Thursday, August 23, 2012

Shared Sacrifice, for the Other Half

I was a little shocked that Paul Ryan was selected for VP. But it does open up wonderful opportunities for articles such as this at the Washington Post. It was fairly obvious from a read through of Ryan's Roadmap in the first place, but a more detailed look at it is worth having.

It does need to be noted that given Ryan's assumptions expressed in the Roadmap having to do with the impact of assistance on individual work ethic and the positive impacts resulting from making real costs felt by an individual, these shifts in spending are fully consistent with Ryan believing his budget not only helps the country but also the poor themselves by reducing dependency and increasing incentives for hard work. I also happen to think that even a passing familiarity with the empirical data on government spending, the impacts of aid, distributional impacts, entrepreneurship, or any other related subject would reveal these assumptions as barking mad. But being barking mad is not inconsistent with thinking you are acting in the best interests of the people whose program's you are cutting.


  1. On a fairly theoretical level, what do you think would actually happen if programs for the poor were cut entirely? Obviously short-term there would be immense suffering, but long term could there be a return to an attitude of total self-sufficiency? I hate taking Ryan's paternalistic view, but I do find myself wrestling with this question.

    Also, I think that it's improper for progressives to make the incentivization discussion off-limits. The cynical description is "work ethic", but ultimately we all agree that a dollar doled to an indigent family is a dollar they don't have to struggle for; all public beneficiaries are somewhere on the spectrum between complete abandonment and complete dependency. I would argue that the abject nature of life on so little income is small enough as to cause a SMALL effect on "work ethic", or stated differently, a low earner's incentive to make money. Would you argue that it is in fact an entirely negligible effect or no effect?

    1. On a theoretical level, my feeling is that in addition to the short term suffering we would see the US to come to look more like third world countries such as the Philippines.

      What would happen is the development of personal dependency networks. Poorer individuals would become increasingly disconnected from the market. They would come to rely increasingly on family networks, religious organizations, and grassroots self-help organizations. You would see sharp declines in interpersonal trust among poorer individuals with family and networking playing a larger role.

      Formal entrepreneurship would decline sharply among these classes (with informal non-market entrepreneurship rising sharply but existing only partially within the cash nexus). Upward mobility would decline sharply as well, increasingly culture would bifurcate between the middle class and the poorest, with institutions diverging between the two classes (think of the difference between grassroots credit agencies like Grameen Bank and formal credit institutions).

      Poorer people would become much less likely to take risks and they would see their potential gains decline sharply. This would result from the nature of these networks. A family member who was successful would see their market income drained away to other, less successful family members. This would making saving for investment more difficult, who would take the risk of investing when care for their parents or an ill sibling may end up eating away all their capital? This is a very common problem in the third world.

      I should probably do some posts on this. The ultimate problem is that the choice isn't between dependency and hard work, the choice is in the institutions that support people. Formal institutions provide rules that are meant to get people to participate in the market economy. The non-formal institutions that form spontaneously in third world nations tend to erode market incentives and replace them with something more like a traditional or customary economy. These economies require different skills to live in, this tends to erode the skills necessary to succeed in a market economy. To use my three ideal type model, government aid programs promote the market economy and participation in the market, ending these programs would shift the economy back towards a customary economy instead, with all the ill effects associated with that.