Government and the Risk Society

1
Government and the Risk Society

• John Quiggin
• Schools of Economics and Political Science,
• University of Queensland
• Web site http//www.uq.edu.au/economics/johnquiggi
  n
• WebLog http//johnquiggin.com

2
Risk in the 21 st century

• A central idea around which discussion is
  organised
• compare globalisation in 1990s
• New developments
• Terrorism
• Climate change
• Increasing economic insecurity
• Reinterpretation of older policy concerns

3
From Fortune to Probability

• Concept of probability not developed until the
  16th century
• Gradually displaced personalised notions of
  Fortune, Fate, Providence
• Not part of our natural mental equipment
• Heuristics and biases

4
Models

• Expected utility
• Von Neumann and Morgenstern 1944
• Savage 1954
• State-contingent approach
• Arrow and Debreu
• Bayesian decision theory

5
Challenges

• Keynes, Knight, Ellsberg
• Ambiguity and uncertainty
• No well-defined probabilities
• Objective or subjective
• Multiple priors models
• Allais
• Probability weighting
• Rank-dependent model
• Kahneman and Tversky
• Prospect theory
• Incompletely specified state space

6
Probability and the social sciences

• Classical statistics 1900-1950
• Economics 1950 -
• Rational choice
• Economic imperialism ?
• Countervailing arguments
• Psychology- bounded rationality
• Sociology - fundamental uncertainty and
  embeddedness in institutions
• Post-Keyneian and Austrian economics

7
The role of the state

• Missing markets in Arrow-Debreu model
• Asymmetric information
• Moral hazard
• Adverse selection
• Fundamental uncertainty in economic sociology and
  post-Keynesian economics
• Austrian economists have a contrary view
• Uncertainty as opportunity for entrepreneurs

8
Historical reinterpretation of the role of the
state (Moss)

• Security for business (1800-1900)
• Bankruptcy
• Limited liability
• Security for workers (1900-1960)
• Unemployment insurance
• Workers compensation
• Social security
• Like Australia, a wage-earners welfare-state
• Security for all (1960 onwards)
• Environmental and consumer protection

9
Risk and the role of the state (Barr)

• The welfare state as piggy-bank
• Consumption smoothing and insurance
• Contrasted with Robin Hood (redistribution)
  function

10
The equity premium(Grant and Quiggin)

• Difference between government bond rate and rate
  of return on private equity
• Cannot be explained by standard models of the
  risk premium
• Due in part to capital market failures
• No private unemployment insurance
• Transactions costs of consumption smoothing
• Implies superior state capacity for insurance and
  consumption smoothing

11
New and old views of the welfare state

• In traditional presentations, smoothing function
  seen as either
• Undesirable side-effect (middle class welfare)
• Poltiically necessary to build support for
  redistribution (universalism)
• In risk-based view, redistribution may be seen as
  providing insurance against a particular kind of
  risk
• Risk of being born without high-value endowments
  of wealth or marketable skills

12
A risk-based view of the welfare state

• Health
• Fundamental information problems
• Retirement incomes
• Risk and the equity premium
• Education
• Capital market failure
• HECS

13
The neoliberal critique

• Risk, choice and opportunity
• Case for social security privatisation
• Partly implemented in three-pillars systems like
  Australia
• Beneficial role of financial markets
• Washington consensus
• Globalisation
• Austrian-style focus on entrepreneurship
• Pushed strongly during dotcom boom
• Less convincing now than in the 1980s and 1990s

14
Towards a synthesis

• Exploit state capacity
• Taxation system
• Low-cost long-term borrowing
• Individualised assistance in place of or in
  addition to mass welfare

15
The HECS model key elements

• Consumption smoothing
• Gradual repayment, zero or low interest rates
• Insurance
• Income threshold
• Income-contingent repayments
• State capacity
• Use of the tax system for efficient collection

16
Other proposed and actual applications

• Child support
• Criminal and civil penalties
• Drought relief and other temporary assistance
• First home-owners

17
Universal capital assistance

• Ackerman and Alstott propose universal capital
  grant
• Financed by wealth or inheritance tax
• Conditionality
• Range of allowable purposes
• Fungibility
• Grants vs loans
• Use of HECS mechanism could allow a larger
  capital sum with subsidised repayment

18
Macroeconomics and public investment
19
Conclusion