Milton Friedman's Social Welfare Program

Not everyone realizes that Milton Friedman is the "architect of the most successful social welfare program of all time":

The Other Milton Friedman: A Conservative With a Social Welfare Program by Robert Frank, Economic Scene, NY Times: Milton Friedman ... was the patron saint of small-government conservatism. Conservatives who invoke his name in defense of Social Security privatization and other cutbacks in the social safety net might thus be surprised to learn that he was also the architect of the most successful social welfare program of all time.

Market forces can accomplish wonderful things, he realized, but they cannot ensure a distribution of income that enables all citizens to meet basic economic needs. His proposal, which he called the negative income tax, was to replace the multiplicity of existing welfare programs with a single cash transfer — say, $6,000 — to every citizen. A family of four with no market income would thus receive an annual payment from the I.R.S. of $24,000. For each dollar the family then earned, this payment would be reduced by some fraction — perhaps 50 percent. A family of four earning $12,000 a year, for example, would receive a net supplement of $18,000 (the initial $24,000 less the $6,000 tax on its earnings). [giving a total income of 30,000]

Mr. Friedman... was above all a pragmatist... If the main problem of the poor is that they have too little money, he reasoned, the simplest and cheapest solution is to give them some more. He saw no advantage in hiring armies of bureaucrats to dispense food stamps, energy stamps, day care stamps and rent subsidies.

As always, Mr. Friedman’s policy prescriptions were shaped by his desire to minimize adverse economic incentives, a feature that architects of earlier welfare programs had largely ignored. Those programs ... typically reduced a family’s benefits ...[with] each increment in earned income. ...[A] family ... might see its total benefits fall by $2 for each extra dollar it earned. ...[N]o formal training in economics was necessary to see that working didn’t pay. In contrast, someone who worked additional hours under Mr. Friedman’s plan would always take home additional after-tax income.

The negative income tax was never adopted in the end, because of concern that a payment large enough to support an urban family of four might induce many to go on the dole. ... Instead, Congress adopted the earned-income tax credit, essentially the same program except that only people who were employed received benefits. ...[T]he earned-income tax credit has proved far more efficient than conventional programs, just as Mr. Friedman predicted. Yet because it covers only those who work, it cannot be the sole weapon in society’s antipoverty arsenal.

This month, economic populists like Jim Webb, Jon Tester and others were elected to Congress on pledges to strengthen the social safety net. In pursuing this task, they should take seriously Milton Friedman’s concern about incentives. How might they expand support for the unemployed without undermining work incentives?

One possibility is government-sponsored employment coupled with negative income tax payments that are too small to live on... For others, government would stand as an employer of last resort. With adequate supervision and training, even the unskilled can perform many useful tasks. They can plant seedlings on eroding hillsides, for example, or remove graffiti from public spaces. ... Coupled with low negative income tax payments, wages from public service or private employment could lift everyone from poverty. This combination would provide no incentive to go on the dole.

Mr. Friedman, of course, would not have welcomed an expansion of the federal bureaucracy. But ... guaranteeing employment at low wages would require no such expansion. By inviting companies to bid for program contracts, government could harness market forces to control costs.

In the face of huge budget deficits, is such a program affordable? In ... 1943, ... Mr. Friedman proposed a progressive consumption tax as the best source of revenue to meet critical national objectives. ... High tax rates on consumption by the wealthy, Mr. Friedman argued, would generate additional revenue with only minimal sacrifice. So if providing greater economic security for low- and middle-income families is an important national objective, ... there are ways to pay the bill.

By all accounts, Mr. Friedman was a generous and compassionate man, someone more keenly aware of good luck’s contribution to individual prosperity than many of his disciples. Careful students of his work will be inspired not to dismantle the social safety net but to make it more effective.

Comments

[Lafayette]

"Instead, Congress adopted the earned-income tax credit, essentially the same program except that only people who were employed received benefits. ..."

It may stick in one's craw to say so, but admittedly Congress showed a bit of wisdom ... this was the wisest thing to do.

Welfare is a palliative solution to what should be a short-term problem. Otherwise, what happens is that which is most obvious in Europe. Long-term generational dependence upon welfare.

And, the bureaucracy that goes with that has become so encrusted that if either a legislature or an administration will reform it, then there is hell to pay in the streets. The consequence, a long-term perennial rate of unemployment between 7 and 9% throughout the EU since the early 1980s.

All that was acceptable in a EU that generated tax revenues to pay for it. But, with the long-term economic downturn that started in the early 1990s, some fifteen years later total taxation is between 40 and 54% of GDP, which effectively smothers consumer disposable income.

Some countries take it better than others. When the riots in France showed how disgruntled with their situation that the ghetto-youth actually were, the French socialists pointed their finger to Sweden - with even higher taxation and lower unemployment than France. And the Swedes have a lower productivity per hour than the French. So, what is happening?

What is happening is that more Swedes WANT to work, which is why the unemployment is lower. Why this? Because even if Swedish welfare subventions are a high percentage of final salary, a firm hand of the administration will find you another job that not only suits base qualifications but that you are not allowed to refuse. That is a subtle but important innovation in welfare subsidy in Europe.

Does this work in the US? You tell me. I doubt it. America is too inured to workers finding their "own solution". Just reduce the unemployment benefits tenure and people will find a job by themselves. Yankee individualism, and all that ...

"Don't ask what your country can do for you, but ask yourself what you can do for your country." Tell that to the plutocrats! They are a laughing all the way to the bank.

[Nicolas]

Of course even moderately high taxes on rich peoples should bring loads of income to the government. The problem has always been tax avoidance. And globalization, as discussed earlier on this blog, isnt making it better. What about high sales taxes on luxury goods (assuming black market and smuggling can be controlled for) ?

[bakho]

VA and MT are both big time Pork states. MT gets ag and energy subsidies and VA lots of DOD contracts. It makes sense for these senators to support Federal programs.

[evagrius]

The EITC program works to a limited degree, ( it's better than getting poked with a sharp stick), but it's extremely complex to administer despite all the touting the IRS makes. Applicants must apply at either a welfare center or a tax service if they want no hassles. Single applicants receive very little credit. Married couples a little more and those with children quite a bit more. The program is really geared towards families.
Unfortunately, the complexity of the program makes it easy to generate payment errors, especially when children are involved.
The program is computer based and the particular computer program, ( Window-based), is very difficult to work with.
I processed a number of applicants for EITC this past spring. I remember it as very sressful and confusing and irritating.
I've forgotten most of the rules and regulations, a defensive maneuver, I think, by my mind.

If anyone's interested, they can always go to the IRS site ;

http://www.irs.gov/individuals/article/0,,id=96406,00.html

It's a typical IRS site- information dense. Very "helpful" for those with limited education.

While it's a good program in its limited way,I really think that it's become a subsidy for businesses and corporations. Why should they pay their employees more when they're eligible for a taxpayer funded credit from the feds?

[Bruce Webb]

Who funds the EITC? People who pay income tax.

While I don't know if Friedman explicitly pushed the notion that gains on capital should not be taxed, certainly his acolytes did and do. Once again when you examine the elements of the Economic Right economic program in isolation each can be made to make sense but in combination they always result in shifting the financial cost of social responsibilities from capital to wages.

Flat tax, consumption tax, carbon tax, negative income tax, elimination or severe limitation of taxes on capital gains, elimination of corporate income tax (double taxation), elimination of taxation on dividends (double taxation now in the opposite direction), tax sheltered HSAs (health savings accounts), tax sheltered IRAs (individual retirement accounts), tax sheltered Educational Savings Accounts (deduct the cost of the computer you would have bought your kid anyway). Each and every one can be argued in isolation but taken in totality means rich people enjoying all their gains without actually, you know, having to pay for anything when compared to those poor shlumps who, you know, actually work for wages.

"Carbon taxes are so fair. After all I pay the same amount for gas I put into my Lamborghini as you do to put gas into your beater. And I drive it less because I take a car service to my job in Midtown."

Negative income tax: good idea or bad idea? Exemption of gains on capital from taxes: good idea or bad idea? Notion that you should examine those components of the Economic Right economic program in isolation? Sorry. No Deal.

[evagrius]

Bruce Webb;

You don't understand. The rich deserve their income and wealth. They work hard for it and they're "risk takers".
They're entrepeneurs, ( the French don't have a word for it according to G.W. Bush).
Wage earners aren't risk takers. They just work hard but they're not creative like the high income folks are.
Look at all the money the wealthy pour into investments into the U.S. as a result of the tax cuts.
It's incredible, no?

[calmo]

Ok, eva we're onto you.
And you deserve it.
For taking this risky satire.
But why should we labor through it, risking our precious time for that promise of...enlightenment ("You don't understand" suggests that we soon will, not merely that we will have our misunderstanding confirmed and perhaps flaunted about mercilessly.)
Do we (investors) deserve this (thrashing)?
Do you (non-thrasher) deserve this (complaint about lousy ROI)?
Somewhat.

[DRR]

I was a beneificiary of the EITC just last year (I just have hit the sweet spot because I got a lot of bang for my buck) and I didn't find it a hassle. My check came pretty swiftly too, and I'm a single white male.

[evagrius]

DRR;

Good for you. Maybe you had a "simple" return. You are a single male so that made it a lot easier.

I'm not knocking the program. I think it's a necessary one given the rest of the situation.

[Bruce Webb]

I'm with Eva. I don't have any problems with the EITC as currently configured. I do have some issues with economists that suggest expanding it in preference to raising minimum wage. And we saw a lot of Friedman inspired calls to do exactly that.

As pointed out the net effect of combining negative income taxes with cuts in taxation on capital is a direct shift for overall social welfare from holders of capital to wage workers. Expanding the negative income tax combined with not increasing minimum wage has the same effect.

Holders of capital are ever so patiently, one step at a time, one piece in the puzzle at a time, working to relieve themselves from all burdens of taxation. Friedman may indeed be a Saint: the Patron Saint of Capital. He may have been a generous and compassionate man personally, but policies drawn from his work tend to pit worker against middle income worker to the benefit of owners.

[georgist]

The dirty little secret is that a significant portion of what passes for "capital" in the national accounts is nothing more than unearned land value, which should ideally be taxed as such. To Friedman's credit, he understood this very plainly, as do other Nobel laureates in economics:

"There's a sense in which all taxes are anatagonistic to free enterprise ... and yet we need taxes. ... So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.

The next least bad tax is a flat-rate tax on income above an exemption. I could design my ideal tax system it would contain an income tax, but it would not be the kind of monstrosity we have now. It would be a flat-rate tax on all income, from whatever source derived, less only a personal deduction and strict occupational expense, and that kind of income tax I think would be the least inconsistent with a strong free enterprise system." -- Milton Friedman Interview

[Bruce Webb]

As usual the faults are not in the work of the Nobel winners, but in the egregious ways they let the students of their students of their students wreck havoc in Econ 101. Friedman may have been a great thinker (I am not qualified to make the assessment) but a lot of malarkey has been promulgated under cover of his ideas by many of his acolytes.

You get the same defence of F. Hayek. And for that matter Karl Marx. Supporters can point to passages where clearly they were taking a deeper look at issues that their followers simply elided over. But when is said and done each in his lifetime allowed some very dubious and even pernicious work to be done under their intellectual cover. And as such do not deserve a free pass from the historians.

[Mike Angelio]

Eva I agree that they're are people out there who have busted their tails for their wealth, but have you forgotten that most wealthy people come from inherited wealth. Rich folks know how to invest their money and with globalization, exchange rate advantages, diverse portfolios, or what have you, these people stay rich, accruing easy money daily.

If you've Friedman's "Free to Choose" he understood they're was always going to be a gap between the rich and the poor, but believed at least most people would be better off if the distribution of income was more equitable. Progressive taxe programs! Supply side tax cuts given to business owners just perpetuates what 'Malthus' referred to in his "theory of gluts". who's to say that this money will go into the economy or if it will be saved up and horded in overseas bank account or the Foreign Exchange market.

[tax services]

When you buy that hot outfit for your Second Life avatar, you don’ t have to pay tax on it, and neither does the person selling it to you. That may change, however, now that virtual economies are on the IRS’ radar.