Government social insurance. Well, the government gets involved in insurance. The first major government involvement in insurance, which ought to be a private, you might think ought to be private business, started out as a private business, occurred in Germany in the 1870s. Germany was the most advanced country for forward economic thinking at that time. A lot of Americans went to get their PhDs in Germany. People like Lujo Brentano, Gustav Schmoller, Adolf Wagner, said that the government should use insurance principles. Otto von Bismarck was not an economist. He was the head of the German government. What do they call them, Chancellor? And he wasn't really very involved in this but his government did this. It created Krankenversicherung, that's Sickness Insurance in 1883, Unfallversicherung, accident insurance 1884, Invaliden und Altersversicherung, old age insurance in 1889. In his memoirs, Otto von Bismarck wrote his autobiography, he forgot all about this [LAUGH] and doesn't mention it. I don't think it came from him, it came from these economists. The Germans did not invent unemployment insurance. It was in the United Kingdom with the impetus of Lord George in 1911. Now these are all insurance things that you might think could be handled privately. While we do have examples of private sickness insurance, accident insurance, and old age insurance, we've got them all, and not unemployment insurance. Except maybe there is some example, minor example of unemployment insurance. I know it's been proposed. I think it might happen soon, by the way. People call me up with their ideas. Maybe in the next five years there would be privately offered add-on to government unemployment insurance, that's a major for us. Well, so why does the government get involved with these things? Well I think it has to do with the private sector can manage certain things well, but not everything. And it's hard to sell some of these to the public. They're mistrustful. Do I have a slide? Yeah, this is Gustav Schmoller around beginning of the 20th century, he wrote memoirs. And he wrote that, it was the triumph of insurance in every imaginable area was one of the century', he's talking about the 19th century, great advances. It was an entirely logical development, replacing the older charitable relief funds. It used to be religion which dominated our loves more. And religion did provide insurance, maybe I should have mentioned that. The church provided insurance. The earliest insurance contracts seemed to be religious documents. So there's other kinds of insurance. Aid to families with dependent children created in 1935 was to support people who couldn't feed their children. It was abolished in 1996 in reaction to what was perceived under President Clinton as an accelerating moral hazard problem. People thought that we're developing a class of people who've lived all their lives with AFDC and have no plans ever to work, and that struck them as wrong. So we have modified that. Although still, we are still feeding. They changed the food stamp program's name SNAP, to disguise it, Supplemental Nutrition Assistance Program. But we still have them, we still have something analogous to AFDC. So there's so many other things. Progressive taxes are a risk management device because if your income falls very low, your taxes go down. And in fact, we have negative taxes for very low incomes in the US and other countries because of the earned income tax credit and its analogs. We have free public education, that's an incredible transfer to the unsuccessful people, unsuccessful in terms of earning income. So that their children will still be supportive with decent public education. Social security, OASDI stands for Old Age Survivors and Disability Insurance. And we have government health insurance, notably Obamacare, which I didn't put on the slide yet. Worker's compensation was a movement before the federal government began really providing much insurance. Worker's compensation was a movement that went across the US states. And now I think every state has it, and it's spread across the whole world. I could give a whole lecture on this, it's an interesting story, to protect people against job related hazards. The theory was developed by economists, I think in Germany at first, but spread to the United States. The idea, that's [FOREIGN], it is Germany. So what is [FOREIGN]? It's insurance the employer must buy for the employees of the company against accidents at the workplace. And since they're forced to buy, it helps employers improve the safety in the workplace. It provides an incentive, that was the argument. It internalizes the cost. It used to be, when Lloyd George went to Germany for a visit in the 1890s or early 20th, one thing struck him. There are no cripples begging on the streets. He said, why not? In London, they're all over the place. Well this is what you had to do. You would be injured at work and you'd lose your legs. And now what would you do? Well, the first thing you do is you try to sue the employer for having an unsafe workplace, you could do that. But it's very hard to win a suit like that. Cause how do you prove that it was the employer who did it and not you own negligence? They could call the other employees to testify but they're not going to testify against their own employer. So you couldn't get it. You ended up on the street begging. So Lake George said, we have to do this too. And it spread all over the world and we still have it. I once, on an airplane, I sat down next to someone, I occasionally converse with people next to me on airplane. And she work for the state of Connecticut, Worker's Compensation Law. And I said, well, that's fascinating, tell me about it. [LAUGH] And she said, you're the first person to say that's fascinating. It's not glamorous, let's not talk about it. It's just there in the background, you don't even know you have it. But when take a job, you've got this insurance policy. In the United States, we try to create an income tax during the Civil War between the states. And it was a low tax rate, but the problem was that they couldn't measure people's income. Only 10% of eligible taxpayers actually paid by one estimate. Fraud was too easy back then. One problem was that how do you know what someone's income is? They didn't have documents. Your employer would pay you in cash. And so, how's anyone know? And your employer wouldn't keep records deliberately because it's an income tax. So, they rescinded the income tax in 1872. We had a much more corrupt government then than we do now. So, some economic historians say that economic development tends to have a slow process occurring over decades against corruption. Eventually, if it works out well, advanced countries are much less corrupt than the lower countries. Then it's partly because they have regulators and they have law enforcement that creates a standard that eventually is accepted. You don't bribe the police officer, right? If you're pulled over for speeding, did any of you [LAUGH], can I ask you this? Do you say, hey, look, I'll give you $100, I don't want a ticket on my record? You might do that in some other country, but it's just not done here. Unless I'm naive, I don't think it's done. I don't think any of you have tried doing that. Also, another important invention in history is the withholding of income taxes, that they don't expect you to pay up at the end of the year. because then that would mean you'd be expecting people to save money to the end of the year to pay their taxes. Well, they're not going to be able to do that, maybe they can. But what do you do with someone that has a family that looks like it's starving, and they come in to you, you're not paying your taxes. What are we going to do? Put the father in jail? What's that going to do? So it's better to create a tax system that withholds. It's an invention, like any other. I think it's a behavioral finance invention. I mentioned survivor insurance. The amazing thing, to me, is that when they created it in 1939, that the insurance industry didn't vigorously oppose it. because it was competing with what private insurance companies were offering. One thing they did in order to confuse the issue, is to rename it survivors insurance. This is fishing but it's well meaning. The government thought, we won't even call it life insurance. We'll call it survivors insurance. It sounds completely different but it isn't. With life insurance, you ensure someone against the death of a named party. And then it was a beneficiary named in the contract who gets it, usually the child or sometimes the wife. Or it could be the other way around, it could be the husband. But if you rename it survivors insurance, insurance companies don't have to mention when they're selling insurance that you already have life insurance. If they called it life insurance, they'd have to mention it. So let me just say that public finance shares many aspects of private finance and insurance. But they are different traditions and have different vocabulary, a different culture. And once again, progress in innovation is slow. It's always about the same general themes. It's about incentivization of good actions in a risky world. People have fears and purposes. And they like to have some choice of alternative financing methods, but they often miss the choices. So we have to give them something automatically.
