Sunday, February 04, 2007

Social Welfare: Incentives Matter

Social welfare programs championed by the liberal-minded inevitably employ compassion as their primary justification. Government should protect and assist those in need. To the extent that social welfare programs actually help the needy is, however, not the simple black-and-white result that liberals claim. It must be realized that in discussing the effects of social welfare programs, one must keep in mind not just the short-term benefits but also the potential long-term destructive effects. In short, incentives must be considered, because incentives matter.

The short-term effects of social welfare are indeed beneficial. The downtrodden receive assistance. The elderly who cannot provide for themselves receive the means by which to do so from the government. The unemployed receive unemployment insurance. One may not have a free lunch, however. The government is not, in carrying out its social welfare programs, simply giving away funds to the needy. The government is partaking in two destructive activities that hurt the needy more than they help.

The first destructive activity undertaken by the government in funding social welfare programs is taxation. Taxation is inherently destructive – it takes money away from individuals and families. Social welfare programs undertake a Robin Hoodian objective – redistribute the nation’s wealth so as to best benefit society as a whole. The idea is that a dollar in Bill Gates’ pocket is worth less to him than would be a dollar in a poor person’s. Therefore, the government should tax Gates and give the money to the individual who values the money more.

Such logic is rife with fallacy. First, one must assume that the reason Gates has more money than the rest of us is due to his superior ability to make that money. Therefore, taking money from Gates and giving to someone of lesser-ability destroys Gates’ incentives to make more of that money. If his incentives to make money do not exist, he will cease to do so, thus destroying all the potential wealth that Gates has proven to be able to accrue. Gates’ money without taxation contributes by itself to the welfare of the needy. His money provides jobs, higher wages, cheaper products, better technology and countless more benefits to society. Furthermore, because Gates values one dollar less than anyone else, he must earn ever-more dollars each year in order to satisfy his present needs. Thus, his incentives to innovate and satisfy consumer demands are ever-increasing. This is the very way in which capitalism produces wealth; and wealth produces overall well-being.

In such a way, one (although I do not make it) may make a case for regressive taxation. If the burden of tax is placed more heavily on the poor, the poor have more of an incentive to lift themselves out of poverty, and the rich have more of an incentive to continue creating wealth. Of course, regressive taxation also limits the opportunities of the downtrodden and thus is contradictory with regard to its aims. Nevertheless, giving incentives to the poor to create wealth themselves rather than allowing them to simply collect it from the government is necessary.

Therein lies the problem with social welfare. Giving the poor benefits eliminates their incentive to create those benefits themselves. Why work when the government can provide for you instead? Especially destructive is unemployment insurance. Why search for employment when the government will pay you anyways? Such social-welfare programs foster a feeling of complacency and eliminate the incentive to work. And thus the long-term effects of social welfare rear their ugly head. In the short-term, the unemployed individual receives benefits and is better off. In the long run, however, his lack of employment hurts society as a whole. Leeching off the government is a burden bore by the taxpayer, who now has less money in his pocket to spend. The money the taxpayer would have spent would have been reinvested, providing more jobs and opportunity for other individuals. Thus, the leach is not only hurting his own prospects by not amassing as much wealth as he potentially can, he is hurting the taxpayer, and consequently, he is hurting individuals who do want work.

The government cannot support such activity. It is destructive, irresponsible and unjust. One individual cannot be punished for the fault of another. The burden of fault must be carried by the one responsible. That is not to say that the government should not assist the needy. Certainly, they need the government’s support. But supporting them through social welfare programs is not productive. Instead, government should pursue programs that allow the needy to benefit while also providing incentive for them to help themselves. Programs such as the Earned Income Tax Credit (EITC) or school vouchers keep in tact incentives for the needy to better their economic status themselves, while also providing them with assistance. It is that which should be government’s objective, not appealing to the illogical compassion of social welfare.


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