The query in the title suggests an epic post, but we’ll keep it simple today. Let me ask folks what they think of a policy proposal that does the following:
Well, this is precisely what Federal Deposit Insurance does. The FDIC was established during the banking panics of 1933 as a way to improve confidence in the bank system and to stem runs, and because the reformers in government refused to otherwise deregulate the banking system by allowing nationwide branch banking (for example) as our brethren in Canada had always allowed. All members of the Fed system are required to carry this insurance, which means they pay a (risk adjusted?) premium on their deposits to the FDIC so that in the event of bank failure and insolvency, depositors will be made whole from the FDIC fund. In effect, what FDIC insurance does is that it has safe banks underwrite the risks of unsafe banks. In other words, prudent and health institutions are legally required to help their imprudent brethren. Not only does this create moral hazard, but it also institutionalizes sclerosis in the financial system by preventing the evolutionary forces of creative destruction to work their magic (please spare me the charge of social Darwinism).
I suggest that many folks find this set-up problematic. Why should well capitalized, plain-vanilla banks subsidize the activities of greedy leveraged banks? And when the FDIC is underfunded, as it inevitably has been and may still be, why should taxpayers be on the hook for this? Indeed, I’ve seen OWS protests pretty much making these arguments.
So pardon me for getting a headache when I see the very same folks who understand this make the argument that “health insurance mandates are necessary” because the healthy ought to pay for those who got the short straw in the sickness lottery. The point of insurance is not to have healthy folks subsidize sick folks. Sorry. If that is what you WANT it to be, that does not mean that this is what it actually IS. The point of insurance is for folks of similar risk profiles to pool themselves together so that what becomes an uncertain event for any one agent becomes a “certain” event for the pool as a whole. That is a far cry from having the “healthy” subsidize the sick. If you want an analogy, it is closer to the “lucky” being asked to unsubsidize the “unlucky.”
Is the force of moral hazard as strong in medicine as in banking? I cannot say. But if you cling to the idea that the healthy ought to subsidize the unhealthy as a matter of justice, irrespective of behavior and how we got there, then I don’t see how you can be all up in arms when Goldman Sachs, AIG, etc. eats at the trough of taxpayer guarantees.