The state as risk manager

Here are three related things:

1. The government is not implementing the Dilnot report, even though uncertainty about the likelihood and cost of needing care in old age makes it impossible for people to plan their finances sensibly.

2. There's widespread hostility to welfare benefits. A TUC survey (pdf) found that 42% of people think them too high, whilst only 18% think them too low. This suggests there's little demand for insurance against unemployment risk, despite the fact that this risk is high, even in decent economic times.

3. Although a plurality of voters (pdf) thinks fiscal austerity is bad for the economy, only 42% think the spending cuts are too deep and a majority think they are necessary. This suggests the public's appetite for counter-cyclical fiscal policy is smaller than that of many (most?) mainstream macroeconomists.

There's a common theme here. All point to government and/or voters having little desire that the state help provide insurance against big risks that the private sector does not insure us against. This is despite the fact that the correction of market failure is a legitimate function of government - though of course left and right differ on the extent of such failure.

Why is there so little demand? There are three possibilities:

1. People are risk-tolerant, so that - as Robert Lucas suggested (pdf) - the welfare costs of aggregate fluctuations are trivial.In the trade-off between risk and incentives, people prefer a position nearer the latter.

I'm not sure about this. Low stock market participation, and demand for poor-value insurance products such as PPI, extended warranties and (I suspect) pet insurance suggests people are risk-averse in some domains.

2.The government (not just in the UK) doesn't understand that the role of the state is to solve problems of collective action, to do what the private sector cannot do. Politicians prefer to patronize the (poor) obese and waffle about vision and destiny than take genuinely hard choices to improve people's security and well-being.

3. Popular thinking about risk is horribly contaminated by cognitive biases. Wishful thinking stops us appreciating the danger of redundancy or dementia, sheer ignorance causes folk to over-estimate the generosity of welfare benefits, and that damned "good housekeeping" metaphor stops them thinking seriously about macroeconomic policy.

Unless reason (1) is the sole factor - which is improbable - the point here is depressing. There are powerful obstacles to the state being used for what it should be for - a means of pooling risks in the face of market failure. Which, in an odd sense, vindicates the anti-statist position that for every market  failure, there's also a government failure.

Comments

[Anonymous]

I suspect history has been forgotten.

The older generation are more likely to have witnessed the state of affairs that existed pre-NHS, and pre-comprehensive welfare state. For the benefit of younger readers, many working class households were unable to afford medical fees and endured constant pain and illness as a consequence.

The memories of pre-welfare state held by older people may so far have restrained the govt from including the pensioners in their assault on the welfare state. However, as these memories fade, and the size of the pro-welfare state vote falls, then the assault on the welfare state could become total.

[chris]

@ Anonymous. That's a great point. Malmendier and Nagel have shown that memories of bad times in formative years' affects people's investment decisions years later:
http://www.gsb.stanford.edu/news/research/nagel.depression.html
Might a similar thing be true for social attitudes?
The tendency for older folk to be more prone to vote Tory suggests not, but I'm not sure that's a very clean test.

[FromArseToElbow]

I think your mention of PPI is significant. People didn't generally buy this because they were risk-averse, it was mis-sold. There was no rational calculation of risk by consumers, any more than there is in the purchase of extended warranties.

The lack of support for unemployment and old age insurance is the inevitable result of decades in which politicians have not merely failed to advance the merits of collective insurance but have dismissed the capability of the state to act as an efficient provider.

[dBonar]

I think you are missing a possibility.

4. People have a sense of fairness and that causes them to reject solutions that they see are subject to strategic behavior.

You are probably putting that into the cognitive bias category, but I think it should be separate. You may think they are being irrational (biased) in thinking that, but it may just be a different view of what is fair.

[guthrie]

People are rubbish at assessing risk. I thought that was well understood. "It won't happen to me", "It'll turn up red next spin" and so on.

Your point 2 is backed up by the mess that is the UK energy policy.

[chris]

@ dBonar - yes, that's a possible justification for hostility to welfare benefits. But I'm not sure it applies to my other examples.

[Ian Bright]

Bravo, Chris!
Perhaps four other points.

First, those who are more wealthy and have had less exposure to and can potentially cover the costs of long term health care have a louder voice in discussing policy. Or they are unaware of the full costs. This will only change when the upper / middle income groups can no longer afford to pay for the long term health care of their parents.

Second, there is mistrust that the premiums (i.e. taxes or national insurance) required to run the insurance system will be set aside to meet the future costs. It will be squandered in general government revenue.

Third, people fear migrants will plunder the system. Even though this is poppy cock. http://www.ucl.ac.uk/~uctpb21/Cpapers/DustmannFrattiniHalls2010.pdf

Fourth, this reminds me of the observation that often the issues on which economists are most in agreement (consider long term healthcare and Dilnot report and taxes and Mirrlees) are those where there public is more likely to disagree with economists.

Ian Bright

[Blissex]

«more wealthy and have had less exposure to and can potentially cover the costs of long term health care have a louder voice in discussing policy»

Time to get out again the second most important fact in UK politics:

http://www.bbc.co.uk/news/business-19288208
"In 2001, the average price of a house was £121,769 and the average salary was £16,557, according to the National Housing Federation. A decade on, the typical price of a property is 94% higher at £236,518, while average wages are up 29% to £21,330"

This means that in 10 years owners of average UK houses have enjoyed (most often tax-free) capital gains of around £12,000 per year, or a boost of 80% on top of after-tax average earnings, all easily extracted without selling the house thanks to second mortages.

Again: 12,000 pounds tax-free yearly extra income for the average/median voter, for 10 years, every year, nearly doubling their after tax income.

Why do they need the state to pool risks, when they are having the risk-free ride of their life?

For them risk pooling, when they are used to get year after year massive tax free capital gain, means giving some of the windfalls gained by their sagacity in investing in property, to some irrelevant losers,

What the average/median "aspirational", "striver" voter, in particular female, middle and older aged ones, wants is simple: more tax-free capital gains for rentiers, lower wages (or welfare) for everybody else, rather than pointless, wasteful ideas like state insurance.

Does Chris Dillow talk with "middle class" Daily Mail/Daily Telegraph readers?

«This will only change when the upper / middle income groups can no longer afford to pay for the long term health care of their parents.»

Ah this reminds me of the other demand of average/median voters: massive cuts in wages and welfare for younger male workers, to finance massive old age care handouts for "poor old ladies in mansions" in order for those massive tax free capital gains to be left as estates to "aspirational" "striver" heirs.

[Strategist]

A very powerful post by Blissex, marred by a tinge of sexism/misogyny.
Blissex, I think the point you are making about inter-generational and inter-class inequity is too important to muddy by hinting at some kind of war between the sexes.

[Strategist]

Oh, brilliant post, by the way. That goes without saying, perhaps, but worth saying sometimes anyway.

[aragon]

The Housekeeping metaphor. Yes!

"This is a cost, we cannot afford!"
Anon.

Re: Asset Inflation
Yes, debt as income, aren't Ponzi schemes wonderful!

[Keith]

If only we could return to the days when houses were seen as just some where to live! Monopoly board speculation will always lead to financial crisis and homelessness for those excluded from the magic money tree.

[David]

Point 2 on collective action - this makes me think that a liquidity trap can undermine one our fantasies about money, namely, that it regulates the distance between us, that it individualises us. A liquidity trap exposes one of the ways in which we are all interconnected. To a certain mindset talking about money in relation to the collective may seem like a category error. The government's refusal to intervene may expose how extremely phobic they are of collectivism. Like all phobias the impulse is to the flee: it's not that they don't understand the situation, it's that they are refusing to acknowledge it.

[John]

I think you're missing a reason 4. People have been told at length that welfare scroungers are robbing them and that cuts are necessary and, in the absence of the time and expertise to examine these claims, have believed them.

The reasons aren't necessarily wholly or even primarily essential.

[ppi claims]

them and that cuts are necessary and, in the absence of the time and expertise to examine these claims, have believed them.

[Ed - Estate Agent in Croydon]

Cognitively, people are definitely not risk-tolerant - it's more they do not know how to deal with risk!

[mri coil]

Infective in nature means infection. Shouldn't infection be tested by using blood test or other tests? From what I know, a swelling shown on an MRI film just means the cells or tissues are inflammed. We shouldn't be able to tell what causes it, can we? Can a radiologist tell that the swelling is caused by infection by studying the MRI films?