Federal government’s role as insurer deserves more attention

by Matthew Glans on November 23, 2011

Government spending has dominated both the media and debate on Capitol Hill in recent weeks, with both parties becoming increasingly polarized and deadlocked, creating little progress in bringing the federal budget back in line. While much of the debate has revolved around the traditional topics of tax increases and discretionary spending, one area that has been continually overlooked is the government’s role as an insurer. In an article recently published in The Hill, Heartland Institute vice president Eli Lehrer discusses how the government’s role as insurer deserves more attention.

“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.”

Eli attributes this lack of attention to governmental accounting tricks. Because these insurance programs are not directly included in the federal budget, they are often overlooked outside those in the insurance industries. Eli believes this anonymity is unfortunate because many of these programs are either unnecessary, expensive or do more harm then good.

“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.”

In the end, Eli argues that many of these programs can and should be phased out or ended altogether. Some programs, which work with private insurers to coverage certain risk, could be phased out tomorrow and see few effects.

“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’s article, “Government insurance is a bad investment,” can be found online at: http://thehill.com/blogs/congress-blog/economy-a-budget/194537-government-insurance-is-a-bad-investment.

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