This is the printable version of an article from Infernal Ramblings (infernalramblings.com). The original web-optimised article is also available.

The Flawed Argument Against Welfare

Right-wing conservatives argue against welfare because it's supposedly inefficient. But the model they use to justify this does not reflect reality, and if you think about it, some government provision for the poor actually creates a more efficient outcome.

Written by johnleemk on 12:45:23 pm Apr 24, 2007.

Right-wing politicians frequently argue against welfare on numerous grounds. Generally, their opposition can be boiled down to the simple idea that welfare is economically inefficient.

After all, say the opponents of welfare, if someone is down on his luck, that is not the government's problem. The government was not responsible for his misfortune; it's his fault, and the onus is on him to pull himself out of the hole he's in.

Some people take the "compassionate conservatism" line and agree that although it's saddening, the plight of the poor is not a problem for government to handle. Rather, this is something that charities should be doing — not the government.

I know how the anti-welfare camp thinks because I used to be one of them. Over time, however, it became harder and harder to reconcile the theory and the reality of things.

For instance, those opposed to welfare operate under a social darwinist model of society — where if you can't hack it, you're poor, whereas if you can do well, you succeed and become wealthy.

As anyone who actually lives in the real world can assure you, this is a flawed model at best. At worst, it goes against everything about life. Unlike the hermetically sealed environment that many people are brought up in, life is neither fair nor just. It's a crapshoot, and you can be the smartest, most charismatic, most sexy person in the world, and still be a bum (although admittedly the chances of this are small, the probability is not zero).

A convincing argument against welfare is that of the "welfare trap". Once someone is taking government benefits, there is no incentive to get a job, which may pay less, and then lose those benefits.

This is actually an argument against the implementation of welfare, and not welfare itself. There are a variety of proposals, including one backed by the Nobel Prize-winning and libertarian economist Milton Friedman called the negative income tax, which would slowly reduce the amount of benefits based on one's income tax bracket, eliminating the welfare trap.

A few cite another inefficiency in the welfare scheme — how it is funded. Taxation, especially progressive taxation (which the negative income tax proposal calls for), is a disincentive to work, they argue.

At first glance, this seems convincing — you and I would work a lot less if, say, 60% of the money we earned ended up in the government's coffers. But not many people are calling for such painfully high tax rates, and since the marginal value of additional income to the wealthy is lower than that of the poor (someone with a million dollars won't care about an extra dollar as much as someone with a hundred dollars would), it actually makes sense to tax the rich more.

Moreover, the equality of opportunity that government programmes for the poor creates is actually economically efficient in the long run. If the next Einstein was born into a poor family (through no fault of his own, mind you), his potential might never show itself unless he had the necessary educational opportunities, didn't have to worry about dropping out of school to feed his siblings, and wasn't too sick to be thinking about physics.

I have argued before that using the orthodox economic model of externalities, we can treat poverty as an externality. An externality is a cost or benefit imposed on a third party to a transaction. The poor might be poor due to a simple lack of talent, but they are also poor largely because of the poverty trap, because they have simply been unlucky in life. Through no fault of their own, these people have real costs imposed on them, and these costs should be corrected for — internalised, in economic jargon.

There is some intellectual merit to the argument against welfare. But in the end, it's just not credible enough. In the long run, not providing for the poor will only result in more economic inefficiency.