The Targetting vs. Universality Debate

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A key issue any future opposition government is going to have to deal with is a very old one in First World social policy, but one barely talked about in our public sphere: should the government extend new social benefits to everyone, or should it try to target them narrowly on those who “need them most”?

Pose the question in those terms, and the answer seems obvious: why would you spend scarce public resources on people who don’t really “need them most”? Intuition comes down heavily on the “Target the Spending” side of the equation, and people tend to then favor it instinctively, before working through the dozens of unintended consequences and drawbacks of a targetting regime.

There are two big, insoluble problems with targetting. The first has to do with work incentives: the more targetted social spending is, the bigger a disincentive it creates for people to work.

Just as an illustration, imagine a program that targets only those who really need it most: people with no money at all. Imagine the government says “ok, we’ll give you Bs.100 a month, but only if you have no other source of income.”

At that point, what happens to the incentives to work of people who, say, are only able to find a job that pays Bs.10 a month? Well, if you have to give up a Bs.100 benefit to get Bs.10 income…you’re just not going to take the job.

That’s not a very good program.So it’s back to the drawing board for the Social Policy maker.

Now he may say, “OK, we’ll give you Bs.100 if you have no income, but we’ll take away Bs.9 of that for every ten dollars in work income you get. So, if you’re offered a job paying Bs.10 a month, you will only get a Bs.91 worth of benefit that month. Your final take-home pay packet will be Bs.101 each month.

So now you do have “a reason to work” – that extra Bs.1 a month, but you will, in effect, be paying a marginal tax rate of 90% on your income up through the end of your eligibility for the benefit program.

People facing 90% marginal taxes do not work hard.

Follow that logic down the line and you come to realize the First Iron Law of Social Policy Design: the more targeted the social benefits, the bigger the work disincentives.

And then we come to the second fatal flaw of targeting: the more exquisitely you want to aim your social spending at only the people who need it most, the more you need to go poking your big fat government nose into poor people’s household finances to assess just how much they’re making.

Means testing” is the kind of thing even highly sophisticated, highly competent First World governments do badly. Bureaucracies typically find it onerously expensive to carry out, and subjects often find it inherently demeaning and unfair. Inevitably spawning its own sprawling bureaucracy rife with opportunities and incentives to cheat, a means tested welfare state is just not something amateurs ought to be messing with: it’s the 42 km. marathon of public administration; the Venezuelan state wheezes up a flight of stairs.

In fact, the policy that carries least work disincentives with it is a fully universal one: “we’ll give you this money however much or however little you work.” Only full universality avoids the trap of creating outsized disincentives for people on low-incomes who receive social assistance. Carry that thought a little bit further and you can imagine a policy where low earners get more benefit for working more – one where marginal tax rates are lower if you work a crappy job than if you don’t work at all.

They actually do that in the U.S.: it’s called the Earned Income Tax Credit. And it works rather well.

These debates are decades old in the welfare states of the rich countries, but largely unheard of in Venezuela. Part of me is convinced that, if the opposition does get into power in 2012, we’re going to be spending a lot of time and effort needlessly, painfully reinventing this wheel.

1 COMMENT

  1. Good point Quico. This is the case of the dental plan for welfare people in Québec: if you are on welfare, you get a dental plan paid by the goverment. If you are not, dental care is almost impossible to afford for someone on a small income.

    The other advantage of a Universal system is that when you pay high taxes, you’ve got the feeling that you are getting something back from the system, which makes you more interested in making it work.

    For instance, as I have said it before, I STRONGLY believe in Universal health care and I would demand my goverment to keep it free and universal, that is why I am paying high taxes for. For that, and for students to get lower tuition fees, or for young couples to get subsidized day care.

    Paying taxes just to maintain a burocracy, without the feeling that you’ll eventually get something in return (like in Venezuela) is counterproductive for a society.

  2. Nice post. Too short! 🙂

    Other advantages include the user-friendliness. For example, someone who suddenly comes upon hard times on top of what that already does to a person, won’t have to worry about doing the welfare line of shame, won’t have to worry about *if* the paperwork will be approved (think about it: having to *prove* in writing that you earn nothing is devastating to the psyche); heck, won’t even have to wait for the help to kick in.

    Another advantage is that the vulnerabilities for corruption or people falling through the cracks is diminished. “Gestores” will not find a business opportunity, nor will beggars make you think they’re completely destitute.

    Also, by receiving your own amount you derive a sense of confidence in the government, because it means everyone is receiving their amount, so the government is doing its job.

    In the economy, you’ll see consumptions shift real-time with the shifts in people’s (perceived) needs. This becomes the ultimate indicator of where government efforts need to focus in oiling the nation’s machinery, or where government needs to augment information and education for more sensible spending.

    Just to mention a few.

    I’m very glad every time you touch on this topic, because it is so permeating in all aspects of society that it deserves ongoing discussion from all its angles.

  3. There is an objective to Social Spending for people who like having civil liberties and citizens; which is just as important as the objectives of War for those who would rather have peace.

    To wit, to ensure that it is only a temporary state of things and that measures are marked “emergency”. That you will NOT become dependant, or say, addicted to it, as a solution of problems.

    If you don’t get peace, you might as well become irredeemably warlike (or accept destruction) as a matter of rational response. Figure what this means for Social emergency spending.

  4. I used to qualify for the EITC, and it was AMAZING. The first year I got it, I didn’t even know what it was until I was filling out my tax forms, and suddenly I find out I’m getting a $1500 bonus. Still boggles my mind to some degree. If you want to call it a simple handout, I beg to differ. I thought of it as a scholarship, because I used it (as a working Dad) to finish college. I really needed it at the time, but I only needed it for a time.

    It’s a brilliant concept, sort of like a check labeled “Thank you for staying off the welfare rolls.”

  5. Francisco,

    You are bringing up excellent points. We must provide a basic safety net. Our humanity demands it. However, the system must reward productivity, not deter it.

    Since we are discussing structural stability and efficacy, how about including some manner to reduce the power of the recipients of public largesse to vote themselves more?

    I have long believed that the concept of “one man, one vote” needs to be reexamined. We need to find some way to apportion the vote in a manner that brings each individual’s authority in line with their level of responsibility and contribution to society. Why can’t we combine the best aspects of democracy and meritocracy?

    • That kind of thing is really really tough to do fairly, but don’t let it stop you from trying, I’d really like to see it. On the one hand, it already seems to happen with money, campaign contributions in elections for example. On the other hand it really is painful to see a very large ignorant population making life worse for themselves AND FOR YOU because they ARE ignorant and vote for the loudest buffoon distributing candy.

      • FoxtrotCharlie,

        I can invent any number of mechanisms to accomplish this. How complex they would be would depend on the society’s sophistication and ability to manage them. The biggest hurdle to overcome is the fallacy that “All men are equal.”, which is a prima facie absurdity. The original concept was “All men are equal in the eyes of the law.” This was a necessary step to overcoming feudalism, in which persons were born into their station in life with little or no social or economic mobility. However, the concept was extended to mean some sort of Utopian ideal that all humans did indeed have identical abilities and potential, a premise not based on reality. We need to craft our social and political structures based on human nature as it is, not as we might wish it to be.

        • You are absolutely correct that all people are not equal, but equal or not, if they all vote, it gives us an incentive to educate everybody to be aware of their self-interests and to vote responsibly.

      • FC,

        Based on the trends in thumbs up and down, you can see the resistance to any change in “one man, one vote.” When I discuss this with people, I get agreement with the basic logic, but visceral opposition to change.

        We are long way away from being able to implement anything like this. Meanwhile, we will just have to muddle along with representative democracy as we currently know it, with greedy campaign contributors on one side and greedy masses on the other.

        • One man, one vote works best when there is a large, affluent, educated, and well-informed middle-class.

          Hugo Chavez got to power just by making big promises. That’s a very effective way to win elections when voters are gullible. Actually, I know doctors and lawyers and professors who voted for him just because he promised a universal pension plan.

      • Then strip the buffoon, forever of whatever discretionary powers he or she may have for giving handouts!

        Democracy is for electing public officials to manage ONLY PUBLIC affairs. That’s it. All. No more.

        Without individual rights it is only a sham. Using it to destroy individual rights is the most ironic accomplishment of totalitarianism in the modern age.

  6. I disagree. The current debate in social policy is not longer Targeting Vs. Universal, but rather if we can assess other future productivity gains to offset the disincentive to work you mentioned. It is how to use the policy tool to produce future human capital gains and break the poverty trap. The debate is how to design targeted income flows contingent to certain desirable behaviors. CCTs in one word. But, in any case, most countries have both universal and targeted programs. But for targeting, and targeting well, you need technical capabilities that are in a galaxy far, far away from Venezuela. To build those capabilities are in my opinion, a policy need far more urgent than the debate if we should focus our social spending because we CAN´T do targeting. Simply can´t.

    • Targeting could be effective when it provides enough support for people who are “desperate,” and in need of basic subsistence. Desperate people are time-bombs that harm the public tranquility and damage the fabric of civilization.

  7. Noting from some of the comments, perhaps a crucial missing point is that no ying system of distribution, whether targeted or not, will be without its yang system of recollection. Quico touches on this when he mentions the success of the Earned Income Tax Credit. It is the recollection system that is compensating for the pitfalls being mentioned of making the distribution universal.

    The key in any distribution/recollection pair of systems is that no one ever feels he is better off by not being more productive/efficient. If you consider cash as a disincentive to produce/improve, then think of it this way: under the universal approach, everyone gets exactly the same amount of disincentive, linearly, as opposed to giving it more to the least productive in the targetted approach.

    So why distribute these disincentives. There are many reasons but let me point out an often overseen reason: seed money. These “disincentives”, like in AIO’s case, are what give fuel to those that have enough incentive to produce/improve. Without it, those people would be less productive/improve less. Do we really want to prevent the AIO’s of Venezuela from receiving these monies for fear of the unmotivated deciding to remain unmotivated? Besides, even the unmotivated are helping get more monies to the motivated by spending on the goods and services that the motivated provide.

  8. Whenever possible, the government should provide jobs working on infrastructure. Especially on roads. I find it very frustrating driving by soldiers sitting on the sides of the road while navigating around potholes. The roads in Venezuela must be the worst in Latin America, and government is paying for people to sit on their butts rather than fixing the highways.

    • Gordo: Have you ever visited Costa Rica? When I was there a couple of years ago there was, among the many things that did impress me, one thing that stood out enormously.

      If you travel in CR (whose roads, BTW, make ours look like brand new 6 lane superhighways) there is one thing you will notice: very little trash on the side of the road. I am not saying there is none, but it takes a while to find it. This you see just about anywhere EXCEPT on their Caribbean coast.

      The Caribbean coast of Costa Rica is just like Higuerote 30 years ago, except the trash is everywhere you look. You literally will have to look INSIDE your car to avoid seeing trash (unless you are traveling with Lady Gaga, but that’s another story).

      I asked if the roads were kept trash free by somebody. Universally, I was told that no, no one has a job cleaning up trash from the roadside, they just know not to throw trash out the window.

      When you travel down HWY 32 from San Jose to the Caribbean coast, there comes a point where all of a sudden you start to see trash all over the place, just like in Venezuela. When you see the trash, you know you have reached the Caribbean coast of Costa Rica. When I asked about that, the usual answer was that that coast had seen a great influx of uneducated workers brought by the likes of Dole, United Fruit et al, from the Caribbean (Jamaica and Haiti mostly) at the turn of the 20th century. Decades of keeping those folks segregated and uneducated is the cause for their customs regarding trash, amongst other things. ( It was the only place in CR where I saw bars on every single window, a la Venezuela).

      So my point is this. There are certainly plenty of things in Venezuela that need fixing by creating jobs to fix those things. Bridges, roads, sidewalks, etc.

      But highway trash collection, being courteous and other behaviors will not be resolved by jobs, but by education.

      • Roberto,
        Thanks for the information. I have never been to Costa Rica. I have a truck-load of family in Venezuela scattered all over the country. I always hear how wonderful Costa Rica is, but I hate trash!
        My family throw bottles out the car window, and I complain to them vigorously! They seem to think it’s a privileged, like a civil right or something of that order.

        • Not only build them, but operate and maintain them. Maintain low toll fees giving the operator other sources of revenue, like rights to adjacent land to build gas stations and malls, local people then align their incentives with the operator because of the road become a source of jobs and revenues for them. Results: New roads, new jobs, low toll fees equals minimizing incentives to expropriate the infrastructure after is build.

          • Speaking as one of the house knuckle dragging types even I think that is a lousy idea. One of the very few jobs government does well (along with breaking things and killing people) is building transportation networks.

            Wait left out things government does well, Peanut Allotment, that’s really the most important of all.

      • For Goodness’ sake, don’t call it after anyone. Call it the A-12.
        Over one hundred (a third) of municipios in Venezuela are called after a military man, a few others after some other personalities. Our obsession with “big names” (I know, D. Barbara is just a book character) is just sick. Not in the USA, not in Colombia, not even in the former Soviet Union will you see something like that…perhaps in North Korea.

        A third of all states is called after a military honcho and one after one of the couple of decent presidents we had (Vargas, a doctor). There are also lots of places called after some forgetten “illuminati”. No more.

        Call it A-12 or the Apure-Amazonas Autobahn.
        Call it Tapahuecotomaica if you want. Let’s stop calling general locations and related things after people.

    • Actually, a comprehensive rail system to move people and goods would be better in the long run for the country.

      You would get a boatload of votes if you promised to remove 90% of gandolas from the nations ways.

      No question that there’s a TON of roadwork on the near horizon, but keep the rail in mind.

  9. Targetting money handouts does creates distortions, we cant deny that, but there are other progressive policies that are targetted towards a group of the population which could create no distortions, like trainning public employees to allow them to find a job and at the same time eliminate government bureacrucy. Another way to diminish distortions is to make it as if universally introduced program but at the same time charge higer taxes according to income in a linear fashion, linear fashion taxation must create less distortions than grouping individuals into the same category and charging taxes according to category or the regressive tax policy that quico suggested in his article origginally. But im sure that was just to make his point easily understood.

    • Rafael Seekatz,

      I agree with your comment’s principle. Note, that your example of targetting, however, implies giving the money to the trainers so that they train the ones that you really want to target. Then it is expected that the targets go get jobs on their own. (By the way, if you follow the money you’ll notice that the jobs will be at the companies that do the training.)

      So, as usual, the government program would make life easier, directly, for those who already have a job, and, indirectly, help the targets by letting them help themselves after their training.

      Contrast this to giving the money to the targets and letting them pay for the training themselves, giving them the option in what to train, and with whom to train, or if training is at all what they need the most to pull themselves up by their bootstraps.

  10. More important, we have to produce a SUSTAINABLE system… Which means that we have to produce an economy that makes it possible to CURE poverty, NOT just ALLEVIATE it. Or better, an economy that enables people to CURE THEMSELVES out of poverty through work and savings/investment.

    The debate about TARGETTING or no targetting should really be the debate about the creation, in a direct (employment, productivity) and indirect (revenues and taxes for the State) manner, of the right conditions for a sustainable society and State.

    For that reason, it would be infinitely better to have economic and legal stability and low inflation at the expense of any “Social Policy” than the inverse situation. More glory to you if you manage to have both.

    • loroferoz, exactly. The way for there to be jobs is to make sure that money gets to those who provide the best goods and services so that they can grow and expand, thus provide more jobs.

      Which of the following two is better:

      A) let the government spend the money on whomever the the government decides they want to grow and expand, hoping that this will get the people in poverty hired.

      B) let the people spend the money on whomever they as consumers think provides the best goods and services, which will help them grow and expand, hoping this will get the people in poverty hired. Oh, wait, there wouldn’t people in poverty anymore…

      • I have to agree with B), given the dismal to horrendous track record of ANY one Venezuelan government since 1976; in producing development.

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