Reflections of a Conservative, Lefty, Right Wing, Do-Nothing, Liberal, Moderate, Tea-Partying Privatizer

Posted by Jeffrey Brown on Nov 29, 2010

Filed Under (Health Care, Retirement Policy, U.S. Fiscal Policy)

In American politics, individuals who advocate a move in the direction of more limited government, greater reliance on market force, and who emphasize the role of individual choice are often labeled as conservatives, neo-cons, right-wingers, privatizers, or, in the last election cycle, tea partiers. Those who advocate a greater government role, restrictions on individual choice, and more regulation are labeled as liberals, progressives, left-wingers, and socialists.

Lately, however, I have been thinking about how meaningless some of these phrases can be when describing specific policies reforms relative to the status quo. The reason is that U.S. economic policy as a whole lacks ideological consistency. This reflects, in part, the fact that our existing set of laws and regulations are often creatures of the time period in which they were passed.

As an example, I want to focus on a broad issue on which I have spent much of my professional life as a researcher and policy adviser. Namely, how we as a nation choose to handle risk. In particular, how we allocate risk – and insurance for risks – across the public and private sectors.

If you think about it, the allocation of risk is one of the primary roles of government in the modern era. Indeed, I once heard the U.S. government described as “a very large insurance company with an army.” This is not a bad description. The U.S. government runs the world’s largest life- annuity and disability programs (Social Security), some of the largest health insurance programs (e.g., Medicare, Medicaid, the VA system), a pension default insurance program (the PBGC), a deposit insurance program (the FDIC), an unemployment insurance program, a crop insurance program, a terrorism risk insurance program, and many more.

There is tremendous scope for reasonable and intelligent debate about the appropriate role of government when it comes to intervening in private insurance markets. I do not pretend to have the only “correct” view – how could I, when some of the economists I most respect in this world have come to different conclusions than I have?

But I do believe that I have developed a world-view about what constitutes a sensible and appropriate division of responsibility between the public and private markets that is informed by economic theory, empirical evidence, a dose of experience in how the government operates, and my own ideological predisposition towards individual freedom over government control. The world view that I have developed is one that believes that when it comes to the allocation of risk, we should find the least intrusive role possible for the government that is consistent with providing citizens with adequate opportunities for insuring against risks when doing so enhances societal well-being.

Yes, that is a mouthful. So let me briefly explain. I first note, however, that you need not agree with this world-view to agree with the main point of this blog. But allow me to – very briefly – explain my rationale. Basically, for nearly any economic policy, I go through the following thought process:

1. Can the private market achieve an efficient outcome without government intervention? Here, I define efficiency is the usual economist way of “1st best” outcome that would be generated by Adam Smith’s ideal of a perfectly competitive market without market failures. If the answer is “yes” – as I feel is typically the case with most markets for goods and services, then my belief is that the government should stay out of the way and let markets work their magic.

2. If the answer to question 1 is “no” because of the existence of a market failure (such as adverse selection or moral hazard in insurance markets, the existence of externalities, etc.), then I ask whether the government is capable of over-coming the market failure. Importantly, the answer is often “no.” In many cases, the government faces the same problem as private markets. For example, if there is moral hazard in insurance markets (e.g., if people behave in inefficiently more risky ways when they are insured), then there is very little the government can do about it. The answer is sometimes also “no” because of “government failure,” that is, a political process that leads to even good ideas being poorly implemented due to policy being influenced by special interests or policies being poorly implemented by an inefficient bureaucracy. Whatever the reason, if the answer to this question is “no,” then I will again favor the private market solution, even with its flaws.

3. In the relatively small subset of cases where the private market does not work, where the government has the ability to overcome the market failure, and where the government solution is likely to be designed and implemented in a sensible manner, then I am entirely willing to back such a policy. Even then, however, I will favor the most limited form of government intervention necessary to overcome the market failure. Thus, for example, I have no problem mandating that drivers carry collision insurance because a government mandate can overcome the adverse selection problem that might cripple a purely voluntary market.

Because my approach starts with a belief in the power of free markets and a healthy dose of skepticism about the political process and the skills of bureaucracies, my view is definitely “right-of-center.” But it is clearly not an unabashed “free markets all the time” view because it does recognize a need for limited government intervention in some cases. You may not agree with this view – but it is an ideologically and economically coherent and internally-consistent approach to economic policy.

But now, let us return to the how my views would be labeled by the political process in America today. In practice, application of my world-view to policy means that I often favor having the government encourage insurance through automatic enrollment or even a mandate (in order to overcome adverse selection), but then allowing competitive private market to actually provide the insurance.

But the U.S. is all over the map when it comes to how we treat insurance programs. Consider two dimensions of the problem:
1. Is insurance mandatory or voluntary?
2. Is insurance provided by the government or the private sector?

There are 4 possible combinations of answers, and we have programs in each. Here are a few examples:

Voluntary/Private – dental insurance, 401(k) plans
Voluntary/government – long-term care under the new CLASS Act
Mandatory/private – automobile insurance
Mandatory/government – Social Security, Medicare, PBGC, FDIC

My view is that we ought to have lots of programs in the mandatory/private, when in fact this is one of the least used approaches. What is interesting, however, is how advocating movement towards mandatory/private is viewed relative to the status quo. Over the years I have publicly advocated the use of personal accounts as a supplement or partial replacement for Social Security, and I would be perfectly happy to make them mandatory (or at least the default option). I have also publicly advocated replacing the PBGC with mandatory private pension insurance. I’d also like to see our public sector defined benefit plans reformed so that they have a defined contribution component. In all of these cases, I am advocating a move from mandatory/public to mandatory/private. As a result, I have been labeled a “conservative” or “neocon,” a “right-winger” and a “privatizer.”

In recent years I have also advocated that we consider making annuities the default distribution option from 401(k) plans, and in a blog in October I suggested that we considering mandating that people buy long-term care insurance in order to eliminate dependence on the inefficient Medicaid program. In these cases, where I am trying to move from voluntary/private to mandatory/private, some people labeled me a “lefty” and “liberal.”

Now, let’s take my view about automobile insurance. In essence, I think we have a reasonable approach – namely, that we mandate coverage but allow private insurance providers to provide it. This has not been a major policy issue in recent years. So I can be fairly characterized as having a “do nothing” or “status quo” approach to this policy issue.

At the other extreme, I cannot help but point out that the recent CLASS Act is precisely the opposite of what I would design. It is voluntary, so fails to overcome the main problem in the market but is provided by the government, despite the fact that the private market is fully capable of providing it! Here I just get labeled as a critic.

So, where does this leave me? Am I a right-wing, small government, neo-con intent on privatizing major government programs? Or am I a left-wing advocated who wants to take away individual choice? Or am I a defender of the status quo? Or am I just a critic of government policies?

The answer to all of these questions is “yes.” But this does not mean that I am a flip-flopper or ideologically inconsistent. To the contrary, it means that I am applying an ideologically consistent world-view to a wildly inconsistent set of existing public policies.

At the end of the day, I believe that much of our political rhetoric has become vacuous, school-yard name-calling that does little to illuminate our policy discussions. I find it frustrating – even sad – that we so often mindlessly label and name-call instead of engaging in well-reasoned, analytical discussions of important policy issues.

6 Responses to “Reflections of a Conservative, Lefty, Right Wing, Do-Nothing, Liberal, Moderate, Tea-Partying Privatizer”

  • Don Fullerton says:

    That’s what you get for being near the center; you are then right of some lefties, and left of some righties!

  • Tina H says:

    I find it very interesting how you laid out the examples for Voluntary/Private, Voluntary/government, mandatory/private, and Mandatory/government. In today’s economy, I firmly believe that Jean Baptiste Colbert’s concept of laissez faire, or basically “government hands off,” is impossible. Just look at the several of examples you stated of government run programs. At the same time, I agree with you in the mandatory/private seems most effective, as mandatory protection ensures a bigger pool of resources, and the private sector running it keeps it running more competitively and effectively. The government tends to make sacrifices to cater to people’s benefits more than the private sector, I believe. People should definitely stop lingering on the unimportant (labels) and start fixing the flawed insurance programs of the nation!

  • Disen C says:

    I totally agree with you on the fact that there´s no single ideology that can be applied to currently inconsistent reality.
    We often find ourselves torn between an economist´s view and that of a Marxist. The fact of the matter is, both views have merit that cannot coexist. Therefore I think the most important job of all for us is to find the right balance between those two extremes and try to reconcile the conflict that may arise from the promotion of politically ambiguous ideas.

  • HP says:

    I am a proponent of mandatory/private, but then again, I have always considered myself a “conservative privatizer”. As we have seen with the automobile industry, competition among providers has lead to more options and price efficiency. Private businesses also seem to be more concerned and proactive with remaining profitable, which we can’t say about the government with the $4 trillion deficit. In the past we’ve discussed the option of having a Social Security-like program through private insurance; individuals would choose to pay into the program monthly and then receive an annuity upon retirement. Unfortunately this program is really only needed because the mandatory/government program of Social Security is being poorly managed. The government is able to hold private businesses to standards that it fails to hold itself to.

  • John Keady says:

    Isn’t it a great time in our country when moderates with good ideas are criticized by parties rather than being seen as a beacon for the change that America truly craves.

    All politics aside, I found your worldview to be very consistent with my own. In theory, however, I have often found myself in favor of programs like Social Security and the PBGC. In practice, I find these programs to be utter messes. Even though they are wonderful ideas, they have been squashed by the political and special interests embedded in our inept government. I had never really considered moving these to a mandatory/private system, though, and I think that it would be a fantastic idea to do so. It would provide the security that the citizens retirement funds deserve, and the competent, efficient management that only the private sector can provide.

    Just out of curiosity, what is your ideological view of ObamaCare?

  • Rohan Sahasrabudhe says:

    The problem with having a lot of problems in the mandatory-private sector is the lack of “full faith and credit”. Take the case of automobile insurance. Illinois is an exception due to it being a free market. In many states, any rate increases but be approved by the state. In times of economic peril, private companies are sometimes unable to provide the same level of liquidity due to regulations and the higher cost of debt in the private sector. This is one of the reasons that catastrophe insurance is generally a government program.

    If other programs were moved to the private sector, the existence of default risk would require either a larger capital or riskier investments in order to provide sufficient cash flows.