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The Nature of the Welfare State

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Welfare-state programs have three central characteristics: plunder, deception, and obfuscation. Because those programs always effect a forcible transfer of wealth from one group of individuals to another, they involve what the great 19th-century economist Frederic Bastiat called “legalized plunder.” The law sanctions stealing in these cases and is thereby changed from its original purpose, which was to protect people’s rights and property. Bastiat’s classic book The Law explains this point with the utmost clarity.

Most people don’t like to have their wealth taken away. (People are funny that way.) So if the government is to get away with legalized plunder, the politicians must make people believe that something else is going on. That’s where the deception comes into play.

However, deception can be expected to work for only so long. People may stumble onto the facts and upset things. If the programs are to endure, the truth needs to be sufficiently obscured so that even if people try to take a close look, it won’t be obvious what is happening. That’s obfuscation. (Try to read any piece of legislation if you want to see how the people are kept from understanding what the government is doing.)

We can see this pattern almost everywhere. The federal budget is a monument to legalized plunder, deception, and obfuscation. The government is a great broker, arranging huge transfers of money from the mass of unorganized citizens to smaller, well-organized interests. Of course, the broker always gets his fee.

Besides being able to hide what they are doing, the policymakers and their clients have other advantages too. As the public-choice theorists have long taught, in the political arena the small, well-organized group almost always can have its way over the mass of citizens. That seems paradoxical in a democracy, where votes are supposed to count. In a country where sugar consumers far outnumber sugar producers, why is there a sugar program designed to keep sugar prices artificially high? That same question can be asked about any number of products and commodities. Why don’t the users outvote the producers?

The paradox is resolved by the concepts of “dispersed costs” and “concentrated benefits.” The price of any single government program, such as the sugar program, is small for any individual consumer. If he could compute the additional amount he has to pay because of the program, it would probably seem too small to justify active opposition. Most people are busy making a living and raising their families. The opportunity costs of organizing against the sugar program would outweigh the benefits even if there was a good chance the program could be abolished. A fully informed citizen would probably shrug his shoulders with regret and a sense of futility. That is the effect of dispersed costs.

While the expense to any individual is small, the total cost for all citizens is huge. That reverses the incentives for the relatively small group on the receiving end of the program. Those large benefits are divided among that small group. Since each member of the group stands to gain a great deal, it is worth his time to actively lobby for the program, or more precisely, to pay dues to a trade association that will set up shop in Washington, D.C., and look after his interests. That is the effect of concentrated benefits.

It is no mystery, then, that special interests prevail over the vast majority of citizens. Most of us have too little to gain materially from trying to stop individual welfare-state programs. Maybe that’s what Thomas Jefferson had in mind when he said that there is a natural tendency for government to grow and for liberty to yield.

The process just discussed is enough to keep government programs going for a long time. But it is always possible that after a while, enough citizens could get so angry by the injustice of a welfare-state program that they actively oppose it even if the financial reward isn’t large. In other words, ideology could outweigh mere material interest. In 19th-century England, Richard Cobden and John Bright got enough people angry about the tariff on foreign grain that their Anti-Corn Law League was able to have the tariff repealed before a decade had elapsed.

To prevent that, the designers of programs like to keep things from being too clear. Some plunder is obvious. With a straight cash subsidy, the government takes money from A and gives it to B. But more subtle methods can be used. Here is where deception and obfuscation enter. The citizens are told that there is no subsidy because not a penny of taxpayers’ money goes to the special interest in question. That could be true, but it is deceptive. Many subsidies are not direct cash grants. They are indirect. For example, domestic sugar producers benefit from sugar prices that are kept artificially high by restrictions on imports through a system of quotas. Under free trade, domestic producers can’t charge above-market prices because foreign producers are free to undersell them. Thus, an effective and subtle way to transfer wealth from citizens to particular domestic producers is to restrict imports. There is little real difference between that method of transferring wealth and directly taxing citizens for the benefit of those domestic interests. But the first method obscures what is really going on.

Incidentally, subsidies such as import restrictions can benefit other parties too, even more indirectly. Since sugar is artificially expensive under the sugar program, a market for other kinds of sweeteners, like high-fructose corn syrup, has emerged. Did you ever wonder why Archer-Daniels-Midland promotes the sugar program, when it is not a sugar producer? It is because the company makes corn syrup, which food manufacturers buy instead of expensive sugar.

There are other subtle ways of subsidizing special interests. Dairy interests are benefitted by a program under which the government promises to buy milk and cheese at an above-market price. If consumers won’t pay the inflated price voluntarily, the government will force them to as taxpayers. Of course, the government must also tax the citizens to pay for the warehousing of the milk and cheese.

There is another piece of deception we should not ignore. Defenders of the programs can always be counted on to claim that the programs actually benefit the average citizen. The farm programs are sometimes defended as saving consumers from price fluctuations.

We can say without fear of contradiction that politicians, bureaucrats, and organized interests have been very clever in deceiving the American people and then obfuscating sufficiently so that few people discover what is happening. The public-choice scholars are correct in considering this process “political entrepreneurship.” That’s a perverse form of entrepreneurship in which people get wealthy by devising innovative ways to fleece consumers and taxpayers. One of the tragedies of the welfare state is that energy that might have gone into economic entrepreneurship and production for the benefit of everyone is instead diverted into political entrepreneurship, which restricts production and benefits a few.

If we analyze the programs of the welfare state, we will find to a greater or lesser extent the elements we’ve been discussing: plunder, deception, and obfuscation. This is easily seen with the crown jewel of the welfare state, Social Security. The working generation is plundered for the benefit of the retirees. The government deceives the workers by implying that the money is being saved for them and that it will be there when they retire. In fact, the government just plans to tax the next group of workers. The whole process is obfuscated with talk about trust funds and employer contributions. This last is especially egregious. Workers are led to believe that employers are kicking in half of the “contribution,” which is actually a tax. That makes the system appear to be a good deal. In fact, the employer cannot really contribute. Anything he appears to pay is really part of the workers’ compensation. Without Social Security, that cash would have been paid to them. The market sets pay levels. If the government commands employers to pay into Social Security in behalf of their workers, regular cash compensation will be reduced. There is no way around that fact. But the appearance of an employer contribution is a clever act of deception and obfuscation.

Bastiat long ago recognized the dishonesty at the foundation of the welfare state when he called it a great fiction whereby everyone tries to live at everyone else’s expense. Perhaps the way to hasten the demise of the welfare state is to focus our teaching on how the system is in fact a big lie. Maybe that will awaken the American people in time.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.