Tuesday, January 29, 2008

Fungibility, food stamps and second best choices

While discussing the counter-cyclical empircal nature of the disability and early retirement systems with Gary Farber a couple of months ago, he discussed the road blocaks that are in the way of successfully navigating SSI disability. One of those road blocks is a very high initial claim rejection rate followed by a lengthy and potentially expensive appeals process that overwhelmingly produces approval for claims. He posited that this is a feature, and not a bug of the system:

"It seems to me a system set up for failure."

It's the basic model for most American welfare/aid systems: the goal is to be dysfunctional and inadequate enough to keep out/drive out most of the people who need it, so as to bring/keep down costs and juke the stats,

Poorly designed, difficult to navigate and unpredictable are a common complaint of the American social safety net. Private charity providers have the right to turn anyone away, providers funded by local governments are pro-cyclical in that they have money when the need is below trend and are making cuts when needs are above trend, and the federal system has been under a sustained thirty year ideological and management assault.

Programs very seldom are designed in first best manners. They are political compromises and reflections of values and beliefs that do not hold operational effectiveness or efficiency as an ultimate objective. American social welfare policy has long been colored by the dichotomy of the 'deserving or undeserving poor'. The deserving poor within this framework are those who are poor due to non-moral failure of their own; the crippled, the elderly, the young, the infirm, the cyclically or short term structurally unemployed. The undeserving poor are those who 'choose' to be poor through a moral or practical personal failing and thus do not deserve aid.

I agree in a Policy 101 manner with Megan McCardle that the most economically efficient anti-poverty program is cash straight up. Cash is fungible, it is widely accepted at a predictable par value, and it can be spent on almost anything. As Mona at Unqualified Offerings noted, non-cash offerings that are restricted stores of value and exchange such as food stamps can not be universally used; " I was forbidden by law from trading any of that value for things I required much more, like blood pressure meds, or gas money." Yes, there is definately a black market that is accessible to those who have good social connections within this mileau that can transform a given value of food stamps into a lesser value of cash, but food stamps are restricted money substitutes.

But let's go back to the American obsession with the deserving and undeserving poor for a moment and see if there is any plausible political demogaugic point that could be used against a pure cash outlay to the poor. Why we only have to go back to 1996 and see the effective railings against AFDC and its cash payment system to what a majority of the American political universe saw as too many 'undeserving poor.' Ronald Reagan ran successfuly on 'welfare queens in Cadillacs' who supposedly took cash payments through fraud and misused them. Cash payments of any sort to the poor are very prone to political risk.

So we enter the universe of second best choices if the intent of a program is to alleviate some of the effects of poverty and deal with a constrained choice that has a chance to gather significant political support. There are two basic options; the first is similiar to the stimulas option that is going through the House right now, make any program that aids the poor overwhelmingly aid the middle class and median voter. The cash rebates that are being debated will not be targeted to cash, credit and liquidity constrained individuals where there would be actual stimulas, but towards the middle class, and they are coming out of income tax base amounts and not the FICA tax base amounts. This is popular, but extremely expensive with minimal effectiveness in achieving the desired policy end on the basis of dollars spent or foregone. The other option is to restrict the fungibility of a near cash grant and target those benefits to the people who need them. And thus we have the idea behind food stamps and Section 8 vouchers.

We live in a constrained world where Pareto efficiencies, Pareto improvements, explict program outcomes, effectiveness and efficiencies are not the ultimate values that guide our decision making. Yes, Policy 101 is a useful tool set of basic bullshit detection, but we live in a complicated world where first best alternatives seldom present itself as the restricting assumptions that we make in Policy 101 do not hold in reality. Second best choices are often the best choices that we can make.

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