Economic Implications of Welfare Reform
Edward C. Harwood
[Reprinted from the Henry George News,
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
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
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.