Barro’s Welfare Error

Via Ted Nesi comes a Bloomberg column by Josh Barro.  It’s one of those commentaries in which it isn’t quite clear whether the author is offering pure political advice or expressing his opinion, so I’ll assume the latter.  In that context, here are Barro’s thoughts on the balance of the economy and government:

If you concede that the purpose of a business is to provide well-paying jobs and solid benefits, then you cannot defend private equity. Private equity defenders must stand up for the idea that firms do not have a social obligation to retain and pay their employees; their function is to produce products and profits and getting them to do so more efficiently is good for consumers and for the economy as a whole.

… [Therefore, it’s a] straightforward neoliberal proposition: The government should provide a robust safety net so that employers can be left free to hire, fire, open and close at will. A dynamic private sector is important, but it needs a substantial welfare state to support the people who fall through its cracks.

Barro’s is an interesting argument, but its greatest asset is how clearly it brings into focus something that people are beginning to sense, especially on the right:  The model of big finance and big business operating to supply wealth, with a robust welfare state picking up the pieces shed in the name of efficiency, is an excellent example of the ways in which the  money-shuffling sector is distorting the country’s economy and government deleteriously in its own favor.

Barro introduces an error with his most fundamental premise that there is such a thing as one single “purpose of a business.”  The purpose of a business is whatever the people involved in it want it to be.  If they value profit above all else, they’ll follow Barro’s reasoning; if they value a sense of community, they’ll operate differently.

Indeed, the infinite variety of priorities is a large part of what makes people go into one industry or another — or one line of work or another.

Admittedly, none of my highly varied jobs have been in the world of finance, but in every career that I’ve undertaken, employers have done  conspicuously better when they’ve fostered long-term relationships with employees, helping them to grow and giving them a sense of participation and belonging.

That takes some forward thinking, and it puts pressure on the bosses to go out and find more work, both of which serve the macroeconomic end of increasing productivity.  That is, it benefits what some might see as the real economy beyond the churning well of lending, borrowing, and investing.  It’s not the only way of doing things, though.

Imagine two residential construction companies.  One hires younger carpenters and trains them in-house, giving them every opportunity to advance according to their ability and interest.  The boss strives to keep everybody consistently employed, and undertakes the tangible stress of constantly bringing in contracts.

The other hires and fires carpenters at various skill levels as needed and is always endeavoring to squeeze the maximal profit from each task.  For example, the boss will risk running out of work for a lead carpenter by temporarily hiring (or contracting with) less expensive carpenters to do whatever tasks they can — say installing siding.

Either approach might be optimal for a particular group of individuals in a particular market niche, but it isn’t clear why the more community-minded business ought to be forced to fund government programs serving the more commodity-minded business.  Broadening the scope, there is nothing inherently immoral about private equity or the operation of business according to the model that Barro describes, but there’s nothing so supremely moral about it that those who operate differently should have to subsidize the moral repercussions.

We absolutely do have to decouple healthcare from employment (yet another mechanism favoring big players), but the answer isn’t to spread the cost around to everybody no matter how they behave.  Even less is the answer to allow some technocrats to try to fine tune every system as an adjustment, giving tax breaks to the community-minded companies, for example.

The peculiarity is that, for all Barro’s cold, clear thinking on the “purpose of a business,” he allows himself to present government in terms of the mushy means by which we accomplish moral ends.  We in Rhode Island have had a front-row seat for the experiment in perverse incentives that such a view begets.

I’d propose that the answer is to make healthcare an individual concern, with private and (perhaps) minimal public assistance as needed, with final implementation made at the smallest level of community possible.  Mainly, that will mean at the state level.

Happily, I think that view translates into worthwhile political advice for the challenger in the current presidential race.  The case that Romney can make to balance all interests is that, given the mix of businesses in Massachusetts and the state’s culture, it made sense for the state government to step in for the provision of healthcare.

Conservatives might ask sardonically whether that means the people of the Bay State are so short-sighted and selfish that the ruling class can’t trust them to take care of themselves or each other; nonetheless, those conservatives would be calmed by the federalism, and they aren’t likely to prefer President Obama’s plans in any event.



  • The assumption of Barro is that everyone has a right to health care, no matter foolishly he/she may have lived.

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