The result of all this activity by both the public and private sectors – shifting, diffusing, equalizing, concealing, shuffling, smoothing, evading, relegating, and collectivizing the real risks and costs of economic  change- is to desensitize the economy.  It no longer responds so well to the bad news of scarcity and disequilibrium- the high prices that signal new opportunities- and no longer provides so dependably the good news of creativity, invention, and entrepreneurship.

This is the overall moral hazard of the welfare state.

From the new edition of Wealth and Poverty by George Gilder.  Originally published in 1980 the new version is updated with 40,000 words and views on the current scene

HKO

Government and society must balance insurance with risk. Risk, most often measured in prices, signals opportunities and economic growth.  Insurance is needed to provide stability. Over emphasize insurance as we have done with the programs from the New Deal onward- and we blunt the winds of economic growth.  An overemphasis on insurance or poorly designed and thought out insurance furthermore creates a moral hazard.

Unemployment compensation promotes unemployment. Aid to Families with Dependent Children (AFDC) made more families dependent and fatherless. Disability insurance in all its multiple forms encourages the promotion of small ills into temporary disabilities and partial disabilities into tptal and permanent ones.  Social Security payments may discourage concern for the aged and dissolve the links between generations.

There is abundant reason to believe that the American welfare state long ago passed its points of diminishing and counterproductive returns, that the insurance features of American society now so overbalance the risk features that everyone- rather than just the direct victims of hardship or change-feels anxious and insecure.

HKO

But the moral hazard is only part of the cost- encouraging the very behavior we seek to be protected against.  It blocks the necessary information that we use to promote new ideas and economic growth. Paul Ryan so appropriately suggested, we measure our poverty programs by inputs (dollars) instead of outcomes. We ignore the results which are a bad mix of moral hazards and missed opportunities,  and only address intentions.  If we measured outcomes we could not escape its failure.

The larger moral hazard of the attempt to nationalize insurance is to upset the balance between risk and security.  Insurance attempts to predetermine outcomes, to assure specific levels of income in retirement, unemployment, family breakdown, sickness- in all the adversities of life.  But when too many people know where they are going, the economy doesn’t get very far.

HKO

Ironically, if you readily swallow the political stereotypes, much of the greatest growth in these insurance programs did not come under Democratic leadership, but from well meaning Republicans such as Eisenhower, Nixon, Ford and even George Bush.

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