Is there a tradeoff between growth and security?

You’re absolutely right, Justin. People can take bigger chances if there is a social safety net. And two comments on this:

1. It’s absolutely clear that the single biggest inhibitor to startup innovation in the US is the lack of health care. No engineering talent with family is going to leave GE, Microsoft, Merck, etc., to join a startup if they can’t get great health care.

2. This also reeks of classism. Frat boys with family resources can always start new businesses. But bright middle class kids, with no family money, student loans, etc., can’t interrupt salary. Like so many things in the US, it’s reverse meritocracy. Only the wealthy can own their businesses. The club is closed.

So a true free marketer would want a stronger safety net to encourage innovation and risk-taking behavior? So why are so many Republicans opposed? I would look at reason #2 above.

I don’t know that “frat boys with family resources” really are a core constituency of the Republican Party anymore, and obviously there must be some point at which expanding the safety net reduces economic dynamism. But yeah, building a safety net in a way that encourages risk-taking would be a good thing, if you can figure out how to do that.

“This sounds reasonable. There must be a tradeoff between dynamism and security, right? It just makes economic sense.”

We need to better characterize and quantify terms such as “innovation,” “dynamism” and “risk-taking.” As Volcker recently observed, financial innovation hasn’t really been what it was enthusiastically cracked up to be. As for risk-taking, we’ve just had an object lesson in how easily rewards are privatized and risks are socialized. And I suspect that one man’s economic dynamism is merely another man’s market volatility.

Justin said, “I’m not saying there’s no tradeoff at all. Just that it’s complicated, and that there are probably some methods of providing economic security (a well-run universal health care or pension system, say) that could lead to increased economic dynamism because they encourage people to make riskier job choices.”

Historically there have been such economic systems here in the US.

Specifically, Colonial Pennsylvania, New Jersey, Delaware and New York had developed stable, dynamic economies using the American monetary system developed by Benjamin Franklin in the early 17 hundreds.

Short of English currency and with little precious metal such as gold or silver to use as a medium of exchange, these four colonial governments issued their own paper script, established government owned and run banking systems, lent scrip at interest and used the interest as government revenue. Additionally, they created and spent script directly into the economy for public goods and services. The amounts they spent were calibrated to replace the interest paid on loans and to compensate for population and economic growth.

As a result of establishing a dynamic equilibrium between interest payment removing money from the economy and government creating and spending money directly back into it, these colonies had produced a stable currency and a sustainable economy. As an added benefit, they a government without the need for taxation or public debt.

Franklin reasoned that the system was a self regulating monetary system. If money was in short supply, people would make more loans, thereby increasing revenues and government spending. If there was surplus money in the economy, people would repay loans early to save money, thereby decreasing revenues and reducing government spending.

The four colonies flourished and the system worked very well until it was outlawed by King George. Franklin contended that the prohibition of colonial scrip and the resulting depression was the true cause of the American Revolution not taxes on stamps and tea.

[...] the relationship between dynamism and safety.  (Curious Capitalist, Felix [...]

[...] the relationship between dynamism and safety.  (Curious Capitalist, Felix [...]

[...] (no, not that one; this one), writing in National Affairs (via Michael Pettis) on the question, addressed here a couple of days ago, of balancing economic security with economic dynamism: Conservatives have [...]

The question is how you get the benefits without the excess volatility that’s now in the system.

This is the big question that I’ve been asking people for the better part of two years. It’s kind of the big fallacy that economists have been ignoring for a very long time. Much of the energy has been spent studying “averages” and not “volatility”.

Financial experts will make suggestions based on broad averages ignoring what happens if you fall into an outlier.

that there are probably some methods of providing economic security… that could lead to increased economic dynamism.

There are and this is definitely where the field of economics could learn some applied game theory.If you look at good games, they try to buffer out highly undesirable outcomes, but our current system fails at this.

Universal health care is a great idea, but I think there’s more than just that. Moving from 401k and employer pensions into self-guided investments like the Canadian RRSP or TFSA would make a nice difference for the middle and upper-middle class. Providing a government-secured pension or even a “default pension option” where all of your deposits are tax-deferred and automatically invested in government bonds would probably be a win-win. A “default retirement” option would definitely help the lower and middle classes.

The government should get out of mortgage lending and open up P2P lending to really make lending an open market. Credit reporting agencies also need some clean-up and transparency. Better credit reporting plus easily available P2P lending will open up more credit for small businesses, the type of “dynamism” we need.

And I think that’s just the tip of the iceberg.