Download docx - Welfare in America Through the Gilder and Krugman Lens

Welfare in America - Through the Gilder and Krugman Lens

By Sharad Sharma

12/7/2011


Welfare is a hotly debated issue within America, especially after the Depression.

While the program seeks to provide financial aid to citizens below the poverty line, it has

succeeded in dividing individuals above that threshold on the legitimacy of the program. There

are two clear and distinct opinions on the topic. One side believes that program seeks to

redistribute wealth in order to provide equal opportunity to those citizens who are struggling to

provide basic necessities for themselves, and the other side believes that it is the existence of this

program that incentivizes these ‘poor’ citizens to stay below the poverty line and continually

reap the benefits, thereby causing this side to question the legitimacy of the program altogether.

Welfare has been an increasingly relevant issue since the policy changes in the 1990s. These two

sides are each arguably represented the left-wing party and the right-wing party, and this point is

illustrated by Paul Krugman in The Conscience of a Liberal (2007). Krugman is undoubtedly

supporting the argument represented by the left, and George Gilder is credited for the argument

of the right which he illustrates in his book, Wealth and Poverty (1981). Although these books

are written in different times, the viewpoints of Gilder and Krugman effectively illustrate the

theories that are employed by right-wing and left-wing politicians, respectively.

For a significant portion of the 20th century, welfare was and still is a highly

controversial topic. The issue became important after the Depression when providing

unemployment benefits to poor families was an important role of the government. Debates

regarding the effectiveness of the program arose in the second half of the 20th century after

Gilder’s book was released, and it’s arguable that his ideology sparked a new life into the debate.

The issue became even more controversial; as a result, the Personal Responsibility and Work

Opportunity Reconciliation Act (PRWORA) was passed in 1996. PRWORA added many

restrictions to the welfare program. To track the changes in the welfare program, one must

TC 357 – Prof. Prindle Page 1


understand the program from its roots and follow the debates which have had an impact on the

policy.

Welfare was provided through federal funding and distributed through the states under

the Aid to Dependent Children (ADC) program; ADC was born through the New Deal as part of

the Social Security Act of 1935. As time passed, claims to the program rose significantly. As

there was a limited amount of funds allocated to the program, it began to receive criticisms and

in 1962, ADC was changed to Aid to Families with Dependent Children (AFDC) primarily due

to belief that the rules of the program discouraged marriage. Further criticisms of the program

pointed out that the program causes dependency and encourages childbirth. Some even believed

that the welfare system was attracting immigrants to the United States. Ultimately, as mentioned

above, the criticisms led to PRWORA (with bi-partisan support) and the end of AFDC.

However, the welfare program did not cease to exist. AFDC was replaced by Temporary

Assistance for Needy Families (TANF) which placed more restrictions upon the recipients of

welfare. TANF’s primary requirements effectively ended welfare as an entitlement program.

Recipients were now required to begin working after two years of receiving benefits, and there

was a lifetime limit of five years of benefits. The program also encouraged two-parent families

and discouraged childbirth out of wedlock. Federal funds were still distributed through the states.

Many states placed additional restrictions on recipients; some even funded private enterprises to

support individuals seeking employment. It is important to note that many states allowed for

exceptions to the time limit imposed by TANF because cutting funding to families that did not

comply with the program’s requirements would undeniably be disadvantageous for the children

belonging to those families.



Rationally, all of the criticisms make sense and these beliefs were held by many.

Congress blamed dependency, out-of-wedlock births and intergenerational poverty as the root

cause for the failure of AFDC. The statistical data that supported many arguments that were both

anti- and pro-welfare may have been used selectively to serve bias of the individuals who pushed

for the arguments (before and after the reform). Such being the case, individuals must seek to

attain their own opinion on the matter. These issues did not go unnoticed in the media, especially

following the reform in 1996. Supporters of welfare argue that the decrease in welfare claims and

lower poverty and unemployment rates in the second half of the nineties are evidence of the

program’s success. Critics argue that - despite the decline in welfare claims - the rise of poverty

and unemployment rates in the early 2000s (after the .com boom had slowed) directly credits the

economy, not TANF, for the rise and fall of unemployment and poverty rates; thereby, TANF

was effectively ineffective in aiding the poor.

With such differing conclusions about welfare being broadcasted through the media, it is

easy to get confused and pick a side on the issue solely based on hearsay. Both Gilder and

Krugman would advise individuals against such action. In order to make a decision on the

subject, one needs to be informed and understand both sides of the argument. Gilder and

Krugman wrote their books in different times, but their opinions have influenced many and

continue to do so even today. Whatever the reason for their differences might be, one must

understand and evaluate their arguments as their arguments are essentially the essence of right-

and left-wing politicians.

Krugman’s book can be seen as a criticism of the 20th century and also a criticism of

Gilder. Krugman, like many liberals, fundamentally believes that active government policies are

essential for the benefit of society. He believes that equality across society is necessary for it to



function impartially and smoothly. From there he draws political collaboration is unfeasible for

society without economic equality. Using the aforementioned premises, Krugman supports

providing increased benefits to the poor; therein, he also supports the redistribution of wealth.

Krugman doesn’t rush to any of these conclusions. He argues and fights for the importance of

each while using portions of American history during the 1900s to support his claims.

According to Krugman after WWII, there was a period of economic prosperity during the

50s and 60s that allowed “millions of Americans [to emerge] from urban slums and rural poverty

to a life of… comfort” (Krugman, Pg. 3). The size of the wealthy and poor classes was relatively

small as the primary characteristic of the economy was a strong middle class. Krugman claims

that this was a period of “economic commonality” which meant that there was a great deal of

economic equality within America during those times (Krugman, Pg. 4). In his eyes, this equality

is of the utmost importance, and those who read Krugman will find that equality manifests as a

fundamental principle for his arguments.

He calls the two decades right after WWII ‘the golden age of economic equality’ and

claims that this economic equality helps preserve collaboration between political parties. This

collaboration effectively promotes political bipartisanship. In essence, he interprets his

observation of economic equality to be the cause for healthy political bipartisanship. This may

very well be a spurious correlation as the country did recently emerge from a war, but Krugman

corroborates his view. He holds that during periods of significant economic inequality political

parties will attempt to favor the interests of the population that supports them. All else equal, this

ought to be when differing views need representation most and thus, bipartisanship should

increase within the political system. However parties cater to specific segments of the population

in order to win elections, implying that disagreement within the population on certain issues



causes conflict between parties. Bipartisanship declines as votes are swayed by candidate or

party positions on certain key issues, and the political system becomes a tool for the party in

control to provide for their constituents. Krugman claims that the political rift of the 70s and 80s

illustrates how economic inequality weakened bipartisanship in support of this argument. With

that it’s rational to assume that economic equality and political bipartisanship will lead to the

development of a strong middle class which will inevitably engender greater harmony within

society.

After establishing the need for equality and the importance of a strong middle class,

Krugman focus shifts towards the role government should play. Krugman says it best, “…

middle-class societies do not emerge automatically” (Krugman, Pg. 18). He claims that active

political action is crucial for society, and the reforms of the New Deal become his key defense.

However, the reduction of the elite class after the Great Depression may not have been brought

about by active political action; the Depression may have been to blame here. Whichever may be

the cause of the reduction of the elite class, the economic conditions in America improved very

slowly in relation to the first 100 years of the economy. The Depression hit hard on a global

scale, and it wasn’t until WWII that America was able to fully crawl out of it. Krugman,

however, credits the active government action after the depression as the tool through which

America was able to recover from its dark hour. All the meanwhile, the shrinkage of the elite

class feeds into this belief that active government policy may be responsible for the emergence

of a strong middle class; this brings us back to equality. Krugman’s view holds that active

government policy leads to equality.

Krugman’s logic to support this claim is weak. However, he effectively makes the same

point later on in a more convincing fashion by utilizing the concept of inequality. Instead of



focusing on the importance of equality, Krugman illustrates the effects of inequality. He

effectively points out that income inequality leads to factions within society where people are

divided on the basis of their income and standard of living. As a matter of fact, a simple

examination of the world today and these effects can be readily observed. Thereafter, he simply

concludes that individuals can’t “make their own place in [an unequal] society” (Krugman, Pg.

247). This is evident in society and can be observed readily without the need of any studies. This

point helps point out that in an unequal society the poor will try to escape their circumstances,

and the majority of them will fail creating a cycle of poverty which will last for generations.

Krugman uses a study by the National Center for Education Statistics to justify his point.

Furthermore, he adds that any argument implementing average American income as their

supporting evidence must be deemed unsuccessful due to the fact that the average income figure

is inflated in relation to the median income figure which is more representative of the majority of

the population (Krugman, Pg. 126). Inequality is disastrous for society and active government

policy is a tool to fight against it. Hence, government action helps ensure economic equality

which promotes political bipartisanship

With the importance of government action and economic equality established, Krugman

focuses on policies that promote economic equality. In the form of taxes, government can raise

funds and direct them towards programs such as social security and welfare (Krugman, Pg. 254).

He proposes that the government raise taxes by implementing progressive tax system that raises

taxes on the rich (Krugman, Pg. 257). Krugman assumes that all marginal revenue collected by

the government would be allocated towards the aforementioned social programs or others like it

when in fact that might not be the case. He also compares American tax policy with that of

France which implements a progressive tax rate. Krugman argues that GDP per worker is



“slightly higher in France” than in the US (Krugman, Pg. 254). Of course, this is average GDP

per worker which is a figure somewhat similar to average income. There should be a cost-

effective means of measuring the median GDP per worker (perhaps a weighted average of GDP

per worker by industry) which will be useful in providing a statistic that is an acceptable measure

of the overall population because earlier Krugman simply denounced all arguments based on

average income. Ignoring that criticism or perhaps being unaware of it, he holds that this proves

that resentments towards a progressive tax structure are unsubstantiated. Critics are quick to

point out that France has a much lower “GDP per person.” France also has a lower nominal GDP

and a lower population; in fact, France even has a lower working population than the US. With

all of this in mind, Krugman’s example here holds little credibility when the data between France

and US is compared impartially. His better argument for a progressive tax structure is when he

claims that spending habits amongst the wealthy is unaltered by higher marginal tax rates. He

points to wealthy Americans during the 60s and holds that the wealthy simply passed less wealth

to their children as a result (Krugman, Pg. 48). In Krugman’s opinion, a progressive tax rate will

result in greater equality and a more prosperous society.

Krugman also proposes other sorts of government policy in order to encourage equality

such as minimum wage, healthcare and stronger unions. However, his argument is effectively

that government policies can better help attain equality within society. He specifically points to

the betterment of the welfare program as a result of a progressive tax structure. His examples in

some instances are inadequate as indicated by his use of statistics in order to support a

progressive tax structure. However, it is the nature of political arguments to be slightly

misleading as they are meant to be persuasive. His arguments and logical structure are well

formulated, and he really does seem to embody the “Conscience of a Liberal.” He supports



TANF but feels that it alone is not enough to guarantee equality. Government needs to

implement a more comprehensive plan in order to aid the lower class in helping them break the

cycle of poverty and establish a stronger middle class leading to a more beneficial society.

Gilder, however, does not embody the “Conscience of a Liberal.” Instead Gilder scribes

in his book the essence of conservative thought. In fact, Gilder writes his book in order to restore

moral legitimacy to capitalism and to attempt a shift to a concept known as “supply-side

economics” (Lecture). His main premises are that people respond to incentives (both good and

bad ones) and that the entrepreneurs are the heroes of the economy. He also points out that the

economy does not run on demand alone. The supply side of economics offers a more meaningful

insight into the importance of capitalism. In regards to welfare, Gilder views the program as an

incentive and a bad one at that. Good incentives are those that promote growth while bad

incentives obstruct growth. Support of welfare through taxation is clearly a promotion of a bad

incentive according to Gilder.

Capitalists play a crucial role in the economy as they are engine of progress. Gilder

values capitalists from the aspect that they own businesses and are thereby the suppliers of goods

and services within the economy. He claims this is true as they can only succeed if they out

compete their rivals and demonstrate a greater “understanding of the needs of others” (Gilder,

Pg. 22). He also points out that the entrepreneur is a giver and lacks a predetermined need

(Gilder, Pg. 25), and the consumers are receivers who voluntarily want to pay the giver

(entrepreneur) for meeting their needs. This causes “profits of the economy to grow”

continuously (Gilder, Pg. 22). Gilder provides innumerable examples to illustrate this nature of

capitalism. Ultimately he notes that promotion of a full-fledged capitalistic system is the only

way to prevent stagnation; in this system, risk-takers ought to be allowed to freely take risks that



will allow them to gain “partial knowledge” which then allows society to progress (Gilder, Pg.

27). This function of capitalism that brings about change and innovation clearly establishes the

value of capitalism and role of entrepreneurs.

In fulfilling their role, entrepreneurs end up participating in highly competitive markets.

From there, competition causes real costs to decline and product efficiency to rise (Gilder, Pg.

83). As mentioned earlier, the profits would grow continuously, and a growing firm provides job

opportunities as employment rates tend to grow at about “40% annually” (Gilder, Pg. 83).

Thereby, entrepreneurs spur creativity and innovation and positively impact society. Gilder

establishes the entrepreneur as a critical part of the society.

As Gilder tackles individual behavior, he bases his theory on the notion that people will

behave rationally. People will react to incentives, simple as that. Incentives may be good for

society or bad. Good incentives encourage entrepreneurs to innovate in order to meet the

demands of society. That is to say, entrepreneurs will cater to the need of society if there is an

incentive for them to do so. Thereby, in the absence of potential profits, entrepreneurs will most

likely stop their productive activities. For instance, tax cuts for charitable donations or interest

expense will be an example of a good incentive. However, government aid to the poor is an

example of a bad incentive. By providing for its citizens, the government eliminates the need for

individuals to take risks and encourages them not to be productive members of society (Gilder,

Pg. 109). And through this mechanism of incentives, he can analyze all individuals, and in the

end, he concludes that welfare programs encourage unemployment (Gilder, Pg. 109). The

incentive for poor people to succeed is the plight of their poverty. By providing their needs for

them in the hopes that they will help themselves (due to their condition) is ridiculous. It is a

stronger incentive not to work and reap the benefits of absolutely no risk until either the benefits



expire or a more lucrative opportunity becomes available. Profit is then a positive incentive or a

motivator, and welfare programs encourage laziness and are bad incentives.

Gilder, throughout his book, repeatedly mentions the positive value of entrepreneurs, and

this is a hint – entrepreneurs and entrepreneurial activity ought to be supported. Gilder’s theory

on incentives actually attacks welfare on two fronts. Primarily, welfare actively encourages

laziness, and since the productive part of society is taxed in order to raise the funds for the

program, welfare programs due to their very existence offer an incentive to entrepreneurs to not

operate at their full potential. Such programs incentivize the productive members of society to

take fewer risks and solve fewer problems within society (Gilder, Pg. 27, 85). Gilder clearly

opposes all forms of welfare programs.

Gilder’s argument is based primarily on human rational behavior. This notion to consider

that the entire population will act rationally at all times is a bit naïve. His book was designed to

be persuasive as its primary focus was to establish the legitimacy of capitalism, and hence, it

stands to reason that he did not attempt to support capitalism through facts because reason sways

opinion more promptly than facts. He would clearly favor a regressive tax rate as it would

incentivize the wealthier segments of the population to take more risks. However, Gilder

overlooks a key fact about welfare which is that society may drive some utility from providing

aid to the needy and poor. The very existence of the poor may incentivize some individuals to aid

them in their plight. Gilder claims that any attempt to do that would be to incentivize the poor to

remain lazy and poor, but if implemented properly, welfare may very well aid individuals in

escaping the cycle of poverty and perhaps even become entrepreneurs themselves. He does also

assume that entrepreneurs have more of an incentive to continue investing in the operations of

their business than to pocket the profits. In doing this, Gilder does not consider all possible



explanations. He worships entrepreneurs and fails to acknowledge the reason why capitalism was

in a fashion detested during his time. Furthermore, he rejects any possible benefit from the

welfare program. Surely, the system has been abused, but it was first institutionalized because

there was an actual need for government aid. Gilder does not acknowledge how to handle this

need because he believes that the “golden rule of capitalism” will solve all problems (Gilder, Pg.

22).

Krugman and Gilder differ from one another on key issues which puts them on opposite

ends of the spectrum. Their style of argument differs significantly as well. Statistics are present

to support both sides of the argument, and thereby, any argument which relies on statistics in

order to point to a course of action are worth looking at with some skepticism as the whole story

may not be captured within one single argument, whether it be by Krugman or Gilder. Since

Krugman relies heavily on the use of historical facts and statistical data to support his claims,

Krugman should not be trusted blindly on a standalone basis. Further, he holds the 50s and 60s

as the golden age for America whereas he disregards the increase in standard of living and

technological advancements in consumer products and healthcare since then as well. Some of his

arguments only consider one possible explanation for the phenomena when other explanations

clearly exist. Gilder’s criticisms are also primarily in his failure to consider alternate

explanations, and he is overly optimistic to hope for a society based purely on the success of

entrepreneurs and minimal government involvement. However, both arguments are golden;

Krugman strives to take America back into the golden age of equality, and Gilder wants America

to fully adopt the golden rule of capitalism.

I can’t favor one side over another due to the fallacies present in both. However, a

combination of the two philosophies is plausible and pragmatic. Gilder’s version of society is



ideal and lays down an appropriate framework as the golden rule of capitalism does work when it

is allowed to operate properly. Krugman’s view that government activity is necessary to ensure

that economic inequality does not reach significant levels to where it threatens the framework of

a democratic government. Economic equality is important, but it should not be the focus of

policy making as that would effectively provide an incentive for individuals not to attain their

full potential. As for the welfare program, it does provide an incentive for individuals to remain

poor, thereby an approach where the program aids in finding employment opportunities for the

poor. The TANF program is not effective in my opinion; however increased taxation on the

wealthy to provide funding for such programs is a plausible and pragmatic idea. Gilder’s

incentive idea applies here also, and since there is taxation to aid the poor on the wealthy, there

should also be tax reliefs for the wealthy when they make investments that invest into the

economy. Overall, both arguments are effective but must be analyzed for logical fallacies as

there are discrepancies present within both.
