Mises Daily Articles
Why Not Universal Car Insurance?
I was recently involved in a car accident in which I managed to smash the front end of my Chrysler — one consolation is the fact that it was a Chrysler and so was not much of a loss. I sat around for a minute or two, trying to figure out what had just happened. Finally, I got out of my car to talk to the driver of the truck I had hit. While filling out the claims report and talking to my insurance company, I could not help but examine my experience through the lens of Austrian economics and the free market.
I was thinking about how much this ordeal would end up costing me. While my insurance covered the damage done to the truck, my car was totaled. Also, my insurance rates were bound to be jacked up; that would be hundreds of dollars more every year.
If I were a diehard and dedicated government pundit, I would demand that Obama set up some type of coverage program for young students like myself to deal with automobile accidents. It makes sense, doesn't it? The government pays for at least part of our schooling and our housing, and, if you are needy enough, will even pay for your daily "necessary" expenses. It is about time that the government step in and help defenseless college students pay for these mishaps!
As much as I would enjoy this "free" service (at the expense of other taxpayers) the fact is that social-insurance and welfare programs do not benefit the economy — or the recipient — over the long run. The welfare state has eroded the concept of personal responsibility, and for affected industries it has replaced the free market with a central economic system that promises higher costs and lower quality. The welfare state accomplishes the exact opposite of what it intends to do. It is a bane to the general wellbeing of society.
The welfare state has a long history in the United States (see Murray N. Rothbard's Origins of the Welfare State). One can trace it back to the early 19th century, and those well acquainted with the topic could probably trace it back even further. The Progressive movement, or the socially "left-of-center" movement, began to push for the expansion of the welfare state in the early 20th century. The modern welfare state in the United States was born out of Franklin Roosevelt's New Deal. Many of our current social-insurance programs, such as social security, were founded during that era.
Since then, there have been a number of generations who have known nothing but the welfare state. The era of instilling the virtues of responsibility seems to be slipping away, and new generations are becoming fixated on "government support." The new culture has become more about the "right" to have opportunities made available for you, rather than the right to make opportunities for yourself.
The old culture has been washed away by the rising tide of government interference and welfare. The notion of self-accountability is being eliminated by so-called "progressives" who believe it unfair to struggle. Instead, they push for a society in which everything should be made free and plentiful. The proponents of such a utopian and egalitarian society are those same individuals who consider the government an omnipotent force capable of providing these services without negative externalities.
Few have stopped to consider the moral and economic arguments against welfare and government-sponsored egalitarianism. It even seems as if the concepts of self-accountability and responsibility have completely slipped their minds.
If there are people receiving money for schooling or individuals having their medical bills for broken bones and other avoidable accidents fully paid for by the government, then I have the right to have my automobile insurance and damage costs paid for as well. After all, there are millionaires who drive expensive cars, and I risk not being able to drive at all because I barely make enough to pay for the basic costs associated with driving. Why don't I deserve their luxuries?
What moral rights can the poor claim on the property of those who own plenty? If one man owns ten automobiles and I own none, do I have the right to claim one of those ten automobiles as my own? Is the government justified in forcefully redistributing an automobile to me in order to (seemingly) raise my standard of living?
Do the rich have a moral responsibility to give the poor what they would otherwise have to work for? Whether it is security or health care or our own exaggerated example, universal car insurance, the morality of forceful redistribution of property is dubious at best.
The bottom line is that taxation is theft. It consists of an entity (government) or an individual (the tax collector) forcefully expropriating another's property. "Voluntary" tax collection is nothing more than an oxymoron:
While the Internal Revenue Service boasts of a "voluntary compliance" system of tax collection, the fact is that taxation is carried out at the point of a gun. If you choose not to pay—for whatever reason—armed men will seize you and forcibly take you to jail. If you resist, violence will be used against you. This is not "voluntary compliance." It is theft.
The case for taxation is oftentimes based on the utilitarian argument that a degree of redistribution is necessary for the good of society as a whole. The analysis itself is flawed given that while the recipient of the redistributed capital is temporarily wealthier, the original owner is now that much poorer. More importantly, the incentive to invest is reduced, which makes society as a whole much poorer over the long run.
If you apply this to the case of universal car insurance, then while the recipients of said car insurance would be that much wealthier, those who had to pay for it would be poorer by the same amount. Furthermore, an increase in the wealth of one person at the expense of another supposes that all other factors remain the same, which is simply untrue. Universal car insurance would make society as a whole poorer than it would otherwise be. The same remains true for universal healthcare and other social-insurance programs.
It's Just Bad Economics
The entrepreneurial and moral case against social-insurance programs, like our hypothetical universal car insurance, has already been established. A loss of entrepreneurship, however, is not the only economic loss that results from a forceful monopolization of an industry. Less abstract than the relationship between liberty, property rights, and economic growth are the direct negative consequences of the monopolies that arise out of public insurance systems:
- rising costs;
- opportunity for an infinite increase in quantity demanded;
- incentives to reduce quality.
Imagine a public car-insurance system devised by the government to cover "essential automobile-related necessities." The government could cover collision damage and maintenance checkups; and, if you are particularly needy, you could also opt for coverage of necessary parts when yours wear down (only if you meet the necessary income requirements, of course). If we are to believe government, all of this can be delivered in an affordable package — let us put a price tag of $800 million on it (not to worry, the Federal Reserve can just "loan" the state the money).
The truth is, however, that a monopolistic insurance program is anything but affordable.
Insurance companies, in a free market, work through competition. They compete by offering better prices or better services to their customers. Over time, different firms will devise different ways of lowering production costs, allowing them to offer lower prices to their customers and still maintain profit margins. They do this to gain larger shares of the market and, therefore, to earn greater revenue.
In a government-organized monopoly, this does not remain true. Insurance companies no longer compete for multiple clients, but for just one — this is called a monopsony. The amount of eligible insurance companies quickly dwindles. First, some companies will immediately become unprofitable, given that if they fail to quickly gain a government contract they no longer take in an income. Second, insurance companies have to be able to meet certain government-set requirements. Limiting the amount of suppliers raises prices, as there are fewer buyers competing against each other. Third, once contracts are offered, those who were not awarded contracts will cease to exist, and thus a legal monopoly is created. With no potential competitors, these firms can now raise prices almost at will.
What is the danger of getting into an accident (other than to one's health, of course)? What would result in higher insurance costs in a free market — and therefore serve as a disincentive to drive carelessly — is free of cost in a world of universal coverage.
Rising costs do not equal rising quality. While government may be investing in research programs to develop better automobiles that have longer life spans, insurance companies themselves will work toward lowering costs of production in order to garner higher profit margins. When the only client is the government, insurance firms have no incentive to maintain their clientele by offering better services or by lowering costs. The exact opposite will happen. Over the long run, government-sponsored monopolies tend to become more expensive, and, eventually, fiscally untenable, while quality diminishes. Thus, a universal car-insurance program is bound to fail.
Virtues of Responsibility
An insurance industry can only work to everybody's benefit if it is operating in a free market. Insurance companies must compete for clients, while the client must bear the fiscal responsibility of his actions. Making the individual liable and responsible gives an incentive to lower costs. It logically follows that government should not interfere in the market by disallowing certain suppliers to enter or by transferring responsibility from the consumer to the state. These distortions cause shortages of coverage, making those who suffer the consequences of those distortions that much poorer.
The concept of a universal car-insurance program is absolutely silly. But it is a great illustration of why social-insurance programs inevitably fail over the long run. The built-in free-market "regulations" that ultimately benefit the consumer simply do not exist outside of a free market, because the government has effectively nullified their relevance.
Few people believe a universal car-insurance program would be tenable. Those who agree with the argument presented here, however, must accept its application to other social-insurance programs. This includes the health-insurance market. A government monopoly in healthcare would suffer from the same economic factors as a monopoly in automobile insurance.
The lapse in logic occurs when emotion overrides reason. There is a utilitarian impulse to support a measure that claims to provide all with the means to "guarantee" their health. But when we look beyond the surface of the issue, we see that there is nothing less utilitarian than a universal healthcare system.
 Palmer, Tom G., Realizing Freedom: Libertarian Theory, History, and Practice (Cato Institute, 2009), p. 293.
 Mises, Ludwig von, Liberty and Property (Mises Institute, 2009).