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Incentives, Income, and Welfare

February 7, 2014
[Editor's Note: The debate over the effects of the Affordable Care Act on incentives to work continues. In this selection from Chapter 11 of Man vs. The Welfare State (1969), Henry Hazlitt discusses some impacts of welfare programs on incentives.] by Henry Hazlitt 200px-Hazlitt-photo I should like to return here to the question of incentives. I have already pointed out how the guaranteed income plan, if adopted in the form that its advocates propose, would lead to wholesale idleness and pauperization among nearly all those earning less than the minimum guarantee, and among many earning just a little more. But in addition to the erosion of the incentive to work, there would be just as serious an erosion of the incentive to save. The main reason most people save is to meet possible but unforeseeable contingencies, such as illness, accidents, or the loss of a job. If everyone were guaranteed a minimum cash income by the government, this main incentive for saving would disappear. The important habit of saving might disappear with it. The more affluent minority, it is true, also save toward a retirement income in old age or for supplementary income in their working years. But with the prevalence of a guaranteed-income system, this type of saving also would be profoundly discouraged. This would be certain to mean a reduction in both the nation's capital  accumulation and the investment in more and new and better tools, plants and equipment upon which all of us depend for increased national productivity, increased real wages, more lucrative employment, and economic progress in general. We might even enter an era of net capital consumption. In other words, the long-term effect of a guaranteed-income plan would be to increase poverty, not to reduce it. It is important to point out that to be concerned with the destructive effects of a guaranteed-income program on the incentives of people to work and save, is not to pass a wholesale moral judgment on the present poor. We must avoid on the one hand the sweeping assumption, sometimes made by conservatives, that the poor have no one to blame for their poverty but themselves, and yet resist on the other hand the frequent sweeping "liberal" assumption that all the poor or jobless are poor or jobless "through no fault of their own." The only realistic presumption is that some people are poor or jobless through no fault of their own, that some are poor or jobless entirely through fault of their own, but that the great majority are poor or jobless through various complicated mixtures of misfortune and personal mistakes or shortcomings. These mixtures differ in each case, ranging from those in which misfortune predominates to those in which personal shortcomings predominate. If we must simplify, we come back to the old Victorian distinction between the "deserving" and the "undeserving" poor. People today are justifiably reluctant to state the distinction in moral terms. Nevertheless, the distinction between those who are trying to cure their poverty by their own efforts, and those who are not, is vital for any workable solution of the problem of poverty. The central vice is that they ignore this distinction. The result of all the guaranteed-income and "negative income  tax" schemes is that these schemes would destroy incentives on a wholesale scale, and therefore have the opposite of their intended effect. It is not merely the effect of guaranteed-income proposals in undermining the incentives of those earning less than the guarantee that we need to be concerned about, but the effect of such proposals in undermining the incentives of those much further up in the income scale. For they would not only be deprived of the benefits that they saw millions of others getting. It is they who would be expected to pay these benefits, through the imposition upon them of far more burdensome income taxes than they were already paying. If these taxes were steeply progressive in proportion to income, as is probable, they would discourage long hours and unusual effort. It is difficult to make any precise estimate of the effect of a given income tax rate in discouraging or reducing work and production. Different individuals will, of course, be differently affected. The activities of a man whose whole income comes in the form of a single salary from a single job will be differently affected than those of a surgeon, a doctor, a writer, an actor, an architect, or anyone whose income varies with the number of assignments he is willing to undertake or clients he is willing to serve.

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