How Social Security Stabilizes

Rick Perry’s odd notion that states should be allowed to opt out of Social Security seems like a good opportunity to discuss the useful role of social welfare programs in promoting “automatic” economic stabilizers.

The way this works is that 50 million or so people — about one American in six — gets a Social Security check on a regular basis. And importantly the size of the check is unrelated to short-term or localized economic fluctuations. During downturns, that’s nice for the Social Security recipients who are cushioned from the blow. During upsides, it’s bad for the Social Security recipients who tend to fall behind. So it kind of nets out. But crucially this stability is nice for everyone else participating in the economy since the fact that a certain proportion of your customer base doesn’t fully participate in short-term swings reduces the exposure of your business to those swings.

Many Floridians, for example, are getting hammered by the precipitous decline in Florida home prices. Many other Floridians are getting hammered by the precipitous decline in Florida home construction. But many other Floridians are getting hammered by the fact that their customers are being hammered by the decline in home prices and construction activity. The existence of Social Security benefits is one of the few things that helps halt the downward cycle of other people’s misfortunes becoming your misfortune. The checks keep flowing and their recipients keep buying stuff and their spending becomes your income becomes your spending becomes someone else’s income.

This is an excellent feature of the modern social insurance state that accounts of the negative impact on incentives of taxation tend to neglect. But unfortunately, in America state and local government doesn’t operate like Social Security. One of the key lessons of the current crisis should be about the importance of “automatic stabilizers” we have, but also the extent to which their gross impact is offset by very unsound budgetary practices elsewhere. This is an issue that can be fixed in principle and would leave us in much better shape to weather the next economic storm.