17.9.05

RETHINKING THE WELFARE ECONOMICS PARADIGM. Kash at Angry Bear has an instructive meditation on the citizen and the state.

Liberals like me tend to believe that when that happens, our society as a whole will be better off if the rest of us try to help out those individuals who have suffered from circumstance. This doesn't mean that we think that we can eliminate suffering, or ensure that nothing bad ever happens, or that we should insulate individuals from the consequences of their own actions. But when things outside of an individual's control devastates their life, we think that it is compassionate and good and just - and even in our own enlightened self-interest - to help out.

Most conservatives, on the other hand, tend to believe that society should play a relatively small role in helping people when they're down - the primary responsibility for recovery from bad times rests with the individual and his or her family, not with society in a broader sense. Perhaps this difference largely springs from the presumption of many conservatives that if an individual is experiencing bad times, it is probably largely a consequence of their own actions, and that they should have to bear full responsibility for their poor choices.

This argument might be phrased more felicitously, as it conflates "society" with "government." Betsy's Page links to an Anne Applebaum column suggesting that society has been stepping up more effectively via non-governmental organizations such as the Red Cross, Move On, or the Salvation Army. The latest poll roundup from Public Brewery notes a decline of confidence in government. The poll appears to focus on whether "Washington" can do the right thing; had somebody asked about "City Hall" or "the Governor" my conjecture is that the decline would have been more pronounced.

Don at Cafe Hayek has an excellent summary of what might be going on in people's minds.
Katrina, in addition to stripping my hometown of life, unmasked the pretenses of government as savior.

David Brooks is thinking along similar lines.

Back to the Angry Bear essay. Economic theory might propose a role for the government.
The reason for this actually goes back to economic theory. One powerful insight that every first-year economics microeconomics student learns is that when something has a positive externality, or is a public good, the provision of that public good by private individuals will be less than each of those individuals would like. The problem is that such goods suffer from the free-rider problem. In such cases, society is unambiguously better off if the government provides the public good.
That argument appends an ideological statement to a logical proposition. A positive externality is a situation in which one person's actions provide uncompensated benefits to other people. The person who provides the benefit has insufficient incentive to exploit all the possible gains from trade, because some people will free-ride. A sufficiently well-informed and properly managed government is indeed able to design the proper rules and taxes to achieve that allocative efficiency. But unexploited gains from trade are equivalent to $100 bills on the sidewalk if one is clever enough to pick up the $100 bill at an expenditure of less than $100. Society will be unambiguously better off if the $100 is picked up at an expenditure of less than $100. The tussle between big-government and limited-government advocates often reduces to an empirical question, namely, is government able to pick up the $100 more cheaply than some other organization?

The Kash essay continues with a bit of elaboration, then this statement of a general principle.
So what does this mean in practice? It means that liberals support government policies that provide help to those who have suffered from the powerful forces that buffet each of our lives but are outside of our control. As I said, that doesn't mean that liberals want to try to completely insulate everyone from anything bad ever happening... just that when bad stuff happens that individuals have no control over, we think the government should help out a bit.
As long as one confines the discussion to the provision of a public good, and grants the national government a superiority over other institutional arrangements at discouraging free-riding, the essay stands. However, it neglects another problem with public policy, namely the moral hazard that is present any time a person who is at risk from forces outside his control holds some kind of insurance against those forces. There have been some lurid criticisms of the moral hazard effect of the Welfare State on the behavior of people left behind in New Orleans. Brendan Miniter at the Wall Street Journal proposes to remove the source of the moral hazard itself.
It is time to break free of the narrow thinking that has prevented progress for decades. It's time to rethink how we, as a society, combat poverty. Are we going to try another big-government program and expect better results this time? Or are we now going to realize that ownership is the most likely path to the middle class? School vouchers can help poor parents take ownership of their children's education and finally break the grip teachers unions have on the public schools. Health savings accounts and private accounts for Medicaid and Social Security will give those on the lower rungs of the economic ladder the skills as well as the assets necessary to climb higher. In late August the levees broke in New Orleans. But the welfare state had left the poor stuck in the mud long before that.
There is one further consideration. Any attempt at changing peoples' behavior by changing policy ought have an answer to Deirdre McCloskey's takedown of the Social Engineering Vice: "If you're so smart, why aren't you rich?" Because any allocative inefficiency leaves unexploited gains from trade, advocates of any attempt at a policy change -- whether to expand the power of government or to take functions away from it -- owes voters an explanation of whether the proposed change will in fact be cheaper to implement than the social benefits it attempts to harvest. Mr Miniter's post lapses into what I refer to as Utopian Wonkery. That accounting has not been offered in it.

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