The Ballooning Welfare State; H. Hazlitt

226 The ~allooning WelfareState HENRY HAZLITT 1883, and was soon even baptized by German journalists as der Wohlfahrtsstaat. The example of Germany was followed by Austria in 1888 and by Hungary in 1891. It was not till 1912 that com pulsory health insurance was in troduced in Great Britain, under Lloyd George's National Insurance Act of 1911. In 1925 came con tributory old-age, widows' and or phans' pensions. Unemployment in surance was put on a fresh basis in the Unemployment Act of 1934, which set up at the same time a national system of unemployment assistance. In 1945 the Family Al lowance Act was passed. It pro vided for payment to every family, rich or poor, of an allowance for each child, other than the eldest. In 1946 came the National Health Service Act, offering free medical services and medicines to every one.

1972 THE BALLOONING WELFARE STATE 227 Then, in 1948, as a result of the report of Sir William Beveridge, the whole system of compulsory contributions for social insurance was immensely extended, with wider unemployment benefits, sick ness benefits, maternity benefits, widows' benefits, guardians' allow ances, retirement pensions, and death grants. The continuous expansion of "social security" and welfare serv ices in Great Britain is typical of what has happened in most other countries in the Western world over the last half century. The broad pattern has been remarkably similar: a multitude of "insur ance" programs, supported in part by compulsory contributions and in part by general tax funds, ostensibly protecting everyone against the hazards of poverty, unemployment, accident, sickness, old age, malnutrition, "substan dard" housing, or almost any other imaginable lack; programs ex panding year by year in the num ber of contingencies covered, in the number of beneficiaries under each program, in the size of in dividual benefits paid, and of course in the total financial burden imposed.

So, year by year, the tendency has been for every working person to pay a higher percentage of his earned income either for his own compulsory "insurance" or for the support of others. Year by year, also, the total burden of taxes tends to go up, both absolutely and proportionately. But direct and acknowledged taxes have tended to go up less than total expendi tures. This has led to chronic deficits that are met by printing more irredeemable paper money, and so to the almost uni versal chronic inflation that marks the present age. Growth 01 Welfare Programs in the u.s. since J935 Let us look at the ballooning welfare state in detail as it has developed in our own country. We may begin with President Franklin D. Roosevelt's 1935 mes sage to Congress in, which he de clared: "The Federal Government must and shall quit this business of relief .... Continued dependence upon relief induces a spiritual and moral disintegration, fundamen tally destructive to the national fiber."

The contention was then made that, if unemployment and old age "insurance" were put into ef fect, poverty and distress would be relieved by contributory pro grams that did not destroy the in centives and self-respect of the re cipients. Thus relief could gradu ally be tapered off to negligible levels.

228 THE FREEMAN April The Social Security Act became law on August 4, 1935. Let us see first of all what hap pened to the old-age provisions of that act. There have been constant additions and expansions of bene fits. The act was overhauled as early as 1939. Coverage was broad ened substantially in 1950. In 1952, 1954, 1956, 1958 and 1960 (note the correspondence with years of Congressional elections) there were further liberalizations of coverage or benefits. The 1965 amendments added Medicare for some 20 million beneficiaries. The 1967 amendments, among other liberalizations, increased payments to the 24 million beneficiaries by an average of 13 per cent and raised minimum benefits 25 per cent. In 1969, retirement and sur vivors benefits were raised again by about 15 per cent, effective January 1, 1970. (It is sometimes argued that these benefit increases from 1950 to 1970 were necessary to keep pace with increases in living costs.

Actually, the increases in individ ual monthly benefits totaled 83 per cent, compared with a 51.3 per cent increase in consumer prices over the same period.) from $60 to $936 From 1937 to 1950, Social Se curity was financed by a combined tax rate of only 2 per cent on both employer and employee (1 per cent each) on wages up to $3,000 a year. Since then both the rates and the maximum wage base have been increased every few years. In 1972 the combined tax rate is 10.4 per cent (5.2 per cent on each the employer and the employee) on a maximum wage base that has been raised to $9,000. The result is that whereas the maximum annual payment up to 1950 was only $60, it has risen to $936. In 1947, payroll tax collections for old age and survivors insur ance amounted to $1.6 billion; by 1970, these taxes had increased to $39.7 billion. At the beginning, the Social Se curity program was sold to the American public as a form of old age "insurance." The taxes were represented as the "premiums"

paid for this insurance. Every body who was getting benefits was assured that he could accept these with no loss of "dignity',', because he was "only getting what he had paid for." This was never true, even at the beginning, and has become less true year by year. The low-wage receivers have always been paid much more in proportion to their "premi urns" than the higher-wage receivers. The disparity has been increased with succeeding revi sions of the act. The typical bene1972 THE BALLOONING WELFARE STATE 229 ficiary even today is recei ving benefits worth about five times the value of. the payroll taxes. he and his employer paid in.2 A Sad Mixture of Insurance and Hand~uts The OASDI program has devel oped into a mixed system of insur ance and welfare handouts, with the welfare element getting con stantly larger. It is today a bad system judged either as insurance or as welfare. On the one hand, benefits in excess of the amounts they paid for are being .given, in some cases, to persons who are not in need of welfare. On the other hand, persons who are in fact re ceiving welfare handouts are be ing taught to believe that they are getting-only "earned" insurance.

Obviously, welfare programs can be expanded even faster than otherwise .if they are masked as "contributory insurance" pro grams. Our concern here, however, is not with the defects of the OASDI program but primarily with its rate of growth. In 1947, social se curity benefit payments covered only old-age and survivors insur ance and amounted to less than half a billion dollars. In 1956, dis ability insurance was added, and in 1965, health insurance. In 1970, these payments reached about $39 billion. Unemployment Insurance Now, let us look at unemploy ment insurance. This program was also set up under the Social Se curity Act of 1935. But whereas old-age insurance was on a strictly national basis, unemployment in surance was instituted on a state by-state basis within the broad scope of certain Federal criteria. While provisions have differed in each of the fifty states, unem ployment insurance has shown the same chronic growth tendency as old-age benefits. In 1937, the states typically required periods of two or three weeks before any benefits were paid. The theory behind this was that a man just out of employ ment would have at least some minimum savings; that the state would be given time to determine his benefit rights; and that the benefit funds should be conserved for more serious. contingencies by reducing or eliminating payments for short periods of unemploy ..

mente Now the waiting period has been reduced to -only one week, and in some states does not exist at all. In contrast with the $15 to $18 weekly benefit ceilings in various states in 1940, the maximums now range between $40 and $86 a week, exclusive of dependents' allow ances in some states. Reflecting both legislated in;;. creases and rising wage levels, na230 THE FREEMAN April tionwide average weekly benefit payments increased from $10.56 in 1940 to $57.72 in 1971. Even after allowing for higher consumer prices, the real increase in pur chasing power of these average benefits was 63 per cent, and they continue to increase much faster than either wages or prices. For example, from its average in 1969, the weekly payment in June, 1971, had increased 25 per cent as com pared to an8 per cent increase in wages and an 11 per cent increase in prices. Fulltime Benefits As of 1971, state legislation had increased the maximum dura tion of unemployment benefits from the predominantly prevailing 16-week level in 1940 to 26 weeks in 41 states - and of longer dura tion ranging to 39 weeks in the other states. In December, 1971, Congress voted to provide. 13 weeks additional benefits in states with sustained unemployment rates of more than 6~ per cent.

This made it possible for workers in such eligible areas to draw such benefits up to a total of 52 consecutive weeks. Total annual benefit payments increased from about one-half bil lion dollars in 1940 to $3.8 billion in 1970 - more than a seven-fold increase and the highest payout in history. In 1970 alone, total benefits increased 80 per cent ($1.7 billion) over the 1969 level. The combination of legislated increases in maximum weekly benefits and in maximum duration of the bene fits has increased nearly tenfold the total benefits potentially pay able to the individual unemployed worker in a year's period (dollars per week multiplied by the num ber of weeks). 3 This is bound to increase still further. On' July 8, 1969, Presi dent Nixon called upon the states to provide for higher weekly un employment compensation bene fits. He suggested that weekly maximums be set at two-thirds of the average weekly wage in a state so that benefits of 50 per cent of wages would be paid to at least 80 per cent of insured workers.

Only one state - Hawaii - re sponded promptly with the full raise suggested, but other states have scheduled future increases. There can be no doubt that un employment compensation reduces the incentive to hold on to an old job or to find a new one. It helps uniQns to maintain artificially high wage rates and it prolongs and increases unemployment. One economist has likened it to "a bounty for keeping out of the la har market."4 Moreover, it is a complete mis nomer to call it unemployment "insurance." In the United States 1972 THE BALLOONING WELFARE STATE 231 the workers do not even make a direct contribution to it (though in the long run it must tend to re duce the real pay of the steady worker). Like so-called govern ment old-age "insurance", it is in fact a confused mixture of insur ance and handout. Those who are continually urging an increase in the percentage of the previous wage-rate paid, or the extension of the benefit-paying period (to avoid undisguised relief), forget that it violates ordinary welfare standards of equity by paying larger sums to the previously better-paid workers than to the previously lower-paid workers.

But apart. from these shortcom ings, what we are primarily con cerned with here is the tendency of unemployment compensation, once adopted, to keep growing both as a percentage of weekly wages Leisure Is Not Free and in the length of idle time for which it is paid. Just what success, if any, the increasingly costly Social Security and unemployment compensation programs have had in enabling the Federal government to "quit this business of relief" we shall see in a subsequent article. ~ • FOOTNOTES • 1 Encyclopedia Britannica, 1965, ar ticle "Bismarck", Vol. 3, p. 719. 2 Colin D. Campbell and Rosemary G. Campbell, "Cost-Benefit Ratios under the Federal Old-age Insurance Program," U. S. Joint ECQnomic Committee, Old-age Income Assurance, Part III (Washing ton, D. C., U. S. Government Printing Office, December 1967), pp. 72-84. 3 Much of the foregoing material on Social Security and unemployment com pensation is derived from studies by the American Enterprise Institute, Wash ington, D. C.

4 W. H. Hutt, The Theory of Idle Re sources (London: Jonathan Cape, 1939), p.129. IDEAS ON $ LIBERTY LEISURE IS NOT FREE. To the extent that we choose it rather than productive work, we exchange it for real income. Longer vaca tions, more holidays, and other time-off practices - like a shorter work week - must all be charged against real income. The aver age worker has gained about 50 hours in additional vacation time since 1960. The ten-hour, four-day week may not reduce work time; it may even add to the productive use of resources and equipment. But by emphasizing leisure instead of work it is likely to point in an unhelpful direction. HERBERT R. NORTHRUP, professor of industry and. director, Industrial Research Unit, Wharton School of Finance and Commerce.