Monday 24 June 2024

Debunking Biden’s Misguided Economic Claims: Why Welfare Recipients Do Not Grow the Economy


Welfare abuse, cartoon image courtesy of Antonio Graceffo

The Biden White House claims that illegal immigrants, asylum seekers, and welfare recipients all grow the economy, and that giving away government money ends poverty. While illegal immigrants do contribute to economic growth, they do not do so more than legal immigrants or citizens.

And the only way to truly end poverty is for impoverished people to earn more money through work. Providing welfare, while sometimes morally justified, neither grows the economy nor ends poverty.

These assertions about government transfers stimulating economic growth are unfounded, based on the false notion that increasing government debt and printing money leads to real growth. In the short run, this approach reduces the earnings of working people and creates a ballooning government debt that must be paid in the future.

Illegal immigrants, asylum seekers, and welfare recipients receive government transfer payments funded primarily by income tax paid by working people. Supporters of these payments argue that recipients stimulate the economy by spending them. While this is true, it is no more beneficial than having the original earners spend their money.

Taxpayer A pays taxes, and $10 of that money is transferred to welfare recipient B. Whether B spends the $10 or A spends it, the immediate impact on the economy is the same.

However, if B also worked and spent his own $10, the combined impact would be $20. Additionally, taxing A to transfer money to B may reduce A’s spending. Therefore, there is no net benefit to the economy from transferring A’s money to B.

The deeper economic argument, often made by those with knowledge of economics but a bias toward socialism, is that poor people are more likely to spend the money they receive, while higher-income individuals tend to save their money, which supposedly does not benefit the economy.

This concept is known as the marginal propensity to consume (MPC), which is higher among the poor, and the marginal propensity to save (MPS), which is higher among those with higher incomes. In essence, people only save money in the bank once their basic needs are met. So, the logic goes that giving money to people whose basic needs have not been met yet increases immediate spending and consumption.

Another spurious argument is that welfare payments can stimulate economic activity through what economists call the “multiplier effect.” Recipients of welfare are likely to spend a significant portion of their payments on goods and services, injecting money into the economy and potentially leading to greater economic activity than if the money remained with higher-income individuals who might save a larger portion of their income.

According to a study by the Economic Policy Institute, every dollar of SNAP benefits generates about $1.70 in economic activity. However, this multiplier effect exists for any money spent in the economy. There is nothing unique about transfer payments that increases the multiplier. If A uses money earned from work to buy groceries, the grocer earns money, which he uses to buy stock, the supplier earns money, and so on. The money travels all the way down the supply chain, benefiting everyone.

The marginal propensity to save (MPS) indicates that a worker who has already met his needs is more likely to save additional income, whereas a welfare recipient will spend it.

Socialists and some U.S. policymakers use this fact to justify welfare, claiming that savers are taking money out of the economy. This argument is flawed because money saved in the bank increases the supply of loanable funds, decreases interest rates, and makes credit more readily available.

This encourages entrepreneurs to borrow, establish new businesses, or expand existing ones, which creates jobs and grows the economy. While consumption gives a short-term boost, investment fosters long-term growth, and investment is a function of savings.

The bottom line is that government transfers do not grow the economy. At best, they create a short-term illusion of growth while increasing government debt, which must be repaid with interest.

These transfers take money from earners and give it to nonearners, creating only a temporary economic boost. While workers are more likely to save additional income, these savings support real investment that grows the economy and increases wealth in the long term. Moreover, government transfers do not end poverty. The only way to end poverty is through increased earnings from better jobs. And jobs are more plentiful when businesses can borrow money, invest, and expand.

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