Capitalism and the Abolition of the Welfare State (Part 4 of 10)

by | Apr 23, 2023 | Welfare

The savings of individuals would steadily replace taxes as the source of provision for old age.

This article is excerpted from chapter 20 “Toward The Establishment of Laissez-Faire Capitalism” from George Reisman’s Capitalism: A Treatise On Economics (1996). See the author’s page for additional titles by Dr. Reisman.

Let me now present a program for accomplishing what many people believe to be simply impossible politically, namely, the abolition of the welfare state.

Elimination of Social Security/Medicare

The social security system, together with medicare, could be eliminated by means of the following steps. First, following a grace period of perhaps two or three years, to provide sufficient warning and time to adjust, there should be an immediate rise in the age at which individuals are eligible to receive social security and medicare benefits, from 65 to 70.

As compensation for the loss of these benefits, individuals in the age bracket 65 to 70 should be made exempt from the federal income tax on whatever earnings they derive from employment. The result would not only be an enormous reduction in government expenditures, but a substantial rise in government tax revenues as well. The rise in tax revenues would come about because the people in the 65-70 age bracket would now pay more in the form of sales, excise, and property taxes, as the result of their having and spending higher incomes. And they would pay more in the form of state and local income taxes as well.

If enacted today, this part of the proposal for abolishing social security and medicare would cut the costs of these programs on the order of a third.

But there is more. As part of the same legislation that quickly raises the social security retirement age to 70, the age at which people are eligible to receive social security and medicare benefits should be further increased, say, by an additional calendar quarter with the passage of each subsequent year. Under this arrangement, individuals who wished to retire at age 70, despite the progressive rise in the social security retirement age beyond 70, would have an additional year of notice in which they would have the opportunity to accumulate additional savings to take the place of the loss of each successive three months’ social security/medicare benefits.

For example, those age 64 at the time the social security/medicare phase-out began, would have an additional year in which to compensate for the rise in their prospective social security retirement age to 70 [and] 1/4. Those age 63 at the time, would have two additional years in which to compensate for the prospective rise in their particular social security retirement age to 70 [and] 1/2, and so on. Possibly, the additional savings such individuals would need to make could be made tax-exempt, under an IRA-type arrangement. (Savings in the government’s budget achieved by the initial rise in the retirement age to 70 would help to offset the revenue loss of making these savings tax exempt.)

All by itself, the progressive rise in the social security retirement age in this way would slowly operate to abolish the system. However, I do not believe the system’s demise should be allowed to drag on indefinitely. I think that no later than twenty-five years after the initial rise in the social security retirement age to 70, the system should accept its last new beneficiaries, who would then be 76 [and] 1/4. By that time, everyone would have had in excess of 25 years to make provision for his own retirement at age 76 [and] 1/4.

It should be realized that the progressive elimination of the social security/medicare system would operate to promote savings and capital accumulation. The savings of individuals would steadily replace taxes as the source of provision for old age. The increased capital accumulation that this made possible would, of course, increase the demand for labor and the productivity of labor, which means that it would increase wage rates and the supply of goods, which latter would operate to reduce prices. Thus, real wages and the general standard of living would rise. The rise would be progressive insofar as the rate of capital accumulation was increased.

* * *

While the total abolition of social security and medicare must always be one of our long-run goals, an immediate way to begin reducing the cost of these programs would be for the government simply to make the kind of tax-exemption offer I described above, to everyone eligible to receive these programs’ benefits. Namely, so long as anyone eligible to receive such benefits abstains from doing so and continues to work instead, his earnings from employment will be exempt from the federal income tax. Being enabled to keep almost all of one’s earnings might make it worthwhile for many people to keep on working some years longer, rather than accept social security and medicare. Not only would the government’s outlays be reduced as the result of this measure, but, as I noted before, its revenues would almost certainly increase. If enacted, this proposal would achieve some significant immediate good, and, in addition, help to prepare the ground for further reductions in the cost of social security and medicare.

It should also be noted here that the phaseout of the social security and medicare programs, or the undertaking of any other measure that would be accompanied by an increase in the number of people seeking employment, calls for an intensification of efforts to abolish or restrict as far as possible prounion and minimum-wage legislation. This is necessary in order to make it possible for the larger number of job seekers to find employment.

Elimination of Public Welfare

The public-welfare system, including food stamps and rent subsidies, could be substantially eliminated within a few years. What would need to be done is to begin reducing welfare payments for able-bodied adults and for minors above the age of fourteen by, say, 10 percent per year across the board, until those payments fell substantially below the wages of the lowest-paid workers. Aid to dependent children below the age of fourteen could be gradually abolished by a law declaring children born more than one year after its enactment to be ineligible for receipt of such aid. Henceforth, dependent children of welfare recipients would have to be supported out of the welfare payments of their parents, which would be steadily reduced. Thus within a few years, welfare for able-bodied adults would cease to be economically significant, because all such adults would be confronted with a situation in which they would be substantially better off taking even the lowest-paid jobs. Within fifteen years, aid to dependent children would cease entirely, whereupon the whole welfare program would be without economic significance.

As previously noted, at the same time that welfare benefits were being reduced, legislation limiting employment opportunities would also have to be abolished or at least progressively restricted, such as the minimum-wage laws and prounion legislation. In addition, restrictions on the employment of teenage juveniles would have to be eliminated in conformity with the immediate reductions in welfare allowances to teenage children. The abolition of these restrictions on employment opportunities are necessary to provide people presently receiving welfare benefits with a realistic alternative of living by working. Finally, the reduction in government expenditures for welfare could be earmarked for increasing the personal exemption from the income tax of people who are gainfully employed. This would further increase the economic advantages of working over being on welfare.

My reason for suggesting the gradual reduction in welfare benefits rather than their immediate or very rapid total elimination, is to allow time for large concentrations of people on welfare, such as in Harlem in New York City, to move to areas that offer better prospects for employment; and, at the same time, for new industry to move into areas such as Harlem, in response to the existence of large numbers of people willing to work for low wages. The gradual reduction in welfare benefits would also allow time for private charitable efforts to develop to deal with the cases of individual suffering not caused by the fault of the individuals themselves.

Once public welfare benefits were reduced to a level substantially below the wages of the lowest-paid workers, the problem, as I have said, would cease to have much economic significance. Almost everyone would be working who was able to work. The system could then be reduced further by totally denying benefits to any able-bodied person, or to anyone suffering as the result of his own irresponsibility, such as drug addicts and alcoholics. After some years, once the government had ceased to be regarded as offering anything but the most minimal relief from want, and private charity had been reestablished in the public’s eyes as the place to which the indigent must turn, the remaining public welfare system could probably be totally abolished, practically without being missed.

A vital aspect of the campaign for the abolition of the welfare system must be the conversion of intellectual opinion among the groups most affected. They must understand that the system’s demise is indispensable to the genuine assimilation of all groups into American society and essential to the opportunities of every person now on the welfare roles who would like to make something of his life, and to the opportunities available to his children.

* * *

When I first wrote the above discussion of the elimination of the welfare system, I believed that the element of gradualism was necessary not only for the reasons stated but also if efforts to eliminate the system were to have any hope of gaining significant public support. On this score, it appears that I may have been wrong. For example, the state of Wisconsin now intends to remove people from the welfare rolls after two years if they turn down a job or job training, and Governor Weld of Massachusetts wants to compel welfare recipients to find work within sixty days or else lose their cash benefits or take state-provided community-service jobs. It remains to be seen whether such policies, which apparently give no thought to the need to abolish the obstacles presently standing in the way of employment, can not only be enacted but also be maintained in the face of the serious hardships that are likely to accompany them.

Elimination of Public Hospitals

Public hospitals and public clinics could also gradually be abolished. Their operation and the ownership of their assets could be turned over to recognized private charities, which would temporarily receive public funds to finance their operation. But the appropriation of public funds for such purposes would steadily fall, again, say, at a rate of 10 percent per year. These charity hospitals and clinics would be empowered to charge fees to their patients, at their discretion, to help compensate for the loss of government funds. It should be expected that the elimination of government control would be accompanied by major reductions in the costs of operating these hospitals and clinics. Medicaid could be phased out in step with the reduction in the public funds turned over to the now private charity hospitals and charity clinics. (Obviously, it would be extremely desirable if this process were accompanied by the most rapid possible liberalization of the licensing requirements for entry into the medical profession and for the ownership and operation of hospitals and clinics.)

Firing Government Employees and Ending Subsidies to Business

I believe that it is possible to fire government employees and abolish government subsidies to business with the support of the groups concerned. This can be accomplished by making the termination of employment or loss of subsidy to the immediate financial self-interest of the parties. What could be done is to offer very generous severance terms, in the form of the continued payment of the salary or subsidy for a limited time, during which the parties would be fully free to change over to any alternative private, unsubsidized activity they wished.

Thus, for example, a government employee presently receiving a salary of, say, $30,000 a year and whose job deserves to be eliminated might continue to receive that salary for a full year, while being free to do anything he wished in the way of private economic activity. He would be in a position to take a substantially lower-paying job in private industry and use his severance pay to tide him over until he had gained sufficient work experience to increase his earnings to a level comparable to what they had been before. Or he could go to school and in that way very comfortably learn the skills necessary to earn an income in private industry comparable to what he had earned as a government employee.

In comparison with the present situation, such an arrangement would be very much in the self-interest of the general, taxpaying public. The financial burden of the taxpayers would certainly be no greater than it is now, and it would, of course, be reduced as soon as the severance pay of the government employees came to an end. Moreover, to the extent that the government employees are presently engaged in carrying out policies of destructive interference in the lives of the citizens, the public would enjoy the immediate gain of the end of some part of such interference. It is a comparatively minor evil to pay a simple dead weight subsidy to former government employees now engaged in other activities, when the alternative is to continue to support them as destroyers. Of course, in order to prevent anyone from taking unjust advantage of such a plan, government employees who received its benefits, should thereafter be barred from government employment (other than elective office) for a protracted period of time, perhaps for life–unless they refunded the extraordinary severance pay they had received.

To the extent that the former government employees turned to seek jobs in private industry, their competition would cause the money wage rates of the average worker there to drop. This would be the case both insofar as they entered the labor market prior to the reduction in government payrolls and in taxes and insofar as, when it came, the reduction in government payrolls constituted a drop in the aggregate demand for labor. (This last would be the result to the extent that taxpayers spent the funds they no longer paid in taxes to meet government payrolls, in buying goods rather than in paying wages.) A tendency toward a drop in wage rates would, of course, also be present as the result of the phasing out of the welfare system and of social security, inasmuch as both would bring about an increase in the supply of labor relative to the demand for labor.

As the readers of this book should know by now, the effect in all these cases would be benevolent. For the necessary fall in wage rates would be accompanied by reductions in prices that would be still greater. This is because the employment of more workers means more production and thus lower prices caused by more supply, as well as the saving of taxes to support the unemployed or unproductively employed. The fall in prices relative to wage rates, moreover, would be a continuing one, because the effect of reduced government spending, reduced taxation, and reduced government interference in general is increased capital accumulation and thus a rising productivity of labor. Capital accumulation and the rise in the productivity of labor would be the result both of a greater relative production of capital goods and a higher productivity of capital goods. The greater relative production of capital goods would be made possible by reduced government spending and lower taxes and thus more saving and productive expenditure relative to consumption expenditure. The higher productivity of capital goods would be the result both of lower taxes and thus greater incentives to use capital goods efficiently, and of reduced government interference of other types that stands in the way of the efficient use of capital goods.

It follows, and deserves to be stressed, that the long-run effect of firing unnecessary government employees is to progressively increase the economic well-being of those employees, along with that of everyone else, and that this is true even in the absence of any severance pay. The former government employees also benefit from the additional capital accumulation and rising productivity of labor and real wages that are made possible. They too benefit from the fact that more people now contribute to production instead of having to be supported out of the production of others, and that production is no longer held down by their activities.

Essentially the same conclusion applies to welfare recipients. In the long run, they too would be economically better off living as self-supporting wage earners in a progressing economy than as welfare recipients. Their gain would come not only from the economic progress or more rapid economic progress that abolition of the welfare system would greatly contribute to, but also, and in many cases even more importantly, from having at long last to develop and actualize their innate human potential, which the welfare system has permitted them to avoid doing. Being compelled at last to work in order to live, many of them would accept that necessity and strive to do better at it, whereas at present they need strive for nothing and thus develop into nothing.

There is absolutely no kind of magic or “free lunch” assumed here. The source of the universal gains is an increase in production. Every individual’s removal from an unproductive or destructive position in government employment or on the welfare rolls, to a positive, productive position in private employment, adds to the total of what is produced and contributes to the further increase in the total of what is produced, through making possible additional capital accumulation. It is because of this increase in total production that everyone is in a position to gain, with no one having to lose. It should actually be no more surprising that former government employees end up being economically better off without their government jobs than that blacksmiths and horse breeders end up being better off without their former jobs–and that they do so, even if they must settle for a relatively lower position on the economic scale. Indeed, it should be less surprising when one considers that the nature of so many government workers’ jobs is precisely the stifling of innovation and improvement and that the loss of such jobs means precisely the opening of the way to progress and improvement. By the same token, the gain of former welfare recipients from the abolition of welfare should be no more surprising than the gain of someone needlessly confined to a hospital from his discharge and emergence into the world of life and action.

Every serious advocate of capitalism has always been able to understand such facts in connection with the so-called long run. The proposal I have made about generous severance pay for government employees makes it possible for a harmony of material self-interests to exist even in the very short run.

* * *

The principle of generous severance terms could be applied to the elimination of government subsidies to business, in the following way. As compensation for the abolition of a subsidy, the government would continue the payment of funds for a number of years equal to the profits and depreciation allowances that the subsidized enterprises would have earned had the subsidies been continued. Its payments could also cover the interest and other such contractual obligations the firms may be obliged to pay as the result of having reasonably entered into such arrangements in connection with the production of the subsidized item. Severance allowances would also probably have to be given for a time to the employees of those enterprises, equal to their wages or to a major portion of them. In addition, it would probably be necessary to some extent to provide such payments to the firms producing equipment or other supplies for the subsidized enterprises, and to their employees. For example, as compensation for the elimination of farm subsidies, not only farmers and their employees would have to receive severance allowances, but also the farm equipment industry and its employees. The total of the severance allowances in any given year, however, would not exceed what the government presently spends in buying the products concerned. The payments at each stage of production would not apply to the sales revenues received at that stage, but only to the much smaller figure of the net income earned by the various parties, plus depreciation allowances.

In this way, I believe that the businesses that are presently recipients of government subsidies, together with their employees and suppliers, could be given a powerful short-run interest in the abolition of their subsidies. They could be placed in a position in which the severance allowances they received would make the transition to producing for the free market virtually painless, indeed, even positively rewarding insofar as those allowances plus immediate earnings in the free market exceeded the income previously derived from the government.

Escaping from Rent Control with the Support of Tenants

The rental housing market, having suffered in places such as New York City from two full generations of rent control, and with no end to rent controls in sight, has devised a method of escaping from the destructive effects of rent controls, and of doing so with the support of the tenants involved. The method rests on the recognition by landlords that in point of fact the tenants have acquired a kind of squatter’s rights to the apartments they occupy, “rights” which have acquired long-standing legal sanction that almost certainly will continue to be upheld by the government. Based on this recognition, the method of escape adopted by growing numbers of landlords is that of allowing the tenants to reap a substantial share of the financial gains resulting from an apartment house becoming converted to condominium or cooperative housing. This is the meaning of the fact that landlords offer their existing tenants substantially below-market “insider prices” on the purchase of the apartments they occupy, on condition that the tenants agree to the building’s change from that of rental housing to condominium or cooperative status. The tenants are then free to turn around and sell their units or rights to their units for a substantial gain, which, of course, is what wins their cooperation.

This is a very sad situation insofar as it represents the fact that to an important extent a group of nonowners has managed to acquire the status and rights of property owners by means of a government-sanctioned–indeed, government-led–violent appropriation. It is the closest the United States has thus far come to a situation comparable to that of a successful feudal invasion, in which an earlier group of property owners is forcibly dispossessed by a subsequent group of property owners. Nevertheless, it is better that property rights of the appropriators finally be recognized than that property should remain indefinitely in a condition in which no one has the power to use it well. Under rent control, tenants can stay on as long as they like, and consume the capital invested in the buildings in which they live. They are succeeded by other such tenants. The result is simply the destruction of the stock of housing, inasmuch as the rent controls deprive the landlords of the incentive and, indeed, the ability, to maintain their housing. Compared with this alternative, the conversion of rental housing to a different status, free of rent controls, at least makes possible the maintenance of the stock of housing and its possible increase.

Apart from once and for all abolishing existing rent controls–however unlikely the prospect may be in many places at present–the contribution that the government could make to the process of the market’s freeing itself from rent controls would be constitutionally to guarantee that once any property managed to escape from rent controls, it would never again, under any pretext, be subjected to them. This would eventually operate to reestablish an extensive market in rental housing. Such a market, of course, is vital for all those who cannot afford to buy their housing.


Articles in this Series

Copyright 1996 George Reisman. All rights reserved. The encyclopedic Capitalism: A Treatise on Economics is a required reference for every Capitalist’s library. Reisman’s treatise is now available in two volumes: Volume I (focuses on microeconomic issues) and Volume II (focuses on macroeconomic issues).

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics. See his author's page for additional titles by him. Visit his website and his blog Watch his YouTube videos and follow @GGReisman on Twitter.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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