Monday, November 18, 2019

Second and Third Order Effects

There are many orders of effects when the government gets involved in the economy.

A reader writes:

Your recent post Why Silicon Valley Embraces Socialism is interesting. Most people, when thinking about whether or not to support government programs, don’t look beyond the first-order effects. They think as though if, for example, if low-wage workers get food stamps or some other financial government benefit, it will help the workers but nothing else will change. They don’t think of how this will change the incentives and disincentives that affect employees’ and employers’ actions, how it will distort market forces, and even how these systems, after not too long, become entrenched to the point where there would be an economic dislocation if the programs were discontinued.

The issue of whether to have work requirements for food stamps (SNAP) and Medicare is a political issue that falls along party lines. Republicans generally favor work requirements, saying they encourage people to get off welfare over time.  Democrats say such requirements are cruel, and that poor people should be given these benefits with no work strings attached.

The work requirement for food stamps is set forth on the USDA website.  Medicaid is still being litigated, with only one State, that I am aware of, having such a requirement.  Note that the "work requirement" could be satisfied by a part-time job, going to school, job training, or being disabled or even having children under 18 at home.

What struck me about the reader's comment was the phrase "first-order effects" in that there are possibly many orders of effects of these social welfare programs.

The first order, of course, is the aid to someone in need.   Someone is struggling with life and having a hard time getting by.  We give them SNAP or other benefits, and this helps them out.

The second order, by dint of the work requirement, is that it forces the beneficiary to seek out a job that they might not have taken if the benefits were not at risk.   If you can collect government benefits without having to work, then why work?   Or more precisely, why work some crummy low-wage job that pays less (or about the same as) government benefits?

But when you put those benefits at risk, suddenly that low-wage job looks more attractive, as the "benefit" of working is equal to the sum of the wages received plus the benefits you'd receive as a result of meeting the work requirement.   Suddenly, that low-wage job seems more attractive, as its net "pay" so to speak is higher, when you factor in the food stamps and medicare you now qualify for.

And of course, with Obamacare, there is an incentive to make a dollar more than the poverty line, so you can qualify for that benefit (with a 100% subsidy).

So there is second order effect, in that we are incentivising and manipulating people to work at jobs they might otherwise turn their noses up at, because we are subsidizing those wages.

And in turn, this has a third-order effect in that Walmart or McDonald's doesn't have to increase wages to attract workers, as the workers will come to them, realizing that without that part-time low-wage job, they lose the SNAP and medicare benefits.

As a corollary, when you increase the minimum wage to a "living wage" of $15 an hour, some of those same workers may be incentivized to work less hours, so they don't lose there government benefits by dint of making too much money.   As noted in the link above, you have to work 30 hours a week or "or earning wages at least equal to the Federal minimum wage multiplied by 30 hours" - which means at $15 an hour, a worker could afford to scale back to almost 15 hours a week.   Funny how that works!   And according to some sources, local increases in minimum wage are doing just that - forcing some workers to work less or request fewer hours, so they don't lose corollary benefits by dint of making too much money.

So low-wage employers like these programs, as they effectively subsidize wages and encourage people to apply for jobs that they otherwise would not take (and give them an incentive not to quit on a moment's notice - a common problem with low-wage employees who have nothing to lose).   It also means that they have a line out the door of applicants, without having to raise wages - too much.

But there are other orders of effects as well.   Since SNAP can be used only to buy food, it forces these low-wage workers to use the benefit for a defined purpose.  Much of the benefits handed out today are directed this way.  Subsidized housing, for example, can only be used for housing.   So the government ends up controlling the lives of the poor, pushing them to work, and then giving them benefits that are directed toward specific needs - housing and food, for example.

And if you think about it, it isn't that bad a system, compared to, say, this guaranteed annual income deal.   Handing out cash-money to people might help some, but others would spend it on drugs and alcohol or other poor life choices.   Maybe if you are in a situation where your life is so messed up you are asking the government for help, the help you should be getting is more than just cash, but guidance, instead - the fourth order effect.

Let's face it - even middle-class and upper-middle-class people struggle to handle money in this economy - which is why I started this blog.  Look around you - at your friends all hopelessly in debt for a shiny car and granite countertops.   We are supposed to be smart and better than that, but we aren't.  An attorney for a big-name firm in Atlanta confessed to me that she was a  "serial refinancer" - having refinanced their mini-mansion in Buckhead four times now.  She had a nice $5000 handbag, though!  Priorities.

But we don't worry as much about the middle and upper classes.  As fast as they squander money, they still have some cash in their 401(k) to live on, and besides, they should know better.  Harder to feel sorry for smart, rich people, when they blow it all on eye candy.  But the poor, well, they can't help themselves, and are incapable of understanding the basics of economics, which is why they fall prey to so many scams and cons.

Speaking of this guaranteed annual income, one obscure Presidential candidate is promoting this idea, and people are saying he is some sort of financial guru or tech genius.   Well, read his Wikipedia page - he made what little money he has (hardly more than I have, and not much less than Kamala Harris, who is technically insolvent) by running a SAT-test prep type course.

This is the guy who is the tech genius who is going to save us?  Please.