Stimulus and safety nets

Stephen Gordon comments on the Nordic model:

He sets the stage by pointing out that fiscal stimulus is fraught with risks, and that most of its proponents (presumably he means the proponents not motivated by blithe populism) accepted those risks but argued that no alternatives were available.  And then:

But here’s a question: Why was a discretionary fiscal policy necessary? Why weren’t the automatic stabilisers enough?

It’s a fair question.  If we put a lot of time and effort into creating a social safety net that’s supposed to make it easier for workers to deal with sudden job losses and smooth over transitions in the economy, why does it fail when it’s needed most?  You could argue that the safety-net programmes in place just weren’t designed to cope with a large volume of claimants, but I’ll just come back and ask you why something totally different — like Keynesian stimulus — was necessary, rather than spending similar amounts of money on increasing the safety net’s capacity.

We can also argue about the cascading effects of the credit crisis, where specialized investments like CDOs were too hard to value and bank run-like symptoms came from creditors rushing to cash out before a company went bankrupt, because — as the Feds demonstrated with GM and Chrysler — once a company actually goes under it’s anyone’s guess which debtholders are going to get theirs and which are going to get fucked up the jacksey.  If the government’s job is to mediate contractual disputes (and mediating contract disputes is high up on my very short list of things I want government to do), then surely the biggest lesson to come out of the credit crisis is that there needs to be a better process to let big firms fail.  But that’s a topic for another post — or you can just read Arnold Kling’s paper.

(Hint: read Arnold Kling’s paper.)

Gordon backs up his question with a quotation about Nordic safety nets.  In part:

The comprehensive safety net, one of the attributes of the Nordic model, has proved to be robust also in times of crisis. The entitlements are not tied to the fate of individual companies or particular markets, and risks are widely shared in the society. While forest plants are shutting down in Finland and car manufacturing is sharply contracting in Sweden, the governments are firmly rejecting requests for support of ailing industries. Still, there are no crowds protesting in the streets, largely because flexible work arrangements, based both on general and company-specific agreements between businesses and labour, alleviate a rise in unemployment.

(Emphasis added.)

Predictably, I’m not a big fan of shared risk.  On the other hand, shared risk is precisely what we’ve ended up with after a few rounds of stimulus spending and bailouts; we just didn’t know about it going in.  Risk explicitly shared beats the hell out of risk you don’t think you share until the feds decide to buy up a company that thought the Pontiac Aztek was a brilliant idea.

Seriously, GM: What the fuck is wrong with you?

Gordon goes on to ask a question, which contains its own answer:

Why doesn’t our fiscal stimulus look like this? Wouldn’t these sorts of programs be a better use of public money than setting up photo opportunities with oversized cheques?

A properly set-up social safety net that just worked (with, perhaps, some extra deficit funding from the feds) would’ve been a far better use of public money — for the public.  But it would’ve been far worse for the politicians.  Let me explain why by analogy.

Imagine yourself sitting at a desk in a good-sized corporate environment, doing whatever it is you do there.  Your network administrator walks in with an enormous smug grin plastered across his face, stands there until you notice him, then takes a little half-bow.

Sysadmin: “You’re welcome.”

You: “Uh, for what?”

Sysadmin: “Didn’t you notice?”

You: “Notice… what, exactly?”

Sysadmin: “Nothing.”

You: “Yeah, exactly.  Nothing happened.”

Sysadmin: “That’s my point.  Nothing happened.  Everything’s working as intended.  You’re welcome. Now clean out your email and change your damn password.”

No politician wants to be that sysadmin.  Far better for them, for their careers, for their standing with their constituents to ride in on a snorting stallion and save the day with poster-sized cheques when the existing system fails (which failure they can always blame on the previous government).  If the system works — especially if it was a previous government’s system, even more so if it was an opposing party’s system — there’s nothing to be gained.  “We didn’t fuck with it, and it operated as designed” should be the sort of shining beacon of policy that gets pols reëlected, but alas, it ain’t.

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