B. Subsidies and Transfer Payments

Let us delve a little further into the typology of government spending. Transfer spending or subsidies distort the market by coercively penalizing the efficient for the benefit of the inefficient. (And it does so even if the firm or individual is efficient without a subsidy, for its activities are then being encouraged beyond their most economic point.) Subsidies prolong the life of inefficient firms and prevent the flexibility of the market from fully satisfying consumer wants. The greater the extent of government subsidy, the more the market is prevented from working, the more resources are frozen in inefficient ways, and the lower will be the standard of living of everyone. Furthermore, the more government intervenes and subsidizes, the more caste conflict will be created in society, for individuals and groups will benefit only at one another’s expense. The more widespread the tax-and-subsidy process, the more people will be induced to abandon production and join the army of those who live coercively off production. Production and living standards will be progressively lowered as energy is diverted from production to politics and as government saddles a dwindling base of production with a growing and more top-heavy burden of the State-privileged. This process will be all the more accelerated because those who succeed in any activity will invariably tend to be those who are best at performing it. Those who particularly flourish on the free market, therefore, will be those most adept at production and at serving their fellow men; those who succeed in the political struggle for subsidies, on the other hand, will be those most adept at wielding coercion or at winning favors from wielders of coercion. Generally, different people will be in the different categories of the successful, in accordance with the universal specialization of skills. Furthermore, for those who are skillful at both, the tax-and-subsidy system will encourage and promote their predatory skills and penalize their productive ones.

A common example of direct transfer subsidy is governmental poor relief. State poor relief is clearly a subsidization of poverty, for men are now automatically entitled to money from the State because of their poverty. Hence, the marginal disutility of income forgone from leisure diminishes, and idleness and poverty tend to increase further, which in turn increases the amount of subsidy that must be extracted from the taxpayers. Thus, a system of legally subsidized poverty tends to call forth more of the very poverty that is supposedly being alleviated. When, as is generally the case, the amount of subsidy depends directly on the number of children possessed by the pauper, there is a further incentive for the pauper to breed more children than otherwise and thereby multiply the number of paupers—and even more dependent paupers—still further.58 The sincerity of the State’s desire to promote charity towards the poor may be gauged by two perennial drives of government: to suppress “charity rackets” and to drive individual beggars off the streets because the “government makes plenty of provision for them.”59 The effect of both measures is to cripple voluntary individual gifts of charity and to force the public to route its giving into the channels approved by, and tied in with, government officialdom.

Similarly, governmental unemployment relief, often supposed to help in curing unemployment, has the precisely reverse effect: it subsidizes and intensifies unemployment. We have seen that unemployment arises when laborers or unions set a minimum wage above what they could obtain on the unhampered market. Tax aid helps them to keep this unrealistic minimum and hence prolongs the period of unemployment and aggravates the problem.

• 58As Thomas Mackay aptly stated: “We can have exactly as many paupers as the country chooses to pay for.” Thomas Mackay, Methods of Social Reform (London: John Murray, 1896), p. 210. Private charity to the poor, on the other hand, would not have the same vicious-circle effect, since the poor would not have a continuing compulsory claim on the rich. This is particularly true where private charity is given only to the “deserving” poor. On the nineteenth-century concept of the “deserving poor,” cf. Barbara Wootton, Social Science and Social Pathology (London: George Allen & Unwin, 1959), pp. 51, 55, and 268 ff.
• 59The reader may gauge from the following anecdote by an admirer of such a drive just who was the true friend of the poor organ-grinder—his customer or the government:
  During a similar campaign to clean up the streets of organ-grinders (most of whom were simply licensed beggars) a woman came up to LaGuardia at a social function and begged him not to deprive her of her favorite organ-grinder.
  “Where do you live?” he asked her.
  “On Park Avenue!”
  LaGuardia successfully pushed through his plan to eliminate the organ-grinders and the peddlers, despite the pleas of the penthouse slummers. (Newbold Morris and Dana Lee Thomas, Let the Chips Fall [New York: Appleton-Century-Crofts, 1955], pp. 119–20)