Supporting low wages inherently means relying on social programs.
Milton Friedman, the famous Nobel laureate economist, presented a dichotomy. He argued that government solutions don’t solve problems and often make them worse, yet he also recommended government solutions to address poverty.
Last week, we explored the first of two questions about this dichotomy. We determined that higher wages don’t cause inflation, so there's no inflationary reason not to pay livable wages. Resolving the inflation question leads us to reconsider the government's role in economically supporting individuals. Without inflationary concerns, there’s less reason not to support livable wages.
This week, we explore our second question by having an AI-enabled discussion with the late Dr. Friedman. That question is:
If government intervention inherently makes problems worse but is needed to address poverty, then government intervention is necessary in either case. If it's necessary regardless, why wouldn’t we use the government to make rules supporting the individual rather than funneling money through the bureaucracy?
Since government intervention is necessary to address poverty caused by low wages, we should prioritize policies that directly support individuals by promoting livable wages instead of relying on bureaucratic social programs that perpetuate dependency and inefficiency.
Dr. Friedman and I don’t agree on everything. His work suggests he viewed the economic system as more important than the individual. I agree with his premise, but I'm against dependency on social programs. When wages are too low, we throw money at the bureaucracy—giving some of that money to other people, and the machine eats the rest.
I recognize the importance of the economic system. I believe individuals having heat in the house and food on the table is more important than the system itself, and I recognize that a healthy system is the best way to achieve that goal.
Let’s get started with an introduction to Milton Friedman.
Milton Friedman
For those who didn’t get a chance to listen to last week’s piece, Milton Friedman (1912 to 2006) was a Nobel laureate and a leading figure in the Chicago School of Economics. He significantly influenced national economic policy, particularly during the 1970s stagflation and into the era of Reaganomics.
His economic brilliance at the University of Chicago led to advisory roles for Presidents Nixon and Reagan. He shaped modern economic thought by advocating for free-market capitalism and minimal government intervention. His theories laid the foundation for supply-side economics, widely known as Reaganomics. Reaganomics promoted major tax cuts, reduced regulation, and controlled the money supply to stimulate growth and curb inflation.
Reaganomics was a solution for its time but increased poverty and inequality over the long term. Forty years of stagnating wages point to a diseased system. Reagan himself expanded some social programs.
Friedman was a brilliant and accomplished economist with a conservative flair. But he presented a fascinating dichotomy. Despite his advocacy for minimal government, he proposed a government-administered solution to address poverty.
Let's explore this intriguing contradiction in more detail.
Friedman’s Dichotomy
Friedman disavowed government solutions to economic problems. In An Economist’s Protest (1975), he wrote:
I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse.
At the same time, Friedman recognized that some lived in poverty, and we had a shared duty to alleviate that poverty. In Capitalism and Freedom (1962), he wrote:
We might all of us be willing to contribute to the relief of poverty, provided everyone else did. We might not be willing to contribute the same amount without such assurance.
This dichotomy begs a question:
If government intervention inherently makes problems worse but is also needed to address poverty, then government intervention is necessary in either case. If it's necessary regardless, why wouldn’t we use the government to make rules supporting the individual rather than funneling money through the bureaucracy?
Friedman was skeptical about governmental influence on the economy but pitched a social program to reduce poverty. Instead of advocating for a minimum wage for the lowest earners, he had another idea: a Negative Income Tax (NIT). NIT embodied a practical resolution to Friedman’s dichotomy—in his view, an attempt to minimize government interference while addressing poverty.
Negative Income Tax
So, what exactly is the Negative Income Tax?
As theorized by Friedman, NIT was a system intended to replace various welfare programs by providing direct financial assistance to individuals below a certain income threshold. He introduced this idea as a more efficient and less bureaucratic alternative to traditional welfare systems.
Under NIT, anyone with earnings below a certain income threshold would receive governmental supplementary pay to boost their income to a specified minimum level, ensuring a basic standard of living. This support would provide enough to meet basic needs without discouraging work.
Unlike welfare programs that cut benefits once an individual reaches a certain income level, NIT would gradually phase out as the individual’s income rises. This design was meant to avoid the "welfare trap" that discourages beneficiaries from earning more because they would lose benefits at a rate that negates the value of working.
Friedman theorized that NIT would reduce the need for a large bureaucracy to administer various welfare programs since the existing tax system could be used to distribute the negative income tax. It would further incentivize work by allowing individuals to keep a portion of their earnings along with the tax benefit.
Let’s look at a couple of examples for clarity.
In our first example, assume an individual earns $30,000 annually. Under our NIT program, the income threshold is $50,000, and the negative tax rate is 50%. The individual would receive no other benefits like food stamps, housing vouchers, or other forms of direct aid. The difference between the individual’s income and the threshold is $20,000. Applying the negative tax rate, the individual would receive a supplemental payment of $10,000 from the government. This would increase their total income to $40,000, bridging part of the gap between their actual earnings and the threshold while providing an incentive to earn more without losing all benefits.
In the second example, assume the individual has no income at all. Again, they receive no other benefits like food stamps or housing vouchers. The difference between their income and the $50,000 threshold is the full $50,000. With a negative tax rate of 50%, the government would provide this individual with a payment of $25,000. This amount represents the guaranteed minimum income level under this NIT system, ensuring every individual has at least $25,000 in annual income, regardless of their actual earnings. This setup was designed to provide a safety net that discourages poverty without disincentivizing additional income generation through employment.
You can watch Friedman discuss the Negative Income Tax here:
NIT may sound similar to Universal Basic Income (UBI), but they take different approaches to income support. UBI is unconditional money, theorized to provide all individuals with additional funds regardless of their income level or employment status. Instead of moving low earners to a suitable income level, UBI intends to create a universal safety net. Further, UBI programs lack conditions tied to receiving the benefit; they do not depend on income, employment, or other criteria.
NIT also resembles another social welfare program: the Earned Income Tax Credit (EITC) program, which President Reagan significantly expanded. However, EITC targets working individuals and families—particularly those with children—and aims to incentivize work. NIT was broader and designed as a general income supplement for all individuals, potentially replacing other forms of welfare. NIT would provide a basic income guarantee regardless of work status, though the benefit would decrease as income increases.
As Friedman originally envisioned, NIT would replace existing social welfare programs, streamlining support into a single system to reduce bureaucracy and administrative overhead. In contrast, EITC operates alongside other social welfare programs such as food stamps and housing vouchers.
Friedman's NIT was a bold proposal aimed at reducing poverty while minimizing government intervention. But how does this theory hold up in the context of our modern economy?
Social Program Relevance for Today
Now, let's add some relevance to our discussion of social welfare programs.
Supporting low wages inherently means relying on social programs.
Individuals have two sources of money: their work or the government, which represents the American people’s money.
We have a systemic job skills and wage problem. There are approximately 84 million families in America. Of these, 42 million, or half, receive social program dollars. Many of these Americans don’t even realize they're getting social program support because it’s hidden in their tax filings and again in this year’s federal deficit.
Half of American families need social program support because wages are too low. My question for Friedman would be: when would you argue to raise wages instead of supplementing the wages businesses pay with social program funds? Would it be when 75% of families need government support? 90%?
A key piece of the market is the training and preparation of individuals. We can’t say there’s a market failure in job training but no market failure in wages. A failure in one area leads to a failure in the other.
At what point does the scale of reliance on social programs to supplement wages indicate a fundamental problem in the market itself?
The Interview
To think about our questions, I fed ChatGPT with Friedman's writings and asked it to answer as if it were Dr. Friedman for an interview.
Joel: If we told American high school students that they have a clear path to prosperity through specific training opportunities and provided them with the means to pursue this training, most would likely seize the opportunity.
Friedman: Absolutely. It's crucial to inform high school students about effective training paths that lead to prosperity. If they know that specific skills are in demand and that acquiring them will lead to better job prospects, most would take advantage of these opportunities. It's essential that educational programs align with market demands and remain accessible, ensuring students are equipped for the evolving job market.
Joel: But of course, the job market doesn’t do that, and sometimes these Americans end up with misaligned job skills and low wages. Don't low wages indicate a failure in the market?
Friedman: Low wages can indeed indicate a mismatch between the skills workers have and those that are in demand. However, I wouldn't necessarily call it a market failure. Markets are dynamic and adjust over time. The key is to ensure that education and training systems are responsive to the needs of the economy. When there's a surplus of certain skills and a shortage of others, wages will reflect that imbalance. Addressing this requires improving our educational institutions and perhaps reducing barriers that prevent workers from acquiring new skills.
Joel: But you’re against government intervention, even though people need to be able to have food on the table and heat in the house.
Friedman: While I advocate for minimal government intervention, I recognize that a safety net is necessary to support those who are truly in need. The challenge is to provide assistance in a way that doesn't create long-term dependency or distort market incentives. Programs should be designed to help individuals get back on their feet and become self-sufficient, rather than fostering reliance on government support.
Joel: Didn’t you propose a social program that became the Earned Income Tax Credit? This program perpetuates government dependency today because half of American families receive benefits from it.
Friedman: I proposed the Negative Income Tax as a more efficient alternative to the myriad of welfare programs. The idea was to simplify the system, reduce administrative costs, and provide direct assistance to those below a certain income level without discouraging work. If a significant portion of the population relies on programs like EITC, it suggests deeper economic issues such as inadequate education, lack of opportunities, or policies that inhibit economic growth. The goal should be to address these root causes rather than viewing the assistance program itself as the problem.
Joel: If government intervention is necessary regardless, why wouldn’t we use the government to make rules supporting the individual rather than funneling money through the bureaucracy?
Friedman: My preference is always for solutions that minimize government intervention and maximize individual freedom. If intervention is necessary, it should aim to empower individuals rather than expand bureaucratic systems. Direct support mechanisms, like the Negative Income Tax, are designed to help individuals without the complexities and inefficiencies of a large administrative apparatus. By simplifying the process and reducing bureaucracy, more resources can reach those in need, and individuals retain the freedom to make their own choices.
Joel: What do you think about a system in which businesses receive tax incentives after they prove they pay wages above the poverty line?
Friedman: Providing tax incentives to businesses that pay higher wages could be a market-friendly approach to encouraging better compensation. It rewards positive behavior without imposing mandates that might lead to unintended consequences like reduced employment opportunities. However, it's important to consider the potential for manipulation and ensure that such a system doesn't create distortions or unfair advantages. The best solutions typically involve creating a healthy economic environment where businesses naturally compete for workers by offering better wages and conditions.
Joel: Dr. Friedman, thanks for the chat. Do you have any final thoughts?
Friedman: Thank you for the engaging discussion. In closing, it's important to remember that economic policies should aim to enhance individual freedom and responsibility. By fostering a vibrant, competitive market and ensuring opportunities for all to participate, we can address many of the challenges we face. Government interventions, when necessary, should be carefully designed to support—not replace—the mechanisms that allow individuals to improve their own circumstances.
While Dr. Friedman and I agree on the importance of a healthy economic system, we differ on how to best support individuals within that system.
Reflecting on Government Intervention
If government intervention is necessary regardless, why wouldn’t we use the government to make rules supporting the individual rather than funneling money through the bureaucracy?
Friedman was a brilliant economist, but we don’t agree on everything. His work suggests he viewed the economic system as more important than the individual. In his view, paying wages higher than the market dictates distorts the system. He would rather preserve the market and use the tax system to pay for social programs.
I agree with his premise about the importance of a healthy economic system, but I'm against dependency on social programs. When wages are too low, we throw money at the bureaucracy—giving some of that money to other people, and the machine eats the rest. Friedman viewed social program support as temporary, but trickle-down economics has demonstrated it doesn’t work. It doesn’t improve the financial position of low earners; they stay on social programs.
I’m not against Americans who need social programs. I'm not against the social programs themselves, even though we acknowledge their inefficiencies, because they still manage to help our fellow Americans. But if half of American families rely on social programs, the rules designed to enable individual Americans to succeed have failed.
I recognize the importance of the economic system. I believe individuals having heat in the house and food on the table is more important than the system itself, and I recognize that a healthy system is the best way to achieve that goal.
Of course, the wage problem is systemic and doesn’t have a simple solution. Systemic problems require systemic solutions.
We won’t be able to eliminate social programs, but we need to address low wages, social program dependency, and the problems that cause them.
Since government intervention is necessary to address poverty caused by low wages, we should prioritize policies that directly support individuals by promoting livable wages instead of relying on bureaucratic social programs that perpetuate dependency and inefficiency.
May God bless the United States of America.
A Conversation with Deceased Nobel Laureate Economist Dr. Milton Friedman