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A Man, a Plan, a Flop

04/24/2006David Gordon

In Our Hands: A Plan to Replace the Welfare State. By Charles Murray. The AEI Press, 2006. Xv + 214 pgs.

Charles Murray, by his own account, should not have written In Our Hands. He identifies a genuine problem; but he himself shows that his plan to solve it is either useless or inferior to a better plan.

Government programs spend billions of dollars to help the poor, but poverty continues. Given the inordinate waste of bureaucratic programs, why not abolish them altogether? Would we not do better instead to give the money that the transfer programs cost directly to the poor?

"America's population is wealthier than any in history. Every year, the American government redistributes more than a trillion dollars of that wealth to provide for retirement, health care, and the alleviation of poverty. We still have millions of people without comfortable retirements, without adequate health care, and living in poverty. Only a government can spend so much money so ineffectually. The solution is to give the money to the people." (p.1)

A problem at once arises. In Murray's proposal, the government uses taxes that would otherwise have gone to welfare programs to finance a grant of $10,000 per year to every American citizen twenty-one or older. But if the government is as inefficient as Murray thinks, why take money in taxes at all? Should people not be free to spend or save their own money as they please?

An obvious objection threatens this suggestion, but Murray provides the resources to answer it. What about the poor? It is all very well to talk about people keeping their own money, but what about those unable in the free market to cope for themselves? Are they to be left to starve or to do without needed medical care that they cannot afford?

As Murray rightly notes, voluntary associations for welfare were widespread before compulsory New Deal programs crowded them out of existence. "At the time the New Deal began, mutual assistance for insurance did not consist of a few isolated workingmen's groups. Philanthropy to the poor did not consist of a few Lady Bountifuls distributing food baskets. Broad networks, engaging people from the top to the bottom of society, spontaneously formed by ordinary citizens, provided sophisticated and effective social insurances and social services of every sort." (pp.116-17) If, Murray asks, so much was accomplished in the relatively poor conditions of the early twentieth century, how much more could be done "to deal with human needs at today's level of national wealth? (p.116, emphasis removed)

Murray surprisingly agrees that a laissez-faire policy is better than his own plan. "The libertarian solution is to prevent the government from redistributing money in the first place. Imagine for a moment that the trillion-plus dollars that the United States government spends on transfer payments were left in the hands of the people who started with them. If I [Murray] could wave a magic wand, this would be my solution." (p.4)

Murray rejects the libertarian approach because it is unacceptable to the American public. Are we then to regard his guaranteed income plan as a compromise with political reality? Unfortunately for this suggestion, Murray also thinks that his own plan exceeds the bounds of political possibility: "The ladder I am describing to you would work if it existed, but today's American politicians will not build it. I must ask you to suspend belief and play along." (p.xv) He cannot then imagine himself a Milton Friedman and say, e.g., "Ideally government should play no role in education. But the public will not accept this. Instead, educational vouchers are the closest to the free market that we can in practice attain." Friedman thought that his proposals were realistic; and however much one may disagree with them — would not vouchers lead to more government control, rather than less? — one can grant that he had a case worth presenting. Not so Murray — what is the point of a detailed account of an inferior plan that cannot be realized?

Perhaps Murray has an answer. Toward the end of the book, he suggests that the plan may not be unrealistic in the future: "I began this thought experiment by asking you to ignore that the Plan was politically impossible today. I end proposing that something like the Plan is politically inevitable — not next year, but sometime." (p.125)

How has the impossible turned into the inevitable? Our author points to the continual progress of American capitalism. Are we not getting richer and richer? "Real per capita GNP has grown with remarkable fidelity to an exponential growth equation for more than a century." (p.125) Unless the government through even more incompetent policies than those it now pursues disables the economy, may we not expect this process to continue? 1 If it does, the continued existence of poverty will become intolerable. People will realize that government programs have not worked and will turn to something else. Hence the Plan will become a live option.

Murray has evidently forgotten his earlier discussion. If the government has failed to alleviate poverty, will not very wealthy people come to realize that a purely voluntary society will be worth trying? If they are sufficiently wealthy, charitable contributions will not burden them unduly. Why then will they turn to the Plan, which Murray acknowledges is less than ideal?

But let us disregard this objection. Suppose sometime in the future people do wish to adopt Murray's plan. If so, they will need to compare the costs of the government programs, Social Security and Medicare chief among them, with the costs of the annual payments to the population that will then exist. What is the point, then, of the elaborate estimates that occupy the bulk of this book? People in future will not be concerned with calculations based on conditions that to them will be past. If Murray's figures are right, he has shown that a politically impossible program could now be realized. So what?

If we seek an answer to Murray's preoccupation with an inferior and politically impossible idea, the answer is not far to be found. It transpires that he is not really a libertarian at all: "People are unequal in the abilities that lead to economic success in life. To the extent that this inequality is grounded in the way people freely choose to lead their lives, I do not find it troubling…. Inequality of wealth grounded in unequal abilities is different … When a society tries to redistribute the goods of life to compensate the most unlucky, its heart is in the right place, however badly the thing has worked out in practice." (pp.4-5) Murray characterizes his own project as an effort "to extend a hand across the political divide between libertarians and social democrats, offering a compromise that provided generous assistance for dealing with human needs without entailing the suffocating and soulless welfare state." (p.xii) But libertarianism rejects coercive redistribution and social democracy embraces it: how then is compromise possible?

What of Murray's plan itself ? It must confront a potentially fatal objection. If all adults receive a guaranteed income, regardless of whether they work, will this not induce many people to leave the work force? Does not the proposal substantially reduce the opportunity cost of leisure? Did not a similar problem render Milton Friedman's negative income tax unworkable? "During the 1970s, the federal government sponsored test versions of the NIT [negative income tax] in selected sites in Iowa, New Jersey, Indiana, Pennsylvania, and, most ambitiously, in Denver and Seattle. The experimental NIT produced disappointing results. The work disincentives were substantial and ominously largest among the youngest recipients."(pp.8-9)

Murray argues that his vastly more ambitious plan would largely escape the incentives problem. The sum and substance of his argument is that neither young people first entering the work force nor those earning substantial salaries will be likely to rely entirely on their $10,000 annual grants. Suppose that he is right: he has still ignored the main problem that the incentives argument poses for his plan.

The difficulty is not that people will "drop out" entirely, living entirely on a hardly munificent sum. Rather, those who prefer a leisurely life may do quite well with little labor. Murray has himself noted the effect, though he fails to see its relevance to the incentives problem: "Surpassing the official poverty line under the Plan is easy for people in a wide range of living circumstances, even in a bad economy, and even at the rock-bottom wage."(p.54) Murray uses this point to counter the objection that his plan will leave substantial numbers mired in poverty, but he fails to see that it allows more skilled workers to avoid full-time employment. 2 If sufficient numbers did so, the income base on which Murray rests his calculations would be upset. Much less revenue than he thinks might be available to pay the annual pensions.

Even on Murray's optimistic figures, the scheme costs a great deal of money. "[I]n all, the expenditures on programs to be replaced amounted to $1.385 trillion in 2002, compared to the Plan's residual funding requirement of $1.740 trillion. In other words, as of 2002, the Plan could have been implemented with a $355 billion shortfall." (pp.17-18) What is a mere $355 billion among us libertarians? You will be comforted to know that by 2011, the Plan will cost no more than the current welfare state; and after that it will cost less — if Murray's projections are accurate.

Given such huge costs, taxes of course must remain high: "There is no way to reconfigure the tax system so that middle-income and affluent citizens do not end up paying just about as much tax as they do now." (p.158) Here for once Murray is entirely correct. The whole point of his plan is to maintain the transfer of income to the poor carried out by the current welfare state: his claim is that the plan will transfer income more efficiently. And to do so, high taxes are necessary.

If we must have redistribution, should we agree with Murray that the process ought to be carried out as efficiently as possible? In this case, we pay a very high price for efficiency. Murray argues that his system minimizes administrative costs because everyone is required to have a national passport and a bank account to which the government can gain access. Does this not enable the government to save a great deal of money? No longer, e.g., would wasteful expenses be incurred in tracking down unmarried fathers who do not pay child support: "Police do not need to track him [the unmarried father] down or try to find him on a day when he has cash on hand. All they need is a court order to tap the bank account." (p.63) Those who do not share Murray's non-Euclidean brand of libertarianism will view such police state measures with suspicion. The internal passport was a defining feature of Soviet communism. 3

Though the plan imposes high costs and threatens liberty, must not even opponents concede that it brings some genuine advantages? Does it not eliminate Medicare? Yes; but the plan hardly provides for a free market in medicine. Quite the contrary, everyone is required to use $3000 of his annual grant for medical insurance.

Murray has anticipated an obvious objection to this. $3000 will purchase very different amounts of insurance, depending on one's risk factors. Someone whose parents died in their forties may find that the money will not buy him much coverage.

Our author solves this problem with consummate ease. "Legally oblige medical insurers to treat the entire population, of all ages, as a single pool" (p.44) Some exceptions might be allowed: perhaps obese hang-gliders might have to pay higher premiums than those who engage in less risky hobbies. But even this is doubtful: "It may well turn out that the cost to the rest of us of subsidizing the health risks of obese smokers who hang-glide is only a few dollars per year per person." (p.44). If so, even these extreme cases should be included in the common risk pool.

What is the point of all of this? It is unfair, as Murray sees matters, that persons risky to insure should be penalized: "the requirement to treat the population as a single insurance pool … eliminates the cosmic unfairness through which some people have genes or accidents that produce debilitation, pain, and physical handicaps that the rest of us are spared, through no fault or merit of their own" (pp.43-44) Why Murray thinks that obese people who smoke and hang-glide are at risk through no fault of their own I shall not venture to say; but to end "cosmic unfairness," Murray's plan subjects medical insurance to government control. Once more, a commitment to equality trumps Murray's "libertarianism."

Also, what if, contrary to Murray's assumptions, many people squander their annual grants? Would not taxpayers demand controls on spending? The bureaucratic programs that his plan aimed to eliminate would reenter the scene. And rightfully so: one should be free to spend one's own money, not other people's. Further, an increase in controls, as President Clinton realized, will tend to drive people off welfare. Murray's plan, by offering "free money", reverses the gains of Clinton's reforms. 4

Murray defends his proposals with elaborate calculations, but he sometimes presents his results in a misleading way. He points out, quite correctly, that a twenty-one year old earning over $50,000 who every year until retirement invests $2,000 from his grant will end up better than he would under Social Security. Hence some at any rate of the relatively well-off will find it in their interest to support the plan.

Murray here ignores the fact that the $2,000 extra that the well-off person has to invest is simply a remission of part of his taxes. Without the universal grant, taxes could be massively reduced, and many people would have much more to invest than the $2,000 Murray generously offers them. But we are not provided with figures on how much people would gain: these calculations, one suspects, would interfere with Murray's need to propagandize against "cosmic unfairness."

Murray ends his book with a surprise. As mentioned before, Murray acknowledges that to implement his plan would result in a massive "shortfall" of $355 billion. He obtains this figure by, on the one hand, multiplying the eligible population by $10,000 and, on the other, adding the costs of the government programs to be eliminated under the plan. (The first figure is reduced by the taxes that high-income earners must pay on their grants.) But our social democratic libertarian has kept something from us until "Appendix D." Some well-off people benefit more from the present system than from the plan. They might have to be "bought off" to induce their acquiescence to the new system, and to do so entails heavy costs. "[A]ll but those on the verge of actually retiring could be bought off with a lump-sum payment that represents less than the present value of the government's obligations to those couples under the current system. Nothing in this perspective denies that the transition costs would be large and problematic."(p.173)

Murray suggests that these transition costs would not be "obviously unmanageable," but he has not included them in his calculations. Had he done so, the financial irresponsibility of his plan would have been more glaring. Perhaps he feared that our shock at the figures would be too much for us to bear. But what we have is bad enough.

  • 1. Murray's argument seems based on the questionable premise that a long established trend, other things being equal, may be expected to persist. In past work, Murray has been guilty of this fallacy. See my review of his What It Means To Be a Libertarian: A Personal Interpretation in The Mises Review, Summer 1997. In the present instance, though, his conjecture strikes me as reasonable.
  • 2. Murray's proposal resembles the plan of the Belgian Marxist Philippe Van Parijs to guarantee everyone a minimum income without work. See his Real Freedom for All (Oxford University Press, 1995).
  • 3. For an excellent discussion of the dangers of a national identity card, see Carl Watner and Wendy McElroy, eds., National Identification Systems: Essays in Opposition (McFarland Publishers, 2003).
  • 4. I am grateful to Jeff Tucker for these points.

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David Gordon is Senior Fellow at the Mises Institute and editor of the Mises Review.