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Social Insurance and Dependency on Government

In a recent essay for The American Conservative, Oren Cass criticizes a viewpoint, which he attributes to the Niskanen Center, among others on the center-right, that places a central emphasis on free markets and economic growth even when doing so “necessitate[s] a much larger safety net, widespread government dependence, and the loss of a baseline expectation that people everywhere can become productive contributors to their communities and form stable families capable of self-reliance.”

I think that Cass is wrong about the relationship between the safety net and government dependence, and wrong about how that relationship is viewed at Niskanen Center. My initial attempt at explaining why, on Twitter, fell short, which is hardly surprising, on a platform with a 280-character limit. I am grateful for the opportunity to reply more fully here.

Cass is right that many of us at Niskanen advocate a larger social safety net, or, as we prefer to say when we are being careful, a stronger system of social insurance. In that regard, we are firmly in the classical liberal tradition of Friedrich Hayek, who “saw no reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.” (Road to Serfdom.) But just what kind of social insurance? A kind that traps people in poverty or a kind that respects the “baseline expectation that people everywhere can become productive contributors to their communities?”

The answer, of course, is the latter. Cass himself, writing elsewhere, gives some very helpful guidance in devising such a policy:

In weighing concerns of policy misfire, the critical question is: compared to what? If the status quo were an idyllic, well-functioning system, the risks of tampering would indeed be high. But the baseline against which any new policy must be judged is an environment that emerged under [the prevailing] constraints, except that it did so with the wrong understanding of the market, using the wrong tools, and aiming for the wrong target.

This guidance frees the would-be reformer from the impossible goal of designing something perfect. That of devising something better than what we have is a good deal more achievable. In the particular case of social insurance, there are two different sets of “wrong understanding” that we need to overcome.

On the left, many defend the existing welfare system, which often seems designed on the understanding that markets don’t matter at all. Its poorly integrated cash and in-kind programs are rife with cascading benefit reduction rates that leave many people with little or no incentive for gainful employment. (See my latest Niskanen Center commentary for a full discussion of the resulting poverty trap.)

In some circles on the right – especially in the current administration – we find a different, but equally wrong-headed set of policies. These not only reflect a wrong understanding of the problem, but employ the wrong tools. They use administrative measures to separate the low-income population into categories of “deserving” and “undeserving,” “disabled” and “able-bodied,” and so on. They further rely on administrative measures to ensure that aid can be used only for approved purposes. Those found to be “undeserving” are subjected to strict work requirements, and left to their own devices if they do not meet them exactingly. In the worst cases, the requirements become little more than a tool for trimming welfare rolls. (See here and here for a full critique of work requirements.)

So, what would be better? Speaking for myself (although I believe many of my Niskanen colleagues would concur), I would prefer a system based on the following principles:

  • The baseline assumption that most people, although never all, can become productive contributors to their communities, given the proper encouragement and support.
  • The greatest feasible consistency with individual freedom, in the Hayekian sense of “independence of the arbitrary will of others.”

A social insurance system consistent with these principles could be implemented in a variety of ways. In a recent paper, A Social Safety Net for an Age of Uncertainty, I outlined one possible implementation, which I call Integrated Cash Assistance (ICA).  Without repeating the entire proposal, here are some its highlights.

First, ICA includes a universal grant sufficient to protect everyone from absolute destitution regardless of work status, family status, or other personal considerations. “Destitution” could, for example, be defined by what the Census Bureau calls “deep poverty,” that is, half of the official federal poverty level. The basic grant could extend to people of all ages or there could be separately defined grants for adults and children. Whatever the details, only by making the basic grant universal can recipients avoid being subject to the arbitrary will of a bureaucracy before whom they must justify being included among the “deserving” poor.

Second, ICA adds a wage subsidy similar to the existing EITC, but available to all low-wage workers regardless of family status. I suggest a subsidy sufficient to ensure than any individual or family with at least one person working at least half-time at the minimum wage or more would have an income above the poverty level, when basic grants, child grants, wage subsidies, and earnings are combined.

Third, as the name implies, ICA tilts strongly toward cash grants rather than in-kind benefits or tax credits. Cash grants not only make it easier for families to meet their varied needs but also make them less dependent on the arbitrary will of welfare bureaucrats. Anyone who truly believes that all people have the potential to become productive contributors to their communities should be willing to trust them to manage their own finances, without imposing petty rules that, for example, allow them to buy hamburger to feed their cat but not to buy cat food.

Fourth, I propose that ICA should replace essentially all existing means-tested income support, including SNAP, TANF, and housing vouchers, as well as “middle-class welfare” like the tax-deductibility of home mortgages. Although Integrated Cash Assistance could be subject to a gradual phase-out at middle and higher incomes, it would eliminate the punitively high overlapping benefit reduction rates that affect many of the poor and near-poor under the current welfare system. As a result, it would, on balance, provide significantly stronger work incentives than does the current system.

I do not claim that cash can solve all social problems. I favor a separate federal program guaranteeing affordable universal access to health care. I also see an ongoing need for specialized programs, both governmental and private, to deal with issues like domestic violence, substance abuse, and reentry into society after incarceration.

I would be happy to discuss the details of social insurance design at greater length with anyone in any forum. Meanwhile, I hope that this brief outline is sufficient to assure readers of American Compass that those of us who write for Niskanen Center are not unconcerned with the dangers of government dependency, nor have we abandoned the hope that people everywhere can be productive contributors to their communities.

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Ed Dolan

Ed Dolan is a Senior Fellow for Fiscal and Monetary Policy at the Niskanen Center.

@dolanecon