Follow the Risk

Tracing the distribution of risk is an important method that is helpful for understanding the trade-offs of any government action. Almost every government action reduces risk for some group and repackages the risk and forces another group to bear it. The government often serves as a hedge against risk, but it is important to understand who the payer is and what the costs are before blindly signing off on state control. The most common form of risk relates to the concept of “concentrated benefits, dispersed costs.” Small groups like farmers or steel producers can hedge against industry risk by receiving benefits that are spread across the entire American tax base. The inverse of this problem is when small groups must make large sacrifices to reduce the overall risk of the total population. There are few situations where government risk management is worth it, and most of them are when the repackaged risk is paid fairly by those who receive the benefit. Growth in government risk management both incentivizes more risk and particularly damages those who avoid creating risk.

“Concentrated benefits, dispersed costs” is a phrase that describes the incentives behind targeted government industry policy. Because some groups are compact and organized with a compelling reason to coordinate, they are able to present their story clearly and effectively to government actors. The taxpayers who will pay for the benefits transferred to the special interest groups are not able to easily coordinate and they have no compelling reason to, as the burden of each individual is relatively small when compared to the cost of coordination. When industries like banking or agriculture face large risks and can convince the government that it is needed to protect them, the industries are able to turn their risk into a guaranteed cost for taxpayers. This makes businesses less responsible, increasing the risk, and putting them into conflict with the people who involuntarily bear their risk. This problem only continues to worsen over time as the government grows and more industries recognize the benefits of state protection. Particularly when industrial failures already damage the nation, forcing taxpayers to insure them even in times of stability only deepens the problem.…