15 February 2008

Of welfare, systems and the intrinsic goodness of mankind

»This article reminds me of the terribly heated argument I had with Mr C a few months ago, and I wonder if it may help to explain why our viewpoints are so divergent and polar. Out of the blue from 1 to 3 am, we started discussing, then arguing about welfare vs self-help, unemployment benefits vs rainy-day savings, luck vs hard work, high tax vs modest safety nets, and more generally, capitalism vs socialism. I remember a fitful night of sleep with all these big social concepts floating in and out of my brain, with the last remnants of the duel continuing into the next day and ending abruptly with a "do not tell me I know nothing about drug problems because my college best friend was a victim of drugs and to this day, I don't know whether she is dead or alive."

Being a disciple of behavioural economics and being from Singapore where "welfare state" is a taboo word (but as I tried to explain to Mr C for 20 minutes, we do have a welfare system), I am a firm believer that human behaviour is shaped by incentive. Therefore, social systems must be designed such that they do not contain incentives for people to cheat. For instance, I am pro-rainy-day-savings and anti-unemployment-benefits: the latter contains incentives for people to be slack about finding work. On this, Mr C attacked me for for the bourgeois assumption that people have money left over for savings. Many lower-middle class people need to count their pennies before ordering a pizza in the last few days of a month, he said. To which I countered, then there must be an underlying problem somewhere else if this is happening. If it is an alcohol abuse or depression problem in the family, there should be social support for that. If it is high rent or too-low wages, we must tackle that bigger economic problem instead. In short, I believe governments should help those in need but I also believe we cannot just hand out cash to support alcohol habits or laziness.

I remember to this day how this part of the argument ended - with a barbed chastise from Mr C:

"You are really blind to the whole problem here. You are successful, you have a good job and you assume that everyone can have it too. But sometimes, it is not about effort. It is about luck."

I couldn't respond during the moment, partly because I was still reeling from the sting of the barbs, partly because I also agree with the last statement - that luck often counts more than effort, and indeed I have been lucky in life. Yet, that is a separate issue from the fact a system cannot systemize incentives to cheat, and I could not see why Mr C could not see that.

In the following weeks when I pondered this on and off, it became clearer to me why.

Fundamentally, my beliefs had two premises: (1) most of mankind is ruled by an intrinsic profit (i.e. self-interest) motive ; and (2) the welfare system is able to correctly identify those in need. Mr C's premises are the exact opposite: he believes that cheaters are the minority and he would rather have a system that gave welfare checks so that no one will die from cold or starvation, even if it meant a few people cheating. I, on the other hand, think that cheaters are in the majority and will cause the bankruptcy of the system. We could both be right though - maybe those people he has seen in Europe are intrinsically nice / altruistic / non-cheating, whereas those I have seen in this part of the world are not.

Soon after, »a NYT article about a welfare recipient who starved to death in Japan made me re-think my position on (2) and see Mr C's point. Systems fail. The question is that when they fail, which side do we want to err on?

And the bigger question is: during the times that they do not fail, what is the cost of the cheaters (summated over time) that we are willing to put up with? This, unfortunately, is a dynamic* equilibrium model which is sadly impossible for a half-baked economist like me to solve.

*Because cheaters will increase over time when non-cheaters see cheaters succeed.

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