Government Insurance Is a Bad Investment

Published November 18, 2011

It seems everyone is getting on the smaller-government bandwagon these days. Republican presidential candidates Rick Perry and Ron Paul say they want to eliminate the departments of Energy and Education. Michelle Bachman has promised to cut the Environmental Protection Agency’s regulatory authority. Even the Obama administration—which has done everything to continue the growth of government begun under George W. Bush—has proposed some cutbacks and regulatory reforms.

For all this talk of cutting government, however, there’s been little attention paid to one enormous part of government: its role as an insurer. This is a shame because government-run insurance doesn’t work very well and ought to be a significant target of those wanting to cut government’s size and scope.

The point of insurance is to provide relief against negative events that are difficult or impossible to foresee. Products that protect people and businesses from the risks of auto accidents, house fires, flooding, crop losses, loan defaults, and environmental liability (the latter four are run by the federal government) all qualify as insurance.

But the biggest federal programs that use insurance-related terminology—the health care programs Medicare and Medicaid—provide ample benefits for things that are welcome (having a child) or easy to foresee (a diabetic’s insulin shots). These programs, like private health coverage, are best thought of as “benefit programs” rather than insurance.

And unlike these efforts—which everyone knows about—the true insurance programs the federal government runs are quite often “off budget” and obscure. For example, even though the National Flood Insurance Program currently owes the Treasury almost $18 billion, eliminating it tomorrow wouldn’t reduce the deficit by a penny because of the way the government keeps its books. Likewise, even though taxpayers are on the hook for insuring more than $50 billion in loans to companies such as the ill-fated Solyndra, those figures don’t appear anywhere in the budget.

Even some programs that are “on budget,” such as the massive crop insurance subsidies, are formally claimed to cost far less than they actually do, as a result of accounting tricks. And some programs designed to cover terrorism risk and nuclear power liability have never actually been used but would cost billions of taxpayer dollars if they ever were.

Gimmicky accounting procedures might be excused if these programs did public good, but for the most part they don’t. Flood insurance provides huge subsidies for developers to destroy environmentally sensitive wetland areas. The structure of the crop insurance program results in enormous amounts of soil erosion and the destruction of endangered species habitat. The existence of nuclear power insurance has discouraged the development of safer ways of using nuclear power. And so forth.

Whereas obvious public goods such as infrastructure and national defense, and social programs such as Medicare, Social Security, and SNAP (until recently called “food stamps”) are available to almost everyone, the government insurance programs are mostly a testament to the power of special-interest groups to force taxpayers to pick up the tab for their insurance costs. Working examples of largely private provision for flood insurance (Germany) and oil spills (the United Kingdom) exist, and some types of federal insurance—guarantees for risky, private, profit-making investments—simply ought not to exist at all.

Almost nobody would notice if these insurance programs were phased out. In some cases, such as crop insurance, where the private sector plays some role in the program, even programs’ direct participants could continue doing what they do with little change. In many of these areas, there’s a knockdown case that private insurance would even cost less, all told. Unlike the government, which can spread risk only across the country, private companies can pool risk internationally. All other things being equal, this reduces insurance costs.

There are many areas where government’s role ought to be cut back. Its role as a big insurer deserves far more attention than it has received.

Eli Lehrer ([email protected]) is vice president of Washington, DC operations for The Heartland Institute and national director of its Center on Finance, Insurance, and Real Estate.