Most of us have no idea how our vaunted economic system works. Granted, not understanding the how doesn’t stop you from benefiting from something. You don’t have to know how your cellphone works to appreciate just how valuable it is.
But this ignorance can have profound consequences if it causes us to make poor decisions. Take the widely-held belief you shouldn’t spend more than you make because eventually you’ll run out of money, with terrible consequences. Applied to the public sector it’s often used as an argument against social safety net programs.
But is the basic thesis correct? Well, actually, no. If it was, hardly anyone could enjoy their own home or go to college because most cannot pay for either outright. Neither would the vast majority of billionaires (and their valuable products) exist. Because their wealth was created by spending more than they had. In fact, it’s only dying businesses that routinely spend less than they take in.
Does this mean we should spend money like drunken sailors? No. Like so many other things the answer is, “it depends.” On the potential rewards, financial and otherwise, we might reap, and the risks we’ll need to run to earn them. Weighing all that as objectively as possible is the bread and butter of private sector financial analysis.
Unfortunately, similar public sector analyses are much harder to do. As individuals we assume benefits are easily measured. If I want to buy a car priced at $50,000, I know the car is worth $50,000. Because I don’t have to pay more than that to buy one, and the manufacturer won’t sell me one for less than that. The same does not hold true for most public goods.
That’s because public goods generally have no market and so cannot be valued by simple observation. Things like justice. Equality before the law. Being safe from being invaded, robbed, beaten or killed. Equal opportunity. Freedom from prejudice and discrimination.
Or consider the ability to fail safely, learn from failure, and try again. We get that by having things like bankruptcy laws, the legal fiction of a corporation being a virtual person — so company founders can fail and not have their lives wrecked by investors — and social safety nets. Why is that important?
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According to a Federal Reserve study, 1 in 4 adults would be unable to pay their monthly bills if hit with an unexpected $400 expense, and more would struggle to cover it. I remember when I began earning enough to weather such shocks. Besides making life more enjoyable, it made me able to take calculated risks to enrich myself and my community.
Our recent flock of billionaires illustrates this. They almost all came from backgrounds where they could fail, learn, keep trying … and eventually succeed spectacularly. Thomas Edison famously told people his first thousand attempts to create a light bulb weren’t failures. They were lessons in how not to build one and were central to him figuring out how to succeed. And only possible because he could afford to keep failing.
Humans are social primates. The primate part makes us curious, intelligent and master environmental manipulators. The social part lets us form communities. Enabling us, as individuals, to do more than any of us could ever hope to achieve by ourselves. The value of safety nets, to the community, isn’t that they help community members handle crises. It’s that they enable those community members to stay in the game, and try again, ultimately making the community better off, both financially and otherwise.
Creating wealth by backstopping failure may sound like a pipe dream. But it’s not: We’ve already run the experiment and seen the results. The laws enabling the formation of corporations — which made it possible for innovative people to try, fail, learn and try again — played a major role in creating trillions of dollars of wealth over the last century or so.
Rather than worry about spending more than we “earn” on safety nets, we ought to be aghast at how much money we are leaving on the table. Simply because we don’t understand the political economic system we enjoy.
Imagine the wealth that would be created if everyone had the chance to become better educated, or didn’t have to worry about child care, medical bills and the like. The most valuable form of capital is human capital, and letting it go to waste is the thing that doesn’t make economic sense.
Mark Olbert is a former mayor of San Carlos. He and Seth Rosenblatt host a podcast at TheBoilingFrog.net focusing on the intersection of economics, politics, history, psychology and science.
Mr. Olbert - actually a great column, thank you. In last Saturday's column by a Highschool student, she mentioned that a significant level of anxiety exists among our youth. That would require improved mental health care. She forgot one of your lines: "Imagine ... if everyone had the chance to become better educated, or didn’t have to worry about child care, medical bills and the like". Instead, our youth seem to have no trouble finding something else to worry about.
Thanx. I often shake my head at the world we are leaving for those who will follow us. I suspect they will shake their heads at much of what we've done, particularly recently.
May be we are both going off on a tangent but I disagree with you that we are not leaving a better world for the next generation. I see armies of spoiled kids that see their world through their devices and become despondent as a result. As a toddler growing up in post WWII Holland, I can tell you that my parents' generation left us with a mess that took decades to correct. Now, that was tangible and worrisome. And look what the Greatest Generation accomplished! We are still the envy of the world. I feel a lot better than most about our children's and my grandchildren's future. They will figure it out, just like my generation did.
Sorry, Mr. Olbert, but this letter reads like a roundabout plea for socialism. And we all know how well socialism works – it doesn’t. Let’s run your idea past millionaires and billionaires (they pay most of what you consider as “money on the table” - aka taxes) and see what they think of giving up much of their wealth to those who will not work to fail, learn, keep trying, and succeed.
I remember about 10 years back maybe when you (Mr. Olbert) used to live near or on Bay View Drive in San Carlos and your dog got out - and I returned him home to you after asking around whos dog it was - and all you had to say was "he does this all the time" and essentially and rather ungraciously shut the door in my face . Listening you pretend to care about people is a joke, quite frankly. Your "humans are social primates" line tells me all I need to know about you.
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(5) comments
Mr. Olbert - actually a great column, thank you. In last Saturday's column by a Highschool student, she mentioned that a significant level of anxiety exists among our youth. That would require improved mental health care. She forgot one of your lines: "Imagine ... if everyone had the chance to become better educated, or didn’t have to worry about child care, medical bills and the like". Instead, our youth seem to have no trouble finding something else to worry about.
Thanx. I often shake my head at the world we are leaving for those who will follow us. I suspect they will shake their heads at much of what we've done, particularly recently.
May be we are both going off on a tangent but I disagree with you that we are not leaving a better world for the next generation. I see armies of spoiled kids that see their world through their devices and become despondent as a result. As a toddler growing up in post WWII Holland, I can tell you that my parents' generation left us with a mess that took decades to correct. Now, that was tangible and worrisome. And look what the Greatest Generation accomplished! We are still the envy of the world. I feel a lot better than most about our children's and my grandchildren's future. They will figure it out, just like my generation did.
Sorry, Mr. Olbert, but this letter reads like a roundabout plea for socialism. And we all know how well socialism works – it doesn’t. Let’s run your idea past millionaires and billionaires (they pay most of what you consider as “money on the table” - aka taxes) and see what they think of giving up much of their wealth to those who will not work to fail, learn, keep trying, and succeed.
I remember about 10 years back maybe when you (Mr. Olbert) used to live near or on Bay View Drive in San Carlos and your dog got out - and I returned him home to you after asking around whos dog it was - and all you had to say was "he does this all the time" and essentially and rather ungraciously shut the door in my face . Listening you pretend to care about people is a joke, quite frankly. Your "humans are social primates" line tells me all I need to know about you.
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