Safety nets: hammocks or trampolines?

A fable about a safety net.

Catacumba park in Rio is a replanted hillside overlooking the upmarket Rio lagoon. It was once occupied by a favela forcibly demolished in 1970 for the greater good, they said. It includes a (paying) adventure trail, with a longish rope walk at two levels: a high one for adults, paralleled by a low one for children, only a metre off the ground. Users of both have to wear a Serious hard hat and a harness clipped to a safety line. The attraction is a success with middle-class parents and children, though it costs too much for the poor. For some reason when we were there the customers were all small girls (footnote).

This got me thinking about safety nets more generally.
Their prime effect is to protect people from various extremely bad consequences of their poor luck or judgement: debt slavery, indigence, loss of life and limb. Only the worst designed fail to achieve this primary goal. Conservatives often object to safety nets (except it seems Paul Ryan) because they claim the secondary effects are negative and outweigh the good ones, or at least make them bad value for money: moral hazard, encouraging excessive risk-taking; promoting laziness; and the waste of resources when the net is actually unnecessary.

Now you could argue that this young adventurer illustrates the third point: perhaps she didn’t need the safety rope at all.

But consider another girl. I don’t think that without the rope she would have got very far.

The safety net here liberates: it allows some people to take good, life-enhancing risks they otherwise could not have faced. This is not a trivial effect: look at her face when she’d finished. She’s not the same person as when she started. The value for her parents’ money is off the charts.

My fable is, you object, a rigged metaphor. By design, there’s no moral hazard or laziness effect. True; I’ve chosen it not as a representative model but to make a point, a proof of principle by example. Every time you read a conservative railing against safety nets on the standard grounds, check if the pundit has considered the positive secondary impact as well: the liberation of people to try new things. If not, ignore her. That even goes for the otherwise great Rabbi Hillel‘s gutting of the Deuteronomic Jubilee cancellation of debts.

Do we have any evidence about the net balance of the various social safety nets? I don’t have a detailed analysis for you (bleg here). But in the grand sweep of history, it’s obvious that the steady reinforcement of the social safety net in developed countries over the last two centuries – bankruptcy (footnote 2), limited liability, poor laws, last-resort central banking, unemployment insurance, state pensions, public health care, etc – has not prevented a colossal economic boom.

Here’s a contemporary data point, on comparative rates of business startups. I’ve taken 2007 as the last pre-crisis year – a lot of startups in recessions are acts of desperation not hope. The entry density is the rate of registration of new limited liability companies per thousand adults of working age.
Spreadsheet here with sources.

The USA is not, contrary to popular myth, a particularly welcoming ground for startups, in spite of low regulatory barriers, good access to venture capital, and a vast domestic market. (Note to data buffs: the Kaufmann index for the USA uses a narrower age band as the denominator than the World Bank dataset I used for everybody else. Correcting this would push the US rate up by 10-15%, gaining one place in the rankings at the expense of the idle Dutch [update] lower the US one place in the rankings, below the go-ahead Czechs. (H/t: Marcel in comments catches my arithmetic howler.)

It’s striking that the countries with significantly higher startup rates than the USA are those with stronger, more comprehensive, and more centralised social safety nets, along with correspondingly higher taxation.

How many Americans are locked into jobs they hate by the fear of losing health benefits? No Dane ever has to worry about losing her right to medical care by quitting her job to go it alone. Norwegians could in conservative theory decide that work isn’t worth it and live comfortably off the dole, but in practice they don’t. In New Zealand, the insurance principle has been largely abandoned: most benefits have nothing to do with contribution records.

American exceptionalists can try to get round the embarrassing data by special pleading, making the Protestant work ethic do overtime to explain those entrepreneurial Nordics (passing over the Calvinist Dutch who invented it); or alternatively claiming that the USA does a better class of startup, with a few Googles making up for many corner stores. Pending evidence, I’ll stick with the old conservative CW that startups matter for innovation and sustainable growth, more than the absolute number of small businesses.

The real puzzle in the table (apart from the – on the face of it – incredible number for New Zealand) is the very low startup rates in Germany and Austria, with very successful and reasonably innovative economies. Bleg: is there some guild protection there for small businesses that makes it unnecessary to set up limited liability companies? Or are there very large bureaucratic, cultural or financial obstacles to startups that pose a long-run threat to their continued growth? [Update: see Katya's answer in comments.]

I hope that nobody feels that publishing these photos is a violation of the kids’ privacy. The girls can’t be identified by me or you; they were appropriately dressed (unlike Alice Liddell in Charles Dodgson’s disturbing and brilliant photograph); they were in the company of parents or caregivers; and IMHO what they were doing was in a sense a public performance. Feedback welcome.

Footnote 2
John Adams’ response to the aftermath of a land bubble, the US’ first bankruptcy law of 1800, looks more vigorous that Obama’s ineffective HAMP.


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