Man vs. The Welfare State MAN VS. THE WELFARE STATE HENRY HAZLITT ARLINGTON HOUSE NEW ROCHELLE, N.Y. THIRD PRINTING, JUNE I97O Copyright © 1969 by Arlington House, New Rochelle, New York. All rights reserved. No portion of this book may be reproduced without written permission from the publisher, except by a reviewer who may quote brief passages in connection with a review. Library of Congress Catalog Card Number 72-93457 SBN 87000-066-7 MANUFACTURED IN THE UNITED STATES OF AMERICA Preface THIS BOOK GREW OUT OF A PAMPHLET THAT APPEARED IN August, 1968, called Life and Death of the Welfare State. The greater part of the material in it is new, but several chapters have appeared in advance of this publication in The Freeman (a monthly published by the Foundation for Economic Education at Irvington-on-Hudson, New York), parts of several chapters appeared in my syndicated news- paper column for the Los Angeles Times Syndicate, and Chapter 16 was published as a pamphlet in Europe in English, French, and German editions by INFRA (The International Freedom Academy). I am grateful to the publishers concerned for permission to republish this ma- terial here. HENRY HAZLITT Wilton, Conn. August, ig6g Contents PREFACE V 1. Instant Utopia 1 2. Salvation Through Government Spending 4 3. "We Owe It To Ourselves" 10 4. Consequences of Dollar Debasement 15 5. The High Cost of Wage Hikes 23 6. Price Controls 29 7. More on Price Controls 34 8. Who Protects the Consumer? 48 9. Famines Are Government-Made 54 10. Runaway Relief and Social Insecurity 57 11. Income Without Work 62 12. Fallacies of the Negative Income Tax 84 13. Can We Guarantee Jobs? 101 14. Soaking the Rich 104 15. Soaking the Corporations 109 16. Government Planning vs. Economic Growth 115 viii CONTENTS 17. Government As Prosperity-Maker 137 18. Uruguay: Welfare State Gone Wild 140 19. Inflation Is Worldwide 150 20. The Case for the Gold Standard 153 21. The Fallacy of Foreign Aid 165 22. Government Unlimited 180 23. From Spencer's 1884 to Orwell's IQ84 185 24. The Task Confronting Libertarians 199 25. What We Can Do About It 215 INDEX 221 Man vs. The Welfare State CHAPTER 1 Instant Utopia IN AMERICA TODAY MOST OF THE OLDER GENERA- tion—and many of the young—stand appalled at the nihilism of the self-styled Now Generation and its de- mands for unattainable reforms, or merely for the sheer destruction of whatever is established. But the cynicism, nihilism, and revolt of "youth," and even of some of its parents, are the result of a common cause. In the last generation politicians and govern- ments have been promising the voters that they could not only bring perpetual full employment, prosperity, and "economic growth," but solve the age-old problem of poverty overnight. And the end result is not merely that accomplishment has fallen far short of promises, but that the attempt to fulfill the promises has brought 2 MAN VS. THE WELFARE STATE an enormous increase in government spending, an enormous increase in the burden of taxes, chronic defi- cits, chronic inflation, and a constant loss in the buying power of the people's earnings and savings. "Social Security" has brought an ominous increase in social in- security. Another result of the promise of instant utopia has been a gigantic growth of governmental power—of in- terference in the details of everybody's business and everybody's life. As this power has increased, it has also become concentrated in fewer and fewer hands. In America the towns and villages have steadily lost power to the States, the States to the Federal Government, and Congress to the President. One mark of the welfare state everywhere has been the gathering of power into the hands of one man. This is no mere unfortunate coincidence; it has been inevita- ble. Thirty-six years ago the eminent Swedish econo- mist Gustav Cassel explained in a prophetic lecture how "planned economy," long enough continued, must lead to despotism: The leadership of the State in economic affairs which advo- cates of Planned Economy want to establish is, as we have seen, necessarily connected with a bewildering mass of gov- ernment interferences of a steadily cumulative nature. The arbitrariness, the mistakes and the inevitable contradictions of such policy will, as daily experience shows, only strengthen the demand for a more rational coordination of the different measures and, therefore, for unified leadership. For this reason Planned Economy will always develop into Dictatorship. The succeeding chapters of this book explain in de- tail the ideology and methods behind the present infla- tion and aggrandizement of State power, the conditions Instant Utopia 3 to which it has led and, finally, the solutions we must apply if this sinister threat—not only to the economic future of the American people but to the future of civili- zation itself—is to be averted. CHAPTER 2 Salvation Through Government Spending IN THE EARLY NINETEEN THIRTIES, IN THE DEPTH OF the Great Depression, the theory became fashionable that the cause of all depressions was Lack of Purchasing Power. The people just did not have enough money, and because of unwarranted pessimism they were refusing to spend enough even of what they had. The solution was therefore simple: at such a time the gov- ernment should boldly increase its own spending, "prime the pump," and "get things moving again." Naive advocates of this theory assumed that more government spending was the whole answer. The more sophisticated advocates saw that the increased spend- ing would not give people more purchasing power if the government kept the budget balanced and took it Salvation Through Government Spending 5 all away again in higher taxes. The thing to do was to spend more without taxing more. The trick, in other words, was deliberately to unbalance the budget—to run a deficit. Most of the champions of deficits—including the eminent John Maynard Keynes himself, the theory's chief architect—at least publicly professed to believe that the required deficit could be financed by selling bonds directly to the public, to be paid for out of sav- ings. But again, the more sophisticated deficiteers must have seen that a man who buys a $1,000 bond out of his savings surrenders that much purchasing power for the life of the bond. In short, he loses just as much buying power as the government gains. On net balance, no new buying power has been created. How, then, can the government "create" new pur- chasing power? It can do so only if it does not increase taxes at all, but "sells" its bonds to the banking system, and if the banks "pay" for them by creating deposit credits on their books in favor of the government. This leads to an increase in "the money supply"—that is, an increase either in the amount of currency or of demand bank deposits. If the government's new bonds are sold directly to member banks, there tends to be a dollar-for-dollar in- crease in the money supply compared with the amount of new bonds. But if the government's securities get into the hands of the Federal Reserve Banks, they are used to create what is called "high-powered" money. This can lead to the creation of about $6 of new money for every dollar of new government securities. It is not easy to give a satisfactory but short explana- tion of the reason for this to readers without any previ- ous knowledge of monetary theory. When member banks "buy" government bonds and "pay" for them by creating a deposit credit on their books against which 6 MAN VS. THE WELFARE STATE the government can draw, they are adding to the na- tion's supply of purchasing media. They are creating money out of government promises, and some would say they are creating money out of thin air. Now if a member bank that has bought such govern- ment bonds sells them to its regional Federal Reserve Bank, it can ask that Reserve bank to credit the pro- ceeds to the member bank's reserves with that Reserve bank. But if the member bank is a "city bank," it is required to keep a reserve with the Federal Reserve Bank of only l6½ per cent against its net demand deposits. This means that the member bank is entitled to lend, and so create demand deposits for, about six times the amount of its reserves with the Federal Re- serve Bank. That is why money created directly or in- directly by the Federal Reserve Banks is called "high-powered" money. Thus new "purchasing power" is brought into being. Thus people have more money to buy more goods, cre- ate more jobs, stimulate more output, and restore pros- perity. At least so it seems for the moment. But soon there are other consequences. If there have been heavy unemployment and much "idle capacity," the new monetary purchasing power in the system, by increasing the demand for commodities, may indeed lead to an increase in production, and hence to an increase in employment. This has been hailed as the great Keynesian contribution to economic theory and policy. But there are fatal flaws in it. Unless there were some serious lack of coordination among prices, costs, and wages, mass unemployment would not exist in the first place. When it does exist, the only appropriate cure is individual adjustment of prices, costs, and wages to each other—the return of coordination. But this can be brought about automati- Salvation Through Government Spending 7 cally only if the competitive forces of the market are given free play.