Recently, David Henderson wrote about how Herbert Hoover had intentionally sabotaged the system of property rights in the spectrum that had existed prior to the government allocation of the radio spectrum. As Commerce Secretary, Hoover had disliked that the government could not determine who had the right to broadcast. As a consequence, he stopped enforcing the property rights rules so that a new system of government regulation could be employed. If there were not so many other reasons to dislike Hoover, this would be reason enough. Bad, very bad.
This brought to mind the old libertarian claim that many—and perhaps most—market failures that are said to have justified government regulation are actually the result of government failures. Here, I discuss another example of a “market failure” actually caused by government failure—in this case, an example that I discovered in my own scholarship on unemployment insurance (UI). (See Michael B. Rappaport, “The Private Provision of Unemployment Insurance,” Wisconsin Law Review 61, January–February 1992.)
The government unemployment insurance system is normally thought to be a form of social insurance that is necessary because the private marketplace would not provide this service. Private insurers could not provide the service because unemployment was not an insurable risk—one that insurers could provide on a reasonable basis.
But it turns out that this story is just that—a story told to justify a government welfare state program. There are three problems with the story.
First, it is true that prior to the establishment of government insurance, there was no private UI—although there was private savings, union-firm and friendly societies that provided this type of service). But one reason why there was no private UI is that it was illegal to sell it in the period prior to the New Deal. There were two obstacles. It was clearly illegal in New York to sell UI, and New York enforced a rule that said an insurance company that sold insurance could not provide a type of insurance in other states that was illegal in New York. Given New York’s economic and political dominance during the early part of the 20th century, when this issue arose, this made UI infeasible to sell. Moreover, a review of state laws at the time also suggests that UI was illegal to sell at the time.
Second, private insurers wanted to sell UI but were legally prevented from doing so. Consider this 1926 statement from Haley Fiske, the President of the Metropolitan Life Insurance Company, one of the largest insurers at the time:
We have desired for years to be enabled to issue insurance against unemployment, and we have been stopped, because the insurance law of New York does not permit us to do it.
I am not going to enter into the discussion of the reasons why, up to date, the law hasn’t been passed. Some personalities might be involved. Some current of obscure political, economical doctrines, might be involved. Perhaps it is polite to use the mere word “conservatism,” but it is a conservatism that, 100 years ago, would have prevented the formation of any life insurance company.
Patience, patience – but as sure as GOD spares my life, we are going to issue unemployment insurance.
Third, the government in part intentionally blocked private unemployment insurance to allow government insurance. In 1931 an authorization bill for unemployment insurance passed both houses of the New York State legislature, but then-Governor Franklin Roosevelt vetoed it. The reason: Roosevelt feared that the law would block the efforts to promote government UI.
We do not know whether private UI would have been successful, but we do know that the government prohibited it when private companies wanted to sell UI and that government did so in part in order to promote government UI.