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The following is an unpublished review I wrote of Charles Murray’s In Our Hands back in 2006. I’ve been fielding student questions on this topic, so thought it might make sense to put this out there for them to refer to.

Social Engineering by Any Other Name …

August (2006) marked the ten year anniversary of the latest alteration to the welfare system. The major change enacted was the substitution of federally managed entitlement cash grants (Aid to Families with Dependent Children) with a federally-funded state-run program of cash grants conditional on work requirements and participation limits (Temporary Assistance for Needy Families).

Predictably caseloads dramatically fell from 12.2 million people in 1996 to 4.5 million in 2005. Employment and earnings of single mothers increased despite niggardly welfare benefits; child poverty rates slid 20 percent. Notwithstanding these apparent advances, real expenditures on means-tested programs increased by 19 percent between 1996 and 2002 to $522 billion. Measured poverty remains stubbornly high with 40 million people (12.7 percent) in poverty today compared to 36.5 million (13.7 percent) in 1996. Today’s rate is no lower than its 1968 level.

One lesson here is that economic growth is the best anti-poverty tonic. Most of the above gains occurred during the boom of the late 1990s. 83 percent of the caseload declined by 2000; the measured poverty rate between 1996 and 2000 fell from 13.7 percent to 11.3 percent, and has since moved up to 12.7 percent. Means-tested program expenditures increased by $10 billion during the expansion, but increased by $84 billion between 2001 and 2002. In fact, American living standards have advanced for centuries without substantial public support mechanisms. The condition of even today’s poorest Americans would be the envy of the wealthiest of America’s revolutionary generation (thus, poverty is necessarily a relative concept). Job-training programs did not spawn indoor plumbing; Medicare and Medicaid did not make possible penicillin’s discovery; electricity and refrigeration were not Washington bureaucratic inventions; AFDC checks did not inspire auto manufacturers to replace the horse and buggy; energy assistance programs did not portend the discovery of oil in Titusville; farm subsidies did not give rise to higher yielding, pest resistant crops; alas government transfers have produced exactly none of the millions of amenities which make life in 2006 more comfortable than our forebears could ever have dreamed.

The Welfare State and Economic Justice

Ironically, the accumulation of great wealth brings greater attention to its unequal distribution; and also to the increasing technical feasibility of eliminating economic misery. This focus has given rise to a vast welfare state. Unfortunately, in its current embodiment, the welfare state inhibits economic justice, and therefore human progress, by limiting the freedom of individuals to plan and choose their goals and their ability to obtain rewards for their efforts. Bureaucratic unscrupulousness is unlikely the source of this difficulty – quite the contrary.

Despite the best intentions of its designers, the incentive structure of the welfare state is incongruous with individual desires to get ahead through education, hard work and thrift. AIER founder E.C. Harwood explains that the problems with the welfare state are more elemental than its particular design:

The problem of achieving economic justice among men seems to have become more complex as social organization has changed from the hunting tribes first to the groups of agriculturalists and then to the modern industrial society … In a modern industrial society such as that of the United States, where fewer than five percent of the working population are engaged in agriculture, achieving economic justice has become exceedingly complex. No longer is the simple rule, free access to good agricultural land, a sufficient means of achieving substantial economic justice. The problem has become so complex that reconsideration of what we are talking about when we use the phrase “economic justice” is the first step toward a solution of the problem.

Harwood understood that promoting economic justice requires the provision of equality of opportunity, but that it is not clear how this is to be accomplished in a complex, highly specialized, modern society. Implicit in this problem is that to understand the causes of poverty it is necessary to understand the causes of wealth accumulation. Neither the current welfare system, nor “The Plan” proposed in Charles Murray’s newest book, In Our Hands, acknowledges that the lack of material resources of the poor is a result of their inability to produce enough goods and services that are valued by other persons (or their inability to exchange desirable goods and services). To ensure equal opportunity for all citizens requires the elimination of barriers to augmenting individuals’ capacity to serve others usefully and to transact freely with others – including the ending of distortions of and interference with free market relationships and the elimination of all special privileges. Mr. Murray’s plan merely scratches this surface.

The Plan

Mr. Murray proposes to eliminate all federal, state and local transfer programs (those where benefits are bestowed on only some constituents, including all transfers to industry, nonprofits and favored groups) via constitutional amendment and replace them with a single cash grant of $10,000 to be awarded to all American citizens above the age of 21 regardless of family status. The grant is to be partially phased out with a 20 percent surtax on incomes between $25,000 and $50,000. Therefore, individuals with earnings in excess of $50,000 will still receive $5,000 per year.

Thus, the Plan is a modified version of the negative income tax proposed by Milton Friedman in the 1960s. The major differences are that the Plan does not fully phase out, allows a higher nominal income limit for repayment, imposes less severe effective marginal tax rates on earnings, eliminates the tax deductibility of employer health benefits, and leaves the existing tax structure in place.

Under unrealistically conservative assumptions, the Plan makes a great deal of progress on the efficiency and social equity fronts. As to efficiency, though the first year of the Plan generates a $355 billion funding shortfall, by 2011 this shortfall disappears and by 2020 grows to over a $500 billion surplus. As to social equity – the notion that a society needs to support those who cannot support themselves –virtually every citizen will have access to greater financial resources under the Plan than under the current system. One reason is that the current welfare state targets a great deal of its largesse to people who are less needy. Of the $1.385 trillion in transfer payments in 2002, $863 billion, or 62 percent, were independent of earned income – with a non-negligible share of the funds provided by the working poor.

Mr. Murray’s ground rules acknowledge that the Plan is politically unfeasible but neglects to remind readers why. Nominally, adherents of both the political right and left should support the Plan. For those on the right, the Plan eliminates a vast bureaucracy; for those on the left, a guaranteed income is a way to substantially reduce measured income disparities. That the Plan is radical demonstrates two unsavory realities in American politics. First, the enormous bureaucracy would vehemently oppose its own extinguishing. Second, neither political party is willing to admit that the current system produces winners and losers, and that neither party is currently serving the latter.

The Problem of Poverty

The rub is that the Plan is unlikely to be much better at eliminating poverty than the existing system – it is rather like a substandard restaurant that converts from buffet to sit-down dining without altering its menu. You can change the delivery but the food is still unpalatable. Mr. Murray disputes this, despite having, “no empirical basis for forecasting,” by asserting that by virtue of eliminating the welfare bureaucracy and that the cash grant is universal and continuing, cohesive communities will emerge, marriage incentives improve, workers will find meaningful employment, and in general the Plan will, “revitalize the institutions that enable us to live satisfying lives.”  But these positive downstream effects depend heavily on people exercising ordinary prudence, which even under the current system is enough to keep almost anyone out of poverty. And since the proposed grants are unending, the Plan does not repair the severed link between transgression and consequence in the current system, and in fact it may widen the divide.

Poor decision making by many disadvantaged is likely a result of a combination of unlucky genetics, poor rearing, cultural factors and non-existent or dysfunctional social networks. Since these internal barriers to accumulating productive abilities are virtually impossible to change, expecting the Plan to do more than bring the poor nominally out of measured material poverty is unrealistic. The best we can do is to consider the external factors which contribute to their lack of productive capacity.

Chief among these is education, and on this Mr. Murray is silent. Virtually no highly educated American is poor and the outcomes and opportunities in education for rich and poor in America are extremely unequal. This omission is particularly striking given that public education appears to qualify under Mr. Murray’s definition of a transfer program and that it is nearly as large as all existing programs he hopes to reform. In 2003, total public expenditures on education were approximately $0.8 trillion while total outlays for transfer programs were approximately $1.3 trillion.

Ability inequalities are not necessarily a recipe for failure, and Mr. Murray overlooks this point as well. The extended order of human cooperation ensures that economic opportunity is available to people of all skill levels through specialization and exchanging. And with America’s extraordinary wealth comes an unlimited set of desires which can be satisfied in untold numbers of ways. The Plan neglects to address other external factors working against equality of opportunity for the poor including mandated wages, special privileges for industries, licensing requirements, zoning laws, and regulations on business operations.

Other Impacts

Despite claims to the contrary, the Plan is unlikely to return much of the “stuff of life” to civil society either financially or in spirit. The most optimistic empirical finding on charitable giving is that a 10 percent increase in income results in a 7.5 percent increase in annual giving. Assuming that the average income of all 203 million Americans over age 21 is $50,000 and that each currently gives two percent annually to charities, the Plan at best generates $150 per adult in charitable donations –$30 billion in aggregate. The contradiction is that since the Plan keeps taxpayer burdens unchanged and makes welfare payments more transparent (and larger in many cases) people may be more secure in their knowledge that their fellow citizens are being provided for, and may plausibly be less disposed to giving charitably than under the current system.

Absent a stronger constitutional amendment, the bureaucratic vacuum left by the Plan will be quickly filled. The Plan prohibits only vaguely defined transfer payments, implicitly sanctioning spending on any unenumerated good. The slippery slope is that newly unfettered interest groups will unleash a volley of defenses for increased spending on “classical” public goods: “Leopard slug research at our local university will benefit all Americans” for example. The flux of political affairs and perceived public needs virtually guarantees increased government spending. When the 16th amendment was ratified in 1913 who foresaw that 2006 federal income taxes would range from 10 percent on the first dollar of income to 35 percent on the highest bracket (about $337,000) –excluding the 15.3 percent for payroll taxes?  At that time the tax rate on the top bracket ($10 million in today’s dollars) was seven percent and less than one percent of the population paid any income taxes. Two additional features of the Plan do little to mitigate the specter of big government. The Plan puts all 300 million Americans on the government goodie train and the proposed welfare reform is decoupled from tax reform. The latter is especially problematic since the tax code is prime real estate for politicos wishing to hand out special favors.

As to fears that some grant recipients would use the cash to finance impious consumption, in-kind aid or vouchers still allow people to transfer spending to non-targeted goods. Moreover, cash grants treat beneficiaries less like children than the current welfare state does by permitting them to make choices, on their own terms, even if they make the wrong ones. However, just as protected industries always stagnate and sporting events are uninteresting when outcomes are certain, the permanence of the grant takes away too much risk from the future and with it the essential human challenge of coping with uncertainty and making decisions.

For those worried that cash grants encourage workforce withdrawals, the Plan is surely a step down from the current system of workfare, despite the findings of labor economists that workforce withdrawals in the negative income tax experiments of the 1970s were moderate (temperate hours reductions and withdrawals from second jobs). However, by leaving the tax code untouched, Mr. Murray misses an opportunity to moderate participation disincentives that moving to consumption based taxes would generate.

Social Engineering is Not the Answer

It is difficult not to place the Plan in context of Mr. Murray’s two previous major works. In Losing Ground (1984) he argues that welfare programs accentuate the problems they are trying to address. He argues in The Bell Curve (with Richard Hernstein in 1994) that the underclass is structurally inferior to others and that wealth redistribution is here to stay.  So, welfare doesn’t work and some people can’t be helped.  A universal welfare program is thus a curious prescription.

The Plan is an expensive solution to the technical poverty problem; and like every welfare policy proposal that has come before it, it is feeble in addressing the real causes of economic misery. In 2004, it would take only $110 billion to bring every poor American up to the poverty line (the total poverty gap). In its first year the Plan spends over 15 times this amount.  While the Plan would reduce the complexity of the current system, it does little to eliminate barriers to augmenting individual productive ability, nor can it be reasonably expected to deliver the smaller government it promises.  Government handouts will never prevent all people from making poor decisions, nor will they enable all people to find ways to satisfy the limitless desires of their fellow citizens.  This latest silver bullet should be relegated to the dustbin of history – the poverty problem is no werewolf.

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