Sunday, April 21, 2013

Time Inconsistency and the Welfare State

Start with a society in which individuals are mostly reliant on themselves—if you don't find some way to earn an income you are likely to go hungry, or at least have to rely on charity and lead a much harder life than if you had a job. In that society, someone on charity will be seen as a failure, by himself and others, which is a strong reason to avoid being in that situation.

Add a reasonably generous welfare state. For a while, perhaps a generation or so, the old attitudes persist. As time passes, it becomes clearer and clearer that going on welfare is not evidence of failure, hence not something to be ashamed of. It may not pay as well as a  job, but it leaves you a lot more leisure and a lot more control over your own life; if you want to go off to Prague or Barcelona for a week or two you are free to  do so, provided you don't mind doing it on the cheap.  As more and more people see welfare as a reasonable choice, attitudes change. Once the old attitudes are entirely gone, you have a society where anyone who prefers a life of leisure with a moderately restricted income takes it, leaving fewer and fewer people to pay the taxes to support that life.

The implication is that a welfare state will look considerably better in the short term, when most of the people collecting welfare are people with no good alternative, than in the long term. One likely effect is to undermine political support for the welfare system, at least among those not on it. Another is to eliminate the economic support it requires to continue.

All of which occurred to me, and I am sure many other people, long ago. What reminded me of it, and inspired this post, was a recent story in the New York Times. 

Denmark has gotten to the long term.

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“In the past, people never asked for help unless they needed it,” said Karen Haekkerup, the minister of social affairs and integration, who has been outspoken on the subject. “My grandmother was offered a pension and she was offended. She did not need it."

20 Comments:

At 1:58 AM, April 22, 2013, Blogger Marnus Beylefeld said...

What I find to be the most striking, yet also the most expected, is the response of the state. It does not completely acknowledge the flaw but suggests even further state intervention.

"Instead of offering disability, the government intends to assign individuals to “rehabilitation teams” to come up with one- to five-year plans that could include counseling, social-skills training and education as well as a state-subsidized job, at least in the beginning. The idea is to have them working at least part time, or studying." - NY TIMES article

I've had to do these investigations for the state before.(Kind of identifying the "embarrassing" cases / Carinas)

The initial response of the state is to find and investigate these cases. An outcry from all state officials about these people then follows. These are often firstly portrayed as isolated incidents of really deprived individuals.

I have observed these "Carina" cases to be investigated, reported and condemned. Yet it will never result in the abolition of the welfare state.




 
At 3:00 AM, April 22, 2013, Anonymous Anonymous said...

Given the moral hazard of a large percent of the population going hungry, and given the moral hazard of a large percentage of the population behind the welfare trap -where going off benefits costs you more than a low-paying job would gain-

Chto dly?

 
At 7:05 AM, April 22, 2013, Blogger Kaj Sotala (Xuenay) said...

This was an interesting article on the topic of such gradual changes in social norms in general.

It mentions that when people were debating whether there should be a cap on the maximum income tax, people thought that Americans accepting an income tax rate as high as ten percent was considered a ridiculous idea. It also mentions that when people were debating whether to give unwed mothers welfare benefits, it was thought ridiculous that anybody would have a baby out of wedlock due to the welfare benefits. And finally, when people were debating whether it should be made easier to get a divorce, the claims of "then there will be more divorce" were countered with the claim that everybody knows that to be ridiculous, because only the people with the very worst problems will ever get a divorce.

Shift a social norm in one direction, and it becomes more acceptable to do something that was previously taboo. And each new person who engages in the previously-unacceptable deed will make it more acceptable for the next one to likewise do so.

 
At 9:30 AM, April 22, 2013, Blogger Noah Siegel said...

"Instead of offering disability, the government intends to assign individuals to “rehabilitation teams” to come up with one- to five-year plans that could include counseling, social-skills training and education as well as a state-subsidized job, at least in the beginning."

There might be a backlash against the Carinas and Robert Nielsen's, but the backlash might lead to even heavier government involvement in individual lives. The most dangerous part of welfare might be the justification it provides for things like state "rehabilitation teams" and 5-year plans: since your private choices cost the whole country, the state should have a say in your private choices.

 
At 5:30 PM, April 22, 2013, Blogger jimbino said...

My girlfriend and I have been overtaxed all our lives for not succumbing to marriage and the breeding mentality. Though worth hundreds of thousands in property value, I gain only some $13000 in social security benefits.

This low income entitles me to Medicare benefits with the monthly premium as well as cop-pays, not to mention food stamps, paid for by Medicaid and other programs.

I would be a fool to reject these handouts and look for work.

 
At 9:50 PM, April 22, 2013, Anonymous Chris said...

"We all have to contribute"

Do we?

I'd say that there is pretty clear evidence that we do not all have to contribute, in the sense of traditional work - that nothing particularly terrible happens when large numbers of people do not work, that income tax reciepts are less important than productive capacity.

 
At 10:57 PM, April 22, 2013, Anonymous William H. Stoddard said...

Noah: The backlash you describe was in fact one of the big things that led to the Affordable Care Act. It was made illegal for emergency rooms to turn away anyone, regardless of ability to pay or level of illness (though they can make you wait for many hours if you're not seriously ill). Then as health care and health insurance costs climbed, it was argued that all those emergency room patients were to blame, and that they ought to have insurance to cover them; but since they wouldn't pay for it voluntarily, they had to be forced to do so. There was never any hint that maybe the hospitals should just be authorized to turn down anyone who couldn't pay.

I've also seen it estimated that the percentage of medical expenses that goes to unpaid hospital care is less than 5%, about the percentage of legal work that's done pro bono. If this is true, then the people in question are hardly the source of the high costs; they're just a handy scapegoat group. Scapegoats are always useful for selling an authoritarian policy.

 
At 11:53 PM, April 22, 2013, Blogger Noah Siegel said...

William: That sounds plausible. And, one step further, we might soon hear lawmakers argue that your private choices are pushing up premiums for the rest of us, and since everyone must pay premiums, the state is justified in banning certain personal behaviors. Or enforcing certain treatments. (They might already be making those arguments).

 
At 3:06 AM, April 23, 2013, Blogger Tibor Mach said...

Noah Siegel:

Uhm, I believe that is already happening. What about state imposed smoking bans in pubs? That is also pushed on the grounds of high insurance costs. And of course that almost funny incident in NYC - with banned big lemonade (/soda) bottles. And a myriad of indirect ways to modify personal behaviour - by subsidies or extra fees - is pretty spread out around the world. The minister of healthcare in our country (where there is a semi-centralized healthcare system with mandatory insurance. You can choose an insurance company but the prices are planned by the state and they can only compete by meaningless bonuses such as spa vouchers. The biggest insurance company is owned by the state and heavily subsidized...and in the UK they have something similar) is currently proposing a law that would ban smoking in all pubs, require all the pub owners to sell at least one non-alcoholic beverage below the price of beer, and he wants to raise the (already very high) "consumption tax" on alcohol and cigarettes in order to deter consumption of those (which at least he thinks is going to be the result). He is a medical doctor by the way. Fortunatelly his proposal has little chance to succeed.

 
At 6:44 AM, April 23, 2013, Anonymous William H. Stoddard said...

Noah and Tibor: There is also the more radical movement in the UK that seeks to deny all nonemergency medical services to people who lead "unhealthy" lifestyles. Apparently a lot of doctors there support it, and it's at least being discussed by UK bioethicists. Google on "fat and fags" if you want the details—and that slogan itself is a fine example of scapegoating.

 
At 6:44 AM, April 23, 2013, Blogger Jim Oliver said...

Chris is right that we have enough people who do not work in the taxed economy (many of them do work for in family consumption and illegally for cash) that it is plain to see that we can still have some economic growth with a large percent of the population not working/contributing. Technology is making it so that fewer people need to work/produce.

So I think that as a compromise with the socialists we should push to just make the system more fair. The way the system works now one person who could get welfare works hard for pride while another who could work accepts welfare.

It seems to me like it would be much better to give adult citizen everyone $150/week and that is it.

 
At 7:28 AM, April 23, 2013, Blogger Tibor Mach said...

William: Well, this is complicated. I kinda symathize with those poeple - they are concerned about being forced to subsidize someone else's unhealthy choices. That is a socialization of costs and not something I would support either. On the other hand, a proper treatment for this seems to me to be entirely private health insurance. Companies that charge a smoker more than a non-smoker, a person who is obese more than a person who is perfectly healthy and so on. Since they bear the cost, they are to be most trusted with estimating it best. Then anyone is free to live any lifestyle he or she finds sutiable as long as they are willing to pay higher insurance (or live without some insurance).

Of course there is a moral issue with people who have extremely expensive incurable deseases, but I think charity can cover that or at least a compromise would be state funded support for these people (unlike smokers or obese people, they have not caused their health problems themselves) but noone else. It seems to me, they actually get a pretty bad deal in the today's system when a lot of trivial (but widespread) stuff is covered (in our system, the state decides what is and what is not covered) and these people with rare expensive deseases don't get much. Not that it is not a surprising result - these people mean very few votes.

And simultaneously you could abolish all the tobacco and alcohol taxes and legalize all drugs. I don't think the last part is feasible (even though I think it would be a good thing for everybody) today, but again - at least partially it is possible right away.

 
At 7:33 AM, April 23, 2013, Blogger Noah Siegel said...

Tibor: You're right, but I was thinking even more direct than that. For example, the soda ban regulates what how much soda you can buy in one cup at a given store. I'm picturing a law that criminalizes the possession of soda. (Cigarettes might be a more likely target.)

William: Thanks, that's a perfect example. Within the internal logic of a national health system, "lifestyle rationing" might not be completely unreasonable. (I say that as an argument against a national health system, not in favor of rationing.)

 
At 7:45 AM, April 23, 2013, Blogger Noah Siegel said...

Maybe a better example would be the mental health side. Suppose there's proof that an individual diagnosed with depression but who opts not to take anti-depressants is likely to need a greater amount of additional medical care. Because of that, the legislature decrees that an individual may not opt out of the anti-depressants that a psychiatrist has prescribed to him.

I guess my point is that currently the burden of enforcement is usually (though not always) on the merchant. In my example, the burden of enforcement is on the consumer.

 
At 5:11 PM, April 23, 2013, Blogger Jerry said...

In general, the person on welfare isn't likely to be able to obtain a job that pays more than minimum wage at the best regardless of what they do. So the people who would move from minimum wage work to welfare are those who are not able to earn much of a living to begin with. This is an entirely different situation from the individual who is capable of earning say $15 an hour. It is very unlikely that this person would go on welfare. I had about a dozen years experience as an employer and found that those who had the sort of ability to earn any kind of decent living were not likely to be willing to be on welfare regardless of what anyone else thought of them. So if we were to allow anyone to decide to go on welfare (federal poverty level) the number of "takers" wouldn't be that large. And those who did decide welfare was better than working would be people who had never earned more than minimum wage and had little if any hope of any improvement in their lives regardless of what they did.

 
At 7:41 PM, April 23, 2013, OpenID Peg said...

A fine explanation of how eventually, you do run out of Other People's Money.

 
At 8:03 PM, April 23, 2013, Blogger David Friedman said...

Jerry:

Your observation depends on either a level of welfare much below what most people can earn, or strong norms, internal and/or external, against being on welfare when you don't have to be. I think the problem being described for Denmark is that the former has not been the case for quite a while, and the result is to make the latter less and less the case.

 
At 8:29 AM, April 24, 2013, Blogger Guillaume Nicoulaud said...

There is another aspect of things: at some point, most people living in a high taxation / generous welfare state end up thinking it is irrevocable – That is: neither taxes nor benefits will ever decrease. Thus, the rule of the game – whether one works or not – is: get as much benefits you can and pay as few taxes as possible. It’s not only about being lazy or preferring a life of leisure: it’s about being amongst winners, not losers.

 
At 4:39 PM, April 27, 2013, Anonymous Nightrunner said...

From the same article:
"In 2012, a little over 2.6 million people between the ages of 15 and 64 were working in Denmark, 47 percent of the total population and 73 percent of the 15- to 64-year-olds.
While only about 65 percent of working age adults are employed in the United States, comparisons are misleading, since many Danes work short hours and all enjoy perks like long vacations and lengthy paid maternity leaves, not to speak of a de facto minimum wage approaching $20 an hour. Danes would rank much lower in terms of hours worked per year."

That looks more like the nation providing extensive social services and struggling to pay for them with the aging population rather than the nation of welfare layabouts.

 
At 1:55 PM, May 23, 2013, Anonymous Matt C said...

This is my main argument against the guaranteed income favored by lots of free market economists, and recently in a book by Charles Murray.

Looking at today's society and seeing that most people choose to work instead of riding on the (unpleasant) welfare system is not much indicator about what they'll do when you make that system much friendlier and more generous.

I myself can fairly easily imagine choosing a life of freeloading poverty under such a system. I suspect there's quite a few guys like me, presently paying taxes, who'd be tempted by a life of modest books-and-internet leisure.

 

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