Tuesday, March 24, 2009

Welfare Moms and Bailout Banks

Unfortunately, it has become far too acceptable, in modern American society, to expect government handouts. Through a long history of increased government assistance and programs, society has developed an inflated notion of entitlement. This problem is clearly seen in two nearly dichotomous phenomena in the news today- Nadya Suleman (the invitro-welfare mother of 14) and the economic bailout. In both instances, we see the excess of government “entitlements” run rampant.

The key parallel is that in both instances the government is serving as an enabler of poor behavior. By serving as an overinflated safety net, the government is encouraging future individuals or groups to behave in a similar fashion. Clearly, Suleman has seen no incentive to stop having children despite her past (and current) status of being on welfare (which she ironically denies is welfare). Likewise, what incentives will future investment bankers have to avoid taking on too much risk (or more properly, mispricing risk)? The government’s actions today essentially limit the downside risk an individual or group can face. This risk assessment is naturally a huge factor when an individual or group is making a decision. If they foresee less risk, because they know the government will bail them out, they will be more willing to make risky, poor decisions. This in turn spirals downward, increasing the role of the government and negating the individual’s personal responsibility.

Do not make the conclusion that I am calling for a complete end to social welfare or that I believe the government should completely be laissez-faire in dealing with the economic crisis. I don’t believe either. What I do believe is that government policies should be more principle-based (rather than rules-based). This is particularly true in the case of welfare. Abuse of the system should be punished harshly; thereby, precluding people from taking advantage. Welfare should only be available to those who absolutely need it AND who are taking steps not to need it any more. Abusers such as Suleman should not only be precluded from collecting any form of government aid but should be punished for their abuse. It would be worthwhile to consider charging her with child abuse (in regards to her current children and for purposefully and irresponsibly bringing 8 new children into the world when she does not have the means to support them). [The doctor who performed the procedure should at a minimum have a moral, if not a legal responsibility, not to perform elective procedures that will become a burden on the state- but this is a separate discussion]. Government resources should be used for the truly needy, in a more discretionary fashion that allows greater scrutiny in distinguishing between abusers and the truly disadvantaged.

Likewise, the economic bailout needs to be focused in more general fashions. I do believe that the government has a role to play in righting the economy. But, it does not mean just throwing away money to failing industries. The auto industry is a prime example. Giving a largely unrepentant, inflexible, and poorly structured industry a vast some of money only incentivizes it to continue its broken ways. What reason would GM have to make radical new changes if it gets money when it messes up? Furthermore, by supporting the old dinosaurs we squash the new upstart innovators that may have better and more efficient products and methodologies (and those we don’t squash will just set up shop in other countries). There will certainly be costs if the auto industry fails- but a few short term costs are much better if they enable a long term fix. We suffer more harm by building on a broken foundation rather than just tearing down the building and starting anew. (This is partially our own fault by having policies which encourage anticompetitive industries that are too heavily reliant on two or three companies).

The bottom line is that the government has to step back- let people and corporate entities fully assess the risk of a situation without the promise of bailout from Uncle Sam. If each actor knows they might have to fend for themselves, they’ll take the appropriate responsibility to make sure they are heading down the right path. Maybe it is simply tough love- after all, we would all ridicule a parent for doing their child’s homework because the child struggles. Sometimes failure is necessary to ensure that individuals learn the correct way to act, and thereby prevent future failure.

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