The Ethics of Entitlement
APRIL 01, 1987 by HANS SENNHOLZ
Entitlement programs—government taking income and wealth from some citizens and transferring it to others—are a fairly recent development. The U.S. government assumed the task only two generations ago when Congress introduced progressive taxation and, soon thereafter, launched systems of old age insurance and unemployment compensation. Since then, social pressure, sustained by strong moral emotion, has caused all administrations to pursue the ideals of a more equal distribution of wealth.
From its very beginning many economists have strenuously opposed all political efforts at redistribution. They point not only at the tremendous rise in economic well-being of all social classes, including the poor and disabled, long before governments embarked upon income redistribution, but also at the futility of all policies of redistribution. The working and living conditions of American workers, they contend, were the best in the world long before New Deal legislators passed labor laws. In the U.S., they remind us, even individuals on public assistance always have lived better than their peers in most other countries.
American economic history clearly attests to the tremendous productivity which a system of economic freedom unleashes. Mindful of the phenomenal improvement in the living conditions of every citizen of a free society, of the reduction in human mortality rates and the great lengthening of life expectancy, the foes of redistribution proudly conclude that unhampered economic freedom is most virtuous and moral. The system of social organization that builds on freedom is in complete harmony with the calls and imperatives of ethics.
These economists are unalterably opposed to political intervention because it springs from politics, builds on verdicts and interpretations of judges, and depends on brute enforcement by police. It runs counter to the inexorable laws of human action and, therefore, brings forth the very opposite of what it sets out to achieve. It hampers economic production, discourages individual effort, stifles economic progress, and creates social and economic classes whose self-interests are irreconcilable. Government intervention on behalf of one social class against another not only is illogical and ineffective, but also highly immoral. It defies the eighth Commandment—Thou shalt not steal—and violates the tenth—Thou shalt not covet anything that is thy neighbor’s. It is bound to bring poverty, frustration, quarrel, and strife.
The advocates of redistribution remain undaunted by such rejoinders. They reinterpret and reject the evidence and cling to doctrines and theories of their own. They raise the question of goodness and desirability of redistribution for the benefit of the greatest number. Searching for fairness and brotherly love, they pursue two distinct ideals: the removal of human want and suffering through the use of economic surplus, and the abolition of the great inequality of means among the several members of society.
The Removal of Want
Many redistributionists like to give vivid descriptions of the sad conditions of impoverished and destitute members of society. They point at the chronically unemployed and underemployed lacking money or means for an adequate existence. They wax eloquent about their fellowmen who are abjectly and conspicuously poor, and who suffering hunger and want due to misfortune, are in urgent need of assistance. After all, man has a moral obligation to help his unfortunate fellowmen. This duty rests squarely on the Judeo-Christian ideal of brotherhood that makes every man his brother’s keeper. To act in accordance with the standards and precepts of Judeo- Christian codes of behavior is to be a Good Samaritan.
A helper and benefactor to the unfortunate and poor, the Good Samaritan binds the wounds, nurses the sick, and helps them get back on their feet. He does not call for government programs that make poverty a permanent social institution playing a central role in politics. He does not depend on progressive income taxation, nor on poverty administrators consuming the lion’s share of the poverty budget, or poverty politicians enacting minimum wage laws, occupational licensing, and union power and privilege. To be a helper in need is to lend a friendly hand to a needy person; it is personal effort and sacrifice.
In order to pool their efforts and maximize their effectiveness, Good Samaritans may want to cooperate with each other in church congregations and other charitable organizations. But they must be ever mindful that any delegation of charitable obligations may reduce the quality of charity and, in the end, deny it altogether. To rush past a poor man who fell among thieves, and later send a few dollars to a world relief organization, is to pass by on the other side, like the priest and the Levite. The Good Samaritan does not ride on, but places the victim on his own beast, brings him to an inn, and takes care of him.
The advocates of redistribution ride on, pointing at the pitiful conditions of the laboring classes during the 18th and 19th centuries, and hailing labor legislators and labor organizers for having brought about remarkable improvements. They pin their faith to politics and labor unions. Unfortunately, both are utterly incapable of improving the economic conditions of all laborers. If they could, the poverty of Africa, Asia, and Latin America could be eliminated by simply passing more laws.
Actually, neither foreign governments nor the U.S. government can improve the lot of working people. Economic conditions spring from and depend on economic production. To improve labor and living conditions is to increase labor productivity. It requires a will and courage to work, to save and invest, and respect for private property in the means of production.
The redistributionists ride on, calling for the distribution of surplus wealth and pointing at more affluent members of society. They are aware that the moral obligation to help the poor and needy rests most heavily, although not exclusively, on the wealthy. But they are grossly misinformed about the magnitude and nature of the surplus wealth that is available for redistribution. In a commercial and industrial society nearly all personal wealth consists of means of production affording jobs and providing consumer goods for the people. The great wealth of an American billionaire consists of oil wells and refineries, means of transportation and communication, founder’s stock and growth stock, debenture bonds and mortgage bonds. To seize his productive assets and consume them is to reduce labor productivity, lower wage rates, and aggravate the plight of the poor. It is counterproductive no matter whether it is exacted by progressive income taxation or confiscatory estate levies.
The Equalization of Incomes
Many redistributionists nevertheless favor progressive taxation because they are more concerned about the inequalities of income and wealth than the alleviation of poverty. They are troubled about the sorry conditions of the unemployed classes; but they are even more ap prehensive about the unequal distribution of wealth. It is highly improper and unjust, they argue, that some people have less than is necessary while others have so much more. Some individuals suffer hunger and want while others dwell in idle luxury; the poor live in alleys and cellar ways while the rich frequent nightclubs, casinos, and horse races. In fact, it is scandalous that so many should live in dire need while others indulge in “silly” expenditures. This is why many redistributionists favor a floor beneath which no one should fall and a ceiling above which no one should be permitted to rise.
It is a popular habit of speech to call “just” that which people desire and “unjust” that which they disapprove. They clamor for economic equality in the name of justice although justice actually demands inequality. Justice means due reward or treatment. It grants individual rewards proportionate to individual effort and assigns to every individual the fruits of his labor. It is therefore reasonable to conclude that justice is not served by compulsory equalization of incomes, and that, contrary to public opinion, our present society engaged in redistribution by political force is not a just society.
The forces of equalization do not spring from justice, but from two absolute disapprovals by public opinion makers: the unrightness of hunger and want, and the unrightness of luxury. Redistribution is supposed to bring forth a righteous society. Sacrificing nothing of value, it is to overcome the evil of want by suppressing the evil of luxury. It is to correct one bad pattern of life—poverty—by the suppression of another bad pattern—luxury.
Egalitarians are ill informed about the quantity of idle wealth that can be seized and distributed. As mentioned above, great personal wealth consists primarily of productive capital, the expropriation and consumption of which reduces labor productivity and labor income. Surpluses consisting of idle luxuries in the hands of the rich are inadequate to raise lower incomes to a desirable level. The pursuit of equality, when conducted in earnest, therefore involves the lowering of all incomes, even those of skilled workers and lower-middle-class producers. In the end, policies of income equalization merely rearrange income horizontally; they do not, as is commonly believed, redistribute much income and wealth from the rich to the poor.
Redistributionists like to base their case on “the economics of welfare,” which teaches that a loss of the last unit of income of the affluent is but a small sacrifice; but the same unit in the hands of the poor amounts to a substantial improvement. Professor Arthur Pigou states it most succinctly: “It is evident that any transference of income from a relatively rich man to a relatively poor man of similar temperament, since it enables more intense wants to be satisfied at the expense of less intense wants, must increase the aggregate sum of satisfactions.” Professor Abba Lerner repeats the principle in an academic garb: “Total satisfaction is maximized by that division of incomes which equalizes the marginal utilities of income of all the individuals in the society.” In the end, he and his welfare colleagues arrive at the conclusion that “the probable value of total satisfactions is maximized by dividing income evenly.”
Victims of Transfers
It is difficult to fathom the inner-direction that leads these professors to such popular though erroneous conclusions. But it can readily be seen that the utilities of income of different persons cannot be measured with a common rod. No one can measure the utility of the last dollar of income of one person and then compare it with its utility in the hands of another person. But we do know that the intensity of the dissatisfaction due to loss of income and sudden lowering of levels of living may be far greater than the satisfaction from receiving largesse. The victim of the transfer process may be more indignant about the loss than the beneficiary is cheerful and contented about his gain. Psychologists warn of the violent, socially disruptive discontent of individuals who are suddenly deprived of their customary ways of life. In fact, being victimized by unjust policies that depress some people at the expense of others may create the emotional ingredients from which revolutions are made. The wrath of the victims may be the spark that ignites the powder keg which is the transfer system.
In democratic societies with a long tradition of majority rule, the dissatisfaction of the victims does not readily ignite the political powder keg as long as the transfer beneficiaries outnumber the victims. The minority is accustomed to living by the decisions of the majority, not because they are believed to be fair and just, but because submission safeguards the peace. To rise and rebel against it would mean conflict and violence to which the friends of democracy are unwilling to resort. However, throughout the nondemocratic world accustomed to political conflict and rule by brute force, attempts at income redistribution often lead to violence. The political minority that is to be sacrificed to majority entitlements search for ways to escape or, when all avenues of escape are barred, to strike back at the majority; acting through juntas of colonels and generals, for example, it may seize political power and establish its own transfer system.
In democratic societies the dissatisfaction caused by loss of income can be observed in the political opposition to measures of redistribution. Successful opposition denotes an excess of dissatisfaction; token opposition signals continuing support for redistribution. Successful resistance may reveal that most voters now see themselves as victims rather than beneficiaries; token opposition may signal voter belief that redistribution continues to benefit them. It should be borne in mind, however, that the relative strength of both the transfer and the anti-transfer party is affected not only by their personal gains or losses, but also by considerations of moral imperatives. Even the victim of redistribution may at times cast his vote for an entitlement if he deems it moral and righteous; similarly, the beneficiary may vote against it and refuse to accept it if he believes it to be wrong.
Most of the time the beneficiaries can be expected to press for redistribution in disregard of its effects on society. They blithely assume that economic activity will continue undiminished no matter what government may do to the producer, that productive capital will be created, jobs provided, and wage rates be raised regardless of the exactions from savers and investors. Obviously, such assumptions spring from wishful thinking and economic daydreaming. Redistribution that seriously aims at equality tends to retard economic progress, brings about stagnation and recession, and, in the end, leads to universal, scarcity through capital consumption.
Redistributionists who refuse to see such basic effects also are oblivious to more subtle effects that tend to render redistribution counterproductive. Three such effects deserve immediate attention.
First, confiscatory tax levies may cause individuals with exceptional energy and ability—the entrepreneurs and captains of industry—to leave economic life and pursue other vocations. In an unhampered market order many highly talented individuals are led to serve the economic needs and wants of the people. In the service of consumers, who are the sovereign bosses of the market order, entrepreneurs are free to apply their energy and ability to try to revolutionize and reorganize every phase of production. In freedom, inventors like Eli Whitney and Thomas Edison, innovators like Andrew Carnegie and Henry Ford, and organizers like Edward Harriman and John Pierpont Morgan, are led to mobilize economic resources and direct them toward serving the public. The vital few, instead of ruling men, are led to serve men.
Individual freedom reveals inequality in productivity, which brings forth inequality in income. Confiscatory tax levies designed to re-distribute income and wealth not only repress individual freedom but also run counter to human nature. They are supposed to achieve an unnatural state of affairs. Moreover, they prevent many gifted people from pursuing their careers in economic life, and cause them to seek self-fulfillment in the arts and sciences, in civil service or military careers, in the pursuit of national, racial, and political objectives. They may force creative people to surrender economic management to politicians and bureaucrats. The detrimental effects on economic well-being need not be elaborated.
Second, redistribution deprives society of the great variety of life styles and cultural and intellectual activities that spring from different life styles. It brings about a radical shift in demand and production. The demand for and production of popular goods and services is bound to rise; production for the affluent classes is destined to shrink. In particular, the production of artistic and intellectual goods is likely to be affected; operas, symphonies, chamber music, painting, sculpturing, and other manifestations of the fine arts face dwindling markets. In fact, man’s cultural aspirations may suffer serious losses unless government provides a new superstructure of cultural activities, maintaining and promoting common interest through public libraries, theaters and opera houses, and public centers of fine arts. Government must grant scholarships and fellowships to artists and scientists, and otherwise provide generous support for creative activities normally sustained and promoted by people in higher income brackets. Government must make investments in individual talents that render services in medicine, engineering, and education. At great expense it must create and maintain a new elite that will serve the masses. It must repair the social damage inflicted by the reduction of upper- and middle-class incomes.
Government repair efforts, however, not only necessitate higher public expenditures and taxation but also run counter to the very purpose of redistribution—the maximization of in dividual satisfactions through income equalization. In search of the “good society” all such efforts promote the production of goods and services for which there is meager demand, and thereby bring about the very allocation of resources that generated the clamor for redistribution. If income equalization maximizes the sum of want satisfactions, all state expenditures in support of cultural and professional activities blatantly disregard the maximization principle and openly contradict the very rationale of re distribution.
Third, the redistribution process as well as the repair efforts that may follow place politicians and government officials in the center of the economic order. To seize income and wealth from individuals with higher incomes, politicians must pass laws, judges must adjudicate them, and policemen enforce them. Having amputated the higher incomes, which provide the savings and investments for economic growth, politicians and officials must assume the saving and investment functions. When desirable social activities are declining they must provide for and preside over these activities. When personal income becomes insufficient for expensive training and education they must select the trainees and provide the necessary funds. In every case redistribution leads to an expansion of the powers of government and of the individuals who run the government-politicians and officials. Redistribution requires an apparatus of redistribution, which extends the scope of government; the consequences of redistribution in turn necessitate repair efforts that call for more government, making politicians and government officials the primary beneficiaries of redistribution.
Pure redistribution would require a simple negative income tax that hands lower-income people that which is taken from higher-income people. But this is not the redistribution that is practiced. Politicians and officials act as trustees of the “underprivileged,” assigning the burdens and doling out the benefits. And, to avoid creation of a class of unproductive wards, whose civil rights would soon be curtailed, the entitlement benefits are extended to all members of society. Social Security and Medicare benefits are extended to the rich and the poor alike, which significantly raises the expenses of redistribution. The extension of benefits to all in turn warrants an extension of tax exactions from all. In the end, low income earners along with individuals in high income brackets tend to contribute more to the system than they receive from it; after all, the legions of administrators need to be supported.
The great beneficiary of the redistribution ideology is government. It helps government to break down the age-old resistance of taxpayers to a larger government share of economic pro duction and income. For centuries the people had resisted successfully and, in many cases, had risen in revolution against governments seeking to increase their shares. But this resistance that gave power to parliament and brought forth political liberty, crumbled under the onslaught of the redistribution ideology. It shattered the solidarity of taxpayers through increasing inequality of treatment, deductions, allowances, credits, and positive benefits for individuals in lower-income brackets. Unfortunately, it also divided society into two social classes: the beneficiaries of transfer who are calling for ever more, and the victims who submit unwillingly. It could hardly fail to injure social peace and harmony.
Envy or Error?
The conflict society does not spring from the desire to improve the economic and social stan dards of its poorer members. It is the bitter fruit of egalitarian ideals that call for equalization of incomes through the agency of the redistributing state. But these ideals do not necessarily reject and condemn all economic inequality; they find fault only with the income and wealth of entrepreneurs and capitalists. Egalitarianism does not necessarily flow from envy and covetousness, but rests precariously on economic error that perceives capitalist income as exploitative.
Throughout the ages man as member of the body politic has readily accepted the pomp and splendor of his ruler. He may have opposed his king when the royal exactions became oppressive and his policies reckless and foolish. Subjects may have risen in open rebellion when the yoke. became unbearable. But if we read history aright, the people were rarely, if ever, led to rise against their duly established government for reasons of envy or covetousness. The most diverse societies have tolerated economic inequality quite willingly.
Surely many people are uneasy and envious of the attainments of others. But few Americans resent the magnificent spectacle of government grandeur displayed in Washington, D.C. Every year millions of people are drawn to the temples of politics that fill them with awe and admiration. They do not begrudge their leaders the luxuries of political offices; they cheerfully approve of the imperial conditions of their President, their senators, and their representatives. Similarly, most Americans do not covet the million-dollar incomes of their favorite artists, entertainers, singers, and athletes. They love and cherish their favorite film stars, crooners, and quarterbacks and expect them to make a gallant spectacle of their success.
The same people who so readily accept the entertainer’s accomplishment and the politician’s position in the body politic, may resent the capitalist’s income for being “unearned” and “unjust.” They may be resentful of the fortunes earned by the manufacturer of men’s shoes or ladies’ stockings, of toothpaste or mouthwash. In their eyes, such fortunes are dirty lucre withheld from workers and gouged from consumers. They cling to popular notions that give rise to the doctrines of egalitarianism and to policies of redistribution.
Intellectual consistency is no great concern for redistributionists. In their own economic lives they often choose and prefer essential want satisfaction over entertainment and politics, allocating more of their incomes to the consumption of shoes, stockings, toothpaste, and mouthwash than to baseball and football, and casting their economic votes for the best producers. As members of the body politic, however, they would like to negate their own economic actions and redistribute the producers’ income.
Ignorance deprives man of his freedom, for he does not know what his alternatives are. He will not choose that which he has never heard of. This is why economic education is so important. It refutes all egalitarian ideas and the demand for equalization of incomes, for they do not lead to economic equality, but to ever more inequality, political power, and social strife.
1. Arthur C. Pigou, Economics of Welfare (London: Macmillan. 4th ed., 1932), p. 89.