Follow The Risk

Via SchiffGold,

Tracing the distribution of risk is an important method that is helpful for understanding the trade-offs of any government action. Almost every government action reduces risk for some group and repackages the risk and forces another group to bear it. The government often serves as a hedge against risk, but it is important to understand who the payer is and what the costs are before blindly signing off on state control. The most common form of risk relates to the concept of “concentrated benefits, dispersed costs.” Small groups like farmers or steel producers can hedge against industry risk by receiving benefits that are spread across the entire American tax base. The inverse of this problem is when small groups must make large sacrifices to reduce the overall risk of the total population. There are few situations where government risk management is worth it, and most of them are when the repackaged risk is paid fairly by those who receive the benefit. Growth in government risk management both incentivizes more risk and particularly damages those who avoid creating risk.

“Concentrated benefits, dispersed costs” is a phrase that describes the incentives behind targeted government industry policy. Because some groups are compact and organized with a compelling reason to coordinate, they are able to present their story clearly and effectively to government actors. The taxpayers who will pay for the benefits transferred to the special interest groups are not able to easily coordinate and they have no compelling reason to, as the burden of each individual is relatively small when compared to the cost of coordination.

When industries like banking or agriculture face large risks and can convince the government that it is needed to protect them, the industries are able to turn their risk into a guaranteed cost for taxpayers. This makes businesses less responsible, increasing the risk, and putting them into conflict with the people who involuntarily bear their risk. This problem only continues to worsen over time as the government grows and more industries recognize the benefits of state protection. Particularly when industrial failures already damage the nation, forcing taxpayers to insure them even in times of stability only deepens the problem.

Another form of risk redistribution is when many individuals shift their risk to smaller groups. One obvious example of this is when equity investors and businesses advocate for lower interest rates at the expense of those with heavy positions in bonds and cash. Inflation simply turns the risks of those with higher demand for present consumption into a guaranteed cost for those with a preference for future consumption. Many regulations make producers responsible for any problems with their products, which reduces customer risk, but damages customers in the long run as producers on the margin often leave the market. Although some of these government actions might make a specific problem better in the short term, they are extremely dangerous, as they put the few at the mercy of the many. Although this occurs most saliently with financial and economic risk, the expansion of the state may take risk redistribution to areas of life with much more troubling consequences.

An expanded welfare state may lead to the promotion of assisted suicide, and other violations of life, for those with a high risk of large medical costs. Risks are best borne by those who create them, as they have enough information to take on risk intelligently. While the voice of the majority can call for government-funded insurance in all areas of life, they cannot change the nature of risk.

The fundamental purpose of government is to create institutions that manage the existential risks that no set of private individuals would be interested in or able to manage. Most of the risks that the government manages against are far from existential, and even more of them would be solved by the market if given enough time and institutional stability. The government is most capable when it manages risks that are experienced by all and turns them into a financial burden shared by the same group. National security and the protection of property rights are two examples of risk prevention where something borne by every citizen is turned into a financial cost for the tax base. While not every citizen contributes equally to the prevention of these risks, every American benefits from them. Whenever a new risk concerns the public, examine how quickly it becomes a government responsibility to fix it.

Evaluate to whom the proposed solution is shifting the risk. Is the benefit of risk prevention worth the guaranteed cost? Do those creating the risk contribute fairly, or will they merely be incentivized to create more risk?