Free to Choose Chapter 4: Cradle to Grave - What Should Be Done

In Part 1, we saw how the welfare state grew from a handful of emergency programs during the Great Depression into a sprawling empire that spent more than the Army, Navy, and Air Force combined. We looked at Social Security, the welfare mess, and the math that did not add up. Now the question is: why do these programs keep failing, and what would actually work better?

This is post 7 in my Free to Choose retelling series. This is Part 2 of Chapter 4. If you missed Part 1, start there.

Housing and Medical Care: Two More Failures

Before Friedman gets to his big argument about why welfare programs fail, he walks through two more examples: housing and medical care.

Government housing programs started small during the New Deal. By the late 1970s, the Department of Housing and Urban Development had a staff of nearly 20,000 and spent over $10 billion a year. The results? More homes were destroyed than built. The families forced out of demolished buildings ended up in worse housing. The families lucky enough to get subsidized apartments did fine. Everyone else lost.

The public housing that was built often became a disaster. The Pruitt-Igoe complex in St. Louis won an architecture prize for its design. Within years it deteriorated so badly that parts of it had to be dynamited. Only 600 of 2,000 units were occupied. It looked like a war zone.

Friedman talked to community leaders in Watts and the South Bronx who said the same thing. Public housing concentrated broken families, drove up crime, and destroyed neighborhoods. One group in the South Bronx chose to rehabilitate abandoned buildings with their own hands rather than move into public housing. They wanted ownership. They wanted pride. They wanted to maintain something that was theirs.

Urban renewal was even worse. It demolished four homes for every one it built. The homes torn down mostly housed Black families. The ones built mostly served middle- and upper-income white families. Critics called it “Negro removal.” The real beneficiaries were property owners, developers, universities, and churches – not the poor.

Medical care followed the same pattern. After Medicare and Medicaid were introduced in 1965, government health spending exploded from $5 billion to $68 billion by 1977. Medical facilities expanded, but not as fast as the money. The main result was sharply higher prices and higher incomes for doctors. When the government tried to control costs, it started down the road toward what Friedman bluntly called socialized medicine.

He pointed to Britain’s National Health Service as a warning. After three decades, Britain had fewer hospital beds than when the program started. Staff increased 28 percent, administrators increased 51 percent, but actual beds occupied daily went down 11 percent – while 600,000 people waited for treatment. Doctors were fleeing the country. Private hospitals were growing because people could not rely on the public system.

The Four Ways to Spend Money

This is the core of Friedman’s argument. It is simple, maybe even obvious once you hear it. But it explains a lot.

There are four ways to spend money. You can spend your own money on yourself. You can spend your own money on someone else. You can spend someone else’s money on yourself. Or you can spend someone else’s money on someone else.

When you spend your own money on yourself – buying groceries, for example – you care about both how much you spend and what you get. You want value. You shop carefully.

When you spend your own money on someone else – buying a birthday gift – you still watch the price, but you are less focused on whether the recipient gets maximum value. If you really wanted to maximize value for the other person, you would just give cash.

When you spend someone else’s money on yourself – eating on an expense account – you do not care much about the cost, but you make sure the meal is good. You want your money’s worth, even if it is not your money.

When you spend someone else’s money on someone else – buying a colleague lunch on the company card – you have no strong reason to watch the price or to make sure the other person loves the food.

Friedman says nearly all welfare programs fall into that last category. Bureaucrats spending taxpayer money on people they do not know. Nobody watches the cost carefully. Nobody ensures the recipients get maximum value. The money comes from strangers and goes to strangers, filtered through a bureaucracy that takes a cut along the way.

That is why the spending explodes. That is why the programs are wasteful. That is why the results are so disappointing.

Why the Poor Lose the Political Game

But it gets worse. When large sums of other people’s money are available, everyone scrambles to grab a share. And the poor are the worst-equipped to compete in that scramble.

The same disadvantages that make people poor in the marketplace – limited education, fewer connections, less experience navigating institutions – make them even more disadvantaged in the political marketplace. The well-organized, the well-connected, and the well-funded will always outmaneuver them. Lobbyists, contractors, unions, and bureaucrats all know how to steer government money toward themselves.

This is what Friedman called “Director’s Law” in Part 1: government programs designed to help the poor end up benefiting the middle class. Housing subsidies go to comfortable families in luxury apartments. Urban renewal clears neighborhoods for developers. Medical spending enriches doctors and hospital administrators. The reformers who pushed for the program move on to the next cause. The poor are left behind.

There is also a hidden cost. If $100 of someone else’s money is available, it is worth spending up to $100 of your own money to get it. All the lobbying, campaign contributions, legal fees, and paperwork spent chasing government funds is pure waste. It helps nobody. It just transfers resources from productive activity to political maneuvering. Sometimes the cost of chasing the money exceeds the money itself.

And when the programs inevitably fail to help the people they were supposed to help, the response is always the same: we need to spend more. The reformers team up with the bureaucrats who want bigger budgets, and the cycle continues.

The Paternalism Problem

There is something even deeper than waste. Welfare programs put some people in charge of deciding what is good for other people. Friedman says this corrupts both sides.

The people making decisions develop a sense of almost godlike power. The people receiving benefits develop childlike dependence. Their ability to make their own choices, to manage their own lives, slowly withers. The community leader in the South Bronx understood this perfectly – that is why his group chose to build their own homes with their own hands rather than accept what the government offered.

Voluntary charity does not have this problem. When you give your own money, you give it freely. Government welfare is different. It requires force. The government takes money from some people to give to others. That use of force, Friedman argues, is at the very heart of the welfare state. Good intentions do not change the fact that the mechanism runs on compulsion. And compulsion tends to corrupt whatever it touches.

Friedman’s Alternative: The Negative Income Tax

So what would Friedman actually do? He is not saying abolish everything overnight. He knows people depend on these programs. You cannot just pull the rug out. But he has a direction in mind.

His proposal has two parts. First, replace the entire mess of welfare programs – the hundreds of overlapping agencies and benefits – with a single, simple system: a negative income tax.

Here is how it works. Under the regular income tax, everyone gets a basic allowance they can earn without paying any tax. In 1978, that was $7,200 for a family of four. If you earn more than that, you pay tax on the excess. But if you earn less, nothing happens – your unused allowance is wasted.

With a negative income tax, if you earn less than your allowance, the government pays you a percentage of the difference. Say the rate is 50 percent. A family of four with zero income would receive $3,600 – half of the $7,200 allowance. If they earned $1,000, the subsidy drops to $3,100, but total income rises to $4,100. Every dollar earned means more money in your pocket. The incentive to work never disappears.

At $7,200 in earnings, the subsidy hits zero. Earn more, and you start paying taxes like everyone else.

The advantages are enormous. It targets poverty directly – you get help because your income is low, not because you fit some bureaucratic category. It gives cash, which lets people decide for themselves what they need most. It preserves the incentive to work. And it eliminates the vast bureaucracy. The whole thing could run through the existing tax system. No more armies of caseworkers deciding who deserves what.

But – and this is critical – Friedman insists it only works if it replaces the existing programs, not if it is added on top of them.

What to Do About Social Security

The second part of Friedman’s plan is to wind down Social Security while honoring all existing promises. He lays out specific steps.

Repeal the payroll tax immediately. Keep paying everyone who is currently receiving benefits exactly what they are owed. Give every worker who has already earned coverage a claim equal to what they have paid in, adjusted for the tax savings from repealing the payroll tax. They could take this as a future annuity or as government bonds. Workers who have not yet earned full coverage would receive bonds equal to the accumulated value of their taxes.

Then stop. No more accumulation of new benefits. Let people save and invest for their own retirement however they choose. Private pension plans would expand to fill the gap.

This plan does not add to the national debt, Friedman argues. It just makes visible what is already hidden – the enormous unfunded promises the government has made. And it would boost economic growth by eliminating a tax on work, increasing personal savings, and encouraging private investment.

The Political Reality

Friedman is honest about the chances of his plan being adopted. Three presidents – Nixon, Ford, and Carter – considered some version of a negative income tax. Each time, political pressure turned it into something unrecognizable. Instead of replacing existing programs, it was layered on top of them. The subsidy rates were set so high that there was almost no incentive to work. Friedman himself testified before Congress against Nixon’s version because it had been so badly distorted.

The core problem is a mathematical trap. Any reform has to do three things at once: provide a decent level of support, maintain the incentive to work, and keep costs reasonable. If “decent support” means nobody currently on welfare can receive less than they already get, then the math breaks. You cannot have high benefits, low subsidy rates, and low costs simultaneously. One of the three has to give.

Friedman accepts this reality. But he also notes that what is politically impossible today can become possible tomorrow. Political experts have a terrible track record at predicting the future. He compares political leaders to ducks flying in a V formation. Sometimes the flock changes direction and the leader keeps flying straight ahead. When the leader finally looks around and sees nobody following, he rushes to get back in front.

Key Takeaway

The welfare state fails not because the people who built it were bad, but because of the basic structure of how government spends money. When you spend other people’s money on other people, waste is inevitable. The poor lose the political competition for funds to better-organized groups. Programs designed to help create dependence instead of independence. Friedman’s alternative – a negative income tax that replaces the entire welfare bureaucracy, combined with a gradual unwinding of Social Security – is simple, humane, and preserves individual freedom. Whether it is politically achievable is another question. But knowing where you want to go is the first step toward getting there.

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

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