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Why Do Libertarians Support User Fees but Not a Family Wage?

| Jul 08, 2021 | Economics

If there is one thing that libertarians, free-market conservatives, and even many center-left neoliberals agree on, it is the logic of paying for highways and other forms of infrastructure out of user fees rather than general taxes. This approach, they argue, is both fairer and more efficient: fair because it ensures those who use the infrastructure pay for its costs, including long-term maintenance and repair; efficient because the amount spent on infrastructure will correspond to users’ willingness to pay.

This same logic should apply to ensuring that workers earn a family-supporting wage. Wages are to workers’ output what user fees are to highways and toll bridges. The benefits from the labor of most workers in the private sector go entirely to the customers who purchase the private, excludable goods or services that the workers provide, not to the general public.

Logically, then, libertarians who want to prevent infrastructure users from free-riding on taxpayers who do not use the infrastructure should also insist that the consumers of private goods and services pay prices, and employers pay wages, that incorporate all of the costs of the worker who provides the good or service. This would include occupational training (the equivalent of installation), regular wages high enough to pay for day-to-day living expenses (the equivalent of operating expenses) and enough extra to pay for purely private health care and to save for an adequate retirement based on purely private savings (long-term maintenance).

Contemporary libertarians and neoliberals often call themselves “classical liberals.” But two of the original classical liberals, Adam Smith and David Ricardo, took precisely the view that I am describing. They thought that customers and employers, not the general public, should pay for all of workers’ living costs.

If wages were too low, Smith worried that workers would not be able to support themselves as individuals, much less support their families. The result would be social chaos:

The lowest class being not only overstocked with its own workmen, but with the overflowing of all the other classes, the competition for employment would be so great in it, as to reduce the wages of labor to the most miserable and scanty subsistence of the laborer. Many would either starve, or be driven to seek a subsistence either by begging, or by the perpetration perhaps of the greatest enormities.

An alternative to starvation, begging, crime, and revolt was public welfare, which had existed for centuries in Britain in the form of the Poor Laws. But Smith denounced the punitive nature of the poverty relief system of his day: “There is scarce a poor man in England of forty years of age, I will venture to say, who has not in some part of his life felt himself most cruelly oppressed by this ill-contrived law.” None of these evils would exist, Smith believed, if employers paid adequate wages.

Ricardo agreed. He supported reductions in spending on poverty relief on the grounds that taxes to maintain the poor on welfare would absorb money that could otherwise go into job-creating investment and wages. What distinguishes Ricardo from contemporary libertarian and conservative advocates of welfare cuts was his assumption that wages would rise, not fall, if employers (and customers) had to pay the full price of “maintenance” for a worker.

In defining the full price of labor, Smith and Ricardo were both far more generous than today’s free marketeers. Both took it for granted that an adequate wage was a family wage that could pay for a breadwinner and a non-working parent and children—not one that paid only for “the most miserable and scanty subsistence of the laborer,” in Smith’s words.

As Smith observed, “A man must always live by his work, and his wages must be at least sufficient to maintain him. They must even on most occasions be somewhat more, otherwise it would be impossible for him to bring up a family, and the race of such workmen would not last beyond the first generation.”

In addition to thinking in terms of breadwinner wages sufficient to maintain entire working-class families, genuine “classical liberals” like Smith and Ricardo also insisted that an adequate wage was defined by standards of comfort in particular countries, not by physiological minima for survival, like 1200 calories a day.

Contemporary libertarians and free-market conservatives love to point out that the poor in America are better off in absolute terms than the poor in developing countries or the affluent in earlier historic eras. In America many poor people have phones, color TVs, and cars! What are they complaining about?

Both Smith and Ricardo rejected this argument. They defined poverty in relative, not absolute terms. Here is Smith in The Wealth of Nations:

By necessaries I understand, not only the commodities which are indispensably necessary for the support of life, but whatever the customs of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-laborer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England.

Ricardo agreed with Smith that relative poverty and social custom, not absolute poverty, was the measure of an adequate minimal family wage. In chapter five of On the Principles of Political Economy of Taxation (1817) Ricardo wrote:

It is not to be understood that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people. An English laborer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin; yet these moderate demands of nature are often deemed sufficient in countries where ‘man’s life is cheap’, and his wants easily satisfied. Many of the conveniences now enjoyed in an English cottage, would have been thought luxuries in an earlier period of our history.

Although they pretend to be “classical liberals,” today’s libertarians and free-market conservatives reject both the family wage, which Smith and Ricardo supported, and their definition of poverty in relative rather than absolute terms. Moreover, instead of insisting that market wages be adequate to make public welfare and social insurance systems unnecessary, libertarians and free-market conservatives have no objection to the existence of a welfare state that allows employers to pay wages that are too low for a single worker—much less an entire family—to survive on without taxpayer subsidies in the form of means-tested or universal welfare programs of some kind.

This makes sense if you view the thinkers, pundits, and politicians of the free-market right not as authentic classical liberals, but as inconsistent and unprincipled lobbyists for employer and business interests. To my knowledge, not a single prominent libertarian in the 20th or 21st centuries has ever argued along with Ricardo that abolition of welfare would force employers to pay much higher market wages—high enough to cover a worker’s family and the worker’s own retirement. On the contrary, libertarians often support a safety net of some kind, including Milton Friedman’s negative income tax or Charles Murray’s universal basic income—but usually on the condition that the safety net be stingy and linked to work requirements that force people to work for undesirable jobs, including those that pay below-poverty wages. In other words, the conventional libertarian welfare state is a welfare state designed in the interest of employers. Its purpose is to privatize the benefits of low-wage work for employers and customers, while socializing the costs and minimizing the bargaining power of workers with employers.

As we have seen, classical liberals like Smith and Ricardo rejected the views of wages and poverty that are orthodox on the free-market right today. But there were 19th century precedents in Britain itself for today’s American libertarian orthodoxy.

In his classic tale “A Christmas Carol,” Charles Dickens includes a scene in which the rich businessman Ebenezer Scrooge is approached by gentlemen trying to raise money for charity. The fundraisers make the same argument about relative poverty made by Adam Smith and David Ricardo:

“At this festive season of the year, Mr. Scrooge…it is more than usually desirable that we should make some slight provision for the Poor and destitute, who suffer greatly at the present time. Many thousands are in want of common necessaries; hundreds of thousands are in want of common comforts, sir.”

Scrooge irritably rejects the Smith-Ricardo argument about “common comforts” defined by relative poverty:

“Are there no prisons?” asked Scrooge.

“Plenty of prisons,” said the gentleman, laying down the pen again.

“And the Union workhouses?” demanded Scrooge. “Are they still in operation?”

“They are. Still,” returned the gentleman, “I wish I could say they were not.”

“The Treadmill and the Poor Law are in full vigour, then?” said Scrooge.

“Both very busy, sir.”

“Oh! I was afraid, from what you said at first, that something had occurred to stop them in their useful course,” said Scrooge. “I’m very glad to hear it… I help to support the establishments I have mentioned: they cost enough: and those who are badly off must go there.”

Unlike Smith and Ricardo, and like the modern free-market right, Scrooge had no objection to paying adequate taxes or donations to support a minimal, punitive, pro-employer welfare state—the Poor Law, with its treadmills and workhouses—and prisons for the poor who turned to crime. For Scrooge, as for modern libertarians and free-market conservatives, the alternative favored by Smith and Ricardo—paying every worker a family wage that enables one earner to support a caregiver spouse and children at a standard of living considered decent by their national society—was unthinkable.

If you think I am being unfair, I direct your attention to an op-ed by Phil Gramm and Mike Solon that appeared just before Christmas, on December 23, 2020, in the Wall Street Journal: “In Defense of Scrooge, Whose Thrift Blessed the World.”

If there is to be a welfare state and you take the logic of Smith and Ricardo seriously, it should mimic what rational workers, paid a family wage according to the custom of the country, would create on their own through their mutual private efforts in ideal conditions.

Such a “mutualist” welfare state might look very much like today’s universal social insurance systems of Social Security, Medicare, and unemployment insurance. It makes more sense for rational and provident workers to pool their personal “maintenance and repair” money for old age, unemployment, and sickness in solidaristic mutual insurance schemes, paid for by more or less flat contributions, than to create millions of separate, prefunded savings accounts. If the economy is working, a pay-go system in which employed workers cross-subsidize the retired and unemployed and perhaps children and caregivers will be more reliable than a system of millions of individual accounts invested in different combinations of assets, often unwisely.

Making payroll taxes the fees for participation in the mutual social insurance club has the effect of being a work requirement that deters free riders. The fact that social insurance systems are not radically redistributive is a feature, not a bug. Their purpose is to ensure that billionaires as well as low wage workers who go bankrupt have a safety net, not to transfer wealth from the rich to the poor. In short, a contributory, universal, comprehensive, and compulsory social insurance system is the sort of thing that well-paid workers in a hypothetical Smith-Ricardo economy might set up themselves.

Means-tested, non-contributory welfare poses more of a challenge than universal, contributory social insurance. In addition to the goal of providing adequate short-term relief to individuals in distress, means-tested welfare programs for working-age people can be designed to promote one of two incompatible social objectives: raising the bargaining power of workers who are between jobs in negotiating with employers, or incentivizing the “idle poor” to break their “addiction” to “welfare dependency” and join or rejoin the workforce.

While there is no doubt that a few “idle poor” exist, the majority of those who use programs like food stamps and housing vouchers are regular workers who have fallen on hard times and stop using these programs when they find jobs with adequate wages. Of the remainder, many have behavioral problems like mental illness or substance abuse and their challenges are mainly psychological and medical, not economic.

Instead of trying to address these two populations with their different problems through a single set of means-tested programs, it would make more sense to pay for the generous custodial care of citizens whose behavioral problems impede long-term attachment to the workforce out of general taxation, as a kind of state-administered charity.

This would enable safety net programs to be designed on the assumption that most who use them will do so only temporarily—allowing the programs’ design to bolster the bargaining power of ordinary workers who happen to find themselves between jobs. For example, longer (though still time-limited) periods of unemployment insurance would allow workers, including breadwinners, to “hold out” longer in negotiations with employers for a higher “reservation wage.”  As Adam Smith observed:

In all such disputes the master can hold out much longer… Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment.  In the long-run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

Now comes the final objection from supply-side libertarians pretending to be classical liberals: Won’t high wages bankrupt the economy by taking money away from investment? 

David Ricardo provides the demand-side rejoinder. Ricardo’s reputation has suffered from his identification with the “iron law of wages,” holding that wages will inevitably be driven down to the minimum needed for workers to survive. But Ricardo stressed that such a catastrophe would only occur in a stagnant economy trapped in “the stationary state”—not in a country enjoying a period of “progressive prosperity” enabled by technology and productive capitalism. According to Ricardo, wages “may, in an improving society, be constantly above” subsistence wages, because investment-driven productivity growth would permit higher profits, higher wages and higher future investment, in a virtuous circle.

The closest labor force equivalent to an infrastructure system paid for by user fees would be a system of wages high enough to pay for both the “operating expenses” (day-to-day consumption at a middle-class standard) and universal contributions to cover the “maintenance expenses” (bouts of sickness and unemployment as well as prolonged retirement) of both a worker and the worker’s family.

If you don’t agree, don’t complain to me. Take it up with the classical liberals Adam Smith and David Ricardo.

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Michael Lind is a professor of practice at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin and the author of more than a dozen books, most recently The New Class War.

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