Libertarians can get very sensitive about accusations that they don’t care about the poor and down-trodden. Many of them go out of their way to say that even though they oppose the welfare state, they don’t think poor people should starve or be given undue hardship, and that charity and the forces of the free market will be able to make up for decrease in welfare payments. But is that true? Would getting rid of the welfare state and having a “free” market actually help the poor? Or will it only make things worse for them? Let’s analyze.

What does the Welfare state do?

The welfare state provides payments and benefits to qualified individuals. Welfare states are found in countries all over the world. The most common forms of welfare are: healthcare payments and subsidies, pensions for retirees, workers compensation, food stamps and payments for the subsistence to households of lower income.

Libertarians try to argue that these programs are not needed, and that the individuals receiving benefits could be able to obtain sustenance on their own in a free market and that in fact the welfare state makes them dependent upon the state. But is that really true?

The average recipient of the so called “entitlements” are elderly and disabled individuals who are unable to be gainfully employed due to infirmity and old age. Medicare and Social Security, by far the 2 largest federal benefits programs, is entirely catered to either people who are over age 65 or individuals who have met the designation of disabled. These individuals are physically unable to work and even in a “super free” market their physical limitations would prevent them from obtaining income through employment. The bulk of the welfare state is in fact geared towards such individuals, and the increase in welfare spending which we commonly see on charts and graphs put forth by the right wing is actually more correlated with the overall rise in median age of the western world, rather than an expansion of government into our lives. The notion of the lazy poor “welfare queen” is largely a myth, the average recipient of public assistance is elderly or disabled.

The proportion of welfare state spending is correlated with median age. It appears that with many people growing older, and the financial crisis wrecking pensions and 401ks, we have many elderly and disabled individuals who simply do not have the capacity to independently provide for their means. Even with state level welfare programs, the majority of recipients remain elderly and disabled individuals who are unable to obtain employment in the private sector due to physical impossibility.

In other words, the bulk of the welfare state spending is not in fact “discretionary” gift giving done for fun, these are sunk costs reflecting conditions in the real economy. If the welfare state vanished overnight, these individuals would still need to provide for their food, shelter and medical care. The old adage “there’s no such thing as a free lunch” still holds true. Saying that cutting welfare spending erases those costs is but a fiscal illusion, the real costs of having an aging society and a large number of people who cannot physically provide for themselves will still be present. They instead will just be shifted elsewhere.

Can Charity and the Free Market really make up for it?

“Wait a second”, says the Libertarian, “even if the welfare state is mostly covering sunk costs, if those costs were shifted to the private sector it would be a good thing because charity and the free market are better equipped to provide for people.” This is the dominant rhetorical strategy that you hear about what could replace the welfare state. They claim that the power of “voluntary” behavior, via the capitalist markets and charity would be able to come up with better, more creative and more efficient ways of dealing with these sunk costs. This argument can be incredibly seductive to some. But is it just a bunch of bullshit?

For the vast majority of the recipients themselves, obtaining wage labor to cover the costs of living is simply not an option because they are physically unable to engage in productive labor. The idea of a regulation free economy being able to cure this is preposterous, their physical condition keep them from engaging in such activities. Thus they will always be dependent on others to obtain the means of survival.

Charity

One way that the non-working poor would be able to obtain the means of subsistence in the non-welfare state economy could be charity. The laissez faire advocates say that charities are not only more efficient in that individual “social entrepreneurs” can better calculate and plan a competent strategy for helping the poor. Because charities tend to be issue oriented (addressing singular problems like cancer research or running a soup kitchen) they can better target specific problems and eliminate them in a way which the top heavy government cannot. Thus through the same “voluntary” framework of the capitalist profit sector, charity allows for more innovation and creativity in addressing these needs, according to the laissez faire advocate. The libertarian also celebrates charity as it is “voluntary” while taxation is not, therefore the moral purpose behind it is more “legitimate” in their eyes.

This of course could not be further from the truth. Empirical measurements of the efficiency of charities are not encouraging. The levels of fraud and waste in charities are often higher than those seen in government finances. While some charities are more efficient than others, the notion that they are somehow more efficient than government is a myth, many charities have a dollar inefficiency rate as high as 95%. This is even more damning when you take into account that many charities falsify or misrepresent their data. Unlike public expenditures, which are subject to review by the population via things like the freedom of information act, charities are privately run, and have the ability to distort all figures and hide them from objective evaluation. But those studies which have looked at charity as a whole paint a bleak picture with rampant inefficiency, fraud and abuse. Sending your dollars to charity is certainly no more efficient than having them work through the welfare state, and in fact the data suggests that charity is far less efficient than public welfare.

Of course this efficiency measure is only measuring a dollar effectiveness in terms of the money you give being used for the designated purpose of that charity. And the designated purposes of many, if not most charities, have nothing to do with alleviating or targeting the sunk costs which the welfare state addresses. Many charities like the Make A Wish Foundation, are not only posting dismal efficiency numbers, but the actual purpose (giving children with cancer “one last wish”) really has nothing to do with helping the poor. The same goes for those charities which fund cancer research or clean up the environment or help homeless pets. Even those charities which do seem to target the poor (like soup kitchens for the homeless or vaccines for impoverished African villagers) are not addressing the whole problem, the non-working poor suffer because of a lack of consistent income, giving them soup or medical care does not help that. Now one could try to argue that this is simply because the government is crowding out those charities which would provide income to the poor, but this too is an unqualified statement. Before the welfare state existed there were no charities which could provide fixed payments to the poor and elderly in such a dependable way as something like social security did, and indeed if such charities had existed we would have never had a need to create a welfare state in the first place! The focus of charities before the welfare state (and in countries which have much weaker welfare states) are no more altruistic than those in the countries which do have strong welfare states. There is no indication that the welfare state is crowding out charitable giving, and it seems that in all likelihood the welfare state is in fact performing a task which charity is unable to perform. Thus the welfare state is not crowding out charity, but complementing it.

Even if one were to ignore the significant statistical evidence which suggests that charity is less efficient than the welfare state, there is still great doubt that charities could replace the welfare state in the libertarian laissez faire economy due to lack of taxation subsidy. Truth be told, most of the private “voluntary” charities are quite heavily subsidized, sometimes from direct contributions from the state, but even more so because of the favorable tax policies put in place. Charities as non-profits, are not taxable in the United States. This stands in contrast to for profit entities and individuals who do have to pay taxes. In such an environment, those entities which are deemed un-taxable are in fact being subsidized by the state via the supply side. Say we have 5 people, I could choose to give one of those people $10, and I would be in effect subsidizing them, however instead of directly giving them money, I could also take $10 from all the other 4 and not take any from the last person. The real effects in either situation would result in my actions making that person $10 richer than he would’ve been had I not specifically targeted him for special treatment. Tax cuts, when done in a disproportionate way

such as that, do in fact act as subsidies, whose real effects differ little from direct subsidies. There is also the even bigger factor that taxable contributions by individuals and businesses are counted as tax deductions. That is to say, if you give a portion of your income to a charity, you can deduct that from your overall income taxes. This is a powerful tool that incentivizes charitable giving, and in fact many try to take advantage of this to lower their overall income, and perhaps if they’re lucky bump themselves into a more favorable tax bracket. Thus, when charitable deductions are taken into account, the charities are even more heavily subsidized by government action than they are from being tax exempt. Take my example of the 5 people and giving one $10, say that I make a rule which says that the other 4 people will only be taxed $5 if they give $3 to the tax exempt man, this lowers their overall tax burden and allows them to keep even more money. Thus, not only is the tax exempt man making $10 from the taxation subsidy, but he is also making $12 from the contributions of others. Now my rules alone have just enriched him by $22 (or perhaps $20 if one is to count $8 as the real loss rate of the others). Charities are extraordinarily subsidized by our income tax rules.

However, the libertarians actually oppose income taxes, and most of them would like to see it disappear and replaced by sales or consumption taxes. This would actually destroy most of the government subsidy to charity. If sales taxes were to replace income taxes, the charities are paying them through purchasing commodities to achieve their purpose, rather than being subsidized through tax cuts they are now losing money by being at an equal level. And furthermore, with the abolishment of income taxation, the incentive for charitable tax deduction is destroyed, thus they lose even more money. Absent some kind of corrective system which allows government to reimburse charities for their expenses via a rebate of sorts, the charity is at a substantial disadvantage, and even if a reimbursement measure existed, the charity would still be at a substantial loss because of the charitable contributions would be lower. Thus under the libertarian tax system, charities will have a substantial deficiency of capital inflows and in all likelihood would not be able to have the same broad applications which they can under our current tax system. This when combined with the inefficiency, lack of targeting of the poor and fraud which naturally exists in charities makes for a substantial loss of aid to the poor. The idea that charity could replace the welfare state or even being to approach its effectiveness in a libertarian economy is thoroughly preposterous. However, these facts won’t stop the libertarian from arguing his next point, which is to play up the ability of the free market to help them.

The free market

The libertarian will say next that charity would not be needed as much in the laissez faire economy because the de-regulation will increase productivity and opportunity which allow poor families to achieve even more income. The poor disabled elderly person will be able to live off of the money which her family members gives her, and since the free market increases their job opportunities, the families of these people will be able to support them and they will be just fine.

This argument, like the charity one, is bullshit. First off, what if a disabled elderly person has no children? Are they to starve and be ignored? Are they to beg assistance from stranger? Are they to look for charity? Well, we already know the answer to the charity question, because chances are their sources of charity are dried up due to an unfavorable tax code. No, in all likelihood, the childless elderly would have no one to look after, and they would be forced into utter poverty and humiliation, begging for pennies on a street corner. There is no doubt that the quality of their lives is substantially reduced in the libertarian economy.

However those who do have children are creating an even more insidious problem. By having to support your parents, the children are forced to begin work at a young age. The sunk costs of living (shelter, food, medical care) are not going to go away, and they require immediate attention. This means that instead of going to school and investing in one’s self, the children of poor families must begin work at an early age, an often times this is in unskilled labor as they are the only jobs which untrained, unprofessional young people are qualified for. This traps them in diminished opportunities, because rather than making long term investments in themselves, they are forced to cover the costs of their elderly or disabled family members. Education requires large investments which do not yield a return until well into the future, but grandma’s medical bills can’t wait that long, they need to meet significant costs in the present. Thus, going to college and then medical school to become a successful doctor is simply not an option for the many of these children, even if they are smart and capable of doing so, the time it takes to see a return from these self-investments is simply too great, and the immediate expenses of paying for their disabled family members takes precedence over any goals and dreams they have. Instead of going to college they trim bushes or flip burgers to pay for the here and now costs of their disabled family members. Furthermore, by having all of his income go to pay for the fixed costs of supporting a disabled family member, the children of poor families are prevented from making savings of their own. Even after their disabled or elderly family members pass away, the child finds himself in the middle of life without an inadequate nest egg. And because he has no opportunities to climb the ladder to higher income (because he never had the chance to get an education), the child is himself at risk. Because he has saved less money, he must delay retirement to as late possible, this creates downward pressure on the job market, increasing unemployment among the youth and forcing them to bargain down their work hours, thus depressing wages and overall income to these families. After a long hard life of working for miniscule wages, the child retires with very little savings to show for it, the lack of investment and savings means that when the child reaches old age or becomes disabled, he too must rely on the assistance of his children. Thus a vicious cycle emerges which keeps families in poverty for generations. The laissez faire economy creates a permanent underclass, and indeed the observations of the real world confirm that the laissez faire free market policies create this.

It is a bitter irony that vulgar libertarians like Hans Herman Hoppe claim that the poor are simply poor because they have “high time preference”, as if to infer some kind of moral defect. Because the conditions which the poor are placed create this high time preference in the first place. This cycle creates a Charles Dickens society, and indeed the Oliver Twist world had the economic policies which libertarians seek to enact. However, this is also a substantial loss for all of humanity, as humans are being under-utilized. It is a profound waste of human capital, one which causes a potential Einstein or Marie Curie to waste away in a factory or fast food joint, in such a situation not only is the intelligent poor person losing out, but society is losing out as well by not having the positive influence of her human capital being used in the most efficient fashion. Such an economic system is not only a crime against the poor, but a crime against all of humanity.

The libertarian may still try to argue that the lack of regulations give the poor more opportunity to be creative, someone like lil Wayne lifted his family from poverty by a capitalist system which allowed for free enterprise. This argument falls woefully on its face however, the increase in opportunity by deregulation would be slim, US markets are already quite liberal, there are very few productive opportunities which would be opened up if they changed. Furthermore, most start-ups require capital investment to get going, and capital for the poor is scarce in this environment, most of it is held by the rich and only used to invest in acitivities which enrich the financiers. So someone like lil Wayne may be able to make money by performing some trick if it helps out a rich record owner, but the overall availability of capital to the poor is quite scarce. And when coupled with the time preference increasing vicious cycle described earlier, there is no doubt that it actually decreases opportunities substantially for the poor.

Furthermore, the de-regulation includes curtailing of Civil Rights legislation which allows for people to work free of discrimination. The point of things like the Civil Rights Act and Americans with Disabilities Act is to make sure that the most qualified person gets the job, thus employers cannot refuse to hire solely on the basis of things like race, age, disability. If these laws were repealed there is no doubt that there would be an increase in these behaviors, making job opportunities even more scarce for these people. A poor, African American family with a disabled elderly family member to support would be at an extreme disadvantage. Thus, the idea that de-regulation and Charity can better provide than the welfare state is absurd. There is a reason why populations all over the world have chosen to have welfare states, welfare states simply work better than the alternatives.

Conclusion

In conclusion we can see that the Welfare state is not merely payments done for fancy out of emotive and naïve concerns. The Welfare state is mostly paying for sunk costs which would exist regardless, to say that cutting these programs saves money is but a fiscal illusion, the costs would merely be shifted onto the private sector. And once shifted onto the private sector they disproportionately hurt the poor, disabled and minorities in a way that is thoroughly unconscionable. There is a reason why rates of physical and mental illness are higher among the poor, and it is not because they are somehow morally defective, but because our economic system is morally defective. Although our system could be doing even more, the existence of a welfare state has greatly mitigated these effects and improved the lives of millions of poor people, giving them both relief and the opportunity to make investments in themselves to lift themselves out of poverty. It is the backbone which keeps the middle class alive, but unfortunately it is under attack.

There is one demographic which does share a heavier load of the burden for the welfare state, and that is the upper and upper middle class, affluent, mostly white members of society. There is no doubt that if the laissez faire economy was put in place, these people would see more opportunity, because the potential Einsteins and Marie Curies of the lower class are wasting away their lives in menial labor to support their family members, this actually creates a surplus of opportunity for the affluent and privileged. Simply put, because there are less poor people taking jobs in these higher paying careers which require substantial self-investment, there are more of these jobs available to the wealthy who can afford to make these investments. Also, the lower tax burden for the affluent means they get to keep more of their money, which means they get to control more of the capital in society. As the laissez faire economy is entirely private (meaning that all capital must come from private individuals) this means that this demographic will have even more social control by controlling most of the capital and controlling all production. Thus if the poor wish to advance themselves, it can only be done through investment of capital coming from this class of wealthy white men, and as only, they are only going to make those investments which benefit them. All production is being done to enrich this class of people, everyone works for them. Not only do white affluent males gain more economic strength in this model, they also gain more social power by being the sole source of capital for all production. This becomes even more curious when you consider that the majority of the advocates of laissez faire and the intellectual thinkers behind it, are in fact affluent white males, the very demographic which would benefit the most from the system they advocate. Perhaps they are simply well intentions but misguided thinkers, who legitimately think that their system helps the poor. But a more likely explanation is that they simply have lop-sided priorities, they value the benefits this system gives them more than they do the burdens it saddles on the poor. They know that there are substantial holes in their argument that laissez faire helps the poor and they simply choose to ignore them.

Just as the advocates of slavery and segregation claimed that their system helped blacks by upholding “the natural order of things”, the advocates of laissez faire claim that their policies will help the poor by doing the same. However, in reality, just like slavery and segregation, laissez faire is nothing more than a system which benefits affluent white males at the expense of everyone else. These individuals seek to reverse the great progress we have made, they seek to misinform the populace and make false claims. We must arm ourselves with the truth, for if we lose these laws and programs, it may be years before we ever get the chance to regain our progress. America it seems, cannot afford to repeal the welfare state.