24 November 2008

Rethinking The Safety Net

The safety net is an apt metaphor for the American social welfare system. You are either self-sufficient, on a high wire, perilously clinging to a working or middle class life, or you plummet far below to a net that prevents your death as you are face to face with homelessness, unfed children, and immediately life threatening medical mishaps that send you to the emergency room.

The High Cost of Unemployment For The Unemployed

If you have a decent regular income, you can insure yourself against all sorts of risks: disability, the need to use a nursing home, illness, car accidents, professional malpractice, on the job injury, burglary and larceny, a tornado hit, a fire, and even your untimely death. But, the only way you can insure yourself against one of the most common and devastating risks in our society, unemployment, is to save so much money that you don't need to work for months.

Even if you are among the minority of unemployed people eligible for so called "unemployment insurance" (more accurately described a layoff insurance) your coverage is a small fraction of what you earned before you were unemployed*, is subject to income taxes, and lasts only a few months. Also, eligibility for unemployment is generally accompanied by a sort of unemployment uninsurance. The unemployed (whether or not laid off), are immediately faced with a Hobson's choice -- lose their health insurance or pick up a major new monthly expense that is often bigger than their mortgage or rent payment, to provide themselves with health insurance at their own expense. Often this new expense rivals or exceeds unemployment insurance benefits in magnitude for those who are eligible for them.

[* Under current Colorado law, weekly unemployment benefits are limited to the greater of (1) 60% of average wages for your best two quarters in the last year up to $431 a week, or (2) 50% of average wages over the last year up to $475 per week. This is paid for up to six months, but in no case with a total benefit more than a third of the wages received over the past twelve months. The maximum benefit is $12,350, for workers who earned at least $49,400 over the last year.]

Unemployment insurance also encourages irrationally short term thinking. If you fail to pursue to potential job while receiving unemployment benefits, you can be summarily punished with the loss of even this thin safety net, even if the beneficiary accurately predicts that holding out a little longer will produce a better paying or longer lasting job.

By the time unemployment benefits run out, most people trying to get buy on them have also exhausted any savings they had, maxed out their credit cards, and are on the brink of foreclosure and bankruptcy. If you have fewer savings and bad credit, eviction from your apartment will come sooner, you won't be able to afford to file for bankruptcy, and your next stop will be accept the slightly lower, but tax free payments that come from poverty programs.

The Hidden Costs Of a Weak Safety Net

No developed country in the world permits its citizens to fall further, with serious, but mostly invisible economic consequences. While we don't generally execute people for failure, like tyrannical military commanders, dictators and Chinese politicians do, the price of economic failure in the United States for a typical household is extremely high.

Hundreds of thousands, if not millions, of would be entrepreneurs, work at big businesses instead so that they can keep their health insurance. While many of the businesses that would have started would have failed, many others would have helped our economy grow and created jobs.

The catastrophic consequences of being laid off from work, particularly for less skilled workers, drives unions to seek layoff protections that have devastated the Big Three as they have steadily lost market share by encouraging them to keep money losing factories operating. When a lost job wrecks havoc on union members, unions lose any interest in helping companies be more efficient.

Fear of lay offs also drives much of the anti-immigrant and protectionist instincts in our politics, and is a not insignificant factor in the politics of economically questionable farm subsidies. A few efforts have been tried to create benefits tailored to people harmed by trade agreements, but the practical difficulties involved in linking a particular lost job to a particular trade agreement makes these programs dramatically under inclusive.

This cliff that any household that is not economically self-sufficient falls from also fuels both high divorce rates, which are closely associated with economic insecurity, and the economic suffering of single mothers (sometimes mothers who have children outside of marriage, and sometimes divorce mothers). The hardest hit in divorces are displaced homemakers, who sacrificed their careers to focus on caring for children in reliance upon a spouse's income. Divorced families generally struggle as they must support two households on incomes that once supported one family, while picking up the added costs of divorce litigation, often for decades.

Also particularly hard hit are foster children. They have no family safety net to fall back on to supplement our nation's weak government safety net, and they have had no opportunity to build up savings or seniority to buffer them from misfortune. Yet, they are particularly prone to making mistakes because they have had less consistent and quality parental guidance, and no experience living on their own as adults, to forewarn them of perils to avoid. One mistake, by people particularly at risk for making them, can leave these children at the very bottom of the cliff.

Indeed, the examples of people who are particularly hard hit, illustrate the main coping mechanism our society has developed. The self-employed often rely on a spouse for health insurance, or upon family resources to weather hard times, or secure the working capital that they need to stay in business until profitability can be established. It isn't unusual these days for adult children to return home to live with their parents multiple times after being wiped out by economic failures. Middle class parents make it possible for their children not only to pay tuition but to give up significant income while having adequate room, board and medical care while they get educations that make future economic security possible.

People, particular children, whose families aren't sufficiently strong or affluent to weather hard times suffer the most.

Imagine if currency brokers at big banks, and investment bankers were treated the way our society treats households that aren't affluent already. What if every single trade had to make a profit, on threat of eviction or missing meals or not having family illnesses treated? What if an investment in a failed company made you personally responsible for all of its debts? While we want to there to be consequences for taking economic risks that don't pay off, if downside risks are too economically punishing, people won't take risks that, on average, do pay off and should be encouraged.

The economically catastrophic impact of underemployment and unemployment is behind all sorts of other serious social problems.

For example, while vagrancy is closely associated with mental health problems, substance abuse, and criminal histories that provide a barrier to employment, most homelessness is simply a consequence of lack of money, often due to unemployment.

An article in the Rocky Mountain News earlier this month, noted the striking correlation between economic hardship and domestic violence.

While there is a fairly weak correlation between the percentage of people who are below the poverty line and crime, there is quite a stronger correlation between extreme, concentrated and sustained poverty and crime.

Milton Friedman, the famed free market economist, was a proponent of a negative income tax, or the equivalent, to buffer the downsides of low incomes. He also argued strenuously that one of the most important differences between the rich and the poor was that they rich had more money, i.e. that more money was all that was necessary to cure the ills of many of the poor, without little further direction.

Insecure incomes and meager savings lead to foreclosures that in turn bring down our entire economy.

Large numbers of people who can't afford health insurance and don't have "no fault" car insurance, produces huge percentages of unpaid bills for ambulances and emergency rooms, driving up the costs of these kinds of care even further, and indirectly providing a major driver for increased health insurance premiums that in turn grow the ranks of the uninsured.

It is easy to blame the personal shortcomings of the jobless for their unemployment when the economy is growing, unfilled jobs are plentiful, and unemployment is relatively rare. But, when the economy slows down, as it is starting to now, we become aware of how often, even in good economic times, people lose jobs for reasons that don't justify draconian economic punishments.

Losing a job that pays $26 an hour, and not being able to find a new one for a few months, brings with it economic consequences to that person comparable receiving a new DUI conviction every month, or a new prostitution or shoplifting conviction every few weeks.

Short term economic hardship can also have long term consequences.

I will never forget representing a landlord in an eviction where one of the items of personal property put on the curb was a stack of college applications being prepared by one of the children who lived in the home, quite possibly lost in the process and preventing that child from going to college.

I will never forget a client of mine with a job that required him to have good dexterity in his hands, who didn't have health insurance, suffered an off the job hand injury, and while he received emergency treatment that stabilized his condition, was unable to raise enough funds quickly enough to pay for the follow up surgery he needed to prevent permanent impairment to his ability to use his hand. A personal injury lawsuit settlement didn't come quickly enough to pay for the treatment that needed to be provided within a couple of weeks to be effective.

A poor family with young children who can't afford pre-school for their children, may never be able to make up that lack later in life, when that critical time period has passed.

The economic game that we play with its incentives and rewards and punishments is an important one to making our society work. But, sometimes the cost of losing can be so high that we need to stop playing and make sure that everyone is O.K. first, and worry about incentives later.


American indifference isn't universal.

We treat our elders far better than almost any other segment of our society. While our Social Security system isn't particularly generous by international standards, almost everyone is eligible for it at retirement age, and the benefits are usually enough to allow beneficiaries to survive on it alone, although part-time work or retirement savings are necessary to spend one's golden years in comfort. Medicare is single payer health insurance for essentially everyone in the United States aged sixty-five or older, it doesn't cover everything, but is more generous that the health insurance available to a substantial share of people with private sector health insurance. Additional government provides supplement the income of the elderly poor and assist the elderly poor and the middle class poor in securing nursing home care.

We also provide considerable tax benefits, in a greater variety of ways than any reasonable person could want, for retirement savings. The tax benefits for retirement savings, which mostly benefit the middle and upper middle class, rival the direct expenditures from Social Security, in magnitude. Retirement savings and home equity, which often serves as a form of retirement saving, also receives generous protection from creditors.

Social Security is the third rail of American politics because it works.

Interestingly, public schooling provides considerably more economic benefit to families with children than simply shifting the expense of tuition from families to their states and communities. It also dramatically reduces poverty rates by providing reliable child care that makes it easier for family members to secure work, thereby increasing family income.

The most successful social safety net programs in our society are categorical, rather than means tested, producing greater security for beneficiaries, and greatly reducing administrative costs.


Some form of subsidized universal health insurance, and public funding of legal assistance in custody matters are two important steps we can take to strengthen our safety net.

Another is to fix the sometimes odd incentives of our higher education financial aid system, which is essential for everyone but members of the upper middle class, who hopes to go to college. The children with poor and working class parents can often obtain substantial need based assistance to go to college, but have trouble achieving the academic preparation needed to succeed in college. Middle class kids are more likely to have adequate academic preparation for college, but often find it hard to secure financial aid. Children of poor, working class and middle class parents alike almost invariably have to work considerable hours at a part time job to stay in school, despite often being less prepared for college work (and hence having a greater need to focus on their studies exclusively) than their upper middle class peers.

But, the piece that none of these better explored proposed additions to our social safety net addresses is the need to reduce the intensity of the economic consequences of unemployment and underemployment.

One model, perhaps the cheapest and simplest, would be to pay every man, woman and child in every household, a check, simply for being a citizen, every single month, regardless of work status. This is what Alaska does. It is cheap to administer, sets a floor on economic hardship, and is a particularly helpful buffer for those closest to the bottom economically. It is the economic equivalent of Milton Friedman's negative income tax regime, in an administrable form. Indeed, such a payment could replace the need for devices like a standard deduction, personal exemption or per child tax credit in the tax system to effectively remove lower income people from the tax system entirely.

Alternately, the concept of the per child tax credit could be strengthened, or converted into a direct payment, so that household with children would face less intense economic hardships relative to households without children.

A variant on the idea is a substantial property tax exemption for each residential property unit, in the same dollar amount regardless of the value of the property. Colorado, consistent with the larger pattern of the American social safety net, has something like that for elderly homeowners, but not for younger ones.

Simply eliminating the need to pay for health insurance while unemployed, would be a major improvement.

Another solution could be a transition from a laid off worker oriented unemployment regime to a "no fault" unemployment insurance regime, where employers didn't have rates set on their "claims experience" and employees could obtain unemployment insurance for a certain number of weeks simply by proving that they were unemployed rather than having to prove that they were looking for work, or that they were unemployed through "no fault of their own," would significantly reduce the administrative costs of the system so that they could be devoted to benefits instead, and the opportunity costs associated with unduly intense pressures to find work. The relatively modest amount and limited duration of unemployment benefits under the current system already provide an ample incentive to seek new employment. Indeed, given the fairly low amount of a typical unemployment benefit, even a much longer duration of benefits would still provide a strong incentive to seek new employment.

Strengthening unemployment benefits, dependent merely on an absence of employment in a household, with reduced benefits available in households with only part-time, low paying employment, might be preferable in many cases to existing welfare programs with elaborate rules and complex means and asset tests.

Many countries have mandatory severance benefits based upon how long one has worked for a company, for example, requiring a severance payment of one month of pay for each year someone worked at a firm. One could also have a system where some percentage of each months pay went to a savings account accessible at any time that the person contributing to it was unemployed.

For single mothers, increasing the amount of child support payments, or making alimony or the equivalent available by formula to all former stay at home parents in addition to child support, might help address the well established pattern of post-divorce economic hardship under the current system.

For foster children, perhaps they are owed, at least, something like the nest egg that many parents with the means to do so, provide for in the event of their untimely deaths. While most foster children still have parents living, their parents are legally dead to them, without so much as a modest life insurance payout or tort settlement.

We do need incentives to work and to seek work. But, they don't necessarily need to be so intense. Categorical benefit programs that are indifferent to actual income and assets, and instead target households where a large percentage of people need income assistance, don't undermine the incentive to work much if the benefits aren't huge. And, by liberating people to take greater risks in self-employment and to fear losing a job less, they can actually encourage greater economic efficiency.

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