Why a hedge fund manager will tell you big government is great for capitalism

What can government do to cultivate a vibrant economy? Nothing, if you ask our political class. Ever since Bill Clinton declared that the era of big government was over, even Democrats have treated the welfare state like a drag on the free market, focusing on its social benefits rather than its economic ones.

But this is a mistake, as any hedge fund manager will tell you. Government investments in social insurance can go a long way to freeing individuals and businesses to take entrepreneurial risks and to innovate, unleashing "creative destruction" in its purest — and most humane — form.

On a basic level, welfare state programs insure individuals against certain risks. "Much of what we call social policy is actually public insurance," writes political scientist Lane Kenworthy in his book Social Democratic America. Unemployment insurance, for example, protects against losing a job. Programs like ObamaCare insure against not having health coverage.

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Other liberal priorities also fit into the insurance mold. Kenworthy rattles off a number of worthy new proposals, including wage insurance in case of a pay cut, sick leave to insure workers in case of illness, and a child benefit to insure parents against the costs of child rearing.

This agenda might seem ambitious. But it also might be precisely what our modern economy needs. These sorts of protections would provide greater individual economic security, allowing more people to venture out as entrepreneurs and put good ideas into practice. They would free individuals to take a chance at a new startup instead of playing it safe at an established firm.

In short, these insurance schemes would encourage the kind of risk taking that our economy thrives on. This is the same insight that the private sector has embraced through hedge positions and futures contracts: that insurance against risk fuels growth.

Without public insurance, private employers are often called on to provide these benefits, constituting a sort of private welfare state. This shackles employers with costly side duties like running a health insurance program or a retirement plan.

This burden would be alleviated if government got bigger. Companies would find themselves suddenly more agile in the marketplace, unencumbered by their employees' hospital bills.

Moreover, as Kenworthy notes, the policy alternative to public social insurance is often more regulation. This can be more disruptive for employers than even higher taxes from new social programs.

Consider the legislative history of ObamaCare. After the demise of the public option, labor unions and other liberal interest groups insisted that the law include a mandate on most employers to provide health insurance. Without the participation of the welfare state, heavy-handed regulation was the compromise position and became law. (Whether the employer mandate will ever see the light of day remains to be seen.)

So how would we pay for these new social programs? Most liberal proposals will look to raise at least some revenue from the most successful firms and earners. And this tax-and-transfer policy is also entirely consistent with a vibrant market economy.

The most prominent argument on this point comes from Sen. Elizabeth Warren of Massachusetts. Her viral "Factory Owner" living room speech was mostly notable for making a moral case for progressive taxation and redistribution. In her more eloquent version of President Obama's ham-handed "You didn't build that," Warren detailed how a successful factory owner benefits from publicly provided goods like roads, property rights, and education.

But she went on to ground her argument in a conception of government and capitalism that celebrates those who challenge successful companies. "Now, look, you built a factory and it turned into something terrific," she said, "God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."

Warren's pay-it-forward vision aims to arrange our social policy to clear the way for young upstarts with fresh ideas to take on today's business status quo. This is the essence of an ultradynamic economy — "creative destruction" that continuously innovates yesterday's ideas into obsolescence. Without transfers and expansive social insurance, upstarts can face a steep uphill climb, which would have the effect of entrenching incumbent firms and outmoded thinking.

This instinct to champion the underdog animates liberal views on social policy. Public social insurance expands access to the poor and helps them climb the socioeconomic ladder. But it also helps level the economic playing field, aiding innovators as they try to unseat their predecessors. (Hence, why the appeal of a disruptive company like Uber to Obama's campaign guru David Plouffe is entirely consistent with contemporary liberalism.)

Liberals shouldn't concede arguments over economic vibrancy to conservatives. Indeed, expanding the welfare state would go far to energize our economy, allowing companies and workers alike to better seize opportunities and pursue groundbreaking ideas.