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The Essence of Libety



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Liberty knows no compromise


A Condensed Version of For a New Liberty: The Libertarian Manifesto by Murray N. Rothbard

Compiled by

Dr. Jimmy T. (Gunny) LaBaume

Chapter 8: Welfare and the Welfare State

Why the Welfare Crisis?

There is something terribly wrong with the welfare system. Rothbard opens this chapter with a listing of figures and comparisons that confirm this charge.

Most people think of welfare as being something that is external to the recipients themselves—similar to a natural disaster. The standard mantra is that "poverty" is the cause. But the fact is that the number of families below the so-called "poverty line" has been decreasing since the 1930s and not vice versa. So, what accounts for the spectacular growth in welfare clientele since that time? This, at first, seems to be puzzling.

But, the solution to the puzzle becomes obvious when one realizes that the number of welfare recipients has a "positive supply function"—that is to say, when the incentives to go on welfare rise, the welfare rolls get longer. It is odd that nobody challenges this in any other area of the economy.

What are the incentives/disincentives for going on welfare? An important one is the relationship between the income to be gained on welfare compared to the income to be earned from productive work. If welfare payment levels increase faster than average wages, an increasing number of people will flock to the welfare rolls and this is precisely what has been happening.

Another powerful factor is the disappearance of the disincentives for going on welfare. The leading disincentive used to be the stigma associated with being on the dole. This stigma has been socially removed by the permeating values of modern liberalism.

The aim of social workers used to be to help people get off welfare. Now it is to get as many people on welfare as possible, to advertise and proclaim their "rights." The result has been an easing of eligibility requirements, a reduction in red tape, and the withering away of the enforcing of residency, work, or even income requirements. This "explosion" was created as part of the so-called "War on Poverty."

The reasons behind the "welfare explosion" are:

  • The War on Poverty elevated the official definitions of "poverty" and "need" and thereby automatically increased the number of people who were “eligible.”
  • Increasing benefits has increased the numbers of poor who apply. In many large cities today, welfare benefits actually outstrip wages.
  • The reluctance of people to apply was diminished by an organized campaign to "sign them up."

More people on welfare, receiving more generous payments, has not made this a nicer place to live—not even for the poor whose condition is not noticeably any better. “Compassionate social policy has bred all sorts of unanticipated and perverse consequences.”

Formerly, the spirit of social work was based on two fundamental principles: (a) that all welfare should be voluntary contributed by private parties; and (b) that the object of giving should be to help the recipient become independent. Logically, (b) follows (a) because no private entity can tap the “virtually unlimited funds that can be mulcted from the long-suffering taxpayer.” Therefore, there was no such idea that "rights" are an “unlimited and permanent claim on the production of others.” There was no room for malingerers. There were also strong disincentives in effect in the form of strict eligibility rules and conditions unpleasant enough to provide a strong deterrent instead of an attractive opportunity. As a result, there was little or no governmental welfare in the uS until the Depression of the 1930s. Furthermore, in this era of a far lower standard of living, there was no mass starvation in the streets.

In the present day, the Mormon Church offers an example of a highly successful private welfare program based on the principle of helping their members gain independence as quickly as possible. The prime objective is to find jobs for the needy. As a complement to the principle of fostering independence, the Church sternly discourages its members from going on public welfare. There is no finer model for a private, voluntary welfare program.

This example demonstrates that the major determinant of who goes on welfare is cultural and moral values rather than level of income. Another example is the Albanian-Americans in New York City . Although their average income is lower than that of blacks and Puerto Ricans, not a single one of them is on welfare because of their pride and independence. The Polish-Americans of Brooklyn are a similar case. Despite low incomes, blight, and deteriorating housing, there are virtually no welfare recipients amongst them. Why? Because "They consider welfare an insult."

In addition to religion and ethnic differences in values, is what Professor Banfield calls "upper-class" or "lower-class" culture. The definitions of these terms are based on the different attitudes toward the present and the future. The upper- and middle-classes are “future-oriented, purposeful, rational, and self-disciplined and, consequently, have higher incomes and better jobs.”

By contrast, the lower class is present-orientated. They are “capricious, hedonistic, purposeless, and therefore unwilling to pursue a job or a career with any consistency…(and) tend to be poor, jobless, or on welfare.”

Furthermore, lower-class death rates and infant mortality are far higher than for upper-class people. The difference is caused by differences in values or culture. These phenomena are higher among the lower classes due to cultural values rather than to income level. This is supported by a comparison of turn-of-the-century Irish immigrants with Russian Jewish immigrants in New York City . The Irish immigrants were present-minded. While the Russian Jews lived on an income lower than the Irish, they were future-minded, purposive, and "upper class." Jewish life expectancy and infant mortality was extremely low compared to the Irish.

(Editor's Note: Readers should consult the original for extensive citations of studies that support these conclusions.)

The same is true in unemployment—an area that is obviously closely related to both poverty and welfare. Michael J. Piore found that the "un-employability" of most of the persistently unemployed did not have as much to do with finding or learning skills as it did with the lack of personal fiber in sticking to a job. High absenteeism, leaving the job without notice, being insubordinate, and even stealing are characteristic of such people.

In other words, the economic positions of people are generally their own internal responsibility and not determined by external factors. That is to say that “much of persistent lower-class unemployment, and hence poverty, is voluntary on the part of the unemployed themselves.”

Rothbard himself says it much to eloquently to be edited: The typical attitude of present day liberals and leftists is: “that it is shameful to try to foist, even non-coercively, ‘bourgeois' or ‘middle-class values' on the gloriously spontaneous and ‘natural' lower-class culture. Fair enough, perhaps; but then don't expect—or call upon—those same hard-working bourgeoisie to be coerced into supporting and subsidizing those very parasitic values of idleness and irresponsibility which they abhor—and which are clearly dysfunctional for the survival of any society. If people wish to be ‘spontaneous,' let them do so on their own time and with their own resources, and let them then take the consequences of this decision, and not use State coercion to force the hard-working and ‘un-spontaneous' to bear those consequences instead. In short, abolish the welfare system.”

If it takes future-minded values to get people off welfare, then at the very least these values should be encouraged and not discouraged. The easy availability of the welfare check promotes present-mindedness and therefore perpetuates the cycle.

Conservative criticism of the welfare system focuses on the ethical evils of coercively mulcting taxpayers. On the other hand, leftist criticism (if any) concentrates on the demoralization of the welfare recipient through dependency. Actually, both are correct. There is no contradiction between them.

One of the most tragic consequences of welfare is that it discourages self-help and rehabilitation by removing the financial incentive. Becoming rehabilitated results in loss of welfare, Social Security disability payments, and workmen's compensation.

There is yet another unfortunate impact of welfare. Welfare families are paid according to the number of children they have. In this way, the system actually subsidizes the production of even more children by those who can least afford it.

Recently there has been agitation for the government to supply day-care centers for children of working mothers. Why does it seem that the market has failed in this case? Answer: The network of onerous and costly legal restrictions with which the government has burdened the suppliers of day-care service. The State insists that day-care centers be licensed. Licenses are denied unless the facility and playground areas are of a minimum size and registered nurses are present.

The case of day care demonstrates an important truth: “if there seems to be a shortage of supply to meet an evident demand, then look to government as the cause…”

Burdens and Subsidies of the Welfare State

The commonly held idea is that the welfare state redistributes income and wealth from the rich to the poor. This is a myth. Consider:

Government contracts funnel tax funds into the pockets of favored corporations and industrial workers. Minimum wage laws generate unemployment among the poorest and least skilled. State higher education redistributes income from the poor to the wealthier. Government licensing requirements exclude poor and less skilled workers from jobs. Urban renewal programs demolish housing in poor neighborhoods “for the benefit of wealthier subsidized tenants, construction unions, favored real estate developers, and downtown business interests.” Unions use government granted privileges to exclude poor and minority workers. Farm price supports push food prices higher injuring poor consumers and helping— not poor , but wealthy, large landowning farmers. Zoning laws keep poorer citizens out. The U.S. Postal Service charges high monopoly rates on the first-class mail used by the general public in order to subsidize the distribution of newspapers and magazines. The FHA subsidizes mortgages for well-to-do homeowners. The Federal Bureau of Reclamation subsidizes irrigation water to well-to-do farmers forcing the urban poor to pay higher water charges. The Rural Electrification Administration and the Tennessee Valley Authority subsidize electric service to well-to-do farmers, suburbanites, and corporations. Government regulation monopolizes and cartelizes industry thereby driving up prices to consumers. The Civil Aeronautics Board allocates airline routes to favored companies and keeps out smaller competitors. State and federal oil pro-ration laws drive up oil prices, which are further kept up by import restrictions. Government grants a monopoly to gas, electric, and telephone companies, thus protecting them from competition—a systematic mulcting of the population by the "welfare state."

Most people believe that the tax system taxes the rich more than it does the poor and thereby redistributes income from higher to lower income classes. But the income tax does not really work that way. Capital gains, which are taxed at far lower rates, accrue mostly to wealthy stockholders and owners of real estate. Private trusts and foundations as well as interest earned on state and municipal government bonds are exempt from federal income tax. Once all things are considered, the lowest brackets pay about as high a percentage of income in taxes as do the highest. (At this point Rothbard provides then current data to support that last statement.)

So, contrary to popular belief, federal income taxes are hardly "progressive." Further, state and local taxes are usually highly regressive. For example, sales and excise taxes (common sources of state and local tax revenues) hit the poor harder than anyone.

At this point Rothbard offers then current data showing combined (all levels of government) estimates for the total impact of taxation—federal, state, and local—on income classes.

Many economists point out that the people in the lowest income category receive more in welfare than they pay out in taxes. But this ignores the fact that the welfare receivers and the taxpayers in each income category are not the same people.

Low-income taxpayers are hit heavily in order to subsidize low-income welfare recipients. In other words, the poor (and middle class) are taxed to subsidize other poor (and middle class)—e.g. the working poor subsidize the welfare poor. Oh, there is plenty of income redistribution alright (to Lockheed, to welfare recipients, etc) but the "rich" are not being taxed to pay for the "poor." The redistribution is within income groups. Some of the poor are forced to pay for other poor.

Rothbard points out that his objective is not to advocate a "really" progressive tax structure. Instead, it is to point out that the welfare state is touted as soaking the rich to subsidize the poor but it does no such thing. In fact, soaking the rich would be a disaster for both the rich and the poor. The rich provide the greater amount of saving, investment, entrepreneurial ability, and technological innovation—e.g. the very things that have resulted in the highest standard of living in history.

What Can Government Do?

What can the government do for the poor? Answer: Get out of the way.

There are at least four specific things that need to be done.

The first is to abolish (or drastically reduce) all taxation. The resulting creation of jobs and increase in wage rates would benefit the lower-income groups more than anyone else.

F. A. Harper wrote: “According to one view, sharing a crust of bread is …charity. The other advocates savings …for the production of additional loaves of bread, which is the greatest economic charity…the two methods are mutually exclusive in absorbing one's time and means…”

He attributes the difference to two different views of the economic world. The former sees the total of economic goods as being constant. The latter holds that expansion in production is possible without any necessary limit. All of history refutes the idea of a fixed total of economic goods. It further reveals that savings (enabling the expansion of tools) are the only way to a substantial increase in economic goods. The point is that taxes confiscate the “excess” profits that could otherwise be re-invested in capital goods that would provide employment an increase the marginal productivity of labor and hence wages and hence greatly aid the poor.

The second thing government should do is to reduce expenditures equivalent to the above reduction in taxes. Then scarce economic resources that are being siphoned off into wasteful and unproductive expenditures would be available to produce goods and services desired by consumers. There would be no more inefficiencies and injury to productivity of government subsidies and contracts and no more scientists and engineers would be diverted to wasteful government research.

Third, if we must settle for a drastic reduction in taxes (instead of abolition), government should cut out all the ways that it taxes the poor to subsidize the wealthy (e.g. higher education, farm subsidies, irrigation, Lockheed, etc.). This would greatly benefit the poor by removing the burden from their productive activity.

Finally government should remove its own direct roadblocks to the productive energies of the poor—minimum wage laws, government privileges to trade unions, licensing laws, the outlawing of gambling, etc., etc., etc—all those things that prevent the poor from starting small businesses and creating jobs for themselves. Peddling is a good example of a contemporary roadblock to productivity of the poor. Classically, it was the path by which immigrants became entrepreneurs and eventually big businessmen. But this route has now been cut off by onerous restrictions for the purpose of conferring monopoly privileges upon retail stores.

Rothbard continues by offering several specific examples that are typical of how government has frustrated the productive activities of the poor.

The bottom line summary is that government could best help the poor, and the rest of society, by getting out of the way: “by removing its vast and crippling network of taxes, subsidies, inefficiencies, and monopoly privileges.”

The Negative Income Tax

The recent trend embraced by the right as well as the left is to abolish the welfare system not in the direction of freedom but the opposite. This is the "guaranteed annual income" or "negative income tax." Citing the inefficiencies, inequities, and red tape of the present system, this scheme proposes to pay money each year to families earning below a certain income. Taxing working families making more than the base amount would finance this automatic dole.

But there is a catch. Estimated cost is based on the assumption that everyone will continue to work to the same amount as before. But the problem with that assumption is the crippling disincentive for both the taxpayer and the recipient.

One element that currently saves the welfare system from disaster is the red tape and stigma involved. But, because this automatic dole would be efficient, the “red tape” disincentive would be removed. Furthermore, everyone will consider the new dole an automatic "right" and, as a result, the stigma will be removed.

At this point, Rothbard details a mathematical example of how these distortions of incentive would actually work.

In addition, there are some extra considerations. In practice, of course, the dole, once set at a given level, will not remain there. Pressure by welfare recipients and others will cause the base level to rise every year. In practice, the guaranteed annual income will not replace the existing patchwork welfare system. Instead, it will simply be added on top of existing programs, exactly as it was with the states' old-age relief programs as well as the New Deal's Social Security program. Also in practice, the contention that able-bodied recipients would be forced to work is laughable. They would only have to find "suitable" work. The universal experience of state unemployment agencies is that almost no "suitable" jobs are ever available.

“The only workable solution is the…abolition of the welfare dole in favor of freedom and voluntary action for all persons, rich and poor alike.”

Continue to the next chapter...


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