The dangers that face our welfare state

By Arthur Middleton Hughes

Federal disability — about $170 billion per year — is intended for those with medical conditions so severe they can’t work at any job. Today, so many people claim to fit that definition that 17.9 million people are getting checks.

“I will just tell you I’m biased when we have one in 20 people in this country on disability,” Republican Sen. Tom Coburn of Oklahoma said during a congressional hearing last year. “I don’t believe it. As a practicing physician in a poor area of the country with lotsa problems I don’t buy it.”

By the government’s own estimate, fraud and other improper payments ate up $25 billion in disability payments between 2005 and 2009 – CBS News Feb 18, 2011

 The goals of our public welfare program must be positive and constructive…[The welfare program] must stress the integrity and preservation of the family unit. It must contribute to the attack on dependency, juvenile delinquency, family breakdown, illegitimacy, ill health, and disability. It must reduce the incidence of these problems, prevent their occurrence and recurrence, and strengthen and protect the vulnerable in a highly competitive world.

– President John Kennedy 1962

 Since the world began, there have always been some people who do not do as well, economically, as others. For some, there is no hope for improvement. This was true during the middle ages. For hundreds of years the feudal system consigned people at birth to a fixed role in society.  If you were born the equivalent of a serf in 1200 AD, in England, Russia or China, you usually remained one for life. This is still true in some countries today.

Since 1800, for most of the world, the industrial revolution has tended to change that. It is possible for poor people to rise from nothing to the highest echelons of wealth and recognition. Certainly the example of people like Benjamin Franklin, Abraham Lincoln, or Clarence Thomas establishes that possibility in our own country.

On the other hand, there are many people today who never make it. They are not successful in breaking out of poverty into the middle class. Still others, through illness or weakness of character, begin their lives well, but end up, not only in the gutter, but dragging their spouse and offspring down with them.

Our Brother’s Keeper

To what extent are we, the successful ones, responsible for the economic well being of the less successful? Is it enough to provide an expanding economy, free education, law and order, and equal opportunity for all, or must we go further than that? Must we “spread the wealth around” – take income from those who are successful and give it to those who are unsuccessful: to provide them with free food, free rent, free medical care, and anything else that they require to help them to avoid poverty?

Ever since the end of World War II, there have been a growing number of people who favor a welfare state: a government that takes full charge of the lives of all of its citizens “from cradle to grave”. Such a government is supposed to see to it that money is given generously to all who are in need — regardless of whether the need is due to bad luck or to the person’s own failure to work.  Like a kind and generous father, the government is supposed to be responsible for providing for everyone’s health and welfare throughout their entire lifetimes.

There are others who argue just as strongly on the other side, that it is not good for people to be sheltered and protected all their lives from struggle and hardship. They argue that self respect and confidence come from facing and surviving challenge and adversity. Those who never have to work will never know the feeling of pride and self-esteem that come from doing a job and earning an income. Hence, they never get a chance to rise above the lowest level in society.

Until 1964, the argument in the United States was heated, but not very serious. We had seen Russia, Eastern Europe, China, Cuba become welfare states. We had seen England, most of the Scandinavian countries, and much of the rest of Europe elect socialist governments pledged to establish welfare states in their countries. But no one, in 1960, thought seriously that America would become like these countries. Then, in the five years from 1964 to 1969, an unexpected legislative revolution took place. During President Lyndon Johnson’s administration — in the midst of the Vietnam War — a number of basic laws were passed which converted America into a welfare state.

The social legislation passed in those five years represents the most significant economic shift in our society since the landing of the Pilgrims. The social impact of these laws has been felt in virtually every school and workplace, every city and town, and every family in America.

How Things Were Before 1964

Before 1964, through private charities and local governments, we provided relief to the destitute, the sick, and those temporarily down and out. But, as a society, we had always believed in four things:

1. People must be held responsible for their actions. They may be acting in response to ignorance or fear, but they are responsible.

2. People are not inherently hard working or moral. In the absence of pressures to do the right thing, they will avoid work and be amoral.

3. People respond to incentives and disincentives. Rewards and penalties are effective in modifying conduct.

4. The role of government should be limited. The government job in protecting the poor can be summed up by an early slogan of the War on Poverty in the early 1960′s “a hand, not a handout”, meaning that government should provide only temporary help to people who are in trouble so that they can get on their feet and make it on their own.

The Welfare Principles

After the welfare state legislation of 1964-69, most of these four principles were set aside in favor of a different set of ideas:

1.  There is a large group of our people (minorities) who, through no fault of their own, have less of the good things of life than other people.

2. It is useless for these minorities to struggle to improve their situation, because “the system” — the social and economic customs that prevail in the schools and workplaces of America — have stacked the cards against them and hold them back.

3. The only solution for this injustice is federal government action to guarantee a decent level of living for every man, woman and child, taking what resources are necessary from the more fortunate citizens and redistributing them to the less fortunate.

4. This redistribution of wealth will improve the lives of the poor, reduce crime, improve education, increase employment, and make America a better place for all to live.

Since that time, the evidence shows that these principles have not worked as assumed in when they were enacted, and, in fact, that they have been responsible for destroying many of the things that their proponents stated as their original goals.

The Reasons for the Change

Why did America decide to become a welfare state?  There was never a conscious decision made.  In the 1960′s there were two major social factors that led to the passage of the welfare legislation:

  • Collective guilt over the way black people had been treated during the previous 400 years, and a national consensus that something had to be done to make up for it.  Following the Brown vs. Board of Education Supreme Court decision outlawing racial segregation in 1954, the nation discovered the problems of the blacks, and wanted to do something positive to help.
  • The disruption of society and government caused by the Vietnam war, and a desire on the part of President Johnson — a very experienced and forceful legislator — to use the power of government to make society better in spite of the war.

Our leading economists were Keynesians. They believed that they had discovered the secret of permanent prosperity that was unknown to previous generations: massive government spending. Leading intellectuals discovered the underclass in our society — both black and white — and determined to use the might of government to solve in one generation a social problem — poverty — which had existed for thousands of years.

What the Programs Consisted Of

There was no single group of laws or regulations that changed during 1964-69. There were hundreds of large and small changes. They included Supplemental Security Income (SSI), Aid for Dependent Children (AFCD), Food Stamps, public housing, rent supplements, Social Security, expansions of disability insurance, dozens of jobs and training programs, unemployment insurance, Medicaid, and Medicare. In addition, there were scores of changes in laws and regulations mandating shifts in the treatment of criminals, discipline of children in school, hiring of employees, preferential treatment of minorities on tests and promotions.  In general, standards were relaxed, and benefits went up.

The biggest change was that welfare — receiving money from others without having to work — was no longer considered as a temporary handout, but as a permanent way of life for both poor working people and unemployed alike. A growing percentage of the population discovered that they were “entitled” to permanent government payments or other means of assistance by virtue of their race, poverty or national origin.

The costs in the early years were modest. No one foresaw what would happen to the expenses fifty years later.

To understand the meaning and impact of these programs, we will look at several of them individually.

Free Federal Food

The U. S. Government accumulated billions of dollars in surplus food as a result of agricultural price support programs enacted originally in the 1930′s. By the 1950′s, government warehouses were bulging with the unwanted crops.  In 1954, a law was passed (PL 480 — the Food for Peace Program) providing for the loan or grant of billions of dollars worth of food to the poor in selected foreign countries. An average of about $1.5 billion per year of milk, cheese, food oil and grains were shipped to such countries as India, Pakistan, Sudan, Bangladesh, Morocco, and the Philippines. In general, surplus food was not given out in the United States because it was felt that the distribution would defeat the purpose of the agricultural price support programs: the food was purchased and held off the market to get food prices to go up — if it were passed out to the poor, prices would go down.

With the passage of major welfare legislation in 1964-69, the obvious question arose: if we are helping the poor in foreign countries with all this free food, why not help our own poor? The Food Stamp Program, originally passed in 1939 with annual disposal of a few million dollars of surplus food to people on relief, was vastly expanded. Under this program, low income families and individuals receive stamps or coupons which can be exchanged for food and groceries. The number of people qualifying and the payments for this food expanded far beyond the dreams of the legislators who created the expansion of the program in the 1960′s.

 To the food stamp program were added a number of additional food donation programs. By 2011 there were a great many special federal nutrition programs including:


Take a good look at this chart.  The “Recovery Act” was the “Stimulus Program” enacted in the spring of 2009. Most people thought that it was a one-time temporary program that did not succeed in reducing unemployment. As you can see, it was a permanent program that grew and grew. In 2009 the food portion of it was only five billion. By 2011 that same stimulus food program had grown to almost $12 billion. As you study these numbers in all columns, you will see that welfare programs (like all other Federal Programs) grow every year because of baseline budgeting.  The food and nutrition programs grow by more than 14% per year.

By 2011, the budgeted annual cost of these programs was over $107 billion dollars. The number of people in the Supplemental Nutrition Assistance Program, known as food stamps, hit a record 44.2 million in 2011. That’s up 4.7 million from 2010.  Currently, one in seven Americans receive food stamps, the highest share of the population ever to do so, according to the Food Research and Action Center.

It is interesting to note that the programs were first established for needy families in 1939. Fifty years later 100,000 needy families were still getting assistance. The other forty four million recipients represented the expansions since that time, and are classified in some category other than “needy”. In fact, they include college students, military personnel, and millions of people employed full time in a wide variety of occupations. The criteria for eligibility have been relaxed year after year to include more and more people who want to get in on the benefits. Those receiving the free food have come gradually to see it, not as an embarrassment (an admission of their failure as a wage earner) but as a right — an entitlement — due to them because “the system” has failed them.

Why does the food program increase every year?  Is it because there are more hungry people in America?  Not really. Put yourself as a bureaucrat in charge of the Food and Nutrition Service.  What is your goal in your job? To be promoted and increase your income.  How can you do that? By having a bigger program, a bigger responsibility, and more employees working for you.  How do you accomplish this? By organizing private groups interested in the welfare of various needy groups. Get them to petition the Congress for more free food.  Change the regulations so that food stamps are available not just to those at the poverty level, but at twice or three times the poverty level income. Year by year, the eligibility for free food has been widened. As a result, the program has increased. Thousands more have been hired to run the program, and the bureaucrats running it have important, well-paid jobs. They can go home every night thinking that they have done a great job for the people.

Food stamps are just a small part of the reason why U.S. Government spending has become so huge, and so out of control. If the Congress were to attempt to hold food assistance spending this year the same as last year, there would be a scream from private groups that food for the poor was being “cut by 14%!” It would be very difficult to do.  The US public is not at all aware of the baseline budget process that is driving the growth in spending.

Social Security Expansions

The Social Security Act was passed in 1935 to provide for unemployment compensation insurance, old age and survivors insurance, and aid for the elderly, blind, crippled and homeless. It is funded by regular deductions of a percentage of the paychecks of all working people. By 2011, there were 49.8 million retirees drawing benefits.

The benefits have been expanded by legislation year after year so that most retirees today are drawing assistance far in excess of the amount that they originally paid in taxes (including the interest on those payments). How can the system continue to pay out more than the retirees paid in? Because the benefits for today’s retirees are being paid — not out of their original contributions — but by taxing today’s 153 million working people. Today there are about 3.1 employed people for every person drawing federal retirement benefits.

The birth rate is going down, and people are living longer. The number of retired people is going up in relation to the wage earners. It is likely to reach the point where working people will find the cost of the retirees will represent a serious burden, and a drag on their ability to support their current families.

The major concern of the employed people of the future is unlikely to be focused solely on the retirees, as much as on the other beneficiaries of social security: the people who draw benefits but who contributed little or nothing to the social security fund.  By 2011 there were about 57.6 million people who received a payment from Social Security. Most (49.9 million) received regular old age benefits only, about 5.1 million received supplemental income only, and 2.6 million received payments from both programs.

A large number of people receive disability benefits today, even though many are still working.  Those receiving disability benefits have grown significantly. From 687,000 in 1960, the program has grown year after year. Bu 2011 there are 8,403,000 people receiving disability checks.

When Carter became president, there was a review of the benefit levels of the exploding disability program. Criteria were tightened. During his administration, and during that of Ronald Reagan, the benefit levels stabilized at around $25 billion dollars per year in 1991 dollars. When George Bush became president, the controls were relaxed, and benefits began to grow again at rates equaling those of the early 1970′s. Disability payments in 2011 are about $108 billion per year, an important and growing part of the welfare state.

Medical Care spending is out of control

The welfare programs with the greatest effect on the federal future debt problems are the twin medical benefits: Medicare for the elderly and Medicaid for the poor. These programs have dwarfed all other public welfare programs.

One result of the medical programs has been an explosion in prices of medical care. By 1992 medical services costs had risen over 800 percent from 1960 levels, while consumer prices gained a little less than half that amount. The price rises were predictable: a vast increase in federal spending in an industry in which it takes years to train doctors and nurses, as well as to build the hospitals and clinics needed to treat the patients. From 1980 to 2009 the medical costs had grown by an additional 256%.

 There is another reason for the price rises, however. Most of the beneficiaries of Medicaid and Medicare are receiving free, or almost free medical treatment — as opposed to other patients who are required by their medical insurance to pay a significant portion of their medical costs. The recipients of the federal programs are, in general, unemployed and can afford to wait as long as it takes to get the medical attention they need. There has been a vast increase in demand fueled by — for many years — an almost blank-check federal medical payment program.

 The Congressional Budget Office developed this chart looking at the percentage of gross domestic product that will be consumed by federal medical programs for those over 64 years of age. As you can see, the biggest growth in spending will come from the growth in medical costs. Clearly, this cannot happen. Medicare will gobble up a great part of our national income. Some change in the spending system will have to occur.

 The Paul Ryan Plan

 Congressman Paul Ryan is the only political leader with a specific plan to fix Medicare and Medicaid as of 2011. His plan would do several things:

  •    Preserve the existing Medicare program for those currently enrolled or becoming eligible in the next 10 years (those 55 and older today) – So Americans can receive the benefits they planned for throughout their working lives.  For those currently under 55 – as they become Medicare-eligible – it creates a Medicare payment, initially averaging $11,000, to be used to purchase a Medicare certified plan. The payment is adjusted to reflect medical inflation, and pegged to income, with low-income individuals receiving greater support. The plan also provides risk adjustment, so those with greater medical needs receive a higher payment.
  •   Fully fund Medical Savings Accounts [MSAs] for low-income beneficiaries, while continuing to allow all beneficiaries, regardless of income, to set up tax-free MSAs.
  •   Based on consultation with the Office of the Actuary of the Centers for Medicare and Medicaid Services and using Congressional Budget Office [CBO] these reforms will make Medicare permanently solvent
  •   Modernize Medicaid and strengthen the health care safety net by reforming high-risk pools, giving States maximum flexibility to tailor Medicaid programs to the specific needs of their populations. Allow Medicaid recipients to take part in the same variety of options and high-quality care available to everyone through the tax credit option.

Of course, there is no possibility that the Paul Ryan or any similar plan could be enacted by the US government as it exists today.  It could not pass the Senate, and would be vetoed by the President.  There is, however, no other plan to solve our entitlement problems currently being proposed or discussed.

The Effect of the Welfare State on American Society

From the above discussion, it is clear that since 1969, America has embarked on a massive spending program designed to provide free food, medical care, housing, training, and other benefits to everyone in our society who falls below a constantly updated set of minimum levels. The benefits are not restricted to the destitute and the unemployed, but are given generously to working people and non-working people alike who meet eligibility requirements.

 The Effect on Poverty

Poverty in the United States is cyclical in nature with roughly 13 to 17% of Americans living below the federal poverty line at any given point in time, and roughly 40% falling below the poverty line at some point within a 10-year time span. Poverty is defined as the state of one who lacks a usual or socially acceptable amount of money or material possessions. According to the U.S. Census Bureau, approximately 43.6 million (14.3%) Americans were living in absolute poverty in 2009, up from 39.8 million (13.2%) in 2008. The poverty level for 2011 was set at $22,350 (total yearly income) for a family of four.  We will always have millions living in poverty as long as there are government officials whose job it is to administer programs for those living in poverty.

Benefits of the Welfare Reform Act of 1996

In 1996, President Bill Clinton signed legislation overhauling part of the nation’s welfare system. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L. 104-193) replaced the failed social program known as Aid to Families with Dependent Children (AFDC) with a new program called Temporary Assistance to Needy Families (TANF). The reform legislation had three goals: (1) to reduce welfare dependence and increase employment; (2) to reduce child poverty; and (3) to reduce illegitimacy and strengthen marriage.

 At the time of its enactment, liberal groups passionately denounced the welfare reform legislation, predicting that it would result in substantial increases in poverty, Hunger, and other social ills. Contrary to these alarming forecasts, welfare reform has been effective in meeting each of its goals.

Since then, overall poverty, child poverty, and black child poverty have all dropped substantially

Although liberals predicted that welfare reform would push an additional 2.6 million persons into poverty, the U.S. Bureau of the Census reports that by 2003:

  •     There were 3.5 million fewer people living in poverty than there were in 1995 (the last year before the reform).
  •    Some 2.9 million fewer children lived in poverty than in 1995
  •    Decreases in poverty have been greatest among black children
  •    The poverty rate for black children was at the lowest point in U.S. history.
  •    Hunger among children was cut roughly in half
  •    According to the U.S. Department of Agriculture (USDA), there were 420,000 fewer hungry children in 2003 than at the time welfare reform was enacted.
  •    Welfare caseloads were cut nearly in half
  •    Employment of the most disadvantaged single mothers increased from 50 percent to 100 percent.
  •    The explosive growth of out-of-wedlock childbearing came down significantly.
  •    The share of children living in single-mother families fell, and the share living in married-couple families increased, especially among black families.

Federal Education Funding brings Federal Regulations

The Federal Government created many programs of assistance to the States in the field of education, including elementary, secondary, post-secondary, and research at educational institutions.  Federal Education spending has increased from $35.9 billion in 1965 to $165.9 billion in 2009, and continues to increase year after year.

With these federal dollars came massive federal rules and regulations. Education had always been a local function before the changes of 1965. With the new funding for every school system in America came federal strings that required federally mandated programs: special treatment for minorities, women, handicapped, speakers of foreign languages. A series of court cases involving student’s rights made it more and more difficult to maintain discipline and order in schools. Schools were required to advance students from grade to grade regardless of the student’s academic achievement. Basic educational subjects such as reading, writing, mathematics, science, languages and history were reduced in importance with new emphasis given to such courses as multicultural understanding, ethnic studies, and bi-lingual education.

Students could not solve problems.

After twenty years of Federal educational spending, the results were not good. The National Commission on Excellence in Education reported in 1983 that:

  •       Nearly 40 percent of 17 year-olds could not draw inferences from written materials. Two thirds could not solve a mathematics problem requiring a sequence of steps.
  •       “Secondary school curricula have been homogenized, diluted, and diffused to the point where they no longer have a central purpose.”
  •      By 1980 remedial mathematics courses constituted a quarter of all mathematics courses taught in public universities.
  •       Traditional performance standards had become meaningless. As homework decreased and real student achievement declined, the average grades given students rose.
  •       The board predicted that for the first time in American history the educational skills of the next generation would not even approach those of their parents.

Discipline in Schools Evaporated

Partly due to the federal regulations, and partly due to the climate of the welfare state, discipline in the school system broke down. From 1950 to 1964, student disorders were of such low levels as to be unimportant. From 1964 to 1971, and thereafter, disorders exploded. One reason was that the disorders were permitted by policy and regulation.

The intellectual climate of the time favored more open, less disciplined, less repressive classes. Federal regulators dispensing aid money favored a less traditional, less white-middle-class value oriented system. The regulators had the authority to withdraw funds if a school was found to be discriminating on grounds of race. The courts had a hand in school discipline. In 1967 the Supreme Court, in Gault V Arizona made a landmark decision that had the effect of requiring due process for suspension or discipline of students in school. Teachers and administrators became vulnerable to lawsuits for disciplinary actions.

As a result, students who did not want to learn were much freer not to learn, and to disrupt other students. Rebellious students could make life miserable for demanding teachers. When only a few students attempted to do the homework, many teachers stopped assigning it. Many teachers just gave up trying to achieve excellence in their students.

Entitlements and the Budget Problem

Thanks to the Welfare Reform Act of 1996, we have reigned in welfare spending and the bad social results that came with it.  We have yet, however, to deal with the massive federal spending on Health Care – for the elderly and for the poor. Medicare and Medicaid together with Social Security have committed the US to a future spending responsibility and debt that cannot be paid.

The entitlement system succeeded in boosting federal spending on individuals.  Local officials had to abide by national regulations — modified slightly by state differentials due to the varying cost of living.

The entitlement system has made welfare budgeting a nightmare. No longer is it possible for the Congress, or a state legislature to determine how much they want to spend on health care and other entitlement programs in the coming year. The budget is determined, instead, by the recipients themselves. They are legally entitled to the health and other benefits. Local, state, and national governments had to provide these payments to all who met the criteria. There is little discretion given to officials at the local level.

Disaster ahead

Taking all aspects of the US welfare state together, the Congressional Budget Office developed a long range forecast based on current laws and regulations. They found that:

Debt is projected to rise to 187 percent of gross domestic product (GDP) by 2035

  •       This accumulation of public debt would reduce economic income between 7 and 18 percent from its potential projected level in 2035
  •       Interest payments to service the debt will be the largest item in the federal budget in 2026
  •    The growth of spending on Social Security, health, and interest will more than account for the growth in total outlays; by 2085, Social Security and health will consume 25% of GDP, up from 10% today
  •    By 2085, excess health care cost growth will account for 56 percent of total growth in projected federal spending

Unchecked federal spending will destroy our country.

 Conclusion

As a nation, we became a welfare state in 1965 without realizing where it would lead. Today, under current laws, we are on the path toward bankruptcy as a nation due to our entitlements –which require us to pay health, food, retirement and other benefits far in excess of the money that we will have available. We have taken on debt and spending commitments that we cannot pay.  There has to be a major solution.  In 1996 we solved our welfare problems.  Today we must rewrite Medicare, Medicaid, Food Stamps, Disability and Social Security and other entitlement legislation to keep our country solvent. Small reductions in spending will not do it. Increased taxation will not do it. We need to develop the will, as a nation, to solve our entitlement problem.

About Arthur Middleton Hughes

Arthur is currently Vice President of The Database Marketing Institute based in Fort Lauderdale, FL. Arthur is the author of 11 books, the latest of which is Strategic Database Marketing 4th Edition (McGraw-Hill 2012). A BA graduate of Princeton with an MPA in Economics and Public Affairs, Arthur taught economics at he University of Maryland for 32 years. He is an Austrian Economist.
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