Saturday, June 30, 2012

Fallacies of the Negative Income Tax

RECOGNIZING THE CALAMITOUS EROSION OF INCENtives that would be brought about by a straight guaranteed-income plan, other reformers have advocated what they call a “negative income tax.” This proposal was put forward by the prominent economist, Professor Milton Friedman, of the University of Chicago, in his book Capitalism and Freedom, which appeared in 1962. The system he proposed would be administered along with the current income tax system.

Suppose that the poverty-line income were set at $3,-000 per “consumer unit” (families or individuals), and suppose that the negative income tax (which is really a subsidy), were a flat rate of 50 per cent. Then every “consumer unit” (this is the statisticians’ technical term) whose income fell below $3,000 would be paid a subsidy of, say, 50 per cent of the difference. If its earned income were $2,000, for example, it would receive $500; if its earned income were $1,000 it would receive $1,000; if its earned income were zero it would receive $1,500.

Professor Friedman freely concedes that his proposal, “like any other measure to relieve poverty. . . reduces the incentives of those helped to help themselves.” But he argues that “it does not eliminate that incentive entirely, as a system of supplementing incomes up to some fixed minimum would. An extra dollar earned always means more money available for expenditure.”

It is true that a “negative income tax”* (which is a misleading name for a tapered-off guaranteed income) would not have quite as destructive an effect on incentives as would a straight guaranteed income. In fact, some thirty years ago I put forward a similar proposal myself. This appeared in an article in The Annalist (a weekly then published by the New York Times) of January 4, 1939. I suggested what I called a “tapering subsidy,” a relief payment that would be reduced by only $1 for every $2 the relief recipient earned by himself. But I abandoned the proposal when I realized that it leads straight into a dilemma, which is precisely the dilemma of the negative income tax: Either it is altogether inadequate at the lower end of the scale of self-earnings, or it is unjustifiably excessive at the higher end. Either it must pay only half an adequate income (by its own definition of “adequate”) to a family that earns no income, or it must pay nearly twice an adequate income to a family that already earns an almost adequate income.

The problem that the NIT (negative income tax) evades or glosses over is the problem of the individual or family with zero income. If an individual were given only $300 (the figure suggested in Professor Friedman’s original proposal in 1962), nobody would regard this as nearly adequate—particularly if, as Professor Friedman also proposed, NIT were made a complete substitute for all other forms of relief and welfare. If the NIT payment for a family of zero income is set at $1,700, no advocate of the guaranteed income would regard it as adequate to live on in “decency and dignity.” So if the NIT were ever adopted, the political pressure would be irrestible to make it provide the minimum “poverty-line” income of $3,400 even to families with zero earned income.

The basic subsidy would therefore be as great as under the straight guaranteed income. But if the basic subsidy under NIT to a family with zero income were $3,400, then under the NIT 50 per cent “incentive” formula that family would continue to get some government subsidy until its annual income reached $6,800. But this is higher than the median family income for the whole country in 1963 ($6,637). In brief, this would be fantastically expensive.

In addition, it would raise serious problems of equity. When the subsidized family was earning $6,798 income it would still be getting a $1 subsidy. When it earned $6,802 would it fall off the gravy train entirely, and have to wait until its income fell below $3,400 before it could get on again? And what about the family that had been earning $3,402 all along, and had never got on the gravy train?
The arithmetical dilemma of the NIT has received so little attention from its advocates that I hope I may be forgiven another illustration to show the paradoxical way in which it would work out.

An orthodox relief program would pay the jobless head of a family, say, $60 a week. If he then started to earn something, he would be paid simply the difference between that amount and $60. Under the NIT principle a man who was earning nothing would also receive a relief payment of $60 a week. But if he then earned $30 a week on his own he would still get a $45 payment (reduced by only $1 for every $2 earnings), bringing his total income to $75 a week. If he was later able to earn the full $60 for himself he would still be getting a relief payment of $30 a week, bringing his total income to $90. In fact, even if he succeeded in bringing his total self-earnings to $118 a week he would still be getting $1 a week in relief payment.

He would then be almost twice as well off economically as he would if he had always earned enough—say, $61 a week—not to get on the relief rolls in the first place. This would be clearly inequitable to those who had never got on relief. The incentive to get on relief, and certainly to stay on relief, would be enormously greater under NIT than under the present system.

If we tried to escape this result by using the NIT formula only in part—taking the man off relief, say, as soon as he was himself earning $60 a week—we would get an even more absurd result. When he was earning $58 a week under NIT, he would still be getting $31 a week from the government, making his total income $89. But if he then made the mistake of earning only $2 more he would end up with a net loss of $29 a week. So the negative income tax would create a tremendous positive incentive to get and stay on relief permanently.

The NIT scheme could avoid this preposterous result by paying a man with zero income only, say, $30 a week, or only half as much as its own proponents assume that he needs to live on.

Some readers may think that the dilemma of the NIT scheme can somehow be escaped by changing the percentage by which the relief payment or income supplement is reduced as self-earnings increase. But any change from 50 per cent one way or the other merely reduces one horn of the dilemma by making the other more formidable. If we reduce the government supplement by 75 cents for every dollar of self-earnings, we correspondingly reduce or destroy the incentive for such self-earnings. If we reduce the government supplement by only 25 cents for every dollar of self-earnings, we increase the recipient’s incentive to work and earn, but at the cost of a still more expensive program for the government, and we increase the recipient’s positive incentive to stay on relief because of the violent drop in his income if he ever got off. If we make the scheme more complicated by, say, reducing the relief payment or supplementary income by only 25 cents for every dollar of the recipient’s first $10 of weekly self-earnings, 50 cents for every dollar of his second $10 of self-earnings, and 75 cents for every dollar of his third $10 of self-earnings, or some similar scheme, we merely pile up an administrative nightmare without solving the basic dilemma. The unpalatable truth seems to be that whenever we try to “increase incentives” by reducing a relief payment by less than a dollar for every additional dollar of self-earnings, we solve an immediate problem at the cost of building up a bigger problem for the future.
In addition to the special dilemma it presents, the NIT retains the fatal defects of the straight guaranteed income. By neglecting the careful applicant-by-applicant investigation of needs and resources made by the ordinary relief system, it would open the government to massive fraud, chiseling, and swindling. And it would also, like the guaranteed income, force the taxpayers to support a man regardless of whether or not he was making any sincere effort to support himself. The government is bound to get into insoluble difficulties if it starts to give money away to “the poor” not only without making sure that they are poor but without bothering to find out the reasons why any particular individual or family is poor.

How Much Would It Cost?
How much would a guaranteed-income or NIT program cost? I have already pointed out that proponents have put out calculations as high as $38 billion a year, but we may be confident that their cost figures are systematically underestimated, even for the early years. And if once the main principle of either proposal were accepted, the minimum subsidy or guarantee demanded would be bound constantly to increase. Anyone who doubts this need merely consult the history of unemployment insurance and Social Security benefits since those plans were initiated in the Nineteen Thirties. (They too were going to replace straight relief, which, however, continues to grow at an alarming pace.)
Is there any assurance that a guaranteed-income or NIT plan would not also grow as rapidly? Present indications are that it might grow even faster. It is significant, as I have pointed out previously, that when Professor Milton Friedman first proposed his NIT plan in 1962, in his Capitalism and Freedom, he was suggesting that an individual with zero income receive a subsidy of the modest amount of $300. Now he is talking mainly in terms of a family of four and suggests that such a family, with no other income, should receive a basic amount from the government of $1,500. But already there is a prominent competitive scheme (published by the Brookings Institution, and written by Dr. James Tobin of Yale, Dr. Joseph A. Pechman, the Brookings Institution’s director of economic studies, and Dr. Peter M. Mieszkowski) that offers much more generous subsidies. Once the scheme gets into practical politics, we can expect the competitive bidding to get going in earnest.

So knowing what we do of political pressures, and of the past history of relief, “social insurance,” and other “antipoverty” measures, we are forced to conclude that once the principle of either the NIT or the straight guaranteed income were accepted, it would be made an addition to and not a substitute for the present conglomeration of relief and “antipoverty” programs. And even alone it would drastically reduce the productive incentives of those earning less than the guaranteed amount and seriously reduce the incentives of those earning more, because of the oppressive taxation it would necessarily involve. Its overall effect would be to level real incomes down, not up.

Let us take a closer look at the problem of raising taxation still further to pay for a guaranteed-income or NIT program. It is obvious that we could not expect such a program to be paid for merely by the very rich. If we were to subsidize all family incomes below $3,400 (let alone $6,800), it would hardly be consistent to tax them. Yet even before the income tax increase of 1968, single persons with net incomes (after exemptions and deductions) of $500 paid 14 per cent on such income, 15 per cent on the next $500, and so on, so that persons with net incomes below $6,000 were taxed at rates up to 22 per cent.

In 1965, moreover, taxpayers with adjusted gross incomes under $15,000 (who received more than three-quarters of the total personal income there was to be taxed) paid 61.5 per cent of the entire personal income tax. Taxpayers with adjusted gross incomes under $20,000 paid 70 per cent of the entire personal income tax.

Why not collect the major part of the income tax, someone may ask, from the really big incomes? Because taxpayers with adjusted gross incomes above $50,000 received even before taxes only 5 per cent of the nation’s adjusted gross incomes.

So when advocates of the guaranteed income and similar schemes insist self-righteously that “we can afford” to pay for more and more of such schemes, they ought to specify just who “we” are. They ought to explain to people who are earning their incomes the hard way why they really don’t need all that they bother to earn for their own families, and tell them also just how much more they can “afford” to have taken away from them.

Neither a “negative income tax” nor a guaranteed-income plan of the dimensions now being suggested could possibly be put into effect with dollars of present purchasing power.

The Poor Laws of England
Even at present our large and overlapping assortment of relief and antipoverty measures is seriously reducing incentives to the production that would otherwise be possible. Our social reformers have been everywhere overlooking the two-sided nature of the problem of reducing poverty. The obstinate two-sided problem we face is this: How can we mitigate the penalties of misfortune and failure without undermining the incentives to effort and success?

Our social reformers—who sometimes talk as if no government ever did anything to relieve the plight of the jobless and the poor until the New Deal came along in 1933—are constantly deploring the alleged indifference, callousness, or niggardliness of our forefathers in dealing with the poor. But wholly apart from private charity, previous generations in their governmental capacity were sharply aware of the problem of poverty and made some effort to alleviate it almost as far back as the records go. There were “poor laws” in England even before the days of Queen Elizabeth. A statute of 1536 provided for the collection of voluntary funds for the relief of those unable to work. Eleven years later the City of London decided that these voluntary collections were insufficient, and imposed a compulsory tax to support the poor. In 1572 a compulsory tax for this purpose was imposed on a national scale.

But the problem soon proved a very serious one for the people of that age. The upper class was very small numerically and proportionately. The middle class itself was always very close to what we would call the poverty line. The workhouse and other conditions imposed on those on relief seem very cruel to us today. But our ancestors were in constant fear that if they increased relief or relaxed the stern conditions for it they would pauperize increasing numbers of the population and create an insoluble problem.

At the beginning of the nineteenth century, indeed, the cost of poor relief began to get out of hand. The total cost of the poor law administration increased fourfold in the thirty-two years between 1785 and 1817, and reached a sixth of the total public expenditure. One Buckinghamshire village reported in 1832 that its expenditure on poor relief was eight times what it had been in 1795, and more than the rental of the whole parish had been in that year.

In face of statistics of this kind, England’s Whig government decided to intervene. It appointed a royal commission, and in 1834 a new and more severe poor law was passed in accordance with the commission’s recommendations.

The guiding principle of the new law was that poor relief should be granted to able-bodied poor and their dependents only in well-regulated workhouses under conditions inferior to those of the humblest laborers outside. This seemed harsh, but the commissioners had argued that “every penny bestowed that tends to render the condition of the pauper more eligible than that of the independent laborer is a bounty on indolence and vice.”

İf the pendulum swung too far in the direction of severity and niggardliness in the middle nineteenth century, it may be swinging too far in the direction of laxity and prodigality today. A sweeping subsidization of idleness, such as is proposed by the guaranteed income, would only weaken or destroy all incentive to effort, not only on the part of those who were subsidized and supported, but on the part of those who would be forced to support them out of their own earnings. There could be no faster way to impoverish the nation.

Clearly the great problem today is how to keep relief from getting out of hand. But how can we withhold relief from those who would merely rest idly back on it as a permanent way of life, and yet extend it to those who would use it to get back on their feet and once more become productive citizens? This is the baffling problem that I cannot hope to deal with here in detail. Our cities may find themselves compelled to return to some of the safeguards of former days that they perhaps too lightly abandoned—careful tests of needs and means and resources; aid in kind rather than in cash to make sure that the relief meets the particular needs it was intended to meet, particularly of children; a restoration of a residential requirement, to prevent people from moving to a city just to get immediately on its relief roll and to get more than in some other city; an obligation to do some sort of useful work in return for relief until a suitable private job can be found.

But there is a further way to hold down the relief rolls, and outstanding liberals of former days did not hesitate to recommend it. In 1914, A. V. Dicey, the eminent British jurist, asked whether it is wise to allow recipients of poor relief to retain the right to join in the election of a member of Parliament. And John Stuart Mill, writing in his Representative Government in 1861, did not equivocate:
I regard it as required by first principles that the receipt of parish relief should be a preemptory disqualification for the franchise. He who cannot by his labor suffice for his own support has no claim to the privilege of helping himself to the money of others. By becoming dependent on the remaining members of the community for actual subsistence, he abdicates his claim to equal rights with them in other respects.

In fact, Mill went much further, and insisted that no one should have the right to vote unless he paid direct taxes.

It is also important that the assembly which votes the taxes, either general or local, should be elected exclusively by those who pay something towards the taxes imposed. Those who pay no taxes, disposing by their votes of other people’s money, have every motive to be lavish and none to economize It amounts to allowing them to put their hands into other people’s pockets for any purpose which they think fit to call a public one.

In the political climate of today, anyone proposing that the right of franchise be suspended even for those on relief and merely for the time they remained on relief would be derided as having lost touch with political realities. Yet as long as the great and growing army now on various forms of relief and welfare programs retain the right to vote for those who promise them still more of other people’s money, we may expect to see relief and welfare programs grow to the point where they eventually undermine the currency and bring on national bankruptcy. The reader will not find it difficult to think of countries where this has already happened.

The Cure Is Production
One of the worst features of all the plans for sharing the wealth and equalizing or guaranteeing incomes is that they lose sight of the conditions and institutions that are necessary to create wealth and income in the first place. They take for granted the existing size of the economic pie; and in their impatient effort to see that it is sliced more equally they overlook the forces that have not only created the pie in the first place but have been baking a larger one year by year. Economic progress and justice do not consist in superbly equalized destitution, but in the constant creation of more and more goods and services, of more and more wealth and income to be shared.

The only real cure for poverty is production.
The way to maximize production is to maximize the incentives to production. And the way to do that, as the modern world has discovered, is through the system known as capitalism—the system of private property, free markets, and free enterprise. This system maximizes production because it allows a man freedom in the choice of his occupation, freedom in his choice of those with whom he associates and cooperates, and, above all, freedom to earn and to keep the fruits of his labor. In the capitalist system each of us, with whatever exceptions, tends in the long run to get what he creates or helps to create. When each of us recognizes that his reward depends on his own efforts and output, and tends to be proportionate to his output, then each has the maximum incentive to increase his effort and output.

Fight Poverty With Capitalism
Capitalism brought the Industrial Revolution, and the enormous increase in productivity that this has made possible. Capitalism has enormously raised the economic level of the masses. It has wiped out whole areas of poverty, and continues to wipe out more. The so-called “pockets of poverty” constantly get smaller and fewer.

The condition of poverty, moreover, is relative rather than absolute. What we call poverty in the United States would be regarded as affluence in most parts of Africa, Asia, or Latin America. If an income sufficient to enable a man “to live with dignity” ought to be “guaranteed” as a matter of “absolute right,” why don’t the advocates of a guaranteed income insist that this right be enforced first of all in the poor countries, such as India and China, where the need is most widespread and glaring? The reason is simply that even the better-off groups in these nations have not produced enough wealth and income to be expropriated and distributed to others.

One of the guaranteed-income advocates, in a footnote, admits naively: “We must also recognize that we still have no strategy for the elimination of poverty in the underdeveloped countries.” Of course they haven’t. The “strategy” would be the introduction of free enterprise, and of incentives to work, to save, to accumulate capital, better tools and equipment, and to produce.

But would-be income guarantors ignore or despise the capitalistic system that makes their dreams dreamable and gives their redistribute-the-income proposals whatever plausibility they have. The capitalist system has made this country the most productive and richest in the world. It has continued to achieve its miracles even in the present generation, and to increase them year by year. It has raised the average weekly factory wage from less than $17 in 1933 to $130 in 1969. Even after the rise in prices is allowed for, it has nearly tripled our real per capita disposable income—from $893 in 1933 to $2,473 in 1968 (in 1958 prices).

Allowed to continue to operate with even the relative freedom that it has enjoyed in recent years, the capitalist system will continue to produce these miracles. It will continue to make progress against poverty by a general increase in income and wealth. But shortsighted and impatient efforts to wipe out poverty by severing the connection between effort and reward can only lead to the growth of a totalitarian state, and destroy the economic progress that this country has so dearly bought.

In his television talk of August 8, 1969, President Nixon announced a giant step deeper into the quagmire of the Welfare State.

What he proposed was the form of the guaranteed annual income known as the negative income tax, plus a couple of additional gimmicks.

He put forward this radical proposal in the language of conservatism. He said that the last third of a century had “produced a bureaucratic monstrosity” and “left us a legacy of entrenched programs.” Then he proposed a plan that can only make the bureaucratic monstrosity more monstrous and create still bigger and more entrenched programs.

He talked about a welfare quagmire with increasing caseloads and escalating costs. He expressed his alarm that “in the past eight years, three million more people have been added to the welfare rolls.” And then he proposed a program that would cost no less than $4 billion in the first year alone, and would more than double the number of people eligible for public assistance—from a little under 10 million to more than 22 million.

What additional taxes would be necessary to pay this extra $4 billion was not stated. The President contented himself with the casual remark that the costs would not begin until the fiscal year 1971, “when I expect the funds to be available within the budget.” So nobody need worry, even though Congress is now proposing tax reductions for that and later years.

Notwithstanding the tremendous differences in prevailing incomes, wage levels and living-cost levels between city and country districts, or between New York and Mississippi, a family of four with no outside income, no matter what state it lives in, would receive under the new plan a minimum Federal payment of $1,600 a year. The states could supplement that amount. The same family could earn as much as $60 a month, or $720 a year, with no loss of benefits. Beyond that, aid would be reduced 50 cents for each dollar earned until the family’s income reached $3,920.

There would be no “demeaning investigations.” Applicants would simply make declarations of need and begin receiving payments.

The great safeguard, which is supposed to keep the nation from going into bankruptcy, is that the plan is to encourage—even force—people to work. Every recipient deemed employable would have to accept a job deemed suitable by the government or would have to undergo training.

The long-term outlook for this program is about as follows:
It is likely to be enacted more or less in the form President Nixon has proposed, though perhaps a little bigger. The Republicans in Congress will vote for it as a matter of party regularity. The chief efforts of the Democrats, who represent the party of ever-bigger welfare handouts, will be devoted to trying to increase the benefits and decrease the safeguards.

No sooner will the program have been enacted than efforts will be made to enlarge it. We need merely look at the history of unemployment insurance and of Social Security, both of which were launched in the Thirties. Both were originally enacted on the same argument as the new guaranteed-income proposal: they would make direct relief unnecessary and so displace it. But not only has direct relief multiplied steadily, despite growing prosperity, but unemployment insurance benefits have constantly grown bigger and longer, and Social Security benefits have been increased every one or two years (especially election years) and the coverage constantly widened.

So every year or two guaranteed income will grow. First of all, it will be argued that a family of four cannot be expected to live in decency and dignity on a mere $1,600 a year. This is less than half of the present quasi-official poverty-line income. So the basic subsidy will gradually be pushed up to $3,200 or $3,500 a year, which means that the top combination of earned income and government benefit will move from $3,920 a year to $7,720 or more.

Next, few people on relief will be declared to be employable. Those who are will find very few jobs that they deem “suitable.” They may consent to take government-financed “training” programs, particularly if they are paid $30 a month for consenting, but many of them will merely go through the motions. In any case, the government-administered programs will fall far short of the kind of training in necessary skills provided by the old-fashioned apprentice system in private industry. Most certain of all, the whole program of trying to force people to work for their benefit payments will be denounced as a sort of slavery. The work requirement will soon be quietly shelved.

The burden of taxation will steadily be increased to pay for the rising benefits. The attempt will be made to place the increased burden mainly on corporations and the high individual incomes. This will further erode incentives and discourage the production upon which the welfare of all of us depends. Government expenditures will continue to increase faster than the new tax revenues, bringing a return to chronic deficits, monetary inflation, and a further fall in the purchasing power of people’s insurance policies, pensions and savings deposits.

It was not altogether auspicious that President Nixon’s announcement of his new guaranteed-income proposal was made on the evening of the same day that France was forced to announce another devaluation of the franc. Like policies, like results.

Trick names of this sort corrupt the language and confuse thought. It would hardly clarify matters to call a handout a “negative deprivation” or having your pocket picked “receiving a negative gift."

Man vs. The Welfare State

Friday, June 29, 2012

Income Without Work

A GROUP OF SOCIAL REFORMERS, IMPATIENT WITH the present “rag bag” of measures to combat poverty, proposes to wipe it out in a single swoop. The government would simply guarantee to everybody, regardless of whether or not he worked, could work, or was willing to work, a minimum income. This guaranteed income would be sufficient for his needs, “enough to enable him to live with dignity.”

The reformers estimate that the guaranteed income ought to range somewhere between $3,000 and $6,000 a year for a family of four.

This is no longer merely the proposal of a few starry-eyed private individuals. The National Commission on Technology, Automation, and Economic Progress, established by Congress in 1964, brought in a 115-page report to the President on February 4, 1966, recommending guaranteed incomes for all. And in January of 1966, the President’s Council of Economic Advisers indicated approval of “uniformly determined payments to families based only on the amount by which their incomes fall short of minimum subsistence levels.” This plan, they declared, “could be administered on a universal basis for all the poor and would be the most direct approach to reducing poverty.”

Since then an increasing number of endorsements of the guaranteed income proposal (sometimes under the euphemisms of “income maintenance” or “negative income tax”) have come from private and official sources. In June of 1968 a subcommittee of the Joint Economic Committee of Congress held extensive hearings (which ran in printed form to 720 pages) on “income maintenance programs.” Though a Gallup Poll published at the time showed 58 per cent of those questioned were opposed outright to a guaranteed income, and only 36 per cent were in favor, the overwhelming majority of the witnesses called by the committee favored some form of guaranteed income.

The plan is spelled out and argued in detail in a book called The Guaranteed Income (1966), a symposium of articles by ten contributors, edited by Robert Theobald, who calls himself a “socio-economist.” Mr. Theobald has contributed three of the articles, including his preface.
Of the following three paragraphs, Mr. Theobald prints the first two entirely in italics:
This book proposes the establishment of new principles specifically designed to break the link between jobs and income. Implementation of these principles must necessarily be carried out by the government. . . .

We will need to adopt the concept of an absolute constitutional right to an income. This would guarantee to every citizen of the United States, and to every person who has resided within the United States for a period of five consecutive years, the right to an income from the Federal Government to enable him to live with dignity. No government agency, judicial body, or other organization whatsoever should have the power to suspend or limit any payments assured by these guarantees. . . .

If the right to these incomes should be withdrawn under any circumstances, government would have the power to deprive the individual not only of the pursuit of happiness, but also of liberty and even, in effect, of life itself. This absolute right to a due-income would be essentially a new principle of jurisprudence.

The contributors to this volume have arrived at these extraordinary conclusions not only because they share a number of strange ideas of jurisprudence, of “rights,” of government, and of the true meaning of liberty and tyranny, but because they share a number of major economic misconceptions.

Nearly all of them seem to share the belief, for example, that the growth of automation and “cybernation” is eliminating jobs so fast (or soon will be) that there just won’t be jobs for even the most industrious. “The continuing impact of technical change will make it impossible to provide jobs for all who seek them.” The goal of “jobs for all” is “no longer valid.” And so on.

Ancient Fears of Automation

The fears of permanent unemployment as a result of technological progress are as old as the Industrial Revolution in the late eighteenth and early nineteenth centuries. They have been constantly reiterated in the last 35 to 40 years and as often completely refuted. It is sufficient to point out here that not only has the average unemployment of slightly less than 5 per cent in the last twenty years not been growing, and that two-thirds of the jobless have usually remained so for periods of not more than ten weeks, but that the total volume of employment in the United States has reached a new high record in nearly every one of these years.

Even if it were true, as the authors of the guaranteed income proposal contend, that the American free enterprise system will soon become so productive that more than anybody really wants can be produced in half the time it takes now, why would that mean the disappearance of jobs? And how could that justify half the population’s, say, being forced to work forty hours a week to support the other half in complete idleness? Why couldn’t everybody work only in the mornings? Or half in the mornings and the other half in the afternoons at the same machines? Or why could not some people come in on Mondays, others on Tuesdays, and so on? It is difficult to understand the logic or the sense of fairness of those who contend that as soon as there is less to be done some people must be supported in idleness by all the rest.

“An Absolute Right”

But that is precisely the contention of the advocates of the guaranteed annual income. These handout incomes are to be given as “an absolute constitutional right,” and not to be withheld “under any circumstances” (Theobald’s italics). This means that the recipients are to continue to get this income not only if they absolutely refuse to seek or take a job, but if they gamble the handout money away at the races or spend it on prostitutes, pornography, whiskey, cigarettes, marijuana, heroin, or whatnot. They are to be given “sufficient to live in dignity,” and it is apparently to be no business of the taxpayers if a recipient chooses nonetheless to live without dignity, and to devote his guaranteed leisure to gambling, dissipation, drunkenness, debauchery, dope addiction, or even a life of crime. “No government agency, judicial body, or other organization whatsoever should have the power to suspend or limit any payments assured by these guarantees.” This is surely a “new principle of jurisprudence.”

Unrealistic Cost Estimates

How much income do the guaranteed-income advocates propose to guarantee? They differ regarding this, but practically all of them think the government should guarantee at least what they and government officials call the “minimum maintenance level” or the “poverty-income line.” The Social Security Administration calculated that the 1964 poverty-income line for non-farm individuals was $1,540 a year. A non-farm family of four was defined as poor if its money income was below $3,130. The Council of Economic Advisers calculated that by this standard 34 million, or 18 per cent, of our 190 million 1964 population were living in poverty. This is in spite of the $40 billion total spent in welfare payments, of which it estimated that $20 billion (in the fiscal year 1965) went to persons who were, or would otherwise have been, below the poverty-income line.

The official “poverty-income line” is constantly rising, and in spite of the smaller number of persons officially estimated to be poor, Federal payments to them have been rising even faster. According to President Johnson’s annual budget message of January 29, 1968, “there remain about 29 million poor. In fiscal year 1969, Federal outlays which aid persons below the poverty line (for example, a family of four with an annual income under $3,335) are estimated to total $27.7 billion. This represents an increase of $3.1 billion over fiscal year 1968 and $15.2 billion over 1963.”

How much would a guaranteed-income program cost the taxpayers? This would depend, of course, on how big an income was being guaranteed. Many of the income-guarantee advocates think that a guarantee merely of the poverty-line income would be totally inadequate. They appeal to other “minimum” budgets put together by the Social Security Administration or the Bureau of Labor Statistics, some of which run up to nearly $6,000 for a family of four.

One of the contributors to the Theobald symposium makes the following estimates of the cost to the taxpayers of different guarantees:
For a “minimum maintenance” level of $3,000 a year: total cost, $11 billion a year.
For an “economy” level of $4,000: $23 billion a year.
For a “modest-but-adequate” level of $5,000: $38 billion a year.

These figures are huge, yet they are clearly an underestimate. For the calculations take it for granted that those who could get government checks to bring their incomes to $3,000 or $5,000 a year, as an absolute guarantee, without conditions, would continue to go on earning just as much as before. But, as even one of the contributors to the Theobald symposium, William Vogt, remarked: “Those who believe that men will want to work whether they have to or not seem to have lived sheltered lives.”

Who Would Do the Work?

Vogt goes on to point out, with refreshing realism, how hard it is even today, before any guaranteed income, to get people to shine shoes, wash cars, cut brush, mow lawns, act as porters at railroad or bus stations, or do any number of other necessary jobs. “Millions of service jobs are unfilled in the United States, and it is obvious that men and women will often prefer to exist on small welfare payments rather than take the jobs. . . . If this situation exists before the guaranteed income is made available, who is going to take care of services when everyone can live without working—as a right?”

Who is, in fact, going to take the smelly jobs, or any low-paid job, once the guaranteed income program is in effect? Suppose, as a married man with two children, your present income from some nasty and irregular work is $2,500 a year. Comes the income guarantee, and you get a check in the mail from the government for $900. This is accompanied by a letter telling you that you are entitled as a matter of unconditional right to the poverty-line income of $3,400, and this $900 is for the difference between that and your earned income of $2,500. You are happy—for just a day. Then it occurs to you that you are a fool to go on working at your nasty job or series of odd jobs for $2,500 when you can stop work entirely and get the full $3,400 from the government.

So the government would, in fact, have to pay out a tremendous sum. In addition, the program would create idleness on a huge scale. To predict this result is not to take a cynical view, but merely to recognize realities. The beneficiaries of the guaranteed income would merely be acting sensibly from their own point of view. But the result would be that the more than one-seventh of the population now judged to be below the poverty line would stop producing even most of the necessary goods and services it is producing now. The unpleasant jobs would not get done. There would be less total production, or total real income, to be shared by everybody.

The Shifting “Poverty Line”

But so far we have been talking about the effect of the guaranteed income on the recipients whose previous incomes have been below the poverty line. What about the other six-sevenths of the population, whose incomes have been above it? What would be the effect on their incentives and actions?

Suppose a married man with two children found at the end of a year that he had earned $3,500? And suppose he found that his neighbor, with the same-sized family, had simply watched television, hung around a bar, or gone fishing during the year and had got a guaranteed income from the government of $3,400? Wouldn’t the worker begin to think that he had been something of a sap to work so hard for a mere $100 net, and that it would be much better to lead a pleasantly idle life for just that much less? And wouldn’t the same thing occur to all others whose earned incomes were only slightly above the guarantee?

It is not easy to say how far above the guarantee any man’s income would have to be for this consideration not to occur to him. But we would do well to remember the following figures: The median or “middle” income for all families in 1966 was $7,436. The median income for “unrelated” individuals was $2,270. People with these incomes or less, i.e., half the population, would be near enough to the guarantee to wonder why they weren’t getting any of it.

Someone Must Pay

If “everybody should receive a guaranteed income as a matter of right” (and the italics are Mr. Theobald’s), who is to pay him that income? The advocates of the guaranteed income gloss over this problem. The money, they tell us, will be paid by the “government” or by the “State.” “The State would acknowledge the duty to maintain the individual.”

The State is a shadowy entity that apparently gets its money out of some fourth dimension. The truth is, of course, that the government has nothing to give to anybody that it doesn’t first take from someone else. The whole guaranteed-income proposal is a perfect modern example of the shrewd observation of the French economist, Bastiat, more than a century ago: “The State is the great fiction by which everybody tries to live at the expense of everybody else.”

Rights vs. Obligations

None of the guaranteed-income advocates explicitly recognizes that real “income” is not paper money that can be printed at will, but goods and services, and that somebody has to produce these goods and services by hard work. The proposition of the guaranteed-income advocates, in plain words, is that the people who work must be taxed to support not only the people who can’t work but the people who won’t work. The workers are to be forced to give up part of the goods and services they have created and turn them over to the people who haven’t created them or flatly refuse to create them.

Once this proposition is stated bluntly, the spuriousness in all the rhetoric about “the absolute constitutional ‘right’ to an income” becomes clear. A true legal or moral right of one man always implies an obligation on the part of others to do something or refrain from doing something to ensure that right. If a creditor has a right to a sum of money owed to him on a certain day, the debtor has an obligation to pay it. If I have a right to freedom of speech, to privacy, or to the ownership of a house, everyone else has an obligation to respect it. But when Paul claims a “right” to “an income sufficient to live in dignity,” whether he is willing to work for it or not, what he is really claiming is a right to part of somebody else’s earned income. What Paul is asserting is that Peter has a duty to earn more than he needs or wants to live on so that the surplus may be seized from him and turned over to Paul to live on.
What the guaranteed-income advocates are really saying, behind all their high-sounding phrases and humanitarian rhetoric, is something like this: “Look, we find ourselves with this wonderful apparatus of coercion, the government and its police forces. Why not use it to force the workers to pay part of their earnings over to the non-workers?”

Lack of Understanding

We can still believe in the sincerity and good intentions of these people, but only by assuming an appalling lack of understanding on their part of the most elementary economic principles. “This book,” writes Robert Theobald, “proposes the establishment of new principles specifically designed to break the link between jobs and income.” But we cannot break the link between jobs and income. True income is not money, but the goods and services that money will buy. These goods and services have to be produced. They can only be produced by work, by jobs. We may, of course, break the link between the job and the income of a particular person, say Paul, by giving him an income whether he consents to take a job or not. But we can do this only by seizing part of the income of some other person, say Peter, from his job. To believe we can break the link between jobs and income is to believe we can break the link between production and consumption. Goods have to be produced by somebody before they can be consumed by anybody.

Claimants to Be Trusted, Taxpayers to Be Examined

One reason for the agitation for an unconditionally guaranteed income is the dislike of some social reformers for the “means test.” The means test is disliked on two grounds: that it is “humiliating” or “degrading,” and that it is administratively troublesome—“a comprehensive examination of means and resources, applicant by applicant.” The guaranteed-income advocates think they can do away with all this by using the “simple” mechanism of having everybody fill out an income tax blank, whereupon the government would send a check to everybody for the amount that his income, so reported, fell below the government’s set “poverty-line” minimum.

The belief that this income tax mechanism would be administratively simple is a delusion. Before the introduction of the withholding mechanism, before the reporting requirements for payments made to individuals in excess of $600 in any year, and the still more recent requirements for the reporting of even the smallest interest and dividend payments, the income tax was in large part a self-imposed tax. The government depended heavily on the taxpayer’s conscientiousness and honesty. To a substantial extent it still does.

The government can check the honesty of individual returns only by a random or arbitrary sampling process. It is altogether probable that more evasion and cheating go on in the low income tax returns than in the high ones—not because the big-income earners are more honest, but simply because their chances of being examined and caught are higher. The amount of concealment and falsification that would be practiced by persons trying to get as high a guaranteed income as possible would probably be enormous. To minimize the swindling the government would have to resort to the same case-by-case and applicant-by-applicant process as it does to administer current relief, unemployment insurance, and Social Security programs.

Is a means test for relief necessarily any more humiliating than the ordeal that the taxpayer must go through when his income tax is being examined—when every question he is asked and record he is required to provide implies that he is a potential crook? If the reply is that this inquisition is necessary to protect the government from fraud, then the same reply is valid as applied to applicants for relief or a guaranteed income. It would be a strange double standard to insist that those who were being forced to pay the guaranteed income to others should be subject to an investigation from which those who applied for the guaranteed income would be exempt.

In short, to prevent the worst scandals and injustices, even by the standards of the guaranteed income’s advocates, some test of need would be inescapable. If we fixed things so that there was no loss of dignity or self-respect whatever in being idle and taking a handout, then there would be no gain in dignity or self-respect in working and earning one’s own living. It goes without saying that any need test or means test should be administered without any unnecessary infringement of the privacy or dignity of the person or family concerned, but such a test would still have to be at least as careful and thorough as a typical income tax examination.

Comparison with the income tax may also remind us of some of the real complications that the guaranteed-income and “negative-income-tax” proposals gloss over. Some of these complications were almost accidentally brought out by Dr. Joseph A. Pechman, director of economic studies for the Brookings Institution, in his testimony of June 13, 1968, before a subcommittee of the Congressional Joint Economic Committee. It is important to keep in mind that Dr. Pechman was testifying in favor of the guaranteed income, but was earnestly considering some of the “anomalous situations” that might arise under it.

“For example,” he pointed out, “an individual owning $100,000 worth of IBM stock receives cash dividends of less than $1,000 annually.” Should such a person, if this were his only income, receive, say a $2,-400 a year annual handout to bring his family’s income up to the $3,400 poverty-line level? Even Dr. Pechman was inclined to think not. But he did apparently think that an individual who received only $1,000 from not more than $25,000 worth of bonds or stock (or other assets of the same market worth) should get this supplementary income.

Most of us, I think, would question this judgment. Among the dissenters, I am confident, would be the man who had received only $1,000, but entirely in wages, and the man who had received $3,401 during the year, also entirely in wages—neither of them with any capital assets to speak of, and certainly not a nest egg of $25,000.

But this is only one of a score of major difficulties raised by the simplistic proposal for a guaranteed income. The income tax mechanism would be irrelevant to the real problem with which the guaranteed-income advocates profess to be concerned. For the applicants would presumably be reporting last year’s income, which would have no necessary relation to their present need. An applicant’s income in the previous year or other previous period might be much higher or much lower than it is today. The process would not meet present emergencies, such as illness or temporary loss of employment. The guaranteed-income payment might either come too late or prove unneeded or excessive.

When such difficulties are pointed out to them, the guaranteed-income champions quickly improvise amendments. Revised income estimates for the current year might be made quarterly, say. But to meet the cash needs of the officially designated poor, the government’s payments would have to be made monthly or even weekly, and in the month or week in which the actual need existed, not later. The guaranteed-incomers have now started to talk of monthly revisions of income estimates, of payments of arrears, of reimbursements to the government for overpayments, etc. Putting aside the question of how realistic it is to talk of getting 30 million poor to return overpayments made to them, we have only to think of the administrative nightmare of payment adjustments, examinations, verifications, and so on, of this “simple” income tax plan.

The Insistence on Cash

A word needs to be said at this point, also, about the insistence of the guaranteed-income advocates that the government make its relief payments in cash. They rest this insistence on a spurious libertarian argument. The only trouble with the poor, they smilingly argue, is lack of money. We should therefore give them this money, and not attempt to dictate how and on what they should spend it (let alone give them relief in kind), because we should not interfere with their liberty to spend their government cash but “let them make their own mistakes.”

The trouble with this argument is that it is precisely because so many of the poor have shown an incapacity for knowing how to spend as well as how to earn money that they suffer as many of the pangs of poverty as they do. Cash is the very last thing to be given to a compulsive gambler, a drunkard, or a drug addict. As soon as he has gambled the money away, or spent it on whiskey or heroin, is the government to telegraph him more? But if it doesn’t, how is it to see that he and his family get proper nourishment, or that he has enough left over for the rent, or that his family are decently dressed, or that his children are properly educated? This is the kind of central problem that must arise if all the poor are to be indiscriminately handed cash incomes, not only regardless of whether they are willing to work or not, but of whether or not they show any responsibility or common sense in what they spend the money on.

I recently found an encouraging sign that a turn of thought may be coming on this subject, at least in England, and that some people may begin to recognize that our forefathers’ policies with regard to relief were not the result merely of blindness and cruelty. In its leading editorial of September 7, 1968, the London Daily Telegraph wrote:
The trouble is that if the poorest are too well cared for by cash handouts from the State they may never have any incentive to get their feet on the next rung of the economic ladder. So why not give them, say, food, fuel, and clothes for their children in kind rather than everything in cash? There would then be the assurance that the help was being properly directed. And if the recipients were not well pleased with such paternalism, they would have the incentive to work instead. Some such radical rethinking is long overdue.

Let me add that the argument that we must respect the liberty of the poor by giving them handouts solely in cash is spurious from still another standpoint. It overlooks the liberties of the industrious and prudent people from whom money is being either withheld or seized, in order to pay the cash handouts. It makes no sense to preserve the “liberty” of the irresponsible at the expense of the liberty of the responsible.

Old Subsidies Never Die

One of the main selling arguments of the guaranteed-income advocates is that its net cost to the taxpayers would not be as great as might appear at first sight because it would be a substitute for the present “mosaic” or “rag bag” of measures designed to meet the same goal—Social Security, unemployment compensation, Medicare, direct relief, free school lunches, food stamp plans, farm subsidies, housing subsidies, rent subsidies, and all the rest.

Neither the record of the past nor a knowledge of political realities supports such an expectation. One of the main selling arguments in the middle Nineteen Thirties, first for unemployment insurance and later for Social Security, was that these programs would take the place of and eliminate the need for the various relief programs and payments then in existence. But in the last thirty years these programs have continued to grow year by year with only minor interruptions.

Let me remind the reader of some of the comparisons of welfare expenditures in the preceding chapter. In spite of the Federal Social Security program, the amount of public aid alone paid out by the States and localities has grown from $3.3 billion in 1935 to about $46 billion in 1968. The Federal Government estimated the number of people on direct relief in the fiscal year 1969 at 8.8 million, or 60 per cent more than the number twelve years ago. “Federal Aid to the Poor” tripled in nine years from $9.5 billion in i960 to $27.7 billion in fiscal 1969. And when we throw in Social Security and all the rest, the total annual welfare costs that fall on the Federal Government, States and localities combined come to the staggering total for fiscal 1969 of more than $114 billion.

So we may expect not only that the guaranteed income would be thrown on top of all existing welfare payments (we can expect a tremendous outcry, plus demonstrations and riots, against discontinuing any of them), but that demands would arise for constant enlargement of the guaranteed amount. If the average payment were merely the difference between an assumed “poverty-line” income of, say, $3,400 and what the family had earned itself, all heads of families earning less than $3,400 would either quit work or threaten to do so unless they were given the full $3,400, and allowed to “keep” whatever they earned themselves. And once this demand was granted (in an effort to avoid the wholesale idleness and pauperization that would otherwise occur), the people whose earnings were just above the government minimum, or less than twice as much, would point out how unjustly they were being treated. And the only “logical” and “fair” stopping place, it would be argued, would be to give everybody the full minimum of $3,400 no matter how much he was earning or getting from other sources.

Anyone who thinks such a prediction far-fetched need merely recall how we got into the present system of paying everybody over 72 Social Security benefits regardless of his current earnings from other sources, and paying benefits to every retired person over 65 regardless of the size of his unearned income from other sources. By the same logic, the British government pays comprehensive unemployment, sickness, maternity, widowhood, funeral and other benefits, and retirement pensions, regardless of need or the size of the recipient’s income. The demand for universal “childrens’ allowances” or “family allowances” is also based on this logic.

Incentive Undermined

I should like to return here to the question of incentives. I have already pointed out how the guaranteed-income plan, if adopted in the form that its advocates propose, would lead to wholesale idleness and pauperization among nearly all those earning less than the minimum guarantee, and among many earning just a little more. But in addition to the erosion of the incentive to work, there would be just as serious an erosion of the incentive to save. The main reason most people save is to meet possible but unforeseeable contingencies, such as illness, accidents, or the loss of a job. If everyone were guaranteed a minimum cash income by the government, this main incentive for saving would disappear. The important habit of saving might disappear with it.

The more affluent minority, it is true, also save toward a retirement income in old age or for supplementary income in their working years. But with the prevalence of a guaranteed-income system, this type of saving also would be profoundly discouraged. This would be certain to mean a reduction in both the nation’s capital accumulation and the investment in more and new and better tools, plants and equipment upon which all of us depend for increased national productivity, increased real wages, more lucrative employment, and economic progress in general. We might even enter an era of net capital consumption. In other words, the long-term effect of a guaranteed-income plan would be to increase poverty, not to reduce it.

It is important to point out that to be concerned with the destructive effects of a guaranteed-income program on the incentives of people to work and save, is not to pass a wholesale moral judgment on the present poor. We must avoid on the one hand the sweeping assumption, sometimes made by conservatives, that the poor have no one to blame for their poverty but themselves, and yet resist on the other hand the frequent sweeping “liberal” assumption that all the poor or jobless are poor or jobless “through no fault of their own.” The only realistic presumption is that some people are poor or jobless through no fault of their own, that some are poor or jobless entirely through fault of their own, but that the great majority are poor or jobless through various complicated mixtures of misfortune and personal mistakes or shortcomings.

These mixtures differ in each case, ranging from those in which misfortune predominates to those in which personal shortcomings predominate. If we must simplify, we come back to the old Victorian distinction between the “deserving” and the “undeserving” poor. People today are justifiably reluctant to state the distinction in moral terms. Nevertheless, the distinction between those who are trying to cure their poverty by their own efforts, and those who are not, is vital for any workable solution of the problem of poverty. The central vice is that they ignore this distinction. The result of all the guaranteed-income and “negative income tax” schemes is that these schemes would destroy incentives on a wholesale scale, and therefore have the opposite of their intended effect.

It is not merely the effect of guaranteed-income proposals in undermining the incentives of those earning less than the guarantee that we need to be concerned about, but the effect of such proposals in undermining the incentives of those much further up in the income scale. For they would not only be deprived of the benefits that they saw millions of others getting. It is they who would be expected to pay these benefits, through the imposition upon them of far more burdensome income taxes than they were already paying. If these taxes were steeply progressive in proportion to income, as is probable, they would discourage long hours and unusual effort.

It is difficult to make any precise estimate of the effect of a given income tax rate in discouraging or reducing work and production. Different individuals will, of course, be differently affected. The activities of a man whose whole income comes in the form of a single salary from a single job will be differently affected than those of a surgeon, a doctor, a writer, an actor, an architect, or anyone whose income varies with the number of assignments he is willing to undertake or clients he is willing to serve.
What we do know is that the higher income tax rates, contrary to popular belief, just don’t raise revenue. In the 1969 fiscal year, individual income taxes were estimated to be raising $81 billion (out of total revenues of $136 billion). Yet the tax rates in excess of 50 per cent have been bringing in less than $400 million a year—less than 1 per cent of total income tax revenues and not enough to run even the present government for a full day. (In other words, if all the personal income tax rates above 50 per cent were reduced to that level, the loss in revenue would be less than about $400 million.) If these rates above 50 per cent were raised further, it is more probable that they would raise less revenue than more. Therefore, it is the income tax rates on the lower and middle incomes that would have to be raised most, for the simple reason that 80 per cent of the personal income of the country is earned by people with less than $20,000 gross incomes.

Poverty for All
It is certain that high income tax rates discourage and reduce the earning of income, and therefore the total production of wealth, to some extent. Suppose, for illustration, we begin with the extreme proposal that we equalize everybody’s income by taxing away all income in excess of the average in order to pay it over to those with incomes below the average. (The guaranteed-income proposal isn’t too far away from that!)

Let us say that the present per capita average yearly income in the United States is about $3,000. Then everybody who was getting less than that (and would get just that whether he worked or not) would, of course, as with the guaranteed-income proposal, not need to work productively at all. And no one who was earning more than $3,000 would find it worth while to continue to earn the excess, because it would be seized from him in any case. More, it would soon occur to him that it wasn’t worthwhile earning even the $3,000, for it would be given to him in any case; and his income would be the same, whether he worked or not. So if everybody acted under an income equalization program merely in the way that seemed most rational in his own interest considered in isolation, none of us would work and all of us would starve. We might each get $3,000 cash (if someone could be found to continue to run the printing machines just for the fun of it), but there would be nothing to buy with it.

A less extreme equalization program would, of course, have less extreme results. If only 90 per cent of all incomes over $3,000 were seized and people could keep 10 cents of every “excess” dollar they earned, there would of course still be a tiny incentive to earn a little more. And if everyone could keep 25 cents out of every dollar he earned above the $3,000, the incentive would be slightly higher.

But every tax or expropriation must reduce incentives to a certain extent. The effect of the guaranteed-income proposal would be practically to wipe out incentives for those earning (or even wanting) no more than the guarantee, and greatly to reduce incentives for all those earning or capable of earning more than the guarantee. Therefore the guaranteed income would reduce effort and earning and production. It would violently reduce the national income (measured in real terms). And it would reduce the standard of living for the taxpaying five-sixths of the population. The government might be able to pay out the specified amount of guaranteed dollar “income,” but the purchasing power of the dollars would appallingly shrink.

Man vs. The Welfare State

Thursday, June 28, 2012

Runaway Relief and Social Insecurity

IN THE UNITED STATES, FEDERAL PROGRAMS TO relieve poverty and unemployment first went into effect on a large scale in the Great Depression. The argument was that they were needed only during the emergency. Since then the nation has enjoyed a return of prosperity, an enormous growth in national income, a fall of unemployment to record low levels, and a sharp decline (by any consistent definition) in the number and proportion of the poor. Yet relief, unemployment insurance, Social Security, and scores of other welfare programs have expanded at an accelerative rate.

In a 1935 message to Congress, President Franklin D. Roosevelt declared: “The Federal Government must and shall quit this business of relief. . . . Continued dependence upon relief induces a spiritual and moral disintegration, fundamentally destructive to the national fiber.”

The contention then made was that, if unemployment and old-age insurance programs were put into effect, poverty and distress would be relieved by contributory programs that did not destroy the incentives and self-respect of the recipients, and that relief could gradually be tapered off to negligible levels.

Let us look first at what has happened to Social Security itself. Since the original act of 1935 there have been constant additions and expansions of benefits. As early as 1939, both the benefit and tax provisions of the basic act were overhauled. The 1939 package added survivors’ benefits.
In 1950, coverage was broadened substantially to include about 90 per cent of the employed labor force. (Initially it had been only about 60 per cent.) The length of working time required to qualify for coverage was sharply reduced.

In 1954 and 1956 there were further liberalizations of coverage. Disability benefits were added. The 1956 amendment dropped the minimum retirement age required for women from 65 to 62.
In 1958, benefits for dependents of disabled workers were added. In 1961 the retirement age for men was also reduced to 62, though with a lower level of benefits than was payable at 65.

The 1965 legislation added Medicare for some 20 million Americans over 65. It made a host of other expensive changes. To the traditional Social Security program it added a 7 per cent across-the-board increase in cash benefits to retired workers.

In addition to other changes, the scale of benefits was increased in 1952, 1954, 1958, and 1965.
The 1967 Social Security amendments increased payments to the 24 million beneficiaries by an average of 13 per cent, raised minimum benefits 25 per cent, increased benefits to non-insured persons over 72, and also increased survivor and disability insurance benefits.

The original Social Security payroll tax was 1 per cent of wages up to $3,000, to be paid both by workers and employers. The combined rate of tax is now 9.6 per cent of wages up to $7,800.

But nobody can seriously expect even these greatly increased payroll taxes to pay for the liabilities that the government has already undertaken. W. Rulon Williamson, the actuary for the Social Security Board from 1936 to 1947, estimated even before the latest increases that it would take $150 billion more just to take care of those who were already on the benefit rolls, and that it would probably take at least $1 trillion to take care of the families of those who are already paying Social Security taxes, but have not yet retired. That estimate doesn’t cover Medicare.

What, meanwhile, has happened to the relief programs that unemployment insurance and Social Security were designed to make unnecessary?

In 1937, the first full year in which the initial Federal public assistance programs were in operation, $316 million was paid out to relief clients under the federally aided programs. In i960 the comparable total had increased more than tenfold, to $3.3 billion.

Though the Federal contribution has been mounting steadily during the years, the burden borne by the States and localities has been mounting at an almost equal rate. The amount of public aid alone paid out by the States and localities increased from $624 million in 1935 to $3 billion in 1966. The total of all social welfare expenditures borne by the States and localities alone has grown from $3.3 billion in 1935 to $40.8 billion in 1966, and for 1968 was probably about $46 billion.

The Federal budget lists the total cost of “Federal Aid to the Poor” in i960 at $9.5 billion. For 1969 the cost is listed at $27.7 billion, nearly three times as much.

These figures include the cost of aid to education, work and training, health, cash benefit payments, and other social welfare services. In the 1969 fiscal year, the Federal Government placed the number of persons on direct relief at 8.8 million. This was an increase of 60 per cent compared with the number twelve years before, though the rate of unemployment is lower than it was then.

The Federal Government estimated that there are still about 29 million “poor” by official definition (a family of four with an annual income under $3,335). Not only do the individual programs to “assist” them become more costly year by year, but new programs are constantly being added, though they overlap and duplicate each other. Upward of 70 agencies have been counted operating some 300 programs for uplifting people.

A detailed account of the waste and scandals that have accompanied these proliferating programs can be found in Shirley Scheibla’s recent book, Poverty Is Where the Money Is.*

In addition to specific antipoverty programs, the Federal Government’s total welfare outlays—including agricultural subsidies, housing and community development, health, labor and welfare, education, and veterans’ benefits—come to a staggering total for the single 1969 fiscal year of more than $68 billion.
Even so we have not finished yet. We must add the $46 billion annual welfare cost that falls on the States and localities, making a grand total of more than $114 billion.

Yet nearly all the “reforms” that are being proposed, even under the new Republican Administration, are changes that would still further increase the Social Security and direct relief burden, not reduce it.
One of these proposals, which may even be enacted into law before this book appears, is that all welfare be placed in the hands of the Federal Government, with a uniform level of relief payments throughout the nation. The practical effect of this would be to reduce the present high relief payments in the big cities hardly at all, but to increase enormously the relief paid in the poorer States and in the country districts.

The relief recipients in the poorer States and country districts would not only, because of their comparatively much lower living costs, be much better off than the relief recipients in the big cities, but their relief payments would be so much higher in comparison with the local wage rates in their districts that hundreds of thousands more would prefer going on relief to staying at work.

As the relief system would probably be administered by the city and county governments, while the Federal taxpayers were footing the bill, all incentives to economy and the elimination of malingerers and chiselers from the relief rolls would fall to the vanishing point. The country would slide easily toward guaranteed-income plans, and the waste and corruption in relief payments would make present waste and corruption seem trivial in comparison.

Man vs. The Welfare State

Wednesday, June 27, 2012

Famines Are Government-Made

FOR THE LAST FEW YEARS AN INFLUENTIAL GROUP OF social reformers has been energetically propagating a dangerous myth. This is that the accelerating pace of population growth is overtaking the rate at which the world can produce food, and that disastrous famines are almost inevitable unless the growth of population can be throttled.

In October, 1966, a study by Prof. Karl Brandt, one of the world’s great agricultural authorities, retired director of Stanford University’s Food Research Institute and a former member of the President’s Council of Economic Advisers, exploded this myth. But his analysis did not receive anything like the attention it deserved.

Governments’ first priorities, Brandt declared, should not be to effect “planned parenthood crash programs,” but to adopt policies that give farmers the freedom and incentive to expand food production.
Brandt has no quarrel with “planned parenthood by voluntary individual decision.” But it would necessarily take years before even successful government birth control propaganda could appreciably affect the total size of the population. Moreover, the emphasis on birth control to counteract famine diverts attention from the enormous potential increase in food production that has now been made technically possible.

Science and technology have now developed overabundant sources of energy, which have opened the gates to replace human and animal power by mechanical power in food production.

The most crucial of all fertilizers, nitrogen, has now been made potentially abundant everywhere in the world at declining costs. One ton of pure nitrogen can yield from 15 to 20 tons of grain equivalent. Technology has developed new methods of irrigation, highly effective weed killers and pesticides, better means of storing and preserving perishables.

Why, then, has the world still been having famines? Brandt replies that in the last generation most of these famines have been primarily government-made. He cites the collectivist policies in Soviet Russia that initially resulted in the starvation of five million people and have continued to prevent any proper expansion of food output there for nearly forty years. Similar and worse policies have cost uncounted millions of lives in Red China.

Famine has been produced by similar policies in India. In its socialist mania for “industrialization,” the Indian government has squeezed the major part of the capital for that industrialization out of farm income. It has arbitrarily set high prices for all manufactured goods and low prices for food and other farm products.

On top of this crushing discouragement to food production, mismanagement and neglect have led to a situation in which mice, rats, birds, and locusts are permitted to devour India’s homegrown food faster than American Food for Peace can be shipped in at very high expense.
On top of all this, some 200 million government-protected sacred cows are allowed to roam around eating food while people are dying of hunger.

Our government has not insisted on any adequate conditions in return for our enormous gifts of food to India. So, Brandt concluded, our generosity has been contributing unwittingly to the prospect of real famine there, while weakening the United States dollar.
Such gifts allow the Indian government further leeway to continue ill-advised policies which suffocate the initiative of their farmers. The magnitude of food deficits these policies continue to create is so enormous that with all charity and foreign aid, we and the other industrial nations cannot possibly compensate for them.

Man vs. The Welfare State

Tuesday, June 26, 2012

Who Protects the Consumer?

CONSUMERS ARE SOMETIMES ASKED TO PAY TOO much for goods. This has been true since the beginning of time. Their great protection against overcharging has been competition. The intelligent shopper can compare price and quality, and go to the merchant who offers the best goods at the cheapest price.

Consumers are sometimes cheated. This also has been true since the beginning of time. They have sometimes been the victims of deceptive practices; they have been sold shoddy goods, or defective goods, or goods that have been misrepresented. Again, their greatest protection has always been competition. They can cease to buy from the dishonest merchant. In addition, when the amount involved is large enough, they have been able under general laws against dishonest practices to resort to the law or to take a case to court.

But in recent years, particularly in the Kennedy and Johnson Administrations, an ominous network of legislation has grown up which attempts to regulate quality and quantity in the minutest detail in one industry or trade after another.

An idea of the scope of this can be gathered from a single message to Congress by President Johnson on February 17, 1967. Here are some of his requests:
I recommend the Truth-in-Lending Act of 1967. . . .
I recommend the Interstate Land Sales Full Disclosure Act of 1967. . . .
I recommend the Welfare and Pension Protection Act of 1967. . . .
I recommend the Medical Device Safety Act of 1967. . . .
I recommend the Clinical Laboratories Improvement Act of 1967. . . .
I recommend the Wholesome Meat Act of 1967. . . .
I recommend the Fire Safety Act of 1967. . . .
I recommend the Natural Gas Pipeline Safety Act of 1967. . . .

He also recommended that Congress give “careful consideration to the [346-page] report and recommendations of the Securities and Exchange Commission” on the detailed control of mutual funds, and that it enact new controls of the electric power industry as soon as a report by the Federal Power Commission was completed.

All this in one message. All this to be rushed through in 1967.

Furthermore, this message came when the most detailed regulation of special industries had already been enacted. On March 15, 1962, President Kennedy had sent a similar special message to Congress with similar recommendations. One result was that Congress that year passed a far more stringent drug-control law. Previously the government had power only to prevent the marketing of unsafe drugs. A new drug could be marketed if the government took no action within 60 days after an application was filed. The new law reversed this, and gave a bureaucrat power to hold up approval of a drug indefinitely until the manufacturer could prove to the bureaucrat’s satisfaction that the drug was not only safe but “effective.” This could give the bureaucrat life-or-death power over a company or its products. It is a very dubious legal principle that allows any bureaucrat to keep off the market something that, even though harmless, is in his opinion “ineffective,” and that in addition puts the burden of proof of effectiveness on the producer. The new drug law has discouraged research and slowed down the introduction of new life-extending drugs.

Before President Johnson’s 1967 message on consumer protection, an automobile safety law had been passed, as well as a food labelling and packaging law. Presumably the designs of future cars will not be specified by engineers, but by lawyers and congressmen, who will also take increasing control over labelling.

There is one very nasty by-product of this itch for more and more Federal control of business. The congressmen and bureaucrats who favor it begin by an enormous propaganda campaign against the industry or trade that they want to control. Thus, in order to get through the Wholesome Meat Act, government officials charged that unsafe and filthy meat was being sold almost everywhere. Then in order to get through a poultry-control bill, Miss Betty Furness, President Johnson’s consumer adviser, stated: “There’s not a place in the U. S. . . . where you can order a chicken sandwich with the confidence you are not endangering your health.” Earlier in 1968, in a sweeping indictment, she had charged that every merchant was “after your back teeth.”

A Senate committee recently held hearings to decide whether the automobile repair industry, with its tens of thousands of local garages and repairmen, ought not to be brought under direct Federal control. The committee credulously listened to witnesses who told it that the chances are 99 to 1 that work ordered will not be done properly, if it is done at all. The implication was left that the industry is made up mainly of incompetents and crooks.

Just how detailed were some of the new regulations that President Johnson was urging in his 1967 message can be judged from its passages on the control of medical devices. Government bureaucrats were to prescribe “standards” for “bone pins, catheters, X-ray equipment and diathermy machines.” Bureaucrats were to say what kinds of nails and screws were to be used for bone repair, and what kinds of artificial eyes were to be permitted.

All this is an ominous reminder of medieval despotism. One thinks of the law of Henry VIII, which made it a penal offense to sell any pins but such as were “double-headed, and their head soldered fast to the shank, and well smoothed; and the shank well shaven; and the point well and round-filed and sharpened.”

The pervading assumption of the Kennedy and Johnson Administrations was that any and all problems could be solved if only we piled up enough new laws and restrictions. Yet it may be doubted that consumers are going to be helped much by defaming and harassing producers.

The consumer has one great protection against incompetent producers or dishonest sellers. This is his own intelligence and his own decisions. His views are heard every day in his purchases and refusals to purchase. With every penny that he spends, the individual consumer is casting his vote for this product and against that. He does not need to sign petitions or march in picket lines. If he patronizes a product, the firm that makes it prospers and grows; if he stops buying a product, the firm that makes it goes out of business. The consumer is the boss. The producers must please him or die.

But this is another way of saying that the great protection of the consumer is the competition among producers for his patronage. This is another way of saying, as even President Johnson admitted in his consumer protection message, that: “Most of these problems are resolved in the free competitive market through the energies of private enterprise. It is remarkable how well the free enterprise system does its job.” This was excellent lip service, but Mr. Johnson’s detailed recommendations were based on the opposite assumption.

A thousand examples could be cited of the miraculous effect of free market competition in serving the consumer. I will content myself with one—the food industry.

The original packaging bill before the 89th Congress not only sought to protect the consumer against fraudulent or deceptive labelling and packaging, but it sought to standardize sizes, shapes and proportions of packages and net weights and quantities. Industry witnesses showed by numerous examples, however, how this would have discouraged innovation and restricted consumer choice. “If there are 8,000 different items in the average supermarket today as compared with 2,000 some years ago,” testified Arthur E. Larkin, Jr., president of the General Foods Corporation, “it’s because the consumer wants it that way. . . . No one of those 8,000 items will continue to be produced and occupy shelf space if the customers don’t take it off the shelf and put it in their shopping bags. . . . Each product must win its right to survival. Each must be sold in sufficient quantity to be profitable.”
In other words, once more, the way to protect the consumer is not to impede and harass, but to encourage the producer

Man vs. The Welfare State

Monday, June 25, 2012

More on Price Controls

THE WELFARE STATE CAN ARISE AND PERSIST ONLY by cultivating and living on a set of economic delusions in the minds of the voters.
As we saw at the beginning of the last chapter, the policies of the welfare state follow a typical time sequence. First the welfare state promises special subsidies or other benefits to this or that pressure group. This increases its expenditures. But it cannot or dare not boost taxes enough to meet these increased expenditures fully. So it runs a deficit, and pays for it by printing more irredeemable paper money. This lowers the value of the currency unit by causing more money to be offered for the same supply of goods. The result is a price rise. The next step of the inflating government is to blame the price rise on sellers, on Big Business, on “profiteers.” The step after that is to put legal ceilings on prices, or to order them to be rolled back, to “protect the consumer.”
If the public is convinced, on the other hand, that it is the government’s fiscal and monetary policies, and not the greed of producers and sellers, that are forcing up prices, and if the public realizes further that government price control only compounds the evils brought about by monetary inflation, and if the public recognizes that price control in the long run cannot help but must hurt the great body of consumers, then the chief political prop of the welfare state will collapse.
It is of the first importance, therefore, even if this necessitates some repetition, to consider the case against price controls in more detail and at much greater length than we did in the brief survey in the last chapter.
Prices in a free market are determined by supply and demand. If the relative demand for a product increases, consumers will be willing to pay more for it. Their competitive bids will both oblige them individually to pay more for it and enable producers to get more for it. This will raise the profit margins of the producers of that product. This, in turn, will tend to attract more firms into the manufacture of that product, and induce existing firms to invest more capital into making it. The increased production will tend to reduce the price of the product again, and to reduce the profit margin in making it. The increased investment in new manufacturing equipment may lower the cost of production. Or—particularly if we are concerned with some extractive industry such as petroleum, gold, silver, or copper—the increased demand and output may raise the cost of production. In any case, the price will have a definite effect on demand, output, and cost of production, just as these in turn will affect price. All four—demand, supply, cost, and price—are interrelated. A change in one will bring changes in the others.
Connexity of Prices
Just as the demand, supply, cost, and price of any single commodity are all interrelated, so are the prices of all commodities related to each other. These relationships are both direct and indirect. Copper mines may yield silver as a by-product. This is connectedness, or connexity, of production. If the price of copper goes too high, consumers may substitute aluminum for many uses. This is a connexity of substitution. Dacron and cotton are both used in drip-dry shirts; this is a connexity of consumption.
In addition to these relatively direct connections among prices, there is an inescapable interconnectedness, or interconnexity, of all prices. One general factor of production—labor—can be diverted, in the short run or in the long run, directly or indirectly, from one line into any other line. If one commodity goes up in price, and consumers are unwilling or unable to substitute another, they will be forced to consume a little less of something else. All products are in competition for the consumer’s dollar; and a change in any one price will affect an indefinite number of other prices.
No single price, therefore, can be considered an isolated object in itself. It is interrelated with all other prices. It is precisely through these interrelationships that society is able to solve the immensely difficult and always changing problem of how to allocate production among thousands of different commodities and services so that each may be supplied as nearly as possible in relation to the comparative urgency of the need or desire for it.
As the eminent economist Ludwig von Mises has demonstrated, only the capitalist system, with private property, a sound currency, free markets, and freedom from price controls, can solve this great problem of “economic calculation.”
Because the desire and need for, and the supply and cost of, every individual commodity or service are constantly changing, prices and price relationships are constantly changing. They are changing yearly, monthly, weekly, daily, hourly. People who think that prices normally rest at some fixed point, or can be easily held to some “right” level, could profitably spend an hour watching the ticker tape of the stock market, or reading the daily report in the newspapers of what happened yesterday in the foreign exchange market, and in the markets for coffee, cocoa, sugar, wheat, corn, rice, and eggs; cotton, hides, wool, and rubber; copper, silver, lead, and zinc. They will find that none of these prices ever stands still. This is why the constant attempts of governments to lower, raise, or freeze a particular price, or to freeze the interrelationship of wages and prices just where it was on a given date (“holding the line”) are bound to be disruptive wherever they are not futile.
Efforts to Boost Prices
Let us begin by considering governmental efforts to keep prices up, or to raise them. Governments most frequently try to do this for commodities that constitute a principal item of export from their countries. Thus Japan once did it for silk and the British Empire for natural rubber; Brazil has done it and still periodically does it for coffee; and the United States has done it and still does it for cotton and wheat. The theory is that raising the price of these export commodities can only do good and no harm domestically because it will raise the incomes of domestic producers and do it almost wholly at the expense of the foreign consumers.
All of these schemes follow a typical course. It is soon discovered that the price of the commodity cannot be raised unless the supply is first reduced. This may lead in the beginning to the imposition of acreage restrictions. But the higher price gives an incentive to producers to increase their average yield per acre by planting the supported product only on their most productive acres, and by more intensive employment of fertilizers, irrigation, and labor. When the government discovers that this is happening, it turns to imposing absolute quantitative controls on each producer. This is usually based on each producer’s previous production over a series of years. The result of this quota system is to keep out all new competition; to lock all existing producers into their previous relative position, and therefore to keep production costs high by removing the chief mechanisms and incentives for reducing such costs. The necessary readjustments are prevented from taking place.
Meanwhile, however, market forces are still functioning in foreign countries. Foreigners object to paying the higher price. They cut down their purchases of the valorized commodity from the valorizing country, and search for other sources of supply. The higher price gives an incentive to other countries to start producing the valorized commodity. Thus, the British rubber scheme led Dutch producers to increase rubber production in Dutch dependencies. This not only lowered rubber prices, but caused the British to lose permanently their previous monopolistic position. In addition, the British scheme aroused resentment in the United States, the chief consumer, and stimulated the eventually successful development of synthetic rubber. In the same way, without going into detail, Brazil’s coffee schemes and America’s cotton schemes gave both a political and a price incentive to other countries to initiate or increase production of coffee and cotton, and both Brazil and the United States lost their previous monopolistic positions.
Meanwhile, at home, all these schemes require the setting up of an elaborate system of controls and an elaborate bureaucracy to formulate and enforce them. These have to be elaborate, because each individual producer must be controlled. An illustration of what happens may be found in the United States Department of Agriculture. In 1929, before most of the crop control schemes came into being, there were 24,000 persons employed in the Department of Agriculture. Today there are 120,000. These enormous bureaucracies, of course, always have a vested interest in finding reasons why the controls they were hired to enforce should be continued and expanded. And of course these controls restrict the individual’s liberty and set precedents for still further restrictions.
None of these consequences seems to discourage government efforts to boost prices of certain products above what would otherwise be their competitive market level. We still have international coffee agreements and international wheat agreements. A particular irony is that the United States was among the sponsors in organizing the international coffee agreement, though its people are the chief consumers of coffee and therefore the most immediate victims of the agreement. Another irony is that the United States imposes import quotas on sugar, which necessarily discriminate in favor of some sugar-exporting nations and therefore against others. These quotas force all American consumers to pay higher prices for sugar in order that a tiny minority of American sugar cane producers can get higher prices.
I need not point out that these attempts to “stabilize” or raise prices of primary agricultural products politicalize every price and production decision and create friction among nations.
Holding Prices Down
Now let us turn to governmental efforts to lower prices or at least to keep them from rising. These efforts occur repeatedly in most nations, not only in wartime, but in any time of inflation. The typical process is something like this: The government, for whatever reason, follows policies that increase the quantity of money and credit. This inevitably starts pushing up prices. But higher prices are not popular with consumers. Therefore the government promises that it will “hold the line” against further price increases.
Let us say it begins with bread and milk and other necessities. The first thing that happens, assuming that the government can enforce its decrees, is that the profit margin in producing necessities falls, or is eliminated, for marginal producers, while the profit margin in producing luxuries is unchanged or goes higher. As we saw in the previous chapter, this reduces and discourages the production of the controlled necessities and relatively encourages the increased production of luxuries. But this is exactly the opposite result from what the price controllers had in mind. If the government then tries to prevent this discouragement to the production of the controlled commodities by keeping down the cost of the raw materials, labor and other factors of production that go into those commodities, it must start controlling prices and wages in ever-widening circles until it is finally trying to control the price of everything.
But if it tries to do this thoroughly and consistently, it will find itself trying to control literally millions of prices and trillions of price cross-relationships. It will be fixing rigid allocations and quotas for each producer and for each consumer. Of course these controls will have to extend in detail to both importers and exporters.
Price Control Distorts Production
If a government continues to create more currency with one hand while rigidly holding down prices with the other, it will do immense harm. And let us note also that even if the government is not inflating the currency, but tries to hold either absolute or relative prices just where they were, or has instituted an “income policy” or “wage policy” drafted in accordance with some mechanical formula, it will do increasingly serious harm. For in a free market, even when the so-called price “level” is not changing, all prices are constantly changing in relation to each other. They are responding to changes in costs of production, of supply, and of demand for each commodity or service.
And these price changes, both absolute and relative, are in the overwhelming main both necessary and desirable. For they are drawing capital, labor, and other resources out of the production of goods and services that are less wanted and into the production of goods and services that are more wanted. They are adjusting the balance of production to the unceasing changes in demand. They are producing thousands of goods and services in the relative amounts in which they are socially wanted. These relative amounts are changing every day. Therefore the market adjustments and price and wage incentives that lead to these adjustments must be changing every day.
Price control always reduces, unbalances, distorts, and discoordinates production. Price control becomes progressively harmful with the passage of time. Even a fixed price or price relationship that may be “right” or “reasonable” on the day it is set can become increasingly unreasonable or unworkable.
What governments never realize is that, so far as any individual commodity is concerned, the cure for high prices is high prices. High prices lead to economy in consumption and stimulate and increase production. Both of these results increase supply and tend to bring prices down again.
Excessive Fears of Monopoly
Very well, someone may say; so government price control in many cases is harmful. But so far you have been talking as if the market were governed by perfect competition. But what of monopolistic markets? What of markets in which prices are controlled or fixed by huge corporations? Must not the government intervene here, if only to enforce competition or to bring about the price that real competition would bring if it existed?
The fears of most economists concerning the evils of “monopoly” have been unwarranted and certainly excessive. In the first place, it is very difficult to frame a satisfactory definition of economic monopoly. If there is only a single drug store, barber shop, or grocery in a small isolated town (and this is a typical situation), this store may be said to be enjoying a monopoly in that town. Again, everybody may be said to enjoy a monopoly of his own particular qualities or talents. Yehudi Menuhin has a monopoly of Menuhin’s violin playing; Picasso of producing Picasso paintings; Elizabeth Taylor of her particular beauty and sex appeal; and so for lesser qualities and talents in every line.
On the other hand, nearly all economic monopolies are limited by the possibility of substitution. If copper piping is priced too high, consumers can substitute iron or plastics; if beef is too high, consumers can substitute lamb; if the original girl of your dreams rejects you, you can always marry somebody else. Thus, nearly every person, producer, or seller may enjoy a quasi monopoly within certain inner limits, but very few sellers are able to exploit that monopoly beyond certain outer limits. There has been a growing literature within recent years deploring the absence of perfect competition; there could have been equal emphasis on the absence of perfect monopoly. In real life competition is never perfect, but neither is monopoly.
Unable to find many examples of perfect monopoly, some economists have frightened themselves in recent years by conjuring up the specter of “oligopoly,” the competition of the few. But they have come to their alarming conclusions only by inserting in their own hypotheses all sorts of imaginary secret agreements or tacit understandings between large producing units, and deducing what the results could be.
Now the mere number of competitors in a particular industry may have very little to do with the existence of effective competition. If General Electric and Westinghouse effectively compete, if General Motors and Ford and Chrysler effectively compete, if the Chase Manhattan and the First National City Bank of New York effectively compete, and so on (and no person who has had direct experience with these great companies can doubt that they dominantly do), then the result for consumers, not only in price but in quality of product or service, is not only as good as that which would be brought about by atomistic competition but much better, because consumers have the advantage of large-scale economies, and of large-scale research and development that small companies could not afford.
A Strange Numbers Game
The oligopoly theorists have had a baneful influence on the American antitrust division and on court decisions. The prosecutors and the courts have recently been playing a strange numbers game. In 1965, for example, a Federal district court held that a merger that had taken place between two New York City banks four years previously had been illegal, and must now be dissolved. The combined bank was not the largest in the city, but only the third largest; the merger had in fact enabled the bank to compete more effectively with its two larger competitors; its combined assets were still only one-eighth of those represented by all the banks of the city; and the merger itself had reduced the number of separate banks in New York from 71 to 70. (I should add that in the four years since the merger the number of branch bank offices in New York City has increased from 645 to 698.) The court agreed with the bank’s lawyers that “the general public and small business have benefited” from bank mergers in the city. Nevertheless, the court continued, “practices harmless in themselves, or even those conferring benefits upon the community, cannot be tolerated when they tend to create a monopoly; those which restrict competition are unlawful no matter how beneficent they may be.”
It is a strange thing, incidentally, that though politicians and the courts think it necessary to forbid an existing merger in order to increase the number of banks in a city from 70 to 71, they have no such insistence on big numbers in competition when it comes to political parties. The dominant American theory is that just two political parties are enough to give the American voter a real choice; that when there are more than these it merely causes confusion, and the people are not really served. There is much truth in this political theory as applied in the economic realm. If they are really competing, only two firms in an industry are enough to create effective competition.
Monopolistic Pricing
The real problem is not whether or not there is “monopoly” in a market, but whether there is monopolistic pricing. A monopoly price can arise when the responsiveness of demand is such that the monopolist can obtain a higher net income by selling a smaller quantity of his product at a higher price than by selling a larger quantity at a lower price. It is assumed that in this way the monopolist can realize a higher price than would have prevailed under “pure competition.”
The theory that there can be such a thing as a monopoly price, higher than a competitive price would have been, is certainly valid. The real question is, how useful is this theory either to the supposed monopolist in deciding his price policies or to the legislator, prosecutor, or court in framing antimonopoly policies? The monopolist, to be able to exploit his position, must know what the “demand curve” is for his product. He does not know; he can only guess; he must try to find out by trial and error. And it is not merely the unemotional price response of the consumers that the monopolist must keep in mind; it is what the effect of his pricing policies will probably be in gaining the good will or arousing the resentment of the consumer. More importantly, the monopolist must consider the effect of his pricing policies in either encouraging or discouraging the entrance of competitors into the field. He may actually decide that his wisest policy in the long run would be to fix a price no higher than he thinks pure competition would set.
In any case, in the absence of competition, no one knows what the “competitive” price would be if it existed. Therefore, no one knows exactly how much higher an existing “monopoly” price is than a “competitive” price would be, and no one can be sure whether it is higher at all!
Yet antitrust policy, in the United States, at least, assumes that the courts can know how much an alleged monopoly or “conspiracy” price is above the competitive price that might have been. For when there is an alleged conspiracy to fix prices, purchasers are encouraged to sue to recover three times the amount they were allegedly forced to “overpay.”
Refrain from Price Fixing
Our analysis leads us to the conclusion that governments should refrain, wherever possible, from trying to fix either maximum or minimum prices for anything. Where they have nationalized any service—the post office or the railroads, the telephone or electric power—they will of course have to establish pricing policies. And where they have granted monopolistic franchises—for subways, railroads, telephone or power companies—they will of course have to consider what price restrictions they will impose.
As to antimonopoly policy, whatever the present condition may be in other countries, in the United States this policy shows hardly a trace of consistency. It is uncertain, discriminatory, retroactive, capricious, and shot through with contradictions. No company today, even a moderate-sized company, can know when it will be held to have violated the antitrust laws, or why. It all depends on the economic bias of a particular public prosecutor, court, or judge.
There is immense hypocrisy about the subject. Politicians make eloquent speeches against “monopoly.” Then they will impose tariffs and import quotas intended to protect monopoly and keep out competition; they will grant monopolistic franchises to bus companies or telephone companies; they will approve monopolistic patents and copyrights; they will try to control agricultural production to permit monopolistic farm prices. Above all, they will not only permit but impose labor monopolies on employers, and legally compel employers to “bargain” with these monopolies; and they will even allow these monopolies to impose their conditions by physical intimidation and coercion.
I suspect that the intellectual situation and the political climate in this respect are not much different in other countries. To work our way out of the existing legal chaos is, of course, a task for jurists as well as for economists. I have one modest suggestion: We can get a great deal of help from the old common law, which forbids fraud, misrepresentation, and all physical intimidation and coercion. “The end of the law,” as John Locke reminded us in the seventeenth century, “is not to abolish or restrain, but to preserve and enlarge freedom.” And so we can say today that in the economic realm the aim of the law should be not to constrict, but to maximize price freedom and market freedom.

Man vs. The Welfare State