Chapter 14: False Remedies for Poverty

FROM THE BEGINNING OF HISTORY SINCERE REFORMERS AS WELL AS demagogues have sought to abolish or at least to alleviate poverty through state action. In most cases their proposed remedies have only served to make the problem worse.

The most frequent and popular of these proposed remedies has been the simple one of seizing from the rich to give to the poor. This remedy has taken a thousand different forms, but they all come down to this. The wealth is to be "shared," to be "redistributed," to be "equalized." In fact, in the minds of many reformers it is not poverty that is the chief evil but inequality.

These direct redistribution schemes (including "land reform" and "the guaranteed income") are so immediately relevant to the problem of poverty that I have treated them separately in Chapter 11. Here I need merely remind the reader that all schemes for redistributing or equalizing incomes or wealth must undermine or destroy incentives at both ends of the economic scale. They must reduce or abolish the incentives of the unskilled or shiftless to improve their condition by their own efforts; and even the able and industrious will see little point in earning anything beyond what they are allowed to keep. These redistribution schemes must inevitably reduce the size of the pie to be redistributed. They can only level down. Their long-run effect must be to reduce production and lead toward national impoverishment.

The problem we face in the present chapter is that the false remedies for poverty are almost infinite in number. An attempt at a thorough refutation of any single one of them would run to disproportionate length. But some of these false remedies are so widely regarded as real cures or mitigations of poverty that if I do not refer to them I may be accused of having undertaken a book on the remedies for poverty while ignoring some of the most obvious.

What I shall do, as a compromise, is to take up some of the more popular of the alleged remedies for poverty and indicate briefly in each case the nature of their shortcomings or the chief fallacies involved in them. ⁽¹⁾

The most widely practiced "remedy" for low incomes in the last two centuries has been the formation of monopolistic labor unions and the use of the strike threat. In nearly every country today this has been made possible to its present extent by government policies that permit and encourage coercive union tactics and inhibit or restrict counter actions by employers. I have dealt with this in the preceding chapter. As a result of union exclusiveness, of deliberate inefficiency, of featherbedding, of disruptive strikes and strike threats, the long-run effect of customary union policies, as we saw, has been to discourage capital investment and to make the average real wage of the whole body of workers lower, and not higher, than it would otherwise have been.

Nearly all of these customary union policies have been dishearteningly shortsighted. When unions insist on the employment of men who are not necessary to do a job (requiring unneeded firemen on diesel locomotives; forbidding the gang size of dock workers to be reduced below, say, twenty men no matter what the size of the task; demanding that a newspaper's own printers must duplicate advertising copy that comes in already set in type, etc.), the result may be to preserve or create a few more jobs for specific men in the short run, but only at the cost of making impossible the creation of an equivalent or greater number of more productive jobs for others.

The same criticism applies to the age-old union policy of opposing the use of labor-saving machinery. Labor-saving machinery is installed only when it promises to reduce production costs. When it does that, it either reduces prices and leads to increased production and sales of the commodity being produced, or it makes more profits available for increased reinvestment in other production. In either case its long-run effect is to substitute more productive jobs for the less productive jobs it eliminates. Yet as late as 1970, a book appeared by a writer who enjoys a lofty reputation as an economist in some quarters, opposing the introduction of labor-saving machines in the underdeveloped countries on the ground that they "decrease the demand for labor"! ⁽²⁾The logical conclusion from this would be that the way to maximize jobs is to make all labor as inefficient and unproductive as possible.

A similar judgment must be passed on all "spread-the-work" schemes. The existing Federal Wage-Flour Law has been on the books for many years. It provides that the employer must pay a 50 percent penalty overtime rate for all hours that an employee works in excess of 40 hours a week, no matter how high the employee's standard hourly rate of pay.

This provision was inserted at the insistence of the unions. Its purpose was to make it so costly for the employer to work men overtime that he would be obliged to take on additional workers.

Experience shows that the provision has in fact had the effect of narrowly restricting the length of the working week. In the ten-year period 1962 to 1971 inclusive, the average annual work-week in manufacturing varied only between a low of 39.8 hours in 1970 and a high of 41.3 hours in 1966. Even monthly changes do not show much variation. The lowest average working week in manufacturing in the fourteen months from June, 1971, to July, 1972, was 39.8 hours and the highest was 40.9 hours.

But it does not follow that the hour restriction either created more long-term jobs or yielded higher total payrolls than would have existed without the compulsory 50 percent overtime rate. No doubt in isolated cases more men have been employed than would otherwise have been. But the chief effect of the overtime law has been to raise production costs. Firms already working full standard time often have to refuse new orders because they cannot afford to pay the penalty overtime necessary to fill those orders. They cannot afford to take on new employees to meet what may be only a temporarily higher demand because they may also have to install an equivalent number of additional machines.

Higher production costs mean higher prices. They must therefore mean narrowed markets and smaller sales. They mean that fewer goods and services are produced. In the long run the interests of the whole body of workers must be adversely affected by compulsory overtime penalties.

All this is not to argue that there ought to be a longer work week, but rather that the length of the work week, and the scale of overtime rates, ought to be left to voluntary agreement between individual workers or unions and their employers. In any case, legal restrictions on the length of the working week cannot in the long run increase the number of jobs. To the extent that they can do that in the short run, it must necessarily be at the expense of production and of the real income of the whole body of workers.

This brings us to the subject of minimum-wage laws. It is profoundly discouraging that in the second half of the twentieth century, in what is supposed to be an age of great economic sophistication, the United States should have such laws on its books, and that it should still be necessary to protest against a remedy so futile and mischievous. It hurts most the very marginal workers it is designed to help.

I can only repeat what I have written in another place ⁽³⁾ When a law exists that no one is to be paid less than $64 for a 40-hour week, then no one whose services are not worth $64 a week to an employer will be employed at all. We cannot make a man worth a given amount by making it illegal for anyone to offer him less. We merely deprive him of the right to earn the amount that his abilities and opportunities would permit him to earn, while we deprive the community of the moderate services he is capable of rendering. In brief, for a low wage we substitute unemployment.

But I cannot devote more space to this subject here. I can only refer the reader to what I have already written on it in my Economics in One Lesson and Man vs. the Welfare State, and more especially to the careful reasoning and statistical studies of such eminent economists as professors Yale Brozen, Arthur Burns, Milton Friedman, Gottfried Haberler, and James Tobin, who have emphasized, for example, how much our continually rising legal minimum wage requirements have increased unemployment in recent years, especially among teen-aged Negroes.

Robbing Peter to Pay Paul

In the last generation there has been enacted in almost every major country of the world a whole bagful of "social" measures, most of them having the ostensible purpose of "helping the poor" in one respect or another. These include not only direct relief, but unemployment benefits, old-age benefits, sickness benefits, food subsidies, rent subsidies, farm subsidies, veterans' subsidies -- in seemingly endless profusion. Many people receive not only one but many of these subsidies. The programs often overlap and duplicate each other.

What is their net effect? All of them must be paid for by that chronically forgotten man, the taxpayer. In perhaps half the cases, Paul is in effect taxed to pay for his own benefits, and gains nothing on net balance (except that he is forced to spend his earned money in other directions than he himself would have chosen). In the remaining cases, Peter is forced to pay for Paul's benefits. When any one of these schemes, or a further expansion of it, is being proposed, its political sponsors always dwell on what a generous and compassionate government should pay to Paul; they neglect to mention that this additional money must be seized from Peter. In order that Paul may receive the equivalent of more than he earns, Peter must be allowed to keep less than he earns.

The mounting burden of taxation not only undermines individual incentives to increased work and earnings, but in a score of ways discourages capital accumulation and distorts, unbalances, and shrinks production. Total real wealth and income is made smaller than it would otherwise be. On net balance there is more poverty rather than less.

But new taxes are so unpopular that most of these "social" handout schemes are originally enacted without enough increased taxation to pay for them. The result is chronic government deficits, paid for by the issuance of additional paper money. And this has led in the last quarter-century to the constant depreciation of the purchasing power of practically every currency in the world. All creditors, including the buyers of government bonds, insurance policy holders, and the depositors in savings banks, are systematically swindled. Once more the chief victims are the working and saving poor.

Yet everywhere this monetary inflation, eventually so disruptive and ruinous to orderly balanced production, is rationalized by politicians and even by putative economists as necessary for "full employment" and "economic growth." The truth is that if this monetary inflation is persisted in, it can only lead to economic disaster.

Many of the very people who originally advocate inflation (or the policies which inevitably lead to it), when they see its consequences of raising prices and money wages, propose to cure the situation not by halting the inflation but by having the government impose price and wage controls. But all such at tempts to suppress the symptoms enormously increase the harm done. Price and wage controls, to precisely the extent that they can be made temporarily effective, only distort, disrupt, and reduce production -- again leading toward impoverishment.

Yet here again, as with the other false remedies for poverty referred to in this chapter, it would be an unjustifiable digression to spell out in detail all the fallacies and evil consequences of special subsidies, improvident government spending, deficit financing, monetary inflation, and price and wage controls. I have myself dealt with these subjects in two previous books: The Failure of the New Economics ⁽⁴⁾ and What You Should Know About Inflation; ⁽⁵⁾ and there is of course an extensive literature on the subject. The chief point to be reiterated here is that these policies do not help to cure poverty.

Another false remedy for poverty is the progressive income tax, as well as a very heavy burden of capital gains taxes, inheritance taxes, and corporate income taxes. All of these have the effect of discouraging production, investment, and capital accumulation. To that extent they must prolong rather than cure poverty. But these taxes have already been discussed in the chapter on dividing the wealth.

Notes

1. I have examined most of these schemes in more detail elsewhere (chiefly in my Economics in One Lesson and in Man vs the Welfare State) and must refer the interested reader to these and other sources for more extended discussion.

2. Gunnar Myrdal, The Challenge of World Poverty, Pantheon Books, 1970, pp.400-401 and passim.

3. Man vs. the Welfare State, Arlington House, 1969, pp.23-25.

4. Princeton: Van Nostrand, 1959.

5. Princeton: Van Nostrand, 1960, 1965. Also Funk & Wagnalls paperback, 1968.

This e-text is made available by the The Henry Hazlitt Foundation in cooperation with The Foundation for Economic Education. The Hazlitt Foundation is a member-supported 501(c)(3) non-profit corporation whose mission is to make the ideas of freedom more accessible. Please visit our flagship Internet service .

© 1973 Henry Hazlitt. For permissions information, contact The Foundation for Economic Education, 30 South Broadway, Irvington-on-Hudson, NY 10533.