The Real Tragedy of the Welfare State

Does America, the richest country on earth, have a poverty problem?

Are vast numbers of people going without shelter or food? Are poor children suffering from malnutrition?

If you read the headlines, you might believe this is true.

It’s not.

America’s “poverty crisis” is fiction—a myth manufactured to make us feel like we’re not doing enough to help “the unfortunate.”

We should feel bad about our treatment of the poor. We are doing them a terrible disservice. But not for the reason you think.

So, where does the myth come from?

It comes from an accounting trick.

Ready for this?

The official measure of poverty does not include 88% of the welfare benefits low-income families receive from the government.

Refundable tax credits, for which the beneficiary receives a check from the Treasury? Not counted. EBT debit cards loaded with SNAP benefits? Not counted. Benefits from over a hundred other programs, including Medicaid and housing subsidies?

The government doesn’t count any of this as income, even though—in the real world—it obviously is.

Let’s see how this plays out:

The average household in the bottom 20% of income-earners receives—on average—annual government transfer payments of about $45,000.

When those transfer payments are counted as income, the poverty rate falls from its official level of 12% to only 3%.

The percentage of children living in poverty plummets from 17% to 3%. Seniors? 9% to 1%. 

Counting transfer payments also eliminates most of the differences in the poverty rate across races.

Census data from 2017 shows that 11% of whites and 21% of blacks are poor. But when counting all transfer payments as income received, the relative poverty numbers fall to 2% for whites and 4% for blacks.

You’ll find these numbers and much more in Phil Gramm and Donald Boudreaux’s excellent book, The Triumph of Economic Freedom.

As Gramm and Boudreaux observe, the only reason the poverty rate has not fallen in over 50 years is that the Census Bureau simply ignores most welfare benefits.

What about consumption? Are “poor” Americans living in destitution?

Hardly.

The Census Bureau’s American Housing Survey shows that more than 40% of officially poor households own their own homes. Almost 90% have air conditioning. Even more have flat-screen TVs and smartphones.

So, who are the truly poor in America? The homeless.

And the reason for their poverty is overwhelmingly mental illness or drug addiction.

Aside from this group, almost no one lacks food or shelter — not to mention cable TV and Air Jordan sneakers.

Does that mean the War on Poverty has been a success?

The answer, unfortunately, is no. Worse than no.

It has been an abysmal failure.

Here’s why: the increased dependency on the government has largely severed the bottom fifth of income recipients from the rewards—and responsibilities—of work.

Yes, many people break out of this dependency and live productive, independent lives, but many—too many—do not.

In 1967, as funding for President Lyndon Johnson’s War on Poverty began to ramp up, 68% of prime working-age individuals in the lower-income groups were employed.

Forty years later, that number had fallen to 36%.

Why? Because you don’t have to work.

In 2017, the bottom 20% of working-age households earned only $7,000 per year in wages.

In the next highest 20% of working-age households, 85% of the people worked, earning a yearly average of $32,000.

But factor in government transfer payments—which are cut off when one earns above a certain amount—and these two groups make essentially the same: $49,000 and $50,000, respectively.

Two-thirds of working-age Americans in the lower-income group have reached the obvious conclusion: Why work when you can be paid for not working?

But this decision not to work comes at a terrible price.

President Franklin Roosevelt understood what happens when citizens come to rely on the government for their daily existence. He said:

“The lessons of history show conclusively that continued dependency upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.”

This is the real tragedy of the welfare state.

By providing able-bodied people with a comfortable existence without requiring effort, we are consigning them to a nether world—a gray zone of stagnation.

We are robbing them of the friction and the struggle that is necessary for growth.

Think of the potential lost under a mountain of government checks. Who knows what businesses these men and women could create? What skills they could master? What problems they could solve?

Instead, they live from government transfer payment to government transfer payment. They subsist, but they do not thrive.

This is not compassion.

If we really cared, we’d expect more from people, so that they’d expect more from themselves. By disincentivizing work, we are stealing their future.

The War on Poverty has turned into a War on Human Potential.

We are all the poorer for it.

I’m Xaviaer DuRousseau for Prager University.