Informal Networks As Social Insurance

Lynne Kiesling

Nancy Folbre has an interesting post about informal safety networks on the New York Times Economix blog. She observes that during economic downturns, those in need of assistance can avail themselves of either formal public assistance or informal assistance through family, friends, and social networks. This coexistence of public and private has been with us for centuries. One point she made that I found particularly insightful is that the composition of families and networks have changed in ways that have changed the extent to which the unfortunate can avail themselves of private, informal assistance:

But today, more than 30 percent of American households are nonfamily households (people living alone or with unrelated people), compared with 10 percent in 1940, the first year the Census collected this information. Many of these households are cohabiting couples who share expenses, but are not legally required to help support one another. And many live a long distance from their families of origin.

Family households have also changed: In 1950, 88 percent included married couples; by 2007, only 75 percent. Many more parents, especially mothers, are raising children on their own.

She does then, however, go on to say that “Participation in voluntary associations — a popular measure of “social capital” related to reciprocity — declined sharply during the Great Depression.” She could be incorrect in the direction of causality, thought, and it is entirely possible, indeed likely, that the New Deal government programs of the 1930s crowded out such voluntary associations.

Folbre does discuss crowding out in the current context, but she makes an observation that I find puzzling:

Crowding out has some positive effects. It reduces demands on family members who may be struggling economically themselves and makes it easier for them to provide the personal and emotional support that public assistance can’t provide. But policy makers should look for ways to make formal and informal safety nets strengthen one another, a topic I’ll explore next week.

Here’s my question: how do you know that spending government money on public assistance is a better use of resources than having the voluntary, mutual, shared bond bear the responsibility, despite the demands on those who may also be struggling economically? For that to be true requires two things: it requires that the net effect of the taxpayer transfer is positive (i.e., the benefit to the recipient is greater than the loss to taxpayers), and that the reduction in pressure on informal networks is larger than the taxpayer transfer. I’m not convinced that’s true, and I’m also sure that no one working on welfare policy takes into account that calculation, let alone making some estimate of the calculation.

And that doesn’t even take into account the moral hazard aspects of the problem (the incentive that public assistance gives people to engage in less job search effort than they would otherwise).

I look forward to hearing her ideas for how formal public assistance and informal private networks can reinforce each other — can be complements instead of (imperfect) substitutes.


One thought on “Informal Networks As Social Insurance

  1. The net effect of voluntary associations is often positive for both the giver and receiver. Voluntary giving is encourages good behavior. Government giving is impersonal and often negative for the receiver encouraging dependency and reducing initiative. Government giving encourages frauds large and small. Government giving is demeaning to the receiver and ego inflating to the bureaucratic giver.

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