This is from a paper which Professor Brozen of the Graduate School of Business, University of Chicago, delivered before the Mont Pelerin Society, Tokyo, Japan, September 9, 1966.
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society…. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.
ADAM SMITH, The Wealth of Nations
Economics has been characterized as the dismal science. However, the two main questions occupying economists belie that description. Classical economists concerned themselves with the means for enlarging income — with the causes of the wealth of nations — and with the determinants of the distribution of income. Neoclassical economists focus somewhat more narrowly within these larger questions on the causes of waste and how to improve welfare by eliminating waste.
The classical group did not neglect the analysis of causes of waste. They dealt with the welfare consequences of state intervention in international trade — the effects of the imposition of tariffs and of trade and navigation acts. They also pointed to the welfare consequences of state intervention in the internal economy — interventions such as the creation, by royal grant, of monopolies of soap, playing cards, salt, and so forth.
The fact that classical and neoclassical economists thought progress possible — that the lot of man could be improved by enlarging resources and by better utilizing the available resources—makes economics an optimistic science. It was the discussion of Malthusian demographic propositions that led to the characterization of economics as a dismal science.
Malthus, and footnotes to Malthus added by Marx, the Webbs, the Fabian socialists, and others such as the proponents of the iron law of wages, created the notion of a permanently depressed class doomed to a subsistence level of life. This was a major excuse for proposals for intervention by the state, although it is hard to see how believers in Malthus and in the iron law of wages could conclude that redistribution of income would cure poverty. All it could do, if the logic of this view is accepted, would be to doom everyone to poverty instead of the laboring classes alone.
Many modern interventionists, such as the members of the Ad Hoc Committee on the Triple Revolution, use the same stale excuse for state action as nineteenth century Marxists and the Fabian socialists, with some change in the supposed reasons for expecting a permanently depressed class growing ever larger.1 The modern version propounded by these dismal scientists argues that automation is dispensing with the need for labor services and that cybernation is leading to the development of "a permanently depressed class… in the United States."2 Old clichés apparently never die nor do they fade away.
The Goals of the Welfare Statists
Welfare statists are as diverse a group as any other. It is, therefore, difficult to ascribe to them any creed on which there is monolithic agreement. There are some goals, however, which apparently have a high priority with most. The most recent, and the oldest, around which they coalesce is the elimination of poverty and of temporary distress by state action. A few poetic souls among the socialists, such as George Bernard Shaw, have suggested that poverty be eliminated by shooting the poor.
Although the elimination of poverty is a goal which the welfare statists have appropriated as if it were their own discovery, economists of a liberal persuasion (in the European sense of liberal) have long held this same goal.³ It is the means for accomplishment on which liberals and interventionists (welfare statists) differ rather than the goal.
The modern welfare statist, at least in the United States, even appears to subscribe to the statement that "the common man or average family has a far greater stake in the size of our aggregate income than in any possible redistribution of income." This is certainly the opposite of the refrain of the English welfare statists of the late 1940′s who thought that the economic problem was not one of increasing production but only one of redistributing the available output. Growthmanship and the urge to direct the economy in paths which maximize the rate of economic growth have become common to the welfare statists. Economic growth is now an important goal among the welfare statists as well as the elimination of poverty and the achievement of greater equality in the distribution of income.
Consuming What We Should
In addition to these goals, there is a very large group among the welfare statists who are also interested in seeing to it that we consume the right things. Cars with tail fins, heroin and other narcotics, useless (however the term may be defined) drugs, the sight of ugly (however that term may be defined) or ramshackle buildings and junkyards, books which are improperly advertised, inartistic television programs, and abstract paintings are proscribed. Orchestral and dance performances, provided they are of the proper variety, representational paintings, statuary, visits to state-owned parks (unless they are outside the national boundaries), and the consumption of educational and medical services are promoted. The most influential groups promoting the interventionist or welfare state are not those who believe in the welfare state because of any ideals relating to the improvement of the lot of the poor and the distressed or the promotion of the brotherhood of man by compressing the differences among them into a semblance of economic equality. They are a disparate set of groups, each interested in enhancing its own material status, even at great expense to others provided some drop of material gain emerges for it. Taxicab owners, in the name of improving the condition of taxicab drivers, persuade city councils to limit entry into the taxicab business. Northern textile mill operators and unions, in the name of helping the poverty-stricken employee and with the aid of the welfare statists, bludgeon Congress into passing minimum wage legislation. Real estate operators, contractors, and building trade unions, in their passion to improve the housing and condition of slum dwellers, eagerly promote governmental appropriations for urban renewal. Railroad, trucking, and barge line interests, in the name of providing essential transportation services for small businessmen and farmers on a nondiscriminatory basis, support transportation regulation with indefatigable zeal. The special interests, from sheep rancher to stockbroker, find the interventionists to be handy, if unwitting, allies. These allies serve as front men and as a smoke screen to obscure their intent and the damage they do to the general welfare when they use the state to serve their special welfares.
More Harm than Help in Welfare State Programs
This melange of specific measures is certainly recognizable to most economists as damaging to the general welfare. A minority recognizes that these measures cause some of the poverty which concerns us. We need not tarry long over the fact that these measures damage the general welfare, on net balance, although they may enhance a host of welfares. Of course, when I say that the general welfare is damaged, I include in the general welfare the welfare of the benefited groups. The damage to others is greater than the gain to those benefited.
I should add that abolition of a large group of these measures simultaneously could produce a net benefit for any one of the groups which would lose from the abolition of the specific measure directed to its welfare and benefit. The producer of price supported cheese and milk could find himself selling in an even higher priced market or producing at a lower cost if transportation regulation, minimum wage laws, union-supporting legislation, tariffs, and so on were abolished along with agricultural price support programs.
Some of these measures, which may have produced short-run benefits in the past, may now damage the very people they once benefited. Textile workers may have had a rise in wage rates relative to what they otherwise would have been paid after the passage of tariff legislation imposing import duties on textiles. However, wage rates earned by textile workers in the United States today are probably lower than they would be without tariffs. Our export industries today are high-wage industries. To the extent that tariffs limit the dollar earnings of those who could otherwise sell more to the United States, they have limited the demand for U.S. exports and the number of jobs at high rates in the export industries. As a result, U.S. export industries are not recruiting textile workers as aggressively as they would without the tariffs, textile workers are not shifting as rapidly as they otherwise would to high-wage jobs in export industries, and their wage in textile work is lower than it would be if export industries were bidding more aggressively for their services.
Although we know that minimum wage laws hurt the poor by costing them jobs, that agricultural price support programs hurt the poor by raising the prices of their food, that transportation regulation hurts the poor by preventing industry from moving to disadvantaged regions where the poor live and increases the cost to the poor of migrating to the regions where better paying jobs can be found, that union supporting legislation hurts the poor by permitting union power to grow to the point where it can be and is used to restrict the entrance of the poor into higher paying occupations, that urban renewal appropriations hurt the poor by forcing the slum dweller out of low-priced housing into higher priced housing, that regulation of the field price of natural gas increases its price and the price paid by the poor for cooking and heating fuel, that usury laws make it more difficult and expensive for the poor to obtain loans, that subsidizing subway fares benefits property owners in mid-town locations rather than the poor who ride the subways,’ where is the welfare statist who opposes these measures and calls for their abolition?
Instead, the welfare statist simply argues more urgently for more poverty programs, more job-training facilities and support, more generous relief programs, still more subsidies for the items he regards as important in the budgets of the poor, more grants to educational institutions and more educational establishments operated by the state, longer periods of compulsory school attendance, and the like. The welfare statist could do much for the poor by working to abolish the measures that add up to a state-of-many-welfares and lowered general welfare.
Here, then, is an important difference in the means of the interventionist and the means suggested by liberals for assisting the poor to greater affluence. The interventionist proposes specific assistance measures for the poor. These essentially aim at trying to offset the damage he has unknowingly created with his melange of state measures benefiting special interests. Job-training programs, unemployment insurance, old-age assistance, aid to dependent children, public aid, the Job Corps, volunteers in service to America, area redevelopment programs, to name a few items from the menu of the welfare state in America, serve primarily to partially offset, for some groups, the damage done by earlier interventionist measures.5 The liberal, on the other hand, proposes to release each man’s drive for self-improvement and each man’s willingness to contribute to the welfare of others when his activity also contributes to his own welfare. He proposes to remove the barriers to self-improvement and to private contributions to welfare. He proposes the provision of opportunity for self-development and the development of independence where the welfare statist proposes measures which not only are less efficient but which contribute to an increase in dependency and a decline in the rate of growth and the level of national income.
Welfare Generation by Non-State Activity
Activities which improve the lot of the poor undertaken for self-interested reasons apparently are suspect to the welfare statists. The motive is wrong; therefore, the results are unacceptable. Those furnishing cheaper provisions for the poor or job training and better paying jobs because they hope to profit by doing so are not acceptable. Presumably, a Peace Corps volunteer who teaches an illiterate Brazilian to read without hope of profit is doing more for the illiterate Brazilian than General Electric do Brasil when it hires teachers to teach the illiterate members of its work force to read in the hope that it can reduce its supervisory costs and increase its profits. The end result is the same. Illiterate Brazilians learn to read. But the motive is different. Somehow that means that the Peace Corps volunteer has contributed to the welfare of poor Brazilians and G.E. has not. The Peace Corps volunteer was not motivated by self-interest (except to the extent that he desires travel and adventure and instant status at minimum cost) while G.E. was motivated by a lust for profit.
Many of the proposals of the welfare statist simply result in the substitution of state activity for private activity without any net gain in the welfare generated. The welfare statist proposes job-training programs for the unskilled poor with the purest of motives -to uplift the downtrodden. He proposes the expenditure of tax funds to train taxi drivers, which reduces the outlay by taxi companies to train drivers. He proposes the expenditure of tax funds to train filling-station attendants, which reduces the outlay by refiners to train attendants.
Does the expenditure of taxmonies do more for the newly trained drivers and attendants than that of private funds? The answer to this question must become embarrassing to the welfare statists when tax funds are devoted to training ship stewards who then find no jobs available even for many with long experience. At least, company funds are used for such training only if some use will be made of the investment in job training. But the welfare statist seems to think no contribution to welfare occurs when profit motivated expenditures are made, while a great contribution occurs if the funds are taken by the state and then expended under state aegis.6 Yet the net improvement in welfare even if we consider only the welfare of the poor is, in many cases, greater if the funds are left in private hands.
No Faith in the Directions Offered by the Open Market
The welfare statist apparently wants to produce economic growth, increased equality, and improvement of the lot of the poor by direct intervention and governmental direction rather than by using or permitting impersonal social forces to produce these same results. Some of them obviously do not understand how normal market forces and normal evolution can produce the desired results. Others, particularly the political types, may understand this but either wish to use direct measures in order to obtain credit for the results or in order to build their power.
If economic growth is desirable, and that is the excuse for much interventionist activity and for many discriminatory or non-neutral tax laws, it is likely that as much or more will be generated (by the private economy) with fewer interventions and a more neutral tax structure than is the case in most countries which have inaugurated interventions and distorted their tax structure for the avowed purpose of stimulating growth.? Usually, these measures have a double purpose of achieving both more growth and more equality. Yet, they frequently negate both purposes.
The passion for equality, which appears to be the basis for imposing both property taxes and corporate earnings taxes on property income in addition to the personal income tax while only the personal income tax is imposed on wage income, would be better served by a neutral tax structure than the present non-neutral structure in use in most countries. With less attempt to use state power to compress the inequality in the distribution of income, inequality would diminish more rapidly. Low wage rates would rise more rapidly with a higher rate of saving and capital formation, and inequality would diminish with the rise in income of wage earners. Instead, the welfare statists are attempting to diminish inequality by slicing down the top with some redistribution to the bottom. Inequality has been diminished by the tax and transfer structure, but by less than it would be diminished in a short time by the evolution which would occur under a neutral tax structure with less intervention by direct means.
The Nonadditions to Welfare Produced by the Welfare State
Inasmuch as a very large portion of welfare expenditures in the United States is for the benefit of those who are taxed to provide the funds, the tax structure is imposing a very large burden with very little redistribution. Elimination of state use of funds to provide people with what they could and in most instances would buy for themselves if their funds were not taxed away would contribute to more rapid economic growth, a more rapid rise in the incomes of those who receive less than $3,000 per year — the official poverty line for families of four in the United States — and an increase in the equality of income distribution through the forces of normal economic progress in free markets.
As Professor Lampman has remarked, with $100 billion of transferred income in the United States, $81 billion of which is financed by taxes, "how can we explain the fact that there is any poverty left in the United States?"8 The explanation lies in the fact that a major part of the transferred income does not go to the poor. It goes to people in the form of services which they are quite capable of buying for themselves and money grants which have been described as "poverty programs for the well-to-do." The agricultural program (a poverty program for rich farmers) is an example of the latter. Free services provided by publicly maintained educational institutions are an example of the former. In 1964, of the $28 billion of tax money spent on publicly operated educational institutions, only 18 per cent of the services were provided for the 28 per cent of the population who are classed as poor on a pre-transfer income basis (only 18 per cent of the population were classed as poor on a post-transfer income basis). In my own state, estimates have been made which indicate that the publicly operated universities take more from the poor in taxes than they provide to them in services. Charging for the services of these universities and removing their tax support would increase the incomes of the poorest part of the population relative to the incomes of those who are relatively well off.
Relief for the Affluent
A number of other government enterprises presumably devoted to the task of redistributing income by providing subsidized or free services for the poor perform in much the same way as the publicly operated educational institutions. They provide a very large portion of their services to the well-to-do who are capable of purchasing these services with their own means. Electricity and telephone service for well-to-do farmers and suburbanites are subsidized by the Rural Electrification Administration. Electricity for poverty-stricken corporations such as the Aluminum Corporation of America and the Du Pont Company is subsidized by the tax free status of the Tennessee Valley Authority (27 per cent of the price of electricity goes to pay the taxes imposed on privately operated utilities). Irrigation water for well-to-do farmers is subsidized by the Bureau of Reclamation and by the city poor who are overcharged for water to pay some of the losses on water furnished for agricultural purposes. Subsidized loans to home owners, to farmers, to small businesses, to maritime operators, to railroads, and so forth are subsidies for the well-to-do. We are even proposing to subsidize middle income apartment renters— where a middle income is defined as $8,000 to $11,000 per year.
A very large portion of the welfare provided by the welfare state simply provides a substitute for what those who receive the services were buying for themselves or would buy in their present circumstances. To this extent, the welfare state has not increased the welfare available in our society. To the extent that the state-provided substitutes are inferior to what people were providing or would provide for themselves, there is a welfare loss. Inasmuch as state-provided services tend to be uniform and are not adapted to the desires of those receiving the services, a very large portion of these services are inferior to what people would purchase in a free market in which firms must compete for customers.
The Welfare Losses Generated by the Welfare State
As indicated above, much of the officially defined poverty found in the United States is a consequence of attempts to increase by state intervention the share of the national income pie received by various groups. These interventions have taken such forms as controlling relative prices to make them different from what would be found in a free market or by changing relative private costs by such means as differential tax rates. To produce some of the hoped-for changes, the state has limited entry in some markets or delegated the power to private groups to limit entry. It has provided goods below cost, and increased the prices of other goods to above their social cost.
The deleterious effects on the size of the national pie of interventions which change relative prices and costs has led some liberal economists to suggest that it is preferable to increase the size of the slice received by various groups by direct income transfers. This, presumably, would have a less harmful effect on the size of the national income pie available for slicing. Such transfers are presumed to avoid shrinking the pie which has the result of shrinking the size of the slice received even when it turns out to be a bigger share of the shrunken pie.
What is too often forgotten is that even income transfers may shrink the pie by as much or more than the amount of income transferred. Income transfers conditioned on the recipient falling below some designated income level also effect relative prices — the price of leisure relative to other goods. There is evidence that many of the poor in the United States are poor in pre-transfer income because they are paid to be poor. As Pigou once remarked, "If… it is understood that everybody’s income will… be brought up by State aid to, say £3 a week, it will, generally and roughly, be to the interest of everybody capable of earning by work any sum less than £3 a week to be idle and earn nothing. This must damage the national dividend."9
When It Pays Not to Work
A study of the effect of the level of public aid payments on the number of persons requesting and receiving such payments in the United States in the 1950′s indicates that a very substantial proportion of those on the welfare rolls are "not on assistance due to zero wage alternatives." The higher the level of public aid to each recipient, the larger the number of people who choose not to work. The proportion on public aid rolls in the 1950′s who were "not on assistance due to zero wage alternatives" averaged nearly 50 per cent over the decade. The level of assistance payments may have accounted for as much as 87 per cent of those on public welfare rolls in one year.¹º
A study of experience with unemployment compensation in six states reached a similar conclusion. The higher the level of unemployment compensation relative to take-home pay from his last job, the longer an unemployed worker remained unemployed.
Still another example of the decline in self-support and national income resulting from income transfers is provided by a study of the economics of vocational rehabilitation. Vocational rehabilitation investment returns $10 to $17 in present value of enhanced future earnings for every one dollar invested. However, the net private return to the disabled is very much less. As a consequence, most of the disabled choose not to invest in rehabilitation. Earning an income would mean the sacrifice of their social security disability payments, their public assistance receipts, or their workmen’s compensation."
Here, then, is a second element in the answer to Lampman’s query, "How can we explain the fact that there is any poverty left in the United States?" despite $100 billion of transferred income. The more income that is transferred to the poor, the larger the number of people who will choose to be poor. A program to alleviate poverty such as direct grants to the poor creates more poverty to be alleviated. A reduction in the level of welfare payments will also reduce the amount of poverty.
Our sovereigns in the United States have been so intent on extending state benefits to each petitioner and have paid so little heed to costs, to the nonrevenue yielding burden of taxation, and to the consequences for general welfare that the welfare state as it is operating is reducing the general welfare. General welfare has been reduced by an amount such that the larger slice obtained by some is of such a shrunken pie that most of the successful petitioners are worse off. In addition, the goals of the avowed welfare statists have been poorly served by our welfare state. Admittedly, there has been a net redistribution of current income in favor of the poor as a result of public assistance payments and the transfers within the social security system. However, even these measures have had undesirable consequences. They have produced a state of dependency which is being handed on within families from generation to generation. They have forced early retirement for many who would prefer to go on working, but choose not to do so since benefits would be sacrificed under the rules enforced. They have created the poor, measured by pre-transfer income, since it pays to be poor.
The small measure of redistributive success accomplished by our welfare state has been accompanied by great inequities, by a failure to stimulate growth (a debatable goal for a state, however acceptable as a matter of individual choice), and by a great waste of resources in attempting to force the consumption of items judged superior by the welfare statists. Even the recent medicare act seems to be resulting largely in the substitution of payments by the state for medical services for those over 65 which were formerly paid for privately. The redistributive effect has been small while the illusion of state benefit has been large.
The welfare statists have succeeded in injecting the state into a multitude of activities ranging from city-operated trash collection services to patronage of the performing arts, but it appears that at best they have substituted public activity for private.¹² More likely, they have diminished the speed of movement toward the goals they profess to serve. At the very time when more symphonic performances under private support were occurring than ever before, more students were in college than ever before, more people over 65 were receiving medical services and were insured against medical disaster than ever before, more effort was being expended on gardening, landscaping, and other forms of beautification than ever before, the welfare statist found that not enough was being done and forced an enlargement of the state role in such activities. At the very time when inequality has lessened and poverty has moved closest to disappearance, the welfare statists suppress the means which brought about this happy state of affairs and inject the state, the device whose iniquitous effect on the wealth of nations was discovered two centuries ago and with whose declining role in economic affairs was associated the greatest flowering of affluence for the masses.
It is the free market which socialized the genius of Edison and Steinmetz and a multitude of others. The state has typically been a device for producing affluence for a few at the expense of many. The market has produced affluence for many with little cost even to a few. The state has not changed its ways since Roman days of bread and circuses for the masses, even though it now pretends to provide education and medicine as well as free milk and performing arts. It still is the source of monopoly privilege and power for the few behind its facade of providing welfare for the many — welfare which would be more abundant if politicians would not expropriate the means they use to provide the illusion that they care about their constituents.
1 "… over 20 per cent of the American population is exiled from the abundant economy and this percentage will grow… in coming years." R. Theobald, Free Men and Free Markets (New York, C. N. Potter, 1963), p. 20.
2 R. Theobald, "The Threat and Promise of Cybernation," Main Currents, September-October 1964, p. 5. See Y. Brozen, Automation and Jobs (Chicago: Graduate School of Business, University of Chicago, 1965), p. 22, for an empirical refutation. Also, R. D. Friedman, Poverty: Definition and Perspective (Washington: American Enterprise Institute, 1965).
3 ".. the chief motive of their I the Physiocratsl study was.. to diminish the suffering and degradation caused by extreme poverty. They thus gave to economics its modern aim…" Alfred Marshall, Principles of Economics (London: Macmillan and Co., Ltd., 1930, 8th ed.), p. 757.
4 A discussion of the damage done by these various measures and references to several studies of their net effect can be found in Y. Brozen, "The Revival of Traditional Liberalism," The New Individualist Review, Spring 1965 (Vol. 3, No. 4).
5 Estelle James points out that "a major rationale for future government activity is past government activity." Review of The Economics of Vocational Rehabilitation, American Economic Review, June 1966 (Vol. LVI, No. 3), pp. 640-42.
6 The Department of Interior, in its suit attempting to block the construction of a dam by the Virginia Electric Power Company for which it had received a license from the Federal Power Commission, argued it would be better if the dam were never built than to have it erected by a private group.
7 E. S. Phelps, Fiscal Neutrality Toward Economic Growth—Analysis of a Taxation Principle (New York: McGraw-Hill Book Co., 1965).
8 R. J. Lampman, "The American System of Transfers: How Does It Benefit the Poor?" (mimeographed, no date).
9 The Economics of Welfare (London, 1952, 4th ed.), pp. 731-32.
10 C. T, Brehm and T. R. Saving, "The Demand for General Assistance Payments," American Economic Review, Dec. 1964 (Vol. LIV, No. 6), p. 1017.
11 Estelle James, op. cit., p. 642.
¹2 One of the results of the poverty program in the U.S. is that many private philanthropic organizations have been stripped of skilled personnel who have been hired away to administer public programs.