Economic Implications of Welfare Reform

Edward C. Harwood

[Reprinted from the Henry George News, November, 1969]

IN AN address to the nation on August 8, President Nixon outlined the Administration's proposals for reforming the welfare system sponsored by the federal government. A few days later he provided more details of the proposals in a message to Congress. In this article we point out important economic implications of these proposals.

Mr. Nixon described the proposals as a new approach to one of the nation's most pressing social problems. The proposals included four measures: first, a complete replacement of the present welfare system; second, a comprehensive new job training and placement program; third, a revamping of the Office of Economic Opportunity; and fourth, a start on sharing of federal tax revenues with the states. We shall focus attention on the welfare reform proposals.

The President noted that "whether measured by the anguish of the poor themselves or by the drastically mounting burden on the taxpayer, the present welfare system has to be judged a colossal failure." He acknowledged that the system, particularly the program called "Aid to Families with Dependent Children," stagnates enterprise, perpetuates dependency, penalizes work, and provides an incentive for desertion by the father. Mr. Nixon proposed to replace this program with a new "family assistance system." Under the proposed new system, the federal government would provide most of a minimum of $65 per month to all aged, blind, and disabled persons and would provide a minimum income to every family with dependent children.

To a family of four with no outside (presumably monetary) income, the federal government would provide $1,600 per year, and states would provide supplementary income. The President said that "the new worker could keep the first $60 a month of outside earnings with no reduction in his benefits, and beyond that the benefits would be reduced by only 50 cents for each dollar earned." A family of four would continue to receive some benefits as long as its annual earnings were less than $3,920. Families larger than four persons would receive larger benefits and would continue to receive them with annual earnings of more than $3,920.

The federal government also would provide supplementary income to family heads already employed at "low wages," which is not provided under the existing welfare system. The amount of income provided would be scaled in relation to earnings in such a way that supposedly "it would always pay to work." Every family head who accepted income payments would be required also to accept work or training, provided that "suitable jobs are available either locally or at some distance if transportation is provided." A $30-a-month bonus would be offered as an incentive to undertake job training.

The President did not elaborate on what is meant by "suitable jobs," nor did he indicate where such jobs might be found. Provision of more income to welfare recipients would divert more funds to use for consumption that otherwise could be used for job-creating capital formation. Such provision thus would tend to restrict the availability of employment.

The proposed family assistance system differs from the existing Aid to Families with Dependent Children program in several important respects. It would provide the same minimum incomes for all families with dependent children (based on the number of children) throughout the United States. The proposed system would provide income to such families with fathers present, whereas the existing system provides income only to those families from which fathers are absent. Unlike the existing system, the proposed system would provide supplementary income to heads of families with dependent children even though such family heads were receiving some earned income.

Few would question Mr. Nixon's assertion, "Nowhere has the failure of government been more tragically apparent than in its efforts to help the poor, and especially in its system of public welfare." Nearly everyone would agree with the aim of "... getting everyone able to work off welfare rolls and onto payrolls." Unfortunately, the Administration has chosen to attempt to solve the problem of poverty as though it were comparable with an earthquake or other natural disaster. In such an event, the obvious solution of relief and reconstruction is sound. In contrast, the solution of problems attributable to uneconomic laws and institutions requires recognition of the basic maladjustments and removal of them.

Administration authorities have not recognized or have ignored one law in particular that greatly aggravates poverty in the United States. The prohibition against employment euphemistically called the minimum wage (which appears to be wholly unconstitutional) absolutely prevents employment in many kinds of work of anyone not already qualified to earn $1.60 per hour. It denies millions of inexperienced youth as well as unqualified adults the opportunity to obtain on-the-job training that would permit them to qualify for adequate earnings for useful work. Removal of this obstacle would enable employers to help prepare unqualified persons for gainful employment at no cost to government.

Instead of abolishing the minimum wage and letting people earn what their services are worth while learning to increase their earnings, Administration authorities have proposed to increase federal expenditures for training programs. They thus have proposed that taxpayers bear the cost of failure to recognize and remove a fundamental maladjustment, as well as other uneconomic institutions such as special privilege that we have described in detail elsewhere.*

The cost to the federal government during the first year of the proposed family assistance system, including $600 million for job training and child care centers, has been estimated at $4 billion more than the estimated federal cost of $1.8 billion for Aid to Families with Dependent Children during 1969. The estimated cost of the proposed system during the first year of $5.8 billion thus would be move than three times the annual cost of Aid to Families with Dependent Children. This estimated cost does not include the many additional billions of dollars that the federal government will spend for other welfare programs such as Medicaid, nor does it include expenditures for welfare by state and local governments. Moreover, the cost of the proposed family assistance system might prove to be far greater than the estimate, as did the cost of the Medicaid program.

Adoption of the proposed family assistance system would add an estimated 12.4 million persons to the 10 million persons now receiving welfare payments, for a total of 22.4 million. Welfare recipients then would comprise a large and powerful voting group. Politicians in and out of office would attempt to buy their votes by offering the largest increases in benefits, just as they have done with Social Security benefits. The new welfare system thus would introduce another political football to be kicked at the expense of taxpayers.

President Nixon asserted that the existing inequality between benefits for mothers with dependent children in various states is wrong and that "no child is 'worth' more in one state than in another." Such an assertion, however much emotional political appeal it may have, reveals that Administration authorities have ignored or overlooked a pertinent aspect of the situation. What a child needing support may be "worth" is not the question; the pertinent question is, what is the cost of adequately supporting a child in a particular location?

Living Costs Vary

The cost of providing shelter and clothing in milder climates found in many areas of the United States is much less than that in other areas. Moreover, many families in rural areas grow much of the food that they need and obtain an adequate diet despite relatively small monetary incomes. Differences in welfare payments for dependent children in different areas of the country thus do not necessarily involve unequal support. Providing the same welfare payments throughout the country, as the President proposed, would provide in many instances more than would be needed for adequately supporting dependent children.

That many low-income families are incapable of handling money wisely has been demonstrated by the use of welfare payments for gambling, drugs, and for buying luxuries such as color television sets and stereo radio phonographs instead of adequate food for dependent children. Thus, some and perhaps much of the minimum income provided by the federal government would not benefit the children for whom it would be intended; instead, the means for obtaining luxuries would be provided to millions of persons, at the expense of the millions of "forgotten men" who pay taxes.

An important objection to the operation of the welfare program, old or new, by the federal government is that such action apparently is unconstitutional. The Constitution does not grant authority to the government to take wealth from some citizens and distribute it to others; this authority is reserved to the states or to the people. Such redistribution of wealth involves application of the Marxian Socialist principle, "From each according to his abilities, to each according to his needs."

President Nixon spoke of applying the principles of a "new federalism" by turning over to the state and local governments the administration of programs established by the federal government. We believe that far better for the nation would be reapplication of the federalism specifically outlined in the Constitution.

Of one thing we are sure: the proposed family assistance program is simply the substitution of one political panacea for another, and neither continuation of the old nor adoption of the new will solve the problem of poverty in the United States. One searches in vain for any major economic and social problem that thus has been solved.

As far as the experience of the human race reveals, there are only two ways in which such problems may be solved. These are:

1. Prolonged and persistent application of modern scientific methods of inquiry into social and economic problems. Such inquiry is only beginning to yield fragmentary warranted assertions or useful solutions to problems; or,

2. Luck in happening to find a complete or partial solution in the process of experimenting with various means.

The President did not even mention the first possible road to success in the long run, and a political panacea planned by the federal government prevents widespread experimentation by the various states and municipalities. Every failure of a single national plan is a disaster that makes practical experimentation a decidedly slow and discouraging process. Such is the usual consequence of central planning by so-called experts who fail to develop useful solutions to problems by modern scientific methods of inquiry.


* Economic Education Bulletin for May 1969 (Vol. IX, No. 4), Can Our Republic Survive? Twentieth Century Common Sense and the American Crisis, pages 26-30.