Reverse Crowd Out

What would it take to dissolve government welfare programs? Mark and I conjecture that some reverse crowding out is in order. The economic term “crowd out,” means that the state discourages private sector production of the same good or service. For example, a working paper by Hungerman and Gruber titled Faith Based Charity and Crowd Out During the Great Depression makes a case that New Deal legislation crowded out Faith Based Charities. Here are some numbers from their paper:

In 1926 churches spent more than twice as much as all governments (state and local) combined on charitable activity. By the end of the depression charitable activity in church spending had declined by at least 30%. Adjusted with the CPI the 150 million spent in 1926 becomes 1.7 billion dollars today and the 60 million dollars spent by all local and state governments adjusts to 680 million (but of course the growth of government programs means that current government spending in charitable activities is far in excess of that).

In other words, the church forfeited its mission of charity to the government. Many would say that the church is far from what it was intended to be – yes, it is still a place of worship – but – no it is not the blessing it was intended to be for the rest of the world. How much different are most of the churches we attend different than monasteries? Are our Christian identities and charitable acts mostly cloistered? What would it take for the church or private organizations such as non-profits to reclaim their former position as the chief distributor of charitable giving?

Almost true: the only people that have interaction with poorest of the poor are those in our government handing out the checks in the welfare line. We were meant to be in relationship with these people, to see them face to face. Famous economist Alfred Marshall once had a poster on the wall in his office of a homeless man, that’s because he wanted to remind himself of his motives. Who was he doing economics for?

At Marshall’s time and thereafter, the growth of government charity programs was supported by arguments that private markets failed to address the problems of Marshall’s unnamed man. But this viewpoint ignored the billions of dollars (in current terms) of church spending. Perhaps because the Great Depression was so cataclysmic, the transfer of primary responsibility for charitable programs away from churches and the federal government was accomplished with substantial majority support. But now, with years in between, economists are asking new questions.

Is our government really that much better at providing these goods? It isn’t all about the money and the taxes its about maximum impact. You can have big impact with smaller dollars. Wall Street Journal writer Julia Virtullo-Martin penned "Homeless in America," in January of this year and cited that with less resources homelessness actually decreased in several cities because of changed institutions.

I’m convinced that the only reason that government welfare programs exist right now is because people don’t believe that other people would give if it wasn’t enforced. But what if people did start to give, how much would they need to give in order to overtake the government? And because it’s not all about the money but really about the impact, how much impact would they need? Surely it has to be an equal impact but more likely it will need to be an even greater impact than the government already is having. Then when the government bows out it can move back to equilibrium. In the coming weeks Mark and I will be doing many other things but we’ll put some effort towards designing an experiment to model this idea. It feels like it’s going to be a lot of fun.