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Monday, February 29, 2016

What Milton Friedman Got Right (And Wrong) about Welfare

In 1972, Friedman started a debate that's still raging

As you may recall, Milton Friedman debated former Health, Education, and Welfare Secretary Wilbur Cohen on means-testing Social Security back in 1972. Now let’s check out the Friedman highlights. The Great One begins with his characteristically brilliant contrarianism: Public opinion notwithstanding, Social Security, not welfare, is the policy disaster.

Widespread dissatisfaction with the public assistance program — with the so-called welfare mess has produced numerous proposals for drastic reform, including the President’s proposed Family Assistance Plan now before the Congress. On the other hand, general complacency about social security is reflected in pressure to expand it still farther.

My own attitude toward the two programs is almost the reverse. Bad as the welfare mess is, at least public assistance does go mainly to needy persons who are at lower income levels than the persons paying the taxes to finance the payments. The system badly needs reform but, at the moment, it serves an essential social function. It seems impossible to eliminate it promptly, even though its elimination should be our long-term objective.
On the other hand, social security combines a highly regressive tax with largely indiscriminate benefits and, in overall effect, probably redistributes income from lower to higher income persons. I believe that it serves no essential social function. Existing commitments make it impossible to eliminate it overnight, but it should be unwound and terminated as soon as possible.

Friedman’s probably wrong about the net redistributive direction of Social Security, but his core point is sound: Taxing everyone to help everyone is madness. More:

I believe that a program which is going to give income to people, which is going to give funds to people, should have a means test. I believe we have a responsibility to the taxpayer and not only to poor people.

I believe that the person who pays taxes has every right to require that, if he pays the taxes in order to help somebody, there be some evidence that that person needs help.

Friedman’s ultimate response to Cohen’s “A program for the poor will most likely be a poor program” argument:

A program of that kind would be vastly less expensive than the ones we’ve now got. It would do a better job of helping people. In my view, the task of people like Mr. Cohen and myself is not to speculate about what people will do if they don’t have leadership but to try to provide leadership in order to obtain the kind of good program that would achieve our objectives.

Overall verdict: While I’m glad Friedman takes my side on means-testing, his arguments are disappointing.

He doesn’t clearly compare much less measure the disincentives of means-testing versus the disincentives of taxes high enough to fund universal programs. He doesn’t ponder alternative measures of “means” (income, wealth, expected lifetime income, etc.). He doesn’t emphasize the obvious fact that most Americans are perfectly capable of saving for their own retirement. And he doesn’t drive home the overlooked fact that retired home owners with zero cash income only look poor. They can and should be expected to support themselves out of their home equity.

P.S.: If you think of Friedman as a strict Chicago School utilitarian, think again:

Mr. Cohen’s view, one which unfortunately is very widely held today, is different. It treats the nation not as a collection of individuals and of the groups which individuals separately value, but as an organic unit. In his paper, Mr. Cohen says: “I speak for the view that the nation should be generous toward the elderly.”
I would argue that the nation can’t be generous to anyone. Only people can be generous. Generosity is a human, individual trait, not a collective trait. There is no generosity involved in my imposing taxes on you to help him. That is not generosity.

Cross-posted from Econlog.

  • Bryan Caplan is a professor of economics at George Mason University, research fellow at the Mercatus Center, adjunct scholar at the Cato Institute, and blogger for EconLog. He is a member of the FEE Faculty Network.