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On Welfare August 5, 2006

Posted by David Bookstaber in Economic Policy, Government Spending, Social Politics, Taxation.

Government welfare is a dangerous thing.  After all, it is a coercive pact wherein productive individuals subsidize unproductive individuals.  What society in its right mind would adopt such an arrangement?

I can discern two premises for welfare: Insurance and guilt.


Nobody likes to see others in need.  The sick and the poor tug at each citizen’s conscience, thanks to human empathy innate in almost all of us.  For all any citizen knows there is some combination of misfortunes that could plunge him into those circumstances too.  Whether this guilt is justified, let us take for granted that a majority of people feel it and need to respond to it.  There are two canonical responses to this guilt, which I would like to call the Conservative and the Liberal.

The Conservative approach leaves each individual free to deal with his guilt as his conscience dictates.  This is effectively a free-market solution to guilt: each individual undertakes charitable actions that he believes will most effectively assuage his guilt.  The beauty of this is that money is only spent in the manner and degree that it is effective.  Insofar as the market for guilt and charity is efficient (and I can’t think of a good reason it would not be), resources will be devoted to the most deserving charity cases and the most effective solutions.

The Liberal approach can’t abide the inequality of aid and outcomes this Conservative approach inevitably produces, and instead demands that all citizens be compelled to help in a manner and scale determined collectively.  This is justifiable because in a sense charity is a public good: Guilt can be assuaged for all citizens even if only one actor is engaging in charity to relieve the needy.  But this is also the moral hazard of public welfare:  When he sees somebody suffering misfortune, the Liberal feels 100% of the guilt but knows that if he advocates for a social solution he will pay an infinitessimal fraction of the remediation.  So there is essentially no restraint on how much a Liberal would demand that society tax to solve social ills.

Compound this moral hazard with the fact that collectivist schemes for assessing and meeting demand are notoriously inefficient, and there is no reason to believe collectivism would effectively handle the markets for guilt and charity.  Hence, there is no good argument for government welfare based on the motive of guilt.


On the other hand, we could argue that every individual should be entitled to buy some basic level of insurance against sickness and poverty.  We could also argue that since a good many of the factors for those risks are congenital, the insurance must be purchased before birth.  After all, almost every individual knows whether he is more or less likely than the average to claim against the insurance.  A citizen born prematurely to a poor single mother will almost certainly require more aid throughout his life than a healthy individual born to wealthy parents.

Thus, we could pretend that “government welfare” is really just “mutual poverty insurance.”  Of course, every citizen must participate in the mutual insurance plan in order to avoid adverse selection.

These are terms that even the most rabid libertarian could tolerate.  The open question becomes:

  1. How can democracy determine the level and nature of mandatory insurance (i.e., welfare)?
  2. How can government most effectively administer this insurance?  I.e., how should premiums be collected and claims be paid?

I suppose we could very well end up in our current situation with the philosophy expressed in these terms.  However, this could avoid a number of problems:

  1. A maximum lifetime insurance benefit could be established.
  2. People who were not born into the insurance co-op (e.g., immigrants, legal and otherwise) could be assessed different premiums based on their known risk factors when they join.
  3. The insurance funds could be constitutionally isolated and fully funded, so that they are not subject to political abuse by the legislature.
  4. Since insurance is an established science, the cost of any particular benefit could be determined and advertised by actuaries instead of being spun around by politicians.
  5. Insurance premiums could be transparently allocated.  They would certainly be progressive in nature, but again the legislature could be prevented from comingling them with other tax and spending programs.
  6. Insurance administration could be readily privatized.


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