O State Ill-Begotten, Save Us

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Floods, fires, mudslides, droughts, and winds assault us with impunity. Pests and pestilence, disease and infirmity, exposure and malnutrition — all lie in wait for us. Woe to the generations of mankind who lacked the all-powerful hand of the State to rescue them from these perils, to make their lives comfortable and secure, to ease their burdens and lengthen their lives, to remove them from harm’s way.

Were it not for modern economists, we would not be told in luxurious and exact detail that private markets fail when confronted with all these urgent matters of life and death. In their false and harmful gospel, our very health and existence, our protection against all manner of perils, our happiness and well-being, depend upon the State. According to their bible, the State is a life-enhancing genie that ameliorates if not overcomes a host of ills that beset mankind. Their perfect State is advertised to solve a panoply of problems stated in technical economic terms such as information asymmetry, moral hazard, adverse selection, externality, underinvestment, market failure, free-riding, incomplete agency, interpersonal effects, etc. We can admire the thoroughness and inventiveness of statist economists even as we note their basic ignorance, navet, and confusion.

The State’s flood insurance and health insurance, its social security and pension guarantees, its promises of freedom from want and terror — all are birds of a feather. Their faulty rationales are similar. Their failures are predictable and grievously the same.

After thoroughly assembling and presenting all the arguments in favor of State health care, and after analyzing the economics of the Canadian health care system at book length, Professor Evans tells us that Canada enacted programs without regard for resource costs (although economists knew better:) "But the perception that regulatory and payment policies have a major impact, for good or ill, on the actual resource costs of whatever care is provided has had relatively little influence on public debate — except among economists."

In other words, politicians didn’t count or foresee the costs when they enacted the programs. They did not understand the impact of the programs on incentives, on costs, on quality, or on progress. Evans says that Canada’s national health-care system, "is nevertheless a good deal less effective and more costly than it could be. The absolute cost amounts are very large." He puts it mildly as we well know. This is the system that makes a man wait 4 months for an appointment and then places him 290th on a waiting list. The Canadian system already absorbs a huge fraction of provincial budgets, up to 40 percent, and can’t be saved without taking even more from taxpayers.

Does this sound familiar? Not only have Medicare costs in the U.S. escalated to the sky, but a brand new prescription drug program already has hugely escalating projections of costs. Our legislators knew this, although now they may feign surprise. All they had to do was look northwards. This means that they pay no attention to anything other than their own petty gains. It means that the State cannot possibly legislate in the "public interest", a delusory mental image that lacks a counterpart in reality. If our Congressmen did not know about prescription drug costs, then surely they are more ignorant than the voters whose ignorance all of these wonderful public programs are designed to overcome — in the futile reckoning of statist economists.

Statist economists have moved us backwards and downwards by labeling all manner of knowledge and information lacks as "private market failures" and by encouraging us to rely on the State as master problem-solver. Yes, it is impossible for everyone to know everything. Yes, it is impossible for markets to be perfect. Yes, it is impossible for private insurance companies to know everything. And so they face moral hazard (losses that rise when insurance is issued) and adverse selection (losses from imperfect knowledge of the insured). Does that justify destroying markets and replacing them with State blundering? Does the State know more? The State not only knows less, but has less incentive to know as much as the private sector, less incentive to learn, less incentive to change and innovate, and less incentive to find solutions that minimize the costs of imperfect knowledge. The State has more incentive to cloud issues, create problems, divert attention to other matters, and create itself as the great problem-solver. The statist economists have an imperfect information problem all their own. They do not understand that a perfect market is a chimera, not something to be brought into existence by a State.

We are nearer the end than the beginning of an experiment in social engineering that began in the distant past and that has accelerated since 1880, a gigantic experiment that has tried to turn base metal into gold and has failed miserably, a world-wide experiment based on false ideas. This experiment, if it has not already crested, will.

It will take us far afield to discuss the many ideas upon which this experiment was based. Instead, let us focus on a few notions lying behind the 101-page National Flood Insurance Act of 1968. The main notion, in my opinion, was the profit or gain to particular special interests. We cannot read the minds of those who voted for this legislation. We can surmise that, among others, it benefited the legislators themselves who either garnered contributions, votes, or other feelings they valued. With any piece of legislation like this, we invariably find Congressmen eager to extol its virtues and the roles they played in bringing such benefit to the voter, even though they usually have not read the legislation and have little or no idea what’s in it. Since the Act increased insurance sales through private insurers, now mainly 15 large insurance companies, it is probable that the insurance industry was a happy participant. Since the Act allowed new development to occur and mortgages to be written, developers, builders, the construction industry and bankers may have looked with favor upon it. Since it meant new building code restrictions, this will have squeezed lower-cost builders and buyers and favored the larger established builders. It seems quite probable that the flood plain engineers working for the States welcomed a Federal presence. It enhanced money for mapping and related activities. It elevated their presence, power and voice in environmental matters. Local government officials also stood to gain, since their communities participated heavily and local officials are often closely associated with local construction and banking people.

None of the above were the stated rationales. The official ideas behind this legislation are part of a larger set of ideas behind our library of laws. These will be looked upon in future ages the way that we look upon the rules and regulations of the Dark and Middle Ages or those of Louis XIV, as utterly ludicrous vehicles for achieving human progress and perfect vehicles for hamstringing human effort. Although these ideas are expressed in black and white as part of the statutes, they make no sense at all. It is one of the marvels of America that its people so conscientiously obey these nonsensical laws and attempt to find ways to work around them so as to mitigate their ills. Unfortunately, the latter is often impossible. If this spirit of cooperation and belief in the rule of law were ever let loose from the periodic invasions of our legislatures, we can predict a colossal resurgence of American ingenuity in ways that might truly enhance human happiness.

Congress in 1968 found that floods caused unforeseen personal distress and that the relief efforts placed a burden on "the Nation’s resources." The concerns here seemed to be two. Floods harm people affected, and then they harm the "Nation" that aids those affected. In reality, there is one loss. The harm of a flood is upon those affected, not also on the Nation. But those who are flooded do not bear all the costs if others in the Nation are forced to pay for them, that is, if taxpayers are herded into a giant insurance scheme. Congress brilliantly recognized that floods cause losses.

There are many other losses that are induced by the forced risk-sharing scheme that Congress concocted, but Congress was unmindful of any of these. For example, people are more prone to live in low-lying areas when they can get subsidized flood insurance. Congress failed to notice these effects just as the Canadians failed to realize the costs of a national health care system. This is a law of government. Governments always underestimate costs.

Even if floods cause people harm, there is neither an economic nor a moral justification for creating a taxpayer-paid insurance scheme. We willingly enter an insurance pool to reduce a large risk that we face. If the State forces us into a flood insurance pool and we face a low risk, then we are simply paying others who bear a higher risk. This is not insurance but servitude. This is a fraud disguised as insurance. This coercion is introduced by the provisions in the law that prohibit lenders from making real estate loans for homes in an area designated as a flood plain unless the owner buys flood insurance. Furthermore, making uninsured taxpayers foot the bill for flood damages is not even disguised servitude, but daylight burglary.

If this national insurance-against-peril principle is allowable, then it is allowable to make taxpayers pay when individuals suffer a heart attack or when they lose their jobs or when they become old. These things have already been done. What else can be "insured" against? Just about everything. In the extreme as the State multiplies these schemes, it means that when anything bad happens to a person, everyone else pays for it. If the total body politic incurs $10 billion of harm, then the total body politic pays itself $10 billion. Forced nationwide insurance on all such perils is nugatory. It is uncollectible and of no real value. It is shifting money around from one to another with no gain. Indeed, there will be net losses because of the negative incentive effects of the programs, the costs of administering the programs, and the costs of tax compliance to fund them.

Congress went on to find that its prior public anti-flooding efforts had "not been sufficient to protect adequately against growing exposure to future flood losses." The double nonsense here is (1) that Congress is not capable of determining what is or is not adequate and (2) Congress can’t estimate future flood losses. Both of these depend on costs and benefits that only individuals can judge and reveal by their actions. Furthermore, if Congress acts in their place, it can never know what individuals deem sufficient in view of their estimates of future losses.

The law states the finding that flood insurance is "uneconomic for the private insurance industry alone." This may or may not have been so in 1968. The insurance industry is so highly regulated by the individual States that it is difficult to say what products it might produce in a truly free market. Hence, this conclusion of Congress, which is open to question, is not a rational basis for an Act of Congress. Even if it were true that flood insurance were uneconomic in 1968, that also provides no basis for Congress to have created it because there is an infinite number of potential products that are uneconomic. It is simply nonsense for Congress to pick out one of them and justify it by the fact that people are not voluntarily producing and exchanging it. If in fact private provision of flood insurance is uneconomic, this tells us clearly that it’s not worth producing at a price that buyers are willing to pay. Hence, from this viewpoint, it also makes no sense for Congress to create flood insurance and subsidize its losses using taxpayer dollars.

Looking at the program in detail, we find that as of one year ago, the program seemed to be breaking even. This illusion was due to two facts. One was that the taxpayer, apart from the 1987-1992 period, completely paid for all the operating costs of the insurance operation (staff salaries, costs of floodplain studies, and floodplain management). Second, the calculation of profit and loss depended on using a benchmark called the "historical average loss year." The actuarial review tells us that "the historical average is less than what can be expected over the long term," because of a dearth of "extremely rare but catastrophic loss years." In other words, the State is running an under-reserved insurance company that would not rate highly in the private market. Now that Katrina has come and gone, the losses of this fund will be staggering.

Before Katrina hit, Congress was already considering ways to control high losses from repeated claims on properties flooded and rebuilt over and over and over again. Two out of every five claims covered properties that had already experienced flood damage. Congress also had raised premiums in order to get some handle on rising costs. This does not mean that Congress is in a penny-pinching mood, because it has supported the Iraq War and other programs lavishly. It simply means that the political clout of the constituencies for flood control had diminished.

What are the most basic issues regarding flood control and other analogous matters like unemployment insurance, social security insurance, education and health care, apart from their gross violations of rights and the economic destruction they cause?

My sense is that knowledge of life’s inherent perils has declined as the State has become more pervasive. Many people want to leave these matters to professionals and government. They assume things will be taken care of for them. Hence, a widely dispersed knowledge base concerning perils is absent compared to decades ago when people faced perils all the time.

Until the last century, individuals faced with these perils did not seek refuge in the State. They could not force their neighbors to help them. Having to deal with perils themselves, they had to learn more about them and more about how to cope with them. It was downright foolish to build an expensive home in an area prone to floods. It might have made more sense, if the area was attractive, to build a cheap cottage or a cabin. If an area became uninhabitable, it made sense simply to move elsewhere. If unemployment rose in an area, the solution was to migrate, and millions did. Old-age planning was handled in a variety of ways. As the State grows larger and supposedly assumes these risks, the skills of dealing with them atrophy.

Today, people have moved into flood plains, whether by ignorance or by being fooled by others or by cheap flood insurance. They have built houses on hillsides prone to mudslides. Many have now ensconced themselves into low land in the face of Nature. They have trusted to others, distant from them, to care for their perils. They ask that the State save them from life’s perils. They believe that it is saving them, can save them and will save them. In doing so, they are creating another peril for themselves. For those whom they trust, being enmeshed in their own lives and difficulties, may well neglect their duties and responsibilities, leaving those who are foolish enough to trust them not high and dry but low and wet.

In the great movement from individual responsibility to socialism over the last 150 years, there has been an abandonment of basic wisdom: Security is not to be found by faith in the fraudulent promises of distant men. Chain letters end. Ponzi schemes unravel. Checks come due. Frauds are uncovered.

The basic issue is that socialism engenders more ignorance, more foolish behavior and stupidity, more gullibility, and more irresponsible behavior.

In the Gulf Coast disaster, our State protectors feign mercy and charity by promising to deliver up treasure stolen from others to assuage the pain and suffering of unfortunates. The protectors want to make themselves seem saviors, they want to deflect the criticisms and fears of others, so that they will remain trusting of these their saviors who will then compass them round with more snares and delusions. The minions of the State have one over-riding goal: To maintain public confidence in them so that they can continue their frauds. The higher-ups wish nothing more than to turn the tragedies of others to their own benefit. They will scramble to make everyone forget the out-and-out incompetence that they have displayed and to shift blame to scapegoats.

A postscript. At this writing, the imbecility of FEMA appears so firmly entrenched that a continuing stream of embarrassments is the peril faced by the Bush administration. Although this may seem a good thing, it raises the chances of a diversionary action by a beleaguered President.

Michael S. Rozeff [send him mail] is the Louis M. Jacobs Professor of Finance at University at Buffalo.

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