Sam Hammond of the Niskanen Center wrote an excellent piece analyzing the under-appreciated complementarity of a strong social safety net and free market policies. Separating labor market and business regulation from social spending, Hammond goes on to argue that there is a steady equilibrium correlation between how free a country’s economy is and how generous their social safety net is. While I applaud his line of thinking on how free market policies and social insurance can be mutually reinforcing, I am not as convinced that there is necessarily a strong equilibrium relationship between the two, nor that the US is in an unsteady state that could lead it down the road to further reactionary populism.

Why the Market Economy Benefits from a Strong Safety Net

As an economy grows and adapts to changing demands, Joseph Schumpeter observed, a process of “creative destruction” leaves newly obsolete industries and skills in the dust. The displaced workers from this process can be enticed by populist revolts that threaten to counteract the productive forces of a market economy. Hammond’s paper “argues that the countries that have eluded Schumpeter’s dreary prediction have done so by combining free-markets with robust systems of universal social insurance.” In other words, if any polity wants to enjoy the fruits of a well-functioning market economy, it needs to cushion the blow for those that are harmed by the inherent dynamism that allows it to prosper. With its relatively stingy cash benefits, the United States is at risk of sliding into a policy environment that removes its unique dynamism.

Hammond argues a more generous social safety net can complement, rather than work against, the power of markets by, among other things: 1) promoting entrepreneurial risk-taking by spreading out risk across society; 2) address the painful adjustment costs embedded in a dynamic globalized market economy; 3) replace policies that ostensibly increase economic security but inevitably decrease economic flexibility; 4) increase labor market flexibility by detaching “important social benefits…from any particular employer or market structure.”

The False Dichotomy of Economic Policy-making

Many tend to incorrectly see economic policy regimes as necessarily being a bundled package. One political party may favor stronger unionization, have a more interventionist approach to industry, a more progressive taxation scheme, and a more generous welfare state, while the other wants to decrease the power of unions, privatize more government functions, lower top marginal tax rates, and cut social spending. In reality, it’s not one bundle or the other. It’s possible to have a generous social insurance system as well as a lightly-regulated economy. Hammond makes a distinction between a Swedish “social insurance state” that has generous social insurance policies but a relatively unregulated marketplace, with a Venezuelan “interventionist state” that relies on nationalization and inflexible labor markets. Both can be referred to as “socialist” or “social democratic” in political discourse, but of course their policy combinations are far from identical. The ideal scheme, according to Hammond (and one I agree with), is one that combines the powers of the market economy with a generous welfare state.

[As a slight aside, this overall point is something I want to increasingly shout from the rooftops. Opponents of “capitalism” or market economies tend to associate pro-market reforms with skimpy welfare states, neoconservative foreign policy, and low environmental regulation. The Niskanen Center is great at producing work that combines ideal policies outside this false dichotomy.]

What Economic Freedom Should Really Mean

Often times, country rankings of “economic freedom” from the Heritage Foundation or Fraser Institute imply a necessary bundling of economic policy decisions. Both of these foundations, Hammond notes, value economic freedoms related to economic regulation, but they also value low government spending and skimpy social safety nets. To better get to an analysis showing the kind of government presence he’s talking about, he develops an index that separates social expenditures and pro-market institutions from “government size.” The economic freedom index thus values government transparency, rule of law, and regulatory efficiency while the social welfare index suggests higher income transfers. Economic freedom does not need to mean low taxation and social spending. We’re left with this graphic:

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The graphic suggests a correlation between his measure of economic freedom and income security. But instead of just saying this is a correlation, he believes the relationship is in fact an equilibrium, and countries that diverge from the path by becoming either economically less-free or decrease welfare spending are at risk of falling down the path to populism found in the bottom left quadrant. In theory, these countries are in disequilibrium, as I see it, because an economically less-free country with generous welfare spending would have low-growth that couldn’t support its welfare state. Meanwhile, an economically free country with skimpy benefits wouldn’t be able to cushion the blow from an ever-changing economy.

But is there a Steady-state Equilibrium?

This is where I’m skeptical. The United States is a significant outlier here. An atypical amount of our government spending goes towards military ventures, but I don’t think that collapsing military spending would result in a more generous welfare state. I’m drawn to this Glaser et al paper suggesting that skimpier US welfare state spending comes from historical and cultural realities that are hard to undo by overnight Federal policymaking. Specifically, the paper suggests that “racial fragmentation is a powerful predictor of redistribution” across countries, and America’s cultural/racial heterogeneity could lead to an unwillingness to provide strong social welfare benefits that is difficult to overcome. The United States is atypical in many regards to other OECD countries, and a big difference is this diversity. Scandinavian countries with relatively homogenous populations could be seen as more willing to provide a social safety net because people perceive their tax dollars as going to people just like them. Countries like Italy or Spain, with relatively less national unity than Denmark or Norway, have administratively weaker welfare states.

Although Nordic countries have recently experienced a surge in “otherness” migration – and with significant frictions politically as they try to protect their natives and welfare states – it’s not clear to me that the dust will settle with these countries having their generous welfare states remain in place. I don’t mean to argue against diversity or say it can’t coexist with strong social spending; instead, I want to assert the common tension between the two and point out that America’s atypical cultural heterogeneity could be an endogenous force working against political willingness to increase social spending. Further, as Hammond notes, Sweden was in an equilibrium in the 70s and 80s more in line with the bottom left quadrant of his graphic than the top right. A particularly bad recession in the early 90s shocked the country and resulted in liberalization of markets but preserved strong social insurance programs. But if Sweden can suddenly switch quadrants, what makes Hammond so sure it can’t just as easily switch back?

A further argument against the inevitability of this equilibrium is in the United States’s long history. Sure, countries in the Anglo world are today on a more authoritarian path with Trump/Brexit than many other OECD countries, likely stemming from an inability to protect citizens who were displaced by globalization. But the United States has never had a particularly strong welfare state? The “pull yourself up by your bootstraps” mentality is a part of what is deemed American exceptionalism. The United States transitioned from an agricultural country to industrial without falling out of this bottom right quadrant. The transition didn’t come without side effects – agricultural subsidies today can be seen as a historical concession towards farmers harmed by the change – but the United States still never left its unique quadrant. Now, maybe I’m oversimplifying United States economic history here, or not involving the nuances of European economic history either. But if I really am misunderstanding history, it begs the question of whether Hammond can show that his graphic is robust enough throughout time in order to prove that this is indeed an equilibrium.

To say that a more robust welfare state counteracts the forces that led to Trump and Brexit also seems like a stretch to me. Specifically, Hammond believes that a well designed welfare state could alleviate “search and adjustment costs…with a system of subsidized employment for the long-term unemployed, combined with job search and relocation supports for geographically locked workers.” I’m skeptical the proverbial rust-belt Trump voter that used to thrive in a coal-fueled world or manufacturing-based American economy will be helped much by this. These workers have a strong connection to the identity their job provides them. I don’t just mean the purpose or community employment gives them. A coal miner isn’t suddenly going to become a male nurse just because that’s where the economy is producing jobs, no matter how much assistance the government gives them. The assembly line worker in West Virginia isn’t going to start to learn Python and move to Silicon Valley. The fact of the matter, as I see it, is that the economic displacement from globalization and automation interacts with a stubbornness of human nature that leaves many workers potentially unable or unwilling to participate in the new economy, regardless of government support. [I’d note that this job-identity relationship extends to professional-class workers who probably refused to work retail jobs during the Great Recession. Our employment opportunities are tied to how we see ourselves, and I think government spending can only do so much here.]

Hammond writes that “unregulated open economies are vulnerable to reactionary populist backlashes when the forces of creative destruction leave large swaths of society behind.” But take a look at his graphic showing OECD countries and their level of “cash minimum-income benefits.”

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Greece paints a picture of an unstable populist backlash, but what about other countries on the left-side of this distribution? Is Canada unstable? South Korea? Hong Kong and Singapore are atypical city-states, but I don’t see them as being at risk of going in a more authoritarian direction, either. Perhaps it’s possible for countries to exist as free-market states without having pressures to increase its social welfare spending. History, culture, demographics, or even size/government setup – something particularly unique about the United States – could lead countries to a steady-state outside the correlation Hammond’s graphic suggests. And if there is no equilibrium, can we really think of these as being necessarily reinforcing rather than just a correlation?

How to Improve American Social Insurance

Outside any theoretical equilibrium, I would like to see the policies Hammond argues for. While I may not be convinced the United States must do this in order to avoid becoming more of an authoritative populist country, I still believe a stronger safety net can complement the wonders of the market economy discusses previously. So how can the United States transition into more a top-right quadrant country? Hammond argues that social insurance schemes can be more politically viable and successful if they are designed to be “neutral” and “universal.” It’s important to be neutral – in the sense that as little as possible is left up to the discretion of policymakers that will likely pander to special interests – to avoid favoritism and cronyism. It’s important to be “universal” because programs perceived to be designated only for the poor are typically poorly-run and underfunded. Making social insurance schemes something that everyone benefits from and pays into will ensure more forces that lead to beauracratic quality and efficiency. Federalism and American attitudes could make this a relatively difficult process, but still one worth pursuing.

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New podcast episode with Brink Lindsey and Steven Teles about their new book The Captured Economy:

Brink Lindsey and Steven Teles argue in their new book “The Captured Economy” that the last few decades have been characterized by an increase in political rent-seeking. Focusing on the financial sector, intellectual property laws, occupational licensure, and land use, they show how legislation has been captured by special interests in ways that slow growth and increase inequality. In this episode, Lindsey and Teles discuss how these policies distort various markets and cause upward redistribution, as well as the different ways we can work to better “rent-proof” our politics.

At the Oxford Practical Ethics blog, Matt Baum objects to cities that have bike rental programs but don’t provide helmets to riders. His conclusion:

I applaud these city-transport schemes for being innovatively convenient and environmentally friendly. But the city, if it is going to provide such a scheme, has a responsibility to make it possible to (and indeed encourage people to) use it safely. In this case, the city has a responsibility to provide helmets.

To be sure, there’s a tension here between public health officials’ campaigns to increase rates of helmet use and local governments renting bikes to people without providing helmets. But I don’t think this is ethically such a big deal, because there’s a lot of evidence that bike helmets don’t do much to make bike riding safer.

Western Australia enacted a mandatory bike helmet law in 1992, causing helmet use rates to rise from 37% to 82%. Here’s a graph with the results:

Head injuries didn’t obviously decrease all that much, while upper limb fractures rose a lot. Risk compensation could explain why increased helmet use may not have the beneficial effect that its proponents hoped for: people who wear helmets feel safer and thus are less careful when they are riding.

Here is a study reporting results that “are consistent with the notion that those who use helmets routinely perceive reduced risk when wearing a helmet, and compensate by cycling faster.” This study found that automobile drivers are less careful around helmet-wearing cyclists than they are around bare-headed cyclists.

There are other studies that showing that helmet use does decrease head injuries (here is one), but based on my cursory examination of the literature, it doesn’t seem like there’s good enough evidence that bike helmets make cyclists safer to justify legislation mandating them. And the evidence definitely is sufficiently inconclusive to exonerate governments of cities with non-helmet providing bike share programs from any moral culpability.

In addition to the post arguing against the mandatory licensing of barbers that W. Jerome highlighted last week, Matt Yglesias has gone on something of a liberaltarian rampage recently (see here, here, here, and here).  He’s taken some flack from his commenters for it.  His response:

A colleague mentioned to me the other day that I’m “pretty conservative” on some state and local government issues, with reference to some recent posts on occupational licensing…. I’m not. And I think that whole framing represents a bad way of understanding the whole situation.

I think it’s pretty clear that, as a historical matter of fact, the main thing “the state” has been used to do is to help the wealthy and powerful further enrich and entrench themselves…. The “left-wing” position is to be against this stuff—to be on the side of the people and against the forces of privilege… dismantling efforts to use the state to help the privileged has always been on the agenda. Don’t think to yourself “we need to regulate carbon emissions therefore regulation is good therefore regulation of barbers is good.” Think to yourself “we can’t let the privileged trample all over everyone, therefore we need to regulate carbon emissions and we need to break the dentists’ cartel.”

Our ideologies tend to encourage overly simplistic thinking on these issues.  Liberals make arguments about the existence of market failures to justify a pro-regulation stance, and conservatives/libertarians make arguments about the efficacy of free markets or the unavoidable ham-handedness of government intervention to justify an anti-regulation stance.  This ideological division makes it so that if a conservative allows that, in a given circumstance, regulation may be justified, it seems like she’s conceding something to the liberal, and vice-versa.  This makes people become increasingly entrenched in their ideological priors so that analysis of real-world issues involves little more than post-hoc justification of a forgone conclusion.

It’s too bad that political discourse is so often conducted in this way.  The world is complex; sometimes regulation is justified, and sometimes it isn’t.  It’s nice to see somebody like Yglesias who is a sophisticated enough thinker to recognize this and move beyond the one-size-fits-all arguments that are favored by his political tribe.

I meant to respond to this a while ago, but a bunch of things came up, so I’m just now getting around to it.  But anyway, here goes.  In W. Jerome’s post on reducing health care costs, commenter Joe said,

We should stop requiring that people get drivers licenses to be able to drive. The government costs in running DMV’s and driver education programs are completely unnecessary. Driving accidents continue to occur even though so called “licenses” are issued every day.

I’m kidding. I’m just pointing out that you are completely neglecting the concept of safety standards in the name of capitalism and competition. The point is that standards and licensing procedures must be constantly reformed and changed as new problems arise, but never completely done away with. It seems that system you propose would result in a class based system of doctors where the rich get “gold star” doctors and the poor get doctors that by today’s standards would be completely illegitimate.

I realize you probably have a good point to make here, but you must understand the ridiculousness of the idea of a medical free for all.

First of all, comparing drivers licenses to medical licenses just doesn’t make sense. When you drive, you have very little control over whom you are sharing the road with. Having a lot of people driving around without the basic driving skills you need to get a drivers license would make driving more dangerous for everybody. It’s completely different for doctors. If there’s a bad doctor, anybody can choose not to go to her. When we drive, we can’t choose whether or not to interact with inept drivers; when we shop for medical services, we can choose to avoid inept doctors. Now, this doesn’t show that medical licenses don’t make sense and drivers licenses do. It just shows that, in certain respects, medical licenses need to be justified on different grounds than drivers licenses.

As W. Jerome said in his post, I tend to be skeptical of medical licensing. The state-enforced monopoly on medical certification creates artificial scarcity in the medical profession and prohibits a lot of voluntary transactions. Doctors have to go through an enormous amount of training to get their MDs: undergraduate pre-med courses, four years of medical school, residency. Buying services from anybody with this much training is enormously costly. And for many complicated medical procedures, this makes sense. Your really do need tons of training to perform brain surgeries. But for many tasks that doctors commonly perform, this amount of training seems unnecessary. Do you really need eight years of undergrad and graduate training to prescribe drugs, set broken bones, and diagnose basic illnesses? But the American Medical Association actively tries to limit the ability of non-MDs, such as nurse practitioners, to do these things. This results in higher health care costs and huge rents for doctors.

But how would you know the difference between good and bad medical care providers under a health care system without licensing?  Well, for one, the internet makes it much easier to get information about things like this.  Right now, I can go to Google Maps, search for restaurants and other businesses, and find user generated reviews.  There’s no reason why this couldn’t exist for medical care.  I think one reason that it currently doesn’t is that our state-enforced medical licensing system creates a false sense of security among health care consumers.  The fact that the government guarantees the quality of licensed doctors makes it so that the consumer doesn’t have to worry about it as much (although consumers probably still should worry, because we have plenty bad doctors providing care despite the government guarantee).  Having a strong consumer feedback system would give medical care providers a strong incentive to give high quality service.  All that said, there probably is still a place for government regulation of medical care provision, but I think that we would be better off if we moved to a system with lower entry barriers where a body other than the AMA determines licensing standards.

An Upset Patterns reader writes in:

In all your politicalness, I don’t hear you talking much about healthcare.

True.

A cookie-cutter libertarian answer to the problem of soaring cost in health care is similar to any issue: deregulate the industry, stop giving away goodies like medicare and medicaid, and don’t give tax-breaks to company-provided health care. All of these things distort the spontaneous order of the market for health care. Regulations drive up costs more than they benefit consumers. Freebies like medicare and medicaid mean that when people are buying healthcare, they aren’t using their own money, which means they’re more likely to buy more than they otherwise would. Tax-breaks to company-provided health care mean that companies are less responsible in buying the insurance, self-employed people are crowded out, etc.

All of this make sense to me. If one is to look at a graph showing the rising cost of health care over time, there are two major “blips” in the general trend: new tax policy related to employer-provided health care after world war II and the introduction of medicare. America, by having government currently spending 50 cents of every healthcare dollar, seems to have a tragic mix of socialized and capitalist medicine.

But maybe the “get the government out” answer is too simple. Do adverse selection problems in insurance mean that making everyone buy health insurance – even those who do not need it or want it – will lower costs and expand affordability? Is there a moral concern to provide health insurance to everyone, regardless of its effect on increasing the deficit? Are insurance companies actually – as people seem to believe – screwing people out of coverage?

Obama’s proposed “public option” is a relevant issue worth discussing. What needs to be considered:

  • Is this actually not going to raise the deficit? What makes it a public option if it’s not subsidized?
  • Obama himself said that “UPS and FedEx are doing just fine. It’s the Post Office that’s always having problems.” Why will a government-run system be more efficient than private ones?
  • This is a huge liability for the future. Programs like this one don’t go away. If costs of it get out of control in the future, as has happened with social security and medicare, it’ll be a gigantic strain on the budget.
  • The number of uninsured Americans is commonly said to be about 45 million. Well, of that number, a third make over $75,000. Those are people that could afford it but don’t buy it. Is making them be covered when they choose not to be really a good answer?
  • What about for people who decide, since they will get free health care no matter what, that they will start smoking, become obese, and become a crack addict? Should healthy people pay for them?

A last thought from The New Atlantic:

I’m a Democrat, and have long been concerned about America’s lack of a health safety net. But based on my own work experience, I also believe that unless we fix the problems at the foundation of our health system—largely problems of incentives—our reforms won’t do much good, and may do harm.