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.

Incorporation is Social Insurance

Strictly speaking the title is not true. A well accepted definition of social insurance can be found here at Wikipedia, and incorporation would not quite meet the definition. However, I will argue that the incorporation is essentially a type of insurance supplied by the government, and therefore should be considered the same sort of thing as social insurance. The reason for making the connection is the right wing's supposed horror at the existence of social insurance while at the same time adoring incorporation.

When a business is incorporated only the assets of the business are subject to being seized to pay off creditors or to satisfy other debt and payments. But the debts and payments still exist, they are effectively paid off by some other members of society. Generally they are not paid off by the government itself, rather by various members of society who get caught by the falling company. The various assets of the owners of the company are not subject to paying off the debts, with the exception of the money invested in the corporation. Essentially, if you are an owner or part-owner of a corporation, due the intervention of the government you are insured against the failure of the company, with your investment being the deductible.

While not strictly "social insurance" according to the Wikipedia definition, it is, in substance, a government run insurance program.

My point is to note that this then is really the first major government insurance program created by the U.S. government, far predating Social Security, unemployment insurance, or any of the other bugbears of conservative angst. The implication of this observation is that the main dispute between conservatives and liberals is not whether the government should provide social insurance, but rather whether it should be supplied only to a select group of privileged individuals. The liberal position is that government is well suited to provide insurance like incorporation, as well as the others, that are valuable to people throughout the entire income scale. The conservative position is that it should be reserved only for a special, privileged portion of society. I am not a conservative.

Democrats Long Term

The Reality-Based Community: The Long Term

Go read what Steven Teles has to say, he makes a very important point and does it well. The Democrats need to focus on the importance of social insurance as a means of reducing risk among the general populace. I would go further than what he said. I believe that the essential function of government is to do exactly this, reduce risk among the general populace by pooling resources, that creating a kind of insurance. National Defense and law enforcement are both functions in which risk (that is to say cost) is spread among the population primarily to insure the security of larger concentrations of property and wealth. This is appropriately <i>the</i> essential function of government. The Democrats have been, and need to continue to, push policies that expand that role toward securing the bulk of the population against the greatest risks they face, health problems and economic dislocation. My point is that these policies are in no way an expansion of government into new areas where government does not belong, but rather an expansion of the proper role of government to provide its advantages to a greater portion of the population. All but the highest income Americans (really those with very large property holdings) pay inordinately to support the functions of government, those people deserve to enjoy those benefits that government provides.

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Rational economic choice in the face of risk

Kevin Drum has a post that's a few days old regarding what is known as the equity premium. Brad DeLong discussed it too. Over the past century or so stocks have consistently returned higher yields than do bonds. This does not mesh with standard economic theory because if stocks are in fact a better deal that should drive up their price with respect to bonds until the two instruments are equal. The idea being beaten around lately is that the difference is because of a higher perceived risk in stocks. In short people are not making the rational choice because they perceive stocks to be relatively riskier than bonds.

This suggests to me that people overcompensate for risk. This in turn implies that it is very valuable for a nation, for an economy to minimize risk and to maximize stability. That is the benefit for minimizing risk is greater than can be expected based on the theory that people are making strictly rational choices.

This conclusion supports one of my strong reasons for supporting the federal programs that constitute our social safety net. I'm talking here about Social Security, Medicare, Medicaid, FDIC, unemployment insurance and the like. It is my opinion that maximizing economic stability and minimizing risk is primarily what the social safety net does.