Liberals and conservatives have long bickered over the question of whether welfare is good or bad for the economy. Liberals have rallied to the defense of New Deal and Great Society programs aimed at providing things as diverse as Social Security checks, food stamps, housing subsidies, and medical care for the poor and the elderly. Their argument has been that these expenditures are a stimulus to depressed sectors of the economy and invigorate those members of society who might otherwise despair of ever contributing productively to the system.
Conservatives, on the other hand, have called for a retreat from the generous welfare policies of the past. They argue that the huge growth in government social programs since the thirties has been a drag on our economy, swallowing up more and more money to redistribute income and encouraging the poor to look upon government benefits as a substitute for the kind of hard work that creates prosperity.
Neither side is at a loss for arguments to support its theory. Conservatives point to the miserable performance of the British economy in recent years and attribute this to the legacy of its Labor governments. Conservatives also argue that during the 19th century, a period of unprecedented economic advance, the world came closer to laissez-faire and free trade than at any other time. Finally, there is the example of the last decade, when the welfare state has become larger than it ever has been, while economic performance has turned sour.
But before you toss out your ADA membership card and take out a subscription to the National Review, consider the examples at the liberals’ disposal. The poor performance of Britain’s economy began in the late 19th century, when Britain still had laissez-faire, and has recently worsened rather than improved under the resolutely conservative and monetarist government of Margaret Thatcher. And while the prosperity of the welfare state dipped in the seventies, between 1945 and 1970, the period of the greatest increase in the peacetime role of the government and of the greatest level of income redistribution to the poor that the world has ever known, all the major developed democracies—including Britain—grew more rapidly than they had ever grown in history. So the great ideological battle between the liberals and the conservatives over whether welfare stimulates or depresses the economy has been more or less a draw.
Conservatives and liberals find themselves fighting to a similar draw when they debate whether welfare states can provide their poorer members with a higher standard of living than more conservative, laissez-faire states can. Liberals argue that the poor, left to fend for themselves, will flounder; conservatives argue that the rising tide will lift all boats. Again, there is no consistent correlation between the ideology of either the left or the right and reality. A traveler will see no great differences in the standard of living of the poor when he or she travels from Switzerland, where the role of government and the welfare state is fairly small, to Sweden, where it is relatively large. Nor can one observe a difference in the standard of living among the poor in traveling from Japan to Great Britain, even though Britain’s welfare state is larger than Japan’s.
If the size of government and the extent of its effort to maintain a welfare state bear little relation to the prosperity either of a nation or of its poor, what does mainly determine whether an economy thrives, or whether the situation of the poor improves? It is, in large part, whether a society avoids redistribution to favored groups in its middle and upper classes. Unfortunately, governments often collect money from the society as a whole and pay it out to groups that are far from poor. This not only fails to help the poor, but is destructive to the economy as well.
To Each According to His Clout
It is welfare for those who are not poor that largely explains why economic growth is slowing down. The culprit is not so much left-wing or right-wing ideology as the acquisitiveness of special interests at the expense of the collective interest of the nation. By lobbying the government or combining and colluding in the marketplace to influence prices and wages, these organizations—professional associations of physicians and lawyers, labor unions, trade associations, farm organizations, and oligopolistic collusions—bring greater harm to the economy at large than benefits to themselves.
Most organizations for lobbying or cartelization have no incentive to make the society in which they exist more efficient or prosperous; the members of the organization will get only a minute fraction of the society’s gains from greater efficiency. Normally these organizations can best serve their members by seeking a larger slice of the economic pie rather than enlarging it. If, as is the case in countries like the United States and Great Britain, the organizations are small in relation to the whole society, they rationally will persist in distributional struggle even if the loss to society is much greater than the amount won by the special-interest group. For example, the lawyers gain larger fees by blocking no-fault insurance, but the rest of us lose much more than they gain when our society becomes more complex and litigious as a result. An organization that represents 1 percent of the income-earning capacity of the country will bear on average only 1 percent of any losses in social efficiency, but will obtain the whole amount redistributed to its membership. So its clients will gain from any redistribution unless the excess burden is a hundred times or more greater than the amount redistributed. A society dense with organizations for collective action is thus like a china shop filled with wrestlers battling over the china, and breaking far more than they carry away.
There are three reasons why ideological differences between laissez-faire governments and welfare-state governments ultimately have little bearing on whether an economy prospers. First, they overlook the force of cartelization, by which firms and individuals in the marketplace can maintain noncompetitive prices or wages, obstruct the free flow of resources, and slow down the innovation that brings more rapid economic growth. History shows that this process can occur in either a laissez-faire economy or a welfare-state economy.
The second reason the traditional argument about the limits of government or democracy does not explain the variation in economic performance across countries is that it neglects the way the governments really work. Socialist and free-market theorists alike presume that governments distribute benefits rationally, for good or ill. But the rationality of government action is undermined to a great extent by the lobbying process. For example, Congress maintains price supports for the dairy industry, even though this has meant higher milk prices for consumers and so many farmers producing milk that the government has just started a program to pay farmers not to produce milk. Why does the government get tangled up this way? Because it is reacting in large part to the lobbying efforts of the dairy industry, rather than serving the interest of the nation at large.
The third reason why the traditional slogans of left and right have failed to be of much help focuses specifically on the issue of welfare. Simply put, the traditional ideologies of left and right make the mistake of focusing on the extent to which government policies redistribute from the rich and middle class to the poor, instead of on the overall picture of redistribution, of which payments from the rich and middle class to the poor are only a small part.
When we focus on government policies that are designed to aid low-income people, we are looking at the tail of the elephant—at only a tiny part of what governments actually do. Most redistribution is not from upper- and middle-income people to low-income people; it’s from middle-income people to other middle-income people, or from the whole society to particular groups of rich people, or from one group to another where the groups are distinguished not by one being poor and one being rich but only by the fact that some groups are organized and some are not.
This is not an accident. There is no society in which the poorest are well organized. If you look at contributions to candidates for the House of Representatives or the Senate, you do not find organizations of welfare mothers or other recipients of public assistance for the poor giving major campaign contributions. Nor do you find well-organized or well-financed lobbies working for the poor in other societies. It is big firms, upper-income people, the professionals, and blue-collar workers with jobs who are organized. And it is to these groups for the most part that the government redistributes income. In any society, there is always some compassion and sympathy and hence some aid to the poorest people. But that is only a small part of what the government does.
Because the middle and upper classes have a greater capacity than the poor to lobby on their own behalf, traditional ideology ends up playing less of a role in the health of an economy than the degree to which redistribution is restricted to its theoretical goal—taking from the well-off to help the poor. If much of the money that ostensibly is used to provide a comfortable cushion for those at the bottom is actually diverted to the middle and upper classes, the nation not only fails to achieve its humanitarian objectives, but injures its economy as well.
Even if redistribution to the poor equaled redistribution to the non-poor, whatever loss to the economy that came from the poor deciding to sit back and enjoy a free ride, as the conservatives put it, would be far less than the loss that came from the rich and middle class who would have gone on the dole. This is because the poor are, on average, less productive than the non-poor. They are more likely to be handicapped, or lack marketable skills, or to be aged or abandoned mothers. There are exceptions, but for the most part, people who are very productive and whose productive skills are prized in the society are not poor. It thus follows that subsidies to the poor, although they tend to have some adverse effect on incentives (as conservatives rightly claim), usually reduce production by less than do subsidies to the non-poor.
Indeed, the higher one goes up the income scale, the greater the damage done by the inefficient use of time and resources. Institutional arrangements or policies that misallocate the labor of healthy males in their prime working years—such as featherbedding and restrictive work rules—are very damaging to the efficiency of a society, yet are commonplace. The professional associations and public policies that largely control the practice of law and of medicine are even more costly to society, because it is the efforts of some of the most highly educated and energetic people in the society that are being misdirected. Yet few areas of modern society are so rife with cartels, anticompetitive rules, and other redistributions as are the law and medicine. Tax loopholes not only induce people to become tax accountants and lawyers, and thus divert some of the most able and aggressive out of more socially productive pursuits, but also twist much of the productive capacity of the whole society into tax-favored activities that contribute little to prosperity. Yet such loopholes are becoming more numerous. Tariffs, tax concessions, and bailouts to major corporations divert or enfeeble some of the most productive enterprises in the whole economy, yet such tariffs are becoming more common each year.
A nation that redistributes income to its poor buys a civilized and humane society, and it buys this with a minuscule share of the national income. The greatest loss it must endure is a modest reduction in the supply of cleaning women. A country that subsidizes workers in their prime working years sacrifices not a dust-free living room but the very muscle of the economy. The society that permits its professions to cartelize and control public policy loses amounts for each professional that make welfare payments seem trivial. And a people that gives tariffs or tax loopholes or bailouts to major corporations, whose great scale could normally have been attained only through exceptional productivity, is accumulating deposits of fat in the arteries that lead to its heart.