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Welfare: Temporary and Forever

Mises Daily: Wednesday, December 19, 2001 by

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Foreign policy has overshadowed some serious domestic debates that are due to surface whenever news from Afghanistan recedes. Chief among these issues has to do with the supposed failure of welfare reform and what should be done about it. Heather Boushey most recently broached the topic in an issue brief for the left-leaning Economic Policy Institute.

President Clinton signed the Temporary Assistance for Needy Families program into law in 1996 as he was seeking reelection.  The legislation was significant because, for the first time since the advent of the Great Society, it set a five-year limit on the amount of time one could be eligible for welfare benefits.  Although this was a maximum time period, individual states could set shorter limits if they so desired, and half of them did.

This legislation was enormously popular because it supported the view that wealth transfers, if they exist at all, should not continue indefinitely.  While it by no means ended welfare, it represented a move in the right direction.  Millions of welfare recipients recognized that the public dole now had limits, and they entered the private sector for the first time.  

Now that the economy is in a slump, however, many of the workers who gave up their benefits are finding themselves without a job.  Many of the industries that were most likely to hire former welfare recipients have been those worst affected by the recession.  The last-hired, first-fired rule especially applies to this group because they represent the most recent entrants to the labor force.  Furthermore, these workers are finding that they have no legal right to a resumption of welfare payments because the disgraceful Aid to Families with Dependent Children program was abolished.

Many of these workers now find themselves in a catch-22.  They gave up their benefits to work in the private sector, but they did not work long enough to be considered eligible for unemployment insurance.  Since these workers vote, as do the millions of bureaucrats whose lifestyles depend on the continued existence of these workers, Congress is under pressure to extend welfare benefits again.

Such efforts to return to welfare as we knew it should be resisted because they contradict the reasons why welfare reform was so popular in the first place.  These efforts will take place in the context of a debate that is sure to surface sometime next year.  Be ready for it.  

At the same time, it is important to understand what motivates advocates of the welfare state.  The intentions of welfare's apologists are not as altruistic as they would have us think.  

Welfare removes potential laborers from the labor market.  The presence of these workers in the labor force places a downward pressure on nominal wages, which politicians and voters alike associate with economic depression.  However, nominal wages are irrelevant to quality of life.  What matters is how much wages can buy, which is measured by real wages.  The inability to understand this point is why poor macro policies, which increase nominal wages rates while reducing purchasing power, are supported.

Welfare masks the negative effects of bad policy interventions.  If policies result in high levels of unemployment, welfare in effect pays workers to leave the labor market entirely.  The solution, of course, is to reduce the degree of intervention in the first place.

Welfare helps the government enforce its minimum wage laws.  If the minimum wage is set arbitrarily high, then there will always be efforts by producers and consumers of labor to agree voluntarily to labor contracts that reflect market conditions.  In a world of many labor suppliers, labor market intervention such as the minimum wage is much harder to enforce.  Welfare makes it easier for the government to set minimum wages while reducing opportunities for employers to become criminals by engaging in such contracts.

Any action that makes setting minimum wages easier should be opposed.  

Welfare protects labor unions.  The most important aspect of any entry-level job is not the opportunity to earn an income but to gain the experience necessary for more responsible, higher-paying work.  These jobs teach workers the value of reporting to work on time, good manners and appearance, cooperating with co-workers, and pleasing customers.  Welfare denies workers the ability to develop these traits, placing them at a permanent disadvantage in the labor market.  These individuals never learn the skills necessary to become self-sufficient, and they tend to become dependent on the state.  

This situation benefits existing skilled laborers who face less competition in the labor market.  The resulting environment enables unions to enforce their wage scales and to protect their membership more easily.  The permanent underclass that welfare creates is essential for labor unions to exist in the long run.

Welfare is a business.  The poor could be fed and housed at a fraction of the cost that is expended by the government to do so, and existing private charities could easily fund this activity.  This endeavor could be pursued in such a way that respects the humanity of the poor and that results in long-term success.  But to do so would displace the army of bureaucrats and social workers who would be forced into other vocations if such a system were put into place.  

This represents an entire class of individuals in society who are threatened by any effort to implement true reforms.  Add to this group the many firms that populate state capitals vying for state contracts to provide services for the poor, and we see that the welfare dependency takes on many forms.

A frank discussion about extending welfare--or whether temporary assistance should be permanent--is dearly needed, whether or not Osama is found.  But there is no need to grant any moral value to the arguments of those who support such coerced wealth transfers.  To do so would confuse them with people who really care for the needy.


Christopher Westley is an assistant professor of economics at Jacksonville State University.  See his Mises.org Articles Archive and send him MAIL.