In the 1930s, statists used the Great Depression as an excuse to attack free enterprise. Now their successors are using the Great Recession to do much the same. In this episode of the Ricochet “Money & Politics” podcast, I chat about the future of free enterprise and the American welfare state with Arthur Brooks, president of the American Enterprise Institute and a regular New York Times opinion writer.
On a previous show, we had on Mike Strain, also of AEI. And I led off by asking him what kind of economist was he. I often get that question about this or that economist. Are you an Austrian? Are you a Keynesian? Are you a Neo-Keynesian? Are you a supply sider? Are you pro-market, classical, neo-classical? What kind of economist are you, Arthur Brooks?
I’m a behavioral economist, which means I look at all kinds of traditionally non-economic behaviors through an economic lens. So I’ve written books about charitable giving and philanthropy, sort of warm glow effects and altruism. I’ve written a great deal on the subject of human happiness. This is something that I think economists have not studied nearly enough to understand the differences of lifestyle and proclivities and behaviors and economics and public policy that lead to happiness and human flourishing.
So those are the things that have interested me the most. But these days, mostly, I’m working as an administrator because I’m the president of a think tank, which is to say that I’m quickly deskilling.
I want to go to a speech you gave last October. Let me read something you said:
One of the things, in my view, that we get wrong in the free enterprise movement is this war against the social safety net, which is just insane. The government social safety net for the truly indigent is one of the greatest achievements of our society. And we somehow want to zero out food stamps or something; it’s nuts to want to be doing something like that. We have to declare peace on the safety net.
I wonder if you could explain exactly what you mean by “declaring peace on the safety net” and what you think we should do as far as helping the poor.
I did get a lot of reactions from that speech. That was in – I think that was a speech I gave in Boston with Jeb Bush. And we were talking about education policy, but we got into the broader solutions to poverty in our country. And one of the things – and just to clarify a little bit – as I’m a political conservative, that’s probably not a big shock, being the president of AEI. And I admire libertarian economists a great deal. One of my personal heroes and that of you guys and many people listening to us today is Friedrich Hayek.
Hayek, in “The Road to Serfdom” said that basically the government is supposed to do two things. Number one is to be able to provide a general level of support to people who are truly indigent. He understood that that creates a headwind on the economy, but it’s a morally justifiable thing to do. And the second thing was to clear up market failures. So the canonical sources of market failures are monopolies and externalities and public goods problems and information asymmetries or things like crime. But aside from that, the government shouldn’t go beyond those things.
And most of the nonsense that we object to as conservatives with the nanny state has nothing to do with simply helping people who are truly indigent, who have an inadequate level of housing or inadequate level of health care or food.
I mean the idea that somehow as a rich society we should not provide an adequate safety net for the indigent mentally ill, for the homeless, for people who are having a hard time feeding their children – that’s what I think is insane. Now, there is a legitimate charge that that can turn into a hammock and disincentivize people from supporting themselves. I completely understand that. And that is something we have to be on the guard about. But to say that it’s a slippery slope and so, therefore, we should be downgrading the benefits from people who are truly hard up in the wake of the greatest recession we’ve had since the Great Depression in this country, I don’t think that’s justifiable. I don’t think Americans agree with it. I think it’s a political loser and it’s something that morally I don’t think that we should be able to have to stand behind.
OK, so you have a certain reward for being on welfare and then there’s a reward for being on work. And what you want to do is make sure there’s a big gap between those two, so it really makes sense for people to work. Now one thing you can do is making it more profitable for people to work. You can have wage subsidies, like the Earned Income Tax Credit, of reduce welfare and therefore force people to work.
And there are certainly Republicans in Congress who want to get ride of the Earned Income Tax Credit. They think it does create dependency. They think it’s full of waste. It’s full of fraud. And there are a bunch of folks who say, listen, we are spending $1 trillion a year already. Do we need to spend more? Maybe we could spend $700 billion and still help the indigent. It almost sounds like you’re saying that we need to do more for the poor, that we’re not doing enough.
Look, there are two basic worldviews out there. And they don’t go right and left. And they don’t go Democrat and Republican. It is whether or not you think work is a blessing or whether you think it’s a punishment. And President Obama, when he talks about work and low wage work and all this, it’s almost as if it’s a punishment. The people who bridle against work requirements on food stamps are basically saying that work is a punishment. And when people basically say – when conservatives say, I want to cut social safety net benefits, so that people will have to go to work, they’re treating work as a punishment.
Now, I don’t know about you, Jim, but I never met somebody who would prefer to have their kids see them get a welfare check than a paycheck. The reason, in my view and in the view of most people who’ve looked compellingly at the behavioral data on this subject, the finding generally is that people will take welfare benefits when they feel that they don’t have alternatives that are adequate.
I bet any one of us would take welfare benefits if we felt that our family was at risk from tremendous material deprivation. That’s the reason that we shouldn’t be having this conversation about whether or not we need to cut welfare benefits. And I don’t think we need to spend more on welfare benefits, certainly. I think what we need to spend time and money and attention on in public policy is a radical agenda of opportunity and growth and jobs.
We need to have entrepreneurship and jobs and education policy that reaches all the way down to the bottom of the income scale. Right now, we’re pulling the ladder up and the ladder is just too high for a lot of people who are being left behind. And it’s primarily an effect of liberal policies, of progressive economic policies that are making it harder for people to get ahead. And instead, they want to pour more welfare down on them.
We don’t need to pour more welfare on them. We need to actually create more opportunity and assume that jobs are what they would prefer to have in the first place.
Are there support programs for low income Americans that you would spend more money on?
Yes. And one of them is the Earned Income Tax Credit. I think the Earned Income Tax Credit is a perfect example of something that gets incentives right, that doesn’t destroy jobs, but helps to make work pay. What we want is for more people to work honestly in a dignified way, to earn their success, and then to pay enough so that they can support themselves and support the families.
If we basically have a moral consensus that if you work hard and play by the rules–I know it’s a cliché–but if you work hard and play by the rules, you should be able to support yourself and your family at some adequate, although austere level, then we should have some relatively economically efficient system that will make that so. And the best one that I’ve seen so far, and part of the reason I think that is because the stuff you’ve written about, Jim, and Michael Strain as well – is that an expansion of the EITC so that it covers singles and families and simply makes work pay. The idea of expanding the minimum wage is insane. It destroys jobs. It primarily destroys jobs in the most vulnerable communities.
And where do you get the money for this? Are you able to find the money by cutting other things? Or do you get the money from fewer benefits for middle class people and wealthy Americans.
The government has plenty of money to pay for this and more, but we do need to start making harder decisions. This leads to another – a slightly different topic, which is what do you cut? That’s basically what you’re asking me: what do you cut?
One of the hardest things to be confronted with as a politician is to talk about the subject of entitlements. You know, it’s funny. All of the back and forth that we have in Washington, DC, about food stamps and farm subsidies and Ex-Im Bank and all this stuff, and little legitimate things to be worried about, of course, and to debate, but those are pennies. You want those dollars, you’ve got to look at entitlements, Medicare, Medicaid, and Social Security. And if you don’t reform those things, they’re going to eat our whole budget and our country will be in decline.
How do I know that? I know that because I have eyes and I can look at other countries that don’t get their entitlements under control that become insolvent. Now, what happens when a country becomes insolvent? The answer is, after a while it must impose austerity.
Next question, what does austerity bring? And the answer is hardship, not for rich people. Austerity never brings hardship for rich people. It brings hardship for poor people. And I know that for a fact. I lived in Spain for a long time. And Jim, you and I as economists look at these periphery economies and we see, for example, since the beginning of the financial crisis, suicides are up by 25% in Greece among the hard up financially. Homelessness is up a factor of two and a half, something like that.
You find that hunger and inadequate medical care are becoming very common in low income groups. What does that mean? That austerity has cut the safety net for the most vulnerable citizens. Austerity comes from insolvency. Insolvency comes from not taking care of spending on entitlements because that’s where the real money is. That’s where you get the money. And the way that you defend those decisions is by being a warrior for the programs that you really want to protect, which is for vulnerable people.
Some people are going to hear what you just said and they’re going to say it almost sounds like what Arthur Brooks thinks cutting government is somehow bad for an economy. I thought it was cut to grow. I thought if we cut government and cut spending, that would somehow unleash the private sector. I thought austerity is supposed to be a good thing. You’re making austerity sound like a bad thing?
Cutting government spending, particularly on unproductive ends, usually is a really good policy. And I am down with that. I think the idea – the problem with the stimulus – and you’ve written about this a lot, too – the problem with the stimulus spending is it just threw a bunch of money down an unproductive rat hole. You didn’t get any economic growth from that because that’s not productive.
And so cutting government spending that is not for infrastructural ends, is not for productive investment ends is a pretty good thing to do. But again, let’s think about what austerity is. Austerity and poverty programs are pennies on the dollar compared to what we spend most of our entitlement dollars on. And furthermore, when you have austerity to save money, what you’re doing is you’re saving money that will stimulate the economy largely for one group and it’s at the cost of benefits for another group.
So there’s a little bit of a cult of austerity sometimes on the right and I’m guilty of it myself sometimes. I’m a fundamentally libertarian leaning guy, where I say, people, you got to take your medicine. We’ll get our comeuppance with all the stupid, wasteful spending, all these boondoggles and nonsense in Washington, DC. You know, the boondoggle capital of the known universe. Unbelievable what they waste our money on.
And so they’ll see when they have to stop spending. Well, the problem is that people who pay are not the people who spent the money. They’re not even the people who got the benefit of all the wasteful spending generally. They’re the poor. We can afford to take care of the poor and we can afford to cut a lot of government spending, much to the – so that we can have more economic growth, that we create the jobs that would help the poor at the same time.
You don’t have to choose when it comes to this kind of austerity. You have to make smart choices in ways that actually can come out for net benefits.
To what extent you think Republicans buy this approach? I think some do. I’m guessing some don’t. When you talk to people on Capitol Hill, what is their response? Do they say, yeah, this makes a lot of sense, or do they view this as some sort of a distraction? Like, why are we talking about a new war on poverty? Why isn’t AEI talking about a new war on middle class stagnation?
One of the most encouraging things that I found is that everybody wants to be a fighter for people who are weaker than they are. Everybody wants to be a fighter for the powerless. You know, the idea of being able to fight for people who need us the most. And again, fundamentally my approach is not just expanding the safety net and handing out more welfare. That’s not the most important thing. By far the most important thing is having a productive economy that generates tons of jobs. That’s the most important thing.
The most important thing is reforming education, so it’s not stripping the civil rights away from the bottom 25% of the income distribution because the kids are poor. It’s not having these obscene licensing requirements that make it impossible to start a business if you don’t have a good education, have a friend who’s a lawyer, and speaks fantastic English, and have systematic access to the Internet.
These things are un-American and they’re wrong. These are the first things we need to take care of and only in fifth place or whatever it is should we be talking about these welfare state issues as far as I’m concerned. So make no mistake. I think I’ve got my priorities straight on all of this.
When I talk about this with policymakers, they’re really open to it. They want to be warriors. Nobody came to Washington, DC, so that they can fight for their favorite crony. They don’t say, well, I actually am kind of here for the lunches with the lobbyists. I mean, nobody’s down with that. They get a bad rap and I understand that they do a lot of dumb stuff sometimes. But fundamentally, there’re a lot of decent people on Capitol Hill. They do want to help people.
Let’s talk a little bit about free enterprise. The big competitive advantage of United States is that we have amazing entrepreneurs. But we also have a belief in the free enterprise system and that entrepreneurship will create the best possible society.
And then I see polls like one not so long ago from Pew Research, saying that among people 18 to 29, the Millennials, that 49% view socialism in a favorable light, compared to 43% who view it unfavorably. Do you feel we’re losing the battle for the hearts and minds of that generation?
Yeah. It does worry me. Although, I’m maybe a little bit more sanguine when I see polls saying that there’s – young people see socialism in not necessarily a terrible light. So Jim, you and I are in our late ’40s, sad to say, and when we think of socialism, when we think pogroms and Stalin and Castro and blood, and it’s horrible. I mean, these guys are animals. You know, what the Soviet dictators and the commies did when you and I were kids, it was the worst. It was during the Cold War and it was good versus evil, man. And we knew that.
The trouble is for people who are the age of my former students at Syracuse University; the only communists they’ve ever seen are the people who look like me. They’re bald guys with beards and glasses and who are in front of them in a lecture hall. They actually haven’t seen it. They – thank God, they didn’t grow up in the Cold War.
So socialism means something fundamentally different. It’s scarier to people of a different generation. And words take on different meanings as you go through these generations. The most important thing is the orientation that people have toward economic freedom. And there’re a lot of good studies that show that the current generation is the most entrepreneurial generation we’ve ever seen. These are people that do demand their economic freedom.
Now, they want to care for others. They see poverty around them. They want to do something. But given the national entrepreneurial proclivities of the current generation, I think we have more opportunity than ever to have a free enterprise generation, to have sweeping victories.
When I look, for example, at public opinion polling at all of these groups that trend left – women, especially single women, Latinos, 18-to-29 voters, African-Americans – when I see these groups, for example, what do they have in common? Well, not a lot.
Arthur, that sounds like almost everybody. (Laughs.)
Who is left? You and me, Jim. You and me. But when you look at these groups, what do they have in common? Holy cow, I mean, I look at Latino voters. That’s one of the things that I’m really, really interested in. The voters, what do they say matters most to them? And the answer is not just narrow economic issues. It’s not, you know, I want my social welfare benefits. They’re worried about poverty. They’re worried about how we deal with poverty. And they see one side, okay, they’re ineffective and they’re incompetent and they waste money and they do dumb things, but at least, at least the liberals say they care about people who are in poverty.
And they look at the other side and the other side seems to throw up their hands and say, look, just work for a living, you guys. It’s not adequate. If we want to reach people in this generation, we need to offer maximum economic freedom and opportunity and earn success, while at the same time recognizing that there’re some intractable problems for people who are being left behind and we have real solutions for them.
You talk a lot about language and how we talk about it. And I asked the folks on Twitter if they had any questions for you. And here is what somebody from Twitter asked: “How do you make the difficult case for the morality of free enterprise when its opponents constantly use easy demagoguery?”
It is a difficult thing to do, but only because that’s not how we’ve been trained to think. That’s not the argument that we’ve been trained to make. Here is the central irony of modern economics: one side called the political left is profoundly materialistic, but wraps itself in moral language. The other side is profoundly moralist, but wraps itself in materialistic language. That central irony is the reason that the left wins and fails. The right loses but actually could do some good.
I mean, that irony leads to all sorts of suboptimal outcomes politically. And that’s what we need to correct. When you talk to people fundamentally on the right and you say, okay, tell me why do you care about the free enterprise system. They say, well, it’s created more billionaires and – no, no, no, no, no. Tell me why do you care about the free enterprise system. Well, there’re so many jobs and you can open so many businesses. No, no, no. Stop, why do you really care about it? They talk to you about the freedom to lead a dignified life. They always tell you about their grandfather who came through Ellis Island. And believe me, he was not – grandpa was not saying, “Thank God, I’m finally in America, where I can get a good system of forced income redistribution.” Uh-uh, he was saying, “Finally, I can start my business or I can work for a living and I’m going to have some sort of a life that I wouldn’t be able to have in the old country.”
They’ll tell you about the essence, the moral essence of earned success. And this is really worthy again. If we don’t make the moral case, we’re going to lose. We’re going to continue to lose because people are going to hear us and say that these guys really all they care about is money. And that’s got to stop.
During the 2012 campaign, I remember hearing conservative pundits advise Mitt Romney to say, “I’m rich, I’m a successful businessman and I’ll make you rich, too.” And I’m thinking, people aren’t going to believe that necessarily. And is that really the message, that free enterprise will make you rich? I’m not sure that’s necessarily everybody’s number one goal to necessarily be rich. To me, that’s a perfect example of people not using the right language.
It’s wrong. It’s stupid. It’s incorrect. It’s going to lose. It’s going to lose forever. You know what, Jim? It should lose. If you want to have a properly ordered life – this is one thing I learned from studying happiness for a long time – you’ve got to follow two rules. You’ve got to follow two rules. Love people and use things. If you want to have a screwed up, unhappy life, here’s the formula: love things and use people. That’s what you do. That’s what unhappy people always do.
If we take an entire political movement, call it political conservatives, and put it at the altar of loving things – see, Mitt Romney will make you rich, too, as opposed to giving you a dignified life where you can raise your family, where your children can see you earning a living, where your kids can have a good life and raise their families, too, such that you can use things and love people. Shame on you if you’re talking this way. The reason that’s uncompelling is because it’s morally disordered to think that way.
That’s not what most people want. I hear all those stories about entrepreneurs. I love entrepreneurs. I’m crazy about entrepreneurs. They’re real American heroes. But here’s the Republican story, though, we always hear from politicians. You know, I met this guy – last week, I met a guy in Dayton. And he dropped out of school. He didn’t have any money and he was kind of screwed up and finally decided to start a sandwich shop. And he borrowed a little money and he worked hard, and it goes for a little while, dot, dot, dot, dot. And then he made $1 billion.
That’s a wrong punchline. The punchline is and then he was able to support himself. And then, he was able to take care of his family. And then, his whole family had a real sense of hope and opportunity.
That’s what this whole project is all about. That’s the reason that America is different than other countries, not because we’re richer, although we are, it’s because we actually have hope for the future, which most people in most parts of the world all throughout history haven’t.
Now, I’ll leave you with – on the subject, with one statistic that I think really brings this home. And this takes it – more than just the level of hope, this takes it to level of survival and the central morality of the system. Jim, when you and I were kids and we were – the way we understood poverty was in terms of a picture in the “National Geographic.” It’s like a kid with a distended belly and flies on his face in Sub-Saharan Africa. That was world poverty. And there’s nothing that we could do about it except offer up some prayers and put some pennies in the dish on Sunday morning. That was it. Nothing was going to happen. The world was lost – out of our grasp.
The difference between the world and poverty then and today, between 1970 and 2012, to be specific, is that the percentage of the world’s population living on a dollar a day or less, adjusted for inflation for all of you economists out there, the percent of the world’s population living on a dollar a day or less since 1970 has declined by 80%. And we know why. It’s the greatest anti-poverty achievement in the history of mankind. It wasn’t the United Nations or the International Monetary Fund or US foreign aid or the World Bank or global socialism or central planning.
It was five things. It was globalization, free trade, property rights, rule of law, and entrepreneurship. It was the American free enterprise system that started spreading around the world that has pulled billions of people out of poverty for the first time in the history of mankind. We can walk away from free enterprise and get a little bit poorer and it’s not right who’s going to pay for that. But somebody around the world will have a country that walks away from it as well because we did. And they’ll go to bed hungry or the children won’t be educated or they won’t survive.
Fundamentally, this is the reason that this is not an economic alternative, but a moral imperative.