PRIVATIZING 1HE WELFARE STATE

John C. GoOOman

and

Michael D. Stroup

NCPA roUCY REPORT 11123 June, 1986

NATIONAL CENTER FOR roUCY ANALYSIS 7701 N. Stemmons, Ste. 717

Dallas, Texas 75247

EXEOJTIve SUMMARY

New evidence shows that there are remarkable differences among the people we label as "poor." The poverty population includes the elderly poor as well as unwed teenage mothers. It includes people with college degrees as weJl as people who are functionally illiterate. It includes the healthy as well as the sick. It includes people who are able to support themselves through productive work as well as people who are mentally impaired. It includes people who use the welfare system only for temporary relief as well as people who become perpetual wards of the state.

Every year large numbers of people fall into poverty, but remain poor for only short periods of time. At the same time a large portion of people who are now poor wiIl remain poor for very long periods of time.

• Among the people who fall into poverty in any given year, 45 percent will be out of poverty by the end of the year.

• Seventy percent will be out of poverty within three years.

• Yet of those who currently are poor, about half wlll remain poor for at least a decade.

The federal government's answer to the problem of poverty is to spend $100 billion a year on means-tested programs. Unfortunately, rules written in Washington are tragically inadequate to take account of the differences in attitude and circumstance of the millions of recipients of this money. For the most part, federal programs encourage dependency and anti-social behavior and do little to encourage self-reliance and desirable behavior.

When the War on Poverty was started it was meant to serve as a social safety net--to help people who failed to get help from the private sector. Yet it is becoming increasingly obvious that today the private sector is providing the real social safety net--helping people that government programs simply do not reach.

• Ninety-four percent of all shelters for the homeless in the U.S. are operated by private sector organizations.

• Studies show that as many as 80 percent of low-income people turn to the private sector first when faced with a crisis.

There is mounting evidence that the private sector does a better job at getting aid first to those who need it most, at encouraging self-sufficiency and self-reliance, at encouraging the family unit, and at using resources efficiently. Currently, the federal government has a monopoly on welfare tax dollars. It is time to end this monopoly by allowing private citizens to make decisions on how their welfare tax dollars should be spent.

A proposal to privatize the welfare state begins on page 33 and is followed by 21 questions and answers on the details of the proposal.

NATIONALIZING THE WELFARE INDUSTRY

3.0

2.0

0.5

0.4

0.3

1955 1960 1965 1970 1975 1980

Source: National Center for Policy Analysis

'DiE WELFARE-POVERTY DEBA1E1

In his 1986 State of the Union address, President Ronald Reagan called for a national reexamination of the nation's welfare system--of its effect s on family, individual initiative and self-reliance, and most important, of its effects on children. As a result, a national debate has begun. On the one hand, there are those who argue that the effects of the U.S. welfare state are primarily beneficial and benign, helping people who are in poverty because of external circumstances over which they have no cont rol. On the other hand, there are those who argue that the welfare state is creating poverty, encour­aging millions of people to choose the condition of poverty because of the attractions created by an overly generous welfare system.

This study argues that there is some truth on both sides of the debat e. Welfare does indeed help people who find themselves in a condition of poverty over which they have little or no control. At the same time there is over­whelming evidence that the welfare state encourages dependency, the breakup of families and the emergence of the single-parent household--effects which no humane, well-meaning person can approve.

An ideal welfare system is one which helps people who are in genuine need, without at the same time encouraging anti-social behavior. In this study we argue that this ideal cannot possibly be achieved through reform and modifica­tion of federal welfare programs. Nor can it be achieved by turning over the administration of such programs to state and local governments.

The ideal welfare system requires "hands-on-management," a system in which the amount and type of aid is determined on a case-by-case basis, depending on the individual circumstances of the recipient. Such a system can be run and administered only by the private sect or.

In short, the solution to the U.S. welfare-poverty crisis is to privatize the welfare state.

1The authors would like to thank the following people for their helpful comments and criticisms during the preparation of this manuscript: ,\tartin Anderson (Hoover Institution), Stuart Butler (Heritage Foundation), Edwin Dolan (George Mason University), Lowell Gallaway (Ohio University), Anna Kondratas (Heritage Foundation), Dee Martin (White House), Tom ~\oore (President's Council of Economic Advisors), Charles Murray (Manhattan Institute), Gerald Musgrave (Economics America, Inc.), June O'Neill (U rban Institute), and Gordon Tullock (George Mason University). These helpful comments do not imply endorsements, however. The authors of this report bear sole responsibility for its contents. Proposals similar to the ones made in this study have been made by Donald Sammis and Joseph Piccione. See Joseph Piccione, "The Human Services Option: New Funding for the Charitable Sector," (Washington, D.C.: The Free Congress Research and Education Foundation, 1982).

1

EVIDENCE OF A PROOLEM

That there is a problem with the U.S. welfare system is confirmed by evidence from many sources. The evidence comes from anecdotal reports, scholarly analysis and statistical tests. All told, the evidence of a problem is clear, unmistakable, undeniable, and, quite frankly, overwhelming.

Anecdotal Evidence

What U.S. pollcymakers are coming to reaHze only reluctantly is a fact that any radio talk show host can confirm on a moment's notice. Let the talk show host brinlS up the subject of welfare and the phone banks will light up immediately as callers eagerly recount first-hand knowledge of young women who intentionally become pregnant in order to become eligible for welfare, of welfare recipients who refuse employment opportunities in order to retain welfare eligibility, of welfare recipients who cheat and defraud the system, and so on.

Most social scientists are reluctant to base public policy on evidence collected in such a casual way. However, a good social scientist does not totally ignore such evidence either.

Scholarly Studies

Beginning in the mid-I960s a number of studies of the welfare system were conducted by scholars with impeccable academic credentials. None of these studies actually proved that welfare was causing poverty. Yet each provided a penetrating analysis of particular dimensions of the problem and did so in very powerful and persuasive ways.

The Moynihan Study. In what has become a classic in the field, The Negro Family2 was published in 1965. Its author, Daniel Patrick Moynihan, then a professor at Harvard University, expressed alarm over the fact that 20 percent of all black children were living in single-parent households. (Today the figure is more than 60 percent.) The book touched off a storm of controversy, as did his later advice to the Nixon Administration: Quit pouring money into the black community and instead follow a poHcy of "benign neglect."

The Anderson Study. Martin Anderson, a Senior Fellow at Stanford Universitys Hoover Institution and at one time chief of the Office of PoliCY Development in the Reagan White House, wrote the pathbreaking book Welfare in the late 1970s. In it he calculated how much a poor family in California would lose (in terms of taxes and lost welfare benefits) if the breadwinner went

2Daniel P. Moynihan, The Neg.ro Family: The Case for National Action, (Washing­ton, D.C.: U.S. Department of Labor, March 1965).

2

into the marketplace and earned an ext ra dollar of income. Astonishing)y, Anderson discovered that:3

• At almost every level of income, low-income families faced the highest effective tax rates of any group in the nation.

• Poor families could lose as much as 80 cents for earning one more dollar from productive work.

• In the case of certain in-kind benefits such as Medicaid, welfare recipient s who earned an ext ra dollar of income lost considerably more than one dollar in benefits.

Anderson concluded that the welfare system was designed from top to bottom to encourage dependency and to discourage self-reliance.

The Gilder Studies. Geor6e Gilder is a SOCiologist who in the mid-1970s did something no other modern scholar had done before. He spent several years living among poor families who were receiving welfare. Gilder's study, Visible Man4 and his best-seHer, Wealth and Povert y5 analyzed in great detail how the welfare system was destroying the family, especially the black family, in low-income communities.

The NCPA Study. "Welfare and Poverty"6 was the first study to document how the welfare establishment has managed to spend increasingly larger sums of money, while at the same time maximizing the poverty count. Official measure­ments of poverty count only money income, and ignore in-kind benefits such as medical care, food stamps and public housing. By spending ever-increasing amounts of money on in-kind (non-cash) benefits, instead of cash benefits, the welfare establishment has managed to make welfare increasingly att ractive without disqualifying reci~ients by endangerinb their status as "poor."7

• Between 1965 and 1981, cash transfers to the poor barely changed at all in real terms.

• Over the same period, non-cash benefit s for the poor increased 5,238 percent.

3Martin Anderson, Welfare, (Stanford: Hoover Institution Press, 1978), Chap. 2.

4George Gilder, Visible Man: A True Story of Post-Racist America, (New York: Basic Books, 1981).

5George Gilder, Wealth and Poverty, (New York: Basic Books, 1981).

6John C. Goodman, "Welfare and Poverty," Policy Report 11107, National Center for Policy Analysis, Dallas, Texas, 1985.

7 Goodman, "Welfare and Poverty," pp. 8-9.

3

The Murray Study. More than any other single study, Charles :v\urray's Losing GroundS shocked liberals and conservatives alike into a realization that something was wrong with the U.S. welfare system. Murray ar6ued that in our central cities the black family has been aU but destroyed, and he made a forceful case that the welfare system bore chief responsibility for this shocking development.

Statistical Proof

One of the criticisms of the studies by Murray, Gilder and others is that they did not perform rigorous statistical tests to support their positions. Social scientists, by nature, like controlled experiments and rigorously developed econometric tests of important propositions. As it turns out, this kind of evidence is now in hand.

The Negative Income Tax Experiments •. In controlled experiments performed by the U.S. Department of Health and Human Services, the effect s of a guaran­teed income on families were observed over several years in large cities. In the Seattle and Denver Income Maintenance Experiments, families were given a minimum level of income by the federal government. Compared to similarly situated families not on welfare, families who were given the income chanf,ed their behavior substantially:9

• The number of hours of work by husbands dropped nine percent. For wives, it dropped 20 percent; for young male adults it dropped an incredible 43 percent.

• The length of unemployment among husbands increased 27 percent. Among wives it increased 42 percent, and for single female household heads it increased 60 percent.

• Divorce increased 36 percent among whites and 42 percent among blacks.

The Gallaway-Vedder Study.lO This study, produced for the NCPA by Lowell Gallaway and Richard Vedder of Ohio University, was a first-of-its-kind statistical analysis which attempted to document the number of people who were living in poverty by choice because of the attractiveness of the welfare system. The findings of the study were shocking.

8Charles Murray, Losing Ground, (New York: Basic Books, 1984). See also Charles Murray, "White Welfare, White Families, White Trash," in National Review, \larch 28, 1986, pp. 30-34.

9Summa rized in Murray, Losing Ground, pp. 151-152. See also Overview of the Seattle-Denver Income Maintenance Experiment Final Report, U.S. Department of Health and Human Services, May, 1983.

lOLowell Gallaway and Richard Vedder, "Paying People to be Poor,1t Policy Report 11121, National Center for Policy Analysis, DaJJas, Texas, 1986.

4

• At least 5.7 million people--about one-sixth of the poverty population--are living in poverty by choice as a result of the generosity of public welfare.

• Each additional $1 billion in welfare spending increases the poverty population by 250,000.

Since 1972, there has been a strong, positive relationship between the amount of welfare spending and the amount of poverty, after adjusting for other important factors, including the unemployment rate and the rate of economic growth. Put simply, we are experiencing more poverty because we have been increasing the amount we pay people to be poor.

One of the greatest tragedies of the welfare system is its effects on children. The statistical evidence shows that:

• The increasing attractiveness of welfare benefits throughout the 1970s has increased poverty among children by more than 20 percent.

• Almost 2.5 million more children are Jiving in poverty today as a direct result of the expanded welfare stat e.

The states that have paid the most generous benefits to welfare mothers have experienced the greatest increases in child poverty. By contrast, states that have been the least generous have seen major reductions in child poverty.

• Between 1969 and 1979, the child poverty rate rose 27.9 percent in the 10 states with the highest welfare benefits.

• Over the same period of time, the child poverty rate fell by 17.4 percent in the 10 states with the lowest welfare benefits.

The GAO Report. 1 1 In the previous studies, the focus was on the harmful effects of increased welfare benefits on the behavior of people. \\'hat made this study by the General Accounting Office unique was that it focused on the opposite phenomenon: \\'hat happens to the behavior of people when welfare benefits are reduced?

In 1981, the Reagan Administration tightened eligibility rules for Aid to Families with Dependent Children (AFDC). The new rules made it more aifficult for less needy people to get covered, and led to a reduction in the number of AFDC recipIents by about 500,000 people per year. As a result of the changes, a large number of welfare mothers scattered throughout the count ry lost their AFDC benefits. More than half of these mothers also lost food stamp benefits.

If the grantIng of welfare benefits makes people more dependent and less likely to engage in productive work, then the taking away of welfare benefits

!lAn Evaluation of the 1981 AFDC Changes: Initial Analyses, General Accounting Office, April 2, 1984.

5

should have the reverse effect: Denied welfare benefits, former recIpIents would be expected to engage in more productive work and other behavior which causes families to be reunited. The GAO study sheds interesting light on these speculations.

Although couched in bureaucratese, and worded carefully to avold making any judgements about why AFOC mothers were behaving as they did, the GAO study' produced evidence that shows what common sense and previous studies already suggested. Bereft of AFOC and food stamp benefits, welfare mothers turned to private options to recoup the losses.

The GAO study focused mainly on welfare mothers who were earning a privat e income before and after losin& their AFOC benefits. The study showed that approximately two years after losing AFOC benefits:

• On the average, welfare mothers had increased the number of hours they worked, were commanding a hil:)her hourly wage, and overall had increas­ed their real income from working si6nificantly.

• In Boston, 43 percent of the welfare mothers had at least as much or more total income after they lost their welfare benefits as they had before. (Their average real income from working increased 25 percent.)

Not only did the welfare mothers who lost AFOC benefits respond by changing their work behavior, they also reacted to the loss of welfare benefits by making important chanl:)es in their family lives.

• Two years after losing AFOC benefits, a Significant number of welfare mothers had increased their family size by at least one adult.

• In Syracuse, 19 percent did so.

• In Dallas, 22 percent did so.

Other Studies. Other, more general studies of the welfare system have confirmed the existence of a major problem. These include studies from some traditionally liberal sources, including the Wisconsin Institute for Research on Poverty and the Urban Institute. For example:

• One recent study concludes that all U.S. transfer payments combined have reduced the Jabor force by 4.8 percent. 12

12Sheldon Danziger, Robert Haveman, and Robert Plotnick, "How Income Transfer Programs Affect Work, Savings, and Income Distribution: A Critical Review," Journal of Economic Literature, Vol. XIX (September, 1981), p. 996.

6

• Another study suggests that aU of the Reagan welfare budget cut shave increased the labor force by as many as one million people.!.3

However, before drawing any general conclusions about the welfare system from these findings we need to take a closer look.

TWO VIEWS OF POVERTY

When welfare policy is set by government (whether at the national, state or local leveJ), politicians invariably search for a single, all-encompassing explanation of what the welfare program is all about. What follows usually is a single set of rules that apply to all beneficiaries, regardless of individual attitudes or circumstances.

It is in this context that two opposing views of the problem of poverty persistently clash. One view sees the problem of poverty as a lack of income--caused by conditions over which low-income individuals have no control. The other view sees the problem of poverty as largely a problem of individual behavior which people, in principle, can cont role

In our own day, the former view is forcefully expressed by scholars such as Michael Harrington, Sar A. Levitan, Clifford M. Johnson, and John E.Schwartz. 14 The latter is eXfressed with equal vi~or by Warren Brookes, George Gilder and Charles Murray. 5

The argument that ?overty is caused by conditions over which low-income people have no control is not a new one. Nineteenth Century critics of the Elizabethan Poor Laws, such as Charles Dickens, Arnold Bennett and George Landsbury, repeatedly emphasized this view, and attacked the Poor Law system as inhumane. For example, of a visit to a workhouse for the poor, Landsbury once wrote:

l.3Robert Haveman, "How Much Have the Reagan Administration's Tax and Spending Pollcies Increased Work Effort?,1t in Charles R. Hulten and Isabell V. Sawhill, editors, The Le ac of Rea anomics: Pros ects for Lon -Term Growth, (Washington, D.C.: The Urban Institute Press, 1984. See also the analysis of this estimate in David Henderson, "Analyzing the Reagan Record," National Center for Policy Analysis, Policy Report 11114, October, 1984, pp. 9-12.

14Michael Harrington, The New American Poverty, (New York: Basic Books, 1984); Sar A. Levitan and Clifford M. Johnson, Beyond the Safety Net: Reviving the Promise of Opportunity in America, (Cambridge, Mass.: Ballinger Press, 1984); John E. Schwartz, America's Hidden Success: A Reassessment of Twenty Years of Public Policy (New York: Norton, 198.3).

15Charles Murray, Losing Ground; George Gilder, Wealth and Poverty; Warren T. Brookes, The Economy In Mind, (New York: Universe Books, 1982) Chapter 7.

7

Going down the narrow road, ringing the bell, waltlng while an official with a not-too-pleasant face looked through a grating to see who was there, and hearin~ his unpleasant voice ... made it easy for me to understand why the poor dreaded and hated these places •••• It was not necessary to write the words 'Abandon hope all ye who enter here' ••• everything possible was done to inflict mental and moral degradation •.• of goodwill, kindliness, there was none.l 6

On the other hand, there were other prominent people who devoted their lives to improving the plight of the poor, yet concluded that poverty was mainly the result of individual behavior. Charles S. Loch, secretary of the Charity Organization Society, one of the most important private charities in England at the turn of the century, wrote that "Want of employment in nine cases out of ten in which the plea is used is not the cause of distress. It is, as often as not, drink."17 In Loch's view, it was important that the conditions under which relief was given never be perceived as more desirable than the least appealing job opportunities in the labor market.

TWO VIEWS OF WELFARE

These two opposing views--poverty as the result of conditions over which people have no control, or poverty as the result of individual choice and behavior--have important implications for public policy.

In modern times, those who take the bureaucratic approach to the problem tend to define it in terms of people's financial condItion. Accordinl:)ly, the magnitude of the problem is "measured" by federal statisticians who attempt to count how many families have incomes which fall below the official poverty level. The solution to the problem is to t',ive families living in poverty enough money to raise their income levels above the poverty line.

It follows that the purpose of welfare is quite simple: To give away money. And, indeed, this is an apt way of describine, AFOC, the food stamp program, and other entitlement prot',rams. The bureaucrat s who run these programs are literally in the business of giving away money. By and large, the program administrators give lIttle thought to making positive changes in the behavior of their cHenteUe. And, defenders of the programs either minimize or ignore the negative behavioral consequences these programs create.

l6Quoted in Maurice Bruce, The Coming of the Welfare State (London: B.T. Batsford, 1961), p. 41.

17Quoted In Bentley B. Gilbert, The Evolution of National Insurance in Great B fit aim The Origins of the Welfare State (London: Michael Joseph, 1966) pp. 51-52.

8

Thus, Greg Duncan and Richard Coe argue that the U.S. welfare system serves as social safety net, which bives relief to people in need without encouraging long-term dependency.l8

By contrast, those who take a behavioral approach to the problem of ?overty see the U.S. welfare system as one which increasingly rewards bad behavior. Why do we have increasing poverty in America? To Charles Murray,the answer is stra1~htiorward: We have increasing poverty because we are paying people to be poor. 19

A lHmD VIEW OF WEI..FARE AND POVERTY

Which view is correct? It Is our position that neither view completely nor accurately describes the welfare-poverty crisis. It is true that some people are poor due to conditions over which they have little or no control. It is also t rue that other people are poor by choice. The correct way to depict the U.S. welfare system is by reco!;,nizing that the system gives relief to people in need, while at the same time encouraging per .... erse behavior.

This third view is depicted in Table I, based on estimates of the effects of welfare on poverty taken from the Gallaway-Vedder study. Even if one does not accept the precise estimates of the Gallaway-Vedder study, the evidence is overwhelming that the U.S. welfare system does both harm and good at the same time.

TABLE I

Two Views of Poverty

Problem

Bureaucratic Approach: Lack of Income

Behavioral Approach: Behavior

Solution

Provlde income and goods and services

Change behavior

18Greg J. Duncan and Rlchard D. Coe, "Welfare: Promoting Poverty or Progress?" The Wall Street Journal, May 15, 1985.

19Charles Murray, "Welfare: Promoting Poverty or Progress?" The Wall Street Journal, May 15, 1985.

9

Two Views of Public Welfare Programs

Activity Result

Bureaucratic Approach: Welfare increases Reduces poverty income

Behavioral Approach: Welfare rewards Increases poverty bad behavi or

A Third View of Welfare and Poverty

For the nation as a whole:

For states:

For individuals:

More welfare produces more poverty

In some states, more welfare produces more poverty. In other states, more welfare produces less poverty.

Welfare benefit s lead to I es s poverty among some individuals and more poverty among others.

LONG-TERM AND 3iORT - TERM POVERTY

In a fascinating study of the poverty population, Mary Jo Bane and David T. Ellwood of Harvard University found that there are striking differences among poor people with respect to the reasons why they become poor, how long they remain poor, and why and how they cease being poor. 20 It is precisely because of these differences that there are so many statistical generalizations about the poverty population which are seemingly cont radictory.

By way of analogy, Bane and Ellwood compare the poverty population to patients in a hospital. Looking at hospital admissions, one will see that the vast majority of people admitted into hospitals stay there for only short periods of time. Based on that observation, one might be tempted to conclude that there is no real problem of long-term hospitalization. That conclusion is wrong, however. Looking at the patients occupying hospital beds, on any given day, one wil1 see that a large portion of those beds are filled with the chronicaUy ill, whose hospital stays are very long. In other words the chronically ill account for a small fraction of hospital admissions, but they occupy a large fraction of hospital beds.

20Mary Jo Bane and David T. Ellwood, "SUpping Into and Out of Poverty: The Dynamics of Spei1s," unpublished manuscript, August, 1985.

10

A similar observation may be made about the "admission rate" of (non-elderly) poor people to the welfare rolls:21

• Among people who become poor at any point in time, 1+5 percent will be out of poverty within one year.

• Seventy percent will be out of poverty within three years.

• Only 12 percent will remain in poverty for ten years or more.

Statistics such as these are frequently quoted by apologists for the welfare state. Yet they are misleading, just as in the case of the chronically ill who fill a large portion of hospital beds.

• Among people who currently are poor, more than half will remain in poverty for 10 years or more. 22

• The average black chlld in poverty today will remain in poverty for almost two decades.23

Bane and Ellwood also discovered that even among the short-term poor, there are radical differences in the reasons for their poverty and in the methods that are used to bet out of poverty. In their own words, "The poverty popula­tion is extremely heterobeneous.n21+

These differences are important. Continuing with the hospit al analogy, no one in his right mind would recommend that the chronically ill be given the same medical treatment as the short-stay patient, or that all short-stay patients be diagnosed and treated in the same way, regardless of medical condition. Yet that is precisely the way the federal government runs the welfare st at e.

BOSTON AND DAllAS: A CASE SlUDy25

Further evidence of the difficulties in generalizing about the effects of welfare--even the effects of a fairly well-structured program like AFDC--can be appreciated by comparing welfare mothers in Dallas and Boston who lost thei r AFOC benefits as a result of program changes in 1981.

21 Ibid., p. 16.

22Ibid., p. 16.

23~., p. 25.

21+ Ibid.

25This section is based on An Evaluation of the 1981 AFOC Changes: Initial Analysis.

11

Differences in Benefits. In terms of welfare benefits, Massachusetts is one of the most liberal states in the count ry. Texas, by cont rast, ranks near the bottom of the 50 states in AFOC payment s and has a record that many would regard as stingy.

• The standard AFOC payment to a family of three in Boston in 1981 was more than three times greater than the payment in Dallas ($379 per month versus $116).

• In addition, the Boston AFOC mother had many more opportunities to exploit the entire welfare system.

To see how lucrative welfare benefits in Boston are, consider the case of a welfare mother as described by a reporter writino in the Boston Globe in 1975:

The mother is well-organized. She buys food stamps twice a month, refuses to live in a housing project, is a member of a community women's group at Catholic charities, and is studying for her high school diploma. Her bimonthly cash grant is $466; she gets a flat grant every three months of $142; and her monthly savings from food stamps amount to $86. Her cash income may be given as $599 monthly, or $7,138 a year. If she and her family spent the average amount paid personally for health care in this country (and the mother gets some psychiatric care), this would amount at full cost to an additional $1,750 in health care expenses. Since there are no financial restrictions for the family on the use of health care, and the mother is intelligent and knowledgeable, one may assume that full use of this opportunity is taken. The three older children go free of char6e to an alternative school which costs paying pupils $2,000 a year, and another child goes to a day care center whose cost for a paying child would be $1,000 a year. Cash income and free health and education services to thi s family thus amount to $16,023. The older children work summers, and I will not cost that out. The family pays no taxes, and need put nothing aside for savings, as the welfare department is committed to meeting its needs. A working head of family would have to earn at least $20,000 to match this standard of living. 26

Differences in Conditions. As Table II Shows, the characteristics of welfare mothers who lost their AFOC benefits in Dallas and Boston are quite different. Clearly the welfare mother in Dallas was in greater need.

• The Dallas mother had more children and younger children than her Boston counterpart.

• After AFOC payments were discontinued, the Boston mother was three times more likely than the Dallas mother to be above the poverty level, three times more likely to have private health insurance, and 38 percent less likely to turn to private charity for food.

26Cited in Anderson, Welfare, p. 36.

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Differences in Ability. There also were clear differences in abilities to compete in the labor market.

• Twenty-nine percent of the Boston mothers had some college education, compared to only 11 percent in Dallas.

• Surprisingly, 2.5 percent of the Boston mothers who lost AFOC payments had a college degree and 1.7 percent had a graduate degree.

• The Boston mother also showed greater ability to hold down a job Lor a longer period of time. Length of time with the current employer was twice as long in Boston as it was in Dallas.

Differences in Attitude Toward We11are. Interestingly, the Boston AFDC mother showed a greater propensity to accept welfare and take advantage of the welfare system.

• The Boston mother went on AFOC more quickly, stayed on it longer, and was more likely to have received other welfare benefits (such as housing subsidies).

• She also was more likely than the Dallas mother to have received AFDC as a child.

Differences in Labor Market Response. Among AFOC mothers who lost their benefits in 1981, the loss in Boston was more than twice the loss in Dallas. In addition, about 85 percent of the Boston women also lost food stamps, compared with only 42 percent in Dallas. Yet despite the greater loss of benefits in Boston, the welfare mothers there suffered much less economic dislocation than those in Dallas.

• Total income for Boston mothers declined only 12 percent.

• Total income for Dallas mothers declined 31 percent.

The difference stems from the fact that Boston mothers were more likely to recoup in the private marketplace income that they had lost from AFDC and food stamps.

• Boston mothers increased the hours they worked, earned more per hour, and, on average, increased their monthly earnings by 25 percent.

• Thirty-five percent of Boston mothers actually had more total income after they lost their AFOC benefits than they had before.

• By contrast, in Dallas (with a lower unemplo}'ment rate than Boston) there was, on the average, virtually no increase in hours worked, and only a six percent increase in monthly earnings.

It appears, then, that Boston's liberal welfare benefits, doled out to people who were not all that needy, were discouraging productive work, and that removing these benefits spurred them to increase their work effort. By

contrast, in Dallas, where AFOC mothers had a greater need and less ability to compete in the marketplace, welfare benefits had only a moderately discouraging effect.

Differences in Response to Household Size. A very different story emerges when we look at the effects of welfare on the family.

• In Boston, five percent of welfare mothers increased their households by at least one adult.

• By contrast, 22 percent of Dallas mothers increased their households by at least one adult.

It appears that welfare's effect on the family is greatest where it makes the greatest financial difference.

Differences in Response to the Welfare Option. Finally, if given the choice between working and receiving no welfare or not working and becoming dependent on the dole, how do welfare mothers respond?

• In Boston, 11 percent returned to AFOC (usually after ceasing employ­ment), whereas in Dallas the percentage was twice as high.

• Moreover, of those who returned to AFOC, the length of time on welfare was much shorter in Boston than in Dallas.

It appears that the more lucrative the private marketplace options, the more likely that work will be chosen over welfare.

The comparison of these two cities, then, underscores the difficulty in making generalizations about the nation's welfare system. Even beneralizations about a single city are hazardous. In Dallas, for example, 24 percent of welfare mothers who lost AFOC benefit s had real incomes just as high or higher than they had when they were receiving benefits and, thus, suffered no enduring economic hardship.

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TABLE II

Loss of Welfare Benefits: Effects on Welfare Mothers

(Two years after loss of benefits)

Loss of Welfare Benefits

Monthly AFDC Payment Lost

Percent also losing food stamp benefits

Characteristics of AFOC Mothers

At least some coLlege education

Family size (number of people)

Percent with children under six years-old

In public housing or receiving housing subsidy

Number of years since receving first AFDC payment

Number of years between birth of first chHd and AFDC coverage

Percent who received AFDC as a child

Number of years with current employer

Economic Well Being After Loss of Benefits

Boston

$156

85%

29%

2.8

33%

56%

8 .5

4 .6

19%

.3 • 4

Average change in total income - 12%

Percent whose income was just as high or higher than when on welfare 43%

Percent whose total income actually increased 35%

Percent with household income above poverty level 66%

Percent with private health insurance policy 49%

Percent with no health insurance of any kind 28%

Effects of Loss of Benefits on Work

Increase in hours worKed per week 2.2

1.5

Dallas

$ 7 1

42%

1 1 %

3.1+

52%

43%

6 • 1

5 • .3

16%

1.7

-31 %

249&

21%

1 S%

16%

59%

o

Increase in hourly wage

Increase in monthly earnlngs

Percentage increase in monthly earnings

Other Responses to Loss of Benefits

Turned to private charity for food

Increased household size

Returned to AFOC (usually aft er ending employment)

$.85

$176

25%

1.5%

5%

11 %

$.27

$ 36

6%

24%

22%

22%

Source: An Evaluation of the 1981 AFOC Changes: Initial Analyses, General Accounting Office, April 2, 1984. Although a final report, An Evaluation of the 1981 AFOC Changes: Final Report was released by the G.A.O. on June 2, 1985, some of the computer data for the Boston site were unavailable. However, those numbers which were available support the general conclusions discussed above.

OiARACIERISTICS OF A GOOD WELFARE. SYS1'EM

In their classic study, "Paying People to be Poor," Gallaway and Vedder make a simple, but profound observation: We cannot give aid without affecting behavior. Furthermore, the more aid we give, the greater the likelihood of changing behavior in a perverse way.

The GAO study and the Bane and Ellwood study have an equally simple, yet profound implication: People are different. The welfare population of one city can differ in remarkable ways from the welfare population of another. Even within a city, the response of one group can differ remarkably from the response of another group. Carried to its logical conclusion, the point is: Within the welfare population there are remarkable differences among individuals, with respect to their circumstance and their personal responses to incentives.

These two findings have devastating implications for po1icymakers. What the findings mean is that it is almost impossible to design, at the federal level, a welfare system that accomplishes what most people want from public charity.

What is it that most people want in terms of an effective, responsible welfare system? The following guidelines probably would command widespread support:

1. The system should be guided by the philosophy that most people can and should take responsibility for supporting themselves and their families. In

16

the absence of physical or mental impairment, individuals should perceive that society expects them to support themselves and their families.

2. Aid should be given first to people who need it most. Since there always will be a limit to the number of welfare dollars available to spend, the people in greatest need should be given the hibhest priority.

3. Aid should be given in a way that encourages independence and seJf­reliance. Since the very act of giving relief encourages dependence, procedures should be adopted to create positive incentives for self- sufflci ency.

4. The welfare system should not encourage the break-up of the family. Family members should never find it in their economic self-interest to dissolve the faml1y unit.

5. Short-term help should be available to many; long-term help should be reserved for a few. A humane welfare system is one which readily provides temporary and emergency help to those in need, while a responsible welfare system is one which provides permanent aid to only the very few who cannot support themselves.

6. The goals of the welfare system should be achieved at the mlrumum cost. As with every other social goal, it is in our self-interest to find the most cost-effective ways of operating the welfare system based on these principles.

PUBLIC SECTOR FAIWRE/PRIVAlE SEcrOR SUCCESS

Although volumes have been written about the failures of government welfare programs, the academic and scholarly community has paid surprisinl;ly little attention -to private sector charity.

The private sector is playing an extremely important role:

• In 1984 total charitable contributions reached $74.25 billion, with contributions by individuals accounting for 83 percent ($61.55 billion) of that total.27

• More than 85 percent of all adult Americans make some charit able contribution each year. 28

27Giving U.S.A.: 1985 Annual Report, The American Association of Fund-Raising Counsel, Inc., 198.5, p. 7.

28Taken from a 1983 Gallup Poll.

17

• Almost half of aU adults (47 percent) volunteer their time to charitable causes--an average of three hours per week per person. 29

• The dollar value of these contributions of time is at least $65 billion.30

• If the value of volunteer labor is included, private sector contribu­tions to charitable causes exceed the poverty budgets of federal, state and local governments combined.31

In this section we contrast some of our best private charities with federal welfare programs in terms of the characteristics of an ideal welfare system.

1. The Nature of Charity: Entitlements vs. Gifts

Rules vs. Discretion. Entitlement programs for welfare are structured so that benefits are granted solely on the basis of personal circumstances. Applicants do not have to give the reasons for their circumstances, nor are they required to explain how they plan to change them in the future. They don't even have to show a willingness to Change. In the AFDC pro!:,ram, for example, the requirements for eligibility essentially amount to: (1) low income, (2) very few assets, (3) dependent children, and (4) no man in the household. Anyone satisfying these requirement s is entitled to benefits. :\nd the word entitlement means llright"--benefits cannot be withdrawn simply because the recipient refuses to modify behavior.

The philosophy of the private sector is quite different. Because of the emphasis on a behavioral approach to the problem of poverty, our best private charities do not view the giving of assistance as a "duty" or the receipt of assistance as a "rie;ht." Instead, charitable assistance is viewed as a tool which can be used intelligently, not only to provide relief but to change behavior. At many privat e charities, for example, the level of assi st ance varies considerably from individual to individual. Private agencies usually reserve the ribht to reduce the level of assistance, or withdraw assistance altogether if recipients do not show behavioral changes.

29Ibld.

3OIbld.

31This is total spending on means-tested programs. See Vee Burke, "Cash and Non-Cash Benefits for Persons with l.imited Income: Eligibility Rules, Recipient and Expenditure Data, FY 1982-84," Congressional Research Source Report No. 85-194 EPW, September 30, 1985.

18

Many private charities require that a caseworker and a recIpIent of aid establish a plan designed to move the recipient to a condition of self-sufficiency. For example,

• At Jessie's House, a transitional home for the homeless in Hampton, Massachusetts, shelter beyond a week's stay is contingent upon positive evidence of individual improvement.30

• At the Dallas Salvation Army, caseworkers are not significantly bound to granting a minimum or a maximum level of assist ance. Aid varies according to the caseworker s evaluation of the recipient's condition and record of behavioral improvement.31

Whose Preferences Count? 'Whether receipt of welfare is viewed as a "right" or a "privilege" is at one level an ethical and philosophical question. At another level, the question has profound implications for how our society is going to function. Under entitlement programs, recipients and potential recipients of aid have full freedom to exercise their preferences at will. In many cases, they can choose poverty over non-poverty. Once this choice is made, the rest of society is presented with a welfare bill which it is obligated to pay. Thus, in a sense, under entitlement programs the preferences of the recipients determine the behavior (in terms of the tax burden) of those who pay the bills.

The philosophy of the private sector is quite different. In (:;eneral, private agencies view the preferences of those who pay the bills as the the standard, and the recipients are expected to change their behavior to satisfy the 6lvers. In other words, under the private sector approach, welfare recipients must adjust their behavior to the preferences of the rest of society, not the other way around.

Hands-on Management At Work. If we accept the view that individuals should take responsibility for supporting themselves and their families, and that welfare assistance should be administered in a way that encourages rather than discourages this behavioral ideal, then it follows that the approach of our best private charities is far superior to the approach of entitlement programs. Because individuals differ, and because individual circumstances differ, it is only through a program of "hands-on-management" of charitable giving that we can give rellef without at the same time encouraging anti- social behavior •

.3OThe U.S. Department of Health and Human Services, Helping the Homeless: A Resource Guide, (Washington, D.C.: 1984) p. 115.

31lnterviews with Dallas Salvation Army social services program administrators and di rect ors.

19

"Hands-on-management" means t aHoring aid to meet individual needs and individual circumstances. For example, take the St. Louis Salvation Army's transitional housing project. The program is administered in four stages:32

• Stage One: The crisis stage, when a family is provided with immediate, temporary shelter.

• Stage Two: The stabilization stage, when the family is provided psychological support and counseling.

• Stage Three: The relocation stage, when the family is assisted in finding a new, permanent dwelling or returned to their old dwelling after resolving the initial crisis.

• Stage Four: The follow-up stage, when the family is assisted in adjusting to their new environment.

This form of support, counseling and follow-up services is virtually unheard of in federal welfare programs, whose administrators have the job of giving away money, not assisting people with personal or family problems. Indeed, when public welfare recipients request counseling from the bureaucracy, they frequently are referred to private sector agencies to get it.

2. Getting Aid to Those Who Need it Most

A basic principJe of the American philosophy of government is that we turn to government only as a last resort. In other words, it is generally assumed that the role of government is to do those socially desirable things that the private sector either will not or cannot do.

Ironically, in the field of social welfare this philosophy has been turned on its head. In the early years of the War on Poverty, it was thou):,ht that federal welfare programs were designed to provide a social safety net--to provide services which the private sector, for one reason or another, had failed to provide. Yet it is becoming obvious that just the opposite has become the case--increasingly it is the private sector that is providing the social safety net by reaching people who government fails to reach and by providing the essentiaJ services that government welfare programs fail to provide.

If a humane welfare system means anything at all, it means getting aid first to people who need it most. One of the most astoniShing and little-known facts about the welfare state is what a miserable job it does in pursuing this goal. Consider that:33

32Helping the Homeless: A Resource Guide, p. 93.

33Census Bureau, Characteristics of Households and Persons Receiving Selected Noncash Benefits: 19&3 (Washington, D.C.: U.S. Department of Commerce, 1985) Series P-60, No. 148, pp. 1-5 and p. 103.

20

• Only 41 percent of all poverty families receive food stamps. Yet 28 percent of food-stamp families have incomes above the poverty level.

• Only 23 percent of all poverty families live in public housing or receive subsidized housing benefit s. Yet almost half of the families receiving housing benefits are not poor.

• Only 40 percent of all poverty families are covered by Medicaid. Yet 40 percent of all Medicaid beneficiaries are not poor.

• Amazingly, 41 percent of all poverty families receive no means-tested benefit of any kind from government. Yet more than half of all families who do receive at least one means-tested benefit are not poor.

Where do people in need turn for help when they aren't betting g,overnment assistance? They turn to private charities.34

• Ninety-four percent of all shelters for the homeless in the U.S. are operated by churches, synagogues, non-religious groups, and other voluntary organizations.

• Only six percent are operat ed by city and county government s.

The private sector also is very heavily involved in emergency food distri­bution • .35

• The Second Harvest network (comprising 79 of more than JOO food banks in the U.S.) distributes about liS million pounds of food each year, worth about $ 78 million.

• This food is donated by the food industry and by private donors; about 40 percent of it goes to food centers pat ronized by the homeless.

Several studies of low-income families confirm the fact that when ?eople get in trouble, they turn to the private sector first. J6

• A study in Detroit found that 80 percent of low-income people, when faced with a crisis, turned to individuals and agencies within their own neighborhood, rather than to government agencies for help.

34S. Anna Kondratas, "A Strategy For Helpinf, America's Homeless," (Washington, D.C.: The Heritage Foundation, 1985) p. 10.

35Ibid.

36See Robert Woodson, liThe Importance of Neighborhood Organizations in \1eeting Human Needs," in Jack A. Meyer, ed., Meeting Human Needs: Toward a New Public Philosophy, (Washington, D.C.: American Enterprise Institute, 1984), p. 1.36.

21

• Similar findings were reported in a study conducted by the University of Southern California •

.3. Providing Relief Without Encouraging Dependency

A major issue in the welfare-poverty industry is whether the recIpIent of aid should have to "do anything" in order to qualify for continued receipt of welfare benefit s. Nowhere is the cont roversy more evident than with respect to the issue of workfare.

Throughout the 1970s there was a continuous political battle at the national level over whether workfare should be tied to welfare. A fascinating account of the politics of this battle has been written by Lawrence M. Mead, who has documented the great lengths to which the welfare bureaucracy lobbied against any workfare requirements. 37 It appeared the welfare bureaucracy lost the battle when Congress passed the Work Incentive (WIN) program and the Community Work Experience Program (CWEP). However, because it administers these two programs, the bureaucracy which lost the battle won the war.38

• In the WIN program, only 20 percent of adult AFOC recipients were found by the welfare bureaucracy to be suitable for workfare. Most of these adults went into training or school activities rather than into job positions. Only two percent actually entered jobs.

• In the CWEP program, only 39 percent of adult AFOC recipients were found by the welfare bureaucracy to be suit able for workfare, and only seven percent participated regularly.

As we have previously noted, the attitude of our best private charities is quite the opposite. These agencies see independence and self-sufficiency on U"le part of their "clientsll as one of their primary 60als. Often this goal is accomplished either by encouraging or requiring the recipients of aid to contribute their labor to the agency itself.

• At Mer111ac House, an emergency food and assistance organization in Chicago, unemployed adults with no dependents must contribute time and services toward program operations after receiving assistance. 39

37Lawrence M. Mead, Beyond Entitlement, (New York: The Free Press, 1936).

38Ibid., pp. 122, 12.5. For a summary of workfare programs currently underway see S. Anna Kondratas "The Political Economy of Work-For- Welfare," (Washingt on, D.C.: American Legislative Exchange Council, 1986). Kondratas 6ives these programs a mixed review and concludes that many of the favorable claims made about certain workfare programs, including the Massachusetts program, cannot be verified •

.39Helping the Homeless: A Resource Guide, p. 17.

22

• At the Good Shepherd Ministry, a low-cost restaurant, soup kitchen and food bank in Auburn, Maine, recipients assist with cooking, serY'ing, truck driving and other tasks--many of which provide valuable job training.40

4. Encouraging the Family Unit Rather Than Encouraging Its Dissolution

The attitude toward family on the part of private sector charities usually stands in stark contrast to the incentives built into federal programs.

• AFOC eligibility rules in nearly half of the states do not allow families with a father who is employed to receive assistance, regard­less of how low the family income is. In the other half of the states, the family is ineligible if the father is present at all, regardless of employment.41

• By contrast, at the Dallas Salvation Army shelter for battered and abused women, the mothers of young children are requi red to either work with professionals to repair their relationship with their husbands, or find employment in order to receive continued assist­ance.42

.s. Temporary YS. Long-Term Relief

A prevalent philosophy in the private sector is that most people are fuJly capable of taking responsibility for their lives in the long-term, but that emergencies and crises occur in which help is both necessary and desirable. As a consequence, private sector agencies make it surprisingly easy for recipients to obtain emergency relief. It really is true that in America, almost anybody can get a free lunch.

The almost universal characteristic of the private sector is: It's easy to get on welfare, but hard to stay there. Most government programs, by contrast, have the opposite characteristic: It's hard to get on welfare, but once on it, it's easy to stay there.

In the public sector, there are often long waiting times between applying for assistance and receiving aid.

• In Texas, the waiting period is typicaJly two to three weeks for food stamps.43

40lnterviews with Good Shepherd Ministry administrators.

41 Vee Burke, "Cash and Noncash Benefit s for Persons With Limited Income," p. 52.

42Dallas Salvation Army interviews.

43Interviews with Texas Department of Human Services administrators.

23

• For AFDC, the waiting period is typically a month after the completion of filling out complicated and cumbersome application forms. 44

• The Dallas Salvation Army has had to hire a special staff to decifer public welfare regulations and forms so they can adequately refer people who come to them to the proper public agencies.45

Once accepted into the public welfare system, however, it is relatively easy to stay there for a long time:46

• Of all women who receive welfare in any given year, about 60 percent will receive welfare the next year.

• Among women receiving welfare for two consecutive years, about 70 percent receive it a third year.

• Among women receiving welfare for four consecutive years, about SO percent receive it a fifth year.

• At anyone time, about one-half of the mothers recelVlng AFDC will continue to receive or wlU have received assistance for a period of eibht years or more.47

6. Minimizing the Cost of Giving

There is considerable evidence that privat e sect or charity makes far more efficient use of resources than do public welfare proorams. Consider some of the ways private charities hold down costs:

Requiring Evidence of Need. Although temporary relief in the form of food or shelter is fairly easy to obtain frorn private abencies, long-term assistance or assistance in the form of cash is far more difficult. For example,4S

• Before the Dallas Salvation Army will provide cash to help people defray the cost of rent, recipients are required to present a court-ordered eviction notice showing failure to pay rent.

44lbid.

45Dallas Salvation Army interviews.

46Martin Rein and Lee Rainwater, "Patterns of Welfare Use," Social Service Review, No. 52, pp. 511-534, cited in Greg Duncan, Years of Poverty, Years of Plenty, (Ann Arbor, Michigan: Institute for Social Research) p. 73.

~7Duncan, Years of Poverty, Years of Plenty, Table 3.1, p. 75.

48Dallas Salvation Army interviews.

2~

• Similarly, before financial aid to defray the costs of utilities is given, the recipient is required to present a notice of termination of service for failure to pay their utility bills.

Checking Other Sources of Support. Even when there is evidence of need, good private charities often seek to determine whether the potential recipient has access to other, untapped sources .of assistance. For example,49

• Before the Dallas Salvation Army will provide continuing assistance to an indlvidual, a caseworker informs the famlly--including in-laws--and requests assistance from them first.

• The caseworker also makes sure the individual applies for aU other public and private aid for which he or she is eligible before continued assistance is provided.

These procedures stand in stark contrast to those followed under the food stamp program, AFOC and Medicaid. Indeed, most states could sionificantly cut their Medicaid expenditures by followinb precisely the same procedures as those followed by the Salvation Army:

• Under current law, Medicaid is supposed to be the payer of last resort--paying only those medical bills not covered by private health insurance or by Medicare.

• Yet in most states there is no routine procedure for making sure that all claims against private health insurance and Medicare have been filed before Medicaid funds are granted.50

Private sector agencies appear to be much more adept at avoidinb unnecessary spending that does not benefit the truly needy. Consider the amount of waste in public sector charities:51

• In 1981, improper payments in the AFOC, food stamp and \\edicaid programs reached $3.5 billion.

• In the food stamp program alone, about one in every 10 dollars was spent on overpayments or payment s to ineligible families.

49Dallas Salvation Army interviews.

50In 1981 alone, $500 million dollars of private health insurance benefit 5

for Medicaid patients went uncollected. See Kenneth W. Clarkson, "The Safety Net From the Reagan Administration's Perspective," in John C. Weicher, ed., Maintainin the Safet Net: Income Redistribution Pro rams in the Rea an Administration, Washington, D.C.: American Enterprise Institute, 1934), p. 173.

51 Ibid.

25

• In 1980, improper spending in the school lunch program was as high as $500 million dollars.

Using Volunteer Labor. Private charities also keep program costs down by utilizing volunteer labor.

• At Jessie's House in Massachusetts, one third of the personnel costs and 70 percent of the food costs are donated by volunteers. The organization utilizes some 400 hours of volunteer labor per month.52

• A study of nonprofit charities in the Twin Cities Minnesota area found that the avera5e human services organization, with a budget of $664,500, had 19 full-time employees; 13 part-time employees, and 60 volunteers.53

• The study concluded that if all of the volunteers utilized by these Twin Cities organizations were paid the minimum wage, the total worth of this labor would be $3.2 miIIion.

An interesting comparison of the use of volunteer labor in public and private sector programs exists in Dallas and the surrounding area:

• In 1985, the private, nonprofit Volunteer Connection placed more than 38,000 volunteers in programs and projects in the Dallas metropolitan area.54

• Over the same period, the Texas Department of Human Resources, Region 5 (covering Dallas and 18 other counties) placed only 7,000 volunteers.55

The number of people actually volunteering through the state agency is only an estimat e. Whereas the private agency employs a staif of seven ful1-time employees and a computer system to keep an accurate account of/olunteer placements, the state program, by contrast, is run by only one full-time coordinator working with a volunteer secretary. The state coordinator frequently learns of volunteer work only after receiving monthly reports submitted by the various agencies and programs. Unfortunately, there is no consistent method of reporting that is followed by all agencies.

52Helping the Homeless: A Resource Guide, p. 128.

53Barbara Lukermann, Madeline Kimmich, and Lester M. Salamon, The Twin Cities Non rofit Sector in a Time of Government Retrenchment (Washington, D.C.: The

rban Institut e Press, 1985 pp. 22, 27 •

.54lnterviews with the Volunteer Connection, Dallas, Texas.

55Interviews with the volunteer coordinator, Texas Department of Human Resources, Region 5.

26

From what data that is avallable, however, we were able to learn the foIl owl ng:56

• About one-third of the volunteers "coordinated" through the state program are actually working in private sector agencies.

• Less than 1/5 of one percent of the volunteers "coordinated" through the state agency choose to work in the AFOC or food stamp programs.

Using Donated Goods-in-Kind. Another way in which private charities hold down the costs of their operations is by using donat ed goods-In-kind. For example:57

• Operation Food Search in St. Louis provides about $& million worth of food annually to local food banks and soup kitchens at a cost of only 1.5 cents per pound.

• Most of the food consists of slightly damaged canned boods, slightly out-of-date food stuffs, or rejected but otherwise usable bulk foods that commercia! food producers would have thrown away.

Other Evidence of Efficiency. Private sector charitable activities are diverse and widespread in cities and counties throughout the country. Our knowledge of these activities is skimpy. However, as more research is done the evidence mount s that in area after area, the privat e sector out-performs government:

• Private foster care agencies have shown they can out-perform govern­ment agencies.58

• Private at;encies engaged in job training for teenagers59 and for the mentally and physlcally handlcapped60 have shown they can out-perform government agencies.

56Ibid.

57Compiled from material provided by Operation Food Search, 325 N. Newstead, St. Loui s, Mo. 6310&.

58Robert Woodson, "Child Welfare Pollcy" in Meeting Human Needs, pp. 455-465.

59Sean Sullivan, "Youth Employment" in Meeting Human Needs, pp. 215-257.

roy. Ruth McKinnon, Patricia W. Samors, and Sean Sullivan, "Business Initiatives in the Private Sector" in Meeting Human Needs, pp. 53-91.

27

• Public housing placed in the hands of tenants costs less and is of higher quality than when owned and maintained by government.6l

• Private sector crime prevention programs,62 alcohol and drug abuse programs63 and neighborhood preservation programs64 also have proved to be superior to public sect or programs.

niE ArrACK ON PRIVATE OiARITY

Despite the fact that our nation's best private charities out-perform federal welfare programs by a number of criteria, both the magnitude of private charitable giving and the vitality and diversity of private sector Q5encies are severely threatened by government policies. The threat comes from three directions: (1) Tax reform legislation now pending before Congress threatens to reduce private charitable giving to programs that work in order to secure increased funding for federal welfare programs that don't work. (2) Federal subsidies to private sector agencies threaten to allow the system that doesn't work to exercise increasing domination and control over programs that do work. (3) Increased funding of federal welfare programs has led to. reduced private giving in the past and threatens to continue to do so in the future.

1liE TIiREA T fROM TAX REFORM

Few would deny that there is an urgent need to reform our federal income tax system. Some reforms promise great benefit s for the economy as a whole. However, changing the tax code will have a severe and adverse Impact on private giving.

• Nearly 83 percent of contributions to charitable organizations are made by individuals, rather than by corporations or foundations. 65

61"The Grass is Greener in Public Housing: From Tenant to Resident to Home­owner," A report submitted to the U.S. Department of Housing and Urban Develop­ment by the National Center for Neighborhood Enterprise, Washington, D.C. Octo­ber, 1984.

62McKinnon, Samors, and Sullivan, "Business Initiatives in the Private Sector," in Meeting Human Needs, pp. 53-91.

63Andrea M. Haines, V. Ruth McKinnon, and Pat ricia W. Samors, "Social Service Programs in the Public and Private Sectors," in Meeting Human Needs, pp. 421-454.

64Ibid.

65Giving U.S.A.: 1985 Annual Report, p. 7.

28

• Tax reforms now being considered by Congress threaten to have a major impact on biving by individuals.

In what follows, we briefly analyze some major tax reforms currently being considered.

Reducing Mar&inal Tax Rates. When the highest tax bracket is 50 percent, the "cost" of giving a dollar to charity for a high-income individual is 50 cents. This is because one-half of the gift is money that otherwise would have gone to government in the form of taxes. Lowering the highest maq;inal tax rate from 50 percent to 25 percent, raises the "cost" of giving from 50 cents to 75 cents. In other words, it becomes more expensive for individuals to give to charities. In this way, lowering marginal tax rat es discourages private donations to charity, despite its other beneficial economic effects.

Limiting Deductions for Charitable Contributions to Two Percent of Income. Such a change would limit the tax advantage of making charitable contribu­tions. Those who are more philanthropic would be more heavily taxed than they are under current law.

Establishing a Deduction Floor for Non-Itemizers. This means that t axpay­ers who do not itemize on their tax returns would be allowed to deduct contri­butions only in excess of a minimum amount. In the House of Representatives tax reform package, the floor was set at $100. The effect of this reform would be to discouraGe giving. According to one estimat e:66

• If a $100 tax floor were imposed on non-itemizers, private charities would lose $1 • .38 for every $1.00 gained by the U.S. Treasury.

• Private charities would lose about $5.8 billion in annual contri­butions.

Experience with similar "floors" in the tax code shows that Congress tends to raise them over time.67

• A doubling of a $100 tax floor on charitable deductions would increase the loss to private charities by 500 percent.

• Increasing the floor to $.300 would increase the loss by 800 percent.

66Calcu!ations by Lawrence Lindsey of Harvard University, reported by the Independent Sector.

67lbid.

29

This reform would have its primary effect on low to moderate income families. Of all private giving in 1981, one-third came from families with incomes of less than $20,000.68

Disallowing the Deduct ability of the Full Market Value of Gifts of Appreciated Property_ Currently, taxpayers can make gifts of property which has appreciated in value, and take a deduction equal to the market value of the property without paying a capital gains tax. That practice would be ended if the House version of the tax reform is adopted. The evidence suggests that:

• This would cause a loss to private charities of $1.33 for every additional doUar of tax collected by the U.S. Treasury.69

• The total loss to private charities would be $570 million. 70

• Two-thirds of this loss would be the result of families earning more than $100,000 giving 3D percent less. 71

TABLE III Individual Charitable Giving Under Tax Refonn

Tax Policy

Current Law

Treasury I Proposal

Treasury II Proposal

House Proposal

Senat e Proposal

Senate Proposal II (Packwood Plan)

Level of Giving in .198.5

(billions)

$65.7

51.3

54.8

62.5

62.4

53.7

Percent Reduction

0

-22.0%

-17.0%

-4.6%

-4.9%

-18.3%

Source: Figures provided by Independent Sector, based on calculations by Lawrence Lindsey of Harvard Univerity.

68Charitable Giving and the Federal Tax Laws: Preserving a Vital Partnership for Public Purposes, Independent Sector, 1985, p. 4.

69Based on calculations by Martin Feldstein of Harvard University, Ibid., p. 12.

70Calculated by Lawrence Lindsey as reported by the Independent Sector.

7llbid.

30

'ME 1HR.EAT fROM GOVERNMENT SUBSIDIES TO PRIVATE SECTOR AGEl"CIES

It is not generally reallzed that to an astonishing degree, private, nonprofit organizations are turning to government--especial1y the federal government--as a source of funds. 72

• About.38 percent of the revenues of aU nonprofit institutions (excluding hospitals and higher education institutions) now comes from the government.

• Among private social welfare agencies, 54 percent of all revenues come from government.

The danger in this trend is that the entity that has failed so miserably in administering its own welfare programs will come to dominate and control the agencies that administer programs that work. For example, it is not uncommon to find private agencies that are heavily dependent on government fundS providing services almost exclusively to AFOC recipients. What this means in practice is that the private agencies have accepted the federal government's definition and conception of who is in need and who should be helped.

There is evidence that administrators of private, nonprofit or6anizations are increasingly aware of the dangers of becoming financially dependent on government.7.3-

• In a recent poll of private sector agencies in the Twin Cities, Minnesota area, 46 percent of administrators said the agencies have become too dependent on the &overnment for funds.

• Eighteen percent said that receiving federal funds caused a signifi­cant distortion in the activities and objectives of their organiza­tions.

Another danger in government subsidies to private sector organizations is the political aspect of this giving. Since government by nature is polltical it is not surprising that federal dollars often are allocated to achieve political goals, rather than broad-based social goals. In Destroying Democracy, James Bennett and Thomas DiLorenzo documented how billions of dollars in federal grants (purportedly made to fight poverty, improve the

72Lester M. Salamon, James C. Musselwhite, Jr., and Carol J. DeVita, "Partners in Public Service: Government and the Non-Profit Sector in the American Welfare State," presentation given at an Independent Sector Forum March, 1936.

73The Twin Cities Nonprofit Sector in a Time of Government Retrenchment, p. 37 •

.31

community, etc.) were, in fact, being used to support blatantly political actlvlties.74

For example, federal grants made to friends and associates of Tom Hayden and Jane Fonda include the following: 75

• A $126,000 U.S. Department of Labor brant was used in part to pay the salaries of rent cont rol lobbyists.

• A $335,000 Justice Department grant intended to promote crime prevention was used to pursue social and political .soals such as fighting tenant eviction and lobbying for rent control.

• A $200,000 VISTA grant was used to fund a training camp for political activists and community organizers.

mE 1liR.EA T OF (l"{OWOING OUT PRIVATE CMNG

There is growing evidence that private sector willingness to contribute to social welfare activities is conditioned by what the federal (;;overnment is doing, or at least by what it is perceived to be doing by the private sector.76

• Since 1955, charitable contributions by individuals have ranged between 2.5 and 3.0 percent of disposable income.

• Yet the percent of income contributed to social welfare activities consistently declined between 1955 and 1980.

• In 1980, the percent of income which individuals contributed to social welfare activities was less than half of what it was in 1955.

A similar trend exists for all sources of private giving (includinE, corporations and foundations).77

• In 1955, 22 percent of alJ private charitable contributions went to social welfare activities.

74James T. Bennett and Thomas J. DiLorenzo, Destroying Democracy, (Washington, D.C.: The Cato Institute, 1985).

75Bennett, DiLorenzo, Destroying Democracy, Table A4.l, pp. 407-409. See also Chapter 4.

76Burton A. Abrams and Mark Schmitz., "The CrOWding-Out Effect of Governmental Transfers on Private Charitable Contributions: Cross Section Evidence," National Tax Journal, Vol. 37, No.4, Table I, p. 564.

77Civing USA, 1985, p. 44.

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• By 1983, that fisure had dropped to lJ percent.

This decline in private contributions to social welfare agencies appears to be in response to a marked increase in g,overnment welfare spending. In other words, the more the government became involved in anti-poverty activities, the more the private sector retrenched. As the welfare state has expanded, the public has responded by giving a larc;er percent of its charitable contributions to other activities: schools, hospitals, art and cultural activities, and various other civic and public programs.

The expanding welfare state is literally crowding the private sector out of the market. According to one study:78

• A 10 percent increase in social welfare spending by government leads to a reduction of $27, on the average, in private contributions by taxpayers who itemize on their tax returns.

• Overall, each additional dollar of social welfare spendinl!, by 60vern­ment leads to a 30 cent reduction in private contributions.

This trend is an unhealthy one. It urgently needs to be reversed.

CltEATING A MARKET FOR niE "BUSINESS" OF OiARITY

Why should government be involved in the business of Charity in the first place? The traditional economic argument is that spending money for the relief of poverty has social effects that extend beyond the interest of the individual giver. Thus, giving to charity is different in principle from the act of buying a loaf of bread. The purchaser of the loaf of bread enjoys the full benefits of his purchase when he consumes the product. Yet a gift to charity benefits not only the giver, but also everyone else in society who has an interest in (and gets personal satisfaction from) the charitable objective. As a result, indIviduals, given complete freedom of choice, will give too little to charity. They will do so because when making choices about how much to .:;ive they will consider only their individual, private benefit from the gift, and ignore the soci al benefit s creat ed for others. Put another way, given freedom of choice, people will try to become "free riders" on the charitable gift s of others and fail to contribute their "fair share."

These are the theoretical arguments behind government coercion--for requiring people to give a certain portion of their incomes for the relief of poverty. They are arguments that, in one form or another, most people accept.

However, it does not follow that because of these argument s the government should nationalize the charity industr},. Government requires licensed drivers to carry automobile liability insurance, but few would argue that it is

78Abrams and Schmitz, "The Crowding-Out Effect," p. 566.

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necessary or desirable for the government to nationalize the automobile liability insurance industry.

As it happens, however, government has assumed the role of a public monopoly in the welfare industry. It has put itself in the position of being the exclusive recipient of charitable contributions taken by coercion (throu;:;,h the tax system) and of having sole discretion over how these dollars are spent.

This is unfortunate, because the most serious defects of the American system of public charity all stem from the fact that it has been monopolized by government. In the fIrst place, under the government's monopoly the dollars almost never go where the givers would have preferred them to go. Although voluntary gifts totaling 574 billion are made each year by the pri'/ate sector.79 whoever heard of anyone voluntarily giving money to the AFDC or food stamp programs? Furthermore, when spending decisions are made through the political process, it is inevitable that powerfully organized special interests have considerable influence over how the dollars are spent. Thus, it is no accident that more than two-thirds of federal welfare spending ultimately ends up in the pockets of people who are distinctly not poor. Medicaid dollars go to doctors and hospitals; food stamp dollars go to the agricultural industry; housing subsidies go to landlords; and legal service dollars go to lawyers. Finally, precisely because it faces no competition in the marketplace, the public charity monopoly can continue to spend money in wasteful and inefficient ways, to fail miserably in achieving its objectives, and to misbehave in other ways without fear of losing customers to a competitor.

To remedy these defects, public sector charity must be denationalized.

Proposal A: Competition and Choice

The basic idea of privatizing public charity is a simple one. Government would continue to force people to give their "fair share" throul,:;h the vehicle of the income tax system. However, individual taxpayers, rather than politicians, would decide how their share of the welfare bill would be spent. In other words, taxpayers would be free to allocate their welfare tax dollars to any qualified private charity. In this way private charities would compete on an equal footing with government welfare programs for the portion of the federal budget that is allocat ed to poverty programs. Furthermore, there would be free and open entry into the market: Anyone could start a private charity and be eligible for "tax dollar contributions," provided the charity had a social welfare purpose and satisfied certain other minimal requirements.

Proposal A involves partial privatization of public charity. Under the proposal, individuals would be able to allocate up to 10 percent of their personal federal income taxes to qualified private charities. These ;ifts could be made directly to the private charities, and then deducted from taxes owed on their income tax returns. Alternatively, individuals would have the

79Giving U.S.A.: 1985 Annual Report, p. 7.

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opportunity to instruct the U.S. Treasury (on their income tax returns) to pay up to 10 percent of their taxes to specific private charitable organizations. Any amounts al10cated to private charities under this proposal would have to be deducted from the federal government's poverty budget. In other words, for each tax dollar allocated to private sector charity, pubJic sector charity would be reduced by a dollar.

In 1984, total federal personal income taxes amounted to $296.2 billion. Ten percent of this amount is approximately $30 billion, or a little less than one-third of ail federal welfare spending. Had Proposal A been in effect in 1984, individual taxpayers would have had the opportunity to allocate one-third of the federal welfare budget away from t;;overnment programs to private sector programs. If the public took full advantage of this opportunity, then Congress would be required to cut $30 billion out of pubJic sector programs. How the cuts would be made would be left up to Congress.

Proposal B: Competition and More Choice

Proposal B is a natural extension of Proposal A. It broadens the choice of the individual taxpayers by allowing individuals to allocate their entire share of the social welfare budget among all public and private sector agencies and programs involved in the "business" of welfare. Every social welfare agency--public and private--wou1d compete against every other agency for welfare tax dollars. In principle, Proposal B allows the public to make all of the decisions on how the social welfare budget is to be allocated, although individuals would be free to forego this responsibility by indicating on their tax returns that they would like to relinquish to Congress the right to decide how their welfare tax dollars are spent.

In 1984, total means-tested welfare spending by the federal government was $100.5 bi11l0n80--an amount equal to about one-third of all personal income taxes paid that year. Thus, Proposal B would &ve individuals direct control over how one-third of their tax dollars would be spent.

Proposal C: Competition and More Choice Still

Proposals A and B are confined to a range of activities which fall under the designation of "welfare." They specifically exclude educational, cultural, medical and other human service activities which are not directly related to the problems of poverty. They also exclude research activities, such as this NCPA report. Yet, because these activities also have a public nature to them, It would seem desirable to expand the range of taxpayer choice to include them as well.

IDYee Burke, "Cash and Noncash Benefits for Persons with Limited Incomes," p. 2.

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Proposal C would do just that. Under the proposal, Congress would define a "human services budget," which would include, in addition to poverty programs, spending on education, medical research, arts and cultural programs. (Proposal C would exclud e spending on religious and political activities, as would Proposals A and B.) Under Proposal C, all public and private sector agencies with a human services purpose would compete against each other for taxpayer dollars, and individual taxpayers would have the option of allocating their individual shares of the human services budget.

Advantages

The three proposals made here have obvious advantages that should lead to a more humane and desirable welfare system. The proposals would replace monopoly with competition and would allow freedom of entry into the marketplace. Charitable organizations would be able to attract contributions only by making a persuasive case to the public. No longer would inefficient, wasteful federal programs be able to count on uncontested access to taxpayer dollars. No longer would special interest c;roups be able to count on political largesse as a result of their special influence. Most important, the people giving the money would have direct control over how their "tax dollar contributions" are spent.

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APPE.N)IX

Twenty-One Questions and Answers About the Proposals

1. How will the "tax doUar contributions" actually get to the private charities to whom they are designated?

In most cases, the private charities will receive funds exactly as they do now--in the form of checks from givers. Under our proposals, the donor would simply indicate on his income tax return the names and tax 1.0. numbers of the organizations to whom he has allocated his tax dollar contributions. However, taxpayers also will have the option of having the U. S. Treasury make the contribution by indicating. on their individual tax returns which organiza­tions they wish to give to and in what amounts--in a manner similar to the way in which taxpayers can now allocate $1.00 of their taxes to the presidential election campaign fund.

2. What if an individual wishes to make charitable contributions in excess of the limits in your proposal?

Individuals wiH make two types of decisions with respect to private charities: (1) whether to allocate a portion of their welfare tax dollars to private charitable organizations, and (2) whether to contribute additional personal dollars to these organizations. The second category of giving--voluntary, personal gifts--will continue to qualify for tax deductions in exactly the same way as they currently are treated under the tax code.

3. How would a private organization qualify to be eligible for tax dollar cont ributions?

The procedure would be identical to the one already in place for nonprofit organizations that wish to be able to receive tax deductible contributions. Under Proposals A and B, the organization's activities would have to be confined to social welfare services. Under Proposal C, educational and cultural activities also would be included.

4. Wouldn't a large bureaucracy be needed to monitor the private charities receiving tax dollar contributions?

No. The IRS already has procedures in place for monitoring nonprofit organizations. There would be no reason to add a new bureaucracy.

5. What safeguards would be needed to prevent fraud, abuse and cheating?

A number of safeguards could be established. Here are four of the most important:

a. EXisting IRS regulations governing nonprofit organizations would continue to apply. These include prohibitions against mis-using a charitable organization for personal financial gain.

b. An even stricter set of rules would be applied to organizations which receive tax dol1ar contributions. For example, no one would be allowed to allocate his tax dollars to an organization from which he or a member of his family receives a salary or with whom he has substantial business relations. Nor could people make "deals" with each other ("1'11 give to your charity if you give to mine") in order to circumvent the law. Enforcing such rules is no more difficult or complicated than the kinds of regulations which the IRS routinely enforces every day.

c. Special freedom of information rules would apply to ore;anizations receiving the contributions. These rules would make it easy for members of the public and competing organizations to have access to financial and other records.

d. The most important check on an organization's activities will be the self-interested inquiries of its competitors who wiJJ be free to engage in comparative advertising in the competition for tax dollar cont ributions.

6. Would private charities receiving contributions be free to engage in political activities?

No. The same prohibitions that now apply to IRS designated 501 (c)O) nonprofit organizations would apply to organizations that receive tax dollar contributions. Public pollcy research institutes would be excluded under Proposals A and B, but included under Proposal C.

7. What about churches and other religious organizations?

No tax dollar contributions could be given to organizations whose prirnary purpose is to advance a religion. However, churches and other religious organizations could form subsidiary organizations with social welfare functions (such as soup kitchens) and tax dollar contributions could be given to these subsidiary organizations. Organizations which primarily serve a social welfare function, but which have a rellgious dimension to their program (such as the Salvation Army), would be permitted to receive tax dollar contributions.

8. U people choose to allocate a certain portion of their taxes to private charities, which federal programs would lose money?

Under Proposal A, tax dollars allocated to private charities would be made up by cuts in the budgets of means-tested federal welfare programs. Congress would decide how the cuts are to be made. Under Proposals Band C, individual taxpayers would have the option of allocating their tax dollars among alJ private and public programs covered by the proposals. Congress would be free

to allocate funds only to the extent that individual taxpayers choose to '/olun­tarily relinquish this choice to Congress.

9. Isn't there already a problem of private charities spending too much money on fundraising? Wouldn't this problem be made worse by the kind of aggres­sive competition you seem to want and approve or?

Maybe. Advertising does more than simply persuade. The best kind of advertising also informs. Right now there is too little information about public and private charities and what they do. Furthermore, some of the best private charities have discovered that it is a real selling point to disclose how ~ they spend on fundraising. For example, the Kansas City Salvation Army, with a budget of over $5 million, spends only eight cents on fundraising for every doUar it raises. 81 If the value of volunteer labor is included, the organization probably spends less than a penny on fundraising for every dollar of spending. In our opinion, that's a good argument for giving to the Kansas City Salvation Army.

10. Won't most of the contributions go to agencies that employ slick Madison Avenue advertising campaigns rather than to the charities that do the best job?

Not necessarily. Our experience with the private marketplace teaches us that people can be fooled some of the time, but as many a bankrupt businessman knows, they cannot be persistently fooled.

1I. Given the complexity of the welfare-poverty industry, how can an average citizen make intelligent choices about where his tax dollar contributions should be spent?

One option Is to rely on the advice of "experts." Ric,ht now, the taxpayer is coerced into taking the advice of one particular group of experts--the U.S. Congress. Our proposal would leave that option open--individuals could continue to allow politiCians to make decisions for them. But they also would have the option of getting advice from other "expert S,II whose opinions are not distorted by the desire to get re-elected.

12. Since each individual taxpayer will be making decisions without knowing what decisions are being made by everyone else, how do we know that we won't end up with some bizarre result that none of us really would approve of?

Let's take an example. Suppose everyone in the nation decides to donat e all of his tax doUar contributions to the Salvation Army, on the assumption that there wiH be many other people who wil1 give to other worthy causes, such as suicide prevention centers and homes for battered wives. When the result s are in, we learn that the Salvation Army is way over-funded and many other

81Helping the Homeless: A Resource Guide, p. 148.

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worthy causes have no money at aU. Seeing this result, people wish they could go back and change their minds, but they can't.

Could something like this actually happen? We think it's extremely unlikely for several reasons. In the first place, people make contributions to private charities every day without consulting their neighbors on their giving decisions. The results of such private giving are far from bizarre. Secondly, all of the g,iving decisions will not be made on April 1.5. Giving decisions will be made throughout the calendar year (in terms of cash gifts and pledges) and people will have access to a great deal of information about where the money is going by April 1.5.

In the third place, should there be some bizarre result, such as described above, there are private sector remedies to deal with it. For example, private pressure could be put on the over-funded Salvation Army to share some of its unexpected wealth with the under-funded agencies. It would be in the Salvation Army's self-interest to accede to the pressure in order to maintain good relations with the giving public.

Finally, the problem--if it is a problem--is only a short-term one. People have memories. In making giving decisions this year, they will remember what everyone else did last year, and adjust their behavior in the libht of that knowledge. Over time, we wiU move to a fairly stable eqUilibrium pattern of giving in which people will be able to make reasonably well-informed decisions about where charitable contributions are going and how they want to allocate their own funds, given the overall pattern.

13 .. What if no one allocated their tax dollar contributions to federal welfare programs?

Under Proposal A, Congress would still have approximately two-thirds of the federal poverty budget to allocate. Under Proposal B, federal welfare pr06rams would have no money and would have to be abolished. Clearly there will be some adjustment problems in eliminating programs of such size and magnitude. That is why we propose phasing in the privatization of public charity over time.

14. What about programs for the elderly, such as Social Security and Medicare?

Social Security and Medicare are exempted under our proposals. However, means-tested programs, such as the Supplemental Security Insurance program, would be included since they are poverty programs.

15. Aren't you substituting "one-dollar-one-vote" for "one-man-one-vote," and won't this give wealthy people an unfair and disproportionate influence over where the charitable dollars are spent?

The criticism would be apt if we proposed to allow wealthy people to make decisions about how to spend other people's money. However, we are not proposing that. We are proposing to allow people the opportunity to allocate their own money--money which they have personally earned--in the charitable marketplace.

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16. Under your proposals, won't the total amount of public and private charitable giving go down?

Not necessarily. It is true that we anticipate that a great deal of wasteful, inefficient and counterproductive spending wiU be eliminated. Considered in isolation, this change would reduce the perceived need for charitable giving" which in turn might cause a reduction in the amount of "voluntary" giving and create political pressure to lower the amount of "required" giving. However, we also are propos! ng a system under which people wiU have complete control over their own giving decisions and thus, will have an active, personal interest in how their dollars are spent.

As a result of the increased personal interest and control, it may be that the public will be willing to accept higher tax rates for the purpose of funding charitable activities. Personal voluntary giving may increase as well.

17. Technical question: How do we know that the tax dolJar contributions will actually get distributed to the "right" charitable activities?

We don't. Economists have a theoretical way of describing "ideal" spending decisions: The last dollar spent on program A should create just as much social benefit as the last dollar spent on program B. One theoretical criticism of the current system is that it has no mechanism for reaching this ideal. Indeed, the current system is inherently destined not to reach the ideal. That is because in the political arena, decisions are made on the basis of political costs and political benefits (How many votes lost? How many votes gained?) and not on the basis of economic costs and economic benefits.

The proposal we are making also has a theoretical defect, however. When people make individual decisions on how tax dolJars are to be spent, they will tend to aUocate their tax doUar contributions in the following way: The last dollar spent on program A will provide just as much personal ("psychic") benefit as the last dollar spent on program B. Clearly, the personal psychic benefits people get from various spending decisions cannot be equated with social benefit s.

What this means as a practical matter is that the system we enVISJOn will not be perfect, even though we expect major improvements over the current one.

18. If you admit that the system you propose is not perfect, how do we know some important social goals will not be left urunet?

We don't. Consider the following problem. Suppose that everyone in Dallas, Houston and San Antonio has some concern about poverty in rural Texas. For each individual, this concern is so small that he allocat es all of his tax doilar contributions to charitable activities in the city where he lives. As a result, no money flows from the large cities to help the problems of poverty in rural Texas. However, if we add up aU of the "smalJ concerns"

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of the mi11ions of people that live in the large, urban areas, they may total up to a very big social concern over a problem that is &oing unsolved.

No one knows how serious such a problem might turn out to be. By gradually movin5 to the system we envision, we wilJ have the opportunity to observe whether such problems warrant modifications in the proposal.

19. If individual choice is superior to choices made by politicians, why not extend your proposal to the extreme and allow each taxpayer to allocate all of his tax dollars among all federal programs, including national defense?

This may turn out to be a desirable thing to do. However, that there are potential problems with such a proposal because federal programs have diiferent degrees of "pubJlcness" to them. As with the problem of rural Texas poverty, individuals might tend to allocate all of their tax dollars to projects in their own communities, with nothing left over for truly "national" problems, such as national defense.

Again, we cannot know what choices people wi1J actually make until we begin to experiment.

20. What about state and local government welfare programs?

Our proposals giving individuals choice over the spending of their tax dollars apply only to the federal income taxes. However, state ~overnments would be free to adopt similar probrams in their own jurisdictions. In addition, taxpayers would be free to allocate their federal tax dollar contri­butions to state and local government welfare programs if they choose to do so.

21. Under Proposal B and C, you would allow individual taxpayers to make all of the choices on how welfare dollars are spent. If people chose to give all of their tax dollar contributions to private sector organizations, wouldn't this completely remove elected officials from the decision-making process and make politicians essentially superfluous?

Yes.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for PoHcy Analysis or as an attempt to aid or hinder the passage of any bH! before Congress.

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ABOUT lHE AUlHORS

John C. Goodman is President of the National Center for Policy Analysis and the author of several books and studies on entitlement programs.

Michael.D. Stroup received his bachelor of science degree in economics from Montana State University and is a research analyst with the National Center for Policy Analysi s.