All Commentary
Wednesday, May 13, 2020 Leer en Español

Why Forced ‘Charity’ Is Bad Economics

Charity is personal, and we should keep it that way.

Photo by Perry Grone on Unsplash

“[E]conomics tells us that the dominant motivation [behind charitable donations] is the internal satisfaction that individuals derive from the act of giving itself.” That was the conclusion of a 2005 article ‘The Economics of Charitable Giving: What Gives?’ published by the Federal Reserve Bank of St. Louis.

Fulfillment from Charity

I couldn’t agree more. Just like freedom is a fundamental desire of every human being, so is the desire to help fellow humans. Individuals express charity in many other forms such as support towards animal welfare, nature conservancy, promotion of arts, incentivizing fundamental research, and environmental causes.

Not to be a cynic, but the fulfillment that charity brings to people is just like any other service. We pay a price to watch a movie or have a great time at an amusement park like Universal Studios. In return, we get the satisfaction of great memories. In the case of charity, the price we pay brings us fulfillment.

So, why is it important to view fulfillment derived from charity just like any other commodity? Because then economists can apply their theories and have fun! (*huge economist grin*)

Let’s consider two thought experiments. First, how would you feel if your desire is to buy a Lexus sedan with your money, but you are forced to buy a Hyundai sedan instead for the same price, even though the Hyundai sedan is priced much lower in the market? Second, let’s say you get great satisfaction by donating your money to the Wounded Warrior Project. However, you are instead forced to donate that money to help with protection of Indian Rhinoceros’ habitat. How does that make you feel?

Both thought experiments are similar. Buying a Lexus sedan and donating to Wounded Warrior Project are your personal choices. That is why charity is personal! If you are instead coerced to donate to charities that you do not relate to, then you do not derive equivalent fulfilment out of that donation.

Welfare Policy

How is this relevant to public policy? Think welfare policies.

Welfare policies are “charity” forced upon people by politicians and bureaucrats who forcibly take away your earnings and wealth, and give them to charities of their choice: for example, Medicaid, food stamps, USAID, and unemployment insurance. Politicians and bureaucrats also patronize other “charities” such as subsidies to the steel industry, farmers, solar and wind power companies, and electric car companies.

Average charitable donations of an American household make up between three and five percent of income. Some highly charitable people donate a lot more, and some do not donate any part of their income to charity. Charity is personal!

However, the US federal and state governments spend over $1 trillion on welfare every year which averages to over 10 percent of median US household income, and this does not even take into account all the other non-welfare related charities.

To add insult to injury, these government-run charities are poorly managed. The nearly $600 billion budget for Medicaid can be used to purchase Obamacare Gold Plans (highest rated health insurance plans) for each one of the 74 million enrollees of Medicaid, and still have over $100 billion left to spare! Yet, many states complain that they do not have sufficient funds to cover all Medicaid requests. In fact, a few years ago, the state government of Oregon conducted an experiment to pick Medicaid beneficiaries via lottery!

If the entire welfare budget of federal and state governments of over $1 trillion were instead disbursed as direct cash payments equally divided among every person below poverty level, then the average poor family of three people would get an amount equivalent to the median US household income of $60,000. And yet, we have Bernie Sanders and Alexandria Ocasio-Cortez moralizing about how the rich are not paying their fair share, that we should consider 60-90 percent taxes on the billionaires’ incomes, and tack on a wealth tax on top of it.

Forced Charity

And worst of all, people who are being forced by the government to perform this ‘charity’ do not even get the satisfaction of having helped fellow human beings in need due to the impersonal nature of charity via government welfare programs. And the welfare recipients don’t feel grateful, because politicians and activists have convinced them that welfare is a government-given right, not a charitable gift.

In countries with highly homogenous populations like Scandinavian countries, charitable people still derive adequate satisfaction from government-enforced ‘charity’ because they can relate to the recipients of government ‘charity’. That is why a large welfare state in such countries does not lead to perceptible public dissatisfaction. As the countries become more non-homogenous, the dissatisfaction levels increase considerably. The US is a good example.

Private charities are able to positively discriminate against people who are capable of standing up on their own feet but willfully refuse to do so versus people who are in genuine need of charity. As Jude Blanchette puts it, “aid given without nourishment of a man’s character would accomplish little except to demean him”. Government ‘charity’ has little room for such positive discrimination due to the bureaucratic nature of enforcement by rigid rules, and in fact encourages dependency due to bad incentives such as bigger welfare rolls leading to bigger welfare budgets for the bureaucrats.

Here is a quirky way to summarize the ‘charity’ enforced by US federal and state governments. You want to buy a Lexus sedan for $50,000. But the government is instead taking away $150,000 from you and in return giving you a Hyundai sedan that is priced at $20,000. That is, you are being coerced to spend the difference of $130,000 without deriving any value from it. Bad economics!

In free-market economic transactions, both the buyer and seller mutually benefit from a transaction. And that’s what happens in voluntary charity too. The charitable people (buyers) voluntarily give their preferred amount of money to causes they believe in. The recipients of charity (sellers) are grateful for the much-needed help. That’s good economics.

In government-enforced ’charity’, the buyers (taxpayers) do not get fulfillment commensurate with their expenditure because they are forced to spend way more money than they intended to and on causes they don’t necessarily believe in. Even the sellers (welfare recipients) do not get proportionate satisfaction because they think they have a right to more welfare payments and that they are being short changed by the government and “the system”. That’s bad economics overall!

Bad economic policies result in lackluster economic growth which leads to more poverty. The share of the US population in poverty was declining rapidly until Lyndon Johnson declared his ill-conceived “war on poverty” in the 1960s via a massive expansion of the welfare state. Since then the share of the US population in poverty has stalled around 14 percent. Forced ‘charity’ will only ensure perpetuation of poverty and misery.

Charity is personal, and we should keep it that way.

  • Satish Bapanapalli is an immigrant to USA from India. His educational training is in engineering and business, and works as a manufacturing operations leader in a Fortune 500 company.