Coronavirus illustrates the importance of a strong social safety net


Imagine how utterly screwed we would be if the people losing their jobs due to coronavirus were left with no income

Part of why I think economics is such a dismal science is because it recognizes there is never enough. Scarcity exists, therefore we need to make choices. Would you like this or that? Not both. Economics is premised on this foundation. Where economics is really powerful is when it balances scarcity with welfare. With coronavirus, we are entering a phase where the economy will be shrinking and we have to make tough choices. Do we cut back government spending or raise taxes? Governments are walking a tightrope facing the threats of the coronavirus pandemic and economic meltdown. Maintaining a strong social safety net should always be a priority reflecting the importance of helping those in need.

I have written a lot about coronavirus in this blog. My articles on working from home, panic buying and the fickle nature of the economy with coronavirus do a reasonable job (I think) of describing some of the impacts. This article on the importance of the welfare state goes deeper in that it talks to the core of what I think like an economist.

I am lucky to live in New Zealand where if I lost my job tomorrow, and had no income, the Government would give me sufficient funds to look after my basic needs. If I was left with no home, the Government would help find me accommodation of some sort. It would not be a large income. It would not be a large home. Compared to the average standard of living in New Zealand, it would feel mean. But it would keep me on my feet. Welfare isn’t a right for everyone. In some countries that is because welfare is not affordable, in others it is because of a lack of political will. Having a social safety net should not be taken for granted, it is not to everyone’s liking.

Coronavirus has demonstrated how important the welfare state is when the economy goes belly up.

With the huge number of people entering temporary or potentially long-term unemployment, the welfare state is working overtime. Welfare payments are going through the roof. Every cent is worth it. The reality is that without these payments we would be facing a far greater crisis than the one we have on our hands today. The effects of homelessness and joblessness are far more devastating to society than the cost of welfare.

Every 10 years or so, there is a large economic shock. The economy needs an automatic method for addressing these shocks. Coronavirus and the lockdown have reduced demand considerably. Many countries just weren’t ready for that. Policy change can take months or even years, but coronavirus ramped up and hit the economy hard in a matter of weeks. The virus has demonstrated that sometimes external shocks move far too quickly for people to respond. With an automatic, principles-based policy in place that can react to these shocks, society is much better placed to absorb the shock when it comes.

Arguments against the welfare state often focus on incentives and taxpayer burden. You would have heard it before – if we give people too much they will lounge about all day, who wants to pay for that? Whether this is true or not I doubt it is an effective way to think from a policy perspective. If the alternative is leaving people with little to nothing, the cost is worth it. The damage to people’s well-being is too high, not to mention the flow-on effects to crime, health, education and a variety of other areas. The level of welfare isn’t even that much so if that creates an incentive to sit on the couch, it’s not going to be a very nice couch.

The numerically minded among you will notice that up to this point I haven’t put any numbers into this blog post. The arguments for a social safety net are easy to make. I recognize that the devil is in the detail. If we were talking about the welfare of $1,000 per week that would be very different to if it was $300. I don’t pretend to know the exact amount of welfare that is appropriate. That would require building up a calculation of food costs, housing, transport, etc. These types of estimates are bottomless pits that take many hours (or even months) of modeling and discussion to resolve. I can’t do that in a blog post. What I can do though, is illustrate the consequences and risks of over funding vs underfunding. It’s better to err on the side of caution and give more rather than less.

Consider the asymmetric risk associated with welfare. Trying to target welfare payments at the breadline is a recipe for failure. If we fund welfare by let’s say $50 more than is strictly necessary, then people might buy nicer food or clothes, or tuck something aside for a rainy day. There is actually a well-being benefit to that extra $50. However, if we underfund by $50, families may be left without enough food or warm clothes. Furthermore, unexpected, unbudgeted expenses can make them destitute very quickly. That is much more drastic and dangerous from a societal perspective. Underfunding by even a small margin can mean that people could go without essentials. So if we go a bit over, does it really matter?

The welfare state talks to who we are as a society and as people. Are we a nation with a heart and a hand up? Or do we let people slip through the cracks? Having a strong welfare state shows that we care when people are down on their luck. That doesn’t mean that welfare is always sufficient, just that we help those in need. During extraordinary events like coronavirus, welfare is critical for alleviating hardship. Having a decent social safety net puts us in a much stronger position to manage the crisis, and come out the other side in one piece.

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