Mises Wire

How to Cure Poverty

[Published January 27, 1964 in Newsweek. Excerpted from Business Tides: The Newsweek Era of Henry Hazlitt]

President Johnson has declared an “all-out war on human poverty.” It is a laudable aim. It has, in fact, been the aim of rulers, statesmen, economists, reformers, religious leaders — of every man of goodwill — from time immemorial. It is an aim shared by all free-enterprise economists since the time of Adam Smith and by all socialists and Communists since the time of Karl Marx. The problem does not concern the end but the means. What is the best way to abolish poverty? 

Unfortunately the means Mr. Johnson recommends are dubious. He proposes more and bigger government spending programs — “to build more homes and more schools and more libraries and more hospitals than any single session of Congress in the history of our republic,” and to “budget the most Federal support in history for education, for health, for retraining the unemployed, and for helping the economically and the physically handicapped.”

Not by Inflation

Whether it is possible to do all this and still cut the total of Federal spending may be reserved for later consideration. But even on the face of his own budget projections this program will involve a combined deficit in the current and next fiscal year of $15 billion. This gap will probably be financed by inflation — i.e., by printing more money, by lowering the purchasing power of the dollar and so raising prices. This cannot help the poor. Regardless of the immediate result, the long-run result of inflation must be to distort the structure of production, and hence to slow down the rate of balanced economic growth. This cannot help the poor. For the government to borrow $15 billion now to reduce taxes $11 billion means that taxes must later be raised to a still higher level to pay off the new debt. This must discourage production and employment, and cannot help the poor.

The economic proposal by Mr. Johnson that would do most harm of all would be to impose a still higher legal penalty for overtime even than the present stiff penalty rate of 50 percent. This could only raise costs of production, lift prices, reduce sales and output, and hence reduce employment. It could not help the poor.

Mr. Johnson proposes to give Federal funds to “the chronically distressed areas of Appalachia,” to expand “area redevelopment,” to “distribute more food to the needy through a broader stamp program.” All these are merely new forms of the age-old proposal to take from the rich and give to the poor, to take from the more productive to give to the less productive. What the reformers who back such proposals forget is that you cannot “redistribute” the fruits of production without drastically reducing production itself. 

For this “redistribution” reduces incentives at both ends of the economic scale. As the productive have more of their income taxed away from them, they have less incentive to exert themselves to earn it. As the poor get increased handouts and subsidies, they too have less incentive to improve their condition through their own efforts. The problem of curing poverty is difficult and two-sided. It is to mitigate the penalties of misfortune and failure without undermining the incentives to effort and success.

Restore Incentives

The way to cure poverty is not through inflation, “share-the-wealth” schemes, and socialism, but by precisely the opposite policies — by the adoption of a system of private property, freer trade, free markets, and free enterprise. It was largely because we adopted this system more fully than any other country that we became the most productive and hence the richest nation on the face of the globe. Through this system more has been done to wipe out poverty in the last two centuries than in all previous history.

The way to combat the remaining pockets of poverty is to keep this system; to reduce government intervention instead of increasing it; to reduce government spending and punitive taxation — in brief, to increase the incentives to the initiative, effort, risk-taking, saving, and investment that increase employment, productivity, and real wages.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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