A Note on Welfare Reform

The more the federal deficit grows, the closer we get to an untenable situation where panic will drive policy and stabilizing, long-term solutions will fall of the political radar screen. We still have time to design a pathway out of our costly welfare state without paying the price of panic and austerity that the Europeans are currently dealing with.

However, time is running out fast. As the awareness of the looming “point of panic and no return” grows stronger, the calls for desperate policy measures will grow louder. One of those calls will be very likely be to cut benefits in welfare, a controversial measure that wins supporters and enemies of equal passion on both sides of the ideological divide. Opponents make the case that it is cruel to cut benefits, but they also claim that people on welfare somehow have a right to what they are receiving, a right that is as untouchable as any of the rights spelled out in our constitutional amendments.

Proponents of welfare cuts, on the other hand, often make the case that lower welfare levels will encourage people to go out and get a job. They have a compelling case, at least if we immediately disregard the job market situation. The challenge for slash-benefits proponents grows stronger the harder it is to find a job for someone who is currently on welfare.

A good example of a welfare reductionist facing this challenge is British Member of the European Parliament, Roger Helmer of the United Kingdom Independence Party. He is also worth listening to because he is a libertarian, a staunch supporter of limited government. A few days ago he wrote about welfare in the Libertarian Press:

I must recently have made some passing comment about welfare, because a certain @DocHackenbush replied: “Memo to Helmer: Unless you’ve lived on social security, you don’t get to have an opinion on it”.  That’s about as sensible as saying “Unless you’ve been hooked on cocaine, you can’t mention drugs”.

Mr. Helmer had a well-worded comeback, pointing to the tax-funded nature of welfare, or “social security” as the Brits call it:

“I’m entitled to an opinion on social security because, like most of us, I pay for it”. This response was felt by a close family member (of mine) to be somewhat lacking in compassion. Yet is seems to chime with public opinion.  I was rather surprised to find in a recent opinion poll that 62% of respondents agreed that “unemployment benefit is too high and discourages work”.  The public understands that the welfare budget is out of control, and that we cannot solve the country’s fiscal and debt problems without dealing with the welfare issue.

This is true indeed. So called social protection programs – bundled together as “welfare” in America – cost about 28 percent of the British GDP. Sweden and the Netherlands are at higher levels, 30 percent, while France and Denmark top out at 32 percent. In almost every EU member state the share has risen considerably during the recession.

American estimates, of which there are several, do not come close to these numbers. The comparison is somewhat difficult to make, though, primarily because the United States still has a large private welfare sector. Another reason is that there are different types of programs here than in Europe, producing different incentives structures among the recipients. The American habit of handing out tax-funded food stamp cards does not exist in the same form in Europe, where instead general cash entitlements are more common. Furthermore, in many European countries people can qualify for general income security, a deplorable form of welfare that thankfully does not exist in the United States.

Overall, and partly because of the restrictions on the American welfare state, the U.S. economy is in better shape than the European economy. As a result, Americans can still support themselves to a larger degree. The high share of private welfare also means that there is still a large presence of charity, voluntary contributions and private compassion here – the true basis for any kind of care for the poor and needy. This makes welfare more efficient, and the personal ties between donor and recipient tend to create motivations for self sufficiency to a larger degree than tax-paid welfare does.

Another major problem with tax-funded welfare is that government makes a promise it can’t keep (it eventually runs out of taxpayers’ money). As is abundantly evident around Europe, governments cannot pay for their spending commitments without having to max out taxes and then still run deficits. (Here in America we just run deficits…)

Back to Roger Helmer:

Compassion is all very well, but if we allow the costs of compassion to run out of control, it can do more harm than good.  You don’t eliminate poverty by bankrupting the country.  I was particularly struck by the case of the single mother of eleven, Heather Frost, who has a new £400,000 house being built for her and her eleven children, all living on benefits.  Hard-working tax-payers who couldn’t dream of having such a house built are paying for Ms. Frost’s house — and have every reason to be angry.  They will be asking “Why do we have to pay?  Where are the men who fathered those children?  Why don’t they pay?”.

This is a lesson for America as well. The ’90s welfare reform was designed to end the opportunities for people to make a career out of living on welfare. It was a relatively successful reform, though the Obama administration has eroded key parts of it. They are handing out food stamp cards like they were invitations to a Wednesday party with Mrs. Obama. There have also been some attacks on the workfare component. So far though the foundations of PRWORA still stand, and the urgent fiscal crisis of the federal government is in itself a mandate on Congress to pursue another welfare reform in the same restrictive direction.

We’ll see where that goes. For now, back to Mr. Helmer, who now turns to the problems of reining in welfare spending:

This point, however, seems to have escaped our new Archbishop Welby, who has written to the papers saying that the government’s welfare policy will have a negative social impact on children.  Of course in the short term, and assuming a static view of the economy, he has a point.  Take money from a family, and if nothing else changes, that family will be worse off.  But the good prelate ignores the positive impact on the wider economy from getting debt and government spending under control.

The theory behind this argument is that it is so easy to live on welfare that recipients see no reason to go out and find a low-paying job. Therefore, the story goes, government should reduce welfare to a point where it barely offers subsistence.

There is an implicit assumption in this argument that there is a job out there for every welfare recipient. That is not true, especially not in high-tax jurisdictions (European countries or U.S. states like New York, Illinois or California). Any effort at incentivizing welfare recipients through benefits cuts must be combined with dramatic tax cuts. Such cuts are not possible simply through welfare benefits cuts. It is important to keep in mind that the high share of GDP that goes to welfare, in Britain as well as in America, is not primarily caused  by lavish benefits – the serial British mom’s half-million-dollar house being an exception – but by the fact that a very large number of people have been enticed into becoming dependent on welfare.

The main problem with welfare dependency is that welfare dependency makes people lazy. Regardless of the job situation, after a certain period of time the automatic replenishment of your bank account becomes a pacifier that can turn people with normal work ethic into lazy couch potatoes.

This effect is reinforced when politicians and bureaucrats preach that “you have the right to this money”, a right for which there is no credible support in the literature on moral or political philosophy.

This does not mean that we can disregard the job situation. In fact, high unemployment adds insult to injury in this case. Back in the last century welfare dependency and poverty was, for the most part, a transitional problem at the individual level. It was still relatively easy – and culturally mandated – for individuals on the dole to become self sufficient. A fair amount of academic research published back in the ’90s confirmed this.

Today, we are looking back at a recession that seems to be transforming people’s attitude to welfare, in particular in notoriously unemployed Europe. This is a warning signal to America, which is a few steps behind Europe but still risks sliding into the same dungeon of irreparable damage from a morbidly obese welfare state. When the “right to welfare” conspires with the pacifier effect and high unemployment, we have a situation where the solution no longer is as simple as cutting benefts.

That is not to say we should disregard cuts altogether. However, to be effective such cuts must be part of a package with a fiscal policy for limiting government (see the economic benefits of limiting government, parts one, two and three). On the structural front, a welfare reform that reduces the benefits people get must be combined with active measures to open pathways for individuals into self sufficiency.

Mr. Helmer raises a very important question. His simple answer – cut welfare benefits – may not be enough to solve the problem he is tackling, but he deserves credit for bringing it up and for pointing right at the heart of the issue. Being from Britain he has experience of a welfare state that exceeds the American in size and “generosity”, which makes his questioning of the nature of tax-paid welfare all the more relevant for the American debate. He gives us a hint of how tense the issue will get if we allow our welfare state to continue to grow.