Government Denies Knowledge

In the 2013 fiscal year, the federal budget was $3.5 trillion. Of this incomprehensibly large amount of spending, $814 billion went to paying Social Security benefits, and another $772 billion went to Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP). An additional $398 billion was spent on other “safety net” programs. In other words, not counting government employee pensions or veterans benefits, a full $1.98 trillion dollars, or 57% of the total federal budget, were spent on transfer payments alone.

And remember, that’s just at the federal level.

In other words, government programs which make direct payments to those ostensibly in need (Social Security payments aren’t always going out to those who “need” it, for example) are kind of a big deal. Most people find this to be a good thing – we ought to give aid to those who need it.

While I certainly find spending on welfare to be far more morally acceptable than, say, imprisoning homeless people or fomenting wars abroad, the case for welfare payments and a social “safety net” is far less clear than the average liberal would believe.

 

The War on Poverty

The stated intention of welfare and the war on poverty is generous enough – to provide temporary assistance to those individuals and families in need. I say “stated” intention because, of course, the real intention is to provide the “bread” half of “bread and circuses”. Welfare is about power.

But I digress.

Welfare has existed for quite some time, both historically all over the world as well as in the contemporary United States. LBJ declared his “war on poverty” in 1964; surely, if government transfer payments were an effective means of alleviating poverty, we would be witnessing a considerable reduction in poverty since then, correct?

President Johnson’s aim in establishing the war on poverty was to make life easier for the poor so that they could lift themselves out of poverty and support themselves. The idea works something like this: poor people are so concerned about day to day financial issues that they can’t do what they need to do to improve their income; the government can then step in and provide them with some slack; with financial concerns less pressing, the poor can invest in themselves or do what they need to do to make themselves self-sufficient.

It actually sounds somewhat compelling. And frankly, I’m sure there are quite a few instances where this is exactly what did happen for a specific family or individual.

On the whole, however, the results of the war on poverty have been pathetic. In the 50 years since this “war” began, taxpayers have spent $22 trillion on welfare payments (in 2012 dollars), not including Social Security and Medicare. So, how much has poverty decreased?

Well, it hasn’t! As you can see from this graph, poverty was rapidly declining during the 50’s – before this massive increase in welfare began. And then right around the mid-60’s….it stopped. Like, completely. As in, there has been zero progress in eliminating poverty during this time, at least based on official measures. Even though spending on means-tested welfare programs skyrocketed during that time.

Now, it’s important to keep in mind that these official poverty statistics don’t include the money that the government has provided (here’s how they are calculated). This makes the figures above less striking, in that actual effective poverty is significantly less. Families on the margin are spending considerably more money than their “income” would suggest. In that sense, the war on poverty has actually been somewhat successful. But if judged on the original criteria of making people self-sufficient, it has been a wild failure.

And fostering self-sufficiency is the only truly sensible goal. Were that not the goal, then the alternative is to aim for creating a population of people completely dependent on the government for their survival to function as a permanent underclass. There is no in between – we either want people to be self-sufficient and out of poverty or not.

Inequality and the Welfare State

There is an additional dimension to the war on poverty that I have not yet mentioned: inequality.

Many liberals consider inequality at the very least to be a secondary reason to support the welfare state. In the face of the alleged massive inequalities that would arise in a more free market system, a system of progressive taxation and transfer payments to the poor can help balance things out.

This is a compelling narrative (for those who believe that inequality is intrinsically bad, at least), because it seems trivially obvious that taking money from wealthier people and giving it to poorer people would reduce inequality. And if there were no “friction”, as in, if money just magically left the hands of the wealthy and somehow found its way to someone in poverty, the narrative would be accurate.

But it’s not.

There is a little thing called “the state” that stands in between. And the state both makes the decisions regarding what kind of inequality-reducing programs there would be as well as administers them. This institution has quite a bit of power to influence inequality.

Liberals tend to believe that the state can and should use this power to reduce inequality, right the wrongs, etc. I certainly don’t dispute that the government has the ability to reduce inequality. But why would it act to reduce this inequality?

The state is controlled by the rich, powerful, and well-connected. The 1%, if you will. And I don’t just mean that the government is owned by Goldman Sachs and Citigroup; politicians themselves are among the wealthiest individuals in the country. Consider these statistics:

• The combined minimum net worth of Congress is $2.1 billion
• There are at least 188 millionaires in Congress
• The median lawmaker has a minimum net worth of over $460,000

And these numbers understate the problem, because lawmakers don’t report all of their assets and liabilities. For instance, they are required to disclose their mortgage (liability), but do not disclose their home values, which are obviously huge assets. Nor do they disclose other assets like cars, home furnishings, and non-interest-bearing bank accounts.

These are the very same lawmakers that collect ludicrously generous pensions and have recently voted to give themselves an extra $1000 per month subsidy to pay for their cars.

Clearly, these politicians are very generous people who can easily relate to those in poverty…

Since liberals don’t trust the wealthy in the private sector to “go against their own interests” and help the poor, what makes politicians better? Furthermore, they believe this despite evidence that people who are more likely to cheat or be corrupt are more likely to go into government.

Sure, there is quite a bit of rhetoric coming from the top brass in politics regarding a supposed desire to reduce inequality. But what about the reality? What of their actual policies?

Well let’s see. Obama has bailed out the “too big to fail” banks while letting many small businesses die and homeowners get evicted, and has presided over the most monumental monetary expansion in American history. That last one is the rub; it is inflation that is the single biggest driver of inequality, particularly at the extremes (the poorest and the richest are most effected).

But what about the fact that politicians do support huge welfare payments, you ask? In some cases, such as with food stamps, welfare programs are just thinly veiled corporate subsides. If food stamps do help the poor, that’s merely an incidental side effect of subsidizing the giant agricultural conglomerates.

Regardless of what you believe about incentives, the data in the US shows that increased spending on welfare programs has NOT reduced inequality.

 

The Economics of Welfare

Not only has our gigantic welfare state not reduced poverty, but it necessarily cannot. It can make the lives of poor people slightly better in the short term, but will inevitably lead to greater impoverishment for everyone in the long term.

How? The welfare state, like all government programs, affects peoples’ behavior. People tend to respond to incentives.

Consider the stereotypical entitled child in a wealthy household. Billy Madison, if you will. This child knows that he will have more than enough money to be taken care of from cradle to grave. And as a result, the rest of us make fun of their laziness and incompetence. Of course, this laziness is completely rational; there is a disutility to labor, so if you don’t need to work, then why bother?

These same incentives come into play just about everywhere (there are, of course, motivations to work besides money, which can operate in the other direction). If there is a system in place that pays people not to work, then this is exactly what will happen.

Consider, for instance, the famous Galloway-Vedder study, “Paying People to be Poor”. Since this study is from 1986, you’ll have to take the numbers themselves with a grain of salt; perhaps they have gotten better or worse since then. They found that:

• One in six people living in poverty were doing so by choice due to the generous welfare benefits they could receive.
• Every $1 billion in welfare spending increased the poverty population by 250,000 people.
• Between 1969 and 1979, the ten states with the highest paying benefits saw child poverty rise by 27.9%, while the ten states with the lowest paying benefits saw child poverty decrease by 17.4%.

And then of course, you have the famous SIME/DIME experiments (Seattle/Denver Income Maintenance Experiment). In these experiments, a control group was compared to an experimental group which was provided a guaranteed income. Here’s what happened:

• Husbands put in 9% fewer hours worked, and wives 20% fewer, compared to the control group. Young male adults worked 43% fewer hours.
• The length of husbands’ unemployment increased 27%, and for wives, 42%, relative to the control group. Single female heads of households were unemployed for 60% longer.
• Divorces increased by 36% more among whites and 42% more among blacks.

Considering our prior discussion above, this shouldn’t be the least bit surprising (except for maybe the divorce part – but we’ll get there later). These results have been replicated many times over (see here and here for the first two studies I came across).

In fact, these experiments likely understate the problem. The “control” group still had access to conventional welfare that was available at the time, so they are hardly a welfare-free group. Enrollees were also given different information about how long they could expect to receive a guaranteed income – unsurprisingly, those who were told they would have it longer responded even more strongly. Finally, there were no penalties against marriage, nor an additional penalty for getting a higher income, as there are in many current welfare programs.

For a more recent example, consider how the reduction in the length that people could collect unemployment benefits led to a significant decrease in long-term unemployment.

The disincentive to work makes everyone poorer in two ways: additional resources are spent to sustain people living below the poverty line, and their unemployment leads to a reduction in the total output of goods and services in the economy. If a few extra million people were working, then goods would be cheaper and more plentiful.

Among the most pernicious effect of welfare on the economy is the disincentive for poorer families to save money. Many of the means-tested programs that the government administers require that applicants demonstrate that they own less than a specified amount of assets. In other words, having a certain level of savings will disqualify applicants from collecting benefits.

Let’s make this more relatable with a thought experiment. Assume you have a job with guaranteed or near guaranteed job security, and thus a secure income. Your employer offers a program saying that if you are an employee who owns a house, you will be fired. How do you think this (silly) policy will impact your decision about whether or not to buy a home?

How Economies Grow

The negative effects due to decreased savings go much, much deeper than this. Obviously, if poor people don’t save, it becomes nearly impossible for them to lift themselves out of poverty. But the decrease in savings caused by welfare programs jeopardizes the economic growth that is responsible for lifting untold masses of people out of poverty in the first place!

Consider what life was like before the Industrial Revolution. Poverty was just the way things were for nearly everyone (except, of course, for the political leaders and exploiters). Surely, at least 90-95% or more of the population lived in utter destitution. Today, about 85% of the population of the US lives above the poverty line. And even for the majority of people who are underneath this (arbitrary) line, life is incomparably better than it was before capitalism raised everyone’s standard of living.

What is it about capitalism that leads to sustained increases in wealth and income?

The answer is capital accumulation; in short, saving and investing.

Consider Robinson Crusoe, who is trying to survive on his island by catching and eating fish. He is able to catch about three fish per day with his hands, and this is enough for him to get by. Unfortunately, he is not very secure in this situation – what if he gets sick or injured? Luckily, our Crusoe has an ace up his sleeve. He knows how to construct a net, which will allow him to catch ten fish per day.

The problem is that it will take two days for him to build that net, and he needs to eat for those two days. So he starts saving; he’ll go with less fish for a couple days and save up some of his catch (let’s ignore the fact that fish will go bad if left out. If you want, you can imagine we are talking about coconuts instead). These savings allow him to build the net and catch even more fish. Now he only needs to go out fishing every other day to sustain himself. And in that extra time, he can build a better shelter, construct a raft, or catch up on Parks and Recreation.

The same analysis holds true with a more complex economy with a deeper division of labor. Surplus production is saved up and used to fuel investments. These investments, if done properly (the fishing net can’t have giant holes that the fish can swim through, for instance), result in capital accumulation. This increase in the capital stock increases the marginal productivity of labor (wages/income). Our Crusoe can now earn ten fish per day instead of just three.

Welfare disrupts this process. Everyone, not just poor people, have a diminished incentive to save. Those near the poverty line will avoid saving because doing so will compromise their welfare income. Those slightly better off will avoid saving for the same reason, but also because social “insurance” makes them feel more secure. If they get fired, they’ll have unemployment benefits, for instance.

Those who are even more well-off, including the wealthy, are less inclined to produce the goods and services that help everyone if some fraction of it is going to be taxed (read: stolen) away. “Progressive” income taxation and capital gains taxes decrease the incentive for people to produce things. The more efficient producers end up being punished the most, and thus reduce their efficiency.

The end result is considerably less saving than there otherwise would have been, and thus less investment, less capital accumulation, and a lower marginal productivity. Put simply, a lower income for everyone. Future generations will experience significantly greater poverty than they otherwise would have due to reduced economic growth.

 

The Social Consequences of the Welfare State

Thus far, I’ve focused primarily on the economic consequences engendered by a pervasive welfare state. But the effects of the welfare state go far deeper than this. In fact, welfare tends to corrupt important institutions in society, including the family and democracy itself.

The origins of the modern welfare state lie with Otto von Bismarck. And like most of the policies that originated from Prussia, its purpose was to help control the population. Welfare does an admirable job of this, primarily by creating interest groups as a means of “divide and conquer”.

In other words, welfare (or income redistribution schemes in general) fosters class warfare. The resources that are distributed through these schemes are not distributed evenly, which leads to cries of injustice. Perhaps southerners get more than northerners, old people get more than young people, black people get more than white people, homeowners get more than renters, women get more than men, or single people get more than married people (other than this last one, I don’t actually know if these particular relations are true). Each of these groups now have competing interests, and can direct their ire and envy at some other social group.

For instance, the AARP, an incredibly powerful lobbying group, will advocate for increased Medicare and Social Security benefits – at the expense of other programs, if need be (and of course, the cost needs to be paid by someone). If an old person is doing poorly financially, they can blame, say, younger people who have chosen not to work, because they are not paying into the system. They may then advocate that any welfare payments that do not go towards people who are working or looking for a job be reduced.

The specifics aren’t all that relevant; what matters is that the population becomes divided. Some groups will have natural “enemies” in other groups. Most fundamentally, there becomes a class war between those who pay into the tax system and those who net benefits. And even among the taxpayers themselves, separate classes arise. For instance, black people will receive disproportionately less Social Security due to shorter lifespans, on average. Similarly, men will receive less than women. This is all despite contributing the same amount.

And then there is another interest group that is created – that of the bureaucracy itself. The welfare state provides jobs to legions of bureaucrats, social workers, health care professionals, and so on. These people directly benefit from an expansion of the welfare state, but their advocacy for it has nothing to do with charity.

Over time, people view themselves less as a part of a community. Fellow citizens will look at each other with hostility. You need not look far to see this today. Many conservatives will look at poor people with scorn and claim they brought it upon themselves (not true). Consider how people react negatively when standing behind someone at the grocery store who pulls out their EBT card. And consider the ire of many in the lower class when some white dude in a suit says that taxes should be lower.

The longer this class warfare goes on, the more heated it becomes. This is largely due to the fact that welfare fosters a dependence on government in order to survive.

I’ve heard many liberals cite statistics claiming that the vast majority of welfare recipients are only “on the dole” for a few months and then stop receiving benefits. I can’t argue with that – most people who become poor at some time or other will be out of poverty soon after. But at any given time, most of the people who are poor will remain poor for the long-term. Here’s an analogy: if you measure the length of hospital stays by considering them as a percentage of admissions, they will seem short. But if you measure the length of hospital stays by considering the number of beds currently occupied by long term patients, they will seem long. So for instance (the following numbers are made up to illustrate my point), you could say that 90% of welfare recipients will be receiving benefits for a year or less, but that 90% of recipients at any given time are long-term recipients, and likely will continue collecting benefits for a while. The statistic you will use depends purely on your political agenda.

Back to dependence. If you’ve been collecting benefits for years and haven’t been working, then chances are you will find it nearly impossible to get a job and become self-sufficient. After all, you have no experience and likely few skills.

As discussed earlier, welfare significantly decreases the incentive for people to save money. This makes them even more dependent. There is a whole class of people who would have an incredibly difficult time finding a job, but also have no emergency fund. Just imagine what would happen if their benefits are reduced or, dare I say, stopped. You don’t need to imagine; just look at what happened last year when a glitch in the EBT system prevented people from using their food stamps for only a few hours.

This dependence gives the government a huge amount of power. I’m not talking about the typical conservative complaint of vote-buying. When you depend on the government to survive, you are far less likely to do anything revolutionary or that may jeopardize your benefits. This makes the state’s power far more secure (well, until the inevitable government default or hyperinflation caused by fiscal irresponsibility).

So how dependent on the government have Americans become? It would be hard to measure this precisely, but we do know that 35.4% of Americans are currently on welfare, and if you include Social Security, Medicare, and veteran’s benefits, the number goes up to 49.5% of the population. We know that 65% of children are living in households receiving federal aid. Add in the 7% of the country that owes its employment to the government, and you have a very easily controlled population.

The Effects of Welfare on Families

One of the most nefarious effects of the welfare state is its impact on the family. It exerts its family-destroying effects through several channels.

Most obviously, welfare programs have stipulations that amount to a direct attack on the choice to have a normal, cohesive family. About half of welfare laws mandate that there cannot be an employed father in the household for it to receive assistance. The other half don’t provide benefits if there is a father in the household, period.

I can understand where these requirements are coming from. The intent is to make sure that people don’t take advantage of the system and only those who truly need it will collect benefits. Nevertheless, incentives are incentives, and people respond to them. The end result is a dramatic increase in single motherhood.

      

As a mostly nonreligious libertarian, I have no moral qualms with having children out of wedlock, people getting divorced, etc. But it is beyond dispute that there are negative consequences to this kind of behavior, and these consequences help perpetuate poverty, crime, and other social ills.

While that may be the most direct effect that welfare has on families, it is far from the only one. Welfare benefits imply that the family’s role as a financial support vehicle is considerably decreased. Peoples’ sense of responsibility are replaced with feelings of entitlement. While people used to take care of their parents when they grew older, now they are wards of the state, and children feel less responsible for taking care of them. Conversely, parents have less of an incentive to take good care of their children, keeping them away from drugs, crime, and bad decisions in general.

Things like subsidized nurseries and daycare centers encourage their overuse. Children are cared for by institutions rather than by their parents. And the high taxation that is necessary to fund the welfare state makes it harder for families to get by on a single income, necessitating further use of these services.

Whether intentional or not, breaking up the family is another way that the state maintains its grip over its citizens. Historically, the family has been the institution that is most responsible for teaching children about the world and creating happy and productive new generation. In other words, the family is one of the state’s biggest competitors. By decreasing the strength of the family unit, resistance to the state breaks down even further.

 

Won’t The Poor Be Starving In The Streets?

“Suppose that one hundred years ago someone tried to persuade me that democratic institutions could be used to transfer money from the bulk of the population to the poor.  I could have made the following reply: ‘The poor, whom you wish to help, are many times outnumbered by the rest of the population, from whom you intend to take the money to help them.  If the non-poor are not generous enough to give money to the poor voluntarily through private charity, what makes you think they will be such fools as to vote to force themselves to give it?'” – David Friedman

It’s incredible how often I hear this question from both liberals and conservatives, as though there were mass deaths of starvation before the welfare state took shape.

The reality is that the greatest enemy of the poor is the government itself. As discussed above, the welfare state leads to depressed wages and low economic growth, fosters a dependency on the government, and weakens peoples’ sense of personal responsibility.

But the government’s arsenal against the poor consists of far more than just welfare programs. The minimum wage prevents those who have the least skills from finding employment. Occupational licensure and regulations prevent individuals who do have skills from using them to help take care of themselves by getting a job or starting a business. Zoning laws and rent control make housing more expensive and more difficult to find, respectively. Worst of all, monopoly central banking creates inflation, which is a hidden tax destroying the purchasing power of our currency.

Conservatives often complain that about half of the population does not pay any taxes. This is actually a misconception. In fact, the bottom quintile of households pay an average of 16% of their income in taxes. At the margin, 16% makes a HUGE difference. This tax burden reduces the choices that poor people have. For instance, while saving for retirement is usually a good idea, the Social Security taxes that are taken from someone living on the margin could make the difference of whether they can feed their children that day or not.

But the most dastardly, morally repugnant thing that governments do against the poor is to essentially wage war against the homeless. For instance, in many cities across the country, it is illegal for citizens to feed the homeless people living there. This has received some media attention recently due to the heroic civil disobedience of one elderly man in Fort Lauderdale who was arrested multiple times for feeding the homeless, but just kept going back to do it some more.

Through all these ways and more, the government has created a significant underclass of people living in poverty for no good reason and through no fault of their own (despite the occasional conservative claiming that the poor have brought it upon themselves).

Private Charities vs. Government Handouts

Even if all of the above laws and government policies were removed, there would still be some number of people who simply cannot take care of themselves, or who come upon hard times. When their family and social circle cannot take care of them, private charities step in.

Many people balk at this suggestion, thinking that private charities cannot possibly provide enough of a safety net for those in need. Technically, that is true. There will surely be people who slip through the cracks. But before dismissing the idea of privatizing the welfare state, consider how poorly the welfare state has done. We are not comparing the libertarian position with some mythical, utopian vision where everyone is taken care of and gets to hold hands in a circle and sing Kumbaya. No, we must merely establish that private charities will do a better job than welfare (for libertarians, the immorality of welfare would be enough, but I expect the non-libertarian readers would require more).

So, will private charity be enough? Consider that in 2013,

• Americans gave $335.17 billion to charities
• 95.4% of households gave to charity, and
• 95% of high net-worth households gave to charity

Certainly, not all of this charitable giving has gone to the needy – some goes towards the arts, for example. To a large extent, this reflects a crowding out effect by welfare itself. If the onus of helping the neediest is already on the government, most private individuals will put their charitable dollars elsewhere.

While this is a lot of charitable giving, it still doesn’t match the $1 trillion per year that the government is paying out. Where would the private sector make up that shortfall?

First, consider that the economic growth that is a consequence of free markets will steadily decrease the amount of poverty as well as increase the amount of real wealth in the world. In other words, given time, free markets will largely resolve the problem itself.

That’s all well and good, but that answer will not do for right now. There is poverty today, and something ought to be done about it.

Realistically though, how many people really need welfare or charitable assistance? I contend that the number is far less than what proponents of the welfare state imagine. When you remove the portion of people who could work but choose not to, the need would drop considerably. The number I’ve provided a few thousand words earlier was one in six who are deliberately avoiding work to remain on welfare. Add those people back into the labor force, and more goods and services become available to everyone at a lower cost.

Then there is the question of how bad living in poverty really is. Most people who are living in “poverty” in America have modern amenities and are not struggling to put food on the table. Granted, there most certainly are people in America who are legitimately in poverty and in need of help. And granted, it’s easier for me to say this while living comfortably. But there is simply no denying that the characteristics of most people living under the poverty line in America are orders of magnitude more comfortable than, say, the lives of nearly all of humanity prior to the Industrial Revolution. Consider that of those households under the poverty line,

• 97.8% have a refrigerator
• 96.6% have a stove
• 96.1% have a television
• 93.1% have a microwave
• 83.4% have an air conditioner
• 83.2% have a VCR/DVD player
• 80.9% have a cell phone
• 68.7% have a clothes washer and 65.3% have a dryer
• 58.2% have a computer, and
• 54.9% have a landline telephone.

By these standards, the majority of middle class American families living in 1960 would be beneath the poverty line. Clearly, the concept of poverty has radically changed as capitalism has fueled economic growth.

Many of these people who are poor but managing don’t need welfare or charity, but would be fine with some short term aid from their family, for instance. Or, they can “rough it” the same way many people do voluntarily these days. I understand it’s not possible for everyone, nor is it the most ideal experience, but these two roommates bought almost nothing for a full year and saved $55,000. And this student lived out of his car for his entire freshman year. Poor people can learn from “minimalists” and find ways to further reduce their expenses.

I don’t mean to sound insensitive or to belittle the difficulties that many poor people face. My point is not that their lives aren’t difficult; rather, it’s that there are options. Just because someone is not well off doesn’t mean they are going hungry.

Okay, but what about the people who really, truly need help? For instance, there are people with disabilities who have no means of supporting themselves, and their families may not have the means to take care of them either.

Here’s where private sector solutions come into play. First of all, with a significantly reduced tax burden, there will be a considerable spike in charitable giving. There would be, at a minimum, an extra trillion dollars floating around that hasn’t been taxed (and a lot more than that if we lived in a truly libertarian society). Some portion of that would go to charity, and another portion of that would be invested, thus speeding up the elimination of poverty in the long run.

Then there is the fact that private charities are indisputably more effective and efficient than the welfare system. Private charities, unlike the monopolized welfare system that is shielded from financial losses, must be more discriminating with their use of funds. In other words, private charities are far better at identifying and helping those who are truly needy.

Consider these facts about welfare recipients as provided by the Census Bureau (these number are from 1983, but I couldn’t find any recent data. If you can find data from the past few years, please let me know):

• Only 41% of all families living in poverty received food stamps, while 28% of families that did receive food stamps had incomes above the poverty level.
• Only 23% of families living in poverty lived in public housing or received subsidized housing benefits, while nearly half of the families receiving housing benefits were above the poverty line.
• Only 40% of families living in poverty were covered by Medicaid, yet 40% of all Medicaid beneficiaries were above the poverty line.
• Worst of all, 41% of all families living in poverty received no means-tested benefit of any kind from government, while more than half of all families that did receive benefits were above the poverty line.

Put simply, welfare isn’t even helping the people who need it most. Huge sums of money that are intended for helping the neediest among us are being given to people who could make it on their own if they tried. Ironically, private charities have formed the safety net for the families who fell through the cracks of the welfare system.

Private charities aren’t just better targeted; they’re also vastly more efficient than welfare. Government redistribution agencies absorb on average 70% of the total funds in overhead costs, significantly reducing the amount available to those in need. For private charities, that number is one third by a conservative estimate. It would most certainly be lower if religious charities were included, since they often rely on volunteer labor, which also decreases costs.

Before concluding this ridiculously long blog post, I’d like to briefly mention mutual aid societies, which thrived across America back in the days before the welfare state. These voluntary organizations filled the role of social insurance (members would pay dues, and then collect payments in times of need) before the New Deal destroyed them. These fraternities were particularly beneficial to minorities, immigrants, and the poor, and one in three males were members of a mutual aid society in the 1920s. These societies deserve an article of their own; for now, please click that link to learn more about them.

 

Summary

This was a long article, so I will summarize the main points here:

• America’s welfare state is incredibly expensive ($1 trillion per year) but has done little or nothing to reduce poverty. Poverty had been cut in half in the decade or so preceding LBJ’s “Great Society”, but then all progress stopped.
• Since most legislators belong to “the 1%” and wealthy elites control Congress anyways, the state is the last institution you would want to give the task of providing for the poor.
• Welfare encourages people at the margins to NOT work. People who don’t actually need support end up collecting a considerable amount of welfare benefits.
• Welfare discourages savings. As such, it hampers economic growth by slowing capital accumulation or even leading to capital consumption. Over the long term, this prevents the free market from continuing to lift the masses out of poverty, which it has been doing since the Industrial Revolution.
• Welfare tears at the fabric of society by creating different social classes with competing interests.
• The welfare state creates a permanent lower class of individuals who are completely dependent upon the government in order to survive. This makes society less stable, but helps the ruling class control the population.
• Welfare is destroying families and creating unfavorable demographic shifts towards increased single-motherhood. This perpetuates poverty and dependence.
• Governments’ interventions in the market have made it far more challenging for individuals to take care of themselves and make a living. This has increased the perceived need for welfare.
• Private solutions to poverty are far more effective than welfare. Private charities are more efficient and more targeted at the right people than welfare is, and therefore better at fighting poverty.

Thank you for reading if you’ve made it this far! If you enjoyed this post, feel free to leave a bitcoin tip for me.

I don’t usually read socialist material (although I did read Keynes’ General Theory once, though that is more Fabian socialist than socialist proper), but I’m going to start now. I enjoy exploring a variety of intellectual traditions, including those that diverge from my personal beliefs – I think it helps keep me sharp. But socialism as an economic theory is nonsensical, due to the calculation problem. Without the market system of prices, a socialist economy would have no rational way to allocate resources. Because of this, I’ve mostly ignored economic writings of a socialist bent.

However, while reading a recent article at Jacobin Mag called “Against Sharing”, railing against the alleged corporate greed of Uber and other peer to peer companies, I realized that there is more to gain from reading this kind of material than merely seeing poor economic arguments rehashed over and over again. Actually dissecting the beliefs that socialists hold and the rhetoric they employ can be highly instructive. As such, I’d like to respond to some of the claims made in this article.

I’ll let the author, Avi Ascher-Shapiro, provide a summary of his claims: “’Sharing economy’ companies like Uber shift risk from corporations to workers, weaken labor protections, and drive down wages.” A fairly predictable panoply of criticisms, all of which are neutralized by the fact that

1. Employees of Uber and any other company voluntarily choose to work there.
2. If Uber didn’t exist, consumers would not be experiencing the benefits that it provides, and the workers wouldn’t either. They would just have to choose from the more limited selection of other available jobs – jobs which they find less preferable, as evidenced by the fact that they haven’t gone to work at them despite being free to do so.

These facts are trivially obvious, yet supporters of free markets constantly need to point them out. I whole-heartedly welcome a socialist/progressive response to these points.

Anyways, the article itself is well written and I think would be convincing to a lot of people who haven’t already been inoculated against these arguments with an education in basic economics. But it is all smoke and mirrors – mere wordplay which cleverly obfuscates the problems inherent in socialist (and most leftist) economic analysis. Unfortunately, many people will simply absorb what they read uncritically; the simple and obvious rebuttals don’t come to mind.

With that, I’d like to dive further into the article (I suggest you read that article, linked above, to get a better idea of what I’m saying here. It is fairly short.). Much of the evidence advanced in favor of his points are quotes from disaffected Uber drivers – an excellent device for writing convincing prose, but hardly a substitute for real argument. You can find employees of any company in the world who are more than willing to complain about their employer, but human action speaks louder than words.

Almost everyone complains about their job at some point, but the vast majority choose to remain at them because they ascribe a higher value to the mediate effects of their labor (that is, getting paid) than they do to the disutility of labor (that is, their distaste for work). When this relationship fails to hold, people quit, and it their quitting that alerts us onlookers to their change in valuation.

As such, we can largely dismiss this “evidence” out of hand. Yes, there is certainly something to be said about using examples of real people in an article such as this one, and I applaud Mr. Ascher-Shapiro for using them in a convincing way. However, they do little to prove his claims. Let’s move on.

Apparently, one of these Uber drivers chooses to lie about enjoying his job when customers ask about it. Why?

“After passengers finish a ride, Uber asks them to rate their driver on a scale from one to five stars. Drivers with an average below 4.7 can be deactivated — tech-speak for fired.”

Ascher-Shapiro writes of this as though it is a bad thing for companies to try to satisfy their consumers. It’s a simple rhetorical trick; make it seem as though employees are forced to lie so as to avoid getting fired, and this is a factor that makes the job less tolerable. The implied logic is circular: Uber employees must do something immoral (lie) in order to keep their job, which makes their job unpleasant. But that assumes that the driver did not like their job in the first place. Someone who does enjoy driving for Uber will find the point completely irrelevant, and someone who doesn’t enjoy it is already in that position, which they’ve brought on themselves for choosing to continue working there.

One can certainly argue that Uber’s firing policies are misguided, and they very well might be. But the market, made up of many individuals’ human action, will determine that. If Uber fires so many people at will for inexplicable reasons, people will be far less inclined to become Uber drivers – forcing Uber to change their policies or let one of their numerous competitors swipe their drivers, the backbone of their business model. Differently stated, from an article on Forbes:

“And some drivers say that Uber is exploiting the opaque policy to fire them for speaking out against the company while saying it’s for another reason — or never giving a reason at all.”

Many companies will fire employees for speaking out against them, and my only response is: “duh!” If the author of that Forbes piece herself wrote a new article called “Against Forbes”, it would seem well within the purview of Forbes’s owners to fire her. It’s a very simple matter of property rights. In the same way that you have the right to kick someone out of your home if you don’t want them there, businesses have the right to fire employees at will, even for wholly irrational reasons. In this case, Uber is firing employees for providing poor service or by trash talking the company – actions which can obviously lead to lower profits and more consumer dissatisfaction.

Okay – back to “Against Sharing”. What do Uber workers want?

“’We want the company to understand that we are not just ants,’ Joseph DeWolf, a member of CADA’s leadership council, told me at the Teamsters Union hall in El Monte, California. ‘What we want is a living wage, an open channel of communication with the company, and basic respect.’”

Of course, having an open channel of communication with the company and basic respect are important, and would likely result in both happier drivers and more profits for the company. I have no idea what these disaffected drivers feel constitutes Uber’s lack of respect, or what sort of communication is available or not. Either way, they are company policies that can be changed if they aren’t optimal, but that is a decision that drivers do not have the authority to make. They are stakeholders, not shareholders. They do not own the company, and thus do not have any right to make that kind of decision.

But what about living wages? There are so many problems with the concept of a “living wage” that it would be imprudent to go into too much detail here. Rather, I will discuss this very briefly and point you to my 6000 word tirade against the minimum wage.

How can a living wage be defined? What it takes to “live” varies considerably in different regions, and the definition of a “living” isn’t clear. Prior to the industrial revolution, even people of great wealth did not possess many of the things that most poor (though not the poorest of the poor) people enjoy today. Is a living wage merely enough to subsist, or is it enough to live “comfortably” (however that would be defined)? These problems are insoluble.

We also run up against the points I brought up originally – what would these drivers be doing without Uber? If Uber didn’t exist (and Uber’s ownership is under no obligation to continue existing and working – they are not slaves, after all), these drivers would have to look elsewhere for work, an option which is currently open to them anyways. The fact that they have chosen to work with Uber speaks far more loudly than whatever complaints they may have, even if there is some legitimacy to them.

Mr. Ascher-Shapiro then accuses Uber of luring unsuspecting drivers with a malicious “bait-and-switch” – originally, prices for rides were fairly high, but due to competition from Lyft, fares needed to be lowered. The 80% share that drivers get to keep of the fare was suddenly no longer enough. Even worse, the “bait” caused people to buy cars just to become Uber drivers:

“Drivers rushed to sign up, and thousands leased and bought cars just to work for Uber — especially immigrants and low-income people desperate for a well-paying job in a terrible economy.”

“Uber drivers have no say in the pricing, yet they must carry their own insurance and foot the bill for gas and repairs — a cost of 56¢ per mile, according to IRS estimates. With Uber’s new pricing model, drivers are forced to work under razor-thin margins. Arman, for instance, made about $20 an hour just a year ago. And now? Some days he doesn’t even break minimum wage.”

Yet again, these points are disingenuous. Uber didn’t make these people buy new cars. In fact, their marketing message on their website is aimed at people who already own cars:

It is certainly an unfortunate circumstance for those people who bought cars anticipating a certain level of income. But uncertainty is a fact of life, and a given in the market. Not even pure socialism can smooth over uncertainty. Heck, even a socialist party wouldn’t pay its employees the $20/hour that they have been fighting tooth and nail for. And really, there is nothing special about the uncertainty inherent in becoming an Uber driver – people face this kind of risk in any career decision they make. I moved to a new city in order to work at my current job, but if my employer’s business goes south (or if I get fired), I will be left without a job. It would be inappropriate to blame the company for this, though I may feel some understandable resentment towards the company if this were to occur. It is completely appropriate for an Uber driver who bought a car for the job to be pissed about the circumstances they’ve found themselves in, but that is certainly not a rational argument for higher prices (which, for obvious reasons, is something that Uber’s management would prefer as well).

Nor is the uncertainty merely a downside – there is the possibility that prices will rise again. If so, drivers will reap the rewards.

“Arman often works up to seventeen hours a day to bring home what he used to make in an eight-hour shift. When he emailed Uber to complain about his plummeting pay, he said the company blew him off. Uber’s attitude is that drivers are free to stop working if they are dissatisfied, but for drivers like Arman who’ve invested serious money in their cars, quitting isn’t an option.”

Again, the frustration that drivers such as Arman feel is perfectly justified. The circumstances they’ve found themselves in are unfortunate, and they have every right to be upset. However, that imposes no obligation upon Uber or any other employer to maintain pay at consistent rates.

In fact, Uber is correct in this quote. Drivers are free to stop working if they are dissatisfied. Arman and others like him made a poor decision in buying a car here, but that doesn’t oblige Uber to support them. I’m unfamiliar with Arman’s circumstances and I have the benefit of hindsight, but frankly, it seems like a downright silly idea to have bought a car if only for this purpose.

And of course, buying this car in no way makes it so that “quitting isn’t an option”. In fact, if the pay has decreased considerably, that makes quitting a fairly attractive option, I would say. And now Arman has the benefit of a new car to open up various other job opportunities in locations that would have been inaccessible to him otherwise. I wish him the best of luck.

The implication of Mr. Ascher-Shapiro’s article is that Uber has some sort of obligation to pay its workers a certain amount of money, guaranteed. I’ve found this to be a common thread between many socialists and progressives (often exemplified in the concept of a basic income guarantee). What this amounts to is just a denial of personal responsibility on the part of these thinkers. Everyone has a responsibility to take care of themselves, but the socialist impulse is like that of Homer Simpson as Springfield’s Garbage Commissioner: “Can’t someone else do it?” The sentiment is understandable given all the existing interventions that make it systematically more difficult for people to take care of themselves (minimum wage, occupational licensing, regulations, monetary inflation, etc.), but the answer is to remove those things, not to add more interventions.

“Meanwhile, Uber acts as if it’s doing drivers a favor by offering them work in the first place. Uber CEO Travis Kalanick, who loves giving inspirational talks about innovation, often claims that Uber helps people ‘become small business owners.’ But working long shifts and forking over 20 percent of fares to a group of Silicon Valley app-engineers doesn’t really count as owning a small business.”

Yet again, Mr. Ascher-Shapiro takes an obvious fact and distorts it in a grossly misleading way. Uber does benefit drivers, and this is indisputable. If drivers didn’t benefit, they would choose some alternative arrangement. Of course, Uber isn’t doing them a favor; the benefits are clearly mutual.

And what about Uber taking 20 percent of the fares makes being a driver any less of a small business? All business owners have expenses, often including variable expenses that are in direct proportion to their revenues. For instance, shirt manufacturers must pay the cost of the cotton that goes into their product. And oftentimes, venture capitalists will own a stake in someone else’s business and take a percentage cut. In this case, it wouldn’t be too off the mark to say that drivers own an 80% stake in their driving business. And the benefits they get from “forking over” a percentage are enormous – I seriously doubt these drivers would find riders without the infrastructure that Uber has already built up.

As an aside, there ARE organizations that take a cut of peoples’ earnings in a way that is clearly exploitative, though you’ll never hear a socialist advocating against it. Governments, through income taxation, steal a considerable percentage of their citizens’ incomes, often significantly more than 20 percent. The difference between Uber and the government in this regard is that drivers submit themselves to this 20 percent policy on a purely voluntary basis; governments, on the other hand, will take your money whether you like it or not.

“But that is just empty spin: drivers aren’t partners — they are laborers exploited by their company. They have no say in business decisions and can be fired at any time. Instead of paying its employees a wage, Uber just pockets a portion of their earnings. Drivers take all the risks and front all the costs — the car, the gas, the insurance — yet it is executives and investors who get rich.”

I’d be curious to hear what Mr. Ascher-Shapiro thinks about entrepreneurs in general. Is he not aware that a major role of the entrepreneur is to front the costs and be subject to the risks of the market not valuing his idea enough for it to be profitable? Uber is not pocketing “a portion of their earnings”; it would be far more accurate to say that Uber is charging a fee for a service they provide (an infrastructure that allows would-be drivers to connect with would-be riders).

Uber may or may not be a well-managed company. I do not have the expertise to weigh in on this question. Many of the complaints that drivers may have against the company could be legitimate, in which case everyone will benefit from a change in policy. That being said, it is a gross mischaracterization of the situation to claim that Uber is exploiting drivers or hurting the working man.

Readers, I’d like to hear what you thought of this post. I rather enjoyed writing it, and I’d like to know if you guys would like for me to write more posts like this, where I dissect the arguments of some other intellectual or pundit. Please let me know in the comments.