Free to Choose Chapter 4: Cradle to Grave - The Rise of the Welfare State

Imagine you sign up for a retirement plan. Your employer tells you the money goes into a trust fund. Every paycheck, a chunk disappears under the label “contribution.” You believe that somewhere, in some account with your name on it, your savings are growing. Then one day you find out there is no account. There is no fund. The money you paid in was handed directly to someone who retired before you. And your retirement depends entirely on whether people who come after you are willing to do the same for you. That is Social Security. And it is just one piece of a much larger story.

This is post 6 in my Free to Choose retelling series. This chapter is split into two parts because there is a lot to cover.

The Election That Changed Everything

The year was 1932. The country was deep in the Great Depression. Millions had no jobs. Breadlines stretched around city blocks. People sold apples on street corners just to survive. Herbert Hoover, the sitting president, got all the blame – even though, as Friedman argued in the previous chapter, the Federal Reserve was the real culprit.

Franklin Delano Roosevelt arrived like a fresh breeze. He was optimistic, charismatic, full of energy. On the campaign trail he actually promised to cut government waste and balance the budget. He attacked Hoover for spending too much.

But behind the scenes, Roosevelt was meeting with a group of university advisers – his “brain trust” – who had very different ideas. They believed the Depression proved capitalism was broken. They believed government should step in to protect people from the ups and downs of life. They looked at Bismarck’s Germany, Sweden’s social programs, and Britain’s new welfare laws for inspiration.

Roosevelt won by a landslide. And American government was never the same. Before 1929, total government spending – federal, state, and local combined – never exceeded 12 percent of national income except during major wars. Federal spending alone was around 3 percent. After Roosevelt, government spending never dropped below 20 percent. By the time Friedman was writing, it was over 40 percent. The role of the federal government in the economy had grown roughly tenfold.

The New Deal: Temporary Programs That Never Left

Roosevelt was inaugurated on March 4, 1933, at the lowest point of the Depression. Banks across the country were closing. Two days after taking office, he ordered every bank in the nation to shut down. But he also gave one of the most famous lines in American history: “The only thing we have to fear is fear itself.”

Then came the “hundred days” – a burst of new laws and programs. The New Deal had three main parts.

First, programs to reshape the economy. Things like the Securities and Exchange Commission and national minimum wages. Some of these were struck down by the Supreme Court. Others are still with us today.

Second, programs to provide security. Social Security, unemployment insurance, public assistance. These were supposed to help working people save for retirement and survive temporary job loss. Public assistance was meant to be temporary – just until things got better.

Third, emergency programs. Make-work projects through the Works Progress Administration. The Civilian Conservation Corps, which put young men to work in national parks. Direct relief for the desperate. Friedman gives credit here: these programs served a real purpose. People were suffering. Something had to be done. They were imperfect and wasteful, but that was understandable given the emergency.

The problem? The emergency programs were supposed to go away. Government programs almost never go away.

How War Made Government Bigger

World War II interrupted the New Deal but massively expanded its foundations. The war brought enormous government budgets and total control over daily life – price fixing, wage controls, rationing, production orders.

And then something important happened in people’s minds. The war effort worked. The United States built an incredible amount of military equipment. Unemployment vanished. America won the war. People drew a conclusion: government can run the economy better than the free market.

Friedman says this conclusion was wrong. It is one thing for a country to mobilize temporarily for a single goal that almost everyone shares. It is a completely different thing for government to run the economy permanently, trying to satisfy millions of different people with millions of different needs and desires. But the impression stuck. In 1946, Congress passed the Employment Act, which made it official government responsibility to maintain maximum employment and purchasing power.

The Depression convinced people that capitalism was broken. The war convinced people that government was efficient. Both conclusions, Friedman argues, were false.

The Welfare Explosion

After the war, many expected full-blown central planning – government ownership of industries, detailed control of the economy. That did not happen, at least not in that form. Countries that tried nationalization – Britain, Sweden, France – found that government-owned industries were inefficient and lost money. The dream of state-run industry quietly died.

But the pressure for bigger government did not die. It just changed direction. Instead of owning the means of production, government moved toward welfare programs and regulation. As one economist put it, socialism “now seeks to socialize the results of production.”

And the growth was explosive. When Lyndon Johnson declared a “War on Poverty” in 1964, it kicked into high gear. Social Security expanded. Medicare and Medicaid were created. Food stamps. Public housing. Urban renewal. By the late 1970s there were literally hundreds of federal welfare and income transfer programs.

The Department of Health, Education and Welfare started in 1953 with a $2 billion budget – less than 5 percent of defense spending. Twenty-five years later, its budget was $160 billion. That was one and a half times the combined budgets of the Army, Navy, and Air Force. It had the third largest budget in the world, behind only the full U.S. government and the Soviet Union. More than one out of every 100 working Americans was employed either directly by this department or in programs it oversaw.

And nobody was happy with the results. Housing programs subtracted from the housing available to poor people rather than adding to it. Welfare rolls grew even as employment grew. Medical costs rocketed upward. Student performance dropped as federal education spending increased. Yet the response to every failure was the same: spend more.

Social Security: The Biggest Misunderstanding in America

Now we arrive at the sacred cow. Social Security is the program no politician dares to question. Barry Goldwater tried in 1964 and it helped destroy his presidential campaign. But Friedman pulls no punches.

The government published a booklet for years called “Your Social Security” that described the program this way: during your working years, you pay contributions into special trust funds. When you retire, monthly benefits are paid from those funds. Simple and comforting.

Friedman calls this “Orwellian doublethink.”

First, the “contributions” are not contributions. They are taxes. You have no choice about paying them. Second, the “trust funds” are almost meaningless. They are tiny compared to the obligations they are supposed to cover – just promises from one branch of government to another. Third, and most important, there is no real connection between what you pay in and what you get out.

Here is how it actually works. Taxes collected from people currently working are used immediately to pay benefits to people who are currently retired. Nothing is saved. Nothing is invested. Nothing is accumulating. The whole thing depends on future workers being willing to pay taxes to support you when you retire. Friedman compares it to a chain letter.

In 1950, there were seventeen workers paying in for every one person collecting benefits. By 1970, the ratio was three to one. Friedman predicted it would drop to two to one by the early 2000s – and he was right.

The tax itself is regressive. It is a flat rate on wages up to a maximum. That means it hits low-income workers harder. It is a tax on work, which discourages both hiring and job-seeking.

The benefit structure is arbitrary. If you worked in a covered industry, you get benefits. If not, you do not. If you worked only a few quarters in a covered job, you get nothing no matter how poor you are. A wife who never worked gets the same benefit as a wife who worked her whole life, as long as both are married to qualifying husbands. If you are over sixty-five and earn even a modest income, you lose benefits – and still have to pay taxes on your earnings.

Perhaps the cruelest irony: Social Security transfers money from the poor to the rich. People from poor families start working younger and die earlier. They pay taxes for more years and collect benefits for fewer years. Meanwhile, people from wealthy families start working later, live longer, and collect more. The system, designed to help the poor, does the opposite.

The Welfare Mess

Beyond Social Security, there were over one hundred federal programs aimed at helping the poor. The spending numbers tell a revealing story.

In the late 1970s, welfare spending (on top of Social Security) was about $90 billion a year – ten times what it was in 1960. The government’s own definition of poverty meant roughly 25 million Americans were poor. Do the math: $90 billion divided by 25 million people is $3,500 per person, or $14,000 for a family of four. The poverty threshold was about $7,000. In other words, the government was spending roughly twice the poverty line per poor family.

If that money had actually gone to poor people, there would have been no poor people left. They would have been comfortably well off.

So where did the money go? A massive bureaucracy took its cut. People who were not poor at all collected benefits – college students on food stamps, comfortable families in subsidized housing. Welfare cheats made headlines. And once someone got on relief, it was extremely hard to get off. The system created a trap.

The country split into two classes: those receiving welfare and those paying for it. Failures were always blamed on not spending enough. The solution to every problem was a bigger program. And the biggest beneficiaries of the programs were often the bureaucrats who administered them.

New York City was the extreme example. It spent more per person on city government than any other American city – double what Chicago spent. Mayor Robert Wagner declared in 1965 that he would not let “fiscal problems set the limits of our commitments.” The city built a vast hospital system, a free university, generous public pensions, and subsidized housing. The result was near-bankruptcy. New York had to be bailed out by the state and federal government, surrendering control of its own finances.

As one writer observed, New York’s generous redistribution policies succeeded in redistributing much of its tax base and thousands of jobs – right out of the city.

Key Takeaway

The welfare state grew from real compassion during a real crisis. The New Deal responded to genuine suffering. But temporary programs became permanent. Small agencies became enormous bureaucracies. Government spending on welfare grew from a few percent of national income to a dominant share. Social Security, the flagship program, was sold to the public through language that would get a private company in trouble with regulators – calling taxes “contributions” and treating a pay-as-you-go transfer system as an “insurance” program with “trust funds.” The poor, who were supposed to benefit most, often benefited least.

In Part 2, we will look at Friedman’s critique of why these programs fail so consistently and what he thinks should replace them.

Book: Free to Choose by Milton and Rose Friedman | ISBN: 978-0-15-633460-0

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