Inefficiencies and Transfer Payments

There is much debate in Washington about the morality of transfer payments, basically taxing people who have income and giving to people who do not have income.  I will address the morality and the practicality of transfer payments and what should have been done and what can be done about the issue now.

Are Transfer Payments Moral?

There is no doubt that Jesus taught that it is the duty of the wealthy to take care of the poor, "He that hath two ^acoats, let him ^bimpart to him that hath none; and he that hath meat, let him do likewise" (Luke 3:11). But the scriptures also teach self-reliance "In the sweat of thy face shalt thou eat bread, till thou return unto the ground" (Genesis 3:19).  The scriptures also teach that we are not to judge the intent of others, but that we should give willingly.  "Judge not, that ye be not judged.  For with what ^ajudgment ye judge, ye shall be judged: and with what ^bmeasure ye mete, it shall be ^cmeasured to you again " (Matthew 7:1-2).  We are are given this instruction on how to give.  "But when thou doest alms, let not thy left hand know what thy righthand doeth" (Matthew 6:3).

At this point, it sounds as if those who advocate government transfer payments have scripture to back them up.  It is true that the scriptures advocate giving of our substance to the poor.  But the question is, do the teachings of the Bible or any other scripture advocate government transfer payments.  Here is what I was able to find in the scriptures.

First, when Jesus was asked if it was lawful to give tribute to Caesar, he answered, "Render therefore unto ^bCæsar the things which are Cæsar’s; and unto God the things that are God’s" (Matthew 22:19).  Again, it sounds like the Bible advocates taxing people and giving to the poor.  

Jesus did not say whether or not the taxpayers had the right to question what Caesar was going to spend the money on, but Jesus also offered this advice. "For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?  Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him, Saying, This man began to build, and was not able to finish.  Or what king, going to make war against another king, sitteth not down first, and consulteth whether he be able with ten thousand to meet him that cometh against him with twenty thousand (Luke 14:28-31).  In other words, before you begin something, consult as to whether or not you will be able to finish it.  

Therefore, if a government is going to tax and give the money to the poor, the question needs to be asked if the government is going to have the ability to finish the job.  What is finishing the job?  It is to continue to make those payments until that assistance is no longer needed.  Either you have to lift the poor above their economic circumstances and get the poor to a point to where they no longer need the money.  Or you have to plan on paying that person until the end of their life.

Therefore, it may not be immoral to tax people to assist the poor and the needy.  But the government is not doing itself a favor unless they help people rise above poverty.  However, there are many examples, both in the scriptures and otherwise, where taxes have become burdensome for the people and have led to revolt.  There is obviously a limit to how much tax burden the people are able to bear and it is not smart for any government to overtax their people, not matter what the money is spent on.  It makes good sense to limit transfer payments and to take steps to ensure that any assistance provided is temporary, even if it is moral.

I would also be remiss if I did not mention that all of the directives in scripture to assist the poor and needy are directed at individuals, not at governments.  I do not believe that you will settle the question of whether or not governments should assist the poor and needy by going to scripture.  But governments need to do what is prudent.  Revolution is not a good thing.

Do Transfer Payments Help the Economy?

Many will tell you that the answer is yes, transfer payments help the economy.  Some may even go as far as to say, "well duh, you are taking money from people who have extra and giving the money to people who have nothing.  More people are able to purchase things, so yes, you are helping the economy."  In the micro-economic sense, you are helping someone.  But in the macroeconomic sense, at best transfer payments have no effect on the economy at all and arguably hurt the economy.

Taking money from one person and giving it to another in theory has no effect on aggregate demand at all.  The purchasing power of the overall economy does not depend on who holds the gold.  The problem is that there are inefficiencies in the system.

The Keynesian economic theory acknowledged this.  Keynes advocated borrowing and using the money to put unemployed people to work.  This would be beneficial to people.  This is in essence transferring money from the future to the present...a transfer payment.

Arguably, to introduce public welfare into the economy is a positive because it takes people to run the system and those people are saved from unemployment.  In bad economic times, this is a positive.  Keynes would agree with this and that is why he pushed for heavy government borrowing in the Great Depression.  

But in good economic times, it is a negative to have a large bureaucratic system to care for the poor and needy.  In good economic times, the government competes for employees with the private sector and introduces wage inflation.  This will exacerbate unemployment when the economy cycles to bad, as private industry looks to cut costs, and will provide an incentive to off-shore jobs.  In good economic times, it is more efficient to transfer the care of those who are in need to private agencies.

Because it takes time for money to get from the pockets of the rich to the hands of the poor, inflation is an inefficiency of government welfare and reduces aggregate demand.  Another inefficiency is interest, especially if the owner of the debt is outside of the economy.

When the government borrows money, the interest has to be paid.  It is true when any of us borrow money.  Interest must be paid.  If our debt holders were all domestic, someone in the economy would always benefit from interest payments, and those payments would reduce the aggregate demand.  But when foreign investors hold public debt, the interest payments will leave the economy and reduce aggregate demand.

This is why it is important for the government to make an extra effort to reduce their size and retire public debt when times are good.  It is a necessary step to take to prepare for times when the economy is not humming.

Another inefficiency in transfer payments is the three headed monster of fraud, waste and abuse.  In the newspapers this week is the story of a Seattle couple who defrauded the state welfare system even though the couple owned an expensive home and traveled overseas frequently.  In the aggregate sense, any money that this couple spent in the US did not leave the economy and did not hurt overall demand.  But any money that they spent overseas did cause a problem with the US economy.

And finally, one other inefficiency is an inefficiency with the economy as a whole.  And that is our trade deficit.  When we purchase a million dollars in goods from China, we should be selling a million dollars worth of goods to them.  In reality, it is not working that way.  Arguably, a person who has money to burn has a greater choice in how that money is spent and has the ability to chose domestic goods and services over those made overseas.  Where a person who is scrapping for his living has to primarily consider cost.

Opportunities lost

Perhaps the biggest opportunity to fix the problems with the welfare system came in the late 1990's when presidential candidate Newton Leroy Gingrich was the House Speaker.  It is true that he successfully pushed welfare reform into law and he should be applauded for this.  He also helped balance the federal budget.

However, some opportunities were lost.  Remember when the federal government had a surplus in the late 1990's?  Well, truth is, the government did not have a surplus at all.  There is no surplus unless all debt is retired.  Yes, there was that brief period of time when government revenues were greater than government expenditures, and some of the national debt was retired.  But government spending was not reduced at all and not enough of the overall debt was reduced very much.  When Gingrich was house speaker, the federal budget increased every year.


There was an assumption at the time that the good times would continue indefinitely.  But nothing about the economy is definite.  It is always in motion and what goes up must come down.  The economy will never be forever in growth unless all of the inefficiencies are removed.  That is impractical if not impossible.  There will always be inflation, interest and crime.  Jesus also said, "For ye have the poor always with you" (Mark 14:7).

If you subscribe to Keynesian economic theory, the federal budget should have been slashed and the public debt retired at a much greater rate than it was.  More people who were employed in the public sector could have found jobs in the private sector.  Wage inflation could have been reduced.  This demand is what first caused many companies to off-shore work.  Companies at first went overseas because they could not find enough people to employ in the US.  This lack of foresight also led to a new wave of undocumented immigration and it could be argued that it even opened the door for the terrorist who crashed airplanes into the Twin Towers and the Pentagon.  The economic troubles that caused the current recession could have been softened if more had been done when times were good.  If you believe in Keynes, then you have to take in all of it.  If you borrow when times are bad, then you repay debt when times are good.

When Newt was House Speaker, during the greatest economic expansion since the end of World War II, the public debt remained at 6 trillion dollars and was not much reduced.  This was our best opportunity to reduce one of the biggest inefficiencies in our welfare system.  That opportunity was lost.  Gingrich did a lot of good things as House Speaker, but in hindsight, it was not nearly enough.  As a result, we are in a situation where we have began the construction of a bridge, and we do not have sufficient to complete it.

There are four men gunning for the GOP nomination that have experience at cutting the budgets of their states, and we see the results in their states economies.  Mitt Romney, Jon Huntsman, Rick Perry and Gary Johnson all succeeded where Gingrich failed.  Perhaps one of these men can help us today.