Economic Efficiency

In order to be politically viable, any concept of socioeconomic rights must limit its conflict with economic efficiency. Specific issues include the consequences of socioeconomic rights on work incentives, savings patterns, risk taking, and international competitiveness.

A prominent American view is that existing social programs reduce work incentives and productivity generally.^[18] The three principal arguments are that a system of extensive social programs: (1) emboldens organized mainstream labor to press for wage increases and other demands, because workers know they will be protected during strikes or interludes of unemployment; (2) reduces workers' motivation, since increased earnings will be taxed to the benefit of others; and (3) discourages people from accepting jobs that pay about the same amount as might be obtained through generous social programs, especially if those jobs are dirty, dangerous, dreary, or degrading in other ways.

If we look overseas, we have no trouble finding evidence that

casts doubts on each of these contentions. In Sweden, for example, the extensive realization of socioeconomic rights accompanies high levels of productivity and strong work incentives;^[19] the Federal Republic of Germany is frequently mentioned in this context as well. Lester Thurow finds little relationship between economic efficiency and economic equality, and Harold Wilensky finds that state spending on social programs is positively associated with levels of productivity.^[20]

Whether these patterns are relevant to the United States is a question that admits no easy answer, and the evidence is quite mixed.^[21] For example, from 1900 to 1980 aggregate labor trends among men exhibit little change except for a decline in labor-force participation among men of retirement age, retirement presumably as a result of social security; women, again except those of retirement age, have dramatically increased their participation in the labor force across the same period.^[22] The negative income tax experiments conducted in stages in several locations in the 1970s, however, show moderate declines in hours worked by people, particularly women, whose income levels were assured.^[23] Overall, the rate of growth in American productivity has declined since social programs were expanded in the 1960s, but this association may be attributed to any number of confounding variables.^[24]

In a society as atomized or individualistic as the United States, it does not seem unreasonable to suggest that particular forms of social programs represent threats to work incentives for people trapped in low-paying jobs, often called the secondary labor market.^[25] Characteristically, such jobs not only return low wages and few fringe benefits but also tend to be subject to frequent termination on short notice. Often dreary, dirty, or dangerous, this sort of work does not lead to pay raises, job security, or promotion in rank or responsibilities.

Popular perceptions of the secondary labor market show vestiges of the notion of two races or two species, a conception prominent in early-nineteenth-century Britain.^[26] The superior class comprised property-owners, and they were motivated by desires for profit, or what we might call positive reinforcement. In contrast, "the poor," or the class that had to work for a living, was alleged to be motivated by the threat of punishment, that is, by adversive control, such as the prospect of starvation.

Today most Americans have to work for a living, but no one would suggest that professionals, paraprofessionals, white-collar workers, or skilled manual workers are primarily motivated by adversive control. For while their jobs are imperfect in many ways, they do afford varying measures of positive reinforcement: good wages, a sense of personal pride, and the development of personal expertise, among others. But for people at the bottom of the income and job-status distributions, it may well be reasonable to suppose that adversive control remains an important factor in decisions about work and therefore that some forms of social programs reduce work incentives. If so, what is called for is a long-range effort to revitalize these incentives through positive reinforcement rather than adversive control. But in the near term we should also question the wisdom of social programs that, like the policy initiatives of the mid-1960s through the mid-1970s, tended to provide benefits without asking for specific forms of constructive activity in return.

The effects of existing social programs on work incentives seem to reflect distinct program features. Wilensky, for instance, argues that retirement pensions provide a powerful incentive for developing a regular work history—a thesis consistent with the aggregate labor trends cited above.^[27] But current American practices with respect to AFDC and unemployment insurance may be destructive of work incentives. Even the disability aspect of social security may be more problematic in this regard than are pensions for the elderly.^[28] Overall, social insurance programs aimed at clearly episodic problems are less troublesome with respect to work incentives than programs aimed at social disadvantage, although both types of programs may improve the payoffs for socially undesirable activities.^[29]

The effort requirement introduced in chapter 2 reduces the work-incentive problems posed by some existing social programs. By facilitating labor-market participation and supplementing its rewards, thereby making household support both necessary and more feasible, the investments approach positively reinforces desirable activity, unlike most current social programs for working-aged adults.

A second criterion of economic efficiency is the personal savings rate. Martin Feldstein, among others, argues that since American

social insurance programs operate on a pay-as-we-go basis, they create no funds that can be used for investment.^[30] Further, he maintains that social insurance discourages relatively prosperous citizens from accumulating personal savings to protect themselves against social hazards. Feldstein's first point is accurate, but its significance in this context hinges on the second: Would Americans save more and would the nation have more capital for productive investment if there were less social program support? The historical evidence suggests that the answer is no. The personal savings rate, expressed as a proportion of gross national product was 16 percent in 1973, the same as in the 1920s, before any national social insurance programs existed.^[31] Nor does Henry J. Aaron's analysis of American savings patterns in the last fifty years reveal any discernible trends in personal savings.^[32]

Even if we assume that Americans would start to save more, we cannot be sure what proportion of the new savings would be available for capital formation rather than locked into collectibles or real estate. We may also wonder whether productivity-enhancing investments would rise with the savings rate. If Americans saved more, they would purchase less, and if social programs reduced their benefits, consumer demand would also drop. Thus the combination of higher savings and lower social benefits might dampen demand to the point that American producers would see little motive to invest in improved domestic capital stock. In that case public policy could structure incentives to channel savings in specific directions and to stimulate domestic capital investment, but such incentives are fully independent of funding for social programs, neither following from reductions in social programs nor requiring such reductions as a preliminary step.^[33]

A third aspect of economic efficiency involves business's attitudes toward risk taking. Production costs (including payroll taxes for social insurance programs), the incentives of workers, and the availability of capital all affect the willingness of American entrepreneurs and corporate managers to take risks with new enterprises or to expand or modernize existing facilities. In the United States, indeed, business enjoys an unusual independence in risk-taking decisions. Whereas French state managers and Swedish labor officials may routinely participate in corporate investment decisions, American businesses expect relative autonomy in their

decision making. The prospect of government "interference" regarding worker safety or environmental impacts makes American private managers hesitant to invest capital in a new enterprise. Similarly, a restive or powerful workforce, or the perception of one, tends to curtail risk-taking.

For this reason, American businesses are wary of social programs that strengthen labor's hand.^[34] In offering substantial benefits to limited segments of the working-age population without a clear quid pro quo, programs like unemployment insurance and AFDC could be interpreted as counterproductive. But this does not mean that economic benefits must be denied to vulnerable individuals in order to allow business managers to feel more confident about risking capital. Rather, it suggests that we try to provide these basic benefits in a way that will be less troubling to business. Again, the investments approach to socioeconomic rights is designed to address this concern.

Increasingly, economic efficiency is discussed in the context of global economic competitiveness. Once, American businesses argued that if social programs were inevitable, uniform national programs were preferable to interstate variations that would put some businesses at a disadvantage.^[35] Today they envision the United States as a relatively homogeneous unit competing with other advanced industrial societies, and they ask whether national social programs may hamper the competitive position of American products and services. Among the potential dangers cited are deleterious effects on work incentives, additions to labor costs, depletion of capital, and constraints on business managers' willingness to take risks due to uncertainties about such problems.^[36]

As noted earlier, however, the United States spends a smaller percentage of gross national product on social programs than do most other industrial societies. Thus any lack of competitiveness of American products cannot be attributed to anomalous social program costs. Nonetheless, one might argue that reducing social program costs might increase the competitiveness of American products or that reducing future increases in social program costs might improve the competitiveness of American products over time.

Such arguments, however, exceed our understanding of the practical consequences of existing social programs and alternatives to them. There is simply no clear consensus among economists or

other analysts about the macroeconomic costs and benefits of social programs. Recent debates about deregulation suggest that business managers perceive social programs as conflicting with their interests—and perhaps with economic efficiency too. The perceptions of this exceptionally influential group carry significant political weight, but we have no way of objectively judging whether they are accurate.

Despite these uncertainties, two points seem indisputable. First, social programs are merely one factor contributing to work incentives, savings patterns, risk taking, and international competitiveness. And if social programs were shown to impinge on the realization of economic efficiency, it might be possible to counterbalance this effect by other actions. For example, changes in management style might enhance work incentives, and various taxreform strategies have been proposed to stimulate savings.

Second, we can easily see that some formulations of socioeconomic rights are more inconsistent with economic efficiency than others. On this criterion my proposal seems less disruptive than, say, the guaranteed-income approach of the Nixon and Carter administrations. Again, anticipated conflicts between socioeconomic rights and core American values may be reduced by careful design of social insurance and social merging programs.