Press-Republican

February 3, 2013

Insurance for us all

Colin Read, Everybody's Business
Press-Republican

— We don’t experience anything riskier than life itself. One view of government is as an avenue to protect us from the slings and arrows of life itself.

Traditional forms of insurance rarely give us complete security. Insurers are wary of taking all the risk sharing away from us for fear we won’t be careful with matches, won’t drive carefully enough, or won’t be responsible with choices that affect our health.

In Canada, there are forms of insurance offered to all residents. There is insurance against unemployment, called Unemployment Insurance, aptly enough, and there is insurance that one can live with a modicum of decency in retirement, called Social Insurance.

In the United States, they are more likely called unemployment compensation and Social Security. Neither program makes anyone feel very secure these days.

Human nature responds best when there is an appropriate form of risk-sharing between individuals and their insurers. When government programs or insurance funds depend crucially on the extent to which we each do our part to minimize risk while we optimize opportunity, the system works well. When we instead create institutions that place all the risk on one side and all the security on the other, we inevitably end up with what economists call “shirking” at best, or moral hazard at worse.

In the former case, we put insufficient effort into doing our part. In the latter case, we may even make matters worse by making poor choices with the full knowledge that someone will bail us out.

Many institutions and organizations have learned that the implicit or social contract between individuals and institutions requires each of us to bear some risk. Retailers offer us our satisfaction or our money back. Warranties provide us with longer-term assurances, but can be voided if we don’t behave responsibly.

Entire medical networks are now being designed not to extract income from their patients for each procedure performed, but rather to take a fee and ensure that their patients remain healthy. Patients’ health becomes the providers’ responsibility, with both the patient and the provider having responsibilities to each other in that relationship.

Lawyers, too, have figured this out. It is not uncommon for lawyers to negotiate with their clients contingency fees that clients only pay if the lawyer wins. These fees are even tied to the size of the award, so the lawyer is rewarded in proportion to how well the client ends up.

Such mechanisms are burden shifting. When all the responsibility is on one side, the other side gains a sense of entitlement. But, when responsibility is shared, both sides work together in the best interest of their union.

When we were the land of milk and honey, and we assured ourselves that every subsequent generation would live easier than the previous one, we began to feel that such risk-sharing was unnecessary. After all, advances in education, in medicine, in technology and in affluence would take care of us all without much sacrifice on each of our parts.

Now, our nation is facing a mountain of national debt, is a decade from foregoing its apex status on another nation that came from nowhere, at least if we weren’t looking, and has a government in paralysis.

Yet, we still don’t engage in a serious discussion of risk sharing. Even our government is reluctant to ask much of us.

At the recent Vision2Action annual forum, the audience responded to an interesting question. Is public education about our society or is it about our kids? They were evenly divided.

I certainly agree that individuals should spend their private dollars on any education they want and can afford. But, society and the economy invests in public education because we want to be able to invest in our collective future, not a child’s individual future.

Some may conclude that I believe public education should be devoted to industry and technology with no room for liberal arts education using public funds. Nothing could be more incorrect. A balanced education that combines the liberal arts and significantly more science and mathematics literacy is good for us all. We need to appreciate more than numbers, equations and equilibria. But we need to understand these concepts, too.

Imagine the difference we’d see if educators took our responsibility even more seriously. Of course, every educator wants more students to appreciate their discipline. What if we put our money where our mouth is? What if we don’t get paid if graduates don’t find viable careers, or conclude 10 years later that the investment they made and society made in their future was not well spent?

What if educators viewed themselves as human-capital-maintenance organizations, just like health networks that guarantee the well-being of their clients. Just like these organizations insist that their clients share some responsibility, we might require students to not take the path of least resistance, but rather the path of most promise, given their aptitudes.

Maybe a pledge to our students that they will believe a decade later that they made great choices in school will become the path more taken. The education institution guarantees the student’s career or their money back — I bet it would make all the difference.

Colin Read contributes to Bloomberg.com, has published eight books with MacMillan Palgrave, and chairs the Department of Finance and Economics at SUNY Plattsburgh. Follow him on Twitter @ColinRead2040