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 isn’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 I’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 Quiggin’s claims—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 isn’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, that’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 don’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 Quiggin’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 ‘comprehensive’ 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 doesn’t cover all sorts of points relevant to the argument: can I therefore impute to him whatever extreme position I want?

Ergas’ 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 doesn’t mean that I’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 ‘unclear’ 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 don’t want to put words in Ergas’ 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 don’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 ‘otherwise uninsurable’ since a lot of this risk is determined very early in life. And I don’t think mental health problems are particularly different from health problems in general as regards the difficulties they present for private financing. In the ‘too big for markets alone’ 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, I’m encouraged that Ergas shares my concern about risk allocation and is willing to frame the core debates about public policy in this way.

34 thoughts on “Ergas v Quiggin on risk and social democracy

  1. As I recall, Capitol Hill was just a bunch of trees before all those architects, engineers and tradeys made a govt bundle out of it. I wonder whether they squandered it all on Earth Sanctuary Ltd shares or the relentless march of Tuscan MvMansions. Still, if it was the latter, at least they won’t be bringing the shopping home in poly shopping bags soon. They’ll probably be free doggy doo bags.

  2. gerard

    Capital is the direct beneficiary of most public expenditure on infrastructure, law enforcement, R&D.

    And what is the source of that “public expecnditure?” Money doesn’t grow on trees, you know. 😉

  3. Wouldn’t efficient use of public money be mostly about management? Even if there are so many instances of the public purse being rorted, the application of good systems of management ought to be able to prevent much of it – contractual arrangements that don’t allow for endless cost overuns for example. Aren’t such arrangements already in place or do gov’ts continue to go on allowing and paying for them because the company directors or union affiliated workforce are members in good standing of the current political party or mates of the current power brokers and/or are big contributors to party fundraisers? I’m not convinced it’s intrinsic, just a matter of “how things are done” tradition that allow public money to be squandered.

  4. In Johns paper he said:-

    Social democracy is built on the idea that as members of a society, we have an obligation
    to look out for each other. We also have a legitimate expectation of help from society when
    we are in need of it. In an increasingly diverse society, this kind of social solidarity cannot
    be assumed to exist automatically.

    This seems to be saying in the one breath that we ought to be social democrats but increasingly we are not.

    The idea that we are “obligated” to look out for eachother needs serious qualification. And who gets to do all this obligating anyway?

    I suppose that discussion is difficult when the disagreement is about core axioms.

  5. I agree that one of the problems with Quiggin’s paper is that it is too full of broad generalisations and assertions, while it is short on specific arguments, logic and evidence. Consequently, one has to read between the lines to work out specificly what he is arguing for. I guess if you avoid making more specific detailed arguments it is easy to avoid being proved wrong on any point.

    The main flaw in the paper is that it focuses solely on the benefits of government insurance, while ignoring the costs. The message of Quiggin’s paper seems to be that we can simply rely on governments to protect and provide for people with no economic or social downside. This is socialist fantasy parading as sound economics. The main job of economists is to identify the costs and benefits of policies, so that people can make an informed choice about policies. Simply identifying benefits and ignoring costs is the exact opposite of sound economics.

  6. #27

    Money doesn’t grow on trees – tell that to “deficits don’t matter” President Cheney. As far as I know the source of public expenditure is either taxes or debt (foreign or domestic bond-buyers). Taxes come out of income (wages and salaries), consumption (VAT/GST) or profits – and the composition of the various tax sources will determine to what extent government spending can be considered ‘redistributive’. The profits of big business are often taxed at a disproportionately low rate relative to the benefits that they receive from government expenditure – indeed Business welfare often comes in the form of tax breaks that they demand from the bought-and-paid for political class in return for investing in a given place (e.g. marginal seats). This does not necessarily mean that the money is purely being ‘squandered’, as the investment often does generate jobs and wealth, however it does mean that the skewed distribution of wealth in society is not always made better by government spending, but can just as easily be reinforced or worsened. In the decidedly non-social democratic rightwing paradise of the United States of America this takes place on a scale that is pure theft, since the massive and ever-increasing government expenditure is paid for by public debt. It is essentially a redistribution of wealth from the public at large to the overclass. It was a fraud when Reagan did it (Reagan’s budget director David Stockman admitted as much) and now it is an even more transparent fraud.

  7. “The profits of big business are often taxed at a disproportionately low rate relative to the benefits that they receive from government expenditure.”
    This is a remarkable assertion. Are you really suggesting that corporations receive more government expenditure than what they pay in tax? Is there any evidence to support this? If you compare how much companies contribute through corporate taxes (and payroll tax) relative to direct expenditure on business, big business would only get a small amount back. This doesn’t even consider that businesses employ most people who in turn pay income tax, while they also collect most GST, excise, etc. If large businesses were to fold the collection of these taxes would become much more difficult and the revenue base would also decline.

    It is true that some businesses engage in rent-seeking activity such as lobbying for tax breaks, restricting competition etc. in return for investment in politically influential areas. But the cost of this is usually borne primarily by other more efficient businesses, not by the poor or average workers. In any event, all this proves is that governments are less capable of managing resources due to political pressures. If taxes and regulations were reduced it would also reduce the economic incentives for this sort of rent-seeking activity.

    As for the United States, the problems with the budget deficit are the result of excessive government spending rather than the wealthy paying less tax. Since the Bush administration started cutting taxes in 2001 government revenues have actually increased substantially (including income tax from high income earners). Yet spending has increased more dramatically. I believe that between 2001 and 2006 federal expenditures increased by 45%. The evidence shows overwhelmingly that it is excessive government spending, rather than tax breaks for the wealthy, that have caused the budget problems.

    It also should be noted that the US federal tax system is more progressive in practice than most other countries. I believe that the top 1% of income earners pay around 37% of federal income taxes, while the bottom 50% of earners pay just 4%. Also, the wealthiest few percent of the population pay the bulk of federal estate taxes. Because there is no national VAT or flat consumption tax, the overall tax system is far more progressive. Due to things like tax breaks for dependent children, many low and middle-income households pay little or no tax. This is not exactly a “decidedly non-social democratic rightwing paradise”.
    Even though the US has less public expenditure than many other developed countries, the cost of funding that expenditure is more strongly targetted towards the more affluent.

  8. Thanks for your comments Nick K, I’ll be the first to admit that my understanding of economics is rather half-baked and without formal training beyond first year undergrad, so I appreciate any informative input. As regards the remarkable assertion that you quoted, I didn’t mean direct subsidies to corporations in general (although there are some such cases especially in the politically connected high-tech defense industries to which about half of the US federal budget is directed), but simply the fact that most business that takes place depends on the physical, legal, social infrastructure that government provides. without government involvement, long-term investment in technological research would be too risky and costly, and critical industries can usually expect government assistance if they are ever in serious trouble like the Northern Rock bailout for example. I see big business and government as being dependent upon each other, not working at cross purposes as per the Ayn Rand worldview. every country with a record of successful industrial development has had an interventionist government that protected and subsidized critical infant industries, and famously pro-business administrations such as Reagan and now Bush never actually reduced the overall scale of government involvement in the economy, just redirected its benefits. With regard to America, it is not surprising that the rich pay a greater overall share of taxes and the poor a lesser overall share than in other countries that do not have such stark inequalities of wealth. the US poor also ‘pay’ in terms of the lack of medical coverage (which kills thousands every year) and welfare benefits that citizens of other industrialized countries take for granted – this is what I mean by “decidedly non-social democratic”. my point is that this lack of social-democratic programs is not a result of the budgetary discipline that is supposedly so important to the Rightwing; there is no lack of government spending in the US – it is just being spent on other things (most notably an extremely wasteful war), things that don’t benefit the poor but often do benefit big business. Goverment spending far exceeds government revenue, and whether this can be blamed on too much spending or not enough revenue is a rather fine distinction I would think. US government revenue and spending have both been consistently increasing in absolute terms over the past six decades (as with most other industrialized countries), but as a share of GDP they have rather consistently hovered around 20%. The sharpest dip in government revenues during this long period came during the first few years of Bush II’s term when he gifted the top 1% with huge tax cuts while sharply ramping up government spending – leading to a huge expansion of the deficit (although not as big as Reagan’s relative to GDP). I’d believe that government revenue is up on what it was since that time, which was in the middle of a recession, at least if you are talking in absolute terms rather than relative to GDP, but that doesn’t really prove that the top 1%’s tax cuts were good policy, especially considering the enormous extent of the spending increases. The end result is a redistribution of national wealth in favor of the rich. I don’t know what the top 1% are doing with their tax-cut money (buying government bonds is probably one thing) but I would suspect it’s mostly being put into financial speculation and bloated hedge funds (contributing to the current instability) rather than into productive long-term investment. In other words it looks like it’s going toward financial capital rather than physical capital, contributing to a savings glut/investment deficit. This abundance of financial capital has lowered interest rates and created a boom in speculative property investment, however there has been an overall decline in nonresidential private investment which does not bode well for future economic growth and proves somewhat that these tax cuts for the super rich do not benefit society as a whole – and now with the latest financial crises there is talk of more recession and government bailouts to boot! So overall I would say the Bush Administration’s policies have been terrible and the whole conservative ideology that it is supposedly based around is simple a trojan horse for upward wealth redistribution, however as I noted at the outset I am not an expert and there are doubtless many others who can make the point better than I can.

    Here is an interesting graph showing where all of this debt spending is going:

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