Economists refer to this as the problem of adverse selection. In the real market, effective risk reduction can be achieved only by discipline. Private insurers are rewarded according to their ability to reduce social risks, while the state must provide benefits to all citizens. The state's commitment to nondiscrimination prevents control of adverse selection through risk segregation, and the state's responsiveness to voter interests cripples efforts to control moral hazard. In addition, while private insurance charges premiums based on risk, then invests the receipts productively to create the largest possible fund from which to pay off losses, government insurance taxes society's most productive activities to redistribute the receipts to the most risky activities.
Government clearly has the potential of enhancing the lives and welfare of our citizenry.
But government expenditures, financed by the taxation of productive Americans, can only be justified if the return on the government's investment exceeds the return to the citizen from the expenditure of his or her own money. Insurance provided by the government, I hope to have shown here, clearly does not meet that test. His article critiqued British Labour Party leader Tony Blair's call for a society in which the interests of corporate shareholders would be balanced against those of managers, workers, vendors, and others. It is this, in fact, which explains much of his enduring fascination for many Western leftists. Ms. Lefkowitz, professor of classics at Wellesley College, presented her thesis at AEI in December 1994 as part of the Institute's Bradley Lecture series.