John Quiggin: The Risk Society, part two

“Risk” may be a central idea of the early 21st century, just as “globalisation” was the dominant idea of the 1990s. The fact that individuals and families are vulnerable to a wide range of social, economic and other risks — and that collective action is needed to help reduce and manage these risks — has long been an important theme in social-democratic thinking.

In the second part of a serialised paper first published by the Centre for Policy Development, University of Queensland economist John Quiggin writes that an improved understanding of risk can contribute to the development of a modernised social democratic model.

Risk and the functions of the welfare state

The interpretation of the welfare state in terms of risk and uncertainty may be illustrated by considering some of its core functions. For some of these functions, such as various forms of social insurance, the risk management function has always been emphasised.

However, concern with risk has traditionally been a subsidiary theme. For instance, the public provision of retirement income and of services like health or education have commonly been justified with reference to notions of redistribution, public goods and the provision of basic needs. However, none of these arguments yields an immediate response to neoliberal criticisms that it would be better to redistribute money incomes, and then allow households or individuals to allocate their expenditure between health, education and other things as they see fit.

But when the argument is flipped over and examined on the basis of risk, a much stronger case for intervention emerges. We can see this by looking at the health and education sectors, where the risks associated with health care and investment in education are compelling.

The problems with market provision of health care are well-known. In the absence of public intervention or insurance, health care expenses for even moderately serious illnesses and injuries are so large and uncertain as to be beyond the capacity of most individuals and households to manage through ordinary methods such as drawing on savings. In the United States, for example, an average day in hospital can cost $US1,500 (around $AUD2,000). Even a short stay in hospital can exhaust the liquid financial resources of the average household.

The usual private market response in cases of this kind is insurance. However, health insurance faces severe problems arising from the fact that some people are more likely to suffer poor health than others. If insurers have information on the health status of their clients, they will charge higher rates for those known to be at high risk – or even refuse to cover them at all. If clients can keep this information private, those at high risk will naturally be more willing to seek coverage, and this will push up rates across the board (the problem known as ‘adverse selection’).

Despite strenuous attempts, no private market solution to this problem has been found. The US has maintained higher levels of reliance on private insurance than most other countries, but even so, almost 50 million people are uninsured. Many more are covered by the public residual insurance schemes Medicare and Medicaid, which are hugely expensive. In fact, despite offering coverage to only limited groups such as the elderly, military veterans and the very poor, the US government sector actually spends more on healthcare relative to GDP than its Australian counterpart.

The Howard government has similarly engaged in massive public expenditure combined with coercive measures applied to high income earners to maintain the private health insurance sector, without achieving much more than a partial reversal of its decline.

In other words, public financing is the only feasible response to the problems of health care.

The necessity of public financing may be traced to the risks associated with health in both the short term and long term. In the short term, we can’t know for sure if or when we will get sick. In the long term, markets cannot manage the risk associated with the fact that some people will have chronically worse health than others.

Although there are good grounds for a substantial element of direct public provision, public financing can also support private provision including both private medical services and community run primary health care centres. These issues are discussed further in the Centre for Policy Development’s ‘A Health Policy for Australia: reclaiming universal care’.

Similar lifetime risks arise in education. On the one hand, as children start school, or as teenagers enter university, there is a lot of uncertainty about the outcomes. Some will do well and go on to high-paying jobs, while others will do poorly and face the prospect of insecure, badly-paid work. But this uncertainty is not uniform. Students from wealthy backgrounds with highly-educated parents face much better odds than those whose parents have low incomes and less education.

As a result, any system relying primarily on private financing and provision of education is likely to be inefficient and inequitable. Students from poor backgrounds will have limited access to loans to support education, and will face less favourable terms and more limited opportunities. This can be seen quite clearly when we look at the make up of student populations in the top US universities. A 2004 study showed that, of the 146 most competitive and selective institutions, just 3 percent of students come from families whose incomes are in the lowest 25 percent. In comparison, 74 percent came from families in the top quarter. Although the situation in Australia is not as bad as this, students from working class background are less than half as likely to attend university as students from professional and managerial backgrounds. These unequal opportunities are partly due to problems at the school level, but they also reflect inadequate responses to the risks associated with education.

A related problem is that external assessment of the quality of education is quite difficult. If a school or university reduces the quality of the education it provides, for example by offering less demanding content, it will be many years before this becomes apparent. As a result, competitive market mechanisms do not work well in the education sector – if indeed they work at all.