Milton Friedman’s Radical Idea

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The American public policy discussion is currently abuzz about economic inequality. French economist Thomas Piketty doused gasoline on the discussion with his work Capitalism in the Twenty-First Century. Last month, President Barack Obama dared Congress to combat inequality in a forceful State of the Union Address, and his budget proposal this week walks the walk. Even conservatives like Jeb Bush and Mitt Romney have recently discussed policy solutions to shrink the gap between the ultra-wealthy and the middle class – a surprising pivot from just a few years ago.

A wide array of policy proposals claim to tackle the problem, but at its core, the solution will require that Americans get more money in the hands of those that don’t currently have it. In other words, we’ll need to ensure that everyone in the United States has a basic level of income to feed, shelter and medically care for themselves. The policy, Voxplained:

Basic income is not a radical socialist idea – it’s a solidly conservative one, designed by the intellectual architect of conservative economics and the messiah of a free-market society – Nobel-prize winning University of Chicago professor Milton Friedman. He was a proponent of school vouchers, financial deregulation, and dismantling Keynesian programs of the New Deal (which, for the record, I am not). However, he was also a proponent of social welfare.

In Capitalism and Freedom (1962), Friedman proposed a solution to the inherent threat of income inequality in capitalism. He called this solution a negative income tax – a tax-funded subsistence payment to any individual who made less than required to live in America. Here I’ve included the entire chapter on the subject, just in case you don’t believe me that this idea came from a staunch conservative:

THE ALLEVIATION OF POVERTY

The extraordinary economic growth experienced by Western countries during the past two centuries and the wide distribution of the benefits of free enterprise have enormously reduced the extent of poverty in any absolute sense in the capitalistic countries of the West. But poverty is in part a relative matter, and even in these countries, there are clearly many people living under conditions that the rest of us label as poverty.

One recourse, and in many ways the most desirable, is private charity. It is noteworthy that the heyday of laissez-faire, the middle and late nineteenth century in Britain and the United States, saw an extraordinary proliferation of private charitable organizations and institutions. One of the major costs of the extension of governmental welfare activities has been the corresponding decline in private charitable activities.

It can be argued that private charity is insufficient because the benefits from it accrue to people other than those who make the gifts — again, a neighborhood effect. I am distressed by the sight of poverty; I am benefited by its alleviation; but I am benefited equally whether I or someone else pays for its alleviation; the benefits of other people’s charity therefore partly accrue to me. To put it differently, we might all of us be willing to contribute to the relief of poverty, provided everyone else did. We might not be willing to contribute the same amount without such assurance. In small communities, public pressure can suffice to realize the proviso even with private charity. In the large impersonal communities that are increasingly coming to dominate our society, it is much more difficult for it to do so.

Suppose one accepts, as I do, this line of reasoning as justifying governmental action to alleviate poverty; to set, as it were. a floor under the standard of life of every person in the community. There remain the questions, how much and how. I see no way of deciding “how much” except in terms of the amount of taxes we — by which I mean the great bulk of us — are willing to impose on ourselves for the purpose. The question, “how,” affords more room for speculation.

Two things seem clear. First, if the objective is to alleviate poverty, we should have a program directed at helping the poor. There is every reason to help the poor man who happens to be a farmer, not because he is a farmer but because he is poor. The program, that is, should be designed to help people as people not as members of particular occupational groups or age groups or wage-rate groups or labor organizations or industries. This is a defect of farm programs, general old-age benefits, minimum-wage laws, pro-union legislation, tariffs, licensing provisions of crafts or professions, and so on in seemingly endless profusion. Second, so far as possible the program should, while operating through the market, not distort the market or impede its functioning. This is a defect of price supports, minimum-wage laws, tariffs and the like.

The arrangement that recommends itself on purely mechanical grounds is a negative income tax. We now have an exemption of $600 per person under the federal income tax (plus a minimum 10 per cent flat deduction). If an individual receives $100 taxable income, i.e., an income of $100 in excess of the exemption and deductions, he pays a tax. Under the proposal, if his taxable income minus $100, i.e., $100 less than the exemption plus deductions, he would pay a negative tax. i.e.r receive a .subsidy. If the rate of subsidy were, say, 50 per cent, he would receive $50. If he had no income at all, and, for simplicity, no deductions, and the rate were constant, he would receive $300. He might receive more than this if he had deductions, for example, for medical expenses, so that his income less deductions, was negative even before subtracting the exemption. The rates of subsidy could, of course, be graduated just as the rates of tax above the exemption are. In this way, it would be possible to set a floor below which no man’s net income'(defined now to include the subsidy) could fall — in the simple example $300 per person. The precise floor set would depend on what the community could afford.

The advantages of this arrangement are clear. It is directed specifically at the problem of poverty. It gives help in the form most useful to the individual, namely, cash. It is general and could be substituted for the host of special measures now in effect. It makes explicit the cost borne by society. It operates outside the market. Like any other measures to alleviate poverty, it reduces the incentives of those helped to help themselves, but it does not eliminate that incentive entirely, as a system of supplementing incomes up to some fixed minimum would. An extra dollar earned always means more money available for expenditure.

No doubt there would be problems of administration, but these seem to me a minor disadvantage, if they be a disadvantage at all. The system would fit directly into our current income tax system and could be administered along with it. The present tax system covers the bulk of income recipients and the necessity of covering all would have the by-product of improving the operation of the present income tax. More important, if enacted as a substitute for the present rag bag of measures directed at the same end, the total administrative burden would surely be reduced.

A few brief calculations suggest also that this proposal could be far less costly in money, let alone in the degree of governmental intervention involved, than our present collection of welfare measures. Alternatively, these calculations can be regarded as showing how wasteful our present measures are, judged as measures for helping the poor.

In 1961, government amounted to something like $33 billion (federal, state, and local) on direct welfare payments and programs of all kinds: old age assistance, social security benefit payments, aid to dependent children, general assistance, farm price support programs, public housing, etc. I have excluded veterans’ benefits in making this calculation. I have also made no allowance for the direct and indirect costs of such measures as minimum-wage laws, tariffs, licensing provisions, and so on, or for the costs of public health activities, state and local expenditures on hospitals, mental institutions, and the like.

There are approximately 57 million consumer units (unattached individuals and families) in the United States. The 1961 expenditures of $33 billion would have financed outright cash grants of nearly $6,000 per consumer unit to the 10 per cent with the lowest incomes. Such grants would have raised their incomes above the average for all units in the United States. Alternatively, these expenditures would have financed grants of nearly $3,000 per consumer unit to the 20 per cent with the lowest incomes. Even if one went so far as that one-third whom New Dealers were fond of calling ill-fed, ill-housed, and ill-clothed, 1961 expenditures would have financed grants of nearly $2,000 per consumer unit, roughly the sum which, after allowing for the change in the level of prices, was the income which separated the lower one-third in the middle 1930’s from the upper two-thirds. Today, fewer than one-eighth of consumer units have an income, adjusted for the change in the level of prices, as low as that of the lowest third in the middle 1930’s.

Clearly, these are all far more extravagant programs than can be justified to “alleviate poverty” even by a rather generous interpretation of that term. A program which supplemented the incomes of the 20 per cent of the consumer units with the lowest incomes so as to raise them to the lowest income of the rest would cost less than half of what we are now spending.

The major disadvantage of the proposed negative income tax is its political implications. It establishes a system under which taxes are imposed on some to pay subsidies to others. And presumably, these others have a vote. There is always the danger that instead of being an arrangement under which the great majority tax themselves willingly to help an unfortunate minority, it will be converted into one under which a majority imposes taxes for its own benefit on an unwilling minority. Because this proposal makes the process so explicit, the danger is perhaps greater than with other measures. I see no solution to this problem except to rely on the self-restraint and good will of the electorate.

Writing about a corresponding problem — British old-age pensions — in 1914, Dicey said, “Surely a sensible and a benevolent man may well ask himself whether England as a whole will gain by enacting that the receipt of poor relief, in the shape of a pension, shall be consistent with the pensioner’s retaining the right to join in the election of a Member of Parliament.”

The verdict of experience in Britain on Dicey’s question must as yet be regarded as mixed. England did move to universal suffrage without the disfranchisement of either pensioners or other recipients of state aid. And there has been an enormous expansion of taxation of some for the benefit of others, which must surely be regarded as having retarded Britain’s growth, and so may not even have benefited most of those who regard themselves as on the receiving end. But these measures have not destroyed, at least as yet, Britain’s liberties or its predominantly capitalistic system. And, more important, there have been some signs of a turning of the tide and of the exercise of self-restraint on the part of the electorate.

LIBERALISM AND EGALITARIANISM
The heart of the liberal philosophy is a belief in the dignity of the individual, in his freedom to make the most of his capacities and opportunities according to his own lights, subject only to the proviso that he not interfere with the freedom of other individuals to do the same. This implies a belief in the equality of men in one sense; in their inequality in another. Each man has an equal right to freedom. This is an important and fundamental right precisely because men are different, because one man will want to do different things with his freedom than another, and in the process can contribute more than another to the general culture of the society in which many men live.

The liberal will therefore distinguish sharply between equality of rights and equality of opportunity, on the one hand, and material equality or equality of outcome on the other. He may welcome the fact that a free society in fact tends toward greater material equality than any other yet tried. But he will regard this as a desirable by-product of a free society, not its major justification. He will welcome measures that promote both freedom and equality — such as measures to eliminate monopoly power and to improve the operation of the market. He will regard private charity directed at helping the less fortunate as an example of the proper use of freedom. And he may approve state action toward ameliorating poverty as a more effective way in which the great bulk of the community can achieve a common objective. He will do so with regret, however, at having to substitute compulsory for voluntary action.

The egalitarian will go this far, too. But he will want to go further. He will defend taking from some to give to others, not as a more effective means whereby the “some” can achieve an objective they want to achieve, but on grounds of “justice.” At this point, equality comes sharply into conflict with freedom; one must choose. One cannot be both an egalitarian, in this sense, and a liberal.

Friedman understood that capitalism provided for maximum freedom only when the least of us were guaranteed a minimum level of security. Capitalism necessarily creates winners and losers – and it should reward those who work hard to get ahead. But Friedman also believed in “dignity of the individual.” If the losers can no longer play the game even if they wanted, everyone suffers. When the poorest are locked out of participation in an economy, competition is reduced, monopolies emerge and profits fall for all but a select few.

Friedman saw this, and realized that freedom is increased for all when the poorest are supported. Another Nobel-winning economist, the late Gary Becker, student and intellectual heir of Friedman’s Chicago School of Economics, agreed:

“Any state intervention, any income redistribution, creates disincentives and distortions,” admits Gary Becker, a University of Chicago economist and Friedman disciple. “But if society decides that a certain level of redistribution must take place, the NIT is the best, the most minimally distorting, solution ever devised.”

Later conservatives have argued that Friedman was wrong – that a negative income tax will provide a disincentive to work. This was a legitimate concern in the manufacturing economy of the 1970s and 1980s, but today, the concern should not be laziness but the demonstrable fact that fewer and fewer jobs will be available in the future as more labor becomes automated and sent offshore. American capitalism is simultaneously increasing production faster than ever before while providing fewer opportunities for meaningful labor. Even those who want work may not be able to find it. In the near future, technology could put many laborers, service sector and even white-collar workers completely out of competition for jobs. Providing a safety net for those individuals will not be a luxury but a necessity – if proponents of capitalism truly want to ensure the health of our free market system, that is.

Reducing extreme income inequality by providing a basic income is a fundamentally conservative idea – and one I fully support.

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