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It is quite evident that the welfare programs in the United States are beyond broken. So much that many of these bloated and red-tape draped initiatives are seem unsalvageable, irredeemable, and impossible to adequately reform! Not only do they often fail to lift recipients out of penury appears to have generated cycles of multi-generational poverty. Leading to the perception that these programs operate more as institutional forms of job security for bureaucrats rather than measures to help the poor. Forms of public assistance stressing dependence versus progressive graduations of increase autonomy are a hair away from being medieval serfdom. A pen stroke away from the restoration of the repugnant practice of sharecropping. If being shackled to the debts incurred at the company store wasn’t haunting enough the ghosts of past sins don’t stop there. Sharecropping often occurred on former slave plantations in the Southeastern region of the United States. Freed only to remain on the same servile living quarters of your captive ancestors. This analogy is fitting because the current welfare system is analogous to an implicit form of slavery, like serfdom or sharecropping.

 

When faced with the social and financial costs of the current programs it is extremely tempting to advocate the flat out abolition of all forms of welfare. It is ineffective at helping recipients claim up the socio-economic ladder. Servers more as a temporary supplement in contrast to a permanent solution. The amount of money that has been squandered on such ineffective measures is very concerning. Considering the dismal results and the ever-expanding expenditures allocated for welfare programs, it is fair to surmise that government institutions are inept at efficiently running them. Despite the qualms any fiscally-minded voter may have pertaining to social welfare, outright elimination is unrealistic.  The public outcry would be so profuse and pervasive it would not be a pragmatic political reality. I hate to expound upon such a reaction in such cynical terms; however, one quirk of human nature is that people like to obtain goods and services for free. Even in the private sector, if a product or service is being given away for free; people are willing to kill each other to obtain it. The best you can hope for is a significant downgrade in the amount of bureaucracy and spending utilized to dispense welfare services.

The question becomes if we cannot feasibly relinquish all welfare programs how do we implement a more efficient and effective means of providing such services?  Literally a trillion-dollar question. Nevertheless, a question that we need an answer too, especially in the age of uninhibited profligate spending.  The answer may come from an unlikely source, the Nobel Laurate Libertarian economist Milton Friedman. The answer is the implementation of a Negative Income Tax (NIT). The Negative Income Tax is often confused with Universal Basic Income (UBI), a policy championed by Democratic presidential candidate Andrew Yang. However, UBI is not a means-tested form of welfare entitlements whereas NIT is. In basic principle, NIT works by providing :

 

“….the percentage difference between an individual’s income and an income cutoff, or the level at which they start paying income tax..” [1].

 

A firm example of how this would be applied the following example would best demonstrate how this would work.

“The NIT would thus be a mirror image of the regular tax system. Instead of tax liabilities varying positively with income according to a tax rate schedule, benefits would vary inversely with income according to a negative tax rate (or benefit-reduction) schedule. If, for example, the threshold for positive tax liability for a family of four was, say, $10,000, a family with only $8,000 of annual income would, given a negative tax rate of 25 percent, receive a check from the Treasury worth $500 (25 percent of the $2,000 difference between its $8,000 income and the $10,000 threshold). A family with zero income would receive $2,500.” [2].

 

Even though budget hawks and limited government purists would still scoff at the notion of implementing NIT. Especially individuals who unconditionally view taxation constituting theft. While their apprehensions are understandable, the unfortunate reality is that the likelihood of America ever becoming a “voluntary” society is minuscule. There is too much-invested interest ranging from self-interested bureaucrats to the welfare recipients themselves that would be an impossible sell. It is hard enough to persuade the public to go along with NIT. If implemented, fiscally, this would be a huge victory in reforming welfare.  Per Milton Friedman’s 1962 book Capitalism and Freedom:

 

“…. In 1961, the government amounted to something like $ 33 billion (federal,

state and local) on direct welfare payments and programs of all kinds: old age

assistance, social security benefit payments, aid to dependent children, general

assistance, farm price support programs, public housing, etc. I have excluded

veterans’ benefits in making this calculation. I have also made no allowance for

the direct and indirect costs of such measures as minimum-wage laws, tariffs,

licensing provisions, and so on, or for the costs of public health activities, state

and local expenditures on hospitals, mental institutions, and the like.

 

There are approximately 57 million consumer units (unattached individuals

and families) in the United States. The 1961 expenditures of $ 33 billion would

have financed outright cash grants of nearly $ 6,000 per consumer unit to the 10

percent with the lowest incomes. Such grants would have raised their incomes

above the average for all units in the United States. Alternatively, these

expenditures would have financed grants of nearly $ 3,000 per consumer unit to

20 percent with the lowest incomes. Even if one went so far as that one-third

whom New Dealers were fond of calling ill-fed, ill-housed, and ill-clothed,

1961 expenditures would have financed grants of nearly $ 2,000 per consumer

unit, roughly the sum which, after allowing for the change in the level of prices,

was the income which separated the lower one-third in the middle 1930s from

the upper two-thirds. Today, fewer than one-eighth of consumer units have an

income, adjusted for the change in the level of prices, as low as that of the

lowest third in the middle 1930s.

 

Clearly, these are all far more extravagant programs than can be justified

to “alleviate poverty” even by a rather generous interpretation of that term. A

program which supplemented the incomes of the 20 percent of the consumer

units with the lowest incomes so as to raise them to the lowest income of the

rest would cost less than half of what we are now spending.  (Page 159) [3].”

 

 

Clearly, even back in 1961 supplanting the many of the “New Deal-era” entitlements with NIT would substantially save money. Even when adjusted for the rate of inflation, those savings would be even more pronounced in 2019. Within the past 59 years, the size and scope of government have only drastically expanded which is in lock-step with sharp increases in spending. The national deficit back in 1961 was $289 Billion with a Debt/GDP ratio of 52%. [4]. While the years between 1961 and 1988 saw fluctuations, it was not until the mid-1990’s that we started to see profound increases in deficit spending [5]. As of 2018, the Debt/GDP ratio reached 104% [6]. Doubling since referenced seminal work of Friedman has been originally published! If the United State were, in theory, able to reduce all current welfare initiatives it would significantly reduce expenditures on such programs. The excessive amounts of spending on welfare programs is one of my biggest reservations pertaining to such entitlements.

 

The question becomes is how does UBI stack up in comparison to NIT when it comes to budgetary allocations. As you can imagine UBI is the more expensive of the two policies. What’s the damage?  Per an article from the Niskanen Center: Universal Basic Income is Just a Negative Income Tax with a Leaky Bucket demonstrates this point astoundingly. At a proposed rate of $10,000 per person, annually would result in an estimated expense of $3 trillion dollars. It estimated even if the allocation per person was cut in half it would still constitute most of the federal budget minus “… Social Security, Medicare, defense, and interest payments” [7]. However, it does appear based on a rough estimate of the cost of NIT that the total would be $182 billion annually. Which would be equivalent to the combined cost of SSI, SNAP, and EITC. Obviously, it is still a noteworthy expense but pales in comparison to the cost of UBI implementation and that of our current expenses.  It becomes quite evident how foolish it becomes to utilize the terms UBI and NIT interchangeably considering the gargantuan differences in the costs. The referenced article questions why more policymakers are advocates of UBI over NIT. That is a reasonable question. Especially when one policy is more economically efficient from the standpoint of expenses.

 

Notable reductions in welfare spending are not the only benefit that would come of narrowing down public assist to only NIT. An article published by the Independent Institute back in 2008: If you Really Want to Help the Poor, Remember Milton Friedman, focuses on these advantages. 1). The article mentions how NIT benefits the individual recipient by receiving more money through not punishing them for working. Many current programs cut benefits once the starts to receive a low threshold of compensation. Relinquishing incentives for working. 2.) It is more efficient than other forms of welfare by eliminating all the departments that currently allocate services. This would amount to a radical consolidation of internal government agencies. 3.) Being the funds are appropriately dispensed. In other words, the money is given to the recipient versus squandered by overhead costs (such as the salaries of administrators) or reallocated for another purpose. It speculated that a mere “… 15 cents of every dollar finds its way to the poor…” [8]. Providing a truly awe-inspiring example of government inefficient at work.

 

The current welfare system is an abysmal train-wreck that most likely needs to be gutted down to the studs. Completely eliminating it is highly improbable, so the unfortunate fact is society needs to find an efficient compromise. From the standpoint of economic and institutional efficiency, a Negative Income Tax would be the most advantageous option. Not to be confused with Universal Basic Income, similar premise, however, financing that variation of distributed funds is a different story. One reading this article today, please stop substituting UBI for NIT and vice versa. Both policies have different ramifications when it comes to funding. In all honesty, one of the policies seems more rational and effective than the other. While the other is merely a Keynesian stimulus package camouflaged as a theoretical solution from the Chicago School of Economics. NIT only provides subsidies to those of the lower-income strata. UBI, in contrast, provides a siphon to everyone regardless of finical need, which is irrational. It harkens back to the fixation of the Keynesian school when it comes to economic consumption being the core impetus for economic health. Which in all honesty hasn’t always proven to be true. If you are going to redistribute tax dollars you might as well give to those in need rather than haphazardly provide it to everyone on the feeble hope it will spur an uptick in spending. In all honesty, welfare programs were intended to operate as a socialized charity. While I personally believe all charity should be privatized, I understand that I am in the minority holding such a view. If my tax dollars are going to be retributed at the very least do so in a rational manner. A five-time lottery winner doesn’t need any of my tax contributions.

 

I always try to give people the benefit of the doubt rather than casting suspicion upon them of duplicity. I am perplexed by the fact that Andrew Yang claiming that Milton Friedman was a proponent of UBI. As demonstrated previously UBI and NIT are similar but not the same.  Yang is either ignorant of the difference because he never deeply examined the distinction between the two or he’s dishonest. Either could be the case as he is a presidential candidate. However, the potential for political opportunism is always lurking in the background for anyone with presidential aspirations. I wouldn’t put it over Yang to sell the benefits by omitting the key differences between UBI and NIT and conflating the two intentionally. Then utilizing the connection to Friedman and his premarket legacy to sell the American public on NIT’s more expensive brother. Why sell UBI over NIT? It is a matter of obtaining votes. What is a better sales pitch only low-income Americans get a check or everyone gets a check? The answer to that rhetorical question should be evident. The problem is when people are so engulfed in their own self-interest they are blind to the big picture, they are incentivized to make idiotic decisions.  Long run everyone getting a check is more harmful than regulating it to the poor.

 

 

 

 

 

 

 

9 thoughts on “Milton Friedman’s Answer to Welfare Reform

  1. Hello! I finally got around to reading this excellent blog post and enjoyed it a lot, especially the way it compares and contrasts Friedman’s sensible NIT proposal with utopian UBI ones. (In fact, I am going to feature your excellent post on my “priorprobability” blog soon.) In the meantime, did you know that Nixon proposed — and that Congress almost enacted (!) — a modified NIT plan in the early 1970s? As it happens, I am currently writing a paper about this doomed NIT plan. As I see it, one reason it was not adopted is because it did go far enough — it did not replace most welfare programs as Friedman had originally proposed — and at the same time, because it went to far (!) by providing every poor family a minimum income regardless of willingness to work. I will be posting my paper to SSRN next month, but I would be happy to share a draft with you via email…

    Like

        1. That certainly is a fair point. Often the commander-in-chief is constrained by political reality. Whether it be by the counterbalance on the separation of powers or by the constituents. It is possible I am potentially biased by his tarnished reputation as well. It could be unfairly projecting that upon him. In turn making me more judgmental of his economic policies.

          Liked by 1 person

        1. Referring this whole ordeal as political theater is an understatement. After reading your paper I retrospectively regret not including any of the context of Nixon’s FAP bill into my blog entry. This sliver of congressional history provides insight into the political complications of passing similar legislation.

          I believe you are correct that the demise of the FAP bill operates as a case study for defeating any UBI on the horizon. For its opponents the 91st congress serves as a how to guide. For advocates serves as a lesson in what to avoid.

          Personally, I feel there is a lesson pertaining to policy as a whole resulting from the FAP flop. Ideally policy should be based on evidence. However, that is not how political policy.
          Rather people have fixed beliefs and convictions that don’t
          always align with reason.

          What I have learned is that the centrist stance isn’t always a vantage point. Conventional wisdom makes it seem likely that the middle road is the safest. This isn’t always true. Nixon took liberties with the concept of NIT and alienated conservatives. However, social liberals were still dissatisfied with the bill for various reasons. Effectively alienating both camps. What should of been a measured strategy became nothing short of a miscalculation. Your article mentions that Nixon misbranding the bill facilitated it’s demise. I suppose If claim to be concerned with austerity and drift away from that principle you look like a hypocrite.

          Sometimes the middle isn’t necessarily the sweet spot. Especially from a selling stand point. In a sense if you are an advocate of a policy you are selling the public on its merits. This highly conspicuous in the current political climate. Pro-Trump / Anti-Trump factions have formed some well defined demographics. The populous movement globally is certainly not gain steam by modest or staid rhetoric.

          While it is true that Nixon may have tried to hard to pander to moderates, there were obvious other factors working against. The dizzying array of political interests. Now, not surprising. But, the intricacies, I was fully ignorant of prior
          reading your article. Even if FAP was consistent with the theoretical vision of NIT, I would still question it passing.

          As layman, wonderful work. Easy to read, never opaque or confusing. Above all engaging. I believe I will have to check out more of your published work.

          Liked by 1 person

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