How much social safety net is too much?
How the hell should I know? A perpetual dilemma of economics is the lack of certainty about what is signal and what is noise, in terms of policy and effect, and we are in a sense blinded by this lack of predictive power of economic models. Thus there will continue to be great risks entailed by every possible policy path that we could take. A suitable metaphor is that we are jogging on a cliffside path, and we need to find our way without falling, but our senses won't tell us that we've found the edge for sure until we start to fall. The only way I can think to survive such a scenario is to have some mechanism to catch ourselves once we begin to fall and this, I believe, is why the most economically successful countries have central banks that are willing to step in and lift their industries out of free-fall. This safety feature, I believe, is a very powerful tool that an economy can use in order to experiment with different policies in a situation where models lack predictive power.
In an ongoing discussion about the nature of capitalism and political stability, my arch-rival and muse Charles Thorington argued that a fundamental problem with social entitlements is that they lead to central economic planning which in turn leads to authoritarian regimes. I am not certain that he sufficiently explains how we get from social entitlements to central planning, but the core of the argument is that economies weaken as a result of too many entitlements and therefore society is destabilized. This may be true, and I'm not going to try to dispute it because it is too broad a claim to definitively prove or disprove. Indeed, here at lackingconviction.com we embrace ambiguity. He concluded that low taxes and classical free market economics is the only reasonable path. I responded to Charles by stating the following:
1.Hayek, the laissez-faire economist, believed that the primary purpose of the social safety net is social stability, or more specifically, keeping the well-to-do safe from the desperation-induced violence of the poor.
2.Peoples' needs have a complex relationship with their current economic wellbeing, and having very rich people taking above a certain portion of the economic pie is psychologically problematic even if people are not starving. This is called positional wealth and its existence has been documented by behavioral economists.
3. Due to positional wealth, as the total economic output increases, the absolute level of wealth guaranteed by the safety net must also increase if it is to keep performing exactly the same function of keeping people safe from other's desperation. In other words, we must periodically increase the magnitude of entitlements in order to keep society stable.
I also acknowledged that because the pain of low positional wealth should be alleviated by increasing absolute wealth, there should be the potential for higher tolerance for inequality as society gets richer. There is just the question of how much entitlement (x) people need to tolerate y amount of inequality given z gdp per capita. Now I would like to explore a bit this idea of needing to find a balance between entitlements and violence. If Hayek's argument is extends to revolutionary violence, we are perpetually balanced in between two collapse scenarios, Scenario A, in which the poor take too much from the rich via extra-governmental violence, and Scenario B, in which they do the same via excessive governmental entitlement programs. Therefore, there is an imperative to find a balance between these two extremes.
In an ongoing discussion about the nature of capitalism and political stability, my arch-rival and muse Charles Thorington argued that a fundamental problem with social entitlements is that they lead to central economic planning which in turn leads to authoritarian regimes. I am not certain that he sufficiently explains how we get from social entitlements to central planning, but the core of the argument is that economies weaken as a result of too many entitlements and therefore society is destabilized. This may be true, and I'm not going to try to dispute it because it is too broad a claim to definitively prove or disprove. Indeed, here at lackingconviction.com we embrace ambiguity. He concluded that low taxes and classical free market economics is the only reasonable path. I responded to Charles by stating the following:
1.Hayek, the laissez-faire economist, believed that the primary purpose of the social safety net is social stability, or more specifically, keeping the well-to-do safe from the desperation-induced violence of the poor.
2.Peoples' needs have a complex relationship with their current economic wellbeing, and having very rich people taking above a certain portion of the economic pie is psychologically problematic even if people are not starving. This is called positional wealth and its existence has been documented by behavioral economists.
3. Due to positional wealth, as the total economic output increases, the absolute level of wealth guaranteed by the safety net must also increase if it is to keep performing exactly the same function of keeping people safe from other's desperation. In other words, we must periodically increase the magnitude of entitlements in order to keep society stable.
I also acknowledged that because the pain of low positional wealth should be alleviated by increasing absolute wealth, there should be the potential for higher tolerance for inequality as society gets richer. There is just the question of how much entitlement (x) people need to tolerate y amount of inequality given z gdp per capita. Now I would like to explore a bit this idea of needing to find a balance between entitlements and violence. If Hayek's argument is extends to revolutionary violence, we are perpetually balanced in between two collapse scenarios, Scenario A, in which the poor take too much from the rich via extra-governmental violence, and Scenario B, in which they do the same via excessive governmental entitlement programs. Therefore, there is an imperative to find a balance between these two extremes.
How might we do this? The social sciences often try to fit theory to reality by looking for historical examples that are congruent with their models. One possibility for such a model would be to incorporate the increasing positional wealth-tolerance attribute that I note, so that:
However, there would very likely be enough extraneous variables so that any achievable model would probably not be very accurate, in the sense that the data modeling the relationship between the x and y mentioned above would exhibit scatter, which brings me back to my opening point about failsafes and experimentation:
The only feasible way I can think of to discover these thresholds is to court disaster by having a strong central bank that can withstand shocks, which might theoretically be induced by brief periods of too much governmental interference in the economy caused by new entitlements. Some, such as Mr. Thorington argue that the recoveries from the Great Depression and other crises were retarded by government interference. Even if this is true, as long as economics remains to some extent trial and error, any economy that is intolerant of a governmental safety net for industry may simply fail once a sufficiently large crisis hits. Therefore, in contrasts to Charles, the only reasonable thing in my opinion is to very slowly increase entitlements when it appears that is the will of the people, and have a sufficient federal banking system to prevent any negative effects caused by this disruption from becoming disastrous.
-the absolute poverty tolerance threshold, expressed as minimum entitlements required to prevent revolution, rises as absolute wealth per capita g goes up
-the tolerance threshold for inequality as a percentage of wealth goes down, i.e. people are somewhat more tolerant of absolute inequality than before.
The only feasible way I can think of to discover these thresholds is to court disaster by having a strong central bank that can withstand shocks, which might theoretically be induced by brief periods of too much governmental interference in the economy caused by new entitlements. Some, such as Mr. Thorington argue that the recoveries from the Great Depression and other crises were retarded by government interference. Even if this is true, as long as economics remains to some extent trial and error, any economy that is intolerant of a governmental safety net for industry may simply fail once a sufficiently large crisis hits. Therefore, in contrasts to Charles, the only reasonable thing in my opinion is to very slowly increase entitlements when it appears that is the will of the people, and have a sufficient federal banking system to prevent any negative effects caused by this disruption from becoming disastrous.
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ReplyDelete"Peoples' needs have a complex relationship with their current economic wellbeing, and having very rich people taking above a certain portion of the economic pie is psychologically problematic even if people are not starving." Yes, this seems likely to me. But then again, some people in the 99% really seem to like having 1% of the population up there making astronomical amounts of money. I'm not sure why they feel this way, but maybe it's because those people want to imagine themselves up there, at the top of the income pyramid, and having someone there is a reminder that it's possible. What do you think?
ReplyDeleteThanks for your comment! I think you are correct that for many Americans, the wealthy serve as an example to follow. A famous paraphrasing of Steinbeck is that we are a country of "temporarily embarrassed millionaires". What he actual said is that we are embarrassed "capitalists", and that there are very few proletariat among us. I see virtue in both capitalists (embarrassed or otherwise) and proletariat. I think they are manifestations of two innate drives that all humans have, those of individualism and collectivism, respectively. It's too bad that the history of the last century has had the two concepts tossed into a boxing ring as opponents, when both are essential ingredients of human society.
DeleteIf there is no accurate way to predict how much safety net there should be, perhaps it is difficult to characterize whether what you observe either as a lack of collectivism, or a healthy abundance of individualism.
DeleteOn the one hand, more collectivist countries have the highest standards of living in the world. On the other hand, perhaps they will fall behind over the long term, as most conservatives seem so sure of, or perhaps this wouldn't work in the US for any number of reasons.
Chease, this is Charlie Thorington. I believe it is not so much increasing entitlements that leads to authoritarian regimes as increasing power of the state over the economy. If you want to see how I think this can happen, take a look at my post The Economic Nature of Fascism.
ReplyDeleteThat having been said, there are other problems with increasing entitlements that threaten in the near future to totally absorb all revenues of the federal government and then some. To see my thinking on this, read my post Economic Plans of Trump, Sanders, and Clinton Are Fantasies, in particular the section on Donald Trump's economic plan.
Hello Charles, thanks for your comment. I read The Economic Nature of Fascism. I particularly like de Tocqueville's idea that the principle of equality, when taken to an extreme, leads either to anarchy or servitude. I do not see a direct connection between the desire for equality and the fascist regimes of the 20th century, other than that the desire for equality was a catalyst for social change in general. Neither do I see clear evidence that the transition was all that "hidden" during the 20th century.
ReplyDeleteGovernment involvement in economic affairs cannot be zero, and facilitating "entitlements" is only one of its necessary roles. It would be great if there was some objective measure of the level of government interference in the economy, but I can't think of any way of collapsing so many possible indicators into a reliable measure. Can you?