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Help others, help yourself

Unconditional financial support is critical during COVID-19

Imagine playing a game of football (a.k.a soccer) without a goalkeeper. Even amateur teams will beat yours because they can score with ease from anywhere on the field. The goalkeeper stops the team from losing unnecessarily from simple stuff. I like to think of the government as a goalkeeper, stopping unnecessarily bad stuff from happening for simple reasons like a lapse of judgment or bad luck.

A consistent theme of this blog is where the government should and should not be involved in the economy. Debates around this issue are often polarising. This post will explore this theme more in relation to social safety nets, efficiency, unemployment and COVID-19. It seems like a long time ago now, but back at the start of April, I posted on the importance of a social safety net during COVID-19. This post expands on that.

There are specific types of problem where government involvement makes sense, specifically:

  1. Where there are substantial externalities (wider societal costs) that are not addressed by the market

  2. If the provision of the good or service is needed to live successful a life

  3. When the cost of something happening (or not happening) is greater than the cost of possible market inefficiency.

That definition isn't perfect but it gets some of the way there.

I'll breakdown item three above on market efficiency using an example, as it is the basis for this post. People have the option of protecting themselves against cancer through insurance. But they may not insure due to cost or misunderstanding risk. If they then get cancer, and cannot afford the fees, there is a good chance they will die sooner. A public health system acts as a safety net giving that person a better chance of survival.

Letting an uninsured person die from cancer is often greater than the cost of providing for them through a public health system - depending on the cost of treatment. The value of a life in New Zealand is estimated at somewhere between $4 to $5million. Treatment is usually much cheaper than that. Health is just one example. There are other examples where government involvement can stop really bad things from happening.

Government own goal due to bad policy

Relying predominantly on user-pays systems makes no sense if the societal cost is really high

The counter-argument is that social safety nets create perverse incentives, e.g. to not get insurance or look after yourself because the state will pay. That can lead to mispricing and inefficient allocation in the market. Government involvement creates inefficiency. User pays systems are preferred so people take adequate precautions themselves and the market is efficient. People pay the full cost of goods they consume, therefore supply represents demand and the product or service is appropriately valued.

This argument makes no sense when the cost of the event is really high. A family loses a loved one. If that person has kids, they grow up worse off. A workplace loses a colleague. Arguing that they should have gotten health insurance isn't sensible. The societal cost is too dam high not to treat. Letting someone die due to a lack of health insurance is actually bad policy. The government acts as the goalkeeper providing public care and society is better off for it because this involvement mitigates the wider societal cost of not treating. Education is another good example. Imagine letting people grow up without an education because their parents should have gone to a private school?

If we were talking about the provision of baked beans, sure, we don't need government involvement in the market for baked beans beyond perhaps health and safety. Reasonably free markets are an appropriate means to distribute baked beans reflecting cost, competition and the availability of alternative foods. But if we are talking about health, education, unemployment, emergency services or that type of issue where failure to provide has a widespread societal cost, then government provision is critical.

Demand and supply curve

There is a lot of bellyaching over trying to achieve market efficiency where demand equals supply. However, markets are rarely efficient due to information differences, human "error" and transaction costs. Also, there is more than one type of efficiency. At a minimum, there is market efficiency, plus social efficiency, where we live within our environmental means and everyone has the basic needs for a successful life.

Universal basic income makes complete sense right now

Here is where we arrive back at COVID-19. The US recently let the unemployment aid of $600 per week expire. Trump has signed an executive order reinstating it at $400 per week. That allows people to continue consuming, though not at the same levels. Financial support for workers is critical if we are to keep the global economy afloat. What we have seen so far during COVID-19 is a reduction in employment mostly due to social distancing, and a bit because of a reduction in consumption.

What could happen at a much larger scale if we are not careful is massive job losses due to people not spending. Providing for everyone's consumption during COVID-19 is good policy because the economic damage of not doing so would just make the recession even worse. The economy is interconnected. If people stop spending in one place eventually it flows to the next. Without a minimum income for the unemployed, many more businesses would fail. While it might be soothing to think people should look after themselves, the damage from leaving people to support themselves would make everyone, employed and unemployed alike, much worse off. Hence - help others, help yourself.

So much of COVID-19 is beyond our control and very difficult to prepare for on a personal level. Removing unemployment aid is unnecessarily destructive. Governments can have their cake and eat it too with unconditional financial support. Not only is it a vote winner, but it is also good policy. Workers have the opportunity to search for new jobs while their livelihoods are protected. It also puts a little fairness back into the system. How can billionaires actually be making money during a pandemic while so many lose out? I don't know if I support a Universal Basic Income (UBI) long term, I wonder if more targeted forms of welfare are more appropriate. But right here, right now, UBI is absolutely necessary.


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