Do We Need a Social Welfare State?

One must evalulate all the trade-offs.

The following article in today’s NY Times asks the provocative question of whether we can afford a major shift to a social welfare state. One must also ask if the USA needs such a level of social welfare spending and what trade-offs it might impose. This is a question that must be answered through the democratic political process because the economic trade-offs are real.

See comments in RED.

Can America Afford to Become a Major Social Welfare State?

nytimes.com/2021/09/15/opinion/biden-spending-plan-welfare.html

By N. Gregory Mankiw

September 15, 2021

In the reconciliation package now being debated in Washington, President Biden and many congressional Democrats aim to expand the size and scope of government substantially. Americans should be wary of their plans — not only because of the sizable budgetary cost, but also because of the broader risks to economic prosperity.

The details of the ambitious $3.5 trillion social spending bill are still being discussed, so it is unclear what it will end up including. In many ways, it seems like a grab bag of initiatives assembled from the progressive wish list. And it may be bigger than it sounds: Reports suggest that some provisions will arbitrarily lapse before the end of the 10-year budget window to reduce the bill’s ostensible size, even though lawmakers hope to extend those policies at a later date.

People of all ages are in line to get something: government-funded pre-K for 3- and 4-year-olds, expanded child credits for families with children, two years of tuition-free community college, increased Pell grants for other college students, enhanced health insurance subsidies, paid family and medical leave, and expansions in Medicare for older Americans. A recent Times headline aptly described the plan’s coverage as “cradle to grave.”

If there is a common theme, it is that when you need a helping hand, the government will be there for you. It aims to assist people who are struggling in our rough-and-tumble market economy. On its face, that instinct doesn’t sound bad. Many Western European nations have more generous social safety nets than the United States. The Biden plan takes a big step in that direction.

Can the United States afford to embrace a larger welfare state? From a narrow budgetary standpoint, the answer is yes. But the policy also raises larger questions about American values and aspirations, and about what kind of nation we want to be.

The issue Prof. Mankiw addresses here is the question as to whether the costs of such programs yield the benefits desired. There is a lot of talk on the left that Modern Monetary Theory demonstrates that deficits don’t constrain government spending so that politicians should spend what’s needed to achieve whatever objective they choose. This is a bit of wishful fantasy. What matters economically and financially is whether such spending yields a greater return in terms of freedom and quality of life for society as a whole. If such spending merely increases the deficit but does not invest in the productivity of the economy, then it is a dead weight upon society. It’s not much different than one’s personal desire to choose between buying a new car or instead investing in education. One must compare how each choice will yield in terms of financial freedom and happiness over the longer term.

The Biden administration has promised to pay for the entire plan with higher taxes on corporations and the very wealthy. But there’s good reason to doubt that claim. Budget experts, such as Maya MacGuineas, president of the Committee for a Responsible Federal Budget, are skeptical that the government can raise enough tax revenue from the wealthy to finance Mr. Biden’s ambitious agenda.

The United States could do what Western Europe does — impose higher taxes on everyone. Most countries use a value-added tax, a form of a national sales tax, to raise a lot of revenue efficiently. If Americans really want larger government, we will have to pay for it, and a VAT could be the best way.

The costs of an expanded welfare state, however, extend beyond those reported in the budget. There are also broader economic effects.

Arthur Okun, the former economic adviser to President Lyndon Johnson, addressed this timeless issue in his 1975 book, “Equality and Efficiency: The Big Tradeoff.” According to Mr. Okun, policymakers want to maximize the economic pie while slicing it equally. But these goals often conflict. As policymakers attempt to rectify the market’s outcome by equalizing the slices, the pie tends to shrink.

Mr. Okun explains the trade-off with a metaphor: Providing a social safety net is like using a leaky bucket to redistribute water among people with different amounts. While bringing water to the thirstiest may be noble, it is also costly as some water is lost in transit. 

In the real world, this leakage occurs because higher taxes distort incentives and impede economic growth. And those taxes aren’t just the explicit ones that finance benefits such as public education or health care. They also include implicit taxes baked into the benefits themselves. If these benefits decline when your income rises, people are discouraged from working. This implicit tax distorts incentives just as explicit taxes do. That doesn’t mean there is no point in trying to help those in need, but it does require being mindful of the downsides of doing so.

Yes, we must reconcile the trade-off, but I would also characterize it as freedom and liberty to pursue one’s personal happiness versus the promise of individual economic security promised by the collective. The fulfillment of that promise is often costlier than anticipated and the benefits disappointing.

Which brings us back to Western Europe. Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 percent lower in France and 26 percent lower in the United Kingdom.

Economists disagree about why European nations are less prosperous than the United States. But a leading hypothesis, advanced by Edward Prescott, a Nobel laureate, in 2003, is that Europeans work less than Americans because they face higher taxes to finance a more generous social safety net.

In other words, most European nations use that leaky bucket more than the United States does and experience greater leakage, resulting in lower incomes. By aiming for more compassionate economies, they have created less prosperous ones. Americans should be careful to avoid that fate.

The point of course, is not that leisure time is undesirable but that people can choose how they invest their time and energy, rather than have state policy reward or penalize that choice arbitrarily. In a free and just society, this choice should be left to the individual. Liberty and security are not mutually exclusive goals.

Compassion is a virtue, but so is respect for those who are talented, hardworking and successful. Most Americans descended from immigrants, who left their homelands to find freedom and forge their own destinies. Because of this history, we are more individualistic than Europeans, and our policies rightly reflect that cultural difference.

That is not to say that the United States has already struck the right balance between compassion and prosperity. It is a continuing tragedy that children are more likely to live in poverty than the overall population. That’s why my favorite provision in the Biden plan is the expanded child credit, which would reduce childhood poverty. (I am also sympathetic to policies aimed at climate change, which is an entirely different problem. Sadly, the Biden plan misses the opportunity to embrace the best solution — a carbon tax.)

But the entire $3.5 trillion package is too big and too risky. The wiser course is to take more incremental steps rather than to try to remake the economy in one fell swoop.

Actually, I would suggest that the choice between liberty and security is a false one and the assumption that security can only be secured for the individual by the state to also be false. The leftist assumption is that the state has to intervene to redistribute wealth after the fact when instead we can design policies that empower citizens to join in the distribution of that wealth by participating in the risk-taking venture before the fact. Then the distribution of resources in society will mostly take care of itself. As it is now, and with this social welfare expansion, we prevent most individuals who need to participate from participating, forcing them to depend on the largesse of the state or the dictates of the market. This is hardly optimal in the search for liberty and justice. In light of my preference to preserve my liberty and take care of my own security, my answer to Prof. Mankiw’s question would be NO.

N. Gregory Mankiw is a professor of economics at Harvard. He was the chairman of the Council of Economic Advisers under President George W. Bush from 2003 to 2005.

How to Get the Rich to Share the Marbles

This is a NYT article that presents some interesting findings from behavioral studies of cooperation and conflict. We can see from the results that our concepts of fairness are related to our perception of effort and chance. If we expend effort to receive an award, fairness dictates that we keep that reward. Also, if fate happens to smile upon us, there is no obligation to share the luck – sharing is purely by choice. This has many implications for the current political discussion over “fairness” in a free society. It is doubly significant given the technologically-driven trend towards “winner-take-all” in the economy. The policy implications are that we eschew envy and seek to create a balanced playing field. Our rules and regulations should be targeted to prevent cheating of the “heads we win, tails you lose” variety, and that especially applies in politics. The Tea Party and OWS movements have been incited by the perception of widespread cheating among elites in control of our institutions. But if we don’t get the policy adjustments correct, these same elites are clever enough to use envy to divide and conquer. We can observe much of this today in the presidential campaigns.

———-

By JONATHAN HAIDT

Suppose scientists discovered a clump of neurons in the brain that, when stimulated, turned people into egalitarians. This would be good news for Democratic strategists and speechwriters, who could now get to work framing arguments about wealth and taxation in ways that might activate the relevant section of cerebral cortex.

This “share-the-spoils” button has been discovered, in a sense, but it may turn out to be harder to press than Democrats might think.

Pretend you’re a three-year-old, exploring an exciting new room full of toys. You and another child come up to a large machine that has some marbles inside, which you can see.  There’s a rope running through the machine and the two ends of the rope hang out of the front, five feet apart. If you or your partner pulls on the rope alone, you just get more rope. But if you both pull at the same time, the rope dislodges some marbles, which you each get to keep. The marbles roll down a chute, and then they divide: one rolls into the cup in front of you, three roll into the cup in front of your partner.

This is the scenario created by developmental psychologists Michael Tomasello and Katharina Hamann at the Max Planck Institute in Leipzig, Germany. In this situation, where both kids have to pull for anyone to get marbles, the children equalize the wealth about 75% of the time, with hardly any conflict. Either the “rich” kid hands over one marble spontaneously or else the “poor” kid asks for one and his request is immediately granted.

But an experiment must have more than one condition, and the experimenters ran two other versions of the study to isolate the active ingredient. What had led to such high rates of sharing, given that three-year-olds are often quite reluctant to share new treasures? Children who took part in the second condition found that the marbles were already waiting for them in the cups when they first walked up to the machine. No work required.

In this condition, it’s finders-keepers. If you have the bad luck to place yourself  in front of the cup with one marble, then your partner is very unlikely to offer you one, you’re unlikely to ask, and if you do ask, you’re likely to be rebuffed. Only about 5% of the time did any marbles change hands.

But here’s the most amazing condition — a slight variation that reveals a deep truth. Things start off just as in the first condition: you and your partner see two ropes hanging out of the machine. But as you start tugging it becomes clear that they are two separate ropes. You pull yours, and one marble rolls out into your cup. Your partner pulls the other rope, and is rewarded with three marbles. What happens next?

For the most part, it’s pullers-keepers. Even though you and your partner each did the same work (rope pulling) at more or less the same time, you both know that you didn’t really collaborate to produce the wealth. Only about 30% of the time did the kids work out an equal split. In other words, the “share-the-spoils” button is not pressed by the mere existence of inequality. It is pressed when two or more people collaborated to produce a gain. Once the button is pressed in both brains, both parties willingly and effortlessly share.

Tomasello has found that chimpanzees doing tasks similar to this one do not share the spoils, in any of the conditions. They just grab what they can, regardless of who did what. They don’t seem to keep track of who was on the team. Tomasello believes that the “share-the-spoils” response emerged at some point in the last half-million years, as humans began to forage and hunt cooperatively. Those who had the response could develop stable, ongoing partnerships. They worked together in small teams, which accomplished far more than individuals could on their own.

So now let’s look at a key line in President Obama’s State of the Union address: “we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.” The president is making three arguments about fairness in this one sentence, but do any of them press the “share-the-spoils” button? If you think that the economy is like a giant marble dispenser with a single rope, then you’d probably agree that if everyone does their “fair share” and pulls on the rope as hard as they can, then everyone is entitled to a “fair share” in the nation’s wealth. But do Americans perceive the economy as a giant collaborative project?

My parents were teenagers in New York City during the Second World War. The home front really was a vast and sustained communal pull. My mother remembers saving up nickels and dimes to buy a war bond. She lingered by her aunts and uncles, waiting for them to finish packs of cigarettes, so that she could grab the foil wrappers for the aluminum recycling campaign.

My parents were part of the generation that went through the depression, a world war, and then the cold war together. This generation accepted federal controls on wages during the war as being necessary for the common good. In the years after the war, the combination of high taxes on top earners, social norms against exorbitant pay, and an increasingly sturdy safety net brought income inequality down from a peak in 1929 to a long valley from the 1950s through the 1970s. It’s a period known as “the great compression.”

The compression went into reverse in the 1980s, and since then, inequality has risen to levels approaching those of 1929. Democrats have long sounded the alarm about rising inequality, but for decades they got little traction among the electorate. It’s only in the last few months, since Occupy Wall Street popularized the concept of the 1 percent, and since we all learned that Mitt Romney pays less than 14% in federal taxes, that the nation’s attention has been focused on the earnings of the super-rich. Will the Democrats’ new emphasis on fairness be enough to rally the nation to raise the top tax rates? Will Obama’s new progressivism press the right moral buttons?

America is in deep fiscal trouble, and things are going to get far worse when the baby boomers retire. Normally, when a nation faces a threat to its very survival, a leader can press the shared-sacrifice button. Churchill offered Britons nothing but “blood, toil, tears and sweat.” John F. Kennedy asked us all to “bear the burden of a long twilight struggle” against communism. These were grand national projects, and everyone was asked to pitch in.

Unfortunately, President Obama promised he would not raise taxes on anyone but the rich. He and other Democrats have also vowed to “protect seniors” from cuts, even though seniors receive the vast majority of entitlement dollars. The president is therefore in the unenviable position of arguing that we’re in big trouble and so a small percentage of people will have to give more, but most people will be protected from sacrifice. This appeal misses the shared-sacrifice button completely. It also fails to push the share-the-spoils button. When people feel that they’re all pulling on different ropes, they don’t feel entitled to a share of other people’s wealth, even when that wealth was acquired by luck.

If the Democrats really want to get moral psychology working for them, I suggest that they focus less on distributive fairness — which is about whether everyone got what they deserved — and more on procedural fairness—which is about whether honest, open and impartial procedures were used to decide who got what. If there’s a problem with the ultra-rich, it’s not that they have too much wealth, it’s that they bought laws that made it easy for them to gain and keep so much more wealth in recent decades.

Sarah Palin gave a speech last September lambasting “crony capitalism,” which she defined as “the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys.” I think that she was on to something and that she was right to include big government along with big business and big finance. The problem isn’t that some kids have many more marbles than others. The problem is that some kids are in cahoots with the experimenters. They get to rig the marble machine before the rest of us have a chance to play with it.