November 26, 2024
By Dominic Pino
Fusion asked me to write a reply to Charles Fain Lehman’s October 1 article, “The Tangle of Pathology Revisited,” about the flaws in the Great Society programs that define the U.S. welfare state. It’s a tough assignment because I basically agree with everything Charles wrote. “The Great Society is less a testament to the power of government than to the limits of what it can do,” he wrote, which I think is an excellent one-sentence summary.
Conservatives are quite good at criticizing the welfare state, and Charles is no exception. But it’s often harder for conservatives to articulate what role the state should take in poverty alleviation. That’s not a criticism of Charles; that wasn’t the point of his article.
The Left’s caricature is that conservatives want to eliminate all welfare programs because they believe the state has no role at all. Some conservatives, perhaps unknowingly, adopt that caricature as their own view. At the very least, many conservatives have a vague notion that the conservative answer to what the state should be doing about welfare is “less,” with little more to say beyond that.
To give a better answer, I’ll turn to three figures who are probably the principal influences on free-market conservative thought in the United States: Adam Smith, F. A. Hayek, and Milton Friedman. Not one of them said the state has no role in welfare. In fact, they dealt quite carefully and intentionally with the question. Their thought should give conservatives direction today.
The Wealth of Nations is primarily a book about the division of labor. That’s Smith’s answer to the title question: Nations become wealthy because of specialization and trade. As the division of labor progresses, “the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.” Smith had a presumption of liberty in policy. That presumption could be cleared, but the burden of proof would fall to the advocate of liberty-reducing policy.
Welfare-state policies are, in general, liberty-reducing in Smith’s framework. Insofar as they rely on redistributive taxation, they involve state coercion. You cannot pursue your own interests in your own way when saving for retirement, for example; Social Security is compulsory. Welfare programs almost always involve the government deciding what beneficiaries’ interests are. Food stamps can only be used on certain products. The scope of government health-insurance coverage is determined by the bureaucracy that administers it. Examples abound, but you get the point.
This is an important point because many on the Left are still guided by the FDR view that welfare programs increase liberty by contributing to “freedom from want.” Smith would reject that argument, and conservatives should, too. To the extent welfare programs exist, they should be considered a necessary evil, not an enhancement of personal freedom.
There was a version of welfare in Smith’s day: the Poor Laws. The laws had already been around for hundreds of years by the time of Smith’s writing the Wealth of Nations in 1776. They created a system where local jurisdictions administered food and clothing to poor people who resided in them.
In Smith’s discussion of the Poor Laws, he does not condemn them outright, and he does not say that they are, in themselves, a violation of liberty. To read this elision of condemnation as an endorsement of the modern welfare state would be to force a diamond through a pinhole.
Smith points out first of all that the reason for the Poor Laws was the “destruction of the monasteries” in England under Henry VIII, which meant that “the poor had been deprived of the charity of those religious houses.” It’s not as though in the absence of the state, there would be no charity. Today conservatives talk about the state’s “crowding out” private charity, and Smith was sensitive to that.
Because of this crowding out, the state had to impose new regulations. The Poor Laws were administered at the local level, and they were a considerable expense for local authorities. Because eligibility was determined by residency, poor people were effectively tied to their villages. That created problems for the division of labor, since people are no longer free to go where the jobs are that suit them best.
The Poor Laws and the regulations that followed from them had created a situation where “it is often more difficult for a poor man to pass the artificial boundary of a parish, than an arm of the sea or a ridge of high mountains.” Smith fulminated, “To remove a man who has committed no misdemeanour from the parish where he chuses to reside, is an evident violation of natural liberty and justice. . . . There is scarce a poor man in England of forty years of age, I will venture to say, who has not in some part of his life felt himself most cruelly oppressed by this ill-contrived law of settlements.”
Though Smith didn’t object to the existence of the Poor Laws as such, he did object strongly to some of their consequences, which he portrays as the natural working-out of their internal logic following from the state’s supplanting religious authorities in the provision of charity. And Smith saw the progression of the division of labor in a free-market system as far more important than anything government could do to alleviate poverty.
As Smith scholar Dan Klein of George Mason University has written, “Smith was an outspoken and striking opponent of any fatalistic view of poverty and of the class supremacism that sometimes accompanied it.” Wealth of Nations was a revolutionary text for many reasons, one of which was Smith’s insistence that a nation’s wealth ought to be measured not by how much gold and silver the government had or how well the aristocracy lived, but rather by the living standards of ordinary people. Government often furthers those living standards by leaving the people alone.
Let’s fast-forward now to the 20th century. Hayek devoted the last third of his Constitution of Liberty, published in 1960, to “freedom in the welfare state.” Hayek believed that a free society is voluntary and rules-based, as opposed to coerced and arbitrary. That means general rules, evenly enforced and under which all are equal, ought to govern the affairs of free people who can choose to associate with whomever they please. It is not an anarchic view at all, and Hayek goes to great lengths to reconcile rules and freedom.
Hayek begins the section on the welfare state by noting that it is not socialism. He considered 1848-1948 to be the “century of European socialism.” The welfare state is an alternative to socialism that arose after socialism’s demonstrated failure in the Soviet Union and elsewhere. The welfare state does not rely on the public ownership of the means of production or the replacement of profit-and-loss signals with central planning by government. It’s a big redistribution scheme, and it can occur in countries with varying degrees of overall economic freedom.
That makes it harder to argue with. “So long as the danger came from socialism of the frankly collectivist kind, it was possible to argue that the tenets of the socialists were simply false,” Hayek wrote. “We cannot argue similarly against the welfare state, for this term does not designate a definite system.”
Hayek warned, “Though socialism has been generally abandoned as a goal to be deliberately striven for, it is by no means certain that we shall not still establish it, albeit unintentionally.” A recent example of this sort of backing into socialism was the nationalization of student lending during the Obama administration and the “forgiveness” of student debt during the Biden administration. The subsidization of student lending, which began in its modern form as a part of the Great Society welfare-state expansion, has effectively become socialized.
That caution does not mean for Hayek that the welfare state should not exist at all. “All modern governments have made provision for the indigent, unfortunate, and disabled and have concerned themselves with questions of health and the dissemination of knowledge,” he writes. “It can hardly be denied that, as we grow richer, that minimum of sustenance which the community has always provided for those not able to look after themselves, and which can be provided outside the market, will gradually rise, or that government may, usefully and without doing any harm, assist or even lead in such endeavors.”
The problem, Hayek writes, is that promoters of the welfare state always go beyond those aims. They see what he views as the limit on the state’s role as the starting point. And, unlike him, they view the ends of government policy as more important than the means. “The reason why many of the new welfare activities of government are a threat to freedom, then, is that, though they are presented as mere service activities, they really constitute an exercise of coercive powers of government and rest on its claiming exclusive rights in certain fields,” he writes.
This occurs when government becomes the sole employer in an industry, such as of doctors in countries with nationalized health care. Hayek also echoes Smith’s concerns about how the welfare state reduces liberty by allowing government to decide on your behalf how you will save for retirement or purchase health insurance. Those decisions are made by an administrative state that cannot be reliably legislated or democratically controlled. “So far as the preservation of personal liberty is concerned, the division of labor between a legislature which merely says that this or that should be done and an administrative apparatus which is given exclusive power to carry out these instructions is the most dangerous arrangement possible,” Hayek wrote.
That’s a good description of unaccountable regulatory agencies, but it also applies to the welfare state. Today in the United States, about three-quarters of federal spending occurs without annual votes from Congress. It covers Social Security, major health-care programs, and interest on the debt, because Congress said decades ago that Social Security and Medicare should do this or that and entrusted their operation to administrative agencies, and the government borrows to make up the difference between the money they pull in and the money they shell out.
Consistent with Hayek’s predictions, those programs, originally sold as ensuring that nobody would be poor in old age, now primarily benefit the middle class. They are redistributive, but not from the rich to the poor. They redistribute from the young to the old, which means, on average, from the relatively worse-off to the relatively better-off. Judging by the budget alone, the primary purpose of the U.S. government today is to subsidize the consumption of retirees.
The progressive income tax was also initially sold as something else from what it is. Hayek notes that Prussia adopted the first modern progressive income tax in 1891, and the highest rate was 4 percent. In 1910, the first British progressive income tax topped out at 8.25 percent. In 1913, after the passage of the 16th Amendment, the first American progressive income tax topped out at 7 percent. I don’t have to tell you that those aren’t the top rates today.
“Does anyone really believe that the average semiskilled worker in Italy is better off . . . because of the 49 cents which his employer pays for an hour of his work, he receives only 27 cents, while 22 cents are spent for him by the state?” Hayek asked in Constitution of Liberty. Today in the U.S., 31 percent of the average single worker’s pay goes to the federal government, and several more percentage points go to state and local governments, depending on where you live. It’s not quite 1960 Italy proportions, but, especially in high-tax states, it’s a little too close for comfort—and the federal government is still coming up roughly $2 trillion per year short.
That these programs and the taxation to fund them were adopted under false pretenses and have evolved largely on autopilot with little input from the people’s elected representatives was a major concern for Hayek. If you ask most Americans, “Do you think the government should make sure there’s a basic social safety net to keep people out of destitution?” they’ll say, “Yes.” Politicians heard that affirmative reply and created a system that does not do that and is bankrupting the government.
What would a better system look like? For that we turn to Friedman. He, too, was sensitive to the needs of providing for the poor and did not view it as illegitimate for the state to do so. “The very first policy proposal he ever crafted was for a guaranteed income in 1939, at the tail end of the Depression,” wrote Jennifer Burns in her biography of Friedman.
He grew up poor, though he resented the idea that this gave him any special insight into welfare policy. When someone shouted whether he had ever been poor during a lecture at Stanford University in 1978, Friedman replied that he had been, “more so than most of the people in this room,” but that was irrelevant. “Is there any one of you who is going to say, ‘I don’t want a doctor to treat me for cancer unless he himself has had cancer?’” he said.
Friedman devotes a whole chapter of 1962’s Capitalism and Freedom to poverty alleviation, though it is the shortest chapter in the book. He begins by urging private charity and notes that voluntary associations for the alleviation of poverty were in their heyday in the 19th century, before the modern welfare state. He then posits a positive externality to poverty alleviation, and writes, “We might all of us be willing to contribute to the relief of poverty, provided everyone else did.” He writes that he accepts “this line of reasoning as justifying governmental action to alleviate poverty; to set, as it were, a floor under the standard of life of every person in the community.”
He sets two conditions for such government action: 1) it ought to benefit the poor without regard to their occupation or age or where they live, and 2) it ought to distort markets as little as possible.
To that end, he posits his idea for a negative income tax to help the poor. It would establish a floor for income. Income above that floor would be taxed at the appropriate rate. Someone who made exactly the floor amount wouldn’t be taxed at all. Someone whose income was below the floor would be negative-taxed, i.e., subsidized, at an appropriate rate. This arrangement would remove disincentives to work that exist under current welfare programs because it would always pay more to earn a whole dollar than to take the subsidized partial dollar.
Friedman was cagy about what the floor would be, saying it would “depend on what the community could afford.” But the advantage of this system is that it would make clear exactly how much government poverty alleviation costs, since all of the money spent on the subsidies would go only to the poor and it would go directly to them without being filtered through a bureaucracy or the subsidization of particular goods and services.
Adding up outlays on Medicaid, CHIP, and all non-veteran income-security programs—this does not include Social Security old-age or disability benefits or Medicare—the federal government spent $1.082 trillion on programs that are supposed to help the poor last year. According to the Census Bureau’s official poverty data, which significantly overstate the number of people actually in poverty, 36.8 million people were below the poverty line last year. That means government antipoverty spending was $29,402 per person below the official poverty line. As Friedman said after doing a similar calculation in a lecture at the University of Rochester in 1978, if that money was really going to the poor, they’d be among the rich.
Despite having been a consistent part of his thought for most of his adult life, the negative income tax probably occupies such a small part of Capitalism and Freedom because Friedman did not believe government programs were the primary source of poverty alleviation. Aside from private charity, which Friedman commends as a “proper use of freedom,” the market system itself would alleviate poverty, as it has done around the world since the industrial revolution.
Friedman was also aware of the political-economy problems associated with welfare programs. In the Rochester lecture, he described Director’s law, named by George Stigler after Friedman’s brother-in-law, Aaron Director. Director’s law says that welfare programs in a democracy will tend to benefit the middle class, not the poor. The middle class is better at organizing politically, and the rich are too few in number to matter in elections.
Social Security and Medicare fit this description perfectly, as most of their benefits go to the middle class. That’s true because those in the middle class make more income, and benefits are somewhat tied to income, but also because they tend to live longer and pay taxes for fewer years than lower-income people. Friedman also gave as an example government spending on higher education, which benefits the largely middle-class population of college students at the expense of everyone else.
So, how should conservatives think about welfare? Based on Smith, Hayek, and Friedman, here are eight principles:
The best way to encourage the welfare of the people is a free economy with low taxes and a flexible labor market.
Government welfare programs are a legitimate function of the state.
Government welfare programs should be structured to discourage long-term dependence, providing a safety net for hard times, not a lifelong support structure.
Government welfare programs should be targeted broadly at helping the poor, not at specific subsets of people within the poor or at the non-poor.
Government welfare programs are well-intentioned, but they are subject to the same interest-group pressures, bureaucratic tendencies, mission creep, and waste as other government programs.
Government welfare programs are costly, not value-adding, to society as a whole.
Government welfare programs are not inherently socialist, but they can become socialist over time.
The government welfare programs that currently exist in the U.S. are fiscally unsustainable, and they are based on false premises about who they benefit and how they are funded.
The American conservative can, and should, say, “I believe antipoverty programs are a legitimate function of the state, and I support them. That is why I oppose the welfare state as it currently exists and wish to see it overhauled and shrunk.”
Dominic Pino is the Thomas L. Rhodes Journalism Fellow at the National Review Institute and National Review.