from NewsLink, Vol. 1, No. 3, Spring 1997

Locking out the poor: the safety net as a trap

Poor Policy: How Government Harms the Poor
by D. Eric Schansberg
(Westview Press, 1996)
Reviewed by Frank Conte, Publications Editor

It has been an unshakable article of faith that government ought to provide a safety net for the nation's poor. However, since the turn of the century, federal, state and local governmentsÐ along with private foundations and nonprofit organizations have woven a safety net that traps the poor.

The resulting welfare state dynamic has created a poverty industry that victimized the poor with transfer payments that discourage work, with price supports that raise the cost of food, and with labor laws and regulations that lock out the unskilled in the job market.

In sum, special interest groups with far more power in this "political market" than the poor are responsible for the expansion of the welfare state. These players (who promote more public spending or expanded government activism) increase the demand for a managerial class that do little to help the poor.

In 1994, agribusiness received $29.2 billion in direct subsidies, which increased the cost of food for the poor. Stiff tariffs on textiles cost consumers approximately an additional $25-$30 billion per year, forcing the poor to shell out a larger portion of their income for clothing. The political market also energizes the capacity of government to destroy jobsÐwhether or not intentionally. It is no secret that many inner city jobs in candy manufacturing have been lost because Americans pay exorbitant prices for sugar thanks to import restrictions.

In this game of redistributing government benefits, two clear losers emerge: the taxpayer/consumer and the poor. The taxpayer/consumer loses because the hidden cost is difficult to see. The poor are hurt because they do not organize as effectively as farmers, academics, and Social Security recipients. Politics being what it is, criticizing aid for families with dependent children is easier than denouncing aid for dependent textile workers.

Using the tools of public-choice economics, Professor D. Eric Schansberg has written Poor Policy: How Government Harms the Poor with an eye toward the spoils of the political market.

It is not welfare policy by itself that is a problem, according to Schansberg, but rather the process of voting and particularly a cabal of nonpoor who have figured out how to manipulate democracy's weak spots.

There is a sound body of knowledge that underlies Schansberg's thesis. The public-choice school of economics, made famous by Nobel laureate James Buchanan, contends that self interest rules not only in private or economic markets, but also political markets. In this setting, compassionate politicians, bureaucrats, and pressure groups, endowed with government power, maximize their self interest as do buyers and sellers in the marketplace.

Some economists are fond of invoking the idea of market failure to justify government intervention. However, they assume that government or political markets are immune from failure. Schansberg says they are not (the key insight of public-choice economists) and the primary victims are the poor who lose out to the nonpoor. "Government is generally driven by the desire to maximize, so bureaucrats always have an incentive to look for new constituents," notes Schansberg. "In the context of welfare programs, this translates into generating 'need' for income transfers ... One reason is paternalism concerning the poor's supposed inability to spend money properly. Another factor is that politicians can target special interest groups with an increased demand for their products. Farm support for food stamps and the American Medical Association's advocacy of Medicare and Medicaid are good examples."

Schansberg offers a slew of prescriptions that transcend conventional social policy and how it impinges upon the poor; he is after all an economist, not a sociologist. Government, he says, should pursue a growing economy by lowering taxes, establishing school choice, legalizing drugs to end the violence that surrounds the illicit trade, and abolishing the minimum wage, the Davis-Bacon Act and occupational licensing.

Schansber's favorite solution is the negative income tax that would replace current welfare programs. Under the NIT, each poor household would be guaranteed an annual income in cash rather than in-kind benefits. The NIT would provide "income credits" and would be distributed as a transfer payment like Social Security.

What the author fails to acknowledge is that the NIT would not solve the problem that many of the poor face today: the absence of a genuine support system provided by intermediating institutions such as churches and neighborhood-based nonprofit organizations.

But Schansberg is on the right track. "Concern for the poor," suggests Schansberg, "must be supplemented with the reality of economic laws." The rhetoric surrounding public policy and welfare usually places people into one of two camps: the angels who passionately believe government must act for the good and the accountants who wisely understand the limits of government action. Accountants, it is said, lack compassion; angels, says Schansberg, lack understanding of the complications of political markets.

The author of Poor Policy lacks neither compassion nor understanding when it comes to the poor. If he lacked either he would not have written such a splendid, incisive book.

NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2005. All rights reserved.

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