Cradle to Grave – The Perverse Consequences of the Welfare State
The fourth major argument in Free to Choose is a comprehensive and fundamental critique of the modern welfare state. The central thesis is that the vast network of government programs designed to provide security “from cradle to grave”—from Social Security and unemployment insurance to public housing, food stamps, and medical care—has, despite its compassionate and well-intentioned origins, produced results that are the opposite of what was intended. Far from being an effective and humane solution to poverty and hardship, the welfare state has become a bureaucratic behemoth that is inefficient, ruinously expensive, and profoundly damaging to the fabric of society. It creates perverse incentives that discourage work and savings, weakens the family, traps the poor in a cycle of dependency, and erodes the very virtues of individual responsibility and self-reliance upon which a free and prosperous society depends.
To understand this powerful indictment, we must first trace the origins and the underlying philosophy of the welfare state. Its intellectual roots lie in a fundamental shift in public opinion, away from a belief in individual responsibility and toward a belief in collective or social responsibility. This shift, which began in intellectual circles in the late nineteenth century, gained massive public support in the wake of the Great Depression. The economic devastation of the 1930s was widely (and, as argued previously, incorrectly) seen as a failure of capitalism, leading to the conviction that the government must step in to protect individuals from the vicissitudes of fortune.
This conviction gave birth to the New Deal in the United States, which laid the foundation for the American welfare state. The original vision was relatively modest. Social Security was conceived as a program to ensure that working people could provide for their own retirement rather than become objects of charity. Public assistance (or “relief”) was seen as a temporary emergency measure for the indigent, which was expected to shrink and perhaps even disappear as the economy recovered and the Social Security system matured.
This is not what happened. Instead of shrinking, the system grew relentlessly. Both programs expanded to cover more people with more generous benefits. In the 1960s, President Lyndon Johnson’s “War on Poverty” unleashed a further explosion of welfare spending, adding Medicare, Medicaid, food stamps, housing subsidies, and a bewildering array of hundreds of other programs. A new cabinet department, Health, Education, and Welfare (HEW), created in 1953 with a modest budget, had by the late 1970s grown into an empire with the third-largest budget in the world, trailing only the total budgets of the United States and the Soviet Union.
The results of this massive expansion have been a conspicuous and widely acknowledged failure. The welfare rolls have continued to grow even during periods of economic prosperity. Public housing projects have degenerated into crime-ridden slums. Social Security faces a long-term financial crisis. The entire system is derided as a “welfare mess,” plagued by fraud, waste, and a soul-crushing bureaucracy. Why have such noble goals led to such dismal outcomes? The Friedmans argue that the failure is not accidental or a matter of poor execution; it is systemic and is rooted in a fundamental, structural flaw.
The Four Ways to Spend Money
To diagnose this flaw, they offer a simple but powerful analytical framework based on whose money you are spending and for whose benefit. There are only four possibilities:
- You spend your own money on yourself. When you go grocery shopping, for example, you have a strong incentive to economize and get the most value for every dollar you spend. You are careful about both the cost and the quality of what you buy. This is the model of the market transaction and is characterized by maximum efficiency and value-seeking.
- You spend your own money on someone else. When you buy a birthday gift, you still have a strong incentive to watch the price, but your incentive to match the purchase to the recipient’s true desires is weaker. You might prioritize what is convenient for you to buy or what you think they should have. Efficiency is diminished.
- You spend someone else’s money on yourself. When you have an expense account for lunch, you have little incentive to economize on the price. You might order the most expensive item on the menu. Your main concern is getting the most value for yourself, not for the person paying the bill (your employer or its customers). This leads to spending more than you otherwise would.
- You spend someone else’s money on someone else. This is the category into which virtually all government welfare spending falls. A government bureaucrat (spending taxpayers’ money) directs resources to a welfare recipient. In this situation, the spender has little incentive to economize on the cost and little incentive to ensure the recipient gets the most possible value. The primary motivations for the bureaucrat are to follow the established rules, expand their agency’s budget and influence, and avoid controversy. This is the formula for maximum inefficiency, waste, and mismatch between what is provided and what is truly needed.
This simple table explains the inherent pathology of the welfare state. It is a system structurally designed for waste. The legislator who votes for a program is spending other people’s money. The bureaucrat who administers it is spending other people’s money. The connection between the service provided and the cost borne is severed. The powerful and dependable spur of self-interest, which ensures efficiency in the marketplace, is replaced by the far weaker and less reliable motives of altruism or, more commonly, bureaucratic self-preservation.
This structural flaw gives rise to a cascade of perverse consequences that corrupt the system and harm society.
The Perverse Consequences in Practice
1. The Trap of Dependency and the Destruction of Incentives: The welfare system, in its attempt to provide a “decent” level of support, often creates a powerful disincentive to work. This is most obvious in what is known as the “welfare cliff.” When a person on welfare takes a low-wage job, they begin to lose their benefits—not just cash payments, but also food stamps, housing subsidies, and crucially, Medicaid. Because these benefits are phased out as earnings rise, the recipient faces an extremely high effective “marginal tax rate” on their work. It is not uncommon for a person to find that for every dollar they earn, they lose 80 cents, 90 cents, or even more than a dollar in benefits.
Imagine you are offered a job that pays $1,000 a month. If accepting it means you lose $1,100 in benefits, you would be irrational to take it. The system creates a trap. It punishes self-improvement and rewards dependency. The very programs designed to help people escape poverty become the walls of their prison, making a transition from the welfare roll to a payroll an economically punishing choice.
2. The Erosion of the Family: The structure of welfare programs has had a devastating effect on the family, particularly in low-income communities. For many years, the primary cash-assistance program, Aid to Families with Dependent Children (AFDC), was structured in such a way that benefits were available primarily to single-parent households. In many states, a family with two able-bodied parents, one of whom was unemployed, was ineligible for aid. The presence of a man in the house—especially a low-earning one—was a financial liability.
The system thus created a cruel and direct incentive for fathers to abandon their families. It subsidized single-parent households and penalized intact, two-parent families. While this was not the intention, it was the undeniable result. The welfare state has effectively replaced the father and husband with a government check, weakening the most fundamental institution of social stability and personal development.
3. The Case of Social Security: The largest single component of the welfare state is Social Security, and it is a prime example of a program that has failed in its promises and operates on a basis of deception. It is presented to the public as an “insurance” program, in which individuals “contribute” to a “trust fund” to provide for their own retirement. This is a fiction.
Social Security is not an insurance program. It is a pay-as-you-go system, which is a technical way of saying it is a massive, compulsory, intergenerational transfer of wealth. The “contributions” (payroll taxes) of today’s workers are not saved or invested for their future; they are immediately paid out as benefits to today’s retirees. Your future benefits depend entirely on the willingness and ability of the next generation of workers to pay taxes to support you. It is less like an insurance policy and more like a chain letter.
The language used is deliberately misleading. Taxes are called “contributions.” The government’s IOUs to itself are called a “trust fund.” The system is in deep, long-term financial trouble due to a simple demographic reality: the number of retirees is growing much faster than the number of workers paying taxes to support them.
Furthermore, the system produces a perverse redistribution of income. While benefit formulas are tilted to favor low-wage earners, other factors work in the opposite direction. People from lower-income families tend to start working and paying payroll taxes at a younger age. They also, on average, have shorter life expectancies and thus collect benefits for fewer years. The net effect is that the poor often pay into the system for more years and collect for fewer years than the well-to-do. It is another example of a program sold in the name of helping the poor that often does the opposite.
4. The Failure of Government Housing and Medical Care: The same pattern of failure is evident in other areas. Government-run public housing projects, intended to provide decent homes for the poor, have instead become notorious for concentrating poverty and social pathologies, leading to crime, vandalism, and despair. The infamous Pruitt-Igoe project in St. Louis, once an award-winning architectural design, deteriorated so completely that the government had to demolish it with explosives.
In medical care, the introduction of Medicare and Medicaid in the 1960s was intended to make healthcare accessible to the elderly and the poor. The primary effect has been a spectacular explosion in medical costs. When a third party (the government) pays the bills, neither the patient (the consumer) nor the doctor (the provider) has a strong incentive to economize. Patients demand more services because they do not feel the direct cost, and providers have an incentive to supply more tests and procedures. This has led to runaway inflation in healthcare, which in turn leads to calls for more government intervention—price controls on doctors and hospitals, detailed regulation of medical procedures—to solve the problem that government intervention created in the first place.
The Alternative: A True Safety Net
The Friedmans argue that the entire welfare state edifice should be dismantled and replaced with a single, comprehensive program that provides a true safety net without destroying incentives: a Negative Income Tax (NIT).
The idea is simple. The government currently sets an income level below which no income tax is owed (through a combination of exemptions and standard deductions). Let’s call this the “allowance.” Under the current system, if your income is above the allowance, you pay tax on the excess. If your income is below the allowance, you simply pay no tax, and the unused portion of your allowance is worthless to you.
The Negative Income Tax would change this. If your income falls below the allowance, you would receive a payment from the government—a “negative tax”—equal to a fraction (say, 50 percent) of your unused allowance.
For example, if the allowance for a family of four was $10,000 and the negative tax rate was 50%:
- A family with zero income would have a shortfall of $10,000 and would receive a cash payment of $5,000.
- A family that earned $4,000 would have a shortfall of $6,000 and would receive a payment of $3,000, for a total income of $7,000 ($4,000 earned + $3,000 subsidy).
- A family that earned $10,000 would be at the “break-even” point and would neither pay tax nor receive a subsidy.
- A family that earned $12,000 would pay positive income tax on the $2,000 above the allowance.
The advantages of this system are immense:
- It Replaces the “Ragbag”: It would replace the entire chaotic maze of current welfare programs—food stamps, housing subsidies, welfare checks, etc.—with one simple, unified system. This would eliminate the massive, costly, and intrusive bureaucracy that currently administers these programs.
- It Preserves the Incentive to Work: This is its most crucial feature. Unlike the current system, under an NIT, an extra dollar earned always results in a higher total income. In the example above, every dollar earned adds 50 cents to the family’s net income. The punishing “welfare cliff” is eliminated.
- It Provides Help in the Best Possible Form: Cash. It treats the poor with dignity and respect, giving them the freedom to make their own choices and set their own priorities, rather than having a bureaucrat decide what is best for them.
- It is General and Impersonal: It helps people because they are poor, not because they fit into a specific category (old, disabled, single parent, etc.). It eliminates the power of bureaucrats to dispense favors and control the lives of others.
The Negative Income Tax, combined with a gradual phasing out of Social Security (while honoring all existing commitments), represents the Friedmans’ vision for a humane and effective alternative to the current welfare state. It acknowledges society’s desire to provide a basic minimum for those in need, but does so in a way that is consistent with the principles of individual liberty, responsibility, and the preservation of incentives. The current “cradle to grave” system, they conclude, is a tragic failure born of good intentions but fatally flawed in its design. It has rotted the moral fabric of society by replacing personal responsibility with bureaucratic dependency, and its continued expansion represents one of the gravest threats to both our prosperity and our freedom.