Mitt Romney on privatization, devolution to the states, and insurance — October 28, 2012

Mitt Romney on privatization, devolution to the states, and insurance

A fellow with whom I used to work tweeted today,

> Watch Mitt Romney say federal disaster relief for tornado and flood victims is “immoral” http://youtu.be/OhXyJeKaj8E

That’s not actually what Romney says in the linked video; Judd is being disingenuous. But I think Romney is wrong in there for some reasons that bear elucidating.

First he says that we need to move programs from the Federal government to the states or to the private sector when possible. He goes on to say that racking up giant debts and passing them on to our kids is immoral, as though the debt piece were connected with the privatization/devolution-to-the-states (just “privatization” from here on in) piece.

The only way this argument makes sense is if you believe that the private sector or state governments are likely to do things more efficiently than the Federal government. If you don’t believe that they will, and if you believe that the thing the Federal government is doing needs to be done — for instance, if you believe that *someone* needs to be handling disaster relief — then transferring this job to the states is just shifting a bucket of money from one place to the other. If states are no more efficient than the Feds at this, then you’re replacing one source of debt (the Federal government’s) with another. Most states are required to maintain balanced budgets, so shifting this burden to the states would result in an immediate tax increase for all state taxpayers.

Privatizing disaster relief has its own problems. If we’re lucky, it would be privatized such that everyone who needed it could afford it. If we as a society believe that people shouldn’t be devastated when natural disasters strike, then we’d probably have to impose some kind of regulation to ensure that everyone who wants it can get it. This starts to look like the act of pantomime that a friend has done for many years: “capitalism picks its nose like this” (right arm reached around behind the left side of the head to pick the left nostril). Rather than simply have the Federal government do what needs doing, we privatize it and then impose a lot of regulations to achieve the outcome that we as a society want. Seems wasteful. Though by all means: if it happens that society can achieve what it wants to achieve using fewer resources in the private sector than it would through government — *including* the costs of the necessary regulation, and including all the efforts that private industry will then go through to evade regulation and get a leg up on its regulated competitors — then that’s a strong argument for privatizing.

Another direction this disaster-relief argument might go is to privatize disaster *insurance*, rather than disaster *relief*. I don’t know how disaster insurance works offhand. With insurance in general, we want to prevent two bad outcomes: __adverse selection__ (only the riskiest cases bother to get insured) and __moral hazard__ (the insured take more socially harmful risks than the uninsured). The way to prevent adverse selection is to require that everyone get insurance; that way the riskiest cases and the least-risky cases are buying in together, and the market doesn’t completely unravel. So if we want flood insurance to work at all, we’re going to have to require everyone to carry it, for some value of ‘everyone’ (maybe only ‘everyone’ in flood-prone areas, for instance). So again, government regulation to make the market work properly seems unavoidable.

*Federal*-government involvement seems unavoidable, in particular, because you want to spread risk over as many people as possible. This is one of the virtues of living in a country as large as the United States: when one group of flood-insurance beneficiaries is cashing in because, say, there’s flooding in the Southeast, another group in the Midwest is doing just fine, and the insurer doesn’t go broke. So having separate state-by-state insurers doesn’t seem like a stable equilibrium: risks are too concentrated in one state to make this work, and we’d likely end up with national insurers. These could either be private national insurers or the government itself. If it were a private insurer, it would have to be regulated: the insurer would have to hold onto enough of a cash buffer so that it wouldn’t be bankrupted by the “storm of the century”. And we as a society want insurance to really be there when it’s needed, so there would be a government backstop of some sort to make beneficiaries whole in case the insurer goes out of business. In exchange for providing this backstop, insurers would have to subject their books to regular auditing, would have to hold sufficient reserves, etc. Again, government involvement is unavoidable.

As for the moral-hazard piece: maybe there’s an argument that people with insurance are more likely to build on flood plains, and maybe we want to discourage this. One way the private market might do this is by setting the premium on flood-prone homes very high. There would then be at least a couple possible responses: either people continue building on those spots, even though they’re not insured, or they don’t build there. Without any regulation at all, maybe a lot of people would continue planting homes on uninsurable spots; when they get wiped out by floods, they’re bankrupted, and maybe we as a society are okay with that. Alternately, maybe we just forbid people from building on spots that no one is willing to insure; the only way to do this is through law or regulation, which — again — means that government involvement is unavoidable.

I’ll give the benefit of the doubt to Romney on this: it’s hard to describe real-world privatization in a 30-second soundbite. Here’s my 30-second soundbite: if we have reason to believe that something is better done by the states or by private industry, by all means let’s consider privatizing it. But privatization is not a magic potion that makes industries efficient — particularly when you consider the government involvement that necessarily has to accompany a lot of industries. Regulation is there for a reason; it’s because we as a society believe that certain things need to be accomplished, and for whatever reason we’ve left those things up to the private market.

Of course, from there you could also ask, “Well, do we actually need to do these things?” Do we actually need flood insurance or disaster relief? The really infuriating thing about watching Romney and his Republican brethren during this interminable election has been watching them try to walk the line: on one side, they want to say that principles of good government require us to drop things like universal health insurance (Ron Paul’s uncomfortable answer when asked whether to let an uninsured patient die) and flood insurance; but on the other side, they know that the public finds these positions morally vile, which they are. Which is why the Republican approach has been to answer a different question: Romney lectures us on the evils of Federal debt rather than say whether the Federal government has a role to play in disaster relief, and Ron Paul just says that the patient should exercise personal responsibility.

I strongly suspect, without having gathered the data on this, that people are liberals when they’re not asked to self-identify that way. Ask people the same question that Wolf Blitzer asked Ron Paul: should society let him die? I suspect most people would say, no, of course not. But in return for not allowing him to die, and for picking up the tab when he falls ill, we should expect him to pay for his own insurance while he’s healthy. And what if he can’t afford to pay that insurance? Should we help him out, in exchange for his subsidizing poorer folks when he gets back on his feet?

Whether or not most people would answer yes to that, that’s the question. The debate over these big moral questions has been hidden behind a technocratic or legal shroud of late. Maybe there was actually an urgent legal question about whether the government can ‘compel you to buy broccoli’, and whether that is meaningfully different from just giving you broccoli and including that in your tax bill. I don’t think so, though. The real root of the issue is whether you believe that society has a responsibility to protect its weakest members. Having decided that the answer is yes, we can set about deciding the best way to achieve that goal. When Republicans make a stink about requiring people to buy broccoli, they’re actually saying that the answer is no, and that society needn’t serve that protective role. They should be honest and just say so.