It’s time policymakers recognize that in the new global economy, growth and economic security go hand in hand.
What’s more, some individuals simply do not adequately insure themselves against economic risks, saving too little for retirement, illness, or short-term bouts of unemployment. Notwithstanding what economists view as rational, utility-maximizing behavior, we know from recent work in behavioral economics–the study of how real people actually make choices–that such rationality is far from universal in practice.
Progressives, by contrast, have traditionally recognized the limits of private insurance and addressed them with social insurance programs that include everyone in the risk pool. And through the combination of social insurance and employer-based benefits, government and the private sector together have provided American families with key forms of economic security for decades. However, this model is growing less and less tenable. In the face of growing competitive pressures, American firms are increasingly retreating from their role as a provider of social benefits. What is needed in response is a rebalancing of responsibilities among government, the private sector, and individuals to provide both economic security and economic growth.
Economic Security and Economic Growth
To be sure, many policymakers and analysts, on both sides of the ideological spectrum, have been trained to believe that providing more security to families must come at the expense of economic performance and that these two goals are thus contradictory objectives. Harvard economist and former Chairman of Ronald Reagan’s Council of Economic Advisers Martin Feldstein, for example, has said that social insurance programs “have substantial undesirable effects on incentives and therefore on economic performance. Unemployment insurance programs raise unemployment. Retirement pensions induce earlier retirement and depress saving. And health insurance programs increase medical costs.” Economist Arthur Okun famously compared using government funds for social programs to a “leaky bucket” because so much is lost in the process of delivering the benefit.
While this traditional view offers an important cautionary note, it misses another salient point about the modern economy: While economic growth can clearly increase economic security, economic security can also increase economic growth. Indeed, growing economic insecurity for American families takes a toll on the economy as a whole and thus leads to a vicious cycle. Insecurity impairs overall growth, which thus increases the likelihood that the stagnation in real median wages will persist, which in turn exacerbates the economic insecurity that American families face.
In particular, this traditional view ignores three key ways in which economic security can bolster economic growth. First, a basic level of security frees people to take the risks–such as starting a business, investing in their own education, or trying an unconventional career–that can lead to growth. For example, empirical evidence suggests that generous personal bankruptcy laws are associated with higher levels of venture capital; that workers who are highly fearful of losing their jobs invest less in their job skills than those who are more secure; and that investment in education and job skills is higher when workers have key risk protections. With inadequate protection against downside risk, people tend to be overcautious, “fearing to venture out into the rapids where real achievement is possible,” as Robert Shiller of Yale has argued. “Brilliant careers go untried because of the fear of economic setback.”
Second, if hardship does occur, some degree of assistance can provide the resources to help a family thrive again. Families with access to some form of financial assistance, educational and training opportunities, and basic health care are less likely to be permanently harmed by the temporary setbacks that are an inevitable part of a dynamic economy. For families experiencing short-term difficulties, a safety net can be a springboard to a better future and higher productivity.
Finally, and perhaps most importantly, economic security can lessen demands for protectionist policies that hamper overall economic growth. Enhancing security eases the painful job dislocations that globalization can cause in particular industries and reduces anxiety among workers more generally, thereby mitigating calls to keep out the forces of competition that benefit the economy as a whole.
To be sure, the symbiotic relationship between economic security and economic growth is not the only reason we should reduce the likelihood that families will experience economic hardship and help them rebound if they do. If nothing else, there is a moral imperative to provide for the economic well-being of all in society. Moreover, as Harvard economist Benjamin Friedman argued in his recent book The Moral Consequences of Economic Growth, providing for the economic well-being of the vast majority of people encourages social progress outside of strictly economic gains, specifically “greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy.
Enhancing Growth, Increasing Economic Security
But how do we deliver economic security in a way that enhances economic growth, not stifles it? Considering the economic anxiety that many Americans feel, it is easy to envision fearful and frustrated policymakers and workers calling for heavy-handed government measures that interfere with the workings of the market. Such efforts could involve hiring and firing constraints, anti-trade protectionism like import tariffs or outsourcing restrictions, regulatory protections for certain industries, excessively high living-wage laws that ignore potential reductions in the quantity of labor demanded, or requirements that businesses spend a certain percentage of their payroll on health care, such as the recent Maryland legislation targeted at Wal-Mart.
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