South By North Strategies, Ltd.

Mark Thoma makes the case for why social insurance matters and why it doesn’t necessarily undercut economic efficiency.

Insurance markets are plagued by market failures such as adverse selection and moral hazard, and when these problems are severe enough the private sector will provide much too little of the insurance. In such cases, there is a role for government to play in resolving the problem. Efficiency is defined, in part, as the economy providing the goods and services that people want and are willing to pay for. Hence, when the government intervenes and makes up for the failure of private markets to provide these goods and services in sufficient quantity, it doesn’t reduce efficiency, it increases it.
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We cannot fully insulate people from every inequity or run of bad luck, and it is possible for governments to provide more than the optimal amount of insurance against life’s ups and downs. But even if social insurance programs are not executed perfectly by government, the important question is whether the benefits exceed the costs. One only has to look at our history – what happened to the elderly, the sick, and the unemployed before we had such insurance – to see its great value. We were much worse off, on net, before social insurance existed, and we would certainly be worse off without it today.