When All Else Fails—Government As the Ultimate Risk Manager - Book Review

Business Economics, Oct, 2002 by James A. Hayes

David A. Moss. 2002.

Cambridge, MA: Harvard University

Press. Pp 456, $39.95, hardcover.

This book is a historical political economy study of government risk management in the United States. Professor Moss recounts the historical evolution of government risk management initiatives to reallocate risk based on seminal events and the statements of policymakers and advocates present at the creation. In general, reallocation refers to risk shifting and spreading but not reduction, and the story is initially framed in an Arrow-Debreu markets model in the spirit that "any risk--no matter how small or unusual--can be bought and sold in the marketplace" (p. 35). Then the author discusses market failure models, burnished by the insights of behavioral economics. The result is a good read.

The organization of the book begins with an introduction and "A Primer on Risk and Its History." They are followed by seven chapters on major government risk management initiatives that include limited liability, money, bankruptcy, workers' insurance, Social Security, and "security for all", described below. A summary chapter "The Foundations of American Risk Management Policy" and an epilogue conclude the book.

Evolution of Government Risk Management Initiatives

According to Professor Moss, the political economy of government risk management passed through three imperfectly defined, but conceptually informative, phases:

* The first phase, Security for Business, lasted until about 1900 and was motivated by a conviction that "well-conceived risk management policies can foster economic development and growth" (p. 4). These policies included limited liability, banking and insurance regulation, bankruptcy law, fixed exchange rates, and property rights.

* The second phase, Security for Workers, lasted from about 1900 to 1960 and represented a risk management shift in emphasis from business to labor. Social insurance legislation for worker's compensation, unemployment insurance, and Social Security was passed by the 1960s.

* The third phase, Security for All, began in the 1960s. The "very heart of Phase III" was "shifting risks away from individuals and onto firms and governments" (p. 253). In pursuit of "security against catastrophic loss" this phase emphasized federal disaster relief, state-level insurance guaranty funds, and environmental liability, among others (p. 257).

Main Findings

There were three main findings of his investigations into American risk management policy:

* "First, the historical record reveals risk management to have been an exceedingly flexible policy tool, used to address a wide range of social problems and to serve a diverse set of social objectives".

* "Second, the historical record reveals a remarkable degree of economic sophistication in the way leading policymakers thought about risk and about the government's role in managing it."

* "Finally, the historical record helps us understand why public intervention in markets for risk was so prevalent in the United States, despite the country's reputation as a bastion of laissez-faire" (pp. 293-295).

Professor Moss summarized "Instead of redistributing income or capital as good socialists would, U.S. lawmakers have actively redistributed risk..." (p. 325). He emphasized that "...the history of public risk management suggests several ways in which Americans seemed to reconcile their laissez-faire and anti-statist sentiments with their pragmatic inclination to employ state power to solve social problems". First, "certain risks simply fell outside the bounds of laissez-fair philosophy." Second, risk reallocation "tended to require little in the way of invasive bureaucracy and could easily be cast in the rhetoric of contract." Third, social insurance "still proved remarkably lean from an administrative standpoint" (pp. 319-321).

Public Risk Management of Health Care Markets

Professor Moss deftly chronicled the kind, degree, timing, and pace of a wide cross-section of public risk management responses to market failures, based on an analytical model of constrained risk allocation by the American public and its policymakers. Specifically, he documented market gains from shifting risks due to market failure while carefully pointing out that policymakers prudently accepted legislative compromises where transactions costs such as monitoring were too high.

Concerning the implications of genetic profiling on health care finance, he suggested in the epilogue that "Ongoing genetic advances make 'socialized medicine...all but inevitable"' (p. 334). Specifically, he argued:

"In an unfettered private market, insurers would seek to divide us into an ever-larger number of progressively smaller pools, always aiming to group together individuals with comparable levels of risk. The healthiest would end up in one pool, the sickest in another, and so forth. Although this sort of market segmentation would make perfect economic sense (with insurers utilizing all available information in determining rates), it might seriously undercut the social appeal of private health insurance" (p. 331).