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Advancing Austrian Economics, Liberty, and Peace

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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)


Chapter 13
Economic Incentives And Welfare

Most people disagree with economists, who point out the important impact that monetary incentives can have on even seemingly "non-economic" behavior. When, for example, coffee prices rise due to a killing frost of the coffee crop in Brazil, or when New York subway fares go up, most people believe that the quantity purchased will not be affected, since people are "addicted" to coffee, and people "have to get to work" by subway.

What they don't realize, and what economists are particularly equipped to point out, is that individual consumers vary in their behavior. Some, indeed, are hard core, and will only cut their purchases a little bit should the cost of a product or service rise. But others are "marginal" buyers, who will cut their coffee purchases, or shift to tea or cocoa. And subway rides consist, not only of "getting to work," but also short, "marginal" rides which can and will be cut down. Thus, subway fares are now 25 times what they were in World War II, and as a result, the number of annual subway rides have fallen by more than half.

People are shocked, too, when economists assert that monetary incentives can affect even such seemingly totally non-economic activity as producing babies. Economists are accused of being mechanistic and soulless, devoid of humanity, for even mentioning such a connection. And yet, while some people may have babies with little or no regard to economic incentive, I am willing to bet that if the government, for example, should offer a bounty of $100,000 for each new baby, considerably more babies would be produced. 

Liberals are particularly shocked that economists, or anyone else, could believe that a close connection exists between the level of welfare payments, and the number of welfare mothers with children. Baby-making, they declare, is solely the result of "love" (if that's the correct word), and not of any crass monetary considerations. And yet, if welfare payments are far higher than any sum that a single teenager can make on the market, who can deny the powerful extra tug from the prospects of tax-subsidized moolah without any need to work?

The conservative organization Change-NY has recently issued a study of the economic incentives for going on, and staying on, welfare in New York. The "typical" welfare recipient is a single mother with two children. This typical welfare "client" receives, in city, state, and federal benefits, the whopping annual sum of $32,500, which includes approximately $3,000 in cash, $14,000 in Medicaid, $10,000 in housing assistance, and $5,000 in food assistance. Since these benefits are non-taxable, this sum is equivalent to a $45,000 annual salary before taxes.

Furthermore, this incredibly high figure for welfare aid is "extremely conservative," says Change-NY, because it excludes the value of other benefits, including Head Start (also known as pre-school day care), job training (often consisting of such hard-nosed subjects as "conversational skills"), child care, and the Special Supplemental Food program for Women, Infants, and Children (or WIC). Surely, including all this would push up the annual benefit close to $50,000. This also presumes that the mother is not cheating by getting more welfare than she is entitled to, which is often the case.

Not only is this far above any job available to our hypothetical teen-aged single mother, it is even far higher than a typical entry level job in the New York City government. Thus, The New York Post, (Aug. 2) noted the following starting salaries at various municipal jobs: $18,000 for an office aid; $23,000 for a sanitation worker; $27,000 for a teacher; $27,000 for a police officer or firefighter; $18,000 for a word processor--all of these with far more work skills than possessed by your typical welfare client. And all of these salaries, of course, are fully taxable.

Given this enormous disparity in benefits, is it any wonder that 1.3 million mothers and children in New York are on welfare, and that welfare dependence is happily passed on from one generation of girls to the next? As Change-NY puts it, "why accept a job that requires 40 hours of work a week when you can remain at home and make the equivalent" of $45,000 a year?

Economists, then, are particularly alert to the fact that, the more any product, service, or condition is subsidized, the more of it we are going to get. We can have as many people on welfare as we are willing to pay for. If the state of being a single mother with kids is the fastest route to getting on welfare, that social condition is going to multiply.

Not, of course, that every woman will fall for the blandishments of welfare, but the more intense those subsidies and the greater the benefit compared to working, the more women and illegitimate children on welfare we are going to be stuck with.

Moreover, the longer this system remains in place, the worse will be the erosion in society of the work ethic and of the reluctance to be on the dole that used to be dominant in the United States. Once that ethical shift takes place, the welfare system will only snowball.

Change-NY wryly points out that it would be cheaper for the taxpayer to send welfare recipients to Harvard than to maintain the current system. In view of the decline of educational standards generally and Harvard's Political Correctness in particular, Harvard would probably be happy to enroll them.

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