Does the Welfare State screw the poor?

Milton Friedman’s complaints about rent control and the minimum wage are cliche. These programs hurt the people they’re intended to help. Unintended negative consequences are the first things I look for when I think about a policy intended to help the poor. I just took their existence as an empirical fact.

But I never really thought about the structure of these unintended consequences. So I second Karl Smith’s recommendation to read Beaulier and Caplan’s paper on the subject.

Poverty policy might hurt the poor because:

  1. Poor people pay more for it than they get. E.g. poor people live shorter lives suggesting they get less social security benefits and social security taxes are regressive.
  2. There may be inter- or intra- family externalities. E.g. a welfare program may make a dad better off by leaving his family but his absence may make the rest of the family worse off.
  3. Poor folks are lead to make bad decisions (where bad is relative to a neoclassical norm) for themselves because of the program. E.g. affirmative action leads minority students to choose “higher ranked” schools whereas they would have had better outcomes if they choose less prestigious schools.

The point of the paper is to show that the third possibility is untenable in the neoclassical framework (where expanding a person’s choice set can only make them better off) but it becomes tenable if results from behavioral economics are taken seriously. Plus, deviations from rational expectations may be especially pronounced among the poor.

Question for those that want to stick it to the banks

Some seem to really dig plans for the housing market that stick to the banks. I’m down; I dig redistributional policy and we should encourage people to do what’s best for them and their families (even if its bad for the banks for “the system”).

I just took a peak at the CalPERS annual statement and it appears they have a huge stake in the bank-side of the mortgage industry (over $10B in MBS and large positions in bank stocks). So here’s the question: what theory of justice requires redistribution from public service retirees to underwater home owners? Less snarkily: why are you so sure that the owners of these banks are any better off at the moment than the folks that bought too expensive houses?

Wouldn’t it be better to directly help poor people?

Mike D’s utility

Mike D commented on this post:

Let’s think about two axes here. On the x axis, put altruism (the weight my assessment of your utility has in my utility function) and on the y axis, put respect (if I assess your situation using my utility function, respect = 0, if I assess your situation using what I think is your utility function, put respect =1, and interpolate between these two).

It seems obvious why altruism decreases with distance/dissimilarity. I would submit that respect is more subtle.
1) Proximity decreases respect, as I may suffer alleged externalities (real, pecuniary, or psychic) from your choices, so I have a selfish motive to override your preferences.
2) Proximity also increases respect, because your internal emotional life becomes more real and vivid to me, instead of a highly abstracted model.

So the utility function looks like this:


where big U is total utility for the individual, little u is his Robinson Crusoe utility, little v is the other person’s utility, x is the individual’s consumption and y is the other person’s consumption. According to Mike D, the parameter’s of that utility function behave like this:
There has to be some experiment, natural or otherwise, that would let us estimate these parameters and see how they vary with social distance.

Genes or culture or both?

An implication of Wilkinson’s theory is that intergenerational mobility should decrease over time. Wilkinson claims intergenerational mobility has decreased. It hasn’t (estimates from Lee and Salon 2009):

The “intergenerational elasticity” (the percentage kids’ incomes raise for every percentage increase in parents’ income) has stayed about the same over the last couple of decades. Other studies get contradictory answers and few find a statistically significant trend.

Which suggests the answer to the question posed in the title is: none of the above.

UPDATE: On rewatching, I see that Wilkenson isn’t trying to explain increasing inequality as I first thought, he’s trying to explain non-existent decreases in mobility.

A definition of paternalism

Just read Mankiw’s new paper and this occurred to me:

I’m definitely a jerk if I don’t have other’s outcomes in my utility function. I’m a paternalist if I have other people’s consumption in my utility function, not their utility.

This is why a paternalist can give you healthcare instead of cash because your consumption of healthcare matters to him more than your happiness/contentedness/life satisfaction/etc.

Interestingly, most folks are jerks with respect to foreigners, they’re paternalist with respect to other anonymous citizens and they’re neither with respect to their close friends and family. I can’t find reason in this mix of preferences.

What is progress?

I’m a political newb, but even I can see why progressives would concern themselves with “stagnating” middle class wages rather than poverty (e.g. here). Poor folks don’t vote, but if you can convince the middle class (which is like everybody if you ask ’em) they’re getting screwed and you’ll fix it, then you’ll get elected.

The thing is, you’re already elected, progressives!

And if you’re looking for more electoral advice from a political naif: everybody cares about poverty. Nobody likes to see people suffer. If you want to broaden your political base even further, tackle poverty.

I recently learned of a group of people called the “undeserving poor”. These people, apparently, don’t deserve to not be poor. You don’t want to associate your anti-poverty rhetoric with them, of course. What you do then, is talk about how the current social safety net actually encourages people not to work!

In fact, progressives, if you want to have the greatest chance of helping people — you know, to make progress— you might consider non-state-based anti-poverty programs. Half of folks think the government can’t do anything about poverty anyway. You come up with a way to help poor people that doesn’t involve the government and you’ll win a lot of those folks over to your camp. An idea I haven’t heard a good argument against is to replace the current welfare state (including tax deductions and credits and the minimum wage) with a basic income guarantee or the EITC on steroids.

In the end, its about making progress, right?

Of safety nets and inequality

Kenworthy responds to the core of Wilkinson’s argument. Kenworthy says income inequality matters because outcomes are determined by luck. Its not fair that two people of equal talent, who both worked hard in school, etc, etc should have different outcomes because one was lucky enough to “have a friend in the business” or won the lottery.

To me, this is an argument for a social safety net not for income redistribution. Most people I know are happy for the people that win lotteries. Nobody bemoans others’ good fortunes. However, most people I know dislike when people hit dire straights because of bad luck. It is unfair for people that have worked hard to be knocked down too far.

Good thing that you don’t have to believe “most people I know”. Experiments have shown that people have preferences for efficiency not for equality.

The difference matters for policy because policy makers should give more weight to policies that increase growth rates even if they increase inequality and less weight to redistributive policies.

Status seeking is great!

Elizabeth Anderson points to this video suggesting its proof about how truly terrible is status seeking (ergo inequality is bad!).

In it, kids are quoted saying they divide themselves up, not by race, but by wealth. Its not “this kid is black or Mexican” anymore its “this kid is rich or poor”.

These sentiments are a bad thing only when you set them to forlorn music and pictures of deserted parking lots. Whoa is us who have given up centuries of racial hatred and division to go shopping at the mall!

Doesn’t follow

I really, really want someone to tell me why concerns about status seeking are so easily conflated with concerns about inequality. I’ve read Robin Hanson enough to believe we’re built-in status seekers and we’d be so whether or not the gini index rose last year.

In a response to Wilkinson’s essay, Elizabeth Anderson quotes Adam Smith:

A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, no body can well fall into without extreme bad conduct.

and then writes:

The consumption of the better-off thereby raises the cost of living for the worse off.

While conceding the point that consumption inequality is what really matters, this clearly does not follow. The better off in Adam Smith’s day didn’t wear linen. They wore fancy, silky stuff from the Orient. Linen is what other laborers wore. A laborer would be ashamed to not live up to the standards of other laborers, not the rich.

I’m tired of the sociology on this issue. I’ve seen enough examples of status seeking to know it exists. I want to know about its mechanisms. Do laborers have higher standards overtime because they are trying to emulate the rich? or some other group? Who do people choose to emulate? Why do people care about their status relative to classmates but not relative to poor Africans? How many people actually participate in status seeking to the pathologic levels sociologists and documentary film makers dwell on?

Why is this at all related to wage inequality?