SAFETY NETS, HAMMOCKS AND TRAMPOLINES
Government social safety net programs can help folks in times of special need ... if they're carefully designed and administered.
As a boy, I remember watching the epic 1950s film, “The Greatest Show on Earth,” in which Director Cecile B. DeMille, Ringling Brothers, and Barnum & Bailey joined forces to produce a fictionalized account of circus life. One of the movie’s scenes that still sticks with me was a daring act performed by circus trapeze artists Holly (Betty Hutton) and The Great Sebastian (Cornel Wilde).
I marveled at the aerial acrobatics until a shocking moment made me gasp along with the audience. The Great Sebastian misjudged a hand-off and plunged toward the ground before landing in the safety net below. To my relief, he sprang to his feet on the net, dropped to the ground, and climbed up to his high perch, and quickly resumed his act. A fall and recovery all in a matter of minutes, thanks to the safety net.
Decades later, I again came across safety nets. This time they were government “social safety nets,” and the performers were everyday folks who, thanks to those safety nets, restored their lives after major setbacks caused by natural disasters, financial turmoil, or major economic disruption. Through much of the last century, social safety nets became critical government tools for mitigating unforeseen troubles, avoiding personal ruin, and easing recovery for millions of Americans and their families.
Those 1930s Depression-era social safety net programs proved critical in restarting the American economy, following the 1929 stock market’s collapse. Programs like the US Civilian Conservation Corps put people back to work building roads and dams and launching major infrastructure initiatives like the Tennessee Valley Authority.
On the global stage, the United States was a key player in Europe following World War II with its Marshall Plan. That decade-long reconstruction program supplied American food and fuel to devastated European countries while they rebuilt their destroyed cities, farms, factories and infrastructure. Although not strictly social safety nets, as we think of them today, the American depression-era re-employment and post-war reconstruction programs helped rebuild the lives of hundred of millions of people in America and around the world.
These post depression and postwar programs not only functioned like a safety net but also like trampolines helping beneficiaries bounce back into fully productive lives and not like hammocks creating huge dependency problems for society.
More recently, however, social safety net programs have gotten a lot of bad press and provoked public distrust. Often that’s been because they were poorly designed or administered, rather than because they weren’t necessary. That’s unfortunate, because social safety nets can play a valuable role in our collective lives.
I have a lot of respect for the economics professors at my undergraduate alma mater, the University of Chicago. One U of C professor successfully translated financial security recommendations into everyday language. His name is Harold Pollack, and he’s most noted for the investment advice he gave in an informal 2013 interview with financial advice author, Helaine Olen. All the financial advice you need to prosper in today’s economy, Pollack asserted in that interview, can fit on one side of a 3x5 index card.
That advice, he claimed, amounts to just nine steps to follow toward financial security and comfortable livelihoods. After their video interview went viral, Pollack and Olen published a book in 1915 on the topic, “The Index Card: Why Personal Financial Advice Doesn’t Have to be Complicated.”
You don’t need the book to access Pollock’s nine major investment tips. Just search the internet under the keywords, “investment index card” and you’ll find the list. Here it is:
Target to save 10% of what you earn; or at the very least, spend less than you make.
Max out contributions to your 401k or 403b employee accounts or set up and fund your own tax-deferred independent investment account (IRA).
Invest in inexpensive, well-diversified index funds; don’t try to time the market by trading individual stocks; it’s not timing the market, but time in the market that pays off.
Pay attention to investment fees; avoid actively managed funds.
Make your investment advisor commit to fiduciary standards; seek unbiased advice.
Re-invest dividends and interest income to benefit from the power of compounding.
Purchase adequate insurance to cover you against catastrophic events.
Pay off all credit cards in full each month; pay-off highest interest loans and debts first.
Promote social safety net programs that help people when things go wrong.
The first eight items on Professor Polack’s list are all pieces of sound financial management advice. It’s his last point about promoting social safety nets that seems out of place in this list, right? But Pollack argued that it’s in our collective self-interest to make sure that we all advance economically as a nation. It is in our self-interest that some of our tax dollars go to helping others to weather the natural or man-made storms not of their own making. After all, tomorrow we may turn to them for the manufactured goods or professional services we need as customers or clients.
The key is to design time-limited need-based social safety nets and avoid hammocks strung up indefinitely between public money trees with beneficiaries collecting dollars falling into their laps. That applies both on a small scale (individuals and families) and a large-scale businesses and industries. Over-indulgent parents sometimes allow their adult children to camp out at home without working, creating a dependency, not a safety net.
And certain US industries pursue government-sponsored protectionist measures against global competition. They advocate for publically funded “hammocks” like quotas, subsidies, or tax breaks. Instead, they should prioritize innovative products and services and modernization of production processes to adapt to shifts in market demand and costs of raw materials.
A few well-known public programs provide instructive models that function not like strung-up hammock, but more like a bounce-back trampoline for those in need. Here are three important lessons to consider in assessing whether social safety nets function like hammocks or like bounce-back trampolines for beneficiaries.
Lesson 1: Social safety net programs work best when they foster the use of existing skills and physical capacity to bounce back. Substantial idle capacity existed in the skilled but unemployed workers of post-depression America and post-World War II Europe. Programs were designed and introduced to feed and mobilize already skilled workers and communities to rebuild infrastructure and reopen factories, in both instances, within a decade.
Following the US recession of 2008, the US government provided billions in loan funds to two American automobile companies to staunch their capital and job losses. Ten years later, those firms had bounced back, creating more jobs than lost during the recession and paying back government loan funds with interest.
That was possible because the capacity was there on which to restore, retool and expand more efficient automobile production lines, including electric cars. This principle applies to restoring operations of both mom-and-pop businesses and corporations, best when temporary or time-specific.
Lesson 2: Social safety net programs should seek solutions, not create a dependency, for beneficiaries. An example often cited are the ‘welfare moms’ who live on unemployment insurance rather than actively seek employment. However, a closer examination of household finances suggests the program's issue might not be recipients gaming the system, but their inability to fully use the programs I which they're enrolled.
Researchers discovered that many single mothers receiving welfare lacked job skills, resulting in wages too low to cover added expenses like transportation and childcare. Further, potential employment income did not offset these added costs of living. It simply made more economic sense for them to stay home with their kids and draw unemployment benefits. The solutions equip recipients so they qualify for and can access better-paying jobs by pairing unemployment insurance with job skills training and affordable childcare initiatives.
Lesson 3: Apply the KISS principle – Keep It Short and Simple - to social safety net programs. Experience reveals that complex procedures make them costly to administer, vulnerable to abuse and operationally cumbersome measures for reaching their intended beneficiaries. A good example of the KISS principle is government supported school lunch programs for kids from low-income families. School meals benefit capacity building, in this case to classroom learning.
They are simple to administer and monitor, because school administrators can easily identify kids who qualify on the basis of their parents’ income. A family qualifies for school lunch benefits only through the years their children are in school or until the household can no longer qualify based on income means testing, whichever comes first.
But food stamp – Supplemental Nutrition Assistance Program (SNAP) – benefits are more problematic. Once turned on, it is hard to turn off. Employers advocate for it because they know SNAP benefits can help make up the difference between low salaries they pay and the costs of living facing their workers.
Moreover, SNAP has developed an unanticipated farmer and food producer constituency advocating for its continuation and expansion because it creates a guaranteed market for what they produce. Food stamp programs violate all the lessons learned about what makes a good social safety net program work: capacity building initiatives to build participants’ self-reliance capabilities; administrative transparency, and protection from political manipulation.
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Without safety nets under their high-flying trapeze artists, the Ringling Brothers and Barnum and Bailey most likely would not have survived as they did until the early part of the twenty-first century. Many of us, regardless of our station in life, lead demanding and risky lives that would rival those of any three-ring circus. To manage risks, some of the more privileged around us have access to resources like private health, property and liability insurance, personal savings or family financial legacies at our disposal.
These advantages have given us a bounce-back capacity when adversity strikes. But many vulnerable populations depend on social programs, including unemployment insurance, social security disability coverage, and school feeding program benefits to help them and their families bounce back from hardship.
In America, we have ways to pick ourselves up and start over again. Social safety net programs play an important role in saving us from disaster and, like trampolines, helping us bounce back from such events. They have a well-deserved place on the list of investment tips included on Pollack’s index card.
We must boldly acknowledge, advocate for, and support well-designed and executed social safety net legislation as crucial investments for securing our shared economic prosperity.. ###