Wealth of Nations April 2006

Why Murray's Big Idea Won't Work

Charles Murray has an intriguing plan to dismantle the welfare state and give every adult $10,000. Too bad his numbers don't add up.

Charles Murray's new book, In Our Hands: A Plan to Replace the Welfare State, is what you would expect from the author of Losing Ground and Bell Curve—a bold and provocative piece of work. As before, only this time more so, Murray thinks big and then dares to share his thoughts out loud.

In Our Hands calls for the whole apparatus of the welfare state to be dismantled—not pruned or reformed, but abolished outright. No more Social Security, no more Medicare or Medicaid, no more unemployment benefits. Nothing. These and all such programs that directly transfer income from one group (taxpayers) to others would be not merely terminated but forbidden: Murray calls for a constitutional amendment to that effect. Taking their place—at, Murray says, far lower cost and with vast side benefits for the country's social well-being—would be a payment of $10,000 a year to every American adult. No more poverty, no more welfare state. Simple as that.

Does Murray think it could ever happen? Yes and no. The plan, he agrees, is politically impossible right now. But look ahead, he argues, and it is not just feasible but maybe even inevitable. The welfare state is doomed, not because it causes enormous damage to the social fabric (which, he says, it does) but because it will be financially insupportable. As he wrote in The Wall Street Journal on March 22, "The welfare state as we know it cannot survive. No serious student of entitlements thinks that we can let federal spending on Social Security, Medicare, and Medicaid rise from its current 9 percent of gross domestic product to the 28 percent of GDP that it will consume in 2050 if past growth rates continue."

In Our Hands deserves to be widely read and debated. It is hugely thought-provoking, hugely challenging to the intellectually complacent modes of discussion that prevail in modern politics. Murray also deserves praise for casting his proposal in a concrete form, exposing himself to proper argument and rebuttal. And, in my view at least, many of his larger ideas are right. The main one, to be sure, is extremely attractive: Empower and oblige individuals to take responsibility for themselves and others, not just as a way to confront poverty, but because individual self-determination is the correct organizing principle for society. For many of Murray's critics, that will be the sticking point—but not here. I buy the big idea. It's the details that slow me down.

Murray is less interested in costs, one surmises, than in social transformation. Yet he insists that his plan is affordable, much more so than the current system, and he goes to some trouble in the book to explain why. As just noted, he aims to motivate his readers by arguing that, in the longer term, the issue of affordability is going to swing the political calculus his way. So it isn't nit-picking or beside the point to question this.

At first blush, the claim that every American adult could be paid $10,000 a year at less cost than the present array of piecemeal welfare payments is indeed startling—even if, as Murray proposes, part of the $10,000 would be clawed back through taxes for Americans earning more than $25,000. Throughout, Murray takes pains to point out that he rests this claim on the least favorable assumptions for the argument he is advancing. But can it really be true? If it is, the idea surely deserves serious consideration.

Unfortunately, Murray is not claiming that it is true straight away. Using his own numbers, switching instantly and comprehensively from the present system of benefits to his plan would leave a shortfall of $355 billion a year—which, at 3 percent of GDP, is a very large sum. His point is that the cost of his plan would grow much more slowly than the projected costs of the welfare state. "I will not bother," he says, "to consider ways of closing that gap through increased taxation or additional budget cuts, because the gap will disappear on its own in a few years."

There are several problems with this. First, even if everything else Murray says is true, financing that enormous gap for the next few years, with the public finances already deep in deficit, would be, well, challenging.

Second, this is to say nothing of the full transition costs of Murray's scheme, which the book makes no attempt to estimate. That gap of $355 billion, beginning in Year One, is not a transition cost; it's just the financial shortfall in a hypothetical equilibrium. Transition costs—which, at a guess, would be enormous—come on top of this, and would persist for decades.

Consider Social Security. It might well be true that, fully phased in, Murray's scheme would allow all Americans to save enough to enjoy a higher income in retirement than they can expect to receive under the present system. But you cannot put today's actual and prospective Social Security recipients, who have not had 45 years to save for retirement under Murray's plan, on a flat annual income of $10,000 and expect to survive—not politically, and perhaps not literally. That is why, as with Social Security privatization (another good idea in principle), very large transition costs would persist for decades. This is not a minor detail, to be brushed away. It is a chief argument against.

Third, putting the instant shortfall and the ongoing transition costs aside, the cost paths that Murray is comparing are not very plausibly defined. Partly, that is because Murray is right that the costs of the present system are unsustainable. If the system is not dismantled, it will indeed be reformed, because it will have to be.

For instance, the retirement age will most likely be raised again, a seemingly small change that makes an enormous difference to Social Security's fiscal outlook. There will be many other patches and tweaks. Murray could fairly reply that extra years of work (or whatever) would then have to be counted as a cost of the existing system—but that is not the same as saying that the present system, once amended in this and other ways, as it surely must be, is structurally doomed.

At the same time, Murray probably underestimates the long-term cost of his universal $10,000 a year. He lets this grant rise in line with inflation, and he allows for further upward slippage (of about 1 percent a year) owing to demographic factors, but the annual payment stays constant in real terms. Fifty years from now—and Murray asks us to think that far ahead—views about what constitutes poverty will have changed, and an annual income of $10,000, even adjusted for inflation, is going to seem like a lot less than it does today.

And there will be other kinds of slippage. For his scheme to succeed, Murray understands the fiscal importance of replacing all welfare benefits with the $10,000 a year—hence his proposed constitutional amendment. But could this line be held, really? An income of $10,000 a year, together with a low-paid job held for just part of the year, is enough to lift an individual out of poverty (even allowing for saving and health costs), as the book emphasizes.

But not everybody who does not work is idle or feckless: Many people, physically or mentally disabled, cannot work at all. In Murray's plan, private charity would be needed to keep them out of poverty. Never mind whether that would be a desirable state of affairs. (Murray thinks it would; I do not.) As a matter of sheer practicality, I find it politically unrealistic, actually hard to imagine, especially alongside a system that treats the able-bodied idle so well.

Murray asks readers to believe that his plan is not just affordable but fiscally compelling. As it stands, it is neither.

Fiscally speaking, its prospects are zero. But this subtracts less from the book's appeal than you might think. It would be far better for the country if the coming, unavoidable, piecemeal reform of the welfare state were guided, as far as possible, by some wise general principles. And Murray's arguments go directly to what those principles should be. He puts self-determination front and center. He wants to confront people with the consequences of their choices, to insist that people take responsibility for their own lives, and to give them the means to do so.

I think he is right to believe that the more this can be done, the better our societies will be.

Unfortunately, implementing this principle is a much harder thing than he allows—and his plan to do it all at one stroke cannot work.

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Why Principals Matter

Nadia Lopez didn't think anybody cared about her middle school. Then Humans of New York told her story to the Internet—and everything changed.

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