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Social welfare is a mechanism for redistributing resources

Since social welfare is a mechanism for redistributing resources from those in a society who have assets to those who do not, under what conditions do you think that social welfare is justifiable. Identify categories of people that you believe society should assist and categories of people that society should not assist. How do these groups of people differ? How are they alike? Please respond to at least two others in your class.

Sample Solution

. Thus, if a family bought a 1929 Ford Model A, they were more likely to maintain their installment payments so the car would not be repossessed. Making regular payments was crucial, especially since the plans often took up a significant portion of a family's disposable income. "Auto prices were 20 to 60 percent of average annual disposable income, pianos cost about one-third of disposable income, and refrigerators and stoves were 5 to 10 percent of disposable income," (322) Olney writes. Maintaining a wealthier lifestyle was costly, but worth it to these families. Unfortunately, because it was expensive for families to default, they chose to reduce their consumption instead, which hurt the economy overall. Unwilling to give up their cars or refrigerators, households kept up with their payments. "Well below 1 percent of auto contracts held by CCC in 1930 were 60 days or more past due, a lower percentage than had been past due in 1925, 1926 or 1927. Refinancing existing contracts also appears to have been uncommon in 1930," (326) Olney said. Instead of default, families with burdensome contracts had few choices: Selling the good and using the proceeds to pay off the contract was ruled out by most installment contracts. Liquidating other assets would have been difficult both because aggregate saving rates had fallen and because installment debt was used most often by young households who had little or no accumulated savings. [Also] increasing the family's wage income was problematic because aggregate employment was declining, hours were falling [and] wages were being cut (328). The only thing families could do to earn more money on the side was to sell groceries or clothes - which provided relatively little money - or to reduce consumption of other goods so they would have more money to make the payments. After the stock market crash in October 1929, families faced greater income uncertainty, but did not change their debt payments "because default would have triggered wealth-reducing repossession" (Olney 333). As a result, "families reduced consumption in nearly all spending categories" (Olney 333). For a typical American family burdened with debt but not willing to hand over the car keys they had worked for, reducing their consumption of food and other goods was the best policy. But when millions of families followed this debt-avoidance pattern, the nation's consumption declined precipitously. Olney estimated that if "25 percent of families were using installment credit, their fear of a wage cut will lead to a fall in aggregate consumption of 3.0 percent" (333). Their spending cuts were across the board: "Food and tobacco spending fell in real terms by 2.2 percent" while personal business declines, "transportation, household operation, clothing and food together accounted for nearly 97 percent of the change in total consumption expenditure" (Olney 329). Ironically, when default became less expensive during the 1938 recession, consumption did not decline as severely. But at the start of the Depression, the consumption decline rattled the nation. As Christina Romer said, "between the peak and the trough of the recession, industrial production in the United States declined 47 percent and real GDP fell 30 percent" (Romer 1). In contrast, GDP only declined 2 percent during the recession of 1981-82. For families, a life of luxury now seemed out of reach. Few could avoid being caught up in the splendor of the 1920s, as money could be made with borrowed cash and luxury items could be bought on credit. But the speculative excess contributed to the dismal era of the 1930s - for the first time America saw bread lines and unemployment at 25 percent. But are America's speculative booms and busts inevitable? Galbraith thinks so: "Th
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