The Economy

Genuine Generosity

(Vadym Petrochenko/Getty Images)
Well-designed government aid programs are not enough.

Because it tends to exaggerate our already excessive national sentimentality, the Christmas season is a time of sloppy thinking about several separate kinds of endeavor that are all lumped into the category of “generosity.” This year, the usual charitable impulses of the season inevitably will tend to bleed into two adjacent concerns: the necessity and design of social-welfare initiatives responding to the coronavirus epidemic, and the necessity and design of a more macroeconomic program in what we hope will be the final months of this emergency.

The easiest consideration is charity itself. Americans are by and large a generous people, eager in their philanthropy — and innovative, too: Writing in the New York Times, Elizabeth Bruenig notes the work of RIP Medical Debt, an organization that buys up medical debt for pennies on the dollar, as some profit-seeking investors do, and then forgives the debt rather than trying to collect it. Because it costs money to collect debts, debt trades at a discount, often a steep one. “That means a buyer can eliminate the debt for much less money than the debtor could,” Bruenig writes.

The idea is an appealing one, and, moving from charity to public policy, the model could be adapted to other pressing current needs. For example, the loss of income associated with the COVID-19 epidemic has left many renters, especially those who had low incomes to begin with, unable to keep current on their rent. Many of those renters have been kept in their homes under the protection of anti-eviction orders put in place as emergency measures, but that arrangement is not sustainable. Landlords have obligations, too: staff, payrolls, operating expenses, property taxes, mortgages, commercial debt, and other expenses that have to be paid, and they may not be able to pay them if renters aren’t making their payments. Smaller landlords are especially vulnerable on that front: The Financial Times reports that landlord households with incomes of more than $200,000 a year depend upon rental earnings for only 5 percent of their household incomes, while landlords with incomes of $89,000 or less get something closer to 20 percent of their income from rent. Peter Spiegel of the Financial Times worries that missed rental and mortgage payments could produce ill effects that “infect the financial system,” sobering words to anybody who remembers 2008–09.

It is easy to imagine a program in which government buys up a portfolio of unpaid rent at a discount with the intent of forgiving that debt in part or in full, as circumstances warrant. Many landlords would jump at the chance to exchange debt that will be difficult and costly to collect — if it can be collected at all — for a lump-sum payment, even one that is well below the notional value of the unpaid rent. Swapping a shoebox full of business records for a shoebox full of cash is very often a good trade. Renters could be kept in their homes; ideally, this could be done in a way that spares at least some renters going forward from the ruinous effects unpaid rent can have on their credit. (The centrality of the credit-rating system to American life, and the burden it represents on the poor, is a subject that receives insufficient attention.) Such a program would be good for the renters and good for the landlords, and it might even (it would be impossible to know for sure) end up saving taxpayers a bit by preventing broader social and financial disruptions. It probably would represent an improvement over well-intentioned but unwieldly eviction-diversion programs currently in place.

Other creative approaches are easy to imagine. What is difficult to imagine is an American public institution we could trust to carry them out.

Most of you will have heard by now that in California, hundreds of millions of dollars (and perhaps as much as $1 billion) in COVID-related unemployment benefits were paid out fraudulently to some 20,000 individuals making claims on behalf of state prisoners, the infamous murderer Scott Peterson among them. Some of the payments were made to prisoners directly, some of them made to third parties making claims on prisoners’ behalf, and some to such presumably fictitious claimants as one Mr. Poopy Britches. The Sacramento district attorney reports that at least $420,000 was paid out to inmates on death row. There are many stories like this one, some of them specific to the coronavirus response, some of them related to other programs.

I do not propose to here engage in the familiar rhetorical exercise in which the standard-issue libertarian critic notes the existence of waste or fraud in a certain category of government programs and then takes that as proving that such programs should never have existed in the first place. (Everybody is a libertarian when the government is doing something that irritates; Democrats complained bitterly about the Benghazi investigation costing $7 million in 2016, or 0.00017 percent of federal spending in that year.) Fraud is a fact of life when there is major money changing hands, as is waste, and that is a problem that we simply have to manage. But we must do the work of managing it.

(How to do so is not always obvious. E.g.: What is the optimal level of fraud in a welfare program? The moralistic answer might be, “The optimal level of fraud is zero,” while the economic answer might be, “The optimal level of fraud is the level of fraud that exists when the cost of the measures necessary to reduce fraud further exceeds the cost of the fraud that would be thereby prevented.”)

The problem is that we need both intelligent programs and credible institutions to carry them out. Good program design is not easy, but we have a lot of brainpower to throw at that problem. (We could, as a matter of national emergency, just lock Tyler Cowen and Reihan Salam in a room together with some very strong coffee and generate enough intelligent and creative reform proposals to keep the public sector busy for the next 20 years.) But whom could we trust to carry out the work?

The problem illustrated by the vast COVID-related fraud in California is not that some money may end up in the pockets of undeserving recipients. In a purely philanthropic consideration, our attitude should be a liberal one in which we do not make too many petty distinctions between the “deserving” and the “undeserving.” (This being Advent, I hope you will forgive me for insisting that Christians, especially, should be generous on that account.) The problem with fraud of this sort is not so critically a moral one as a practical one: What government does is not philanthropy, though it may come from philanthropic impulses, and as repugnant as it may be to imagine fraudsters profiting by the exploitation of our charitable impulses, the urgent and principal concern is that these maladministered programs are ineffective. Funds that go out the door on fraudulent pretexts do not accomplish what we wish for them to accomplish in the short term, and, in the long term, the incompetence thus demonstrated undermines public confidence and trust in such programs and institutions across the board. That makes weak institutions even weaker as declining prestige and low reputation make it more difficult for them to recruit good workers and to secure adequate funding and other resources. In order to be trusted, institutions must be trustworthy.

It is not as though reformers are asking the impossible.

Consider the case of the public schools in New York City: As Mayor Bill de Blasio and his colleagues have lurched from one pageant of buffoonery to the next, operators of New York City charter schools — public schools managed with a degree of independence — have shone. Students at Success Academies are learning virtually (wearing their uniforms while doing it) in a way that is orderly, safe, and effective. As The Economist reports, this required some great feats of logistics: About 7 percent of Success Academies students live in homeless shelters, meaning that the charter operators had to set up wi-fi hotspots and provide them with supplies such as laptop computers and noise-canceling headphones — which they did. The head of Success Academies, Eva Moskowitz, is Public Enemy No. 1 among New York City public-school teachers, and it is not uncharitable to interpret that fact as plain proof that the interests of New York City’s public-school teachers are not the same as the interests of New York City’s public-school students. That our interest in the well-being of the latter is used to justify a blank-check attitude toward the former is as cynical and as destructive an abuse as California’s COVID-unemployment fraud.

Wasting good money on badly run programs is not generous. Neither is greasing the wheels of corrupt or ineffective governments.

For years, institutions such as the International Monetary Fund and the World Bank endured savage criticism for imposing “austerity” measures on developing countries as a condition of aid, requirements excoriated as miserly and meddlesome. These institutions were in most cases acting in the genuine interests of their beneficiaries, which would have had very little chance of achieving long-term stability and prosperity without reforming their public finances and opening their economies. (It is a part of leadership to understand that people’s desires and their interests are not necessarily the same thing.) And now we are seeing a domestic version of that same drama playing out as basket-case states such as Illinois use the COVID epidemic as a pretext to try to finagle a federal bailout of their grossly underfunded pension systems and other obligations resulting from bad governance and bad decisions that long predate the coronavirus. Conservatives want reform, and Democrats denounce this as short-sighted and uncharitable. Democrats also charge that failure to assist spendthrift states and municipalities threatens the overall health of the economy even as they steadfastly refuse to make the reforms that might ease the way for such relief. That isn’t an honest position — that is hostage-taking.

We should not allow our generous impulses to lure us into imposing destructive policies (student-loan forgiveness leads the current list) or to lull us into accepting the ineffectiveness and dysfunction of the institutions we entrust with the public’s resources. It is a relatively easy thing for rich people, or a rich society, to look at someone’s Christmas wish-list and check off a few boxes, making everybody feel a little better. It is a more difficult and higher kind of philanthropy to build the kind of institutions — and the kind of society — that will help people to prosper in the long term. We need clear thinking on this, urgently.