Ergas v Quiggin on risk and social democracy
A while ago, I wrote a piece for the Centre for Policy Development (PDF) , making the case that risk and its management, in various forms, would be the central policy issue of the 21st century. The central idea of the piece was to show how an improved understanding of risk could contribute to a modernised social democratic model.
The piece got a bit of attention, and has now been paid the compliment of a full length reply in Quadrant by Henry Ergas . Ergas raises some good points, and usefully extends the discussion in important respects. Unfortunately, he misses the point of the article fairly thoroughly, to the point where he often seems to be arguing against an imaginary opponent. His repeated claims that the paper is unclear reflect the problems he is having matching my paper to the one he thinks he is reading. The debate isnâ€™t helped by the fact that, although Quadrant is now at least partly online, the idea of hyperlinks is too new for its editor, with the result that most of Ergas readers will probably not have read the piece he is criticising.
Ergas attributes three main points to me, which Iâ€™ll take in reverse order of his presentation, and also in reverse order of distance from what I actually wrote.
FINALLY, WE COME to the third of Quigginâ€™s claimsâ€”that governments should not only fund protection against economic and social risk, but also directly provide the services, such as education, health care and welfare support, through which that protection would be made available.
Quite why Quiggin believes this is never made at all clear.
Indeed, it isnâ€™t, perhaps because, in my, admittedly brief, discussion of this topic, I wrote exactly the opposite. In relation to health care, I wrote
Although there are good grounds for a substantial element of direct public provision, public financing can also support private provision including both private medical services and community run primary health care centres.
By contrast, Ergas repeatedly imputes to me a demand for a public monopoly on provision. (At least, thatâ€™s how I read him, reading me. Perhaps he is objecting to any public provision of health and education services. If so, the burden of proof against him is very strong.)
As regards education, where I donâ€™t discuss public provision at all, Ergas gives a pretty good presentation of cream-skimming arguments. I think these arguments provide good reasons for being dubious about voucher schemes and the like. But if I thought the long-standing policy of providing public finance for private schools should be abolished, I would have said so.
For the record, I believe there is a significant role for both public and private non-profit providers of education at every level. By contrast, I think the hopes that neoliberals placed on for-profit education in the 1990s (Edison schools, University of Phoenix) have proved to be misplaced, except in a few marginal areas. More on this point later perhaps.
Moving on we have
the second of Quigginâ€™s claims: that in taking on all the risks for which he believes governments are the least-cost insurer, governments should make coverage against those risks comprehensive.
Actually, the intro to the paper stated
This does not mean that we should try to protect everyone from every possible risk – overly zealous or misplaced risk management can stifle innovation and creativity. But what we can do is take a long, hard look at what kinds of risk are best managed at an individual, government or business level.
and the word â€˜comprehensiveâ€™ appears nowhere in the article.
Ergas justifies his imputation of the opposite claim to me on the basis that
[Quiggin] does not set out any form of test that would limit the extent of coverage. So here too, the claim is made as an unbounded truth.
As an argumentative tactic, this is quite unsatisfactory. Ergas doesnâ€™t cover all sorts of points relevant to the argument: can I therefore impute to him whatever extreme position I want?
Ergasâ€™ presentation is unfortunate, because he goes on to make some useful points about the role of copayments and conceptually similar devices in limiting moral hazard. As he says, these areas have hardly been unexplored, and the fact that I did not recapitulate the literature on the topic doesnâ€™t mean that Iâ€™m unaware of it.
The first and most useful section of Ergas paper applies the standard economic distinctions between adverse selection and moral hazard to the question of when there is a role for government in risk aversion. Ergas argues that I have overstated the appropriate role of government but complains again, about the fact that I have been â€˜unclearâ€™ in making my case.
The reason for Ergas dissatisfaction is that this was my main concern in this paper was not, as he appears to assume, to rehearse the long-running debate between social democrats and neoliberals about these issues. Rather the paper was primarily aimed at convincing those sympathetic to social democracy that the best way to think about a whole range of public policy issues, including income redistribution, was in terms of risk and risk management.
I donâ€™t want to put words in Ergasâ€™ mouth but it seems to me he implicitly accepts my primary claim, and wants to carry on to the next stage of debate about the range of areas in which government action to spread risk is likely to outperform the private market. At least in principle, I donâ€™t have much disagreement with his suggested set of conditions, namely that:
In particular, the benefits of government action are only likely to exceed the costs in three sets of cases: where governments are uniquely well-placed to determine whether an insurable event has occurred because they can combine that task with some other part of their ordinary operation (as in HECS); where the risks involved are otherwise uninsurable because they lack the requisite degree of uncertainty (as in recurring mental illness); or where the risks are of such a scale, and so difficult to predict statistically, that even the widest and deepest capital markets cannot pool them efficiently (as in terrorism insurance).
I suspect that we would disagree about the scope for intervention covered by these cases. My prime example of income redistribution fits under the category of â€˜otherwise uninsurableâ€™ since a lot of this risk is determined very early in life. And I donâ€™t think mental health problems are particularly different from health problems in general as regards the difficulties they present for private financing. In the â€˜too big for markets aloneâ€™ category, climate change is a standout. Taking these examples, along with education, we have a pretty good prima facie case for both the postwar welfare state and the expansion of public concern, from the 1960s onwards, to cover environmental issues of which climate change is the biggest.
Although we are still talking past each other to some extent, Iâ€™m encouraged that Ergas shares my concern about risk allocation and is willing to frame the core debates about public policy in this way.