- The Washington Times - Saturday, April 15, 2006

IN OUR HANDS: A PLAN TO REPLACE THE WELFARE STATE

By Charles Murray

AEI, $20, 214 pages

REVIEWED BY MARTIN HUTCHINSON

Charles Murray’s “Losing Ground” (1984) inspired the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 that reformed America’s welfare system. “The Bell Curve” (1994), written with Richard Herrnstein, changed the way we think about IQ and is increasingly being validated by further genetic research (for example, that the human genome differs significantly between populations, is constantly changing and has acquired significant new features within the last 10,000 years).

So when with “In our Hands” Mr. Murray proposes a new Plan (capital P) to replace the welfare state it’s worth listening — his idea may well be conventional wisdom 10 years from now.

Mr. Murray’s Plan replaces social security, welfare and Medicare payments (and a number of corporate handouts) with a flat payment to every U.S. citizen age 21 or over of $10,000 per annum.

There would be no conditions on this payment, made to millionaires and paupers alike, other than possession of a bank account. But the payment would partly be clawed back through the income tax system with an additional 20 percent surtax for those earning $25,000 per annum or more, with a cap at $50,000, above which participants would receive half the payment.

Plan participants would need to devote approximately $3,000 of the payment to medical insurance, which insurance companies would be compelled to offer at a flat rate for all ages and health conditions. Thus $7,000 would remain for recipients to live on, which Mr. Murray believes sufficient to ensure bare subsistence, but not enough to deter them from striving to earn more. An additional refinement might be to compel participants to devote $2,000 a year to retirement savings, thus ensuring old age security for the improvident.

The Plan would have a net cost of $355 billion in 2002. But because it gets the government out of the health care business, its economics improve quickly. By 2020, it would be $549 billion cheaper than current policy.

Apart from the obvious elimination of welfare bureaucracy, Mr. Murray believes the Plan would have a number of helpful economic and moral effects:

It pretty well ends involuntary poverty.

It reduces illegitimacy, by making children a financial burden on single mother Plan recipients, rather than, as now, a source of additional welfare payments.

It provides a known income for irresponsible young males, which could be garnished for child support and criminal penalties.

It makes it easier for low income workers to change jobs or start a small business, and reduces the risk of not finding work, thus increasing labor mobility and job satisfaction.

It makes it easier for low-income mothers to care for children, so they don’t need to return to work before it is parentally desirable.

By eliminating government philanthropy, it provides room for a resurgence in private philanthropy, which could focus on the most difficult cases.

Financially, the implications of the Plan are straightforward. If you believe that it’s cheaper to give welfare to everybody rather than using a huge bureaucracy to figure out who deserves it, then the Plan is fiscally attractive. Mr. Murray cheats a bit by including agriculture subsidies and other corporate welfare in the items he would abolish in favor of the Plan.

Abolishing those things is a good thing and should be done anyway, but doesn’t relate directly to the social safety net. (Surely even in Iowa they don’t still believe the old FDR line about agriculture subsidies serving to help the impoverished family farmer; the vast majority of them go to corporations and the rich.) Nevertheless, the opportunity to remove the twin costs of rising life expectancies and ever-expanding healthcare “needs” from government may eventually make the Plan fiscally too good to pass up.

Healthcare is one major Plan weakness. If you make insurance companies charge the same premium for all ages and health conditions, they will hire a sales force of cheerleaders and Chippendales to rope in college athletes, while subjecting potential middle-aged and elderly purchasers to an 800 number with one line and a single sales outlet in Nome, Alaska. A company that did this would get a risk pool consisting almost entirely of fit 25 year olds, but would be paid the same premium per head as its competitors with pools spread across the population.

Preventing discrimination on the grounds of age is just asking for shysters to enter the market. Once its pool of insured aged past 40, a shyster’s company would declare bankruptcy, leaving its customers to the rest of the market, but its profitability for the first couple of decades would be immense.

In any case, transferring healthcare costs to insurance companies does not solve the third party payer problem — that those receiving healthcare services don’t directly pay those providing them but rely on a third party to do so. The efficiency gains resulting from direct payment of healthcare costs, for example through Medical Savings Accounts, are mostly lost by an insurance-based system.

The Plan’s strength, of paying the same amount to everybody, is also in some respects a weakness. Ten thousand dollars per annum for a single middle-aged person living around New York is nowhere near enough to live on comfortably; $10,000 each for a commune of six hippies on an organic farm in South Dakota is a huge subsidy to their enjoyable but unproductive lifestyle. The costs of shelter vary so much between locations, and can be reduced dramatically by communal living, that the Plan risks becoming a poly-amorists’ charter, at least for the unmotivated young — presumably not a side-effect Mr. Murray would welcome.

The principal objection to the Plan is that it hugely favors the young over the old. Currently, the old receive much more in social security and welfare payments than the young, reflecting the reality that their earning capacity is lower, their medical costs higher, their ability to “make do” less and their overall needs correspondingly greater. Medicare has an accrued deficit of some $62 trillion; if the Plan were instituted that deficit wouldn’t disappear magically but would fall squarely on the shoulders of Plan participants, particularly those who are nearing or past retirement in the present system.

The ever-increasing old age medical costs of 2030, instead of being borne by government, would be borne by Plan participants or by their insurance companies whose unwillingness would soon turn into bankruptcy if the costs became too great. Life is in general more fun for the young than the old; the Plan hugely compounds this.

The Plan’s virtues are so great that it should be possible to remedy these defects. If the Plan paid $5,000 per annum from age 21 to 40, increasing each year by $500 per annum to $15,000 at 60 and $25,000 at 80, much of its bias towards the young would be removed.And health care costs could be provided by health savings accounts and the free market, with a collective “catastrophe” pool shared between insurance companies to take care of the truly sick and difficult cases.

Plan participants would have less need to save for old age since their income would increase automatically. Such a modified Plan would have the great virtue of placing almost all purchasing decisions with the beneficiary, even in healthcare, without the subsidies to hippies and poly-amorists that Mr. Murray’s Plan provides.

Government is a drag on the economy in two ways: Its taxes reduce and distort incentives, and its spending produces inferior allocation of resources. Mr. Murray’s Plan, by returning spending to individuals, greatly reduces the latter economic drag and thus should produce large economic as well as moral benefits. It may appear impracticable today, but the ever-rising costs of healthcare may move the recalcitrant U.S. political system towards the solution it outlines.

Martin Hutchinson, a journalist and banker, is the author of “Great Conservatives” (Academica Press, 2005). Details can be found on the Web site www.greatconservatives.com

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