There’s No Substitute for the Government

By James Kwak

Mike Konczal wrote an excellent article for Democracy about the problems with a voluntary safety net and the superiority of government social insurance. The article draws on serious historical research (by other people) to prove two main points: first, there never was a Golden Age of purely voluntary charity; second, and more important, what charitable support mechanisms existed were not up to the challenges of the Second Industrial Revolution of the late nineteenth century and completely collapsed with the onset of the Great Depression.

This shouldn’t come as a surprise. There are basic economic reasons why public social insurance is superior to voluntary charity. The goal here is to protect people against risk: of unemployment, of health emergency, of outliving one’s savings, and so on. For a risk-mitigation scheme to work, there are a few things that are necessary. One is that people actually be covered. This is something you can never have with a private system (unless it’s regulated to the point of being essentially public), since charities get to pick and choose whom they want to help. As Konczal says of private agencies before the Depression,

“They were also concerned they’d lose their ability to stigmatize—or to protect—various populations; by playing a role in determining who wasn’t deserving of assistance, they could shield those they felt worthy of their support.”

Another thing you want is the assurance that the system has the financial capacity to actually protect you in the event of a crisis. That’s why you don’t depend on your neighbors to rebuild your house if it burns down. Besides the fact that they may not like you, they probably don’t have enough money—especially if you lose your house in a fire that burns down the entire neighborhood. As I’ve said many times before, there is no other entity in the country—and not really one in the world—with the financial capacity of the federal government. Even state governments scramble to cut benefits when push comes to shove, which is one reason why some states provide Medicaid coverage to almost no one.

We like to think that we are a nation of generous people who will help each other out, but that isn’t really true. We do have a much larger charitable sector than other advanced economies, where the state shoulders more of the burden. But more than half of our total donations go to religious organizations, private schools, and medical organizations, with only 12 percent going to human services organizations. Some money does filter from other organizations to the poor, but at most you can get to one-third of the total. (The vast majority of my donations have gone to services for the poor, primarily legal services.) I’ve argued elsewhere that we should place limits on the tax deductibility of charitable contributions, which are effectively a way that rich people can force other taxpayers to contribute to their pet charities. But as long as we have this idealized picture of our charitable sector, it isn’t going to happen.

42 responses to “There’s No Substitute for the Government

  1. Very good point in terms of charity. I think the title of your blog entry however is worthy of more discussion – or a life’s work of scholarship.

    I could see perhaps a discussion that opens up with considering what differentiates public from private services, transitioning into a discussion about what services are best handled by public agencies, and then follow up with how public agencies can best be structured (yet still remain fully public) to improve upon the models we currently have for providing public services.

    it might also be interesting to simply narrow the discussion down to a particular focus: financial services and whether any of them should ever be offered through a for profit model, versus non-profit models that are thus able to remove the inefficiencies of profit taking in such a system as well as shifting the motivation of the people running the system away from profit and hopefully toward maximizing service. The discussion of eliminating private medical insurance through single payer often takes a similar tack.

  2. Of course a true analysis would also have to subtract from the (alleged) good done by government, the bad, and sometimes unintended consequences of government actions. Mainly the changed in incentives of government safety net programs.

    A good place to start would be the recent housing bubble. Without the incentives created by the CRA and follow-on legislation, we’d never have had the lowered lending standards that created the bubble which set the stage for the financial crisis and recession from which we still suffer.

  3. This seems a bit un-hinged. Are you saying that the government in North Korea is good because the alternative (no government) is so much worse? Please explain where you draw the line, if I am understanding you correctly. Or, perhaps you really do not think there is a line and you literally mean that all government is better than none.

    Thank you.

    Regards.

  4. Apologies for a follow-up comment, but I’ll try to ask my question more simply.

    Are you really saying that all governments are good, or are you saying that you are able to judge which governments are good, that ours is, that most are, and that North Korea, Hitler’s German government were not but are somehow anomalous and cross some line?

    Your argument seems a little broad, and seems to be the kind of thing Westerners say, but not those with different life experiences. I’m sure most wealthy Americans think our government is awesome, for example, because it is awesome for the wealthy and/or powerful. But, that doesn’t seem too comforting nor does it prove that our government is necessary at any level of depradation it imposes on, in this example, the poor.

    Anyway, just some questions to get a clearer sense of where you draw a line, as I am assuming you’d draw a line well before putting yourself in the shoes of a 1939 German and making the same argument that you are right now…

    Finally, I am a bit frustrated by the entire logic of the post-crisis world being “well, if I were in charge…or if my friends the honest regulators were in charge, none of this would have happened”. Really?

  5. The problem with all of the public systems, is the pooling of resources, which then are controlled by the few. That control is used to circumvent the control people normally would have over own resources.
    This causes distortions and fraud, like unbelievable salaries and investments you would never condone for you own money.
    If you think this through, it strikes at the core of our current rotten financial system.
    So all starts out noble, but ends up tearing society apart.

  6. The trouble with the government is, in that trying to get rid of it means that someone else will make the government instead. So any man who says, get rid of the government, should in all honesty actually be saying, I want my government.

    The ‘best’ government is probably one that can be modified non-violently by everyone without modifying the possibility to modify it out.

    Reality hits hard…

    Also g kaiser, what systems would you consider public? Because any form of resource pooling could be consider appropriate for your description. Actually, you could simply drop the “with all of the public systems” from your starting sentence and there would be value neutral description of problem.

  7. @ Are you really saying that all governments are good, or are you saying that you are able to judge which governments are good, that ours is, that most are, and that North Korea, Hitler’s German government were not but are somehow anomalous and cross some line?

    We are saying that it is each groups interpretation of gvt which is the problem that can’t be agreed upon. For some it is too broad, still others see it as being to narrow. Which is why gvt trusts most of it’s people, while at the same time, some of it’s people, trust the gvt.

  8. I’m confused…are you saying the North Korean gov’t trusts its people?

    This really sounds like Westerners and elites explaining to the proles why they should shut up and be happy for the system we have, which obviously those with power think is fine.

  9. “We like to think that we are a nation of generous people who will help each other out, but that isn’t really true. We do have a much larger charitable sector than other advanced economies, where the state shoulders more of the burden. But more than half of our total donations go to religious organizations, private schools, and medical organizations, with only 12 percent going to human services organizations.

    You act like this is a bad thing. Its really the point. Folks need more than handouts. they need guidance on how to live their lives without being dependent. that part of the role of religious organizations that the federal gov’t is prohibited from providing……religious-based guidance that helps folks live by the 10 commandments. Where does fed gov’t money provide the other legs of the stool other than dependency-creating handouts?

  10. After looking into a number of the blog posts on your site, I really like your technique of writing a blog.
    I bookmarked it to my bookmark site list and will be checking
    back in the near future. Take a look at my website too and tell me your opinion.

  11. Yes, yes, yes. Governments are the only type of organization that can accomplish quite a lot of things, not just charity.

    Arguing that this is untrue because some gov’ts are vile, is like condemning families because some parents are abusive. We shouldn’t go there, because no gov’t really is worse than a bad one.

    Seldom mentioned is that true private charities, such as bake sales for cancer victims, food banks, homeless shelters and so on, have two serious flaws.

    First, private charity is really, really inefficient. Every aspect of it uses far more of unpaid human time and energy to deliver, for example, a can of beans to a hungry person than the usual route of getting that can of beans at a store. The donation dollars of kind people may be efficiently used by the charity in question, but the whole process of obtaining them requires fundraising, volunteer organizing, and a host of unrecognized and uncompensated costs (photocopying, prize donations, gas money and so much more.)

    There is no way this under-the-radar burden cannot effect the larger economy. Plus, it’s unfair. Charity is fundamentally a tax on the compassionate, falling most heavily on the most caring people in society. Should they be punished simply because they can’t abide suffering?

    Second, the existence of many private charities exhausts those who might otherwise work for wider social justice. It blunts people’s outrage, and supports a system which causes the poverty in the first place. Yes, we need to feed the poor, but when so many people in deep poverty are working, the institutionalized resources that keep them alive are subsidies to the businesses that employ them.

    Noni

  12. Thanks for sharing your thoughts on your blog. I have been following you for some time. The increased frequency of your posts is most welcome. One thing I would point out relative to neighbor helping neighbor is that it comes about through insurance pools. Car insurance, home owners insurance and health insurance seem to all be forms of neighbor helping neighbor. In our ill-formed capitalist structure the organizing is performed by the insurance industry. Morally reprehensible in the case of healthcare. No business should profit from providing health care.

    No one wants to depend on charity to make their way through life. Also it is morally repugnant that business is willing to rely on subsidies to keep their employees in good health and sufficiently fed.

  13. i see we still have wall streeters trying to cover up their culpability for the 2008 debacle with the CRA. the CRA had nothing to do with it. teh CRA was strictly a reporting requirement. it didnt force those not covered by it (mortgage brokers) to write mortgages for those who could breathe. nor were there any rules mandating stupid loans. since the CRA has existed since the 1980s, why didnt it happen a lot sooner? no the 2008 debacle was generated by wall street to generate profits selling to ‘investors’ (aka suckers) bogus investments that they knew going in were going to fail. add on the control frauds that banks were running (which had been seen previously in the S&L loan mess a decade or so earlier).

  14. and some noticed. insurance is a private form of socialism, in that its based on a group (policy holders paying premiums) that band together to cover foreseeable events. and they also depend on the government otherwise they cant invest enough to pay claims. and your premium will not pay your claim by itself, its all of the policy holders as a group that makes its possible to pay claims. otherwise you would have paid the company enough to turn around and pay for the claim. and why would you do that?

  15. I am still not understanding the parameters of this view that government is good and necessary.

    I have no doubt that educated elites such as Mr. Kwak benefit from our current setup. It reflects and protects them/us. Our government setup is reasonable for me. However, my prior is that intellectual pursuit is not pursuit of one’s own interests, and that one should be alert to bias in ones opinions that happen to be consistent with one’s interests.

    Anyway, I still don’t know whether Mr. Kwak would write the same thing in 1939 Germany…in North Korea…and if not, why?

    Thank you.

  16. i am agree with all the written word.. very informative

    https://3dformation.com/

  17. I normally enjoy this blog but I think this post is way off the mark. “There’s No Substitute for the Government” but you use the example of a house burning down. Government does not provide funds to rebuild; insurance companies do. There are substitutes for all government activities. Keep in mind that the modern nation state is a recent invention but civilization has been around for thousands of years.

  18. ‘i see we still have wall streeters trying to cover up their culpability for the 2008 debacle with the CRA. the CRA had nothing to do with it.’

    Right. What could $5 trillion in CRA lending–lower standards and lower down payments–have to do with the housing bubble

    ‘ teh CRA was strictly a reporting requirement.’

    And a bad report meant a bank didn’t get to expand into new markets. Something that housing activists and community organizers were well aware of, and too advantage of to extort billions from the banks.

    ‘ it didnt force those not covered by it (mortgage brokers) …’

    Who were forced to ‘voluntarily’ succumb to HUD’s Best Practices Initiative, which was the CRA by another name.

    ‘…to write mortgages for those who could breathe. nor were there any rules mandating stupid loans.’

    Except for the rules in the GSE Act of 1992, the Clinton Housing Initiative, and the amendments to the CRA in 1995, you mean?

    ‘… since the CRA has existed since the 1980s, why didnt it happen a lot sooner?’

    Because it wasn’t until 1992, with the GSE Act, that Fannie and Freddie were made to meet quotas of low quality loans.

  19. but that was what 16 years before the economy blew up???? seems like a big (ok enormous) stretch to claim it was the sole source of the debacle? if it was voluntary how can it force them to do any thing unless its in their interest to do so? after all, if you reduce under writing requirements (to can breath) because you know that you will sell that loan to your latest ‘investor’ with in months or origination just what exactly is your down side? and then of course there is that almost all mortgage brokers weren’t regulated by the FEDs. thats a state deal. and it seems that some states allowed bank robbers to become brokers. not like any thing can go wrong there is there? and what of the quants invention in the 90s of the method to sell bad loans for profit? and of course almost all of the loans that went bad, weren’t even subject to the CRA at all. since almost all weren’t sub prime. nor in areas subject to it.

  20. I am still not understanding the parameters of this view that government is good and necessary.

    well we can see a shinning of example of where there is no government. in Africa. where it seems rules are he who has the biggest gun rules.

    doesnt mean all governments are good (nor does that mean that all business are bad. or good). without a disinterested 3rd party who would trust courts to do any thing? and why would any one attempt to make investments of any kind since they could loose it all because some one with a bigger gun can take it from them?
    is government necessary. if you want to have a civilization it seems history shows it is. is it always good? no we have lots of examples where its extremely bad.

  21. Patrick R Sullivan has failed to learn a single thing about the causes of the economic disruption of 2008 and is hereby sentenced to do some research.

    http://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story.html

    http://www.ritholtz.com/blog/2011/11/the-big-lie/

    http://www.ritholtz.com/blog/2011/11/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/

    Secondly, the anti-American premise that government of, for and by the people is somehow incompetent just means that proponents of this view need to put up or shut up and move to their desert island and quit whinging.
    Finally the libertarian idiocy that attempts to judge other nations’ governments and citizens on the basis of a propaganda level of understanding is ignorant, ahistoric and repugnant.

  22. The best government is the smallest possible government, It should be a government that constantly tries to limit it’s size, and not as now, constantly tries to grow.
    Essentials for governments are infrastructure, law and order (including defence) – and that is about it.

  23. well i am sure the smallest government works wonders for power elites. but then in a way they really dont need it do they? and while some want it smaller. some dont. so we are lucky in that its majority rule. sort of.

  24. So the elite is finding it harder and harder with the growing government in the US? And the freedom and the liberty of normal people in the street is growing with increasing government, And NSA is finding it near impossible to work because the government is keeping a tight rain, and people are not forced to pay multibillionaire banksters to bail them out of their own stupidity and greed. And all the foreign wars are fought because people in the street are itching to go and fight?
    Yea, big government has certainly brought you many benefits!

  25. actually no, the elite have no problem with government size (as long as they dont have to pay for it). they can control either just as easily. as for those on the street? not so sure that it matters then either. cause extremely small government means that criminals have almost as much power (think a country on our southern border if you doubt that). and extremely large government, is in the eyes of the beholder i suppose (or depends on what one wants). and why is it we gripe a lot about the NSA and its spying, when all along (and long before we ever heard of the NSA spying) business has been spying on you? after all, the NSA gets the data from who? the telephone companies. and who has been collecting data on you also for a long time? the credit bureaus. and you in reality have no control over what they have, since they collect it from others, and usually only make noise about caring about data quality

  26. ‘…almost all of the loans that went bad, weren’t even subject to the CRA at all. since almost all weren’t sub prime…..’

    Factually untrue. Unless you are playing games with the definition of ‘subprime’, if you even know what you’re talking about. Fannie and Freddie were exposed to about $2 trillion in high risk loans, and FHA and FHLBs probably another half trillion by 2007. Add all the CRA lending by banks to that.

    By 2006, 46% of first time buyers were putting ZERO down for their loan. The median downpayment was only 2%. Neither category, zero or low down payment, existed (maybe one in 200 loans) in 1990, I.e. prior to the GSE Act of 1992.

  27. ‘Patrick R Sullivan has failed to learn a single thing about the causes of the economic disruption of 2008 and is hereby sentenced to do some research.’

    So you quote Ritzhouse. Really impressive scholarship.

  28. @Yea, big government has certainly brought you many benefits!

    A government big enough to give you everything you want, is strong enough to take everything you have.

    Thomas Jefferson

  29. When conservative politicians speak of people being addicted to hand-outs, thus suffering from a dependency syndrome, they usually mean government programs like food stamps and Medicaid. But they think private charities are noble and depending on them is not bad. Ask yourself how you would feel if you have to go to a church-run food pantry to feed your children, versus a food stamp program that ensures a non-stigmatized supply of nutrition for your family. In which case would your dignity be more protected? Umm, I wonder how the poor are perceived by the rich who support private organizations (and get tax deductions for doing so as Mr. Kwak points out).

    A public service that says this is your right in a civilized society, is far superior to having to be at the mercy of private charities. In fact at the ground level they are made of outstanding human beings who believe in helping others out by working in the food bank or whatever other organization. So this is not a criticism of volunteers who do wonderful service to others.

  30. A government big enough to give you everything you want, is strong enough to take everything you have.

    That bears repeating!. It is amazing how much foresight the founding fathers had, and how blind people have become today.

  31. Anonymous: “Anyway, I still don’t know whether Mr. Kwak would write the same thing in 1939 Germany…in North Korea…and if not, why?”

    I would presume, that as long as 1939 Germany followed democratic institutions, he would critizice and agitate the government toward more peaceful/tolerant/accebtable practices etc.

    Besides, to majority of German people, it seemed as good times had come and there was hope for prosperity despite war and oppression of minorities. Also remember that times have changed somewhat from then.

    If Governments were bad to majority majority of time, obviously it wouldn’t last forever. Depending on competence of people upholding it, it might go on long enough that people wouldn’t question it at all.

    Irregardless, governments are tools of people, sometimes to people on top, sometimes more wide spread, but always there will be government, if only in the form of biggest gang of violent thugs claiming ‘Veto’ to any action they consider of interest to them.

    TLDR; to remove government, is to remove hammer from your toolbox, because it can smash our fingers when wielded improperly. (Not very good metaphor, but I hope it clarifies what I am aiming for.)

  32. elspi, the fed is Always wrong, but never in doubt. So in this case, it’s a draw and let’s play for some more merits. What else ya got?
    And Sumitra, only a conservative politician would allow gvt allocated money to be spent on junk food, just so the rich could set up there food pantry’s to cater to the ones THEY want to cater to, and not have it tricked down to the others in need.

  33. Considering the resistance to grant the government a free pass on doing only good (a reasonable criticism), perhaps the title of the blog should have been: there’s no substitute for GOOD government.

    Anonymouse, you say somewhere that you need religious guidance, not just hand-outs, for people to be guided by the ten commandments. But in a real democracy, a secular one, you have the freedom to go to church and seek whatever help you need. Some citizens may want to be guided by the Buddhist philosophy of mindfulness, and they too can practice what they believe in. I don’t see public programs as taking away anything from religion and good values. And why should a needy person be required to be guided by some doctrines?

  34. “Any man who thinks he can be happy and prosperous by letting the government take care of him; better take a closer look at the American Indian.” Henry Ford

  35. I wonder who then, came up with the phrase, i’ve had a talk with those who created the english alphabet and they seem to have a small inkling of it from back then. They said they wanted to expand on it and see where it lead.
    And religiously, i was just pointing out another flaw in the cog of a chance to take advantage of teaching, rather than preaching. Give a man a fish, feed him for a day, teach a man to fish, feed him for a life time. And at this moment, I don’t need to much guidance thank you.

  36. 20 Bankers Found Dead

  37. It astounds me that supposedly smart people do things like look at the amount contributed IN A SOCIETY THAT TAKES HALF and promises to do it for you and extrapolates to the case this was absent. What happens now proves nothing about what people would give if they weren’t taxed to death already. Way to thin dynamically leftist fool.

  38. Sorry, “think”, but still a leftist fool.

  39. The facts, TODAY, are that “private” control of information is the New World Order that replaces “government”.

    The amount of critical information that the PUBLIC had every right to know since the FDA and the health of your personal skin suit was involved – educated decisions, anyone? – that is no longer “searchable” from this shuttered public access website is mind-boggling! It was “history” happening in real time and the archives are GONE.

    How “un-charitable” regarding “education” from private owners, no?

    http://www.the-scientist.com/?articles.view/articleNo/38780/title/Goodbye–Pharmalot/

    There is NOTHING theoretical about “government”. It is what real labor calls “operations”. THOUSANDS of years of government history – this is not an MIT level of scholarly research – it is blatantly Koch-sucking.

  40. I can see why the poster Anonymous above remains anonymous. Who would want credit for such absurd comments?

    And no, I don’t think the post is praising the government of N Korea.