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PRIVATIZING 1HE WELFARE STATE

John C. GoOOman
and

Michael D. Stroup

NCPA roUCY REPORT 11123


June, 1986

NATIONAL CENTER FOR roUCY ANALYSIS


7701 N. Stemmons, Ste. 717
Dallas, Texas 75247

EXEOJTIve SUMMARY

New evidence shows that there are remarkable differences among the people
we label as "poor." The poverty population includes the elderly poor as well as
unwed teenage mothers. It includes people with college degrees as weJl as
people who are functionally illiterate. It includes the healthy as well as the
sick. It includes people who are able to support themselves through productive
work as well as people who are mentally impaired. It includes people who use
the welfare system only for temporary relief as well as people who become
perpetual wards of the state.
Every year large numbers of people fall into poverty, but remain poor for
only short periods of time. At the same time a large portion of people who are
now poor wiIl remain poor for very long periods of time.

Among the people who fall into poverty in any given year, 45 percent
will be out of poverty by the end of the year.

Seventy percent will be out of poverty within three years.

Yet of those who currently are poor, about half wlll remain poor for
at least a decade.

The federal government's answer to the problem of poverty is to spend $100


billion a year on means-tested programs. Unfortunately, rules written in
Washington are tragically inadequate to take account of the differences in
attitude and circumstance of the millions of recipients of this money. For the
most part, federal programs encourage dependency and anti-social behavior and
do little to encourage self-reliance and desirable behavior.
When the War on Poverty was started it was meant to serve as a social
safety net--to help people who failed to get help from the private sector. Yet
it is becoming increasingly obvious that today the private sector is providing
the real social safety net--helping people that government programs simply do
not reach.

Ninety-four percent of all shelters for the homeless in the U.S. are
operated by private sector organizations.

Studies show that as many as 80 percent of low-income people turn to


the private sector first when faced with a crisis.

There is mounting evidence that the private sector does a better job at
getting aid first to those who need it most, at encouraging self-sufficiency
and self-reliance, at encouraging the family unit, and at using resources
efficiently. Currently, the federal government has a monopoly on welfare tax
dollars. It is time to end this monopoly by allowing private citizens to make
decisions on how their welfare tax dollars should be spent.
A proposal to privatize the welfare state begins on page 33 and is followed
by 21 questions and answers on the details of the proposal.

NATIONALIZING THE WELFARE INDUSTRY

3.0

2.0

0.5

0.4

0.3

1955

1960

1965

1970

1975

1980

Source: National Center for Policy Analysis

'DiE WELFARE-POVERTY DEBA1E1

In his 1986 State of the Union address, President Ronald Reagan called for
a national reexamination of the nation's welfare system--of its effect s on
family, individual initiative and self-reliance, and most important, of its
effects on children. As a result, a national debate has begun. On the one
hand, there are those who argue that the effects of the U.S. welfare state are
primarily beneficial and benign, helping people who are in poverty because of
external circumstances over which they have no cont rol. On the other hand,
there are those who argue that the welfare state is creating poverty, encouraging millions of people to choose the condition of poverty because of the
attractions created by an overly generous welfare system.
This study argues that there is some truth on both sides of the debat e.
Welfare does indeed help people who find themselves in a condition of poverty
over which they have little or no control. At the same time there is overwhelming evidence that the welfare state encourages dependency, the breakup of
families and the emergence of the single-parent household--effects which
no humane, well-meaning person can approve.
An ideal welfare system is one which helps people who are in genuine need,
without at the same time encouraging anti-social behavior. In this study we
argue that this ideal cannot possibly be achieved through reform and modification of federal welfare programs. Nor can it be achieved by turning over the
administration of such programs to state and local governments.
The ideal welfare system requires "hands-on-management," a system in which
the amount and type of aid is determined on a case-by-case basis, depending on
the individual circumstances of the recipient. Such a system can be run and
administered only by the private sect or.
In short, the solution to the U.S. welfare-poverty crisis is to privatize
the welfare state.

1The authors would like to thank the following people for their helpful
comments and criticisms during the preparation of this manuscript: ,\tartin
Anderson (Hoover Institution), Stuart Butler (Heritage Foundation), Edwin Dolan
(George Mason University), Lowell Gallaway (Ohio University), Anna Kondratas
(Heritage Foundation), Dee Martin (White House), Tom ~\oore (President's
Council of Economic Advisors), Charles Murray (Manhattan Institute), Gerald
Musgrave (Economics America, Inc.), June O'Neill (U rban Institute), and Gordon
Tullock (George Mason University). These helpful comments do not imply
endorsements, however. The authors of this report bear sole responsibility for
its contents. Proposals similar to the ones made in this study have been made
by Donald Sammis and Joseph Piccione. See Joseph Piccione, "The Human Services
Option: New Funding for the Charitable Sector," (Washington, D.C.: The Free
Congress Research and Education Foundation, 1982).
1

EVIDENCE OF A PROOLEM
That
evidence
scholarly
is clear,

there is a problem with the U.S.


from many sources. The evidence
analysis and statistical tests. All
unmistakable, undeniable, and, quite

welfare system is confirmed by


comes from anecdotal reports,
told, the evidence of a problem
frankly, overwhelming.

Anecdotal Evidence
What U.S. pollcymakers are coming to reaHze only reluctantly is a fact
that any radio talk show host can confirm on a moment's notice. Let the talk
show host brinlS up the subject of welfare and the phone banks will light up
immediately as callers eagerly recount first-hand knowledge of young women
who intentionally become pregnant in order to become eligible for welfare, of
welfare recipients who refuse employment opportunities in order to retain
welfare eligibility, of welfare recipients who cheat and defraud the system,
and so on.
Most social scientists are reluctant to base public policy on evidence
collected in such a casual way. However, a good social scientist does not
totally ignore such evidence either.
Scholarly Studies
Beginning in the mid-I960s a number of studies of the welfare system were
conducted by scholars with impeccable academic credentials. None of these
studies actually proved that welfare was causing poverty.
Yet each provided a
penetrating analysis of particular dimensions of the problem and did so in
very powerful and persuasive ways.
The Moynihan Study. In what has become a classic in the field, The Negro
Family2 was published in 1965. Its author, Daniel Patrick Moynihan, then a
professor at Harvard University, expressed alarm over the fact that 20 percent
of all black children were living in single-parent households. (Today the
figure is more than 60 percent.) The book touched off a storm of controversy,
as did his later advice to the Nixon Administration: Quit pouring money into
the black community and instead follow a poHcy of "benign neglect."
The Anderson Study. Martin Anderson, a Senior Fellow at Stanford
Universitys Hoover Institution and at one time chief of the Office of PoliCY
Development in the Reagan White House, wrote the pathbreaking book Welfare in
the late 1970s. In it he calculated how much a poor family in California would
lose (in terms of taxes and lost welfare benefits) if the breadwinner went

2Daniel P. Moynihan, The Neg.ro Family: The Case for National Action, (Washington, D.C.: U.S. Department of Labor, March 1965).

into the marketplace and earned an ext ra dollar of income.


Anderson discovered that: 3

Astonishing)y,

At almost every level of income, low-income families faced the highest


effective tax rates of any group in the nation.

Poor families could lose as much as 80 cents for earning one more
dollar from productive work.

In the case of certain in-kind benefits such as Medicaid, welfare


recipient s who earned an ext ra dollar of income lost considerably more
than one dollar in benefits.

Anderson concluded that the welfare system was designed from top to bottom to
encourage dependency and to discourage self-reliance.
The Gilder Studies. Geor6e Gilder is a SOCiologist who in the mid-1970s
did something no other modern scholar had done before. He spent several years
living among poor families who were receiving welfare. Gilder's study, Visible
Man4 and his best-seHer, Wealth and Povert y5 analyzed in great detail how the
welfare system was destroying the family, especially the black family, in
low-income communities.
The NCPA Study. "Welfare and Poverty"6 was the first study to document how
the welfare establishment has managed to spend increasingly larger sums of
money, while at the same time maximizing the poverty count. Official measurements of poverty count only money income, and ignore in-kind benefits such as
medical care, food stamps and public housing. By spending ever-increasing
amounts of money on in-kind (non-cash) benefits, instead of cash benefits, the
welfare establishment has managed to make welfare increasingly att ractive
without disqualifying reci~ients by endangerinb their status as "poor."7

Between 1965 and 1981, cash transfers to the poor barely changed at
all in real terms.

Over the same period, non-cash benefit s for the poor increased 5,238
percent.

3Martin Anderson, Welfare, (Stanford: Hoover Institution Press, 1978), Chap. 2.


4George Gilder, Visible Man: A True Story of Post-Racist America, (New
York: Basic Books, 1981).
5George Gilder, Wealth and Poverty, (New York: Basic Books, 1981).
6John C. Goodman, "Welfare and Poverty," Policy Report 11107, National Center
for Policy Analysis, Dallas, Texas, 1985.
7Goodman, "Welfare and Poverty," pp. 8-9.

The Murray Study. More than any other single study, Charles :v\urray's
Losing GroundS shocked liberals and conservatives alike into a realization that
something was wrong with the U.S. welfare system. Murray ar6ued that in our
central cities the black family has been aU but destroyed, and he made a
forceful case that the welfare system bore chief responsibility for this
shocking development.
Statistical Proof
One of the criticisms of the studies by Murray, Gilder and others is that
they did not perform rigorous statistical tests to support their positions.
Social scientists, by nature, like controlled experiments and rigorously
developed econometric tests of important propositions. As it turns out, this
kind of evidence is now in hand.
The Negative Income Tax Experiments. In controlled experiments performed
by the U.S. Department of Health and Human Services, the effect s of a guaranteed income on families were observed over several years in large cities. In
the Seattle and Denver Income Maintenance Experiments, families were given a
minimum level of income by the federal government. Compared to similarly
situated families not on welfare, families who were given the income chanf,ed
their behavior substantially:9

The number of hours of work by husbands dropped nine percent. For


wives, it dropped 20 percent; for young male adults it dropped an
incredible 43 percent.

The length of unemployment among husbands increased 27 percent. Among


wives it increased 42 percent, and for single female household heads
it increased 60 percent.

Divorce increased 36 percent among whites and 42 percent among blacks.

The Gallaway-Vedder Study.lO This study, produced for the


Gallaway and Richard Vedder of Ohio University, was a
statistical analysis which attempted to document the number of
living in poverty by choice because of the attractiveness
system. The findings of the study were shocking.

NCPA by Lowell
first-of-its-kind
people who were
of the welfare

8Charles Murray, Losing Ground, (New York: Basic Books, 1984). See also Charles
Murray, "White Welfare, White Families, White Trash," in National Review, \larch
28, 1986, pp. 30-34.
9Summa rized in Murray, Losing Ground, pp. 151-152. See also Overview of the
Seattle-Denver Income Maintenance Experiment Final Report, U.S. Department of
Health and Human Services, May, 1983.
lOLowell Gallaway and Richard Vedder, "Paying People to be Poor,1t Policy Report
11121, National Center for Policy Analysis, DaJJas, Texas, 1986.
4

At least 5.7 million people--about one-sixth of the poverty


population--are living in poverty by choice as a result of the
generosity of public welfare.

Each additional $1 billion in welfare spending increases the poverty


population by 250,000.

Since 1972, there has been a strong, positive relationship between the
amount of welfare spending and the amount of poverty, after adjusting for other
important factors, including the unemployment rate and the rate of economic
growth. Put simply, we are experiencing more poverty because we have been
increasing the amount we pay people to be poor.
One of the greatest tragedies of the welfare system is its effects on
children. The statistical evidence shows that:

The increasing attractiveness of welfare benefits throughout the 1970s


has increased poverty among children by more than 20 percent.

Almost 2.5 million more children are Jiving in poverty today as a


direct result of the expanded welfare stat e.

The states that have paid the most generous benefits to welfare mothers
have experienced the greatest increases in child poverty. By contrast, states
that have been the least generous have seen major reductions in child poverty.

Between 1969 and 1979, the child poverty rate rose 27.9 percent in the
10 states with the highest welfare benefits.

Over the same period of time, the child poverty rate fell by 17.4
percent in the 10 states with the lowest welfare benefits.

The GAO Report. 11 In the previous studies, the focus was on the harmful
effects of increased welfare benefits on the behavior of people. \\'hat made
this study by the General Accounting Office unique was that it focused on the
opposite phenomenon: \\'hat happens to the behavior of people when welfare
benefits are reduced?

In 1981, the Reagan Administration tightened eligibility rules for Aid to


Families with Dependent Children (AFDC). The new rules made it more aifficult
for less needy people to get covered, and led to a reduction in the number of
AFDC recipIents by about 500,000 people per year. As a result of the changes,
a large number of welfare mothers scattered throughout the count ry lost their
AFDC benefits. More than half of these mothers also lost food stamp benefits.
If the grantIng of welfare benefits makes people more dependent and less
likely to engage in productive work, then the taking away of welfare benefits

!lAn Evaluation of the 1981 AFDC Changes: Initial Analyses, General Accounting
Office, April 2, 1984.
5

should have the reverse effect: Denied welfare benefits, former recIpIents
would be expected to engage in more productive work and other behavior which
causes families to be reunited. The GAO study sheds interesting light on
these speculations.
Although couched in bureaucratese, and worded carefully to avold making any
judgements about why AFOC mothers were behaving as they did, the GAO study'
produced evidence that shows what common sense and previous studies already
suggested. Bereft of AFOC and food stamp benefits, welfare mothers turned to
private options to recoup the losses.
The GAO study focused mainly on welfare mothers who were earning a privat e
income before and after losin& their AFOC benefits. The study showed that
approximately two years after losing AFOC benefits:

On the average, welfare mothers had increased the number of hours they
worked, were commanding a hil:)her hourly wage, and overall had increased their real income from working si 6nificantly.

In Boston, 43 percent of the welfare mothers had at least as much or


more total income after they lost their welfare benefits as they had
before. (Their average real income from working increased 25 percent.)

Not only did the welfare mothers who lost AFOC benefits respond by changing
their work behavior, they also reacted to the loss of welfare benefits by
making important chanl:)es in their family lives.

Two years after losing AFOC benefits, a Significant number of welfare


mothers had increased their family size by at least one adult.

In Syracuse, 19 percent did so.

In Dallas, 22 percent did so.

Other Studies. Other, more general studies of the welfare system have
confirmed the existence of a major problem. These include studies from some
traditionally liberal sources, including the Wisconsin Institute for Research
on Poverty and the Urban Institute. For example:

One recent study concludes that all U.S. transfer payments combined
have reduced the Jabor force by 4.8 percent. 12

12Sheldon Danziger, Robert Haveman, and Robert Plotnick, "How Income Transfer
Programs Affect Work, Savings, and Income Distribution: A Critical Review,"
Journal of Economic Literature, Vol. XIX (September, 1981), p. 996.
6

Another study suggests that aU of the Reagan welfare budget cut shave
increased the labor force by as many as one million people.!.3

However, before drawing any general conclusions about the welfare system
from these findings we need to take a closer look.
TWO VIEWS OF POVERTY

When welfare policy is set by government (whether at the national, state or


local leveJ), politicians invariably search for a single, all-encompassing
explanation of what the welfare program is all about. What follows usually is
a single set of rules that apply to all beneficiaries, regardless of individual
attitudes or circumstances.
It is in this context that two opposing views of the problem of poverty
persistently clash. One view sees the problem of poverty as a lack of
income--caused by conditions over which low-income individuals have no
control. The other view sees the problem of poverty as largely a problem of
individual behavior which people, in principle, can cont role
In our own day, the former view is forcefully expressed by scholars such as
Michael Harrington, Sar A. Levitan, Clifford M. Johnson, and John E.Schwartz. 14
The latter is eXfressed with equal vi~or by Warren Brookes, George Gilder and
Charles Murray. 5
The argument that ?overty is caused by conditions over which low-income
people have no control is not a new one. Nineteenth Century critics of the
Elizabethan Poor Laws, such as Charles Dickens, Arnold Bennett and George
Landsbury, repeatedly emphasized this view, and attacked the Poor Law system as
inhumane. For example, of a visit to a workhouse for the poor, Landsbury once
wrote:

l.3Robert Haveman, "How Much Have the Reagan Administration's Tax and Spending
Pollcies Increased Work Effort?,1t in Charles R. Hulten and Isabell V. Sawhill,
editors, The Le ac
of Rea anomics: Pros ects for Lon -Term Growth,
(Washington, D.C.: The Urban Institute Press, 1984. See also the analysis of
this estimate in David Henderson, "Analyzing the Reagan Record," National
Center for Policy Analysis, Policy Report 11114, October, 1984, pp. 9-12.
14Michael Harrington, The New American Poverty, (New York: Basic Books, 1984);
Sar A. Levitan and Clifford M. Johnson, Beyond the Safety Net: Reviving the
Promise of Opportunity in America, (Cambridge, Mass.: Ballinger Press, 1984);
John E. Schwartz, America's Hidden Success: A Reassessment of Twenty Years of
Public Policy (New York: Norton, 198.3).
15Charles Murray, Losing Ground; George Gilder, Wealth and Poverty; Warren
T. Brookes, The Economy In Mind, (New York: Universe Books, 1982) Chapter 7.

Going down the narrow road, ringing the bell, waltlng while an official
with a not-too-pleasant face looked through a grating to see who was there,
and hearin~ his unpleasant voice ... made it easy for me to understand why
the poor dreaded and hated these places It was not necessary to write
the words 'Abandon hope all ye who enter here' everything possible was
done to inflict mental and moral degradation . of goodwill, kindliness,
there was none.l 6
On the other hand, there were other prominent people who devoted their
lives to improving the plight of the poor, yet concluded that poverty was
mainly the result of individual behavior. Charles S. Loch, secretary of the
Charity Organization Society, one of the most important private charities in
England at the turn of the century, wrote that "Want of employment in nine
cases out of ten in which the plea is used is not the cause of distress. It
is, as often as not, drink."17
In Loch's view, it was important that the
conditions under which relief was given never be perceived as more desirable
than the least appealing job opportunities in the labor market.
TWO VIEWS OF WELFARE

These two opposing views--poverty as the result of conditions over which


people have no control, or poverty as the result of individual choice and
behavior--have important implications for public policy.
In modern times, those who take the bureaucratic approach to the problem
tend to define it in terms of people's financial condItion. Accordinl:)ly, the
magnitude of the problem is "measured" by federal statisticians who attempt to
count how many families have incomes which fall below the official poverty
level. The solution to the problem is to t',ive families living in poverty
enough money to raise their income levels above the poverty line.
It follows that the purpose of welfare is quite simple: To give away
money. And, indeed, this is an apt way of describine, AFOC, the food stamp
program, and other entitlement prot',rams. The bureaucrat s who run these
programs are literally in the business of giving away money. By and large, the
program administrators give lIttle thought to making positive changes in the
behavior of their cHenteUe. And, defenders of the programs either minimize
or ignore the negative behavioral consequences these programs create.

l6Quoted in Maurice Bruce, The Coming


(London: B.T. Batsford, 1961), p. 41.

of the

Welfare

State

17Quoted In Bentley B. Gilbert, The Evolution of National Insurance in Great


B fit aim The Origins of the Welfare State (London: Michael Joseph, 1966)
pp. 51-52.

Thus, Greg Duncan and Richard Coe argue that the U.S. welfare system serves
as social safety net, which bives relief to people in need without encouraging
long-term dependency.l8
By contrast, those who take a behavioral approach to the problem of ?overty
see the U.S. welfare system as one which increasingly rewards bad behavior.
Why do we have increasing poverty in America? To Charles Murray,the answer is
stra1~htiorward: We have increasing poverty because we are paying people to be
poor. 19

A lHmD VIEW OF WEI..FARE AND POVERTY


Which view is correct? It Is our position that neither view completely nor
accurately describes the welfare-poverty crisis. It is true that some people
are poor due to conditions over which they have little or no control. It is
also t rue that other people are poor by choice. The correct way to depict the
U.S. welfare system is by reco!;,nizing that the system gives relief to people in
need, while at the same time encouraging per. . erse behavior.
This third view is depicted in Table I, based on estimates of the effects
of welfare on poverty taken from the Gallaway-Vedder study. Even if one does
not accept the precise estimates of the Gallaway-Vedder study, the evidence is
overwhelming that the U.S. welfare system does both harm and good at the same
time.

TABLE I
Two Views of Poverty
Problem

Solution

Bureaucratic Approach:

Lack of Income

Provlde income and


goods and services

Behavioral Approach:

Behavior

Change behavior

18Greg J. Duncan and Rlchard D. Coe, "Welfare: Promoting Poverty or


Progress?" The Wall Street Journal, May 15, 1985.
19Charles Murray, "Welfare: Promoting Poverty or Progress?" The Wall Street
Journal, May 15, 1985.
9

Two Views of Public Welfare Programs


Activity

Result

Bureaucratic Approach:

Welfare increases
income

Reduces poverty

Behavioral Approach:

Welfare rewards
bad behavi or

Increases poverty

A Third View of Welfare and Poverty


For the nation as a whole:

More welfare produces more poverty

For states:

In some states, more welfare produces


more poverty.
In other states, more
welfare produces less poverty.

For individuals:

Welfare benefit s lead to I es s


poverty among some individuals and more
poverty among others.

LONG- TERM AND 3iORT- TERM POVERTY


In a fascinating study of the poverty population, Mary Jo Bane and David

T. Ellwood of Harvard University found that there are striking differences


among poor people with respect to the reasons why they become poor, how long
they remain poor, and why and how they cease being poor. 20 It is precisely
because of these differences that there are so many statistical generalizations
about the poverty population which are seemingly cont radictory.
By way of analogy, Bane and Ellwood compare the poverty population to
patients in a hospital. Looking at hospital admissions, one will see that the
vast majority of people admitted into hospitals stay there for only short
periods of time. Based on that observation, one might be tempted to conclude
that there is no real problem of long-term hospitalization. That conclusion is
wrong, however. Looking at the patients occupying hospital beds, on any given
day, one wil1 see that a large portion of those beds are filled with the
chronicaUy ill, whose hospital stays are very long.
In other words the
chronically ill account for a small fraction of hospital admissions, but they
occupy a large fraction of hospital beds.

20Mary Jo Bane and David T. Ellwood, "SUpping Into and Out of Poverty: The
Dynamics of Spei1s," unpublished manuscript, August, 1985.
10

A similar observation may be made about the "admission rate" of


(non-elderly) poor people to the welfare rolls: 21

Among people who become poor at any point in time, 1+5 percent will be
out of poverty within one year.

Seventy percent will be out of poverty within three years.

Only 12 percent will remain in poverty for ten years or more.

Statistics such as these are frequently quoted by apologists for the


welfare state. Yet they are misleading, just as in the case of the chronically
ill who fill a large portion of hospital beds.

Among people who currently are poor, more than half will remain in
poverty for 10 years or more. 22

The average black chlld in poverty today will remain in poverty for
almost two decades. 23

Bane and Ellwood also discovered that even among the short-term poor, there
are radical differences in the reasons for their poverty and in the methods
that are used to bet out of poverty. In their own words, "The poverty population is extremely heterobeneous.n21+
These differences are important. Continuing with the hospit al analogy, no
one in his right mind would recommend that the chronically ill be given the
same medical treatment as the short-stay patient, or that all short-stay
patients be diagnosed and treated in the same way, regardless of medical
condition. Yet that is precisely the way the federal government runs the
welfare st at e.

BOSTON AND DAllAS: A CASE SlUDy25


Further evidence of the difficulties in generalizing about the effects of
welfare--even the effects of a fairly well-structured program like AFDC--can be
appreciated by comparing welfare mothers in Dallas and Boston who lost thei r
AFOC benefits as a result of program changes in 1981.
21 Ibid., p. 16.
22Ibid., p. 16.
23~., p. 25.

21+ Ibid.
25This section is based on An Evaluation of the 1981 AFOC Changes: Initial
Analysis.
11

Differences in Benefits. In terms of welfare benefits, Massachusetts is


one of the most liberal states in the count ry. Texas, by cont rast, ranks near
the bottom of the 50 states in AFOC payment s and has a record that many would
regard as stingy.

The standard AFOC payment to a family of three in Boston in 1981 was


more than three times greater than the payment in Dallas ($379 per
month versus $116).

In addition, the Boston AFOC mother had many more opportunities to


exploit the entire welfare system.

To see how lucrative welfare benefits in Boston are, consider the case of
a welfare mother as described by a reporter writin o in the Boston Globe in
1975:
The mother is well-organized. She buys food stamps twice a month, refuses
to live in a housing project, is a member of a community women's group at
Catholic charities, and is studying for her high school diploma. Her
bimonthly cash grant is $466; she gets a flat grant every three months of
$142; and her monthly savings from food stamps amount to $86. Her cash
income may be given as $599 monthly, or $7,138 a year. If she and her
family spent the average amount paid personally for health care in this
country (and the mother gets some psychiatric care), this would amount at
full cost to an additional $1,750 in health care expenses. Since there are
no financial restrictions for the family on the use of health care, and the
mother is intelligent and knowledgeable, one may assume that full use of
this opportunity is taken. The three older children go free of char6e to
an alternative school which costs paying pupils $2,000 a year, and another
child goes to a day care center whose cost for a paying child would be
$1,000 a year. Cash income and free health and education services to thi s
family thus amount to $16,023. The older children work summers, and I will
not cost that out. The family pays no taxes, and need put nothing aside
for savings, as the welfare department is committed to meeting its needs.
A working head of family would have to earn at least $20,000 to match this
standard of living. 26

Differences in Conditions.
As Table II Shows, the characteristics of
welfare mothers who lost their AFOC benefits in Dallas and Boston are quite
different. Clearly the welfare mother in Dallas was in greater need.

The Dallas mother had more children and younger children than her
Boston counterpart.

After AFOC payments were discontinued, the Boston mother was three
times more likely than the Dallas mother to be above the poverty
level, three times more likely to have private health insurance, and
38 percent less likely to turn to private charity for food.

26Cited in Anderson, Welfare, p. 36.


12

Differences in Ability. There also were clear differences in abilities to


compete in the labor market.

Twenty-nine percent of the Boston mothers had some college education,


compared to only 11 percent in Dallas.

Surprisingly, 2.5 percent of the Boston mothers who lost AFOC payments
had a college degree and 1.7 percent had a graduate degree.

The Boston mother also showed greater ability to hold down a job Lor a
longer period of time. Length of time with the current employer was
twice as long in Boston as it was in Dallas.

Differences in Attitude Toward We11are. Interestingly, the Boston AFDC


mother showed a greater propensity to accept welfare and take advantage of the
welfare system.

The Boston mother went on AFOC more quickly, stayed on it longer, and
was more likely to have received other welfare benefits (such as
housing subsidies).

She also was more likely than the Dallas mother to have received AFDC
as a child.

Differences in Labor Market Response. Among AFOC mothers who lost their
benefits in 1981, the loss in Boston was more than twice the loss in Dallas.
In addition, about 85 percent of the Boston women also lost food stamps,
compared with only 42 percent in Dallas. Yet despite the greater loss of
benefits in Boston, the welfare mothers there suffered much less economic
dislocation than those in Dallas.

Total income for Boston mothers declined only 12 percent.

Total income for Dallas mothers declined 31 percent.

The difference stems from the fact that Boston mothers were more likely to
recoup in the private marketplace income that they had lost from AFDC and food
stamps.

Boston mothers increased the hours they worked, earned more per hour,
and, on average, increased their monthly earnings by 25 percent.

Thirty-five percent of Boston mothers actually had more total income


after they lost their AFOC benefits than they had before.

By contrast, in Dallas (with a lower unemplo}'ment rate than Boston)


there was, on the average, virtually no increase in hours worked, and
only a six percent increase in monthly earnings.

It appears, then, that Boston's liberal welfare benefits, doled out to


people who were not all that needy, were discouraging productive work, and that
removing these benefits spurred them to increase their work effort. By

contrast, in Dallas, where AFOC mothers had a greater need and less ability to
compete in the marketplace, welfare benefits had only a moderately discouraging
effect.

Differences in Response to Household Size. A very different story emerges


when we look at the effects of welfare on the family.

In Boston, five percent of welfare mothers increased their households


by at least one adult.

By contrast, 22 percent of Dallas mothers increased their households


by at least one adult.

It appears that welfare's effect on the family is greatest where it makes


the greatest financial difference.

Differences in Response to the Welfare Option. Finally, if given the


choice between working and receiving no welfare or not working and becoming
dependent on the dole, how do welfare mothers respond?

In Boston, 11 percent returned to AFOC (usually after ceasing employment), whereas in Dallas the percentage was twice as high.

Moreover, of those who returned to AFOC, the length of time on welfare


was much shorter in Boston than in Dallas.

It appears that the more lucrative the private marketplace options, the more
likely that work will be chosen over welfare.
The comparison of these two cities, then, underscores the difficulty in
making generalizations about the nation's welfare system. Even beneralizations
about a single city are hazardous. In Dallas, for example, 24 percent of
welfare mothers who lost AFOC benefit s had real incomes just as high or higher
than they had when they were receiving benefits and, thus, suffered no enduring
economic hardship.

14

TABLE II
Loss of Welfare Benefits:
Effects on Welfare Mothers
(Two years after loss of benefits)
Boston

Dallas

$156

$7 1

85%

42%

At least some coLlege education

29%

1 1%

Family size (number of people)

2.8

3.1+

Percent with children under six years-old

33%

52%

In public housing or receiving housing subsidy

56%

43%

Number of years since receving first AFDC payment

8 .5

61

Number of years between birth of first chHd and


AFDC coverage

4 .6

5 .3

Percent who received AFDC as a child

19%

16%

Number of years with current employer

.3 4

1.7

- 12%

-31 %

Percent whose income was just as high or higher


than when on welfare

43%

249&

Percent whose total income actually increased

35%

21%

Percent with household income above poverty level

66%

1 S%

Percent with private health insurance policy

49%

16%

Percent with no health insurance of any kind

28%

59%

2.2

Loss of Welfare Benefits


Monthly AFDC Payment Lost
Percent also losing food stamp benefits
Characteristics of AFOC Mothers

Economic Well Being After Loss of Benefits


Average change in total income

Effects of Loss of Benefits on Work


Increase in hours worKed per week

1.5

Increase in hourly wage

$.85

$.27

Increase in monthly earnlngs

$176

$ 36

25%

6%

1.5%

24%

5%

22%

11 %

22%

Percentage increase in monthly earnings


Other Responses to Loss of Benefits
Turned to private charity for food
Increased household size
Returned to AFOC (usually aft er ending
employment)

Source: An Evaluation of the 1981 AFOC Changes: Initial Analyses, General


Accounting Office, April 2, 1984. Although a final report, An Evaluation of
the 1981 AFOC Changes: Final Report was released by the G.A.O. on June 2, 1985,
some of the computer data for the Boston site were unavailable. However, those
numbers which were available support the general conclusions discussed above.
OiARACIERISTICS OF A GOOD WELFARE. SYS1'EM
In their classic study, "Paying People to be Poor," Gallaway and Vedder
make a simple, but profound observation: We cannot give aid without affecting
behavior. Furthermore, the more aid we give, the greater the likelihood of
changing behavior in a perverse way.
The GAO study and the Bane and Ellwood study have an equally simple, yet
profound implication: People are different.
The welfare population of one
city can differ in remarkable ways from the welfare population of another.
Even within a city, the response of one group can differ remarkably from the
response of another group. Carried to its logical conclusion, the point is:
Within the welfare population there are remarkable differences among
individuals, with respect to their circumstance and their personal responses to
incentives.
These two findings have devastating implications for po1icymakers. What
the findings mean is that it is almost impossible to design, at the federal
level, a welfare system that accomplishes what most people want from public
charity.
What is it that most people want in terms of an effective, responsible
welfare system? The following guidelines probably would command widespread
support:
1.
The system should be guided by the philosophy that most people can and
should take responsibility for supporting themselves and their families.
In

16

the absence of physical or mental impairment, individuals should perceive


that society expects them to support themselves and their families.
2.
Aid should be given first to people who need it most. Since there
always will be a limit to the number of welfare dollars available to spend, the
people in greatest need should be given the hibhest priority.

3.
Aid should be given in a way that encourages independence and seJfreliance.
Since the very act of giving relief encourages dependence,
procedures should be adopted to create positive incentives for
self- sufflci ency.
4.
The welfare system should not encourage the break-up of the family.
Family members should never find it in their economic self-interest to dissolve
the faml1y unit.

5.
Short-term help should be available to many; long-term help should be
reserved for a few. A humane welfare system is one which readily provides
temporary and emergency help to those in need, while a responsible welfare
system is one which provides permanent aid to only the very few who cannot
support themselves.
6.
The goals of the welfare system should be achieved at the mlrumum
cost. As with every other social goal, it is in our self-interest to find the
most cost-effective ways of operating the welfare system based on these
principles.
PUBLIC SECTOR FAIWRE/PRIVAlE SEcrOR SUCCESS

Although volumes have been written about the failures of government


welfare programs, the academic and scholarly community has paid surprisinl;ly
little attention -to private sector charity.
The private sector is playing an extremely important role:

In 1984 total charitable contributions reached $74.25 billion, with


contributions by individuals accounting for 83 percent ($61.55
billion) of that total. 27

More than 85 percent of all adult Americans make some charit able
contribution each year. 28

27Giving U.S.A.: 1985 Annual Report, The American Association of Fund-Raising


Counsel, Inc., 198.5, p. 7.
28Taken from a 1983 Gallup Poll.
17

Almost half of aU adults (47 percent) volunteer their time to


charitable causes--an average of three hours per week per person. 29

The dollar value of these contributions of time is at least $65


billion. 30

If the value of volunteer labor is included, private sector contributions to charitable causes exceed the poverty budgets of federal,
state and local governments combined.31

In this section we contrast some of our best private charities with federal
welfare programs in terms of the characteristics of an ideal welfare system.

1. The Nature of Charity: Entitlements vs. Gifts


Rules vs. Discretion. Entitlement programs for welfare are structured so
that benefits are granted solely on the basis of personal circumstances.
Applicants do not have to give the reasons for their circumstances, nor
are they required to explain how they plan to change them in the future. They
don't even have to show a willingness to Change. In the AFDC pro!:,ram, for
example, the requirements for eligibility essentially amount to: (1) low
income, (2) very few assets, (3) dependent children, and (4) no man in the
household. Anyone satisfying these requirement s is entitled to benefits. :\nd
the word entitlement means llright"--benefits cannot be withdrawn simply because
the recipient refuses to modify behavior.
The philosophy of the private sector is quite different. Because of the
emphasis on a behavioral approach to the problem of poverty, our best private
charities do not view the giving of assistance as a "duty" or the receipt of
assistance as a "rie;ht." Instead, charitable assistance is viewed as a tool
which can be used intelligently, not only to provide relief but to change
behavior. At many privat e charities, for example, the level of assi st ance
varies considerably from individual to individual.
Private agencies usually
reserve the ribht to reduce the level of assistance, or withdraw assistance
altogether if recipients do not show behavioral changes.

29Ibld.
3OIbld.
31This is total spending on means-tested programs. See Vee Burke, "Cash and
Non-Cash Benefits for Persons with l.imited Income: Eligibility Rules, Recipient
and Expenditure Data, FY 1982-84," Congressional Research Source Report
No. 85-194 EPW, September 30, 1985.

18

Many private charities require that a caseworker and a recIpIent of aid


establish a plan designed to move the recipient to a condition of
self-sufficiency. For example,

At Jessie's House, a transitional home for the homeless in Hampton,


Massachusetts, shelter beyond a week's stay is contingent upon
positive evidence of individual improvement. 30

At the Dallas Salvation Army, caseworkers are not significantly bound


to granting a minimum or a maximum level of assist ance. Aid varies
according to the caseworker s evaluation of the recipient's condition
and record of behavioral improvement. 31

Whose Preferences Count? 'Whether receipt of welfare is viewed as a "right"


or a "privilege" is at one level an ethical and philosophical question. At
another level, the question has profound implications for how our society is
going to function. Under entitlement programs, recipients and potential
recipients of aid have full freedom to exercise their preferences at will.
In many cases, they can choose poverty over non-poverty. Once this choice is
made, the rest of society is presented with a welfare bill which it is
obligated to pay. Thus, in a sense, under entitlement programs the preferences
of the recipients determine the behavior (in terms of the tax burden) of those
who pay the bills.

The philosophy of the private sector is quite different.


In (:;eneral,
private agencies view the preferences of those who pay the bills as the
the standard, and the recipients are expected to change their behavior to
satisfy the 6lvers. In other words, under the private sector approach, welfare
recipients must adjust their behavior to the preferences of the rest of
society, not the other way around.
Hands-on Management At Work. If we accept the view that individuals should
take responsibility for supporting themselves and their families, and that
welfare assistance should be administered in a way that encourages rather than
discourages this behavioral ideal, then it follows that the approach of our
best private charities is far superior to the approach of entitlement
programs. Because individuals differ, and because individual circumstances
differ, it is only through a program of "hands-on-management" of charitable
giving that we can give rellef without at the same time encouraging anti- social
behavior

.3OThe U.S. Department of Health and Human Services, Helping the Homeless: A
Resource Guide, (Washington, D.C.: 1984) p. 115.
31lnterviews with Dallas Salvation Army social services program administrators
and di rect ors.
19

"Hands-on-management" means t aHoring aid to meet individual needs and


individual circumstances. For example, take the St. Louis Salvation Army's
transitional housing project. The program is administered in four stages: 32

Stage One:
The crisis stage, when a family is provided with
immediate, temporary shelter.

Stage Two: The stabilization stage, when the family is provided


psychological support and counseling.

Stage Three: The relocation stage, when the family is assisted in


finding a new, permanent dwelling or returned to their old dwelling
after resolving the initial crisis.

Stage Four: The follow-up stage, when the family is assisted in


adjusting to their new environment.

This form of support, counseling and follow-up services is virtually


unheard of in federal welfare programs, whose administrators have the job
of giving away money, not assisting people with personal or family problems.
Indeed, when public welfare recipients request counseling from the bureaucracy,
they frequently are referred to private sector agencies to get it.
2. Getting Aid to Those Who Need it Most

A basic principJe of the American philosophy of government is that we turn


to government only as a last resort. In other words, it is generally assumed
that the role of government is to do those socially desirable things that the
private sector either will not or cannot do.
Ironically, in the field of social welfare this philosophy has been turned
on its head. In the early years of the War on Poverty, it was thou):,ht that
federal welfare programs were designed to provide a social safety net--to
provide services which the private sector, for one reason or another, had
failed to provide. Yet it is becoming obvious that just the opposite has
become the case--increasingly it is the private sector that is providing the
social safety net by reaching people who government fails to reach and by
providing the essentiaJ services that government welfare programs fail to
provide.
If a humane welfare system means anything at all, it means getting aid
first to people who need it most. One of the most astoniShing and little-known
facts about the welfare state is what a miserable job it does in pursuing this
goal. Consider that:33

32Helping the Homeless: A Resource Guide, p. 93.


33Census Bureau, Characteristics of Households and Persons Receiving Selected
Noncash Benefits: 19&3 (Washington, D.C.: U.S. Department of Commerce, 1985)
Series P-60, No. 148, pp. 1-5 and p. 103.
20

Only 41 percent of all poverty families receive food stamps. Yet


28 percent of food-stamp families have incomes above the poverty
level.

Only 23 percent of all poverty families live in public housing or


receive subsidized housing benefit s. Yet almost half of the families
receiving housing benefits are not poor.

Only 40 percent of all poverty families are covered by Medicaid.


40 percent of all Medicaid beneficiaries are not poor.

Amazingly, 41 percent of all poverty families receive no means-tested


benefit of any kind from government. Yet more than half of all
families who do receive at least one means-tested benefit are not
poor.

Yet

Where do people in need turn for help when they aren't betting g,overnment
assistance? They turn to private charities. 34

Ninety-four percent of all shelters for the homeless in the U.S. are
operated by churches, synagogues, non-religious groups, and other
voluntary organizations.

Only six percent are operat ed by city and county government s.

The private sector also is very heavily involved in emergency food distribution .35

The Second Harvest network (comprising 79 of more than JOO food banks
in the U.S.) distributes about liS million pounds of food each year,
worth about $78 million.

This food is donated by the food industry and by private donors; about
40 percent of it goes to food centers pat ronized by the homeless.

Several studies of low-income families confirm the fact that when ?eople
get in trouble, they turn to the private sector first. J6

A study in Detroit found that 80 percent of low-income people, when


faced with a crisis, turned to individuals and agencies within their
own neighborhood, rather than to government agencies for help.

34S. Anna Kondratas, "A Strategy For Helpinf, America's Homeless," (Washington,
D.C.: The Heritage Foundation, 1985) p. 10.
35Ibid.
36See Robert Woodson, liThe Importance of Neighborhood Organizations in \1eeting
Human Needs," in Jack A. Meyer, ed., Meeting Human Needs: Toward a New Public
Philosophy, (Washington, D.C.: American Enterprise Institute, 1984), p. 1.36.
21

Similar findings were reported in a study conducted by the University


of Southern California

.3. Providing Relief Without Encouraging Dependency


A major issue in the welfare-poverty industry is whether the recIpIent of
aid should have to "do anything" in order to qualify for continued receipt of
welfare benefit s. Nowhere is the cont roversy more evident than with respect to
the issue of workfare.
Throughout the 1970s there was a continuous political battle at the
national level over whether workfare should be tied to welfare. A fascinating
account of the politics of this battle has been written by Lawrence M. Mead,
who has documented the great lengths to which the welfare bureaucracy lobbied
against any workfare requirements. 37 It appeared the welfare bureaucracy lost
the battle when Congress passed the Work Incentive (WIN) program and the
Community Work Experience Program (CWEP). However, because it administers
these two programs, the bureaucracy which lost the battle won the war. 38

In the WIN program, only 20 percent of adult AFOC recipients were


found by the welfare bureaucracy to be suitable for workfare. Most of
these adults went into training or school activities rather than into
job positions. Only two percent actually entered jobs.

In the CWEP program, only 39 percent of adult AFOC recipients were


found by the welfare bureaucracy to be suit able for workfare, and only
seven percent participated regularly.

As we have previously noted, the attitude of our best private charities is


quite the opposite. These agencies see independence and self-sufficiency on U"le
part of their "clientsll as one of their primary 60als. Often this goal is
accomplished either by encouraging or requiring the recipients of aid to
contribute their labor to the agency itself.

At Mer111ac House, an emergency food and assistance organization


in Chicago, unemployed adults with no dependents must contribute time
and services toward program operations after receiving assistance. 39

37Lawrence M. Mead, Beyond Entitlement, (New York: The Free Press, 1936).
38Ibid., pp. 122, 12.5. For a summary of workfare programs currently underway see
S. Anna Kondratas "The Political Economy of Work-For- Welfare," (Washingt on,
Kondratas 6ives these
D.C.: American Legislative Exchange Council, 1986).
programs a mixed review and concludes that many of the favorable claims made
about certain workfare programs, including the Massachusetts program, cannot be
verified
.39Helping the Homeless: A Resource Guide, p. 17.
22

At the Good Shepherd Ministry, a low-cost restaurant, soup kitchen and


food bank in Auburn, Maine, recipients assist with cooking, serY'ing,
truck driving and other tasks--many of which provide valuable job
training. 40

4. Encouraging the Family Unit Rather Than Encouraging Its Dissolution


The attitude toward family on the part of private sector charities usually
stands in stark contrast to the incentives built into federal programs.

AFOC eligibility rules in nearly half of


families with a father who is employed to
less of how low the family income is.
states, the family is ineligible if the
regardless of employment. 41

By contrast, at the Dallas Salvation Army shelter for battered and


abused women, the mothers of young children are requi red to either
work with professionals to repair their relationship with their
husbands, or find employment in order to receive continued assistance. 42

.s.

Temporary

YS.

the states do not allow


receive assistance, regardIn the other half of the
father is present at all,

Long-Term Relief

A prevalent philosophy in the private sector is that most people are fuJly
capable of taking responsibility for their lives in the long-term, but that
emergencies and crises occur in which help is both necessary and desirable. As
a consequence, private sector agencies make it surprisingly easy for recipients
to obtain emergency relief. It really is true that in America, almost anybody
can get a free lunch.
The almost universal characteristic of the private sector is: It's easy to
get on welfare, but hard to stay there. Most government programs, by contrast,
have the opposite characteristic: It's hard to get on welfare, but once on it,
it's easy to stay there.
In the public sector, there are often long waiting times between applying
for assistance and receiving aid.

In Texas, the waiting period is typicaJly two to three weeks for food
stamps.43

40l nterviews with Good Shepherd Ministry administrators.


41 Vee Burke, "Cash and Noncash Benefit s for Persons With Limited Income," p. 52.
42Dallas Salvation Army interviews.
43Interviews with Texas Department of Human Services administrators.
23

For AFDC, the waiting period is typically a month after the completion
of filling out complicated and cumbersome application forms. 44

The Dallas Salvation Army has had to hire a special staff to decifer
public welfare regulations and forms so they can adequately refer
people who come to them to the proper public agencies. 45

Once accepted into the public welfare system, however, it is relatively


easy to stay there for a long time: 46

Of all women who receive welfare in any given year, about 60 percent
will receive welfare the next year.

Among women receiving welfare for two consecutive years, about


70 percent receive it a third year.

Among women receiving welfare for four consecutive years, about SO


percent receive it a fifth year.

At anyone time, about one-half of the mothers recelVlng AFDC will


continue to receive or wlU have received assistance for a period of
eibht years or more. 47
6. Minimizing the Cost of Giving

There is considerable evidence that privat e sect or charity makes far more
efficient use of resources than do public welfare proorams. Consider some of
the ways private charities hold down costs:
Requiring Evidence of Need. Although temporary relief in the form of food
or shelter is fairly easy to obtain frorn private abencies, long-term assistance
or assistance in the form of cash is far more difficult. For example,4S

Before the Dallas Salvation Army will provide cash to help people
defray the cost of rent, recipients are required to present a
court-ordered eviction notice showing failure to pay rent.

44lbid.
45Dallas Salvation Army interviews.
46Martin Rein and Lee Rainwater, "Patterns of Welfare Use," Social Service
Review, No. 52, pp. 511-534, cited in Greg Duncan, Years of Poverty, Years of
Plenty, (Ann Arbor, Michigan: Institute for Social Research) p. 73.
~7Duncan, Years of Poverty, Years of Plenty, Table 3.1, p. 75.
48Dallas Salvation Army interviews.
2~

Similarly, before financial aid to defray the costs of utilities is


given, the recipient is required to present a notice of termination of
service for failure to pay their utility bills.

Checking Other Sources of Support. Even when there is evidence of need,


good private charities often seek to determine whether the potential recipient
has access to other, untapped sources .of assistance. For example,49

Before the Dallas Salvation Army will provide continuing assistance to


an indlvidual, a caseworker informs the famlly--including in-laws--and
requests assistance from them first.

The caseworker also makes sure the individual applies for aU other
public and private aid for which he or she is eligible before
continued assistance is provided.

These procedures stand in stark contrast to those followed under the food
stamp program, AFOC and Medicaid. Indeed, most states could sionificantly cut
their Medicaid expenditures by followinb precisely the same procedures as those
followed by the Salvation Army:

Under current law, Medicaid is supposed to be the payer of last


resort--paying only those medical bills not covered by private health
insurance or by Medicare.

Yet in most states there is no routine procedure for making sure that
all claims against private health insurance and Medicare have been
filed before Medicaid funds are granted. 50

Private sector agencies appear to be much more adept at avoidinb


unnecessary spending that does not benefit the truly needy. Consider the
amount of waste in public sector charities: 51

In 1981, improper payments in the AFOC, food stamp and \\edicaid


programs reached $3.5 billion.

In the food stamp program alone, about one in every 10 dollars was
spent on overpayments or payment s to ineligible families.

49Dallas Salvation Army interviews.


50In 1981 alone, $500 million dollars of private health insurance benefit 5
for Medicaid patients went uncollected. See Kenneth W. Clarkson, "The Safety
Net From the Reagan Administration's Perspective," in John C. Weicher, ed.,
Maintainin the Safet Net: Income Redistribution Pro rams in the Rea an
Administration, Washington, D.C.: American Enterprise Institute, 1934),
p. 173.

51 Ibid.

25

In 1980, improper spending in the school lunch program was as high as


$500 million dollars.

Using Volunteer Labor.


utilizing volunteer labor.

Private charities also keep program costs down by

At Jessie's House in Massachusetts, one third of the personnel costs


and 70 percent of the food costs are donated by volunteers. The
organization utilizes some 400 hours of volunteer labor per month.52

A study of nonprofit charities in the Twin Cities Minnesota area


found that the avera5e human services organization, with a budget of
$664,500, had 19 full-time employees; 13 part-time employees, and
60 volunteers. 53

The study concluded that if all of the volunteers utilized by these


Twin Cities organizations were paid the minimum wage, the total worth
of this labor would be $3.2 miIIion.

An interesting comparison of the use of volunteer labor in public and


private sector programs exists in Dallas and the surrounding area:

In 1985, the private, nonprofit Volunteer Connection placed more than


38,000 volunteers in programs and projects in the Dallas metropolitan

area. 54

Over the same period, the Texas Department of Human Resources, Region
5 (covering Dallas and 18 other counties) placed only 7,000
volunteers. 55

The number of people actually volunteering through the state agency is only
an estimat e. Whereas the private agency employs a staif of seven ful1-time
employees and a computer system to keep an accurate account of/olunteer
placements, the state program, by contrast, is run by only one full-time
coordinator working with a volunteer secretary. The state coordinator
frequently learns of volunteer work only after receiving monthly reports
submitted by the various agencies and programs. Unfortunately, there is no
consistent method of reporting that is followed by all agencies.

52Helping the Homeless: A Resource Guide, p. 128.


53Barbara Lukermann, Madeline Kimmich, and Lester M. Salamon, The Twin Cities
Non rofit Sector in a Time of Government Retrenchment (Washington, D.C.: The
rban Institut e Press, 1985 pp. 22, 27
.54lnterviews with the Volunteer Connection, Dallas, Texas.
55Interviews with the volunteer coordinator, Texas Department of Human
Resources, Region 5.
26

From what data that is avallable, however, we were able to learn the
foIl owl ng: 56

About one-third of the volunteers "coordinated" through the state


program are actually working in private sector agencies.

Less than 1/5 of one percent of the volunteers "coordinated" through


the state agency choose to work in the AFOC or food stamp programs.

Using Donated Goods-in-Kind. Another way in which private charities hold


down the costs of their operations is by using donat ed goods-In-kind. For
example: 57

Operation Food Search in St. Louis provides about $& million worth
of food annually to local food banks and soup kitchens at a cost of
only 1.5 cents per pound.

Most of the food consists of slightly damaged canned boods, slightly


out-of-date food stuffs, or rejected but otherwise usable bulk foods
that commercia! food producers would have thrown away.

Other Evidence of Efficiency.


Private sector charitable activities are
diverse and widespread in cities and counties throughout the country. Our
knowledge of these activities is skimpy. However, as more research is done the
evidence mount s that in area after area, the privat e sector out-performs
government:

Private foster care agencies have shown they can out-perform government agencies. 58

Private at;encies engaged in job training for teenagers59 and for the
mentally and physlcally handlcapped60 have shown they can out-perform
government agencies.

56Ibid.
57Compiled from material provided by Operation Food Search, 325 N. Newstead,
St. Loui s, Mo. 6310&.
58Robert Woodson, "Child Welfare Pollcy" in Meeting Human Needs, pp. 455-465.
59Sean Sullivan, "Youth Employment" in Meeting Human Needs, pp. 215-257.

roy. Ruth McKinnon, Patricia W. Samors, and Sean Sullivan, "Business Initiatives
in the Private Sector" in Meeting Human Needs, pp. 53-91.
27

Public housing placed in the hands of tenants costs less and is of


higher quality than when owned and maintained by government. 6l

Private sector crime prevention programs,62 alcohol and drug abuse


programs63 and neighborhood preservation programs64 also have proved
to be superior to public sect or programs.

niE ArrACK ON PRIVATE OiARITY


Despite the fact that our nation's best private charities out-perform
federal welfare programs by a number of criteria, both the magnitude of private
charitable giving and the vitality and diversity of private sector Q5encies
are severely threatened by government policies. The threat comes from three
directions: (1) Tax reform legislation now pending before Congress threatens
to reduce private charitable giving to programs that work in order to secure
increased funding for federal welfare programs that don't work. (2) Federal
subsidies to private sector agencies threaten to allow the system that doesn't
work to exercise increasing domination and control over programs that do work.
(3) Increased funding of federal welfare programs has led to. reduced private
giving in the past and threatens to continue to do so in the future.

1liE TIiREA T fROM TAX REFORM


Few would deny that there is an urgent need to reform our federal income
tax system. Some reforms promise great benefit s for the economy as a whole.
However, changing the tax code will have a severe and adverse Impact on private
giving.

Nearly 83 percent of contributions to charitable organizations are


made by individuals, rather than by corporations or foundations. 65

61"The Grass is Greener in Public Housing: From Tenant to Resident to Homeowner," A report submitted to the U.S. Department of Housing and Urban Development by the National Center for Neighborhood Enterprise, Washington, D.C. October, 1984.
62McKinnon, Samors, and Sullivan, "Business Initiatives in the Private Sector,"
in Meeting Human Needs, pp. 53-91.
63Andrea M. Haines, V. Ruth McKinnon, and Pat ricia W. Samors, "Social Service
Programs in the Public and Private Sectors," in Meeting Human Needs,
pp. 421-454.
64Ibid.
65Giving U.S.A.: 1985 Annual Report, p. 7.
28

Tax reforms now being considered by Congress threaten to have a major


impact on biving by individuals.

In what follows, we briefly analyze some major tax reforms currently being
considered.
Reducing Mar&inal Tax Rates. When the highest tax bracket is 50 percent,
the "cost" of giving a dollar to charity for a high-income individual is
50 cents. This is because one-half of the gift is money that otherwise would
have gone to government in the form of taxes. Lowering the highest maq;inal
tax rate from 50 percent to 25 percent, raises the "cost" of giving from 50
cents to 75 cents. In other words, it becomes more expensive for individuals
to give to charities. In this way, lowering marginal tax rat es discourages
private donations to charity, despite its other beneficial economic effects.
Limiting Deductions for Charitable Contributions to Two Percent of Income.
Such a change would limit the tax advantage of making charitable contributions. Those who are more philanthropic would be more heavily taxed than they
are under current law.
Establishing a Deduction Floor for Non-Itemizers. This means that t axpayers who do not itemize on their tax returns would be allowed to deduct contributions only in excess of a minimum amount. In the House of Representatives
tax reform package, the floor was set at $100. The effect of this reform
would be to discouraGe giving. According to one estimat e:66

If a $100 tax floor were imposed on non-itemizers, private charities


would lose $1 .38 for every $1.00 gained by the U.S. Treasury.

Private charities would lose about $5.8 billion in annual contributions.

Experience with similar "floors" in the tax code shows that Congress tends
to raise them over time. 67

A doubling of a $100 tax floor on charitable deductions would increase


the loss to private charities by 500 percent.

Increasing the floor to $.300 would increase the loss by 800 percent.

66Calcu!ations by Lawrence Lindsey of Harvard University, reported by the


Independent Sector.
67lbid.

29

This reform would have its primary effect on low to moderate income
families. Of all private giving in 1981, one-third came from families with
incomes of less than $20,000. 68
Disallowing the Deduct ability of the Full Market Value of Gifts of
Appreciated Property_ Currently, taxpayers can make gifts of property which
has appreciated in value, and take a deduction equal to the market value of the
property without paying a capital gains tax. That practice would be ended if
the House version of the tax reform is adopted. The evidence suggests that:

This would cause a loss to private charities of $1.33 for every


additional doUar of tax collected by the U.S. Treasury.69

The total loss to private charities would be $570 million. 70

Two-thirds of this loss would be the result of families earning more


than $100,000 giving 3D percent less. 71
TABLE III
Individual Charitable Giving Under Tax Refonn

Tax Policy

Current Law

Level of Giving
in .198.5
(billions)

Percent
Reduction

$65.7

Treasury I Proposal

51.3

-22.0%

Treasury II Proposal

54.8

-17.0%

House Proposal

62.5

-4.6%

Senat e Proposal

62.4

-4.9%

Senate Proposal II
(Packwood Plan)

53.7

-18.3%

Source: Figures provided by Independent Sector, based on calculations by


Lawrence Lindsey of Harvard Univerity.
68Charitable Giving and the Federal Tax Laws: Preserving a Vital Partnership for
Public Purposes, Independent Sector, 1985, p. 4.
69Based on calculations by Martin Feldstein of Harvard University, Ibid., p. 12.
70Calculated by Lawrence Lindsey as reported by the Independent Sector.
7llbid.
30

'ME 1HR.EAT fROM GOVERNMENT SUBSIDIES


TO PRIVATE SECTOR AGEl"CIES
It is not generally reallzed that to an astonishing degree, private,
nonprofit organizations are turning to government--especial1y the federal
government--as a source of funds. 72

About.38 percent of the revenues of aU nonprofit institutions


(excluding hospitals and higher education institutions) now comes from
the government.

Among private social welfare agencies, 54 percent of all revenues come


from government.

The danger in this trend is that the entity that has failed so miserably in
administering its own welfare programs will come to dominate and control the
agencies that administer programs that work. For example, it is not uncommon
to find private agencies that are heavily dependent on government fundS
providing services almost exclusively to AFOC recipients. What this means in
practice is that the private agencies have accepted the federal government's
definition and conception of who is in need and who should be helped.
There is evidence that administrators of private, nonprofit or 6 anizations
are increasingly aware of the dangers of becoming financially dependent on
government.7.3

In a recent poll of private sector agencies in the Twin Cities,


Minnesota area, 46 percent of administrators said the agencies have
become too dependent on the &overnment for funds.

Eighteen percent said that receiving federal funds caused a significant distortion in the activities and objectives of their organizations.

Another danger in government subsidies to private sector organizations is


the political aspect of this giving. Since government by nature is polltical
it is not surprising that federal dollars often are allocated to achieve
political goals, rather than broad-based social goals.
In Destroying
Democracy, James Bennett and Thomas DiLorenzo documented how billions of
dollars in federal grants (purportedly made to fight poverty, improve the

72Lester M. Salamon, James C. Musselwhite, Jr., and Carol J. DeVita, "Partners


in Public Service: Government and the Non-Profit Sector in the American Welfare
State," presentation given at an Independent Sector Forum March, 1936.
73The Twin Cities Nonprofit Sector in a Time of Government Retrenchment, p. 37

.31

community, etc.) were, in fact, being used to support blatantly political


actlvlties.7 4
For example, federal grants made to friends and associates of Tom Hayden
and Jane Fonda include the following: 75

A $126,000 U.S. Department of Labor brant was used in part to pay the
salaries of rent cont rol lobbyists.

A $335,000 Justice Department grant intended to promote crime


prevention was used to pursue social and political .soals such as
fighting tenant eviction and lobbying for rent control.

A $200,000 VISTA grant was used to fund a training camp for political
activists and community organizers.

mE 1liR.EAT OF (l"{OWOING OUT PRIVATE CMNG


There is growing evidence that private sector willingness to contribute to
social welfare activities is conditioned by what the federal (;;overnment is
doing, or at least by what it is perceived to be doing by the private sector.76

Since 1955, charitable contributions by individuals have ranged


between 2.5 and 3.0 percent of disposable income.

Yet the percent of income contributed to social welfare activities


consistently declined between 1955 and 1980.

In 1980, the percent of income which individuals contributed to social


welfare activities was less than half of what it was in 1955.

A similar trend exists for


corporations and foundations).77

all sources

of private giving (includinE,

In 1955, 22 percent of alJ private charitable contributions went to


social welfare activities.

74James T. Bennett and Thomas J. DiLorenzo, Destroying Democracy, (Washington,


D.C.: The Cato Institute, 1985).
75Bennett, DiLorenzo, Destroying Democracy, Table A4.l, pp. 407-409.
Chapter 4.

See also

76Burton A. Abrams and Mark Schmitz., "The CrOWding-Out Effect of Governmental


Transfers on Private Charitable Contributions: Cross Section Evidence,"
National Tax Journal, Vol. 37, No.4, Table I, p. 564.
77Civing USA, 1985, p. 44.
32

By 1983, that fisure had dropped to lJ percent.

This decline in private contributions to social welfare agencies appears to


be in response to a marked increase in g,overnment welfare spending. In other
words, the more the government became involved in anti-poverty activities, the
more the private sector retrenched. As the welfare state has expanded, the
public has responded by giving a larc;er percent of its charitable contributions
to other activities: schools, hospitals, art and cultural activities, and
various other civic and public programs.
The expanding welfare state is literally crowding the private sector out of
the market. According to one study:78

A 10 percent increase in social welfare spending by government leads


to a reduction of $27, on the average, in private contributions by
taxpayers who itemize on their tax returns.

Overall, each additional dollar of social welfare spendinl!, by 60vernment leads to a 30 cent reduction in private contributions.

This trend is an unhealthy one.

It urgently needs to be reversed.

CltEATING A MARKET FOR niE "BUSINESS" OF OiARITY

Why should government be involved in the business of Charity in the first


place? The traditional economic argument is that spending money for the relief
of poverty has social effects that extend beyond the interest of the individual
giver. Thus, giving to charity is different in principle from the act of
buying a loaf of bread. The purchaser of the loaf of bread enjoys the full
benefits of his purchase when he consumes the product. Yet a gift to charity
benefits not only the giver, but also everyone else in society who has an
interest in (and gets personal satisfaction from) the charitable objective. As
a result, indIviduals, given complete freedom of choice, will give too little
to charity. They will do so because when making choices about how much to .:;ive
they will consider only their individual, private benefit from the gift, and
ignore the soci al benefit s creat ed for others. Put another way, given freedom
of choice, people will try to become "free riders" on the charitable gift s of
others and fail to contribute their "fair share."
These are the theoretical arguments behind government coercion--for
requiring people to give a certain portion of their incomes for the relief of
poverty. They are arguments that, in one form or another, most people accept.
However, it does not follow that because of these argument s the government
should nationalize the charity industr},. Government requires licensed drivers
to carry automobile liability insurance, but few would argue that it is

78Abrams and Schmitz, "The Crowding-Out Effect," p. 566.


33

necessary or desirable for the government to nationalize the automobile


liability insurance industry.
As it happens, however, government has assumed the
monopoly in the welfare industry. It has put itself in the
the exclusive recipient of charitable contributions taken by
the tax system) and of having sole discretion over how these

role of a public
position of being
coercion (throu;:;,h
dollars are spent.

This is unfortunate, because the most serious defects of the American


system of public charity all stem from the fact that it has been monopolized by
government. In the fIrst place, under the government's monopoly the dollars
almost never go where the givers would have preferred them to go. Although
voluntary gifts totaling 574 billion are made each year by the pri'/ate
sector.7 9 whoever heard of anyone voluntarily giving money to the AFDC or food
stamp programs? Furthermore, when spending decisions are made through the
political process, it is inevitable that powerfully organized special interests
have considerable influence over how the dollars are spent. Thus, it is no
accident that more than two-thirds of federal welfare spending ultimately ends
up in the pockets of people who are distinctly not poor. Medicaid dollars go
to doctors and hospitals; food stamp dollars go to the agricultural industry;
housing subsidies go to landlords; and legal service dollars go to lawyers.
Finally, precisely because it faces no competition in the marketplace, the
public charity monopoly can continue to spend money in wasteful and inefficient
ways, to fail miserably in achieving its objectives, and to misbehave in other
ways without fear of losing customers to a competitor.
To remedy these defects, public sector charity must be denationalized.
Proposal A: Competition and Choice
The basic idea of privatizing public charity is a simple one. Government
would continue to force people to give their "fair share" throul,:;h the vehicle
of the income tax system.
However, individual taxpayers, rather than
politicians, would decide how their share of the welfare bill would be spent.
In other words, taxpayers would be free to allocate their welfare tax dollars
to any qualified private charity. In this way private charities would compete
on an equal footing with government welfare programs for the portion of the
federal budget that is allocat ed to poverty programs. Furthermore, there would
be free and open entry into the market: Anyone could start a private charity
and be eligible for "tax dollar contributions," provided the charity had a
social welfare purpose and satisfied certain other minimal requirements.
Proposal A involves partial privatization of public charity. Under the
proposal, individuals would be able to allocate up to 10 percent of their
personal federal income taxes to qualified private charities. These ;ifts
could be made directly to the private charities, and then deducted from taxes
owed on their income tax returns. Alternatively, individuals would have the
79Giving U.S.A.: 1985 Annual Report, p. 7.

34

opportunity to instruct the U.S. Treasury (on their income tax returns) to pay
up to 10 percent of their taxes to specific private charitable organizations.
Any amounts al10cated to private charities under this proposal would have to be
deducted from the federal government's poverty budget. In other words, for
each tax dollar allocated to private sector charity, pubJic sector charity
would be reduced by a dollar.
In 1984, total federal personal income taxes amounted to $296.2 billion.
Ten percent of this amount is approximately $30 billion, or a little less than
one-third of ail federal welfare spending. Had Proposal A been in effect in
1984, individual taxpayers would have had the opportunity to allocate one-third
of the federal welfare budget away from t;;overnment programs to private sector
programs. If the public took full advantage of this opportunity, then Congress
would be required to cut $30 billion out of pubJic sector programs. How the
cuts would be made would be left up to Congress.
Proposal B: Competition and More Choice
Proposal B is a natural extension of Proposal A. It broadens the choice of
the individual taxpayers by allowing individuals to allocate their entire share
of the social welfare budget among all public and private sector agencies and
programs involved in the "business" of welfare. Every social welfare
agency--public and private--wou1d compete against every other agency for
welfare tax dollars. In principle, Proposal B allows the public to make all of
the decisions on how the social welfare budget is to be allocated, although
individuals would be free to forego this responsibility by indicating on their
tax returns that they would like to relinquish to Congress the right to decide
how their welfare tax dollars are spent.
In 1984, total means-tested welfare spending by the federal government was
$100.5 bi11l0n 80 --an amount equal to about one-third of all personal income
taxes paid that year. Thus, Proposal B would &ve individuals direct control
over how one-third of their tax dollars would be spent.
Proposal C: Competition and More Choice Still

Proposals A and B are confined to a range of activities which fall under


the designation of "welfare." They specifically exclude educational, cultural,
medical and other human service activities which are not directly related to
the problems of poverty. They also exclude research activities, such as this
NCPA report. Yet, because these activities also have a public nature to them,
It would seem desirable to expand the range of taxpayer choice to include them
as well.

IDYee Burke, "Cash and Noncash Benefits for Persons with Limited Incomes," p. 2.

35

Proposal C would do just that. Under the proposal, Congress would define a
"human services budget," which would include, in addition to poverty programs,
spending on education, medical research, arts and cultural programs. (Proposal
C would exclud e spending on religious and political activities, as would
Proposals A and B.) Under Proposal C, all public and private sector agencies
with a human services purpose would compete against each other for taxpayer
dollars, and individual taxpayers would have the option of allocating their
individual shares of the human services budget.
Advantages

The three proposals made here have obvious advantages that should lead to a
more humane and desirable welfare system. The proposals would replace monopoly
with competition and would allow freedom of entry into the marketplace.
Charitable organizations would be able to attract contributions only by making
a persuasive case to the public. No longer would inefficient, wasteful federal
programs be able to count on uncontested access to taxpayer dollars. No longer
would special interest c;roups be able to count on political largesse as a
result of their special influence. Most important, the people giving the
money would have direct control over how their "tax dollar contributions" are
spent.

36

APPE.N)IX
Twenty-One Questions and Answers About the Proposals
1. How will the "tax doUar contributions" actually get to the private
charities to whom they are designated?
In most cases, the private charities will receive funds exactly as they do
now--in the form of checks from givers. Under our proposals, the donor would
simply indicate on his income tax return the names and tax 1.0. numbers of the
organizations to whom he has allocated his tax dollar contributions. However,
taxpayers also will have the option of having the U. S. Treasury make the
contribution by indicating. on their individual tax returns which organizations they wish to give to and in what amounts--in a manner similar to the way
in which taxpayers can now allocate $1.00 of their taxes to the presidential
election campaign fund.
2. What if an individual wishes to make charitable contributions in excess of
the limits in your proposal?
Individuals wiH make two types of decisions with respect to private
charities: (1) whether to allocate a portion of their welfare tax dollars to
private charitable organizations, and (2) whether to contribute additional
personal dollars to these organizations.
The second category of
giving--voluntary, personal gifts--will continue to qualify for tax deductions
in exactly the same way as they currently are treated under the tax code.
3. How would a private organization qualify to be eligible for tax dollar
cont ributions?
The procedure would be identical to the one
organizations that wish to be able to receive
Under Proposals A and B, the organization's
confined to social welfare services.
Under
cultural activities also would be included.

already in place for nonprofit


tax deductible contributions.
activities would have to be
Proposal C, educational and

4. Wouldn't a large bureaucracy be needed to monitor the private charities


receiving tax dollar contributions?
No. The IRS already has procedures in place for monitoring nonprofit
organizations. There would be no reason to add a new bureaucracy.
5.

What safeguards would be needed to prevent fraud, abuse and cheating?

A number of safeguards could be established.


important:

Here are four of the most

a.

EXisting IRS regulations governing nonprofit organizations would


continue to apply. These include prohibitions against mis-using a
charitable organization for personal financial gain.

b.

An even stricter set of rules would be applied to organizations


which receive tax dol1ar contributions. For example, no one would be
allowed to allocate his tax dollars to an organization from which he
or a member of his family receives a salary or with whom he has
substantial business relations. Nor could people make "deals" with
each other ("1'11 give to your charity if you give to mine") in
order to circumvent the law. Enforcing such rules is no more difficult
or complicated than the kinds of regulations which the IRS routinely
enforces every day.

c.

Special freedom of information rules would apply to ore;anizations


receiving the contributions. These rules would make it easy for
members of the public and competing organizations to have access
to financial and other records.

d.

The most important check on an organization's activities will be the


self-interested inquiries of its competitors who wiJJ be free to
engage in comparative advertising in the competition for tax dollar
cont ributions.

6.

Would private charities receiving contributions be free to engage in


political activities?

No. The same prohibitions that now apply to IRS designated 501 (c)O)
nonprofit organizations would apply to organizations that receive tax dollar
contributions. Public pollcy research institutes would be excluded under
Proposals A and B, but included under Proposal C.
7.

What about churches and other religious organizations?

No tax dollar contributions could be given to organizations whose prirnary


purpose is to advance a religion. However, churches and other religious
organizations could form subsidiary organizations with social welfare functions
(such as soup kitchens) and tax dollar contributions could be given to these
subsidiary organizations. Organizations which primarily serve a social welfare
function, but which have a rellgious dimension to their program (such as the
Salvation Army), would be permitted to receive tax dollar contributions.
8. U people choose to allocate a certain portion of their taxes to private
charities, which federal programs would lose money?
Under Proposal A, tax dollars allocated to private charities would be made
up by cuts in the budgets of means-tested federal welfare programs. Congress
would decide how the cuts are to be made. Under Proposals Band C, individual
taxpayers would have the option of allocating their tax dollars among alJ
private and public programs covered by the proposals. Congress would be free

to allocate funds only to the extent that individual taxpayers choose to '/oluntarily relinquish this choice to Congress.
9. Isn't there already a problem of private charities spending too much money
on fundraising? Wouldn't this problem be made worse by the kind of aggressive competition you seem to want and approve or?
Maybe. Advertising does more than simply persuade. The best kind of
advertising also informs. Right now there is too little information about
public and private charities and what they do. Furthermore, some of the best
private charities have discovered that it is a real selling point to disclose
how ~ they spend on fundraising. For example, the Kansas City Salvation
Army, with a budget of over $5 million, spends only eight cents on fundraising
for every doUar it raises. 81 If the value of volunteer labor is included, the
organization probably spends less than a penny on fundraising for every dollar
of spending. In our opinion, that's a good argument for giving to the Kansas
City Salvation Army.
10. Won't most of the contributions go to agencies that employ slick Madison
Avenue advertising campaigns rather than to the charities that do the best job?
Our experience with the private marketplace teaches us
Not necessarily.
that people can be fooled some of the time, but as many a bankrupt businessman
knows, they cannot be persistently fooled.
1I. Given the complexity of the welfare-poverty industry, how can an average
citizen make intelligent choices about where his tax dollar contributions
should be spent?
One option Is to rely on the advice of "experts." Ric,ht now, the taxpayer
is coerced into taking the advice of one particular group of experts--the
U.S. Congress. Our proposal would leave that option open--individuals could
continue to allow politiCians to make decisions for them. But they also would
have the option of getting advice from other "expert S,II whose opinions are
not distorted by the desire to get re-elected.
12. Since each individual taxpayer will be making decisions without knowing
what decisions are being made by everyone else, how do we know that we won't
end up with some bizarre result that none of us really would approve of?
Let's take an example. Suppose everyone in the nation decides to donat e
all of his tax doUar contributions to the Salvation Army, on the assumption
that there wiH be many other people who wil1 give to other worthy causes, such
as suicide prevention centers and homes for battered wives. When the result s
are in, we learn that the Salvation Army is way over-funded and many other

81Helping the Homeless: A Resource Guide, p. 148.

iii

worthy causes have no money at aU. Seeing this result, people wish they could
go back and change their minds, but they can't.
Could something like this actually happen?
We think it's extremely
unlikely for several reasons. In the first place, people make contributions to
private charities every day without consulting their neighbors on their giving
decisions. The results of such private giving are far from bizarre. Secondly,
all of the g,iving decisions will not be made on April 1.5. Giving decisions
will be made throughout the calendar year (in terms of cash gifts and pledges)
and people will have access to a great deal of information about where the
money is going by April 1.5.
In the third place, should there be some bizarre result, such as described
above, there are private sector remedies to deal with it. For example, private
pressure could be put on the over-funded Salvation Army to share some of
its unexpected wealth with the under-funded agencies. It would be in the
Salvation Army's self-interest to accede to the pressure in order to maintain
good relations with the giving public.
Finally, the problem--if it is a problem--is only a short-term one. People
have memories. In making giving decisions this year, they will remember what
everyone else did last year, and adjust their behavior in the libht of that
knowledge. Over time, we wiU move to a fairly stable eqUilibrium pattern of
giving in which people will be able to make reasonably well-informed decisions
about where charitable contributions are going and how they want to allocate
their own funds, given the overall pattern.
13.. What if no one allocated their tax dollar contributions to federal welfare
programs?
Under Proposal A, Congress would still have approximately two-thirds of the
federal poverty budget to allocate. Under Proposal B, federal welfare pr06rams
would have no money and would have to be abolished. Clearly there will be some
adjustment problems in eliminating programs of such size and magnitude. That
is why we propose phasing in the privatization of public charity over time.
14. What about programs for the elderly, such as Social Security and Medicare?

Social Security and Medicare are exempted under our proposals. However,
means-tested programs, such as the Supplemental Security Insurance program,
would be included since they are poverty programs.

15. Aren't you substituting "one-dollar-one-vote" for "one-man-one-vote," and


won't this give wealthy people an unfair and disproportionate influence over
where the charitable dollars are spent?
The criticism would be apt if we proposed to allow wealthy people to make
decisions about how to spend other people's money. However, we are not
proposing that. We are proposing to allow people the opportunity to allocate
their own money--money which they have personally earned--in the charitable
marketplace.
ix

16. Under your proposals, won't the total amount of public and private
charitable giving go down?
It is true that we anticipate that a great deal of
Not necessarily.
wasteful, inefficient and counterproductive spending wiU be eliminated.
Considered in isolation, this change would reduce the perceived need for
charitable giving" which in turn might cause a reduction in the amount of
"voluntary" giving and create political pressure to lower the amount of
"required" giving. However, we also are propos! ng a system under which
people wiU have complete control over their own giving decisions and thus,
will have an active, personal interest in how their dollars are spent.
As a result of the increased personal interest and control, it may be that
the public will be willing to accept higher tax rates for the purpose of
funding charitable activities. Personal voluntary giving may increase as well.
17. Technical question: How do we know that the tax dolJar contributions will
actually get distributed to the "right" charitable activities?
We don't. Economists have a theoretical way of describing "ideal" spending
decisions: The last dollar spent on program A should create just as much
social benefit as the last dollar spent on program B. One theoretical
criticism of the current system is that it has no mechanism for reaching this
ideal. Indeed, the current system is inherently destined not to reach the
ideal. That is because in the political arena, decisions are made on the basis
of political costs and political benefits (How many votes lost? How many votes
gained?) and not on the basis of economic costs and economic benefits.
The proposal we are making also has a theoretical defect, however. When
people make individual decisions on how tax dolJars are to be spent, they will
tend to aUocate their tax doUar contributions in the following way: The
last dollar spent on program A will provide just as much personal ("psychic")
benefit as the last dollar spent on program B. Clearly, the personal psychic
benefits people get from various spending decisions cannot be equated with
social benefit s.
What this means as a practical matter is that the system we enVISJOn will
not be perfect, even though we expect major improvements over the current
one.
18. If you admit that the system you propose is not perfect, how do we know
some important social goals will not be left urunet?
We don't. Consider the following problem.
Suppose that everyone in
Dallas, Houston and San Antonio has some concern about poverty in rural
Texas. For each individual, this concern is so small that he allocat es all of
his tax doilar contributions to charitable activities in the city where he
lives. As a result, no money flows from the large cities to help the problems
of poverty in rural Texas. However, if we add up aU of the "smalJ concerns"

of the mi11ions of people that live in the large, urban areas, they may total
up to a very big social concern over a problem that is &oing unsolved.
No one knows how serious such a problem might turn out to be. By gradually
movin5 to the system we envision, we wilJ have the opportunity to observe
whether such problems warrant modifications in the proposal.
19. If individual choice is superior to choices made by politicians, why not
extend your proposal to the extreme and allow each taxpayer to allocate all of
his tax dollars among all federal programs, including national defense?
This may turn out to be a desirable thing to do. However, that there are
potential problems with such a proposal because federal programs have diiferent
degrees of "pubJlcness" to them. As with the problem of rural Texas poverty,
individuals might tend to allocate all of their tax dollars to projects in
their own communities, with nothing left over for truly "national" problems,
such as national defense.
Again, we cannot know what choices people wi1J actually make until we
begin to experiment.
20.

What about state and local government welfare programs?

Our proposals giving individuals choice over the spending of their tax
dollars apply only to the federal income taxes. However, state ~overnments
would be free to adopt similar probrams in their own jurisdictions. In
addition, taxpayers would be free to allocate their federal tax dollar contributions to state and local government welfare programs if they choose to
do so.

21. Under Proposal B and C, you would allow individual taxpayers to make all of
the choices on how welfare dollars are spent. If people chose to give all of
their tax dollar contributions to private sector organizations, wouldn't this
completely remove elected officials from the decision-making process and make
politicians essentially superfluous?
Yes.

NOTE: Nothing written here should be construed as necessarily reflecting the


views of the National Center for PoHcy Analysis or as an attempt to aid or
hinder the passage of any bH! before Congress.

xi

ABOUT lHE AUlHORS

John C. Goodman is President of the National Center for Policy Analysis and
the author of several books and studies on entitlement programs.
Michael.D. Stroup received his bachelor of science degree in economics from
Montana State University and is a research analyst with the National Center for
Policy Analysi s.