DRI-271 for week of 1-13-13: How (Not) to Help Orphans

An Access Advertising EconBrief:

How (Not) to Help Orphans

The current issue of Great Britain’s venerable weekly The Economist contains a revealing anecdote about Vice President Joe Biden – revealing not merely about Biden himself but about economics, politics and their interaction.

The anecdote is recounted by one of the magazine’s American correspondents, whose byline is “Lexington.” The column identifies Biden as chief mediator between the Obama administration and the Republican opposition. Lexington finds Biden suited to that task, citing his 40-year Congressional career mostly spent brokering deals and schmoozing colleagues. It is not Biden’s fault that “America’s problems are larger than the deals that a vice-president can cut.” It seems that, according to Lexington, “small-government conservatives – backed by the Tea Party and allies on the airwaves and online – have raised the political costs of dispensing political pork and favours.”

Since it is not clear why this is a bad thing, it would seem that The Economist’s left-wing bias is showing. This is confirmed when Lexington cites “an old Senate belief cherished by Mr. Biden: that fellow politicians may be wrong but are rarely bad. Mr. Biden likes to recall his shock as an angry young senator on learning that a seemingly heartless Republican foe of disability rights, Jessie Helms, had adopted a disabled orphan.” Lexington’s point is that this experience chastened Biden and made him tolerant of Republicans, willing to oppose their policies but not to question their motives.

Lexington is wrong on both counts. Biden is bigoted, not tolerant. The episode reveals his intolerance of the right wing. But that is the least of its importance.

Helping the Disabled

Even as the current Economist was hitting the newsstands, the tolerant, conciliatory Mr. Biden was floating proposals for his boss to suspend the Second Amendment rights of Americans via executive order. In so doing, Biden was displaying the same callous insensitivity he displayed toward Jesse Helms in assuming that Helms’ opposition to federal disability “rights” legislation reflected a persona animus toward the disabled as a class.

Today, thanks to research by Arthur Brooks of the American Enterprise Institute, we know that right-wingers like Jesse Helms provide the bulk of charitable assistance in America. Left-wingers tend to consider their tax payments as their contribution to charity. We also know that federal-government welfare programs have become a monstrosity, mushrooming in number and size while failing to make a dent in the problems they were ostensibly intended to solve. The latter conclusion is now shared by many on the left as well as practically everybody else.

The notion that opposition to big-government is “heartless” implies that compassion is expressed impersonally, indirectly and ruthlessly by taking money from some people and giving it to others, rather than personally and directly by immediately benefitting those who need help. This not only prejudges the motives of the opponent, it takes for granted both the good will and the efficiency of the government. In other words, it was not only bigoted but dumb.

Biden’s opposition to Helms was simply the reflexive action of a man not given to reflective thought. His numerous verbal gaffes committed while Vice President reinforce this interpretation. Biden’s status as the Obama administration’s designated dealmaker does not bespeak any innate sense of empathy for his opposite numbers across the aisle, any more than a used-car dealer need feel kinship with his customers.

Jesse Helms vs. Joe Biden

Lexington’s anecdote has much more revealing economic implications. Contrast the two types of problem-solving approach illustrated. On the one hand, there is the “Jesse Helms” approach. Orphans are in trouble. They need help. Helms sees them. He responds immediately and directly – by helping orphans.

Now compare this with the “Joe Biden” approach. He sees orphans in trouble. He responds by – well, he “responds” by setting in motion a lengthy, ponderous, indirect process that just may, if all goes well, after many months or even several years elapse, succeed in helping some orphans, to some vague and indeterminate degree.

Is this comparison unduly pejorative? Does it prejudice the case against the Biden approach? No, this would seem to be a pretty dispassionate summation of the history of federal-government welfare programs over the last five decades, when balanced against the efforts of the private sector. The Congressional legislative process is indeed protracted, beginning with bill introduction, committee study and submission to the full chamber, followed by reconciliation and eventual passage by both houses. This alone often takes up the better part of one legislative session. Sometimes bills are held over into the next session; sometimes they linger on for years.

When the aid-to-orphans bill passes, does that mean the problem is solved? Certainly not. It means that government machinery is formally set up. It may take months or even years for the resulting program to become operational. After it does, the program may operate indirectly through pre-existing state and/or local programs. The federal program may generate related programs, exhibiting a form of political cellular mitosis.

The programs themselves are intended to help orphans, but they do not provide the form of direct help that Jesse Helms provided. That is, they do not take in orphans and provide them with those things the lack of which makes them orphans in the first place; namely, a loving, caring, compassionate home and family. They may provide institutional shelter in the form of a state-run home. They may provide real income, mostly in the form of in-kind assistance. This second-best form of care will be dispensed by bureaucrats and tied to all kinds of strings and rules. These rules are ostensibly designed to insure that the taxpayer funds bankrolling the program are wisely spent. But the result of this bureaucracy is invariably a system that works poorly and is disliked by the social workers who administer it, the recipients of its largesse and the taxpayers who fund it.

Ah, but surely private charity comes with its own constraints, its own delays, its own bureaucratic drawbacks and roadblocks? For example, Jesse Helms almost surely had to undergo a suitability test in order to adopt; running that gauntlet took time and effort. True enough, but the example of Father Flanagan and Boys’ Town in Omaha, Nebraska shines a glaring light of contrast on the difference between government welfare and private charity. Starting with nothing but a handful of homeless and impoverished boys and his own determination, Father Flanagan built Boys’ Town into a self-sufficient city of self-governing boys that has attracted orphans like a magnet for nearly a century.

It is true that the sunk costs of enabling legislation and setting up programs have already been expended; the welfare system is already in place. But instead of time take to pass new laws, we have to factor in time and expense of re-authorizing and financing programs already in place. Indeed, the crisis posed by public debt alone is reason enough to abandon the fiction of the “compassionate” Biden and the “heartless” Helms. It is not only that the Helms approach works and the Biden approach fails. The Biden approach is drowning representative government in a sea of debt throughout the world.

Roundabout Production

Even if we stipulate that the “Biden approach” has failed dismally in this particular case, can we say that this is a general result? That is, should we apply this lesson not merely to welfare programs but in all situations involving private vs. public assistance? And does it have even broader applicability?

“Helms vs. Biden” illustrates a lesson in the economic theory of production. To drive home the lesson in general terms, consider the example of fishing – a productive activity man has undertaken throughout recorded history. The most primitive production process is also the most direct: wading into the water and catching fish with bare hands. This requires skill and patience as well as access to shallow water holding fish.

A somewhat more productive process involves building a net, which improves the catch-per-unit-of-time. The first net builders had to take time off from fishing or hunting, which required them to build up a store of food to support themselves while net building. In turn, this required reducing their food intake for awhile prior to the investment period. This was an early historical example of the economic process of saving (dietary stricture and food stockpiling) and investment (net building).

More productive still is to construct rod and line to supplement the net. Yet more productive is to build a boat to enlarge the geographic range of fishing. These broaden the time frame of the production process considerably since they require much more time spent on investment and fishing itself. But the huge improvement in physical productivity in terms of potential catch makes the time spent worthwhile.

In the last half-century, fishing has become a production activity analogous to farming. Businesses have purchased infant fish and/or breeding stock and ponds, lakes or defined oceanic territory in which to raise colonies of fish for commercial harvesting. Obviously, this is the most protracted and costly of all fishing production processes, as well as potentially the most productive and lucrative.

The economic term of art that describes this continuum of production processes is “roundaboutness.” The most direct production processes are those that translate inputs into consumption output the quickest. Successively less direct processes take more and more time and involve more and more steps, but tend to gain more productivity with each increase in time and stages. The great Austrian economist of the late 19th and early 20th century, Eugen von Bohm Bawerk, described this by saying that roundabout production processes tend to be more productive.

Bohm Bawerk also found roundabout processes to be more characteristic of capitalism. Owners of capital (the machines and goods-in-process vital to the productivity of longer processes) can borrow to finance their own investment in these longer processes. They pay workers the discounted value of their marginal product for the work they do and use the premium above the discount to repay the borrowing. Thus, everybody can benefit from the enhanced productivity of roundabout production. Interest rates are reflected in the borrowing and in the discounting process that produces the premium.

Capitalism comes into the discussion because roundaboutness cannot be properly evaluated without the existence of prices and interest rates. It is tempting to view the productivity of roundabout production as an immutable physical law, but sometimes the good being produced is a service that has no physical yield. Now we have no alternative except to evaluate that yield in monetary terms using its price as a multiplicand. Even more compelling is the fact that a larger quantity of physical output in the future is not necessarily preferable to a smaller quantity today; it depends on the time preferences of individuals and their rate of preference for consumption today versus consumption in the future. A sufficiently high rate of preference for consumption today could override the possibility of more output in the future and tip the balance in favor of the simplest and most direct production process rather than a more roundabout one.

Another factor that might argue against roundabout processes is scarcity of inputs used in those processes. Thus, input prices have to figure in the evaluation, too. And interest rates reflect the intensity of consumer time preferences as well as the scarcity of funds made available by savers for investment purposes. Thus, interest rates are key to the calculation of costs and benefits for roundabout processes.

In a pure capitalist economy, roundabout processes are used only when they are profitable. That is the same as saying that they are used only when the value created by their higher productivity exceeds the value lost to their higher investment cost. Thus, under capitalism we are doubly blessed. As consumers, we benefit from the ofttimes greater productivity of roundabout production without having it jammed down our throats when it is not beneficial on net balance. The safety factor is the presence of the profit motive. When roundabout production is too costly, it will be unprofitable and firm owners and managers will veto it.

Government and Roundabout Production

Government is roundabout production to the max. The very existence of the legislative process itself gets government started in a roundabout direction. Stages of production increase every time a new level of bureaucracy is created. The difficulty of interacting with bureaucrats and repeating budget authorization procedures annually maintains and even increases the temporal distance between the consumer and the good or service being provided by government.

Unlike production in a pure capitalist economy, however, government production possesses no inherent internal check on roundabout processes. There is no profit motive; thus, there is no easy way to tell how much recipients like the service being provided. The absence of profit means that there is no check on costs incurred; indeed, the value of government services is traditionally gauged according to the value of the inputs used in providing them! In other words, the more we spend on government, the better off we are supposed to be. The polite way of describing this state of affairs is to say that the incentives are perverse.

Nobody has any reason to spend money carefully since bureaucrats are rewarded by overspending their budgets (with bigger budgets and larger departments) and for increasing the size of their departments (with promotions, larger salaries and more impressive titles). Government employees are the inputs into the roundabout production of government services; those production costs are income to them. Thus, the higher costs soar, the better they like it – no matter how economically inefficient this might be. True, government employees pay taxes, too, but they pay only a tiny fraction of the costs of their services while reaping all the wage, salary and fringe benefits.

To make matters worse, the demand side of the market is least amenable to roundabout production for goods and services provided by government. Welfare payments, disaster relief, military goods and services, “social insurance” and medical care for the aged and impecunious are things typically desired with the highest degree of immediate urgency. That is, they are areas where time preference is presumed to be very high and the wish for current consumption is at its greatest. Thus, even where productivity gains from roundabout production might be available, it is by no means likely that recipients of government aid would consider those gains to be “worth the wait” in the economic sense. Judging from the high level of dissatisfaction commonly expressed with government production, it is probable that neither consumers of government nor taxpayers are getting their money’s worth.

In summary, then, roundabout production has proven to be an economic triumph in free capitalist markets, where it has spurred tremendous improvements in productive techniques and living standards. And it has proven disastrous when used by government to produce goods and services. The difference between the two outcomes is the presence of the profit motive under free markets and its absence in government.

Why Has “Biden” Triumphed Over “Helms”?

Over time, various rationales have been advanced for the “Biden approach” and against the “Helms approach.” Originally, the “Helms approach” was seen as a “do-nothing” approach. The presumption – sometimes tacit, sometimes explicit – was that unless government adopted its roundabout approach, nothing would be done to help the poor, sick, orphaned, old, infirm, stricken, et al. We know now that this is not true and was never true. Even in past centuries, much voluntary effort was expended to help those in need. The reasons why this effort looks skimpy to modern eyes is twofold. First, real incomes in general were much lower and less was available for every purpose – charity included. Second, much activity was carried out informally within the boundaries of the family, neighborhoods and churches, without ever being recorded. Today, the omnipresence and scope of government has diminished the importance of the family and reduced the importance of the voluntary private sector.

The problem with the “do-nothing” presumption is that it contradicts the other premises of the welfare state. Much is made of the fact that we “voluntarily tax ourselves” to enable government to undertake its work. Of course, if this were really true, taxation would be superfluous and wasteful. The purpose of taxation is to coerce the unwilling; they are being taxed, not those who voluntarily surrender their income to the state. If people are unwilling, they presumably have a good reason. Either way, there is no reason to preserve a status quo that has broken down. Let the willing contribute to charities of their choice. This gesture will undoubtedly recruit many who are now unwilling to allow government to waste their money but would willingly give money if allowed to supervise, evaluate and find-tune their contributions.

Of course, somebody must be lobbying strongly in favor of the current system. It is the administrators, managers and employees of the 180 or so federal agencies that make up the welfare system. Welfare started out as an ostensible benefit for the poor but has now become a kind of dole for those who operate the system rather than its supposed beneficiaries. Most of these people earn higher salaries and larger employment benefits than they would otherwise earn in the private sector. Thus, they have a very strong motivation to preserve the status quo even though they are themselves taxpayers.

There is one more group – a small one – whose self-interest is identified strongly with the “Joe Biden approach.” That is the relatively small number of politicians who gain a large number of votes from their staunch of this system. And it is this group whose resistance to change has kept that system in place.

Meanwhile, what of the orphans themselves, disabled or otherwise? In a voluntary society, they could choose where to seek assistance just as the rest of us could choose whether and how to render it. The problem would be getting those who need help together with those willing and able to help. Today, the one thing available to all in profusion is information. It is impossible to believe that the voluntary efforts of a free people would accomplish less than the self-interested efforts of a badly motivated, poorly informed government.

That is the crowning irony of “Biden vs. Helms;” the Helms approach empowers the poor while the Biden approach renders them relatively powerless. The best way to help orphans is to keep government away from them.

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