Sunday, August 19, 2012

We Take Care of Our Own

As Bruce Springsteen points out in his recent song, We Take Care of Our Own, American don't seem to have much tolerance for moral hazard when it comes to the social safety net.

I've been knockin' on the door that holds the throne 
I've been lookin' for the map that leads me home 
I've been stumblin' on good hearts turned to stone 
The road of good intentions has gone dry as bone 
We take care of our own 
We take care of our own 
Wherever this flag's flown 
We take care of our own 

Despite a long great recession, rising poverty and high unemployment, Americans persist in their belief that the poor are culpable for their own plight. 

Nothing divides Americans more than attitudes towards the poor. A recent Kaiser/Kennedy School pool on the causes of poverty asks the question, "Which is the bigger cause of poverty today — that people are not doing enough to help themselves out of poverty, or that circumstances beyond their control cause them to be poor?" 

Americans are split down the middle on this one. 48% says the poor aren't doing enough and 45% say circumstance beyond their control.  This issue almost defines the difference between Republicans and Democrats - Republicans go 63-31 on not doing enough while Democrats end up 57-37 on circumstances.  Not surprisingly,  Europeans with their vastly more expanded welfare state, go for circumstances by more than a 2 to 1 margin.  

Americans who believe the poor aren't doing enough are worried about moral hazard. 
Moral hazard hazard arises when an individual does not take the full consequences and responsibilities for their actions, and therefore has a tendency to act less carefully than they otherwise would, leaving another party to hold some responsibility for the consequences of those actions. 

The social safety net provides assistance to people who for one reason or another have fallen on hard times. Divorce or pregnancy might lead to poverty for a single woman with a child. Mental illness including addiction might lead to the loss of a job and eventually a home. A serious illness could lead to bankruptcy and poverty.  During today's recession, long periods of unemployment leave people with few or little resources to make ends meet.  

The degree to which  the safety net helps or hurts a person varies. In some cases,  the availability of unemployment insurance, welfare, food stamps or other benefits might lead to people postponing their job search, or avoid seeking mediation in marriage.  The assistance could insulate people from the adverse consequences of their actions. 

The problem is that there is no way to calculate the absolute level of moral hazard in social programs. In reality, most safety net programs benefit a mix of people and thus a wide mix of motivations and behaviors. The public policy question is does the amount of moral hazard created by the program exceed the net benefit to those in need? How much moral hazard are we willing to tolerate to meet the need of those in real need?  If there are 500,000 people on food stamps and 25 of them use the stamps at a casino, should the program be curtailed cutting off another 25,000 people to prevent the abuse? 

Unfortunately, most people derive the answer to this policy question based on values or ideology rather than empirical data. As we can see from the recent survey on the causes of poverty, the question of moral hazard versus needs essentially defines the two political parties in the U.S.   

Those who believe in moral character versus circumstances continue to hold to their beliefs even as conditions change radically. It doesn't matter if unemployment is 4% or 8% or if poverty rates change from 11% to 16% - the conclusion is always the same - the safety net will lead insulate people from taking action to change their situation. 

Today, in one of the hardest times in American history, a near majority of Americans appear to have little or no tolerance for moral hazard. For them, taking care of our own is merely a crutch. 

Wednesday, August 8, 2012

The Political Agenda

What determine what gets on the political agenda at the national, state and local level? Which issues get to be debated and considered,  which never see the light of day?

The most common answer to this question is interest groups. Interest groups invest money in campaigns and then in lobbying and their issues get considered and often accepted by policy-makers. There is no doubt that they exert enormous clout in determining the outcome of public policy issues.  However, I really don't think it is that simple. I don't think interest groups or even political parties actually get to decide most of what is considered in government. Looking at the policy agenda in the U.S. the key issues appear to be jobs and the economy, health care, gay marriage, immigration, education and the budget deficit . While interest groups may play a disproportionate role in determining many of the alternatives that are considered to solve these problems, they don't get to pick which ones draw the attention of policy-makers.

Author and professor, John Kingdon in his classic works
Agendas, Alternative and Public Policy  identifies three policy streams that most often need to come together for an issue to be seriously considered by policy-makers.

1. Problems - problems come up and have to be dealt with. I worked with a former Federal Reserve Board economist during the Locke Administration who was always frustrated that the Governor's agenda never seemed to stay the course. For him, it was always issue du jour. You are working on economic development and then all of sudden energy prices skyrocket and you have to drop it and work on energy issues. Problems become the focus because citizens expect elected officials to deal with them. But problems in themselves aren't enough.

2. Solutions - if a policy-maker is going to consider an issue, she is going to want to know that the problem can be solved. Otherwise, an enormous amount of political capital will be spent and you will end up looking pretty foolish. The property tax is unfair because it doesn't include the value of financial assets in the valuation of property. But how would you do it? Could you administer it or would cheating be so prominent it wouldn't be worth it?  Tornadoes, earthquakes and Tsunamis are horrible events that should be stopped, but can you? A more realistic example might be health care reform - in a country so ideological devoted to the free market, can you have a solution that doesn't involve government ownership?

3.  Politics - there has to be the right political alignment for the issue to move through the political process. Somebody or some people who are policy-makers have to make it a priority. Health care reform wasn't politically ripe during the Cater Administration because it wasn't the priority of the president and the political mood of the country was souring on government solutions. On the other hand, the election of Barak Obama was accompanied by large majorities in the House and the Senate and Obama made it the #1 priority of his administration. Climate change was clearly on the agenda in 2008 with major Republicans and Democrats in Congress and the President seeking legislation. But the 2008 recession knocked it off the agenda as concerns moved away from the environmental protection to it's effect on jobs.

Politicians who understand these forces are often said to have a good sense of timing.  An advocate for education reform might hold off on passing major investments in education because they know that during a severe budget crisis there is no viable financial solution. But when the economy improves, and revenues are back on track, they may have a solution in hand and will work ensure that the public sees that it is a problem worth solving. When that time comes, they will jump on any news on comparative test scores or school failures try and put the issue on the agenda. Advocates for small government jumped on their chance to shrink government when the great recession and tax cuts led to huge budget deficits.

Given the problems we are facing today, the political climate and the availability of realistic solutions, what issues might be ripe for getting on the agenda?