loss, via incorporation.   If one invests in a firm that is incorporated the maximum loss that you will face is the value of your investment.  Effectively, that is a deductable and the rest of the population (or some portion thereof) will take on the remainder of the loss if it is greater than the total value of the business.  Very effective.  Very valuable.

The government is also an essential supplier to the telecommunication and broadcasting industries.  They both need to have a guarantee that if they are transmitting on a give frequency they will face no interference.  The only entity that can supply that guarantee is the government, so it is also the sole supplier.  Both of these industries (and as a consequence much of the advertising industry) depends upon this service.

The government defines and creates a regime of intellectual property via copyright legislation, which is also extremely valuable.  This right to intellectual property is not some natural right that has always, in any sense, existed.  Rather it can be dated to the creation of the British government in the Statute of Queen Anne in 1709.  It is also, clearly, not an ancient right.  Likewise, the government protects trademarks and patents. 

It negotiates treaties with other nations, secures the high seas and property held in other nations.  The security services of the government are extensive and extremely valuable.  The white collar crime unit of the FBI alone provides the financial service industry with protections far more valuable than ADT, Pinkerton Detective Agency and Brinks Armored Car combined.

These services are also an expansion on the original size of government, but they are expansions that largely provide value to those who are, or are becoming, wealthy.  I think it very ill advised for progressives to leave these portions of the government out when discussing what it does.  The government is most certainly not primarily involved in providing social services, those may be its expenses, but not its activity.  Primarily it is involved in providing essential services to business and industry.

My view is that the United States is organized as a kind of shareholder corporation where every citizen has a share, every share is a voting share and shares are not tradable nor transferable.  The major activity of government is as outlined above for which it collects revenue due to the value of what it provides.  The major expenses then are dividends paid to the shareholders.  This is the expense that government has, but not what it does.

Insurance

One factor which is shaping political discourse is that there are a number of issues that are either poorly understood or misrepresented, yet no one is trying to clear them up. I think that, the value and nature of insurance is one of these. Atrios over on Eschaton has done a good presentation on this, but I want to add a few points of my own.

Confusion arises because what you are purchasing when you buy insurance, at least what makes it worthwhile, is intangible. Added to this is the fact that there are, for some, apparently tangible returns to insurance.

When you take out an insurance policy, you are paying someone to take risk off your hands. That is the intangible. Without insurance there is some risk which you are assuming, loss of a car, loss of a house, personal injury, etc. The risk lies in the fact that you don't know what your expenses will be. They are likely small or nothing but could be huge, you just don't know. With insurance the insurer takes on the risk and in this way you know what your expenses will be. It is the security and stability that comes from knowing what your expenses will be that makes insurance valuable. You pay money to get the security and stability. And, like most other things you purchase, there is no expectation of other reward.

So, if you own a $300,000 house and have no insurance you will, most every year, spend nothing. But there is a small chance that you will have to rebuild the whole thing at a cost of $300,000. Rather a lot for most folks. So although the chance of loosing the whole thing is small the cost is so large that the risk is substantial. If, on the other hand, you insure the house with a policy costing $1,000 a year, you know what your expenses will be. The probability of the $300,000 hit is zero and your expenses will be, in any case, about $1,000 a year (there might be deductible, etc.) There is no risk, no uncertainty. Your expenses will probably be higher with insurance than without, but remember you are paying for the security and stability of knowing what the costs will be. That is the value in insurance.

This value should not be underestimated. The stability provided by insurance of all types (private and public) is a huge advantage for the nation as a whole. Stability and security are vital of a strong economy. People are much more willing to invest and spend under stable, secure conditions.

These are points that Democrats need to promote and spread. The kind of cooperation that comes through insurance is a prominent part of the great successes of the Democratic Party, from social security to FDIC. We need to help people understand why we value insurance in the form of SS and health care.