(noun, etymology Dutch from ‘boedel’: estate, possession, inheritance, stock.). 1. Crowd, pack, lot, as in ‘the whole boodle.’ 2. a. Counterfeit money b. Money acquired or spent illegally or improperly, particularly when used in bribery for political purposes. 3. Slang for money in general.

Wel-Fairness (Part II)

Posted on: Oct. 2, 2012  |  By: Ronnie Kahn  |  Category: General

(continued from Planes, Trains, Automobiles, and Welfare States)

The question of when an individual should be protected from a risk, of course, comes down to economics.  It is obvious to most of us now that paying for someone’s food by giving out food stamps or paying for social security and Medicare when we are all living so long is putting a huge burden on the budget and on future generations.  However, this can also be reframed as a question of economic fairness.  Who are getting the benefits, are they being distributed fairly, and do we have enough to pay for them?

When it comes to welfare, most of us think of the downtrodden.  However, while the poor get food stamps and the working poor get the earned income credit, the middle has social security as well.  In addition, the wealthy are getting benefits by tax breaks and corporations are given “welfare” by trade agreements, relaxed regulations, contracts, and tax laws.  While many may believe in free markets, many corporations lobby government from not having to compete in certain ways or areas.  There have been firms that should have died off from financial evolution but they have been propped up by the breaks they get.  More and more money is flowing in to influence government to get these breaks and especially this has been ratcheted up now that corporations are given free speech rights from the Citizens United decision.  Income inequality stems in part from how each sector works into what breaks they are getting and what they do with them.  Many of the superrich come from the finance industry.  CEO’s are generally not paid by a fair market based transaction according to their skill and merit.  This can also be seen as a form of income redistribution since shareholders and stakeholders don’t get as much since there is less remaining.  Countries use welfare too.  It can be said that Saudi Arabia created a welfare state by buying off its citizens in order to avoid being swept up by the Arab spring.  There is a natural tension between democracy and Capitalism.  Democracy should be the territory of “the greater good” and welfare choices while money is all about everyone getting their own share.  It is in governmental regulations where these two butt heads.  Perhaps all the divisiveness in Washington is a good distraction so that everyone won’t pay attention to just how much the few are prospering over the many and how much money is flowing to politics.  Also, market activity does not protect someone from from oil spills, mortgage fraud, or even criminal behavior that would kill miners.  Winners and losers are all part of the welfare and governmental decisions that include the one and ninety-nine percent and come down to fairness.  The occupy folks claim that “We the People” is now “We the One-Percent.”

The question around welfare benefits extends to when is it too costly for a government to try and protect a risk, who should that risk be extended to,  or if that benefit is creating some type of dependency or expectation that governments are there to bail them out.  There are obviously far too many risks in this world and not enough money to cover them all.  If we spend vast amounts of money to fight fires in wooded areas where there are homes, is that also not a service extended only to those homeowners that all taxpayers are paying for?  With all the welfare state and governmental benefit discussions, there is an underlying concern for human behavior and feedback.  Social security benefits that are received by retirees today are paid for by current employees.   Disability payments are deliberately designed to only pay a portion of income so that the disabled will be motivated to get back to work and not stay on the dole.  Unemployment benefits and disability benefits are only given out in the short term.   The criticism is that this system doesn’t encourage savings along with the direct feedback of helping yourself but only creates a system of entitlement.  The social security system was designed to help those who would not have enough money when their work life ended.  Yet when those with plenty of money retire, they feel entitled to take their benefits since they paid into the system even though they may not need the money at all, although there are some tax ramifications for those that do have plenty of other income and then take the benefits anyway.

Everyone seems so concerned with jobs these days in that there aren’t enough of them.  Just as horrifying is that so many of the higher paying jobs in the U.S. have been replaced with lower wage jobs that the poverty levels just keep increasing so that more citizens have to be added to welfare.  In the middle, some persons decide to take jobs that probably are not their first choice in order to get pension, medical, and other benefits that offer security.  Although, the true defined benefit pensions are becoming rarer or those benefits are being cut back for solvency reasons there is still a strong case that pension and social security reform needs to be addressed.  The fact is that there aren’t enough current workers to fund retiree benefits.  This is because all of us are living so much longer and drawing benefits for way more years than the original formulas that were designed to figure how much was to be paid into and drawn out of the system.  This cannot be examined though without taking into account getting more and more individuals to have decent jobs.

In all of this, the narrative of what is risk and what society should be doing is part of our ongoing story.   First, there is still a natural tension between corporate profits short term thinking which pressures to keep wages down and having enough good paying jobs in the long run to provide a healthy economy.  Providing a strong education system and affordable child care for single parents are long term solutions.  In addition, there has become a bias to take the money and run with certain institutions and individuals who can game the system within a regulatory void.  On another behavioral and cultural narrative front, is government too big and welfare putting the burden on today’s younger demographic or should it be part of helping to solve for the greater good?  The problem with any cultural story that we tell ourselves is that the story does not account for the interconnections of today’s modern life.  When the financial crisis hit, it was caused by the moral hazard of so many bad loans and thirst for making a fast buck or a huge profit.  The problem was that with the global world of interconnectivity, bad financial decisions don’t just benefit the few but those who take advantage of the system cause ripple effects that can hurt everyone.  Some say the unemployment caused by the big recession will take a generation to get back to the “full” employment that was once commonplace before the crash.  Is this fair to those who had nothing to do with these loans, profits, and securities?  In this case, can we afford to look the other way or not change regulations that allow for another big meltdown?  While it is important to allow markets to float and go where they may even though that creates winners and losers, it is also crucial that markets are not allowed to be manipulated in such a way that amount to deceit, underhandedness, and cheating on a grand scale.  Although when it comes to having a handle on all things economic, we may be way past regulations that can allow for markets to be unfettered and to go where they may.  We have countries manipulating currency, trade, liquidity, and doing their own investing of funds and property that has gone beyond a way to trace cause and effect on our world economy.  Everyone is pouring money in to influence the political system in order to gain their share.  This is not to mention financial instruments like derivatives which add even more uncertainty and complexity by bundling their intricacy into layers.  The complexity of the world economy does not allow for calculable risk like an insurance company measuring death chances by using mortality tables.  Financial risk now has to be spoken of in contexts like “too big to fail.”  No one knows which markets and technology will be born down the road and which will die off as a result.  We are left with a world that cannot be measured and must come face to face that there is only one certainty, which is unpredictability.

While we cannot control all risks, we can realize the lessons of the financial meltdown that allowing system manipulation when we live in a globally connected world has the potential for long term calamity.  The list of unsavory financial relationships in the modern financial world goes on and on.  Banks have been caught bribing officials to get municipal bids.  Fraudulent loans and financial instruments caused damage to European countries whose recessions and unemployment then caused them to go into debt in order to cover their social safety nets like unemployment insurance.   When it comes to the interrelationship between “China” and “America” they seem to need each other now but no one knows how this twisted interrelationship will play out.  Who is the parasite and who is the host?  In the investment world, currently, there are numerous hedge funds that are unregulated and make huge winners out of their managers more than anyone else.  These funds are making big bets on markets that can affect all investors.  It is very easy for someone to set up a hedge fund that works fine in normal markets but then when the seemingly inevitable extreme circumstance happens, these under the radar funds can drag us all down.  They are allowed to use leverage that makes their losses even more dramatic.  This should sound familiar to any of our infamous past crises.  Also, just as in the 2008 crisis, the complexity of these interrelationships are little known.  The world has changed financially as we have all seen.  Extreme events can occur more often than we would like to believe.  We now know that bell shaped curves have been replaced by a stronger statistical probability of the radical fat tail fringe event.  Again, we are in a situation where moral hazard can do us all in when these outlying situations happen and those who take advantage of the system can bring us all down with them.  We will not be in a position where we can lower risk, like transportation safety, with the wave of a hand.  While this may just be Cassandra prophesy, does it make sense to allow these things to not be scrutinized?  If we don’t watch out, we will all be entitled to have a world where there is no risk left since with all this interconnectivity, no one but the scant few will have anything left to lose.

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