Free Markets and Safety Nets

An important point from David Leonhardt:

It’s easy to look at the current debate and see an unavoidable trade-off between this country’s two economic traditions — risk-taking and security. But I don’t think that’s quite right. I think it is ultimately as misplaced as those worries about Social Security and Medicare equaling Bolshevism.

Guaranteeing people a decent retirement and decent health care does more than smooth out the rough edges of capitalism. Those guarantees give people the freedom to take risks. If you know that professional failure won’t leave you penniless and won’t prevent your child from receiving needed medical care, you can leave the comfort of a large corporation and take a chance on your own idea. You can take a shot at becoming the next great American entrepreneur.

I would add that this merging of goals occurs not just at the individual level, but also at the social level. Over time, technical and organizational improvements lift living standards. That’s why people in 2010 are better-off than people in 1910. But these innovations can be quite bad for individual people. Desktop publishing software severely reduced the value of the human capital possessed by people (like my mother) who had advanced specialized skills in the kind of page layout that involved X-Acto knives and actual paste. People will natural seek to use their influence over the political process to mitigate their exposure to these kinds of risks. Mitigating risk-exposure via a broad social safety net allows economic progress to continue, whereas mitigating risk-exposure through tailored efforts to protect incumbents does a lot of harm.


Either way, it’s worth taking the safety net metaphor seriously. Typically when you see a safety net in place, you’re not really looking at someone who’s trying to be safe. You’re looking at someone who’s trying to do something dangerous. Because it’s dangerous, there’s a safety net in place. But the main point of the net is to facilitate risky-taking behavior not to make you safer than the average person.