Why isn't welfare considered a good economic strategy?

I’m not an economist, I’ll put that out there to start. But common sense suggests certain things, and raises some questions for me, that perhaps some people here might be able to answer.

When you give tax breaks and money to the rich, a lot of that money goes out of the country in the form of international investments, or through exotic luxury goods which 1) come from other countries (eg gold watch, foreign sports car), and 2) don’t produce any value in and of themselves - if anything they also depreciate. Luxury goods can also be a way to save up and stockpile “value” through what seems like an economic waste, like personal real-estate. A luxury home provides very little social return of course, but also very little economic return, since a 5 million dollar personal residence doesn’t really “produce” anything further of value the way a factory or school would.

Welfare to the poorest of the poor, however, is the exact opposite. None of it wasted in “savings” that do nothing, but nearly all of that money immediately returns into the local economy. Poor people need food, shelter, and yes, entertainment, etc… and most of that stuff is met locally.

So if you wanted to jump start a nation’s economy, instead of giving tax breaks for the rich and hoping it trickles down to the local poor, isn’t welfare more effective? In fact, wouldn’t welfare be one of the MOST effective means of doing this, since much less of it is wasted and much less of that money leaves the country?

I suppose the easiest counter-argument I can come up with myself, is how poor people shop at Walmart, and therefore all of their money also leaves the country pretty damn fast. The cheapest things are made in China now. But I still want other people’s opinions on this… Can an argument be made for welfare actually being a very effective method of stimulus VS tax breaks for the rich?

The most common argument you’ll hear is: “why should my hard earned money go to these deadbeats.”

It has nothing to do with economics and more to do with moral judgment, if you ask me.

Not sure there is a factual answer to this. It’s probably more of a Great Debates kind of thing.

I"ve got to agree, so—moved from General Questions to Great Debates.

samclem MOderator

Except to the people who get hired to build it. And property taxes. And sales taxes on the furnishings. And maintenance, and upkeep.

I find it interesting that you include “factories” in your short list of investments that produce value. Suppose you tax away money from someone rich, who would otherwise invest it in factories, and instead give it to a poorer person who spends it on the rent. Wouldn’t you agree that in this case, you are transferring money away from productive investments (factories) to non-productive ones (rental buildings)?

Regards,
Shodan

Have you ever been hired by someone on welfare? I don’t see a lot of IPO’s with Darla McTrailerqueen or Chuck Downonhisluck at the helm. Those businesses hire people who make more money than they would on welfare, and increase their standard of living. Some of those folks go on to create their own business and hire more people.

I don’t need to be hired by someone on welfare if his shopping habits are keeping my grocery store in business, or if his minimal rent payments on my spare bedroom are helping me pay for my own expenses. This kind of use of welfare money goes directly into the local economy and helps further the local “circle-of-cash”, benefiting many people down the line.

The amount of money that gets its hands into labourers is significantly less on a pre-built luxury estate, then if I were to build a factory - and then run the factory (given an equal amount of money for both of those things). Or so logic would suggest to me.

As for the other example:

  1. There’s a good chance that person’s factory will be built in China. Chinese productivity will have a comparatively negligible effect on our local/national economy. It’ll have some, of course, but it would have been better if he had built the plant here, no?

  2. If the poor person pays ME rent for his single bedroom unit, I will go out and use that money to buy something… something that has a reasonable chance of being local. It may even make it’s way to a local factory producing goods.

Point is… there’s only so much “local” goods a person needs, and after that, it would seem luxury spending tends to be less a) economically beneficial and b) more foreign. 'Cause we all know of so many luxury goods that come from America… the Europeans just can’t seem to import enough of our quality goods.

The simplistic answer is that the rich contribute to society and the poor do not, so welfare encourages the poor to stay poor and be leeches. The real world is not so simple. While some rich people deserve every penny, others may have gotten their money through more or less illicit means (Madoff) or by creating investment instruments that made them a lot of money in the short term but hurt the economy in the long term (much of Wall Street.) I’d say the junkie on welfare might be hurting society less then they do.
On the other hand, a safety net encourages people to take risks. If working for a startup which might fail might result in a loss of healthcare for your family, you might want to stay put in your everyday job, which might be bad for society.
Plus, the rich investing in factories is fine so long as there is someone around to buy the stuff the factory makes.
I don’t think whether the money stays in the country is much of a determiner. The poor person might send his money overseas by buying junk made in China at the local WalMart instead of stuff made here.

The problem here is your first sentence, which conflates two issues. The first half is not necessarily true, but the second half generally is. As you spend the rest of your post attacking the first half, you’ve made things seem more simplistic than they really are.

The fact is that “welfare encourages the poor to stay poor and be leeches”. There’s no way around this. It’s human nature.

While it’s true that not all rich people are productive and some are leeches (and even many of the ones who are productive are being grossly overpaid, e.g. fat-cat CEOs and the like), being on welfare is almost never productive. The more welfare you give, the more you encourage people to be lazy, which is both morally wrong and counterproductive for the economy as a whole.

[Which is NOT to say that all people on welfare are lazy. But that some are, to one extent or another, and the more welfare you give, the more this will tend to be the case.]

  1. Economics is not a zero sum game. Foreign investment isn’t at the expense of our country.
  2. Higher taxes make the wealthy and middle class scared about the freedom of the market, which causes businesses to become more conservative, which depresses the economy.
  3. The poor don’t spend money in growth markets. Basically all extra money which goes there automatically goes into liquor, cars, gambling, smokes, and Walmart. Those will likely be American companies which provide those services, but it takes a while for that money to percolate through the economy. Whereas, investments are more spread across the economy and target themselves at new and growing markets which are the types that create new technologies.

Creating new technologies is how the market is able to grow from year to year. You make everything that came before cheaper, better, or redundant so that you can buy everything you used to be able to, or can achieve everything you used to for less money, freeing up more money for even more new technologies.

Keeping money in the market isn’t useful if it isn’t going anywhere that drives the economy.

. The tax breaks have gone over and over to the rich at the expense of the poor and middle class. The result has been a suppression of demand. More people with less money kills the economy. Demand is what increases hiring. Companies do not hire , even if they are sitting on a pile of cash, if the demand for their products is low. The Repub redistribution of wealth to the extremely wealthy has damaged our economy.
Putting more money into the poorer people will increase demand. They do not sit on it. They buy things and pay bills.

Borzo, it depends on what school of economics you belong to. Mainstream economics which is has been dominated by the neo-classical school does not consider it good strategy. Neo-classical economics focuses on economic efficiency and supports policies that distribute resources to the most productive use. It has a very libertarian bent to it, and believes that the only efficient distribution can be achieved through market forces, and that government welfare causes distortions in that market. It is a misallocation of resources and creates false incentives, they claim. Government policies should be focused on easing access to capital and creating a stable environment for firms to operate in, which also means minimal regulation.

A major problem with the above is that the only criteria for productive use is whatever generates profits regardless of how many people may actually benefit from that production. So five million dollar homes are considered productive as long as there is a buyer willing to pay for it. It claims that economics is purely a positive discipline - i.e. purely descriptive and value-free. Or rather the only value that matters is the extrinsic value of a good in the market place, and that its price exceeds its cost. Any attempt at normative values, i.e. what ought to be, is futile.

Several critiques of neo-classical economics exist and it is losing the hold it has had on the mainstream for the last sixty-odd years.

The most relevant is probably the development economics school where the main figure is Amartya Sen. I highly recommend Development as Freedom which proposes that the focus of economics should not be efficiency but the development of capabilities for each person to act as their own agent for change.

It focuses as much on human development as economic development. The majority of the work has been focused on developing third world economies, but much of it is applicable to populations of any economy, especially the lower classes. It gives the government and other institutions a much greater role than neo-classical models in creating an infrastructure for that development, and the allocation of resources should based on the capability of increasing human welfare - education, health, environmental wellness, human rights, as well as economic opportunities. It is highly normative - it posits a model of human wellness and advocates policies to achieve that model.

I started athread not to long ago which is similar - that money spent at the bottom would be more effective than money spent at the top. But I was focusing on micro-businesses, not on traditional welfare, but I agree with your sentiment. A million dollars given to the poor would have a stronger multiplier than a million dollar tax break to the rich. The claim is that they have a greater propensity to invest, but most of it goes to passive investments such as previously-issued stocks or existing real estate, or worse, to conspicuous consumption which uses up assets without creating new ones, and not to productive investments such as new factories or equipment. The poor will spend it, which means that businesses will still receive those funds, but first it will spent on goods that people actually need, not on items to impress those at the country club.

Providing welfare should not be seen as an entitlement - at least no more than the right to live without fear of dying from preventable conditions should be considered an entitlement - but as increasing a person’s capabilities to take risks and decide their own path, such as the example Voyager gave.

Unfortunately the political climate suggests that the poor are lazy. In my experience it is the rich who are lazy - they only do the bare minimum necessary. Urban blight and industrial wastelands don’t exist because of the poor, but because of the rich pulling their money out and letting a property fall into disrepair because it is cheaper for them to take the money and run, and stick the costs of cleanup and redevelopment onto the buyer of last resort - i.e. the government - which is also now poorer since it no longer earns tax revenues from those properties being in use.

The rich spend far more money on Dom Perignon, Porsches, the Bellagio, Cohibas, and Soho boutiques. The poor ain’t even in the same league when it comes to wasting money as the rich are.

It isn’t the poor who spend their money on those things - it is humans! And as a percentage of their income, the poor spend far less on those items than the rich do.

I can’t help but feel that it’s actually IMPOSSIBLE to waste money on the poor, since they don’t actually hold on to it for any significant amount of time. Instead of giving subsidies to companies, why not just let the poor do it for me, and that way they can find food and shleter along the way as well.

You can’t say that Americans would be *equally *well off by subsidizing factories in China, instead of America. Sure we get some of that investment back, but most of it remains in China.

Can’t argue with this.

First, I think it’s terribly unfair and insulting to suggest that this is how most of their money is spent. Please confirm for me that you don’t actually believe this is true. I would say food and rent would make up over 50% of a person’s welfare check. (Two things you didn’t even mention, at all! I can’t help but feel you have a strange idea of what it’s like to be poor…)

But okay… so you’re saying that the things they’re spending their money on (which includes food and rent), even if it stays local, isn’t where most of the growth is happening. You’re saying that instead of waiting for the welfare cash to** trickle up **to where it would be most useful, why not just directly subsidize those industries?

I suppose I can see how corporate subsidies might be better economic stimulus than welfare. Though once you’re dealing with money that isn’t yours, you give yourself a pay raise and reduce productivity, no? Where do you think a balance could be found here?

I do think, however, that it’s naive to say that this money won’t reach a place where it will be able to drive the economy.

Agnostic Pagan, and I’m not trying to insult here, but that’s the worst neoclassical economics I’ve read since Marx, the worst understanding of the role of wealthy individuals in the economy, and flat wrong about the supposed weakening of neoclassical economics.

I think he meant the extra money, if you increase their welfare payments.

From a macro perspective, the only thing that matters is how much value is being created at a given time. That is, how often someone is taking $1 of nails and $3 of wood and making a $10 table, or burning $3 of gasoline to dig up $5 of ore. That’s the only thing that, in the long run, employs people and makes up for all the consumption (like eating or heating our homes) that we do.

Transferring money from those that have earned it to those that haven’t simply robs incentive from the producers. It removes the motivation to make a $10 table, so to speak.

Last year, I had a job for $X/year. I was offered a job for $10,000 more but there were some drawbacks. The commute was farther. I’d have less vacation days. I valued those drawbacks as costing me $8,000. Since it’s giving me $10,000 more in salary but costing me $8,000 in drawbacks, you’d think I’d have taken the job. But with the tax rate, that $10,000 becomes only $7,000. So I didn’t take the job. That means the economy loses out. I decided not to “dig up that ore” or “make the table”. So no wealth was created and the government missed out on extra tax revenue that they would’ve gotten with a lower tax rate.
But anyway, you’ve got a lot of assertions that aren’t supported in the OP. For one thing, even if the rich invest overseas, the whole point of investing is the get a nice return. And you know who gets a piece of that return? Uncle Sam, via capital gains tax. So that money is only out of the country temporarily.

Secondly, you assume that if the poor spend money quickly, that it will stay in the country. I don’t see that as evident at all. The US imports cheap goods, not expensive luxury items. Our major export is technology and financial services. Now ask yourself- who makes use of financial services, the rich or poor? Who buys up new gadgets like iPods, Cisco routers, and Oracle servers, the rich or poor? And finally, when Apple sells a million iPods to Japan, what government gets to tax those profits, the US or Japan?

And finally, all those arguments are from an economic angle. I didn’t even mention the inherent unfairness of taking from one for the sole purpose of giving to another.

Thank you for your informative post. I will check out that other thread also. I’ll have to think about this some more before I respond or ask a couple more questions.

Ahhh… I should have read a little more carefully. Thank you.