Welfare Aid: What Form is Best?
by Fred E. Foldvary, Senior Editor
Aid to the poor can be given either in cash or in kind, i.e. as things. Government welfare programs are usually provided in goods and services such as food coupons, housing subsidies, and medical care. Would it be socially better to provide cash?
The recipients of welfare usually prefer cash, because then they can get the goods they prefer rather than those the government officials prefer for them. The poor get more immediate utility from cash than from goods. But government welfare aid, and much of charity, is not given just to enhance the short-term utility of the poor. Government assistance is provided to the poor to enhance the utility of the voters more than that of the poor.
Most folks in wealthy countries would feel bad if the poor starved and if children were seen begging in the street. Government aid is provided for paternalistic reasons: to prevent the poor from suffering from hunger or lack of shelter or illness. If a poor person prefers to spend extra money on cigarettes rather than food, the government does not cater to that preference, because the concern of the voters is for the health of the poor rather than to let them indulge in their habits and addictions. Taxpayers don't want their extracted funds to be spent for tobacco, gambling, and get-high drugs.
If one earns money, then one should be able to spend it as one wishes. Those who give charity, or are forced to be donors, may rightfully decide how the money should be used. It is impossible to say what is socially better, to let the poor satisfy their tastes or to do what is physically better for the poor. Since it is the taxpayer's money, it is morally proper for the donors to choose what to do with the funds, to spend it on food for the poor rather than letting them buy cigarettes.
If a poor person is getting some cash income already, then extra aid as goods and services has similar results as cash, because the poor person can shift his spending. If he was already buying some food and some cigarettes, then when he gets food stamps, he can spend less cash on food and use the cash to buy tobacco. So for many poor folk, who earn or receive some money, it does not matter that much if aid is in goods or in cash. This thwarts the paternalistic intent of the voters and government officials.
Rather than just give the poor money or goods, it is socially better to have them work for it. There are plenty of services that society wants, such as child care, cleaning streets and parks, pulling weeds, surveillance against crime, and assisting the ill. Most poor folk who receive welfare are capable of doing such tasks. If the poor work for their welfare aid, then they could receive part in cash and part in kind. Make the payment somewhat below the minimum wage, so that they have an incentive to shift to market-based employment. In some cases, such as a large family of small children, the work-based aid can be supplemented, and gradually phased out when the recipients shift to higher paid work.
The main obstacles to market-based employment for the poor are the interventions of government. Often, to remain on welfare, the poor person has to be not working and not saving money. If they do work, they get a double penalty of lost welfare benefits and extra taxes. To really help the poor, labor should be tax-free, at least up to a decent living wage level. Permits and licenses also block the poor. They are not allowed to work at home, and if they want to earn money such as by cutting hair, they need a license that unnecessarily requires years of schooling.
Other government interventions contribute to poverty. The war on drug users, for example, creates high-profit illegal opportunities for the poor and violent neighborhoods, which siphons entrepreneurship to the underground and scares off productive investments.
Taxes on labor decrease wages two ways, directly taking wages and indirectly by reducing productivity. Market-hampering land speculation decreases wages by shifting the margins of industry to less productive lands. It takes economic understanding to realize that poverty can be cured simply by letting workers earn their complete natural wage. It requires real economics rather than ruling-class propaganda to realize that productivity gains go to landowners who get incited to seek more land at ever higher prices, which reduces wages and ultimately crashes the economy, unless the landowners have to pay for the public works that generate the rent.
So long as that economic message does not get grasped, the public will have to face the poverty problem. Having the poor work for their aid is better than just giving it to them, but this is difficult because society for some odd reason likes to punish labor. When Americans say good-bye to someone, we say "don't work too hard!" and "take it easy!" maybe because we know that much of our work will be taxed by government, whereas leisure and doing nothing is tax-free. Society tells the poor, "don't work too hard!" so no wonder we have to face the problem of how to compensate the poor for having been denied the natural opportunity to work.
-- Fred Foldvary
Copyright 2003-2004 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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