The Myth of Social Welfare: Part II
A more rigorous analysis of the myth, with commentary about the social and political consequences of the quest for "social justice".
After I posted “The Myth of Social Welfare” (now with “Part I” added), I remembered other material that I had posted on the subject at my old blogs. This post is a consolidated and edited version of the other material. It comes at “social welfare” and its close kin, “social justice”, from several angles. Some repetition is therefore necessary. But I believe that you will profit by reading the whole thing.
There is among many (most?) Americans (even some who claim to be conservative) approval of some degree of income and wealth redistribution by force (i.e., through government action). Redistribution can occur by direct transfers of money (e.g., welfare payments), programs that have the same effect by providing benefits that are subsidized by higher-income taxpayers (e.g., Social Security), and privileges that are accorded to classes of (presumably) “disadvantaged” persons (e.g., affirmative action, preferential treatment in college admissions).
The various justifications for redistribution include “fairness” or “social justice”. Particular justifications — vague as they may be — are encompassed in an even vaguer one: improving “social welfare”, that is, the general well-being of the populace.
There is also an economic justification, based on the fallacy that consumption spending drives GDP. The idea is that the transfer of incomes and wealth from persons with a low propensity to consume (i.e., “the rich”) to persons with a high propensity to consume (i.e., “the poor”), GDP will rise.
I will begin by disposing of that bit of economic hogwash before addressing the other justifications. I will end with some general observations about the quest for “social justice” and the evolution of that quest into a kind of civil war.
REDISTRIBUTION AS A SPUR TO ECONOMIC GROWTH?
GDP (Gross Domestic Product) is an estimate of the aggregate monetary value of the goods and services produced in the United States during a specified period of time (usually a year). Some of that output takes the form of goods and services that are “consumed” (used) immediately upon purchase or soon thereafter. A sudden drop in the rate of consumption (C) would cause GDP to drop because C is a major component of GDP.
But given a rather stable distribution of income and wealth (in the short run), C will not drop suddenly unless something else causes a sudden drop in GDP (a financial shock, for example). The cart (C) is pulled by the horse (GDP), not the other way around. (As for the Keynesian multiplier, which justifies increases in government spending as a remedy for GDP shocks, see “The Keynesian Multiplier: Fiction vs. Fact”.)
The rate of economic growth, and therefore the material well-being of Americans, depends largely on investments in new capital that enable more and better things to be produced by a given number of workers. Such investments are made possible by non-consumption — saving — the rate of which tends to rise with one’s income. Therefore, in terms of GDP, it is counterproductive to take income (and wealth) from high-income persons and give it to low-income persons. The latter will consume most or all of what they receive instead of using it to finance capital investments. Result: A lower rate of economic growth and therefore fewer and less-well-paying jobs for low-income persons.
Redistribution is therefore harmful to the long-term prospects of those persons who are most vulnerable to the vagaries of economic growth.
IS “SOCIAL WELFARE” THE ANSWER?
The Bottom-Up Approach
I learned some years ago, and to my surprise, that David Friedman (son of Milton and Rose Friedman) subscribes to the mistaken notion that the utility (well-being) gained from additional income diminishes as income increases; for example:
Consider a program such as social security which collects money and pays out money. Dollars collected from the richer taxpayer probably cost him less utility than dollars collected from the poorer taxpayer cost him. But dollars paid to the richer taxpayers also provide less utility than dollars paid to the poorer.
Friedman’s mistake is a common one. It is a misapplication of the concept of diminishing marginal utility (DMU): the entirely sensible notion that the enjoyment of a particular good or service declines, at some point, with the quantity consumed during a given period of time.* For example, a second helping of chocolate dessert might be more enjoyable than a first helping, but a third helping might not be as enjoyable as the second one — and so on.
Do not assume (even implicitly, as Friedman does) that as one’s income rises one continues to consume the same goods and services, just at a higher rate. In fact, having more income enables a person to consume goods and services of greater variety and higher quality. Given that, it is possible to increase one’s enjoyment by shifting from a “third helping” of a cheap product to a “first helping” of an expensive one, and to keep on doing so as one’s income rises.
Look around your home and thing of all of the things you could improve with more income — the food you eat, your apparel, TV, PC, phone, tablet, auto, furnishings, cookware, tableware, etc., etc., etc. And think beyond that. For example, If repeated trips to a Florida beach become boring, graduate to the Caribbean, and then to the Riviera. Think about equivalent upgrades in other leisure pursuits: reading material, home-entertainment products, restaurants, clubs, sporting events — the list may not be endless, but it is very long. Then there are durable things to acquire and even amass: flashy cars, boats, yachts, houses, horses — another long list of possibilities.
On top of all that, there’s the accumulation of wealth. It’s obviously the objective of the likes of Jeff Bezos, Warren Buffet, partners in Wall Street investment banks, high-paid lawyers, etc. It’s also an objective that’s shared by almost everyone and for many reasons (e.g., a more comfortable and secure retirement, leaving money to children and grandchildren). I daresay that one’s sense of well-being — though it can’t be measured — actually rises faster than one’s wealth.
Amassing more wealth also allows one to engage in philanthropy on a grander scale than giving a $5 bill to a panhandler. The philanthropist’s sense of well-being is being served by making others happier. And the wealthier they are, the happier they can make others — and themselves.
Is there a point at which one opts for leisure (or other non-work activities) over income? Yes, for most persons, but income and wealth can continue to accumulate even after a person quits working — and even after he quits actively managing his wealth.
So much for diminishing marginal utility.
Here’s the most that can be said without assuming knowledge that is impossible to acquire: Taking money from a person who is in a high-income (or wealth) bracket will not harm that person as much (financially) as would taking the same amount of money from a person who is in a low-income (or wealth) bracket. Why? Because the high-income person would still be able to afford everything that a low-income person can afford (and a lot more, besides), but the low-income person might become ill or die from lack of nutrition, adequate clothing, or shelter.
But when government gets into the act and forces redistribution, it damages the engine of economic growth, which is what really enables low-income persons to better their lot permanently. And by damaging the engine of economic growth, government also makes it harder for persons to make enough to engage in voluntary charity on the scale that would alleviate hunger, inadequate clothing, and lack of shelter.
Am I serious? Yes. Read “America’s Mega-Depression”.
What about the short run? Why not just use governmental power to help those most in need? Governments don’t work that way. The creation of a program for any purpose essentially guarantees perpetual life for that program regardless of its effectiveness. Social Security, to take a leading example, not only offers much larger old-age benefits to many more persons than originally envisaged, but it has been expanded (through Medicare, Medicaid, and Obamacare) to encompass a vast array of medical (and non-medical) expenses for persons of all ages — retired or not. Social Security and its offshoots are a large part of the problem outlined in “America’s Mega-Depression”.
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* It is a misconception that demand curves slope downward and to the right because of DMU. They do not, as explained by Bruce R. Beattie and Jeffrey T. LaFrance in “The Law of Demand versus Diminishing Marginal Utility”, which is available here as a PowerPoint presentation.
The Top-Down Approach
The foregoing discussion should obviate the need for what follows, but I will nevertheless plunge ahead.
Some fans of redistribution will argue that there must be — conceptually, at least — a social welfare function (SWF) that will rise if income is redistributed from high-earners to low-earners, and if wealth is redistributed from the wealthier to the less wealthy. To put it simply, it must be the case that “society” will be better off if “the rich” are forced to make “the poor” better off.
This erroneous view rests on four errors.
There is the fallacy of misplaced concreteness, which is found in the notion of utility. Have you ever been able to measure your own state of happiness? I mean measure it, not just say that you’re feeling happier today than you were when your pet dog died. It’s an impossible task, isn’t it? If you can’t measure your own happiness, how can you (or anyone) presume to measure and aggregate the happiness of millions or billions of individual human beings? It can’t be done.
Next is the error of arrogance. Given the impossibility of measuring one person’s happiness, and the consequent impossibility of measuring and comparing the happiness of many persons, it is pure arrogance to insist that “society” would be better off if X amount of income or wealth were transferred from Group A to Group B.
Think of it this way: A tax levied on Group A for the benefit of Group B doesn’t make Group A better off. It may make some smug members of Group A feel superior to other members of Group A, but it doesn’t make all members of Group A better off. In fact, most members of Group A are likely to feel worse off. It takes an arrogant so-and-so to insist that “society” is somehow better off even though a lot of persons (i.e., members of “society”) have been made worse off.
Would the arrogant so-and-so agree that “society” had been made better off if I were to gain a great deal of satisfaction by punching him in the nose? I don’t think so, but that’s the import of his redistributive arrogance. He could claim that my increase in happiness doesn’t cancel his decrease in happiness, and he would be right. But that’s as far as he could go; he couldn’t claim to measure and compare my gain and his loss.
Which leads me to an error that I will call lack of introspection. If you’re like most mere mortals (as I am), your income during your early working years barely covered your bills. If you’re more than a few years into your working career, subsequent pay raises probably made you feel better about your financial state — not just a bit better but a whole lot better. Those raises enabled you to enjoy newer, better things (as discussed above). And if your real income has risen by a factor of two or three or more — and if you haven’t messed up your personal life (which is another matter) — you’re probably incalculably happier than when you were just able to pay your bills. And you’re especially happy if you put aside a good chunk of money for your retirement, the anticipation and enjoyment of which adds a degree of utility (such a prosaic word) that was probably beyond imagining when you were in your twenties, thirties, and forties.
In sum, the idea that one’s marginal utility (an unmeasurable abstraction) diminishes with one’s income or wealth is nothing more than an assumption that simply doesn’t square with my experience. And I’m sure that my experience is far from unique, though I’m not arrogant enough to believe that it’s universal.
A Closer Look at the Social Welfare Function
The validity of the SWF depends on these assumptions:
It is possible to make interpersonal utility comparisons (IUCs), that is, to determine whether and when it hurts X less than it benefits Y when the state takes a dollar from X and gives it to Y.
Having done that, the proponents of redistribution are able to conclude that the Xs should be forced to give certain amounts of their income to the Ys.
Making the Xs worse off doesn't, in the longer run, also make the Ys worse off than they would have been absent redistribution. (This critical assumption is flat wrong, as discussed above.)
All of this is arrant — and arrogant — moonshine. Yes, one may safely assume that Y will be made happier if you give him more money or the things that money can buy. So what? Almost everyone is happier with more money or the things it can buy. (I except the exceptional: monks and the like.) And those who don't want the money or the things it can buy can make themselves happier by giving it away.
What one cannot know and can never measure is how much happier more money makes Y and how much less happy less money makes X. Some proponents of IUCs point to the possibility of measuring brain activity, as if such measurement could or should be made -- and made in "real time" -- and as if such measurements could somehow be quantified. We know that brains differ in systematic ways (as between men and women, for instance), and we know a lot about the ways in which they are different, but we do not know (and cannot know) precisely how much happier or less happy a person is made -- or would be made -- by a change in his income or wealth. Happiness is a feeling. It varies from person to person, and for a particular person it varies from moment to moment and day to day, even for a given stimulus. (For more about the impossibility of making IUCs, see these posts by Glen Whitman. For more about measuring happiness, see these posts by Arnold Kling.)
In any event, even if individual utilities (states of happiness or well-being) could be measured, X's and Y's utilities are not interchangeable. Taking income from X makes X less happy. Giving some of X's income to Y may make Y happier (in the short run), but it does not make X happier. It is the height of arrogance for anyone -- “liberal”, fascist, communist, or whatever -- to assert that making X less happy is worth it if it makes Y happier.
WHAT ABOUT “SOCIAL JUSTICE”?
This is from Anthony de Jasay’s essay, "Risk, Value, and Externality":
Stripped of rhetoric, an act of social justice (a) deliberately increases the relative share . . . of the worse-off in total income, and (b) in achieving (a) it redresses part or all of an injustice. . . . This implies that some people being worse off than others is an injustice and that it must be redressed. However, redress can only be effected at the expense of the better-off; but it is not evident that they have committed the injustice in the first place. Consequently, nor is it clear why the better-off should be under an obligation to redress it....
There is the view, acknowledged by de Jasay, that the better-off are better off merely because of luck. Here is his answer to that assertion:
Nature never stops throwing good luck at some and bad luck at others, no sooner are [social] injustices redressed than some people are again better off than others. An economy of voluntary exchanges is inherently inegalitarian.... Striving for social justice, then, turns out to be a ceaseless combat against luck, a striving for the unattainable, sterilized economy that has built-in mechanisms ... for offsetting the misdeeds of Nature.
Further — for reasons that I explain in “War, Slavery, and Reparations” — the cost of delivering “social justice” is borne by persons who derived no benefit from “injustices” that are the works of Nature, the consequences of governmental misfeasance and malfeasance, or of powerful persons who are beyond the reach of justice.
The best that government can do is ensure a level playing field. Every attempt to tilt the playing field in favor of some “victims” simply creates new, innocent ones. Perhaps the most egregious attempt to tilt the playing field has been affirmative action, which is simply an indirect form of redistribution that harms many innocents. All I need say about affirmative action I have said here, here, here, here, and here.
A guaranteed income is not the way to level the playing field. It creates dependency on the state. Dependency on the state creates voters who support its continuance and expansion. The result: more victims of injustice, more discord, and more waste and fraud. These are commodities that the state already produces in abundance (e.g., “crony capitalism”, the gutting of neighborhoods in the name of improvement, race-consciouness, the futile and antis-scientific effort to fight “climate change” by replacing effective and efficent source of energy with inefficient and ineffective ones).
The expansion of state power should not be encouraged by anyone who values equal justice under the law and prosperity for all.
POWER-LUST AND A NEW KIND OF CIVIL WAR
Redistribution is now just a subset of the never-ending quest for “social justice”, which has morphed from an economic imperative with racial overtones to a war on anyone who is “privileged” (excepting affluent “elites” of the left). The enemies of “social justice” are legion but easily defined: every straight, white, male, of European descent, who is law-abiding, not a beneficiary of “social justice” privileges, and an opponent of such privileges.
The quest for “social justice” is therefore a main component of a new kind of class warfare, of which “wokeness” is a salient feature. “Social justice warriors” of high and low rank seek to:
exact economic tribute from their foes;
acquire and solidify special privileges that they merit because they are members of “victim groups”;
“purify” Earth, which has been “victimized” by capitalism and its artifacts (e.g., the efficient generation of energy by fossil fuels); and
suppress dissent from this agenda through ostracism, financial blackmail, and outright censorship.
Given the vast economic and social destruction that this new kind of civil war has exacted and will continue to exact, it is necessary to ask who benefits. The short answer: everyone who believes that he can and will accrue power, prestige, or greater prosperity as a result of the war. There is also the not-inconsiderable satifaction of laying waste to one’s opponents.
Is there anyone on the side of “social justice” or “wokeness” who wants to do good? There is undoubtedly, but those of us on the other side cannot afford to credit good intentions when the consequences are so dire. This is war, not a debate conducted by the rules of the Oxford Union.
In a sane world where government had not undone the good that arises from liberty — peaceful, willing coexistence and its concomitant: beneficially cooperative behavior — the quest for “social justice” would be a risible eccentricity.
Robert Nozick puts it this way in Anarchy, State, and Utopia:
We are not in the position of children who have been given portions of pie by someone who now makes last-minute adjustments to rectify careless cutting. There is no central distribution, no person or group entitled to control all the resources, jointly deciding how they are to be doled out. What each person gets, he gets from others who give to him in exchange for something, or as a gift. In a free society, diverse persons control different resources, and new holdings arise out of the voluntary exchanges and actions of persons. [Quoted by Gregory Mankiw in "Fair Taxes? Depends on What You Mean by Fair," The New York Times, July 15, 2007.]
The Framers of the Constitution bequeathed us a system of government that would have brought us as close as is humanly possible to the realization of liberty. Decades of searching for “social justice” have squandered that bequest, leaving Americans on the path to subjugation by their government and, eventually, by foreign powers.