Freeman

ARTICLE

Does Welfare Diminish Poverty?

APRIL 01, 1984 by HOWARD BAETJER JR.

Does government-provided poor relief decrease the amount of poverty? That it does is an assumption at the heart of our nation’s very large antipoverty programs. In fact those programs were instituted for the purpose of making themselves obsolete. Shortly before passing the Social Security Act in 1935, for example, Franklin Roosevelt declared to Congress, “The Federal Government must and shall quit this business of relief . . . . Continued dependence upon relief induces a spiritual and moral disintegration, fundamentally destructive to the national fiber.” Thirty years later, as he signed the first antipoverty bill of the Great Society, Lyndon Johnson said, “We are not content to accept the endless growth of relief or welfare rolls. We want to offer the forgotten fifth of our population opportunity and not doles . . . . The days of the dole in our country are numbered.”

The assumption that welfare helps the poor also explains why so many people today reject in practice the appealing old notion of classical Liberalism that government should play no favorites: that the force of law should not be used to benefit some people at the expense of others. While they recognize and perhaps regret that welfare does involve the force of law to benefit some (those considered poor) at the expense of others (everyone else), they feel the principle is justifiably violated since welfare diminishes need. But is this assumption true? Does welfare, when all is said and done, really help solve the problem of poverty?

There is good reason to believe that it does not. What is worse, there is substantial evidence that welfare impedes progress against poverty. In our country, worst of all, welfare seems to have increased poverty. What follows is a brief summary of the thinking and evidence that lead to this surprising conclusion. We would do well to consider it seriously, for if it is true, our national antipoverty policy is doing great disservice precisely to those it is intended to help. In the words of Walter Williams, professor of economics at George Mason University, “corn-passionate policy requires dispassionate analysis” of policy effects. Analysis of welfare shows it to be a problem for poverty, not a solution.

Experience with government intervention in Britain turned Mr. Baetjer to the cause of liberty. So, after a year back at St. George’s, he left teaching to write the first drafts of his essay, The Golden Rule of Laissez-Faire, an argument on moral grounds for limited government and a free society. Since the fall of 1982 he has been enrolled in a master’s program in political science at Boston College, concentrating on political philosophy. He will receive his degree at the end of May.

Howard recently has joined in the work of FEE as a full time staff member. He plans to continue studying, writing, lecturing, and practicing liberty in the effort to draw others to the free market way of life.

Three Guidelines for Analysis

As one considers the problem of poverty, one should keep three basic truths in mind. The first of these is obvious, that is: poverty is finally overcome only when people are self-supporting. It is not enough that they be living for the moment at an acceptable standard if they remain dependent, just as one is not cured of a disease when he is taking medicine that eliminates his symptoms. Thus an essential objective of any antipoverty program must be to maximize self-sufficiency.

The second basic truth becomes clear only after some thought, that is: prosperity depends on production. Unless physical goods are produced in the first place and then replaced as necessary, there can be no prosperity for anyone. If this stock of goods is not constantly increased, higher levels of well-being overall are impossible. Other things being equal, the more goods there are in the world food, shelter, medicine, electric light, shoes, water heaters, and so on the more there is to go around and the less poverty there will tend to be. (Of course things are not always equal, and different people end up with different amounts of these goods, but the principle stands nonetheless: if there is literally not enough to go around, some poverty is inevitable. At the other extreme, if goods should become overabundant, their price would approach zero and the poorest could afford all they could use.) Thus an important means of reducing poverty is increasing production.

The third truth has more to do with method, that is, to paraphrase Henry Hazlitt: good economics looks beyond obvious and short-term effects to see effects that are hidden and long- term. Applying this idea to welfare programs, we must look beyond the immediate advantages such programs provide to welfare recipients-the food stamps, medicaid, increased income and the like—and see other effects of the welfare process as a whole. For example, how do welfare programs affect employment, wage rates, productivity and prices (all of which are important to the poor).

With these truths in mind, before looking at any statistics, let us turn to some indirect effects of welfare that we would expect to occur.

Predictable Effects of Welfare

A first observation is that the incentives associated with welfare tend toward unwanted results (not that they necessarily bring about these results, only that they cause a tendency in that direction). The benefits go to people who, for a host of reasons, are relatively unproductive, while the funds to pay for them come, through taxation, from people who are relatively productive. Now we know that for human beings, benefits are positive incentives while taxes are negative incentives. Thus the welfare system tends to encourage unproductiveness and discour age productivity. A person who could bring home only a few dollars more per week working than taking advantage of the welfare system has an incentive not to work. Accordingly welfare tends to diminish both self-sufficiency, since it leads more people to accept unemployment, and production, since the productive potential of those people is not turned into goods. The effect may not be a large one, but it is something to consider.

From a purely economic standpoint, we must look beyond the visible welfare benefits and compare them with other positive effects that might have occurred in the absence of welfare, but cannot occur in its presence. For an important example, consider that the billions of dollars which go into the welfare system are no longer available for other things—such as investment. Many dollars spent on welfare would otherwise have been invested in new tools, new buildings and the like. This investment would have had concurrent positive effects of creating new employment opportunities and raising productivity. With welfare, however, these contributions to self-sufficiency and production never come about.

A final effect of government-provided welfare that we would expect to find, knowing how human beings behave, is inefficiency and waste. This is a phenomenon we might call “government failure”: the inherent inability of government to do much of anything well. Since bureaucrats are paid out of tax revenues, which are collected regardless of whether or not the bureaucracy does a good job, there is little incentive for them to maintain high standards. Since the amount of taxpayers’ money that passes through their hands depends on the size and perceived importance of their programs, the bureaucrats have an incentive to expand the numbers encompassed by those programs, and to find new reasons for increased funding. Since allocation of funds must for fairness’ sake be by rule, a great deal of time and paperwork gets generated, and minimal scope is allowed for individual judgment about who deserves how much. Other problems of this kind could be identified.

A Look at the Record

Are these potential problems realized in fact? If so, how bad are they? According to the U.S. government’s figures, the answers to these questions are, respectively, “yes” and “very bad indeed.”

In regard to government failure, to begin with, there is a rather impressive disparity between the amount of money spent for the stated purpose of relieving poverty, and the amount the poor actually receive. In an article entitled “Where Do All the Welfare Billions Go?” (Human Events, February 6, 1982) M. Stanton Evans points out some remarkable figures. In 1965, combined federal, state and local outlays for “social welfare” totaled $77 billion. This was the beginning of the “Great Society” era. In 1978, the total was $394 billion. “This means that, over the span of a dozen years, we increased our national outlays for the alleged goal of helping poor people, on an annual basis, by $317 billion.” But the number of poor people in the country, according to official estimates, has remained nearly constant in those years, at about 2.5 million. Here I quote Evans at length:


One has to wonder how it is possible to spend these hundreds of billions to alleviate poverty and still have the same number of poor people that we had, say, in 1968. Waive that objection for a moment, however, and simply compare the number of poor people with the dollars spent to help them: You discover that, if we had taken that $317 billion annually in extra “social welfare” spending, and given it to the poor people, we could have given each of them an annual grant of $13,000—which is an income, for a family of four, of $52,000 a year.

In other words, with this colossal sum of money, we could have made all the poor people in America rich . . . . It prompts the more suspicious among us to ask: What happened to the money? . . . [A] tremendous chunk of these domestic outlays goes to pay the salaries of people who work for and with the federal government—including well-paid civil servants and an array of contractors and “consultants,” many of whom have gotten rich from housing programs, “poverty” studies, energy research grants, and the like.

In the words of Thomas Sowell, “the poor are a gold-mine” for the predominantly middle-income bureaucracy.

But we might expect ending poverty to be expensive. The crucial question is what has happened to poverty itself. That question is partly answered in the statistic above that the number of official poor has remained at about 2.5 million; clearly poverty has not been eliminated. But what of poverty as a percentage of population—are we at least decreasing the proportion of poor people in the country? Alas, no. In an article called “The two wars against poverty: economic growth and the Great Society” (The Public Interest, Fall 1982), Charles A. Murray demonstrates that around 1968, when Great Society antipoverty spending was booming and unemployment stood at 3.5%, progress against poverty slowed, and then stopped.

The Problem Persists

Since 1950, the number of (official) poor as a percentage of population was approximately 30%. From then until 1968, the figure dropped steadily, to about 13%. But then, right in the heart of the Great Society years, when more money than ever was being spent to decrease poverty even faster, the trend line flattened. After ten more years marked by ever-increasing outlays, the percentage of poor in our population had dropped only to 11%. Two years later, in 1980, it was back up to 13% again. The more we spent, the less progress we made.

Murray also discusses the figures on the proportion of people dependent on the government that is, those who would be below the poverty line were it not for government benefits. This measure, which Murray calls “latent poverty,” is perhaps the best indication of progress against poverty because it best reflects self-sufficiency, or lack thereof. Like official poverty, latent poverty as a percentage of population decreased steadily until the late sixties, from about 33% in 1950 to 19% in 1968. In 1968, however, the trend reversed; the proportion of Americans dependent on the government began to increase. With the exception of one dip after 1975, it has increased since, back to 23% in 1980.

In short, despite doubled and redoubled outlays to try to do away with poverty, poverty is increasing in our country. We made much better progress when we were spending less.

These sad results fit well what we might expect from the theoretical expectations mentioned above. Where there are incentives against self-sufficiency and productiveness, people will tend to become less self-sufficient and productive. The bigger the incentives, the stronger the tendencies. It should come as no surprise to see dependency increase when dependency is met with large cash and in-kind benefits. Perhaps these are not the reasons for the system’s failure; perhaps entirely different forces are at the base of it. None spring to mind, however.

Quit this Business of Relief

In any case, welfare, the dole, poor relief—call it what you will—is a spectacular failure. More than that, if the reasoning presented here is sound, it is one of the vast tragic ironies of our age. It springs from the desire of good-hearted people to see poverty diminished, but in practice, apparently, it augments poverty. The fault is not in our intentions, but in our methods, our economic understanding, and ultimately, perhaps, in our principles. “To quit this business of relief,” to end “the days of the dole,” we might well find it best simply to do it. Let officials design policy—that is, do away with policies—according to the classical Liberal principle that “the force of law should never be used to benefit some people at the expense of others,” not even if those benefiting are poor. Let care of the really needy be returned to individual responsibility—to genuine, private charity and efficient, private organizations. []

1984 ID: Mr. Baetjer Is a graduate student in political science at Boston College. This article also has been published at the college in The Observer.
Howard Baetjer Jr. comes from Stevenson, Maryland. He received his undergraduate degree from Princeton University in 1974. From 1974 to 1978 he taught English and coached the football team at St. George’s School in Newport, Rhode Island. In 1978 he went to Scotland to study English literature at the University of Edinburgh, gaining a master’s degree in that subject in 1980.

ASSOCIATED ISSUE

April 1984

ABOUT

HOWARD BAETJER JR.

Howard Baetjer Jr. is a Lecturer in the Department of Economics at Towson University and a faculty member for seminars of the Institute for Humane Studies. This article is based on ideas from his book, Free Our Markets, A Citizens’ Guide to Essential Economics.

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