Blog

Welfare programs throughout the Western world have never been able to avoid the moral hazard that arises from the fact that when you keep giving people something for nothing, they stop trying to earn it for themselves.

The classic examples are such as welfare programs that immediately create dependency on government handouts – a dependency that all too often becomes inter-generational.  Another is the American AFDC program – Aid to Families With Dependent Children – which aimed to help young mothers by giving them a monthly payment per-child.

The result? One of the rules was that if there was a father/husband living in the home, the money was cut off. So … guess what? Poor people are not so stupid. They soon realized that they could get more money by having more babies out of wedlock, and by ensuring their boyfriends were not caught living with them. The unintended, but disastrous consequence was that the AFDC program created more fatherless babies and more dependency on government.

But many Western governments could not – still cannot –  resist flirting with the idea of a so-called Universal Basic Income, or a Negative Income Tax (NIT), or what is sometimes coyly called a “basic income supplement.” That’s a fancy expression for a graduated subsidy, by which recipients receive a cash payment to bring them up to a specified average income level. Theoretically, this is designed to replace all other welfare benefits – as well as the considerable load of bureaucracy that comes along with it. What toying with this idea amounts to is a recognition by governments that welfare doesn’t work – “so let’s just give them the money!”

This idea gained great credence when it suddenly got support from the American Nobel Prize economist Milton Friedman in his book Capitalism and Freedom, in 1962. He calculated that if you took all the money that the welfare system costs the U.S.A. and sprinkled it among the poor and the needy, each would receive about [on today’s terms] $60,000 annually! So, the thinking went, why not just give them the money? Of course, it’s not that simple, and below you will see why it always backfires.  Nevertheless, many countries have flirted with this screwy idea. Finland has been trying it for the past year, and is just about to give up on it as a failure (see the April 26, 2018 article on the Finnish experience in The National Post).

Canada’s Liberal (okay, soft-socialist) government, under our theatrical Prime Minister Justin Trudeau, has been dreaming about this, too. But before leaping into this dark and unforgiving free-lunch abyss, enthusiasts would be well-advised to consider the now famous American  SIME/DIME experiment that was designed to test precisely this idea. Definitively. Once and for all!

The Seattle (and Denver) Income Maintenance Experiment of 1971 to 1978—called SIME/DIME for short – was the creation of an enthusiastic union between modern social-policy researchers and idealistic government bureaucrats from the U.S. Office of Economic Opportunity (OEO) in the mid-1960s. Their sole and express purpose in creating the experiment was to prove that the only way to win the War on Poverty was to use some form of Guaranteed Income Supplement. “Somehow, proof must be established that a guaranteed income would not cause people to reduce their work effort, get married less often, divorce more quickly, or any of the other things that the popular wisdom said it would cause them to do.” ^[1]  Charles Murray wrote that the OEO’s proof “took the form of the most ambitious social-science experiment in history. No other even comes close to its combination of size, expense, length, and detail of analysis.” The study used 8,700 people as subjects, and lasted ten years. (A planned twenty-year sub-sample was cancelled in 1980, because they saw it couldn’t succeed). More than one hundred research articles were published from the data, and it cost many millions of dollars. As Murray put it, “The proponents of the NIT in the Johnson administration were out to slay the folk-beliefs that welfare makes people shiftless. The NIT, properly redesigned, would provide work incentives and get people off the welfare rolls.”

The experiment took large low-income groups in those two cities and told half of each group that they would be guaranteed no less than the official poverty-level income if they couldn’t earn it. The other half was on its own, and would receive no benefits or guarantees whatsoever. What was the result? Here’s a summary.

1. The guaranteed-income group reduced their work effort “by 9 percent for husbands, and by 20 percent for wives.” These reductions were mostly caused by dropping out of the workforce altogether. Analysts said this was a particular disaster because it was often the wives that could lift families out of poverty.

2. Even more disastrous: the hours of work per week put in by young males not yet heads of families was reduced by 43 percent! Just when they should be preparing for family life, they dropped out of the race. Even when these people married, their work effort was still down 33 percent.

3. Periods of unemployment claimed by members of the experiment who lost their jobs were lengthened by 27 percent for husbands, 42 percent for wives, and 60 percent for single female heads of families.

4. The dissolution of marriage was far higher for all those receiving the guaranteed income payments than for those who did not.

[1] Charles Murray, Losing Ground, p. 149.

The economist Martin Anderson, using elaborate and detailed analysis of the NIT experiment, estimated that if the NIT were applied nationally, it would, on an average-case basis, result in a 60 percent reduction in national work effort. Further, the work reduction observed was over and above reductions already experienced as a result of existing welfare programs.

In short, “the NIT experiment made a shambles of the expectations of its sponsors. But at the same time it was being conducted, the disincentives it would later demonstrate were being woven into the fabric of the welfare system.”

A really interesting feature of this experiment is that prior to launching this it, all the researchers and enthusiasts for supplementing the income of the poor (the experts) were asked what they thought the outcome of such an anti-poverty program would be? They answered unanimously: “It will be a wonderful success, recipients will regain their pride, look for additional work, and rise out of poverty!”

They also asked a group of ordinary working people (the folk wisdom) the same question. They unanimously answered: “It will fail. People will stop looking for work. They will get lazier, and will depend on your handout.” Well, those legions of overpaid experts just hung their heads, folded their tents, and went home.

The mere idea that social engineers of Canada, or any other nation, would ever even consider such a scheme – which they do periodically – in the face of such an exhaustive volume of detailed proof that such schemes can’t possibly work, is a mark of gross moral and intellectual incompetence.