Formal and Informal Social Safety Nets

Growth and Development in the Modern Economy

M. Ashraf

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137388742
• Topic: Economia
• Subtopic: Politica economica

In Formal and Informal Social Safety Nets, Ashraf analyses the role of social safety nets in a time when our global economy threatens our way of life, as entire cities such as Detroit are declared bankrupt.

CHAPTER 1

Why Do Social Safety Nets Matter?

Any crisis situation highlights the importance of safety nets. In recent history, examples of such situations abound. In August 2005 Hurricane Katrina reminded us the value of stronger levies; in February 2012 the Fukushima Daiichi nuclear disaster pointed to the loopholes in nuclear energy production; and in April 2010 the BP oil spill in the Gulf of Mexico showed how hard it was to control a disaster. Similar is the case with economic misfortunes and missteps. One example is the Great Recession of 2007–2009 and its aftermath. It has certainly made it clear that individuals do fall on hard times and that they do need assistance. Often hard times happen even if people have been responsible and saving for the proverbial rainy days.

As of late 2013, unemployment rate—the percentage of labor force that cannot find jobs—is still hovering well above 7 percent.¹ The unemployment rate peaked at 10 percent in October 2009, and stayed above 8 percent until August 2012.² As any basic economics textbook would tell you, national unemployment rate estimates, useful as they are, do not tell the whole story. For one thing, these estimates are averages—some areas suffer higher unemployment rates than others. This means that hardships suffered by individuals and families in areas where unemployment rates are higher are understated. Another important key factor is the length of unemployment. On the eve of the 2007–2009 Great Recession, the average length of unemployment was about 17 weeks. During November and December of 2011, it reached 40.7 weeks.³

The increase in the length of unemployment is extremely worrisome. Labor demand (or any input demand) is derived demand—employers hire workers for what they can produce, and not for their own sake. The longer an individual stays unemployed, the higher the skill loss and the lower the likelihood that he/she will find a job. The reason is that, on the one hand, since the worker would not have been using the skills on account of being unemployed, it is quite likely that there will be a drop in dexterity, making a given worker less desirable. On the other hand, since economy is dynamic, it will keep changing, and will thus need new and/or different jobs and new and/or different skills to perform those jobs. Since the worker has been unemployed, she/he would be falling further behind by not acquiring skills that he/she could have acquired had he/she been employed. This is one reason why one hears more about job training and retraining programs after a recession.

Recognizing the ill effects that the deficiency of desired skill levels may have on workers and the economy, the United States Department of Labor has a division specifically devoted to updating and upgrading labor skills. It is called the Employment and Training Administration.⁴ The mission statement of this division is as follows:

The mission of the Employment and Training Administration is to contribute to the more efficient functioning of the U.S. labor market by providing high quality job training, employment, labor market information, and income maintenance services primarily through state and local workforce development systems.⁵

The formation of the Employment and Training Administration had a forerunner. In 1946 as the United States was starting its recovery from World War II, President Harry Truman, on the request of John W. Snyder, director of the Office of War Mobilization and Conversion, appointed a commission to explore the state of higher education in the United States.⁶ It is known as the Truman Commission. It resulted in the formation of a community college system—”intermediate technical institutes,” as President Truman called them in his letter to the prospective members of the commission.⁷ For the most part the responsibility of these colleges was, and still remains, to train and retrain labor force for the ever-evolving job requirements. These are among the various forms of formal social safety nets.

1.1. Overview of the Book

In his book Development as Freedom,⁸ Amartya Sen writes:

[N]o matter how well an economic system operates, some people can be typically on the verge of vulnerability and can actually succumb to great deprivation as a result of material changes that adversely affect their lives. Protective security is needed to provide a social safety net for preventing the affected population from being reduced to abject misery, and in some cases even starvation and death. (p.40)

That social safety nets are needed is not a partisan issue. During the 2012 Republican primary debates, Ron Paul, a libertarian⁹ seeking the Republican nomination, was asked what should a hypothetical individual do if he/she did not have health insurance and got sick; should society leave the person to die?¹⁰ Paul replied that the society should not leave such a person helpless. He reminisced that as a physician he had helped a lot of patients who could not afford to pay. He argued that “we’ve given up on this whole concept that we might take care of ourselves and assume responsibility for ourselves. Our neighbors, our friends, our churches would do it.”¹¹ I mention this to point out that even the most ardent supporters and promoters of self-reliance recognize the need for some form of social safety nets. The question is: How to provide and finance social safety nets?

I argue in this book that formal social safety nets, as I define below, provided by the government and financed by taxes, are not only important but indeed vital for a modern economy. I argue that formal social safety nets not only provide the indigent the help they need while preserving their dignity, but may also help promote economic growth. Just as a modern economy cannot function without well-functioning financial and monetary systems, a modern economy needs formal institutional arrangements upon which individuals can rely in times of need.

The barter system served its purpose when a small number of goods and services were exchanged. However, a modern monetary system was needed as economies grew. The development of the system helped economies grow even further. Indeed, a well-functioning monetary system and economic growth go hand in hand. In the same way, informal safety nets, as I define below, served their purpose when the village populations were small and travel beyond a certain radius was a rarity. As populations and economies grew, economic prosperity allowed individuals to travel long distances. Travel further expanded trade and spurred economic growth. Travel to thus-far-unchartered territories was not just limited to satisfy curiosities of restless minds, although that was one factor, but it was also needed to find new sources to satisfy growing populations’ needs. And so informal social safety nets, upon which one could rely closer to home, proved deficient when one moved sufficiently far away from home—far enough that help from family and friend was not readily accessible. (More on this point, shortly.) Deficiencies of informal social safety nets are becoming ever more apparent as time passes.

Before I go any further, let me define more precisely what I mean by social safety nets, and how informal social safety nets differ from the formal ones.

1.2. Social Safety Nets: Some Definitions

I define a social safety net as a source upon which one can rely in times of need, regardless of the help-seeker’s ability to repay. The “ability to repay” part of definition is important. This precludes banks and other commercial lending institutions. A well-functioning banking system, while crucial for an economy, is not a safety net. Commercial banks are businesses that operate for profit. Banks do not lend to individuals who do not have any assets to put as collateral, or who do not have a reasonable expectation of repaying the loan along with the interest. A bank may not issue a personal loan unless the individual is employed and has a well-enough paying job, or has a reasonable expectation of getting a well-enough paying job, which ensures that the borrower will be able to repay the loan along with the interest. It may not provide a home equity loan if the owner of the house does not have built-up equity in the house. Note, however, that in this regard even the financial crisis that started in 2007 was not any different.¹² Banks, incorrectly, thought that house prices will keep on increasing. By virtue of price increases, a house purchased today will have built equity by tomorrow. Lax financial regulations further fueled the mania.¹³ Even the financial intermediaries such as credit unions, which do not have a for-profit business model, are not charity organizations. Credit unions do need veritable assurance of loan repayment along with the interest. As a result these institutions do not, and cannot, serve as safety nets. Indeed, troubled times happen when one runs out of these options.

A social safety net may be formal or informal. Let me explain what I mean by these terms.

1.2.1. Informal versus Formal Social Safety Nets

In an informal social safety net, one relies on family, friends, neighbors, fraternity, sorority, or religious organizations associated with one’s place of worship—church, synagogue, mosque, temple, and so on. One main defining feature of informal social safety nets is that they are relationship dependent. I will expand on this point shortly. First note that informal safety nets may be delineated into “casual” versus “organized.”

By “casual” I mean that usually no formal records of favors extended or taken are kept. While how a particular family member, or a friend, or a neighbor has behaved in the past may very well determine how favors will be rendered in the future, formal record-keeping is usually not needed as a memory devise. The size of group membership is not large enough to require formal record-keeping. Family, friends, and neighbors are examples of casual informal social safety nets.

In the case of “organized” informal social safety nets, formal record-keeping is usually done. This may be due to legal reasons or for keeping a record of who contributed and how much, and who received help and in what amount. Examples of organized informal social safety nets include The Freemasonry,¹⁴ The Benevolent and Protective Order of Elks of the United States (the Elks, for short),¹⁵ Boy Scouts of America,¹⁶ Girl Scouts,¹⁷ Kiwanis,¹⁸ YMCA,¹⁹ YWCA,²⁰ and the Salvation Army,²¹ among others. In the United States for these organizations to obtain a “not-for-profit” status, a detailed record-keeping is required. Furthermore, organized informal social safety nets may be divided into religious versus secular informal social safety nets. While organizations like the Elks or the Boy Scouts of America, and so on, have a religious component, they may not be attached to a particular denominational church, or a synagogue, or a mosque, and so forth. Organizations like the Salvation Army, on the other hand, are associated with a particular denomination.

A subset of organized informal social safety nets is organizations that provide social services and are religious in nature. They use some religion as their moral compass and are generally referred to as “faith-based organizations” (FBOs). It may be a particular religion or some inter-faith coalition. In the faith-based organizations literature, these organizations broadly fall under the following categories:²²

1. Neighborhood congregations established around a church, synagogue, mosque, temple, and other places of worship. The distinguishing feature is that these organizations are limited in their geographic reach.

2. FBOs that have a network at the national as well as international levels. For instance, Catholic Charities USA is a nationwide organization. According to its website,²³

Catholic Charities USA is the national office for Catholic Charities agencies and affiliates nationwide. As a professional association and social justice movement, Catholic Charities USA supports local Catholic Charities as they provide help and create hope for over 10 million people each year regardless of religious, social, or economic backgrounds.

FBOs such as YMCA,²⁴ YWCA,²⁵ and the Salvation Army²⁶ are international organizations.

3. FBOs may also be “interfaith.” Interfaith FBOs are an amalgamation of different religious faiths. Usually all larger metropolitan areas have interfaith FBOs in one form or another.²⁷

Furthermore, FBOs may also differ with regard to the tax status. For instance, while all charity organizations have a tax exempt status, according to the Charity Navigator website, “Many religious organizations, like the Salvation Army, are exempt under Internal Revenue Code from filing the Form 990.” According to the Internal Revenue Service website, Form 990 allows the general public to get information about the organization.²⁸

Curiously, the White House Office of Faith-Based and Community Initiative and the Office of Management and Budget (OMB) were asked to define what constituted an FBO by the US Government Accountability Office (GOA) so that the performance of such an organization could be judged.²⁹ Both the organizations refused to provide a precise definition of an FBO. According to the GOA’s report:

[T]he White House Office of Faith-Based and Community Initiative, OMB is not planning to establish a definition for faith-based organizations. As they stated in their agency comments (June 2006), they are concerned about the practical and legal difficulties inherent in developing a uniform definition for what constitutes an [a] faith-based organization. In September 2008, OM...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures
• List of Tables
• Preface
• 1. Why Do Social Safety Nets Matter?
• 2. The Need for Formal Social Safety Nets
• 3. Research and Development, Innovation, and Economic Growth
• 4. Innovation and Formal Social Safety Nets
• 5. Income Distribution and Economic Growth and Development
• 6. Formal Social Safety Nets, Income Distribution, and the Society
• 7. Financing of Formal Social Safety Nets
• 8. Faith-Based Organizations and the Provision of Informal Social Safety Nets
• 9. Concluding Remarks
• Notes
• Bibliography
• Index