Saturday, September 12, 2015

The Implications of a Safety Net

The phrase "safety net," intended to describe the plethora of government funded programs providing cash and other benefits to Americans of all income levels (Warren Buffet collects social security and is receiving medicare benefits) was first coined by a Republican.  That Republican was, at the time, speaking in defense of the safety net.  There seems to be a general acceptance that a government-provided "safety net" is a good thing, worth preserving.  Is it?

If the so-called safety net were targeted toward people who were truly unable to help themselves and had no other resources available, then who could object.  But that isn't what the American safety net is all about.  Wealthy Americans typically receive two to three times the social security cash benefits that are paid to low income Americans.  Buffett receives approximately $ 40,000 per year and his wife is likely eligible for even more.  Is Buffett someone who is in need of a safety net?  This is Robin Hood robbing the poor to provide money for the Sheriff of Nottingham.  Indeed, much of the American safety net is exactly of this character.

The historical reasons that families save and provide for their children is that no one else is going to do that job.  Increasingly, the US government claims that they can do that job better than parents -- a claim, reminiscent of Lenin's argument after the Russian revolution that the state should take over the raising of children since parents are ill-suited to the task.  In any event, the safety net in the US has reduced private savings to near zero, as Americans grow accustomed to the idea that someone else is responsible for their most basic needs -- income, health, housing, food, education.  Not much is left for private initiative.  Is it any wonder that the culture of America is changing dramatically.

There was no safety net as America grew to be most powerful economic engine on the planet, from the end of the civil war to the end of the first world war.  There was no safety net in China as 350 million people moved from a per capita income of $ 200 per year to a per capita income of $ 20,000 per year in a single generation.  The absence of a safety net meant that families had to make do.  That meant work, savings, and responsibility.

Yes, many fell through the cracks during rapid economic growth, as many fall through the cracks today, even with an elaborate safety net.

The difference is that Americans in the early twentieth century and Chinese today were optimistic about their future and could expect their standard of living to grow dramatically in the future. No American today seriously expects the standard of living for the average American to do much of anything in the future.  The idea of a stagnant economic pie is widely accepted, hence the constant political battle to divide it.

An elaborate safety net preserves and extends income and wealth inequality.   The past forty years are a dramatic testament to that fact.  Back in the good old days, before the dawn of the safety net, wealth and income inequality were on the run and economic opportunity in America was unparalleled in human history.  That isn't the case any longer as big government increasingly dictates worker income levels and in what form workers can receive that income (sick leave, paid leave for a variety of reasons, vacations, over time, health care payments, litigations rights, etc.).

Like it or not, the American worker today has very little say over the composition of the pay received.  Big daddy government dictates the composition of income and makes it a crime to substitute one form of payment for another (the minimum wage makes it a criminal offense to take worker training as payment as opposed to cash).

The ultimate effect of the safety net is a stagnant economy where the winners are folks like the Clintons who seek payments from political entities in return for government favors.  The Clintons have never faced a market test where they had to produce a product for the enormous amount of money that they have extracted from American citizens and ruthless global dictatorships around the world.  Instead they trade government favors for money.

In a world of an elaborate safety net, politics not economics determines who gets what.  If you like big government dictatorships where wealth and income are distributed on the basis of political favoritism, then an ever-expanding safety net is the ticket for you.

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