Easy Problems

Will Wilkinson has a piece at The Economist where he riffs on a story Nick Kristof told about a disabled friend of his who died relatively young, his financial hardship being a likely contributor to that death. In his piece, Wilkinson uses the case of disability benefits to claim that welfare benefit provision presents particularly hard problems:

Designing a safety net is hard, and empathy does not much help in telling us how to do it. People living off public assistance certainly don't have it easy. If we recognise that, as we must, we may wish to make it somewhat easier by increasing the size of transfer payments. At the same time, we will recognise that this increases the incentive to remain eligible for payments by not looking for work. Mr Kristof is correct to identify work as a linchpin not only of material but also emotional well-being, and he's right to recognise, if only allusively, that the disability insurance system can hurt people, such as Mr Green, by making it harder for them to feel the impetus to find work. It is not a failure of empathy to say so.

Indeed, if Americans were maximally empathetic, and had full information about the texture of life on public assistance, as well as all the relevant facts about the incentives and disincentives inherent in the system, we might choose to make it harder to qualify for disability, and to push recipients to find work compatible with their remaining capabilities.

In the US (but not in other countries), disability benefits are administered in a way that makes it difficult to work while also receiving benefits. From this, it is concluded that the benefits often lead to the kind of situation Wilkinson provided. Whether that's true is a matter of empirical dispute.

But, even if it were true, it's wrong to take the narrow case of disability benefits (less than 10% of the US poor are disabled people between the age of 18 and 64) and generalize them to the safety net, social insurance, and welfare benefits overall. For the most common causes of financial hardship (whether poverty, bankruptcy, or otherwise), the welfare benefit solution is quite easy as a policy matter.

Consider the following major life circumstances that market distributions have so consistently failed to deal with that almost every developed country has worked out welfare benefit solutions:

  • Illness. Falling ill can be extremely costly, both in medical bills and in foregone income. In the US, the system for dealing with is so bad that illness is the most common cause of bankruptcy in the country. But this is easily solved with universal health insurance of one sort of another.
  • Old Age. Getting too old to work can mean serious poverty and did mean that for more than one-third of our own elderly not too long ago. You can easily fix this with a universal old-age pension scheme. The US has one of those, called Social Security, and it officially kept 14.7 million elderly people out of poverty last year, cutting the elderly poverty rate from 42.6% to 9.5%.
  • Unemployment. Being laid off or made redundant can suddenly eliminate your income. You can easily fix this with an earnings-related unemployment benefit that replaces a reasonably high percentage of your prior income. The US has one of these programs as well, though it is less generous than many other countries have. Studies have tended to find that unemployment insurance reduces employment by a slight 0.1 to 0.5 percentage points, which is both small and arguably a net good because it allows people to find better job matches instead of plunging into the first job that is available.
  • Children. Having a child creates enormous financial hardships, especially since it is generally done early in someone's working career, which is also when people make the least amount of income. Children need a lot of costly resources and also tend to make it more difficult to do market labor, at least for some time. Accordingly, children, especially young children, have very high poverty rates, as do the parents taking care of them. The US doesn't tend to treat child-raising as an object for social insurance concern, but other countries do and handle it pretty easily. Universal maternity leave, per-child cash benefits, free or subsidized day care, free schooling, and so on go a long way to easily and effectively cushioning the child-raising experience and reducing the poverty that so often accompanies it.
  • Low Wages. Especially early in people's career (which also incidentally is when they have kids), low wages are a major cause of poverty. Aside from pressuring employers to pay better wages, this is easily dealt with by using wage supplements of some sort that have slow tapers. Nearly every country has something like this. The Earned Income Tax Credit is the US version. As with most things the US does for benefits, it could be significantly improved.

There are always some harder cases that may require more complicated benefit schemes that do pose some of the challenges Wilkinson identifies. But these hard cases are a tiny sliver of the overall problem.The great majority of the financial insecurities that capitalism causes are fairly easily solved by welfare regimes.

When the benefits are robust and administered well, health insurance, old-age pensions, unemployment insurance, child benefits, and wage supplements are able to take care of the vast majority of serious financial hardship.