How America Drifted from Welfare to Entitlement

MOST MODERN AMERICANS view government handouts as natural and necessary. We happily endorse payments for the poor, to the rich, for the middle class, to college students, for apple growers, opera lovers, cotton farmers, electricity consumers, feminist poets, and endless others. People may quibble about the exact operation of these subsidies, and some worry about their aggregate cost. But practically no one questions their premise—that it is right for government to make grants of taxpayer funds to individuals, groups, or businesses. If we don’t have programs to subsidize cellists or the makers of argyle socks, it’s not because the public thinks they would be wrong, destructive, or immoral. We just haven’t gotten around to them yet.

How did America become a subsidy-loving nation? The conversion was accomplished with semantics. Politicians took to heart the recognition of French philosopher Gustave Le Bon, who said, “In politics things are less important than their names. To disguise even the most absurd ideas with well-chosen words often is enough to gain their acceptance.” The result is the sweeping system of welfare-not-called-welfare that Americans now see all around them.

From Welfare to Entitlement

The grandfather of today’s semantic confusion was Franklin Roosevelt, and the textbook example of his craft was the Social Security program adopted in 1935. Roosevelt’s idea was to force the entire country—poor, middle class, and wealthy—into a comprehensive national pension system. His reasoning, cynical yet accurate, was that once everybody depended on these government transfers, there would be no going back. This tactic, as he famously said, guaranteed that “no damn politician can ever scrap my Social Security system.”

When a national, tax-funded pension system was proposed in the 1920s, it was rejected as “un-American and socialistic.” Even the head of the American Federation of Labor, Samuel Gompers, scorned it as “undemocratic.” When Roosevelt first broached the idea, most of the mail Congress received on the proposal was critical. FDR had his work cut out for him in selling his plan. His talents of semantic obfuscation, however, were up to the challenge.

A new wage tax was begun, said to be specifically earmarked to pay the pensions. It wasn’t called a tax but a “contribution,” and the payout was not called a subsidy but “social insurance.” The funds that came in from the wage tax were said to be “trust funds” to dupe the public into believing that these dollars were kept in specific piles in the Treasury to be used only to pay Social Security benefits. (In practice, Social Security Trust Funds are simply an accounting fiction, and revenues from the wage tax are spent on everything government buys.) To further the illusion that workers have a contractual right to benefits, the Social Security Administration keeps records of each worker’s “contributions,” as if these tax payments establish a legal right to specific benefits. In practice, Congress can lower or raise benefits whenever and however it wants, and the Supreme Court has ruled that recipients have no legal rights to any payments.

The deceptive marketing of Social Security has been deliberate, carefully designed to prevent the American public from realizing that Social Security is simply a pay-as-you-go welfare system. As Arthur Altmeyer, Roosevelt confidante and first Social Security commissioner, said, “Every effort was made to use terminology that would inspire confidence rather than arouse suspicion.”

The linguistic con job deepened with the birth of the term “entitlements” in 1944. By alleging a connection between taxes paid and benefits received, politicians encouraged recipients to treat the subsidy as an “earned right.” Seniors both rich and poor cashed their Social Security checks confidently, never pausing to notice that this was a subsidy extracted from younger taxpayers. The first recipient, Ida Mae Fuller, paid a total of $25 in Social Security taxes and collected $21,000 in total benefits over her lifetime. She became the poster girl for the program, not the least bit embarrassed by her bonanza.

Another device for hiding welfare payments was to call subsidies “insurance” or “loan” programs. In this case, recipients pay something, which lets them imagine they are paying their own way. They almost never are. For example, in the Medicare program for outpatient care (part B), the premiums pay for less than a third of the benefits (and less than a tenth of all Medicare costs). In programs like student loans or small business loans, taxpayer subsidies artificially lower interest rates and cover default losses.

The specious logic of the Social Security program was eventually extended to cover all subsidies: Paying any tax at some time in your life entitles you to any government benefit you can get your hands on.

Taxpayer Dollars for Your Use

Politicians aren’t the only ones who use language to spin away moral, social, and economic objections to income transfers and subsidies. Government agencies are masters of this. If the task of an agency is to give away taxpayer funds, then doing a good job means giving out more money.

Consider the agency in charge of food stamps, the U.S. Food and Nutrition Service. It has a huge marketing and advertising program—which it euphemistically calls “outreach”—designed to boost food stamp use. It produces brochures, videos, and pamphlets that aim to help local distributors increase their caseloads. One office in Pennsylvania sent a mailing to a targeted group opening with this sentence: “With the rising cost of food, we wondered if you could use a little help at the grocery store.” Maryland officials set up toll-free numbers, touch-screen computers in shopping malls, and a special card that “looks like a credit card, and therefore no one knows he is using food stamp benefits.” In West Virginia they set up “outstations” to facilitate applications and reduce the “welfare office stigma.” To motivate more innovative marketing, the Food and Nutrition Service has a “Hunger Heroes” award for officials who provide “exemplary service in assisting eligible clients to obtain food stamps.”

The key to any marketing effort is the manipulation of language to put a good face on the product being sold. The sellers of soft drinks do not mention the risks of obesity, tooth decay, cancer, and diabetes; they say their product “tastes great.” Agencies giving out subsidies follow the same principle. The Food and Nutrition Service never announces, “Taxpayer dollars for your use!” Its slogan is “Making America Stronger.” Rather than say, “Caution, food stamps may cause dependency and loss of motivation,” it claims that its programs make “communities more self-reliant” and foster “self-sufficiency.”

The Food and Nutrition Service has commissioned numerous taxpayer-funded studies to identify the barriers to food stamp use. These studies reveal that one of the main sources of resistance is the problem of stigma. “Using food stamps involves a certain amount of humiliation,” said one subject. Another commented, “Korean people have this tendency, their pride hurts. Food stamps kind of hurt their pride.” Another said, “I was from the generation where no way did you take that stuff. You either worked for it or you did without.”

Officials in subsidy programs abhor these views, which block expansion of their programs. They need a public that feels “there’s no need to be ashamed of accepting government benefits,” as one official put it. Administrators break down recipients’ “pride” with reassurances that their benefits are “rights” to which individuals are “legally entitled.” Not surprisingly, it has become automatic among much of the public to look to government to alleviate any hardship.

Capitalism is sometimes criticized because the techniques of promotion and advertising that go along with it may distort culture. Liberal critics in particular complain that self-serving companies push their products incessantly, creating spurious demands and unhealthy values. Seldom is it acknowledged that government agencies do the same thing. And government can be more enticing because it is generally giving things away rather than selling them.

The Missing Trillions

Most people are not even dimly aware of the staggering waste involved in subsidy programs. What they see—once they get past the fallacies and euphemisms—is that money is taken from one place and shifted elsewhere. And then, in other subsidy programs, money is shifted back. Farmers are taxed in many ways, and then subsidized in others. Seniors are taxed, and then a lot of their taxes are given back to them in the form of medical care. And so on.

Politicians, policy experts and academics are amazingly complacent about the blizzard of cross-subsidies that now rages. Several years ago I asked a staff member of the Senate Budget Committee whether she was worried about this problem. Not at all. “It evens out,” she said. “Everybody pays for everyone else’s goods.”

This view ignores the overhead costs of subsidies. When you rob Peter to pay Paul, you incur all sorts of losses. Peter’s incentives to work, create, and invest are undermined. Very often, so are Paul’s. The result is that economic effort, production, and employment are often lower than they would otherwise be.

And of course there are the costs of operating the tax system: compliance costs, litigation costs, tax planning distortions, and so on. A few years ago I made an attempt to add up all these burdens. The total was a 65 cent loss for every dollar of taxes collected.

The process of giving Paul his subsidy also entails waste. If Paul is a businessman running an inefficient company, a subsidy keeps his wasteful firm in business. If he is a farmer, the subsidy encourages him to raise crops that aren’t needed. Every subsidy system involves citizen compliance costs—the jumping through hoops to get the subsidy, the manning of government agencies that disburse the subsidy, the economic friction of red tape, the cases of fraud.

When all costs are combined, the typical waste in a subsidy system is on the order of 125 percent. That is, for Paul to end up with $100 from the government, Peter not only has to pay $100 in taxes, but he and the nation in general give up an additional $125 in lost production and frittered resources. Translate these numbers onto a national scale and the result is staggering.

The gush of subsidies left, right, and center does not harmlessly “even out.” It destroys national wealth more than any disaster. Once the public understands the appalling waste involved, it may be able to overcome the semantic tricks and childish illusions that have seduced it into embracing the subsidy regime.

James L. Payne is the author of The Culture of Spending: Why Congress Spends Beyond Our Means. A version of this article appeared March 2005 edition of The American Enterprise, a national magazine of politics, business, and culture ( Reprinted with permission of The American Enterprise.