Commentary: How social welfare benefits help the economy

Commentary

Republicans and Democrats have very different ideas about social insurance programs such as unemployment compensation, Social Security, Medicare and food stamps. Democrats would like to see the scope and generosity of these programs increased, while Republicans would like to cut back, if not eliminate, many of these programs (e.g. Obamacare). 

It’s true that GOP presidential nominee Donald Trump has, at times, said he’ll protect Medicare and Social Security. But given Trump’s plans to cut taxes and raise the national debt by trillions over the next decade, and the general Republican sentiment about social insurance, it’s hard to see how these programs can be protected if Republicans gain control of Congress and the presidency.

Part of the GOP’s objection to these programs is the idea that they take money from those who have earned and deserve it and redistribute it to those who have not. They say that’s unfair. Is that true, or is there an economic basis for social insurance?

The case for social insurance begins with the recognition that capitalist economies are subject to boom-and-bust cycles. With a managed, socialist economy, business cycles are much less severe (though they can’t be eliminated entirely, for example, in years when agricultural production is unexpectedly low due to the weather) because the government manages production and employment. But these economies tend to grow slower than capitalist economies, and they often have substantial inefficiencies in the way resources and labor are used.

Thus, the benefit of a capitalist system is much higher economic growth on average and a more dynamic, innovative and efficient economy. The cost is the instability in the capitalist system, the tendency for the economy to periodically plunge into recessions. 

When that happens, workers who show up everyday to jobs they may or may not like to support themselves and their families can suddenly find themselves out of work and at significant financial risk. College and retirement savings can suddenly evaporate and foreclosure can loom if a new job isn’t found relatively soon. The consequences can be substantial for workers and their families.

People who have done absolutely nothing to deserve it suddenly find themselves struggling to make ends meet.

The idea behind social insurance is to share these risks broadly across the population. We all benefit from living in a capitalist economic system rather than, say, a government-managed economy, so we ought to share the costs as well. 

Unemployment compensation provides a good example. It’s a lot like fire insurance. Nobody is sure whose house might burn down, so to prevent economic catastrophe if that happens, people pay insurance premiums each month into a fund. Then, if you’re unlucky and your house burns down, you draw on the insurance to prevent economic loss (in part or in full depending on the policy). 

As a result, instead of having one person face a huge loss, a large number of people share the costs.

Unemployment compensation is the same. Nobody is sure who might become unemployed in the future. It can happen suddenly and unexpectedly. So people pay into a fund each month, and those who are unlucky -- they lose jobs through no fault of their own -- draw on the fund to limit the economic damage.

In both cases, income flows from a large group of people paying for insurance to a smaller group with claims on the insurance as the costs are shared. But those premiums weren’t “taken” from people who got nothing in return and then redistributed to others. The premiums pay for insurance services -- protection against economic loss -- so they get something of value.

But why does the government provide these programs? Why not let the private sector provide the insurance?

Insurance markets are subject to well-known failures that in many cases prevent the private sector from providing coverage in sufficient quantities and at reasonable prices. In some cases, they prevent the private sector from providing insurance at all.

Sometimes these market failures can be fixed through government regulation, or the private sector can design its own fixes. For example, deductibles overcome a problem known as “moral hazard” -- the idea that people are more likely to take risks when they’re insured. If every small dent in your car can be fixed for free, what incentive is there to avoid small risks that might damage the car? Making people pay for minor damage themselves through deductibles gives them the incentive to be careful.

But sometimes the market failures are so severe that the best solution is for the government to provide the insurance. That’s the case, for example, with Social Security (it’s possible to find economists who disagree and advocate Social Security privatization, but even then it would need to be heavily regulated).

The problem with retirement insurance is that most people won’t buy it in sufficient quantities to prevent the risk of poverty in old age. They either choose to spend their tight budgets on other things, prioritizing immediate needs over a distant future, or they understand that society is unlikely to allow them to starve homeless on the streets. They’ll be taken care of, at least minimally, regardless of whether they have retirement savings.

If that’s the case, if many people are going to need to be taken care of in old age to avoid severe poverty, wouldn’t it be better if we asked everyone to pay into an insurance fund that can cover at least part of what it takes to support them after they retire? 

And since some people will get lucky in life and do well, while others will be unlucky and face the risk of poverty in old age, why not have an insurance program that moves income from the lucky (those who did well, i.e. did not have a “fire”) to those who missed out on the same breaks? That’s what Social Security does.

Health insurance also suffers from significant market failures. Although I believe experience from other countries shows that government-provided health insurance (or care) is the best way to overcome the problems in these markets, it’s possible that heavily regulated private sector health insurance and care could work.

That’s what we’re trying to do with Obamacare: use regulation to expand the number of people covered by private sector-provided health insurance and health care. If that doesn’t work, we can go back to the system we had before and all the problems that came with it (like society having to pay for the care of the uninsured rather than mandating that they get insurance). Or we can move on to try more centralized systems such as single-payer insurance.

None of what I’ve written tells us how much social insurance we ought to have. I believe there’s a strong economic argument for the risk-sharing features of social insurance and that we ought to be generous as a nation when people encounter economic difficulties that could befall any one of us no matter how virtuous we have been. 

Yes, some people will take advantage of these programs -- that’s true for all programs whether they’re provided by the government or the private sector -- but such people are few. The vast majority of those who benefit from social insurance worked hard all their lives to provide the goods and services we all consume, and they deserve society’s protection against economic risks in return.

The good these programs provide far outweighs the costs imposed by those who take advantage of societal generosity.

I also believe as we get richer as a nation, our generosity should increase. Social insurance programs should be strengthened and expanded instead of being sacrificed to tax cuts for those who got the big breaks in life and are unlikely to need the protection that social insurance provides.