Thursday, November 29, 2012

No Work, No Reality

Clearly there are enough Americans who have rejected the libertarian argument against forced redistribution.  You can be opposed to redistribution on the normative grounds of freedom and fairness, and if so there is no need to prove such policies are counterproductive.  But if you think on normative grounds that it is imperative to use government compulsion to help the poor, you are nevertheless on the hook to prove that such policies achieve the intended effects. (Unfortunately, the possibility of expressive voting may mean that in fact you’re never on the hook to prove that the policy that sounds compassionate on its face is compassionate in its effects.  But in the spirit of priming you for some informed retrospective voting next time around, let’s ask ourselves how effective government policies have been in caring for the poor, and how likely it is that their extension or expansion will work as intended.)
A recap on last week’s post: increasing taxes on the rich to supply more bennies to the poor reduces the supply of labor for both the rich and the poor, reduces the demand for unskilled and skilled labor, increases the number of people on the dole, and requires increased taxation for those below the initial rich targets.  We know that increasing the welfare state has negative tax and employment effects for the rich and most likely the middle class.  It also dampens the demand for, and the supply of, unskilled workers.  For all of that, suppose you’ve still come to the conclusion that it’s all worth it given the plight of the poor.  
In order to come to this conclusion, I think you have to believe that prior to the increase in the welfare goodies, there were people who didn’t qualify who were suffering significantly.  The reduction in both labor supply and labor demand for unskilled work means that many of those added to the welfare rolls would have otherwise been employed – to argue for the expansion of the dole, you have to believe that is for the best that these people leave the market and enter the soup line.  But it is more likely that many of these people, via the substitution effect, have chosen to have less income under welfare than what was available to them in exchange for their labor in the market. 

What is lost for these people who will have left the workforce?  First - the dignity of work and the pride of independence.  Second - the learning on the job, the assumption of responsibility, and the potential for advancement.  Third – the example they set for their kids, if they have them, as someone who seeks to earn a living through service to others, rather than through claims to entitlement. Those cut off from work are surrounded more often than not by others with no link to labor market exchange, effectively ghettoized.  I was reading one of the books I referred to in the last post on our current economic situation, and came across the following quote: “work attaches people to reality… without work, there’s little sense of reality.”  I never heard it put in that way before, but it made a lot of sense.  It’s like that old gentle rebuke – you clearly have a lot of time on your hands – meaning you’ve become a little unhinged from reality
What is lost for others as a result of fewer unskilled workers being employed?  Putting aside the tax costs to the wide set of taxpayers who face an increased burden to finance the expanding welfare rolls, there is much that is lost in the elimination of market exchange.  Have you ever noticed the convention, so widespread, of mutual thanks being given between parties to an exchange?  If market exchanges were zero-sum games – i.e. one person only gained at the expense of the other – there would be resentment.  Any market trade, due to its voluntary nature, most likely involves two people who both get some surplus benefit from the trade – the seller usually gets a fee that exceeds the lowest price it would willingly accept, and the buyer usually pays a fee beneath the maximum it would be willing to pay.  This is true for any potential employer of an unskilled worker, and truer still for that employer’s end customers.  By withholding services from the market in favor of the dole, the costs to find an employee to fill that role increases for the employer, causing a rise in prices at the expense of end customers.  The decision not to offer your labor in the market erases the benefits that would flow to those on the other side of the transaction – this loss of benefit is not measured in any GDP figures, but it is as real as any benefit that is.  Likewise, there is much that may also be lost for the poor as consumers on the other side of transactions that involve the middle class and the rich, in cases where these people have cut back their own work efforts. 

The mutual benefits from trade more often than not leads to an appreciation and tolerance for those we might otherwise not see eye to eye with – we don’t fret the politics of a person who can sell us something we want for cheap (or at least we shouldn’t).  Market exchange is a vital link between classes, and it may be the only possible link, once beyond the schooling years, between the poor and those in the middle and upper classes. 
As an aside, I was doing some research on this issue over the internet, and found an Urban Institute study in the wake of the welfare reforms signed by Clinton. The study bemoans the fact that while the reforms changed eligibility requirements for certain forms of welfare, many who became ineligible for one form were nevertheless still eligible for food stamps, and yet many did not continue to receive such benefits:
Participation rates for very low-income families (below 50 percent of the poverty level) that left welfare were particularly troubling—only half continued to receive food stamps. Our 1999 results also show a significant increase in the share of families that reported that they left the FSP because of administrative problems and a decline in the percentage that left because of employment compared with 1997. Finally, we found that families that reported incomes below the poverty level and did not continue their food stamps were significantly more likely to own a car and to have moved in the previous 12 months than families that stayed in the program.
Why did car ownership matter? It mattered because the fair market value of your car affected your eligibility for food stamps. If you own a Lexus, it turns out you couldn’t receive food stamps. When given the choice between owning a nice car and receiving free food, people chose to own a nice car. Did they do so at the expense of starving? Apparently not, because people starving to death in nice cars would make for a great reality TV show, and so far none has been forthcoming. (Of note in the study is the fact that the authors at the Urban Institute find it troubling that many who are eligible choose not to collect – the question to them is not how to convince others similarly situated to reject the food stamps, but how to get these people back on them.)  Personal pride is the one factor than can help people avoid being sucked intot the maw of dependency, and the government agencies in charge of these programs, as well as their supporters, view such pride as a problem.


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