I think that Stephen Williamson gets it right. He wishes that people were able to insure themselves against being born with the wrong parents, or against being protein-deprived in utero, or against getting some of the not-so-good brain-development genes:
Stephen Williamson: Income Distribution Part II: Here's another thought relating to this post. Our basic notion of social insurance is that each of us is placed, at birth, in a set of circumstances beyond our control. Before birth, we're not able to write insurance contracts that will compensate us for being born poor, for being born with a serious disease or birth defect, or for other possible bad events. There is then some role for the government in stepping in to provide the insurance that the private market cannot provide, by redistributing income from the rich to the poor, providing health care, or other interventions. The problem... is... prices help to allocate resources efficiently. To a degree, people are rich by virtue of the fact that society puts a high value on their services, and society puts a high value on their services because these are the services society wants. To provide the services that society wants, people have to be motivated to provide them. Becoming a skilled brain surgeon requires time and effort, and people won't do it if there is no payoff. Thus, what we have here is a very standard economic problem. We are trading off insurance with incentives. ...
Mark Thoma has some questions:
When I see the argument about trading off incentives (efficiency) for insurance, the first and most basic question is if there is a market failure preventing the insurance from being offered by the private sector -- and there seems to be -- why does correcting it reduce rather than increase efficiency?... But I want to ask a different question. Why aren't incentives subject to diminishing returns?.... When profit rates are very high, the tradeoff seems much less important...
I think Mark is right on the rhetoric.
When you add a government institution that mimics a missing market, you almost surely increase rather than reduce efficiency--at least for the the first few "transactions." Nearly everybody would, if they could, buy some pre-conception insurance. But a world in which the government forces everybody to buy 100% pre-conception insurance and thus eat the same thing all the time and wear identical blue overalls is a very poor and inefficient world. We try to strike a balance via public policy since there is no competitive industry of insurance companies providing actuarially-fair pre-conception insurance, so we do the best we can. But--Mark says and I agree--we should not view the first tranches of social democratic income redistribution as making the economy less efficient: it makes it more efficient.
Now you can reject the argument: you can say that you simply reject the idea that the government ought to provide social insurance to mimic that particular missing market. The problem with that, I think, is that you have then rejected all government policies that mimic missing or, indeed, establish markets. And you reject all government policies that improve the functioning of markets as well.
Benthamite utilitarianism is not a streetcar that you can dismount from when it reaches a stop that justifies your good fortune and low tax burden. Rather, for the sake of intellectual consistency you need to ride it to the end of the line.