I often hear, when talking to people about government debt and deficits, that social programs are vital to our society and provide great benefits. This always gives me pause as I try to break this down in my mind of how exactly government social programs benefit society and what are the costs and benefits. First, and the most easily recognizable benefit, is that some people receive assistance – food subsidies, healthcare subsidies, housing subsidies, and direct money transfers. It is good that people who need help can get help, but then I start to brood over how exactly this is accomplished and if they are truly beneficial.
The government can only give what it first must take. This is the side of social programs people rarely examine in any great detail because the surface level observation is that people are getting help and this makes people feel good. If the government is to deliver one dollar of assistance, it must first extract that dollar out of the economy. So how does the government extract money out of the economy and what effects does this have?
Most often, people assume that a dollar can be taken from one person and given to another with a costless mechanism. That is, there are no costs associated with the gathering, accounting, and delivery of the dollar to be transferred. According to James R. Edwards, in his essay “The Costs of Public Income Redistribution and Private Charity”…
…public income redistribution agencies are estimated to absorb about two-thirds of each dollar budgeted to them in overhead costs, and in some cases as much as three-quarters of each dollar. Using government data, Robert L. Woodson (1989, p. 63) calculated that, on average, 70 cents of each dollar budgeted for government assistance goes not to the poor, but to the members of the welfare bureaucracy and others serving the poor. Michael Tanner (1996, p. 136 n. 18) cites regional studies supporting this 70/30 split. Read the rest of this entry »