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Businesses Romney does not understand

October 29, 2012 - Harry Eagar
I’ve been thinking about this post for weeks but putting it off because it’s pretty obscure. On the other hand, Mitt Romney goes around making statements along the line of, “Private business always outperforms government,” and that is wrong.

No one who knows America’s business history thinks that. Of course, the number of people who know America’s business history is very small.

In fact, huge sectors of business exist only because of government supervision or encouragement. In aggregate, most of the U.S. economy would either not exist at all or would be weak and puny without government interference. I don’t have time to list all of them, but let’s take life insurance as an example.

Life insurance is a big, big part of American business. It’s assets were $18,000,000,000,000 (that’s trillion with a T) and cash inflows were nearly $3,000,000,000,000 (trillion again) in 2009. That’s serious money. Without life insurance, capitalism would be hard put to it to find capital.

Yet, until government stepped in, the life insurance business was small, corrupt and disreputable; and, yes, America was starved of capital in those days.

Aside from a couple of benevolent societies (which tried to, gasp, socialize private charity for their members), life insurance was hard to find and often not worth finding in the early Republic. There were no regulations, so insurors did not have to maintain capital reserves. Since they didn’t, they had no need for actuarial science.

Life insurance was not then a form of saving. If you bought a policy, it might -- or might not -- pay off if you were lucky enough to die early. If you were unfortunate enough to live to a normal old age, most likely the original underwriter, figuring you were going to die pretty soon and he had nicked you for plenty of premiums over the decades, sold your policy.

This was legal, since life insurance was unregulated.

If the second buyer was honest (a dubious assumption), if you died on him, he still might not be able to pay off, since he hadn’t received many premiums.

In practice, policies of long-lived customers tended to change hands several times, with each marginal to desperate “insuror” betting that he could get at least one more premium payment before the customer kicked the bucket. Prices to buy contracts spiraled downward, and speculators hung around the doors of rich decrepit policyholders (ordinary folks didn’t have the option of life insurance), milking the servants for intelligence about whether Mr. Gotrocks might hold out for at least one more premium payment.

The odds that the holder of the contract when the customer expired would be able to fulfill the policy were remote.

It was, however, a nearly perfect example of an efficient market.

Mitt Romney would have loved it.

Pernicious, meddling politicians and bureaucrats changed everything.

By regulating insurors, usually at the state levels, requiring adequate reserves and audits, they created a demand for a secondary service business, the actuary.

Once talented statisticians set up shop providing tables for insurance companies, other businessmen took advantage of their skills for other purposes, and thus was born the multimegabillion consulting sector. It might have happened without government interference, but the fact is, it didn’t.

Other sectors that were created by, or never thrived until government interference include road building and overland freight hauling, manufacturing using interchangeable parts, electronic computing and aviation.


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