Jared Bernstein: The premise of your piece may surprise some readers: A robust system of government supports is critical to maintaining a free market. This stands in stark contrast to the usual political formulation: You can have markets or you can have social insurance, but you can’t have both. Can you elaborate?
Samuel Hammond: The apparent antagonism between social insurance and unfettered capitalism is mostly a product of our politics. One mood, the anti-government mood, fights to cut entitlement spending and roll back the regulatory state, while the pro-government mood fights to do just the opposite. And yet I think it makes far more sense, philosophically and pragmatically, to treat regulatory policy and social insurance as distinct.
In fact, we should start thinking of free markets and robust social insurance as close complements. A dynamic economy is one in which open trade and the adoption of new technologies can lead whole industries to rise and fall. The economist Joseph Schumpeter called this “the process of creative destruction,” and while it may be the ultimate source of our modern-day prosperity, it also comes with tremendous short-run costs, often borne by those who can least afford them. We’re fooling ourselves if, as economists and policymakers, we choose to deny those costs or, just as bad, come to believe they’re unavoidable. On the contrary, a well-designed social safety net can do a lot to mitigate the downsides of creative destruction and thus grease the wheels of social change.
J.B.: Your paper makes a linkage that resonates with me: the lack of protections from economic disruptions and the rise of Trumpian nationalism. What’s the connection?
S.H.: There’s a perennial debate in Washington about whether the rise of Trumpism is explained by economic or cultural factors. The answer is clearly both. That said, I am quite convinced by the work of economist David Autor that China’s entry into the World Trade Organization, and the enormous increase in import competition that hit us in the 2000s, had a large and lasting effect on our politics. The regions most affected by the “China Shock” became more politically polarized, saw an increase in the vote share of nativist and anti-trade congressional candidates and were surprisingly well-correlated with Trump’s voter base.
J.B.: One conservative objection to your thesis, one that drives current politics, is what economists call “moral hazard”: If you provide people social insurance, they’ll quit the market. Why is that wrong?
S.H.: When conservatives object to social insurance programs, they tend to employ the moralizing language of “personal responsibility.” Yet moral hazard is a common feature of all insurance, public or private, so we need to look at the details of policy design. The Earned Income Tax Credit, for example, is an important source of income support for poor households. And yet because of its smart design, it actually encourages labor force participation.
In some cases, moral hazard cuts the exact opposite way. The bailout of General Motors, for example, was largely a bailout of their pension obligations, a cost borne by the U.S. taxpayer. Countries that have universal public pensions don’t face nearly the same pressures from politically connected firms and, thus, let them fail when that is the market outcome. As a rule, if we provide income security directly, we won’t be pulled into providing it indirectly by propping up failing industries. That’s my pretty straightforward, free-market case for enhancing Social Security and temporary income supports.
J.B.: I found this scatter plot really interesting. Can you unpack it for us?
S.H.: This shows the surprisingly strong relationship between income security and economic freedom, which in this context refers to trade openness, low levels of regulation and protection of property rights. The higher the income floor provided by your country’s safety net, the more political buy-in there seems to be for free markets. Yet with more trade and technology shocks on the horizon, I contend America’s outlier combination of relatively free markets and threadbare income supports is fundamentally unstable. Either we use the cooperative surplus generated by trade and economic growth to buoy workers in transition, or we’ll be tempted to directly intervene in the market itself through reactive regulations.
Our recent slide toward protectionism is itself a direct indictment of our inadequate social insurance system. In the regions hurt by trade, for instance, Social Security Disability Insurance was more than twice as responsive to people’s needs as were unemployment insurance and Trade Adjustment Assistance combined. Conservatives have tried to blame this on the generosity of SSDI, yet our disability program is restrictive by international standards. We should instead point the finger at the abject lack of alternatives: the slow erosion of unemployment insurance; our near total lack of active labor-market policies like job search and retraining; and our cynical, bureaucratized welfare programs.
J.B.: As you know, I’m a fan of your work, but politically speaking, I can’t figure out where you fit in the swamp. Help me out here!
S.H.: “The Free-Market Welfare State” is in some ways my attempt to think through a political realignment, to sketch a research and reform agenda that runs contrary to our usual ideological spectrum and transcends the politics of austerity. I’m posing a simple question: What if we went about designing our safety net programs with entrepreneurship, labor market flexibility and technological innovation at front of mind? In many case, I believe it would point us toward expanding various forms of social insurance and making them more universal, not less. If that makes my politics a bit hard to pin down, so be it.