Against the Welfare State – and Bank Bailouts

Leave a comment

The welfare state is undoubtedly one of the elements of government opposed by libertarians, not only due to its inherent injustice and economic destructiveness, but also because of its ability to provide fuel and sustenance to the growth of the metastasising state

If we are launch a critique of the welfare state we must first attempt to define it and to distinguish it from other categories of government activity. Such a task is not an immediately clear cut one as, fundamentally, all government expenditure sustains the welfare of its beneficiaries. If the government launches an invasion of a foreign country, spending on military grade weaponry, aircraft and whatever else will very much contribute to the “welfare” of armaments manufacturers yet we wouldn’t ordinarily classify this as part of the welfare state. Similarly, if the government decides to build a new road or railway line we wouldn’t usually describe this as providing “welfare” to the construction workers who undertake the leg work (although certain “job creation” schemes that simply pay people to carry out pointless work could be classified as welfare).

Whether or not a particular government outlay is classified as part of the welfare state is therefore defined more by its purpose rather than by its effect. The purpose of a foreign war is usually to gain control of valuable resources (even if it is veneered with an alternative justification such as spreading freedom and democracy). The purpose of building a road or railway is to “improve” the country’s transportation and communication networks. None of these projects is designed to provide some kind of comfortable lifestyle to those who undertake them (and, ignoring the possibility of benefiting favoured lobbyists and donors, to the extent that a government has a particular purpose in mind and wishes to achieve it efficiently it will have a desire to remunerate its suppliers as little as possible rather than as highly).

Welfare spending, on the other hand, is markedly different. Its purpose is always couched in the language of providing some kind of “help”, “care”, or “assistance” to the citizenry, as if the government is a giant nanny who appears with an equally giant milk bottle whenever one’s own teat runs dry. Given this, then, we can attempt to define the welfare state as that portion of government activity which is devoted to the sustenance of either the existing lifestyle of a particular citizen or to a lifestyle that is thought to be the minimum that is equitable in terms of wealth and income. The welfare state therefore provides a cushion or relief from events that may intercede in that lifestyle so, for example, if you get sick, the government will provide you with either free or subsidised healthcare; if you lose your job you will be entitled to unemployment benefit; and if you have baby the government will give you some money so that you are able to take care of it and give it an “adequate” upbringing. Granted, this definition if the welfare state is not precise and it will overlap with many other types of expenditure – few government outlays have a single purpose, even if some of these purposes are not made public – but we can be satisfied that it is reasonably accurate.

In spite of the fact that the welfare state is a moral issue and that its proponents believe that its existence is justified by the fact that the able should take care of the less able (“from each according to his means to each according to his needs”) it is arguable that the strength of its cause derives more from a misunderstanding of economics and that an amelioration of these misunderstandings is likely to weaken the foundations of the welfare state most effectively. Rather, therefore, than elaborating on the fact that the welfare state is, in a genuine free market, a morally unjustifiable confiscation and redistribution of property from its owners to non-owners respectively, let us concentrate mainly on a proper realisation of the economic effects of the welfare state in order to find the source of its undoing.

The type of welfare spending that we will focus on specifically is the bailout of the banks. This selection may appear surprising as surely most supporters of the welfare state are flat out opposed to bailing out the banks? And yet if we look closely, the qualities of bankers’ bailouts fits our definition of welfare spending all but perfectly. The financial services industry was accustomed to its business of expanding credit during the boom years and ploughing them into ultimately unsustainable malinvestments; its practitioners were richly rewarded for doing so and could afford big houses, expensive cars, private schools for their children, exotic foreign holidays, and so on. Metaphorically, they became accustomed to a lifestyle of gambling and partying fuelled by the punch bowl of monetary expansion. Following the inevitable crash that revealed the extent of the malinvestments and the huge losses that would ensue, the bailout of the banks was designed precisely to prevent the liquidation of this crumbling economic structure so that the banks could keep on making loans, keep on making profits from those loans, and so their top employees would not lose the lifestyle to which they had become accustomed. It was meant to refill the punch bowl and to keep the music playing so that the party would never end. The difference, therefore, between bankers’ bailouts and what we typically regard as the welfare state is simply a matter of degree, not of kind. They each provide a taxpayer funded cushion for their respective beneficiaries that insulates their lifestyles from the effects of either their own choices or from events that are beyond their control. Indeed, the collapse of the financial services industry as we know it would also have seriously curtailed the ability of governments to retain their accustomed lifestyle of borrowing and spending. To that extent, therefore, the bank bailouts were an exercise in self-preservation. The only perceived difference between bank bailouts and the welfare state is that the beneficiaries of the former were “rich” and not “poor”, which, it must be understood, is itself a misrepresentation. Many of those affected by a collapse of the financial services sector would not necessarily have been multi-millionaires as any insolvencies and downsizing is likely to have hit those lower down the pecking order first such as local branch managers and tellers before it hit those in the penthouse offices.

We have outlined this description of bank bailouts because every single argument that welfare statists use to oppose them are, in fact, the very same arguments that apply to their conception of the welfare state. We will therefore take each of these arguments in turn and show just how both bank bailouts and the welfare state, which are both a form of welfare spending, are economically destructive.

The first argument against the bank bailouts used by its opponents is that it creates moral hazard. In other words, if the banks can privatise their gains yet socialise their losses it provides an incentive to carry on and, indeed, augment the very destructive activity that was the source of the problem in the first place. All of this is true and we can have no quarrel with it. Yet it applies equally to the welfare state as well. Proponents of the welfare state imagine that if the government throws money at all of the events that manifest themselves as pitfalls in one’s own lifestyle then these pitfalls will simply go away. However if the government simply pays for a problem when it occurs then it creates as much of a moral hazard as the bank bailouts because all you have done is simply lowered the cost to individuals of bearing these pitfalls – and lowered cost leads to a swelled demand. If you pay people when they get sick, there will be more sickness; if you pay people when they are unemployed there will be more unemployment; if you pay people when they have children people will produce more children that need a roof and need feeding. The welfare state is not the solution to the problems it seeks to resolve; it is, rather, a fertiliser for their growth and proliferation, just as bank bailouts are a fertiliser for the growth of credit expansion, malinvestment and repeated boom and bust cycles.

The second argument against bank bailouts, related to the one we just outlined, is that it shoves the cost of the bad decisions of the bankers onto the shoulders of everybody else. Yet isn’t this precisely what the welfare state does? Welfare statists imagine that nearly every unfortunate circumstance in which people find themselves is not the product of their own making and that they are therefore blameless and should be (patronisingly) pitied – in short, that people do not bear any responsibility for their own circumstances. However, this is not the case with many of the issues that the welfare state attempts to address. As was argued in a previous essay on universal healthcare, the majority of medical ailments from which people suffer are not the unfortunate result of a random, illness lottery but are, rather, directly related to their environment and lifestyle – particularly diet, exercise and consumption of alcohol, tobacco and narcotics. If, therefore, people choose to pursue a lifestyle of eating gluttonously, exercising little and smoking and drinking heavily with this resulting in sickness, then if the government picks up the tab this simply forces the cost of these bad decisions onto everyone else. People, in most cases, choose to have children, or at least to engage in the intercourse that results in children – it isn’t a random, spontaneous event that appears out of nowhere to inflict itself upon people’s lifestyles. To the extent, therefore, that people cannot afford to raise these children properly and the government intervenes then the cost of other people’s bad decisions is again shovelled onto the shoulders of everybody else. But even those aspects of the welfare state that are not necessarily the fault of the individuals concerned – such as unemployment – is usually the result of government anyway. Low employability is caused not only by inadequate state education, but also government interference in the labour market such as minimum wages and excessive regulations that cause the cost of employment to exceed that of the productivity of the lowest skilled workers. Why, therefore, do welfare statists propose a government solution to what is a government created problem? Why not just get rid of the government created problem?

The third argument against bank bailouts is that they perpetuate what we might call a crony “corp-tocracy” where taxpayers’ money is siphoned off into the hands of the government’s favoured millionaire chums. Yet this is precisely the result of the welfare state also. Although the nominal beneficiaries of the welfare state are individual people, someone has to be paid in order to carry out the work of the welfare state. Not only does a welfare state require the creation and sustenance of a vast, leeching bureaucracy to administer it all but particular parts of the welfare state have to be contracted out to individual specialists. For example, public housing schemes need to find construction companies, hospitals need to find doctors and they need to purchase medicines from drug companies. The interests of these suppliers to the welfare state is to ensure that their compensation for carrying out their tasks is as high as possible; indeed, one of the reasons why the welfare state is such a burgeoning expense is because the disconnect between the consumer that pays and the supplier that is paid results in spiralling costs for the services of the latter, with the result that the majority of welfare spending goes not to the individual people but straight into the bank accounts of large corporations and contractors. Moreover, the welfare state is not usually a fixed pool of services that are provided by the government, but includes also private organisations and charities that lobby the government for money in order to solve the particular societal “problems” and grievances that they happen to have identified. Much of this money is simply wasted, as suggested by the recent collapse of Kids Company, a UK children’s charity, around a week after it received a £3 million grant from the government. Indeed, in the UK – when the chief executives of high profile charities are paid six figure salaries and they have been chastised for “aggressive” funding raising strategies that were recently attributed, at least in part, to the death of a pensioner – the substantive difference between a charity on the one hand and a corporation on the other is becoming increasingly questioned.

The fourth argument against bank bailouts is that they distort the economy, shovelling excess funding into the financial services sector and expanding their profits at the expense of other industries. Again, nothing about this is untrue and, indeed, as “Austrian” economists we would make an even more detailed case about how the resulting credit expansion distorts the consumption/investment ratio in order to result in unsustainable malinvestments across the entire economy. Yet the welfare state distorts the economy also, only in a more incremental and pacing manner. In the first place, the increased incentive caused by the welfare state to exacerbate the very problems it is supposed to solve, such as sickness and unemployment, reduces the capacity of the labour market and thus shrinks the extent of the division of labour that would otherwise have been possible. Second, the burgeoning cost of the welfare state caused by an artificially inflated demand for welfare requires more and more resources to be confiscated by the government in order to fund it. Thus, the areas of the economy that are devoted to providing welfare are swollen at the expense of other areas of the economy which must correspondingly shrink. Third, this is compounded by the fact that a large, government pot of gold encourages rent seeking behaviour, which in the case of welfare means (as we stated above) large numbers of special interest groups lobby the government each with a claim that they have identified some societal affliction that is ripe for resolution by government spending. Governments are eager to attract this kind of attention for more government spending means not only more power and prestige but also provides another outlet with which to bribe citizens with their own money when making election “promises”. The result of this, again, is that the total portion of the economy that is devoted to welfare spending is artificially inflated compared to what consumers would otherwise prefer.

The final argument against bank bailouts that we will consider is that they create a feeling of bitterness and resentment in the general population, a fissure of hate, contempt and distrust between the bankers and the people whom they supposedly serve. Again, all of this is true. However, it applies just as readily to the welfare state. Its proponents usually justify the imposition of the welfare state by stating that it is morally good for us to care and look after one another as if we are all one big family. This may be true enough, but the welfare state does not create that situation. In order to become a morally better person I have to choose to care and to look after my fellow man – I have to decide to do it voluntarily. I am looked upon with admiration because in spite of all of the personal luxuries I could have spent my money on, I willingly deprived myself of them and was happy to give the money to a person in need. The welfare state, however, does not give me any choice in this regard – it just forces me to do it regardless of what I want. The action, therefore, is not as the result of any personal sympathy or empathy for the plight of the less fortunate, nor of any aspiration to moral heights. Instead, the void left by an absence of sympathy and empathy is likely to be filled by bitterness and resentment as my hard earned money has just been confiscated from me to go to people who I believe may not deserve it, particularly if it goes to some cause that I may disagree qualifies for welfare spending (such as breast enhancement surgery on the NHS or unemployment benefits to those who are just workshy). The welfare state therefore creates the opposite of any charitable feeling whatsoever and destroys any notion of brotherhood or family. When this is coupled with the welfare state’s encouragement of the afflictions it seeks to solve then the result is a society with a lower, rather than higher, moral standing. This is exacerbated by the interdependent relationship between bank bailouts on the one hand and the welfare state on the other. Bank bailouts mean that the banks take the money of the taxpaying public and plough it into assets so that the income of anyone who owns these assets – i.e. the bankers themselves – is swollen while the incomes of those who do not stagnates. The resulting price inflation lifts the affordability of assets such as houses and basic necessities, such as food, out of the grasp of those on low incomes. The consequence is another artificially swollen demand for welfare to give ordinary people somewhere to live and something to eat. Thus, the poorest in society demand increased taxes on the rich – i.e. the very bankers who were bailed out – in order to fund increased welfare spending. The result, therefore, is a toing and froing of mutual theft, a circle of robbery where bankers demand taxpayers’ money to continue their casino operations, after which everyone else demands some of it back to ameliorate the resulting effects. Far from being a moral and harmonious society all we end up with is hating each other and trying to grab whatever we can out of each other’s pockets.

What we can see from this brief comparison of the welfare state to bank bailouts, therefore, is that there is very little qualitative difference between the two and that the arguments that are used to oppose bank bailouts apply just as easily to the welfare state. The amelioration of welfare demand is achieved not through the redistribution of a fixed pool wealth but through the raising of real incomes by increasing the productive output per person. In order to achieve this we need to eliminate both the bank bailouts and the welfare state so that we can return to a genuine economy where everyone serves each other rather than engages in mutual plunder. The rich would have to earn their wealth by directing and increasing the productive capacity of the economy to best meet the needs of the consumer; the poor earn their money by providing the labour to bring about this direction, with their wages being able to buy more and more goods as a result of the increased output. Not only would this create a more prosperous society where poverty has truly been consigned to the history books, but the vanquishing of hatred, resentment and antagonism would create a morally superior one too.

View the video version of this post.


The False Dilemma

Leave a comment

Current, conventional thinking about social, political and economic subjects typically narrows the options available to a set of policies advocated by two, may be three political parties or scarcely dissimilar ideologies. Consequently any genuine radical or lateral thinking about these topics is abandoned and it is assumed and accepted that the fundamental questions of the state, the government, and of tackling the biggest societal problems of the day are already settled. Seldom are alternatives to these entrenched matters – such as whether the state should have any positive role at all in anything – given the light of day, let alone the opportunity of being debated. This phenomenon, which presents a distinct challenge to libertarians, is known as the “false dilemma” – the illusion that the only choice is between a very constricted range of possible options, preserving the status quo in favour of the state and its cronies while at the same time bestowing the illusion of control on a gullible electorate.

In the UK the “false dilemma” is playing itself out in such a way as to completely obliterate one of the basic truths (understood by Austro-Libertarians) that all humans can flourish and co-exist peacefully. Those on the ideological right such as supporters of the Conservative Party believe that business should be helped in order to boost economic growth, while cuts should be made to welfare and to public services in order reduce the government “deficit” (a much overused term given that the overall debt and not the deficit is the real problem) and to slim down the cash cow that the benefits system has become to the allegedly lazy and unproductive. Those of the ideological left believe that a strong welfare state, heavy taxes on the wealthy and increased government spending are needed to end the scourge of poverty. Both of these ideologies contain kernels of truth and genuine, honourable concerns that make their particular preoccupations seem plausible. It is true, for instance, that business needs to flourish if there is to be any economic progress at all, and that government needs to reduce its profligate borrowing, taxing and wasting with all due haste. On the other hand, it does not seem fair that a society should allegedly produce vast wealth for a few while leaving others to languish in stagnating poverty, nor is it necessarily true that wealth creation is “top-down”. The continuing result of this for UK politics seems to be that political action is becoming a choice, or a very false dilemma, between two broadly defined groups of people in society – a choice between those who are “rich” and those who are “poor”.

This impression is exacerbated by the fact that the political parties whose rhetoric represents these ideologies never achieve their aims, or never really carry them out. “Austerity” is proving not to boost economic growth nor help the plight of the poor simply because government spending is not, in fact, decreasing. Bank bailouts and cartelisation of businesses will not do the same either as they simply perpetuate malinvestment and economic waste. They do, however, save the politically connected rich from the consequences of their actions while leaving everyone else to foot the bill. On the other side, increased government spending and a burgeoning welfare state only siphon funds from the productive sector to be consumed and wasted by government. Both sides, therefore, in failing to ever be able to achieve their stated aims provide plenty of ammunition for the opposition, ammunition that is fuelling this apparent basic choice between “rich” and “poor”.

If we are ever to have any hope of recovery from the current economic malaise we must seek for a repudiation of this false choice and a restoration of the understanding that both economically and ethically the rich and poor can prosper side by side. At the heart of the problem, the false axiom accepted by each ideology, is the notion that government must help somebody in order to create a better society. There is curious mixture of economic and ethical arguments that are used in order for each side to select whom government should help and to whom it should deny the same. Take, for example, the supporters of big business. They will say that it is right to use taxpayers’ money to bail out the banks in order to avoid a complete financial meltdown. Conveniently “their chums” in the city will reap fat rewards from doing so. But they then deny this very same method – the diversion of taxpayers’ money – to welfare programmes to help the poor because people should work for what they earn without leeching from the productive and the so-called “benefits scroungers” should get off their backsides and find a job. In other words they are using primarily economic arguments to justify bank bailouts while using ethical ones to deny welfare spending. Their “lefty” opponents will argue that throwing cash at the rich who made mistakes is unjust and that they should be left to foot the bill for their own mistakes. Yet they then state that welfare spending is needed to eliminate poverty and fuel growth from the “bottom up”. So they too, deny the flowing of taxpayer’s cash to certain groups based on ethical grounds but then promote it to others based on economic grounds. Each side, will of course, pepper their ethical arguments with economic ones and vice versa – the right, for example, will, as we have said, argue that welfare spending needs to be cut in order to reduce government outlays, and the left will argue that alleviating poverty is a just and noble cause. But the main thrust of each side’s opinion cannot be denied.

If we unscramble all of this and look at the ethical and economic arguments separately we will find that there are no grounds whatsoever for any state involvement. If it is unjust to violently confiscate tax revenue from innocent citizens to fund the lifestyle of bamboozling bankers then it is equally unjust to do the same to fund the lifestyles of those who are poorer. The difference is one of degree rather than of kind. Nobody, whether he is a prince or a pauper, a saint or a sadist, or a capitalist or a labourer has the right to wrestle away the property of other people for his own benefit. And from the economic side, bailing out bad business will simply perpetuate the moral hazards and malinvestments that need to be eliminated, while continuously funding the poor through welfare spending will only exacerbate poverty as it makes being poor relatively more attractive, reducing any incentive for people to do more to lift themselves out of that position, while squeezing the role of benevolence and charity for the genuinely needy. Furthermore, government would do a lot more for the poor if it stopped interfering in wealth creation in the first place with all of its burdensome laws and regulations that make the exercise impossible but for a few large and politically connected corporate favourites.

The real choice is not between “rich” and “poor”, “left” or “right”, “Conservative” or “Labour” “employer” and “employee”, and whatever other faux selection that the establishment throws at us. The real choice we have to face is, on the one hand, whether we want to continue with a political and economic system that, whomever’s interests the particular delegates of the day purport to promote, will only result in a parasitic existence for the politically connected at the expense of the stagnation of the standard of living for the rest of us. Or, on the other hand, we could choose a system where nobody has the violently enforceable right to live at the expense of everyone else and that everyone is free to trade and produce whatever he wants with his property, a system that will raise the standard of living for everyone and not just a select few. Only by considering radical options and overcoming the assumption and acceptance that the fundamentals of our society are beyond debate can we hope to build a world that is both truly just and economically prosperous.

View the video version of this post.

The “Bedroom Tax”

Leave a comment

The furore over the UK Government’s latest changes to Housing Benefit appear to be bearing witness to what we might say is a “revolution within the form” – the neutralisation of a word or concept by changing its definition rather than challenging it directly. In this case, whereas once upon a time you were taxed if the Government took the money you had earned, it now appears that you are taxed if the Government finds a reason to give you less of everybody else’s money.

The announcement of the changes were followed by marches and demonstrations all over the UK, showing just how many people seem to be dependent upon the welfare state and how sensitive any reduction to its size may be.

Let us briefly reiterate and emphasise a few truths from the perspective of ethics and economics:

  • The welfare state is funded by taxation. Taxation is theft, the violent confiscation of other people’s property. If you are in receipt of welfare payments you are the recipient of stolen property. If people believe that taxation is not theft then it is incumbent upon these people to define it in such a way as to distinguish it from theft. Such a definition has never been forthcoming and any attempts have involved a twisted, distorted meaning of words that practically end up saying that theft is really voluntary. In particular it would be fitting to see the churches try to make this attempt before it starts wading into the debate;
  • That to pay people the fruits of productivity without having to produce lowers the value of productivity and increases the value of non-productivity. There will therefore be less societal wealth.

Merely arguing that benefits recipients are lazy and idle on the one hand and answering this charge with the claim that benefits cuts encourages selfishness on the other hand is of no relevance to these points we have made. What people should and should not do with their own money voluntarily is entirely up for debate. But there is no justification at all for one set of persons to violently wrestle money from another of persons. And yes, that includes everyone who has benefited from such methods – the bankers who received bailouts and welfare recipients. Ethics and economics are universal and apply to everyone and their laws should be applied to judge all situations whether they involve either the rich or the poor.

View the video version of this post.