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.
One of the first movies I recall watching as a kid is “The Greatest Show on Earth,” an early-1950’s mega-motion picture production in which Director Cecile B. DeMille partnered with the Ringling Brothers and Barnum and Bailey to give us a fictional look at the drama 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 amazing aerial acrobatics, and I gasped with the theater audience when The Great Sebastian misjudged a hand-off and plunged toward the ground before being stopped by the safety net below. I looked on with relief as he bounced upright, moved over to the net’s edge, flipped to the ground, and quickly climbed back up the ladder to the perch at the top of the big tent, ready to continue the performance. 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 “social safety nets,” and the performers were everyday folks whose livelihoods were restored 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 individuals and families.
Depression-era social safety net programs in the 1930s 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 rebuilding Europe following World War II with its Marshall Plan, an eight-year social safety net program of sorts that supplied food and fuel for devastated countries while they rebuilt their cities and farms, transportation networks and manufacturing capacity.
Although not strictly social safety nets as we think of them today, post-depression and post-war reconstruction programs pulled entire countries back from the brink of anarchy and ruin. More recently, however, social safety net programs have gotten a lot of bad press and provoked public distrust in part because they have not been administered well, rather than because they aren’t at times a good idea and the best course of action. Fortunately, they also have supporters, sometimes from outwardly unlikely places.
I have a lot of respect for the economics professors at my undergraduate alma mater, the University of Chicago. They have gained an impressive following among those who believe in pragmatic market-driven solutions to the most vexing problems we face in our national economy. Several Chicago economists have received Nobel Prizes for their research and contributions to the behavioral sciences. Much of that economic research is highly quantitative and theoretical, but its applications have often made their way into national economic policy.
One Chicago Professor successfully translated into everyday language some pragmatic economic recommendations for actors in the market place. His name is Harold Pollack and he’s most noted for the investment advice he gave in an informal 2013 interview with financial 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 its nine major investment tips. Just search the internet under the key words, “investment index card” and you’ll find the list. In any case, here it is:
1. Target to save 10% of what you earn; or at the very least, spend less than you make.
2. Max out contributions to your 401k or 403b employee accounts or set up and fund your own tax-deferred independent investment account (IRA).
3. 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.
4. Pay attention to investment fees; avoid actively managed funds.
5. Make your investment advisor commit to fiduciary standards; seek unbiased advice.
6. Re-invest dividends and interest income to benefit from the power of compounding.
7. Purchase adequate insurance to cover you against catastrophic events.
8. Pay off all credit cards in full each month; pay-off highest interest loans and debts first.
9. 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, considering the topic and the conservative university where individual self-interest is at the center of economic thinking and where Pollack lectures. But Pollack is arguing that it’s in our collective self-interest to make sure that we all advance economically as a nation; when some can’t, none of us can, at least not as much as would otherwise be possible. Like the other eight investment tips, Pollack argues, it is in our interest that some of our tax dollars go to helping others to weather the natural or man-made storms not of their own making.
The challenge is assuring that social safety nets do not become hammocks that program beneficiaries string up between two public money trees and wait for the dollars to fall into their laps. That applies both on a small scale and a large scale.
When over-indulgent parents allow their off-spring after high school or college to come home, camp out in their basement, and surf TV and the Internet with no motivation to get a job and become self-reliant, they have strung up a hammock, not a safety net. When some industries in the American economy are so fearful of foreign competition that they lobby for government quotas, subsidies or tax breaks, instead of investing and reinventing themselves to become more technologically advanced and competitive on the global stage, they have cajoled politicians in setting up a golden hammock for themselves or their industry sector. That’s not good for either economic efficiency or national welfare.
Since social safety nets have been around for some time, there certainly must be some lessons to apply to assure that their impact is not one of stringing up a hammock but of producing a trampoline-like bounce-back effect for those in need. Indeed, there are a few things we’ve learned. Here are three of perhaps the most important lessons to consider in assessing when and whether social safety nets are warranted.
The first lesson is that social safety net programs work best when they are designed to encourage and enable the use of existing 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 little more than a decade.
More recently, following the US recession of 2008, the US government provided billions of dollars in loan bailout funds to just two American automobile companies to staunch their losses of capital and jobs. Ten years later those firms have bounced back creating more jobs than were stripped away by the recession and enable those companies to pay back the loan funds, with interest. Again, that was largely possible because the capacity was there on which to restore, retool and expand more efficient automobile production lines, including cutting edge electric cars. This principle of building back existing capacity applies to mom-and-pop businesses just as much as corporate conglomerates when funds are carefully targeted to those in need but with the knowhow to restore their operations and their lives.
A second lesson applies when the capacity to bounce back is not there or very limited and it’s necessary to integrate capacity-building measures into safety net supports. A common criticism of social safety net programs is that they can create a dependency among beneficiaries. An example often cited are the ‘welfare moms’ who live on unemployment insurance rather than actively seek employment. However, a close look at intra household economics explains that the program’s problem may not be beneficiaries trying to game the system, but rather with their lack of capacity to benefit from welfare programs in which they participate.
That was the discovery when researchers observed that many single moms on welfare, because of their limited skills, could not find jobs that paid high enough wages to cover the added transportation and childcare costs they incurred while working. Added employment income did not offset added costs. It simply made more economic sense for them to stay home with their kids and draw unemployment benefits. Lesson: Combine unemployment insurance payments with job skills training and incentives to encourage more childcare services at affordable costs.
The third lesson is to apply the “KISS” principle to social safety net programs. That is, “Keep It Short and Simple.” Experience reveals that complex open-ended ongoing support programs build dependency. Also, their often-complicated administrative procedures make them costly and cumbersome programs for reaching many of their intended beneficiaries.
Subsidized school lunch programs for kids from low-income families is an example of all three lessons well-learned. School meals are connected to capacity building, that is, to school classroom learning. They are simple to administer and monitor. They extend only through the years a child is in school or until the household can no longer qualify based on income means testing, whichever comes first.
On the other hand, food stamp programs are more problematic. In practice they are long-term income supports more than short-term safety net support. Too often employers are reluctant to increase their workers’ wages when they know those workers can turn to food stamps to supplement their salaries. Even more insidious, food stamp programs have developed an unanticipated constituency for their continuation and expansion: the food industry and agriculture sectors which produce the foods that can be purchased with those stamps. Food stamps today have become a money hammock for food producers and employers paying low wages, not a bounce-back program for their intended beneficiaries. Food stamp programs violate all the lessons learned about what makes a good social safety net program work: no associated capacity building initiatives to build participants’ self-reliance capabilities; administratively complex, prone to political manipulation, and no end in sight.
Without safety nets under their high-flying trapeze artists and safety measures for their other daring and mystifying performers, Ringling Brothers and Barnum and Bailey most likely would not have survived as they did until the early part of this century. Most of us, regardless of our station in life, lead demanding and often risky existences that would rival any three-ring circus. Our survival continues to be uppermost in our minds no matter our fortunes or misfortunes.
Those of us who are fortunate to have earned college degrees, acquired professional skills, and often benefited from family financial legacies to fall back on in time of need, recognize that those advantages give us a bounce-back capacity when adversity strikes. But that also makes it hard for us to appreciate the challenges facing vulnerable populations who have few or none of those resources to help them get back on their feet after an economic setback. Social safety nets are important for helping those who lack the trampoline-like bounce-back support and capacity that we enjoy.
Our free-market system prods us to become the investors and risk-takers that have made our national economy one of the strongest, and our lives among the most prosperous, in modern history. A part of it are the social safety nets that provide that added trampoline-like bounce-back that, if administered well, can give all of us the opportunity to participate in American prosperity even when we make mistakes, take failed risks or have bad things happen to us and have to pick ourselves up and start over again. Social safety net programs have a well-deserved place on the list of investment tips included on Pollack’s index card. We should not be hesitant to recognize that, to say so, and to support well-crafted social safety net legislation as worthy guardrails for keeping our economic prosperity on track and broadly accessible for all. ###