WHAT COMES AFTER THE WELFARE STATE?
Today the welfare state is omnipresent in every part of the United States. The federal budget is dominated by entitlement spending, with 45 percent of federal spending in 2012 going to Social Security, Medicaid, and Medicare (among other health care entitlements). Simultaneously, the states are struggling under the fiscal burdens imposed on them by mandatory entitlement programs: spending by the South Carolina Department of Health and Human Services (primarily on Medicaid) has averaged $1.21 billion over the last three budget years. Yet the federal appetite for entitlement spending is far from sated – consider Obamacare – and if history is any guide, we can expect more entitlement programs in the future.
The historical increase in spending has of course been accompanied by a rising portion of Americans who use these entitlement benefits; the Wall Street Journal reported that as of early 2011, 49.1 percent of the population lived in a household where at least one member received government benefits, up from 44.4 percent in late 2008. Further, the size of these programs perpetuates a cycle of dependency as the total benefits package of the average welfare family is actually larger than the average salary of jobs that pay higher than the minimum wage.
The history of Mutual Aid Societies
Before the rise of the modern welfare state and our current onerous level of societal regulation, aid to citizens in need was provided on a large scale by the private sector. There’s no reason to believe that if this combination of regulation and state benefits were pared back, the spirit that animated private giving in pre-welfare state generosity wouldn’t return.
Indeed, for much of the history of the United States when individuals needed aid, they turned first to family and communities. The private safety net to which individuals would turn took the form of what are often called fraternal or mutual aid societies. Mutual aid societies were voluntary organizations (separated into lodges) to which members would pay dues and that in turn would provide needed benefits and instill in their members a sense of community and civic virtues such as thrift and self-reliance. These societies provided such diverse services as orphanages, hospitals, medical care, homes for the elderly, and scholarships. It’s estimated that a third of all U.S. men belonged to a mutual aid society in 1910.
Through the pooling of resources, mutual aid societies were able to provide services to their members at a rate far cheaper than they would be able to receive on their own. One striking example is in the societies’ provision of health services. Lodges would often enter into contracts with physicians to provide regular on-call service to lodge members for a set salary over a specified time. In the early twentieth century, individual lodge members would typically pay about $2, around a day’s wage, as their share of a year’s worth of medical care. In contrast, non-members typically paid around $2 per doctor’s visit during the same time period. The lodges would prevent abuse of the system and related increases in the cost of the contract by self-policing overuse of the benefits.
While they were highly popular and prevalent at the turn of the twentieth century, they began to experience problems around the same time that government benefit programs began to expand.
Programs providing mothers’ pensions and workers’ compensation expanded rapidly between 1920 and 1930. The true explosion in growth of the welfare state would occur, of course, in the 1930s with New Deal programs like Social Security.
As early as 1915 one mutual aid society, the Fraternal Order of Eagles, complained that “the State is doing or planning to do for the wage-earner what our Order was a pioneer in doing eighteen years ago. All this is lessening the popular appeal of our beneficial features. With that appeal weakened or gone, we shall have lost a strong argument for joining the Order; for no fraternity can depend entirely on its recreational features to attract members.” By the 1930s, orders such as the Security Benefit Association began to close down orphanages and homes for the elderly, citing a lack of demand, as individuals were increasingly going to the government for those needs.
The problem of regulation as it relates to mutual aid societies began in the early twentieth century when medical boards (under advice from the American Medical Association) began refusing to license large numbers of medical universities. This move dramatically reduced the number of legal universities and drove up medical costs. Many licensing boards also threatened to take away the license of doctors who participated in lodge contracts, which many of the powerful medical associations disliked because they kept physician wages in check. By 1919, 40 states had enacted what was known as the Mobile Law, which required mutual aid societies to keep financial reserves at a level at which they were unaccustomed. The law also required a doctor’s examination for all lodge members, largely removing the societies from the group insurance market, which offered insurance to large groups without medical examinations.
The twin problems of lavish and expensive government benefits and burdensome regulation persist today. Indeed, as if to memorialize the aid societies effectively squeezed out of the market by government, a section of South Carolina’s law code still regulates fraternal benefit societies.
None of this is to claim that mutual aid societies somehow made poverty and injustice negligible components of human society. The point, rather, is that the welfare state promised to accomplish precisely those ends, failed miserably, and saddled generations with dependency and debt. Mutual aid society at their height may not have created utopia, but they achieved remarkable benefits for millions of people without coercion or confiscating anyone’s wealth.
What can be done to restore private aid?
There are two major reforms that would go a long way towards restoring the viability and widespread availability of mutual aid societies in particular and private aid in general.
First, the General Assembly can pass a law a clearly defining a contractual process for South Carolina’s acceptance of federal funds. The contract process would require elected officials to explain precisely and in detail how the acceptance of federal money would affect the state, including: the cost to citizens freedoms, new restrictions on citizens or state authority, new government positions created, new regulations, duplication of private sector services, and how businesses will be notified of new regulations created by accepting the funds. If such a process were codified, the number of federal dollars flowing into the state would almost certainly dramatically decrease. That, in turn, would reduce the “crowding out” effect whereby government funding makes beneficial private activity redundant.
Second, the legislature should repeal Title 38, Chapter 38 of the South Carolina code of laws, referred to above. The code section regulates the administrative procedure by which the fraternal benefit societies must be run (bylaw changes must be approved by the director of the Department of Insurance), the number of members and funds they must possess, how they disburse benefits, how they invest their assets, and much else. Of course, all societies that issue any kind of insurance certificate (with a few minor exceptions: societies limited to one hazardous occupation, grandfathered military societies established prior to 1880, etc.) must also be licensed to operate by the state and have all their agents licensed by the state.
Not until the welfare state is cut back and burdensome laws repealed will citizens have the freedom to reestablish private aid on a large scale. Such a system would be superior to our current welfare state in a number of ways.
- Those in need would be able to be part of and speak with a private organization that could cater to their personal needs rather than forcing them into a one-size-fits all system of benefits that the state provides.
- The community fostering aspects of aid societies and private aid in general would also serve to lessen the resentment and class conflict created by the current redistribution system. This is because all members would pay small dues to the society and therefore everyone would be seen as having skin in the game.
- Those giving aid (through the medium of benefit payments from the society) would do so voluntarily and would hence feel a sense of pride that they do not receive from paying taxes; and those receiving aid would have visible human benefactors to whom they would feel grateful and would likely wish to repay, if not through monetary means than through demonstrations of improvement.
- Being part of a permanent support group would also likely prevent many from falling into a long term state of poverty by both the quick and personalized aid that would be available and the connections that could be leveraged for new opportunities.
- A larger degree of aid being voluntary would serve to reduce the distorting economic effects of forcible redistribution.
The welfare state has had a lengthy and unsuccessful run in America. The war on poverty has in 50 years barely budged the poverty rate, and for all the pronouncements on ObamaCare the program is expected to leave millions uninsured (not to mention the often ignored fact that health insurance is distinct from actual medical care). It’s surely time that we allowed private individuals to once again take on more of the provision of aid to those most in need.