What Can Government Do?

What, then, can the government do to help the poor? The only correct answer is also the libertarian answer: Get out of the way. Let the government get out of the way of the productive energies of all groups in the population, rich, middle class, and poor alike, and the result will be an enormous increase in the welfare and the standard of living of everyone, and most particularly of the poor who are the ones supposedly helped by the miscalled “welfare state.” [p. 163]

There are four major ways in which the government can get out of the way of the American people. First, it can abolish — or at the very least drastically reduce — the level of all taxation, taxation which cripples productive energies, savings, investment, and technological advance. In fact, the creation of jobs and increase of wage rates resulting from abolishing these taxes would benefit the lower-income groups more than anyone else. As Professor Brozen points out: “With less attempt to use state power to compress the inequality in the distribution of income, inequality would diminish more rapidly. Low wage rates would rise more rapidly with a higher rate of saving and capital formation, and inequality would diminish with the rise in income of wage earners.”38  The best way to help the poor is to slash taxes and allow savings, investment, and creation of jobs to proceed unhampered. As Dr. F. A. Harper pointed out years ago, productive investment is the “greatest economic charity.” Wrote Harper:

According to one view, sharing a crust of bread is advocated as the method of charity. The other advocates savings and tools for the production of additional loaves of bread, which is the greatest economic charity.

The two views are in conflict because the two methods are mutually exclusive in absorbing one’s time and means in all the choices he makes day by day . . . .

The reason for the difference in view really stems from different concepts about the nature of the economic world. The former view stems from the belief that the total of economic goods is a constant. The latter view is built on the belief that expansion in production is possible without any necessary limit.

The difference between the two views is like the difference between a two-and three-dimensional perspective of production. The two-dimensional size is fixed at any instant of time, but the third dimension and therefore the size of the total is expandable without limit by savings and tools . . . .

All the history of mankind denies that there is a fixed total of economic goods. History further reveals that savings and expansion of tools constitute the only way to any appreciable increase.39

The libertarian writer Isabel Paterson put the case eloquently:

As between the private philanthropist and the private capitalist acting as such, take the case of the truly needy man, who is not incapacitated, and suppose that the philanthropist gives him food and clothes and shelter — when he has used them, he is just where he was before, except that he may have acquired the habit of dependence. But suppose someone with no benevolent motive whatever, [p. 164] simply wanting work done for his own reasons, should hire the needy man for a wage. The employer has not done a good deed. Yet the condition of the employed man has actually been changed. What is the vital difference between the two actions?

It is that the unphilanthropic employer has brought the man he employed back into the production line, on the great circuit of energy; whereas the philanthropist can only divert energy in such manner that there can be no return into production, and therefore less likelihood of the object of his benefaction finding employment . . . .

If the full role of sincere philanthropists were called, from the beginning of time, it would be found that all of them together by their strictly philanthropic activities have never conferred upon humanity one-tenth of the benefit derived from the normally self-interested efforts of Thomas Alva Edison, to say nothing of the greater minds who worked out the scientific principles which Edison applied. Innumerable speculative thinkers, inventors, and organizers, have contributed to the comfort, health, and happiness of their fellow men — because that was not their objective.40

Second, and as a corollary to a drastic reduction or abolition of taxation, would come an equivalent reduction in government expenditures. No longer would scarce economic resources be siphoned off into wasteful and unproductive expenditures: into the multibillion dollar space program, public works, the military-industrial complex, or whatever. Instead, these resources would be available to produce goods and services desired by the mass of the consuming population. The outpouring of goods and services would provide new and better goods to the consumers at far lower prices. No longer would we suffer the inefficiencies and the injury to productivity of government subsidies and contracts. Furthermore, the diversion of most of the nation’s scientists and engineers to wasteful military and other governmental research and expenditure would be released for peaceful and productive activities and inventions benefitting the nation’s consumers.41

Third, if the government also cut out the numerous ways in which it taxes the poorer to subsidize the wealthier, such as we have named above (higher education, farm subsidies, irrigation, Lockheed, etc.), this [p. 165] in itself would stop the government’s deliberate exactions upon the poor. By ceasing to tax the poorer in order to subsidize the richer, the government would aid the poor by removing its burdens from their productive activity.

Finally, one of the most significant ways in which the government could aid the poor is by removing its own direct roadblocks from their productive energies. Thus, minimum wage laws disemploy the poorest and least productive members of the population. Government privileges to trade unions enable them to keep the poorer and minority-group workers from productive and high-wage employment. And licensing laws, the outlawing of gambling, and other government restrictions prevent the poor from starting small businesses and creating jobs on their own. Thus, the government has everywhere clamped onerous restrictions on peddling, ranging from outright prohibition to heavy license fees. Peddling was the classic path by which immigrants, poor and lacking capital, were able to become entrepreneurs and eventually to become big businessmen. But now this route has been cut off — largely to confer monopoly privileges on each city’s retail stores, who fear that they would lose profits if faced with the highly mobile competition of street peddlers.

Typical of how government has frustrated the productive activities of the poor is the case of the neurosurgeon Dr. Thomas Matthew, founder of the black self-help organization NEGRO, which floats bonds to finance its operations. In the mid-1960s, Dr. Matthew, over the opposition of the New York City government, established a successful interracial hospital in the black section of Jamaica, Queens. He soon found, however, that public transportation in Jamaica was so abysmal that transportation service was totally inadequate for the hospital’s patients and staff. Finding bus service inadequate, Dr. Matthew purchased a few busses and established a regular bus service in Jamaica, service that was regular, efficient, and successful. The problem was that Dr. Matthew did not have a city license to operate a bus line — that privilege is reserved to inefficient but protected monopolies. The ingenious Dr. Matthew, discovering that the city did not allow any unlicensed busses to charge fares, made his bus service free, except that any riders who wished could buy a 25¢ company bond instead whenever they rode the busses.

So successful was the Matthew bus service that he proceeded to establish another bus line in Harlem; but it was at this point, in early 1968, that the New York City government took fright and cracked down. The government went to court and put both lines out of business for operating without licenses.

A few years later, Dr. Matthew and his colleagues seized an unused [p. 166] building in Harlem owned by the city government. (The New York City government is the city’s biggest “slumlord,” owning as it does a vast amount of useful buildings abandoned because of nonpayment of high property taxes and rotting away, rendered useless and uninhabitable.) In this building, Dr. Matthew established a low-cost hospital — at a time of soaring hospital costs and scarcity of hospital space. The city finally succeeded in putting this hospital, too, out of business, claiming “fire violations.” Again and again, in area after area, the role of government has been to thwart the economic activities of the poor. It is no wonder that when Dr. Matthew was asked by a white official of the New York City government how it could best aid Negro self-help projects, Matthew replied: “Get out of our way, and let us try something.”

Another example of how government functions occurred a few years ago, when the federal and New York City governments loudly proclaimed that they would rehabilitate a group of thirty-seven buildings in Harlem. But instead of following the usual practice of private industry and awarding rehabilitation contracts on each house individually, the government instead awarded one contract on the entire thirty-seven building package. By doing so, the government made sure that small, black-owned construction firms would not be able to bid, and so the prize contract naturally went to a large white-owned company. Still another example: In 1966, the federal Small Business Administration proudly proclaimed a program for encouraging new black-owned small business. But the government put certain key restrictions on its loans. First, it decided that any borrower must be “at the poverty level.” Now since the very poor are not apt to be setting up their own businesses, this restriction ruled out many small businesses by owners with moderately low incomes — just the ones likely to be small entrepreneurs. To top this, the New York SBA added a further restriction: All blacks seeking such loans must “prove a real need in their community” for filling a recognizable “economic void” — the need and the void to be proved to the satisfaction of remote bureaucrats far from the actual economic scene.42

A fascinating gauge of whether or to what extent government is helping or hurting the poor in the “welfare state” is provided by an unpublished study by the Institute for Policy Studies of Washington, D.C. An inquiry was made on the estimated flow of government money (federal [p. 167] and district) into the low-income Negro ghetto of Shaw-Cardozo in Washington, D.C., as compared to the outflow that the area pays in taxes to the government. In fiscal 1967, the Shaw-Cardozo area had a population of 84,000 (of whom 79,000 were black) with a median family income of $5,600 per year. Total earned personal income for the residents of the area for that year amounted to $126.5 million. The value of total government benefits flowing into the district (ranging from welfare payments to the estimated expenditure on public schools) during fiscal 1967 was estimated at $45.7 million. A generous subsidy, amounting to almost 40% of total Shaw-Cardozo income? Perhaps, but against this we have to offset the total outflow of taxes from Shaw-Cardozo, best estimated at $50.0 million — a net outflow from this low-income ghetto of $4.3 million! Can it still be maintained that abolition of the entire massive, unproductive welfare state structure would hurt the poor?43

Government could then best help the poor — and the rest of society — by getting out of the way: by removing its vast and crippling network of taxes, subsidies, inefficiencies, and monopoly privileges. As Professor Brozen summed up his analysis of the “welfare state”:

The state has typically been a device for producing affluence for a few at the expense of many. The market has produced affluence for many with little cost even to a few. The state has not changed its ways since Roman days of bread and circuses for the masses, even though it now pretends to provide education and medicine as well as free milk and performing arts. It still is the source of monopoly privilege and power for the few behind its facade of providing welfare for the many — welfare which would be more abundant if politicians would not expropriate the means they use to provide the illusion that they care about their constituents.44

• 38Brozen, “Welfare Without the Welfare State,” p. 47.
• 39F. A. Harper, “The Greatest Economic Charity,” in M. Sennholz, ed., On Freedom and Free Enterprise (Princeton, N.J.: D. Van Nostrand, 1956), p. 106.
• 40Isabel Paterson, The God of the Machine (New York: G. P. Putnam’s Sons, 1943), pp. 248-50.
• 41On the massive diversion of scientists and engineers to government in recent years, see H. L. Nieburg, In the Name of Science (Chicago: Quadrangle, 1966); on the inefficiencies and misallocations of the military-industrial complex, see Seymour Melman, ed., The War Economy of the United States (New York: St. Martin’s Press, 1971).
• 42On the Matthew and Small Business Administration cases, see Jane Jacobs, The Economy of Cities (New York: Random House, 1969), pp. 225-28.
• 43Data adapted from an unpublished study by Earl F. Mellor, “Public Goods and Services: Costs and Benefits, A Study of the Shaw-Cardozo Area of Washington, D.C.” (presented to the Institute for Policy Studies, Washington, D.C., October 31, 1969).
• 44Brozen, “Welfare Without the Welfare State,” p. 52.