To Boost Freedom, End the Free Lunch

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One day soon the Supreme Court is going to issue its ruling on the legality of Obamacare subsidies in the 34 states which did not establish a state health insurance exchange. If the Supreme Court says the law means what it says, approximately 6.5 million Americans could lose access to federal subsidies for their health insurance. This is assumed by many to be a bad thing. At the same time, Senator Bernie Sanders (D-VT), running for the Democratic nomination for president, is proposing the government somehow make college free for everyone. At the moment, the federal government is operating over 80 welfare programs. Americans seem to be addicted to free lunches.

While the federal, state, and local governments are handing out over $1 trillion in free food, health care, phones, rent, and good, old-fashioned cash (okay, actually a new-fangled debit card) each year under means-tested programs, it is not simply the poor that are getting free lunches. Obamacare subsidies are available for a family of four earning about $95,000 per year, clearly middle class. State subsidies to public colleges flow mainly to children of the middle class.

City dwellers benefit from subsidies for mass transit; suburbanites enjoy subsidies for roads; rural residents get subsidized roads, electricity, and mail deliveries. Those of us with mortgages enjoy an interest rate subsidy from the government's mortgage underwriting.

Lose your job to foreign imports? Get subsidized job training. Want to open a factory somewhere? Get state and local governments to subsidize you. Federal research programs subsidize corporations who commercialize the resulting discoveries. If corporations are people, they are people who like free stuff just as much as all the rest of us.

The problems with all these free lunches, provided courtesy of your federal, state, and local governments, are fourfold: they are not truly free, they create horrible incentives, they breed dependency while actually being somewhat undependable, and they are virtually impossible to end.

Of course, everyone realizes that there is no such thing as a free lunch; somebody somewhere is paying. In the case of government free lunches, the taxpayer is usually the one stuck with the bill. In other cases, user fees pay at least some of the burden (think, gas tax), or the government uses regulations to force the cost onto somebody other than taxpayers (think, mandatory paid sick leave).

As to the incentives, welfare programs are the prime example. When income-limited free lunches are too generous, they create an incentive not to work or not to earn too much income as the benefits lost can easily exceed the additional income earned. Even when work is not a literal money-losing proposition, it is often not worth the effort if the welfare program benefit structure makes the implicit tax rate on earnings too high. For example, a single parent earning the federal minimum wage will lose over half of any increased earnings to taxes and reduced benefits.

Extending unemployment benefits during the recent recession caused people to stay unemployed longer (by making it affordable to wait for a better job). Subsidized water in the western states has led agriculture to become reliant on crops that consume a lot of water; California is now suffering the consequences of making water free (or cheaper than the free market would).

At the same time that government free lunches create dependency, they are not dependable. Because most U.S. public transit systems rely more on government funding than on fares from riders, during the recession, public transit systems in many cities had to cut services at the same time that economic forces were raising the demand for public transit. Ridership rose, but because cities and states were faced with falling tax revenue they cut their subsidies to transit, leading to fewer trains and busses at the exact moment that people needed them the most.

Having made millions of people dependent on government subsidies for health insurance, those subsidies could suddenly disappear in most states if the Supreme Court rules against them. During the recession, food stamp allotments were temporarily increased. When they were lowered back to "normal," howls of protest ensued about the likely onset of starving children.

The last example leads perfectly to my fourth drawback of government handouts-the difficulty of taking them away (even partially) once bestowed. The food stamp increase amounted to about $20 per month for most families, yet allowing the temporarily supplement to end involved a rather large political battle. Changing another food stamp provision that allowed people who got $1 in heating assistance from a different federal welfare program to collect more in food stamps benefits led to another high-volume fight. In London, the Conservative government faced riots when, as part of its post-recession austerity package, it reduced college tuition subsidies. Rural electrification subsidies still exist, although rural areas have been fully electrified for quite some time.

Almost half of all Americans have been removed from the income tax rolls; by paying no income tax they essentially are receiving all federal government programs other than Medicare and Social Security as free lunches (those are mostly funded by the payroll tax). By some measures, the U.S. has the most progressive income tax system in the world. Can such policies ever be rolled back (say, in the direction of a flat tax) and can free lunches ever be stopped? I fear the answer is no to both questions in most cases.

How long does a free lunch have to exist to become status quo and untouchable? Is Obamacare already there? If the Supreme Court throws out subsidies in federal exchanges, will Obamacare be effectively repealed or will Republicans be forced to reach some compromise that keeps the subsidized insurance train running?

Recent history here (food stamps) and overseas (London riots) suggests that rolling back the amount of free lunches provided will come at a very high cost in terms of social unrest, but the price must be paid at some point before we go well and truly bankrupt. Sooner is better than later because the longer we wait the more dependent those receiving the free lunches will become and the bigger the fight will be to end or reduce the freebies.


Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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