State, Society, and Unemployment Insurance

by Don Boudreaux on January 28, 2007

in Charity, Complexity & Emergence, History, Myths and Fallacies

Perhaps the difference that most fundamentally separates true liberals and libertarians from others is that, to one degree or another, true liberals and libertarians are, unlike non-liberals and non-libertarians, dutiful sons and daughters of the Scottish Enlightenment.  And one of the great lessons of that remarkable intellectual movement is the refinement of the understanding that state and society are not the same thing.  Society is not created by the state, and the state’s activities not only do not define those of society but often diminish society’s activities.

I thought of the distinction between state and society when I read this passage in Paul Krugman’s column from this past Friday’s edition of the New York Times:

For the fact is that F.D.R. faced fierce opposition as he created the institutions — Social Security, unemployment insurance, more progressive taxation and beyond — that helped alleviate inequality.

Did Franklin Roosevelt “create” unemployment insurance?  His administration did champion legislation that created government-provided unemployment insurance.  But Mr. Roosevelt emphatically did not create such insurance.  Here’s a letter that I sent to the Times in response:

Paul Krugman mistakenly credits Franklin Roosevelt with having “created” unemployment insurance (“On Being Partisan,” Jan. 26).

Private unemployment insurance was offered long before the New Deal.  As Professor Michael Rappaport found, starting around 1910 companies began selling such insurance to railroad workers.  Alas, seeking to offer such coverage to other workers, private insurers were consistently blocked by state governments.  And when New York’s legislature in 1931 finally approved the expansion of private unemployment insurance, the bill was vetoed by none other than Gov. Franklin Roosevelt.

Sincerely,
Donald J. Boudreaux

The Rappaport paper is “The Private Provision of Unemployment Insurance,” Wisconsin Law Review, Vol. 61 (1992).   (I cannot find a non-gated version of this paper on line.)  A summary of some of the key points of the paper is found in this Regulation article by George Leef.

Private, voluntary actions supplied unemployment insurance in yet other ways.  My friend Steve Ziliak wrote, after I sent him a copy of my letter:

As I and David Beito have independently found, fraternities, sororities, lodges, and mutual aid societies had been offering private unemployment insurance in the United States throughout the second half of the 19th century and in the early years of the 20th.  Also: sickness insurance, death insurance, worker injury insurance, and temporary charitable aid.  Fred’s and Barney’s membership in the Royal Order of Water Buffalo Lodge “back in the Stone Ages” isn’t much of a fiction.

Steve also offers these cites:

David T. Beito, From Mutual Aid to the Welfare State: Fraternal Societies and Social Services, 1890-1967

S. T. Ziliak (with Joan Hannon), “Public Assistance: from Colonial Times to the 1920s,” Historical Statistics of the United States (Millennial Edition, Cambridge University Press, 2006). S. Carter, et al., eds.

S. T. Ziliak, “The End of Welfare and the Contradiction of Compassion,” The Independent Review Vol. 1 (1996).

I suspect that unemployment insurance would today be much more efficiently supplied, with greater attention to the individual needs and circumstances of workers and their families, had the state not pre-empted and prevented society from creating this beneficial institution.

F.D.R. clearly did not create unemployment insurance.  It’s closer to the truth to say that he helped to destroy it.

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{ 9 comments }

kurt January 28, 2007 at 7:47 pm

But is the risk of getting unemployed actually an actuarial risk? Maybe "unemployment insurance" is more aptly called a "voluntary redistribution scheme."

Sam January 28, 2007 at 7:59 pm

But isn't insurance more aptly called a "voluntary redistribution scheme"?

David Z January 28, 2007 at 11:14 pm

Sam,

Kurt is right. There's a significant difference between insurance and voluntary redistribution. Most people don't want to be the beneficiary of an insurance policy, which indicates that they've suffered some sort of hardship. Policies also generally do not pay claims for those occurrences that the insured party caused: suicide, arson, &c; i.e, fraudulent claims.

The events that give rise to claims are generally out of the control of any individual, who knows nothing about his own particular risk except the fact that he's part of a certain pool with certain characteristics. In this regard, "unemployment insurance" is really not an insurable risk in the pure sense, because the employee has some control over whether he remains employed.

Tim Worstall January 29, 2007 at 7:05 am

There's a long history of such things in the UK too: we call them the Friendly Societies. The Co-Op movement, still a sizeable chunk of the Labour Party, was based upon them.

For more, strongly recommend James Bartholomew's "The Welfare State We're In". The blog is here:
http://www.thewelfarestatewerein.com/

The book itself is a history of what we had as a welfare state before it became a State welfare state.

SaulOhio January 29, 2007 at 7:27 am

See also David Kelley's "Unrugged Individualism".

Flash Gordon January 29, 2007 at 11:46 am

Some great book and article suggestions here. Let me add one: Tocquesville's other book, that is less well known but also brilliant, originally written in 1835, it is: Memoir on Pauperism; How Public Charity Has Created A Pauper Class, available at
Amazon. By "Public Charity" Tocqueville was referring to what we now know as government welfare.

Person January 30, 2007 at 11:58 pm

Ah! But you most dreadfully forgot to mention a prevalent form of private unemployment insurance that exists today: credit agencies that offer to defer interest accrual for a set period if you lose your job.

UI_Actuary February 21, 2007 at 9:41 am

As an actuary who has spent most of his working career dealing with UI, and has dealt on the international scene, I can assure you that unemployment is an actuarial risk. To say that it is not insurable because people have some control over how long they stay unemployed overlooks the fact that this is the case for most if not all insurances – people have some control over the length of their illness, over the number and severity of car accidents, over where they build houses subject to flooding, etc.

The benefits people get when they are unemployed are so low as to provide little real incentive to stay unemployed. Maybe a few people do abuse but most find jobs well before they draw all of their UI benefits, and most actually never even draw any benefits in their lifetime.

Kazaril February 23, 2007 at 10:41 am

If you find yourself unemployed in America today, you can make use of the system to obtain a part of your lost wages at this site!

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