What Government Does Well/Poorly (Updated 6-20: fixing Social Security & Medicare)

Among the popular American commentariat -- that is, the "Left" and the "Right" -- seeking out real insights from many views is simply absent. Other views are presented in caricature or included only if they have some obvious flaw, as a convenient straw man. A substantive alternative view isn't of value for the ideological purpose of the forum, and if one appears, it is ignored or shouted down and mischaracterized and then it's time for the commentary from the guru. The real story is: You are either for us or against us.

Government is either a good solution to any problem...or is an unfortunate, necessary evil to be shrunk for the better whenever possible.

It would be one thing if this was only the fringes.

It has become predominate.

This has become so normal, for so many years, Americans don't even realize how mentally unbalanced most popular rhetoric and commentary has become.

Can a nation whose popular thought is based on mischaracterizations and labeling of our fellow citizens remain civil? Or will it experience a progressive loss of mutual regard...and eventually see the fading of civil rights that mutual regard supports (as in 1930s Germany)?

This is no abstract question, nor is it a phenomena confined to a small subset of America. Instead, even commentary in our top forums is suffused with misinterpretations and characterizations of a degrading nature which encourages us to join camps and oppose our real enemies -- our fellow citizens.

Consider, do many of the popular blogs, talk shows, or columnists you have heard/read, from the yellow to the erudite -- from Fox News to top newspapers and some leading blogs (e.g.-- when they address the 'real' motives of groups) -- have more-than-occasional commentary that paints groups/classes/professions of citizens as following base motives and goals?

When you read/hear that the labeled group isn't of typical mixed character (with isolated malfeasance), but instead has a dramatic pervasive character, a hidden agenda, or the crudest of motives, a natural response is to join in condemnation or a feeling of moral superiority.

One of the oldest games of humanity is being played, sometimes for profit (more eyeballs), but often with sincere, true-believer indignation.

This is the paranoid style of American commentary. And it can lead to a breakdown in dialogue in the body politic.

This is a subject worthy of many significant posts (the link above is a start), or of books, but we have a profound question at hand -- what is government for and what should it do?

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What if government is neither a general panacea nor a corrupt drag on our lives, but instead is something more native, something not discussed lately in America?

What if government is essentially a universal, or inclusive, co-op?

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A co-op after all is simply people cooperating for mutual benefit. We are surrounded by co-ops of all manner -- such as school districts, corporations, neighborhood associations, or insurance pools (like the automobile mutual insurance pool you share with other policy holders).

Might it be possible -- exactly as is the case with a co-op -- that government may by nature do some things well and some things poorly?

Why, yes.

But...that would imply much, or most, of today's rhetoric from the "Left" and the "Right" is of little value in solving our problems.

We need to go beyond the Left and the Right to gain insight.

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At this point, some might be thinking: "What if I'd like to opt out of this big federal government in all ways except mutual defense?"

To consider this, consider that every major function of American federal government arose in direct response to a strong national need, especially during crises.

Flooding led to the modern version of the Army Corps of Engineers. The Great Depression bank run of 1933 led to the creation of the F.D.I.C. -- ultimately backed by the U.S. taxpayer -- which insures you won't lose all of your money deposited at a bank some day (such as for instance a day like September 16th, 2008 when "money stopped" in the famous Frontline phrasing).

Might some of these functions of the federal government be no longer needed? Which?

This is a central issue of our time.

This post will address the most general form of this question: What is government best for?

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If government is simply a co-op by nature, then it follows that the structure of government determines whether it is effective.

When government is well-structured for a particular need, then it can effectively secure that necessity and support the lives of its citizens.

Quality of life depends on the effectiveness of co-ops: if we aren't worrying about carjacking or bridge collapse, then conversation can turn to something fun -- like a musical performance, or the antics of boys who have been trying to gain your daughter's attention.

To consider whether government should fulfill a certain need which people find hard to accomplish on their own, we must review whether government can be well-structured for that activity.

If it can be well-structured for the need, and act to the benefit of all citizens (directly or indirectly through secondary effects; see more below), then this is an activity government could do well.

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Let's look at what peoples around the world have done well with government. Why does government exist to begin with?

Modern nations exist because of our history of war.

When city-states faced concerted attack from large forces, only broader alliances could protect them. Nation-states were born in bloodshed generally, as groups of people sought to secure their mutual way of life.

National government exists first to defend us, in mutual cooperation, against attack.

Next, government is always used to defend its people from criminal activity, organized or individual. The police and judiciary are some of the most essential functions of government -- to meet the most primary of the human needs: security in our persons and property. We want our police and our judges to be impartial, so that they cannot be bought.

People want government to defend them in all ways, including any new way we see our security of person or property threatened.

I state this in a general way to recognize that governments are looked to not only for protection against aggression, but against all forms of events that threaten security -- from hurricanes to epidemics, from burglary to fraud to stock front-running.

When a people feel threatened, they wish for action. If you see a family or city suffer a catastrophe you wish something done, as you know the same could happen one day to you.

But it isn't only direct security people have sought from governments around the world and throughout time.

As we look around the world, we see governments have been universally considered a good way to build roads, water works, and infrastructure that generally benefits all citizens directly or by secondary effects. In others words, governments are used to build and maintain publicly used goods and services that typically support a country's way of life.

It makes sense that Rome built aqueducts.

And it makes sense that most nations build more and higher public schools to provide progressively higher and lengthier levels of free education -- which allows the poor to gain useful education and thus be able to engage in useful work, instead of crime, as a means of income.

Education not only enables economic growth that makes the entire nation -- rich, poor and middle class -- richer. It also reduces the number of criminals and aids security from common crime.

So often, upon examination, we find most governmental activities enhance common security.

At first it might appear free education is just a indulgence, like having fancier parks and roads. But careful examination shows effective education increases economic growth, reduces crime, and pays for itself.

These common or "public" goods benefit all citizens because an economy is interdependent by nature -- that which spurs or allows economic growth enriches everyone.

All jobs and income and all investment returns are dependent in the end on all the working people: all forms of income depend on customers with the means to buy. Workers earn money and thus are potential customers.

All wealth is entirely dependent on the totality of all workers.

(Yes, I know this is a major point, and deserves its own post, so I'll put it on the short list.)

Further, economic growth itself depends significantly on education. In an economy where education spreads new knowledge, businesses that provide common goods and services become more productive. Where a loaf of bread after a local dry spell might once have cost 1/5th of a day's income, it costs 1/20th or less after technology and trade progress sufficiently. This increasing productivity allows economic expansion because newly freed disposable income (since some basics cost less than before) allows the purchase of new goods and new services and funds new investments.

The whole society grows richer, and that tends to make it more secure also.

Education is a public good that pays. The lack of education is a real source of threat, of insecurities.

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The only question for such basic public goods as education and roads is who is the best provider?

Should we have publicly-built roads, free to all, supported by gasoline taxes?

Should we have publicly-owned toll roads (or universal metering), resulting in improvements being more rapidly built, supported only by those that use the roads, in proportion to use?

Should we have privately-owned toll roads -- sometimes controlling the only available good right-of-way in an area and free to raise tolls far above maintenance and capital costs? Free to sometimes extract a monopoly rent in spite of the fact of using what is ultimately the land of a nation? Is that the best system for roads?

Which is best for the economy, the wealth, of the nation?

For goods like education, where universality helps lower crime, or roads, where public ownership gives a better deal to citizens, nations around the world have decided that public provision is best.

It's a matter of structure. Of what works well for a particular need.

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Sometimes in these debates people confuse rights and interests, giving what is only an interest the high status appropriate to a right.

A right is something natural to a human being, such as the right to breathe, or the right to speak, or the right to be secure in one's person from arbitrary search or seizure.

An interest is typically a possibility of gaining more of some good such as land or money, or sometimes even gaining something at the expense of other people, such as freedom to emit pollutants without paying the costs those pollutants impose on others. Many interests we see politically are often about something like additional subsidies for instance, or variations on subsidies.

Lately, we have seen an interest in escaping paying taxes for our current level of common public goods (even though tax payers benefit from public goods in proportion to their wealth -- from the economic and secondary effects of most public goods). I don't mean to obscure the complexities that exist in many cities and states -- sometimes there is significant local public corruption and reducing revenue is mistakenly thought to be a counter to this corruption, while only law enforcement actually is.

Broadly, many arguments against public goods fail to recognize their real benefits. Those opposing or wishing deep cuts in free public education fail to recognize that economic strength is created by education and that this creates the national strength needed to live free from foreign coercion in the future. Military might depends on economic strength.

Strong military might depends on publicly funded education.

Economic strength can even allow us a way to protect ourselves (should we choose) from more subtle levies imposed on us by foreign nations -- such as job losses across our borders caused by currency manipulation and its effects (which build over time). Unlike a lesser economy, the US does not have to choose between free trade and allowing China to impose tariffs and subsidies against our industries. We can chart our own course exactly because of our economic strength.

Publicly-funded education is one of the fundamental supports of our freedom.

Education is not an indulgence like more and better park benches, but instead is a fundamental necessity to our way of life.

Once we recognize universal education (regardless of wealth) is beneficial to all, the only question is structural: how to best pay for various levels of education.

We still want to get a good deal. That should concern us all.

So the question about public education becomes more about where and how -- about what is effective to give us quality universal education. For the sake of our freedom and quality of life.

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At first, providing an universal safety net against old-age sickness and poverty might seem less a real public good which benefits all, and more a "intergenerational transfer" (there can indeed be intergenerational transfers).

But why do Americans strongly favor having Social Security and Medicare? Perhaps because it is a fundamental form of security to know that you won't die of simple starvation or an easily-cured illness when you are 70 or 75. Even the young would like to have that future security.

We tend to like the idea of there being an ultimate safety net, so that if a series of unfortunate events pushes you towards poverty as you lose your physical ability to do gainful work, there will still be a basic support to allow you some golden years while you still have your mind and heart.

Considering this, we might reasonably conclude that what matters in Social Security and Medicare is not extravagant medical care or rich benefits, so much as a security against more basic dangers -- such as dying from lack of heat or cooling, from simple infection, an easily repaired broken bone, or from being unable to afford sound nutrition.

Social Security provides an absolute safety net for all in retirement, come what may, rich or poor. Americans value this. We want to preserve it.

Social Security is currently projected to remain solvent until 2036. While some suggest Social Security could be means tested (retirees qualify for benefits according to income), fairer ideas are already widely known and accepted. After all, it's part of our social contract that Social Security is more pension system than a pure welfare system.

You make your contributions and you get your retirement benefits, with a modest insurance effect of partially leveling out incomes and paying benefits to survivors. This fairness was the basis of its original political viability, its original contract.

The mostly widely considered idea to fix future Social Security is for retirement qualifying ages to rise some modest amount (beyond that already planned), perhaps even some fraction of changes in life expectancy of retirees. Indexing to lifespan makes sense so long as lifespans change.

More than one idea is needed here though.

Consider that Social Security benefits rise with inflation. This implies total (nation wide) contributions should rise by some measure that typically paces accumulated inflation over long periods of time.

One related measure performs well against inflation over long periods: nominal average income, or GDP per capita.

The best idea then is to increase the cap on income subject to Social Security withholding beyond the current $106,800 cap proportionate to the change in GDP per capita -- if GDP/capita rises 3%, the Social Security wage base should rise 3%, etc.

The rate of the tax remains the same, but Social Security is made profoundly solvent.

A family earning under the withholding cap would still pay the same amount of total annual tax. And the increased payments for richer households would be only a minuscule portion of the wages above $106,800, as the increase is a small portion of a small portion of those wages.

For instance, as GDP rises 3%, a family making around $150,000 will typically get a raise of 2% - 4% (several thousand dollars), but would pay an increased withholding of only 6% of 3% or about 2/10ths of a percent (a few hundred dollars).

Regardless of the exact adjustments we make, modest Social Security benefits are a fundamentally good idea for a society. This retirement benefit provides an absolute safety net for all -- even the rich can lose wealth and need this income insurance. It's real insurance.

Medicare, a far more potent fiscal problem, can be adjusted in a somewhat different way as already addressed by this blog -- does the medical care work (is it really going to extend life)? If so, it's worth paying for in a competitive way after those benefits are proven.

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So what does government do poorly?

To address many aspects of government even in rough detail would take a far longer post, but it is possible to draw some powerful, broad brush strokes here.

One of the most popular notions of what government can do to solve problems is regulation. Unfortunately, past really basic crimes like forms of fraud, violence, etc., regulation is not so effective as many people imagine.

Consider, we implemented food safety inspections to control the outbreak of deadly contaminations of food stocks long ago. We've had an agency responsible for food safety for decades, with deep experience.

The result? Recurrent, deadly outbreaks of food borne illness.

While regulation will temporarily work for anything, every few months this seeming food safety we think we have is entirely reversed or inadequate, resulting in sometimes massive food-borne illness and death, in all major, advanced nations.

The fault of regulation?

Yes.

The problem: knowing there is a regulator gives us a false sense of security, when we really should be on our guard.

What could protect us from recurring, massive food-borne illness?

People knowing that there is no regulator, and that they themselves must learn to choose providers, brands, that they can trust.

The resulting brand loyalty in the abscence of regulation is extremely valuable to a business.

That result? Those businesses would be profoundly motivated to have perfect food safety.

Trust is not something to risk when there is no regulation, because losing trust would be devestating to a respected brand. Fatal to the brand, and the company, and it's stock value and bottom line.

That's real safety. The bottom line aligned with safety (instead of against it, as a having regulator sets up -- a race to the bottom, when the blame will go to the FDA instead of a provider).

A key insight is that we can't really control human nature. Instead, we must harness it as well as we can.

Often, regulation is not the answer. More often, the true safety from being taken advantage of depends on creating the right economic incentives, the structure of the market.

Here's a prime example -- power generators emitting harmful, often deadly, toxins while they are regulated, who would quickly cease to do so if they had to actually pay the costs the emissions of those toxins create.

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So, when we leave behind ideology and ask "What works well," we get better answers.

We get a guide to what kind of government we should really want.