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Health care economist Uwe Reinhardt has a nice piece today about the utility of social insurance to capitalism and why the failure of Lehman Brothers last year is a good case for health care reform. But it's nice to be definitional for a moment:
]T]he first application of social insurance in our latitudes actually was aimed not at protecting individuals against financial risk, but at supporting the growth of modern capitalism. Its main instrument to that end was the legal sanction of the principle of limited liability of the owners of corporations.Prior to this form of social insurance, the owners of a business were legally liable with their personal wealth for damages the business might have inflicted on others. With limited liability, the corporation’s shareholders are liable only up to their equity stake in the company. They can lose at most the value of their investment in the corporation’s stock. Beyond that, someone else in society — often the taxpayer — bears the financial risk for damages attributable to the corporation.One wonders how many business executives and members of chambers of commerce around the country realize that the limited liability of shareholders is social insurance.The most pervasive form of social insurance for the business sector in recent times, of course, has been the massive government bailout of the financial sector following the Lehman Brothers bankruptcy.Removing limited liability laws, of course, would be an excellent way to increase the risk management skills of bankers -- the ultimate alignment of compensation and interest. But as Reinhardt points out, doing so would be a severe discincentive to investment, and bad for society, so we tolerate the fact that the public accepts some of the cost of business failure. The analogy to health care reform -- the kind of social insurance we debate now -- isn't that hard to draw: our current system places to much onus on private responsiblity which has hidden costs that affect us all. Redrawing the system would be better not just for the people who directly benefit from social insurance, but better for us all.This also raises the usual cliched questions about our priorities as a society. The cost of health care reform is less than the Iraq and Afghanistan wars, less than the Bush tax cuts, less than the stimulus act, etc. But it is being held to a much higher fiscal standard -- it must be deficit neutral -- because it does not involve defense spending or disproportionately benefit the wealthy. Decades hence, people will look back at this debate and shake their heads.
-- Tim Fernholz
