Mr. Rockwell is president of the Ludwig von Mises Institute in Auburn, Alabama.
The movie classic Double Indemnity tells the story of a couple’s attempt to commit murderous insurance fraud. Their plans were foiled through the investigation of a hard-bitten insurance executive. At the time, audiences were shocked that a middle- class couple would attempt such a scam.
The film shows how insurance is supposed to work. The company offered double payment on life insurance if the policyholder fell off a train and died. Why did the company offer such a policy? Because the data from past experience suggested that it virtually never happened. When it did in fact happen, executives at the company suspected foul play.
As the story makes clear, the business of insurance is the business of making money, not granting welfare. That requires collecting more in premiums than is paid out in settlements. To do that, firms must assess the risks inherent in every conceivable set of conditions.
Most of us don’t know the odds of falling off a train. That’s not our job. But insurance companies do know, because that is their job. When a company grants insurance against some random event, they are betting that it is not going to happen.
For example: What are the chances someone will be killed by an asteroid? Pretty low. If a company wants to insure against that, it will charge low premiums and make high payoffs.
But what are the chances that a drug-dealing gang member in the inner city is going to be gunned down? These days, pretty high. That means high premiums and low payoffs, or, more likely, no insurance at all.
The risk inherent in most insured events falls somewhere between the impossible and the very likely. It’s a tricky business assessing risk and staying ahead of the uncertainties with which life confronts us. It is best handled by hard-bitten capitalists.
Sound insurance requires that people who attempt to beat the company through fraud be weeded out. The astronaut who applies for an asteroid-protection policy, for example, had better tell the truth about his profession, or face penalties. Neither can a member of the Crips be allowed to lie about his occupation or his address.
Government Insurance Fraud
Insurance fraud, like that committed in Double Indemnity, is still illegal—for people in the private sector. The federal government, on the other hand, perpetrates huge insurance frauds every day, and taxpayers are enlisted to pay double indemnity settlements in perpetuity.
The most prominent example is the extension of health insurance to the entire country through programs such as Medicaid and Medicare, and the never-ending call for making these schemes or something similar universal. To insure people for their medical bills regardless of a pre-existing condition is like an insurance company offering a widow a life insurance policy for her husband after he has been buried.
It does not make economic sense. And it creates a moral hazard. If insurance companies don’t root out insurance fraud, they create a perverse incentive structure that can turn a portion of their customer base into plunderers. The result is bankruptcy.
When governments offer insurance regardless of risk, they create the same sort of moral hazard. They reduce the incentive to avoid the very behavior they are insuring against, which in this case is sickness.
Ironically, any form of government-mandated health insurance will increase the degree of unhealthiness in society. It reduces, as Ludwig von Mises pointed out, the will to health. If medical care comes at zero price, risky behaviors carry less of a penalty, and healthy behaviors carry less reward.
In private markets, your behavior determines your risk pool. When you get a speeding ticket, your auto insurance goes up. Keep up the behavior, and you won’t be able to get insurance. This is as it should be.
In a market economy, there is no affordable flood insurance for people who live on rivers that flood every year. There is no affordable fire insurance for people who live on combustible underbrush. We can live in these areas, but we do so at our own risk.
Under government health insurance, those who are covered qualify for reasons other than profitability. Risk pools are chosen with politics, not demographic risks, in mind. Not even joining the Bloods or jumping canyons in a motorcycle increases your premium.
So long as they qualify as “poor” or “aged,” health-club addicts pay no less than couch potatoes. Government likes to brag that its insurance can’t be taken away, but that is the exact opposite of the market-based insurance message.
From the government’s point of view, providing health insurance has one great benefit. It draws people into a dependency relationship with the government. Bureaucrats get more customers. The long history of government insurance shows how successful this trick is, and how much long-term damage can be done.
Welfare for the Middle Class
Otto von Bismarck was an innovator in promoting middle-class welfare in the guise of social insurance and selling it as a conservative program. Decent people disapprove of the dole. But social insurance? Now that’s another matter, he found. That’s just government protecting people against uncertainties, just like private insurance. Germany still suffers today as a result.
The English and Swedish governments also excelled at duping the public into buying varieties of insurance with their tax dollars. In each case, the public formed a dependency relationship with the State. The Fabians much preferred this form of socialism over revolution, though the long-run consequences are not that much different.
Our federal government offers a variety of false forms of insurance that invite the “policyholders” to squander the contents of the public purse. One of these policies is offered to bankers. It’s called deposit insurance.
Like the insurance company in Double Indemnity, banks once had an incentive to keep costs and risks low. Market pressures of competition—and the threat of bank runs—forced bankers to remain solvent. If banks lent out more deposits than they promised to keep available for withdrawal on demand, they went belly up. Bankers would compete by advertising high reserve ratios and pursuing only sound investments. This made for soundness in banking and more economic stability.
But with the Great Depression, Franklin D. Roosevelt had the idea of offering insurance for all deposits. The bankers did not mind. They no longer had to compete for customers in the same way. Bad loans would be bailed out by Washington’s printing presses.
If the wad of cash you take to Las Vegas is your own, you’re more careful about what you gamble on. But if you’re using someone else’s credit card, high-stakes poker is definitely the way to go. You get all the returns and suffer none of the losses.
So it is with deposit insurance. Bankers get double indemnity payments on errors of their own creation. Depositors don’t care, so long as they get the cash when they want it. But the public pays, through taxation or the hidden tax of inflation that comes with running the Federal Reserve’s printing presses.
Throughout its history, deposit insurance has caused bankers to make unsound loans and to invest irresponsibly. And as we saw in the savings and loan scandals, or the Mexican bankruptcy, it has caused moral hazards that cost taxpayers tens of billions.
The government has another policy to offer. This one is for workers. It’s called unemployment insurance. If you lose your job, you start collecting benefits. If the government had advertised this as welfare, it might not have been so successful. The dole has never been dignified. But with unemployment insurance, you collect a “monthly settlement” financed with “prior premiums.”
In fact, by its very nature, employment cannot be insured in a market, any more than entrepreneurship can be. It is not a random event. Only involuntary events, with premiums carefully controlled for risk, are conducive to profit-making insurance.
Unemployment insurance nearly destroyed the British economy. It protected people from the ravages of unemployment all right. It protected them so much that the unemployed decided to stay unemployed, which drove the economy into the tank. Jobless insurance, combined with other labor interventions, prolonged the depression in this country as much as seven years.
This type of insurance creates the illusion of sticky wages and a stagnant job market. In a recession, wages are supposed to fall. With insurance, wages stay high. They then induce mistaken Keynesian policies like fiscal stimulus, monetary stimulus, jobs programs, and price supports. If labor markets are allowed to correct downward, the political support for such programs would not exist.
For some reason, unemployment insurance remains among the most untouchable aspects of the welfare state. It has led people to believe that they have a right to a constant income stream.
We were much better off in the old days, when wages were tied to productivity. There was no profit to be gained from endless looking or waiting for a job. Now idling about pays double indemnity.
When George Bush was confronted with growing unemployment a year before his term was up, he extended the term length of benefits. No surprise that joblessness became an even greater problem.
We could yet see this program explode out of control. It has been a long time since we have had a serious and sudden all-round recession. When that happens again—and it will, thanks to the Federal Reserve—and as many people begin drawing on their insurance as are eligible, we could see a fiscal crisis and a deepening and spiraling loss of jobs.
Such a situation would look very much like a bank run. Every one will want what has been promised by the insurance scheme. But everyone will know that all the claims cannot be paid out without bankrupting the Treasury, or hyperinflation.
Government still has another policy to sell you. It insures you against old age. In the old days, the best protection against poverty in the older years was saving and a large family. But Social Security—the most insidious form of government insurance—did away with some of the need for private savings or marriage and children. And like the other forms of government insurance, it was a welfare program that created a new class of state dependents.
Today, Social Security is widely recognized as a Ponzi or pyramid scheme. It is insurance fraud on a massive scale. Recipients get checks for far more than they paid in. What is this? Quadruple indemnity?
Social Security and Medicare have turned the people that society ought to look toward for leadership and wisdom—the elderly—into social pariahs with lobbies demanding handouts at the expense of the next generation.
Ronald Reagan and Alan Greenspan “saved” Social Security in the early eighties by raising taxes, but everyone knows that the system will eventually burn itself out. What young person today believes that Social Security is going to care for him in his old age?
Social Security, in other words, is going bankrupt. Good, I say. Maybe that will cause people to start having children and saving their money again. Maybe that will cause the middle class to sever this most insidious dependency relationship with the State.
The current administration had another policy it wanted to sell you: access to health care at very little cost. Of course, this promise was a fraud. It was as fraudulent as the claim made by a murderous couple against the insurance company. Except that it would be the middle class being pushed off the train, and the government collecting the benefits.
Whether the government is providing insurance for banks, workers, the elderly, or the sick, the mechanism is always the same. Premiums do not match risks, payers end up getting looted, beneficiaries transfer their loyalty to the State, and massive quantities of public and private resources are wasted.
If you see this in private markets, chances are that illegal fraud is involved. If you see this in the public sector, chances are that legal fraud is involved. Despite promises to the contrary, the middle class is the ultimate victim of this subversive form of welfare provision.
The insurance industry is a respectable market institution. It provides services for people at profit, like any business. What the government calls insurance works like anything else the government does. It takes other people’s property by force and deception, and uses it to gain more power for itself.
So long as we know the difference between true and false forms of insurance, we can know insurance fraud when we see it. And maybe someday, we can make the government’s managers and employees pay a double indemnity out of their own pockets for this crime.