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.

A Fundamentalist Revival?

This is a fine essay by David French, noting the ideological rather than just the religious underpinnings of fundamentalist social movements.

In the US, the Left has embarked on a secular fundamentalist movement that is now reaching a fever pitch. It is a bit ironic that its proponents have strongly condemned conservative religious fundamentalism along the way while adopting the same social behavioral tactics. Fascism was/is a form of fundamentalism too, as well as communism and environmentalism. So is the more virulent form of right-wing Trumpism.

Fundamentalism comes with the territory when we all are expected to march in lockstep toward some abstract common good. Coercion is its necessary tool. But freedom and civic responsibility have always accomplished this task far better.

America Is in the Grips of a Fundamentalist Revival

But it’s not Christian.

 

“…yes, secular religion is breaking out across the land. That’s old news. Here’s what’s new—it’s growing so very dark. We don’t need to repeat all the recent excesses of cancel culture to know that many anti-racist progressives are in the midst of a hunt for ideological heretics, and even the oldest sins can’t be forgiven. Consider that on Friday a Boeing executive resigned after an employee complained about an article he wrote 33 years ago opposing women in combat.”

 

Cancel

Another interesting passage that ties belief systems to the uncertainty that is the nature of the universe:

To understand the distinction between fundamentalism and, say, evangelicalism or other forms of devotion, I want to go back to Ecclesiastes 3:11 and quote the entire verse: “He has made everything appropriate in its time. He has also put eternity in their hearts, but no one can discover the work God has done from beginning to end.”

Let me quote another verse, this one from the New Testament: “For now we see in a mirror dimly, but then face to face. Now I know in part; then I shall know fully, even as I have been fully known.”

Both of these passages speak to the existence of an immovable, irreducible amount of uncertainty in this world, including mysteries about God Himself.

Recall the end of the book of Job, when the righteous, suffering man demands an explanation for his plight from the God of the universe, and the God of the universe responds with an extended soliloquy that essentially declares, “I’m God, and you’re not.” And what is Job’s response? “Behold, I am of small account; what shall I answer you? I lay my hand on my mouth.”

As a consequence, while there are many, many things we can know about God—and many things we can learn—we must approach our faith and our world with a sense of existential humility.

Managing the uncertainties of our existence brings us back to social science, economics and the art of politics. It’s a deep well.

Political Autopsy

The following is the Executive Summary of a report authored by Democratic Party activists titled “Autopsy: The Democratic Party in Crisis.” On a quick read of the summary, one is left with a mishmash strategy that seems to try to be all things to all people (except for those Republicans, that is! The stated goal is “to end Republican rule and gain lasting momentum for progressive change.”)

That would be the starting point of my critique. What we’ve learned over the past 16 years is that most voters in the US are tired of partisan posturing and could care less about which party wins elections if only their elected representatives would be accountable and serve voters’ interests. Voters are far less partisan than party activists and the media. With Trump’s election, roughly half the population across 85% of the county landscape voted a pox on both their houses. So, let’s start with that inconvenient fact.

Specific comments in red below:

Executive Summary

The Party’s Base

• Aggregated data and analysis show that policies, operations and campaign priorities of the national Democratic Party undermined support and turnout from its base in the 2016 general election. Since then, the Democratic leadership has done little to indicate that it is heeding key lessons from the 2016 disaster.

• The Democratic National Committee and the party’s congressional leadership remain bent on prioritizing the chase for elusive Republican voters over the Democratic base: especially people of color, young people and working-class voters overall. [Yes, but that’s because in a country where whites comprise 70% of the electorate, identity politics based on race and ethnicity have a ceiling of support that is insufficient to win national elections. Identity politics that is based on preferences also leads to zero-sum games over who gets what.]

• After suffering from a falloff of turnout among people of color in the 2016 general election, the party appears to be losing ground with its most reliable voting bloc, African-American women. “The Democratic Party has experienced an 11 percent drop in support from black women according to one survey, while the percentage of black women who said neither party represents them went from 13 percent in 2016 to 21 percent in 2017.”

• One of the large groups with a voter-turnout issue is young people, “who encounter a toxic combination of a depressed economic reality, GOP efforts at voter suppression, and anemic messaging on the part of Democrats.” [The problem with young voters is that they cynically perceive “politics as usual.” Sanders appeal seems to have transcended that, but the question is whether “socialist” policies can. The historical record is not promising.]

• “Emerging sectors of the electorate are compelling the Democratic Party to come to terms with adamant grassroots rejection of economic injustice, institutionalized racism, gender inequality, environmental destruction and corporate domination. Siding with the people who constitute the base isn’t truly possible when party leaders seem to be afraid of them.” [Politics against “injustice, racism, gender inequality, environment and corporate malfeasance, etc.” must be based on some unifying principles in order to filter out subjective grievances that merely favor narrow interests. The party has not made those tough distinctions.]  

• The DNC has refused to renounce, or commit to end, its undemocratic practices during the 2016 primary campaign that caused so much discord and distrust from many party activists and voters among core constituencies. [Yes, there is internal discord.]

• Working to defeat restrictions on voting rights is of enormous importance. Yet the Democratic National Committee failed to make such work a DNC staffing priority. [Empirical data and the appeal of voter ID laws discount this grievance strategy. Thus, deploying it is not likely to have positive effects. Better to advance GOTV efforts.]

Populism and Party Decline

• The Democratic Party’s claims of fighting for “working families” have been undermined by its refusal to directly challenge corporate power, enabling Trump to masquerade as a champion of the people. “Democrats will not win if they continue to bring a wonk knife to a populist gunfight. Nor can Democratic leaders and operatives be seen as real allies of the working class if they’re afraid to alienate big funders or to harm future job or consulting prospects.” [There’s a difficult choice for the party highlighted by the Perez-Sanders split: identity politics or class politics? The mishmash of this manifesto results from trying to pursue both. To do this the party advances an implicit assumption that ‘white’ voters are only virtuous if they are poor. This is blatantly hypocritical to middle class whites.]

• “Since Obama’s victory in 2008, the Democratic Party has lost control of both houses of Congress and more than 1,000 state legislative seats. The GOP now controls the governorship as well as the entire legislature in 26 states, while Democrats exercise such control in only six states…. Despite this Democratic decline, bold proposals with the national party’s imprint are scarce.” [So, trying to pursue a triangulation strategy while paying lip-service to identity racial and ethnic grievance groups for the past 8 years has led to defeat across the spectrum. Yet, this new party manifesto really refuses to make a choice. So, it’s more of the same: trying to appeal to white middle class voters while implying that the party is really for social justice that disfavors them because they are white. This is a losing contradictory strategy.]

• “After a decade and a half of nonstop warfare, research data from voting patterns suggest that the Clinton campaign’s hawkish stance was a political detriment in working-class communities hard-hit by American casualties from deployments in Iraq and Afghanistan.” [Yes, but they point with pride to their sacrifices for country. Disrespecting their patriotism by implying they’re dupes is not a winning strategy.]

• “Operating from a place of defensiveness and denial will not turn the party around. Neither will status quo methodology.”

Recommendations

Party Operations and Outreach

• The Democratic National Committee must make up for lost time by accelerating its very recent gear-up of staffing to fight against the multi-front assaults on voting rights that include voter ID laws, purges of voter rolls and intimidation tactics. [As explained above, not likely to be productive.]

• The Democratic National Committee should commit itself to scrupulously adhering to its Charter, which requires the DNC to be evenhanded in the presidential nominating process.

• Because “the superdelegate system, by its very nature, undermines the vital precept of one person, one vote,” the voting power of all superdelegates to the Democratic National Convention must end.

• “Social movements cannot be understood as tools to get Democrats elected. The ebb and flow of social movements offer a rising tide in their own right that along the way can lift Democratic Party candidates — if the party is able to embrace the broad popular sentiment that the movements embody.” [Both parties have willingly dragged their constituencies into cultural conflicts that are largely unresolvable. Thus, the parties gain by making compromise untenable: Vote for us or else!]

• “This is about more than just increasing voter turnout. It is about energizing as well as expanding the base of the party. To do this we must aggressively pursue two tracks: fighting right-wing efforts to rig the political system, and giving people who can vote a truly compelling reason to do so.” [Enthusiasm based on negative opposition (i.e., anti-Trump or anti-liberal) is not very durable.]

• “The enduring point of community outreach is to build an ongoing relationship that aims for the party to become part of the fabric of everyday life. It means acknowledging the validity and power of people-driven movements as well as recognizing and supporting authentic progressive community leaders. It means focusing on how the party can best serve communities, not the other way around. Most of all, it means persisting with such engagement on an ongoing basis, not just at election time.” [Yes, but to do so successfully requires an appeal beyond the particularistic identity of the individual. How can I be part of something bigger if it’s all about who I am?]

Party Policies and Programs

• The party should avidly promote inspiring programs such as single-payer Medicare for all, free public college tuition, economic security, infrastructure and green jobs initiatives, and tackling the climate crisis. [Here we get into the problem of the viability of socialist policies – when they fail, it discredits the bigger goal.]

• While the Democratic Party fights for an agenda to benefit all Americans [Does it? What about those Trump voters?], the party must develop new policies and strategies for more substantial engagement with people of color — directly addressing realities of their lives that include disproportionately high rates of poverty and ongoing vulnerability to a racist criminal justice system. [And then there is an immediate turn back to biological identity. This is not to deny the problems of disadvantaged communities, but merely questions the best way to empower them.]

• With its policies and programs, not just its public statements, the Democratic Party must emphasize that “in the real world, the well-being of women is indivisible from their economic circumstances and security.” To truly advance gender equality, the party needs to fight for the economic rights of all women. [Better to let the economy and the demand for labor sort this out. It works.]

• The Democratic Party should end its neglect of rural voters, a process that must include aligning the party with the interests of farming families and others who live in the countryside rather than with Big Agriculture and monopolies. [Agree. But these are not people looking for pity or hand-outs or victim status. They want to be able to take care of themselves.]

• “While the short-term prospects for meaningful federal action on climate are exceedingly bleak, state-level initiatives are important and attainable. Meanwhile, it’s crucial that the Democratic Party stop confining its climate agenda to inadequate steps that are palatable to Big Oil and mega-players on Wall Street.” [The trade-offs the majority of voters are willing to make here are not clear. It’s not a choice between clean air or the death of the planet, but clean air at what price?]

• “What must now take place includes honest self-reflection and confronting a hard truth: that many view the party as often in service to a rapacious oligarchy and increasingly out of touch with people in its own base.” The Democratic Party should disentangle itself — ideologically and financially — from Wall Street, the military-industrial complex and other corporate interests that put profits ahead of public needs. [Yes, welcome to the corruption of 21st century American party politics. Why do you think Americans of all stripes voted for Trump?]

Unicorns, Tooth Fairies, and Free Markets

The most frequent criticism of free markets lies in their comparison to unicorns, fairies, and leprechauns. In other words, they exist only in our imaginations and thus are unworthy of serious discussion. This is sheer nonsense. It is like denying the value of Plato’s ideal forms as a means of comparison and judgment. Democracy also does not exist in its pure, idealistic form, so, is it a useless figment of our imaginations? I don’t believe so.

Free markets should be thought of as markets for free people, much like democracy is a political market for free people. In terms of exchange, people are free when buyer and seller can either mutually agree on an exchange or walk away. This freedom obtains best when there are lots of competing and comparable alternatives to any particular good or service. Also, voluntary action is enhanced when the terms of the transaction are transparent to both parties. Some markets offer better and more options than others, while some are more transparent than others, so markets are defined along a continuum from “free” to “unfree.” The whole thrust of free market theory is to point us in the right direction.

Oddly enough, the failure of unfree, or controlled, markets is often cited as proof that markets don’t work. This is like pulling the wheels off my car and then stating that since it can’t go anywhere, cars are a poor form of transportation. Such arguments should be the butt of jokes, not serious debate. Some may qualify this argument by saying some markets are easier to manipulate or control by narrow interests or are less transparent, and thus need to be regulated by a disinterested third party such as a government bureaucracy. But that just begs the more important question over what means will insure that any particular market becomes freer?

Regulation vs. Competition

We can’t really answer this question without a careful analysis of behavioral incentives, of both the economic and political variety. It is widely accepted that economic and political actors pursue their narrow self-interests, with economic behavior determined by loss aversion and profit/utility maximization and political behavior more influenced by power, status, and control. These behaviors dovetail in real people as we all seek to survive by pursuing wealth, power, and control over our own destinies. When we scrape beneath the surface we find that survival is more about not losing (loss aversion), than winning (big rewards).

We would assume from these incentives that most actors would like to manipulate markets to their personal advantage, so how do we constrain or redirect this?

Most people would look to contract law as the explanation for what keeps us honest, but that offers only a narrow understanding of how markets work. We make dozens, if not hundreds, of market transactions every day and very few ever reach that threshold where we feel the need to consult legal counsel or call our Congressperson in Washington. Instead, we rely on more efficient means, such as trust, reciprocity, the implicit value of repeat business, and competing alternatives to guide our choices.

This point about competing alternatives is crucial because while trust, reciprocity, and relationships help ameliorate the need for transparency, competition gives us freedom of choice. Anti-competitive monopolies are considered economic evils because they control the market for their product or service, so consumers must pay their price or go without. (Likewise why we despise political tyranny.) Critics often deride market capitalism as a competitive conflictual system, but that too is a myopic point of view. Markets foster cooperation as much as competition, and many of the transactions in economic markets are win-win positive sum games rather than win-lose zero-sum games.

Think about it: Sellers compete among themselves in order to develop a long-term cooperative relationship with their buyers and suppliers. Ever wonder why a department store takes back that dress or pair of shoes you bought last week because you changed your mind? That doesn’t seem in their immediate profit interest, but it does when you consider how the retailer values repeat business against the freedom you have to take your business elsewhere.

It is not laws or regulatory watchdogs but open competition under accepted market rules that constrains most of our selfish economic behavior. In addition, market competitors have the biggest incentive to insure all play by the established rules, thus they are the watchdogs. This implies the need for transparency. Third party regulatory agencies are inadequate to the task of monitoring the multitude of transactions in markets, especially financial markets. For example, the banking industry is the most regulated industry in the US, and yet the financial crisis of “too big to fail” revealed how ineffective that regulation was. So the test should not be regulation OR competition, but regulation FOR competition. Financial markets in particular need to be open, transparent, and competitive to constrain behavior that risks the integrity of the financial system. In financial markets, failure is a big inducement for prudence.

For an illustrative case, consider the policy response to the financial crisis of 2008, the 2010 Dodd-Frank law. Under that legislation, “too big to fail” banks have gotten even bigger, while 1,500 community banks—the source of half of all loans to local businesses—reportedly have been destroyed. The remaining community banks have had to hire 50% more compliance staff just to keep up with the regulations. That means far less competition among lenders to serve borrowers and more concentrated finance that does not respond to the bankruptcy constraint. It means a far less efficient and just credit market and far more control centralized in a financial oligopoly seeking to influence the policymaking process in its favor. According to the practice of regulatory capture – where lobbyists “buy” politicians with campaign contributions to formulate policy to constrain their competitors – we’ve discovered too often that big government mostly works for big business, the powerful, the wealthy and the well-connected to the detriment of open and honest competition among free people.

One could make the same argument against health care reform under the Affordable Care Act. Has policy made the market more open, transparent, and competitive, or less? Health care provision is really about competition and abundance in the supply of health care rather than the price and distribution of access. With an abundance of competitive health care providers, price and access take care of themselves.

The most important argument in favor of markets is the crucial role they play in providing information feedback signals. Free markets provide the most accurate and essential signals to consumers and producers needed to make efficient economic decisions, like comparing alternatives to maximize preferences, or where to invest and how much to produce, and how to adapt to changing market conditions. These signals are embodied in prices and inventory quantities and without these, producers are operating in the dark about what people want. Hayek was the first to point out the lack of private exchange markets would make central planning under socialism untenable over time. He was right.

Market failures do exist and we don’t live in a world of idealized free markets. But in addressing those failures we should strive not to make the perfect the enemy of the good, because free markets support free people and that’s the bottom line.

Besides, it would be heartbreaking to admit to our children that this is best we can do when it comes to unicorns and tooth fairies:

adult-unicorn-costume toothfairy1