April 15, 2013
by Bill Frezza
Poverty Professionals And The Crony Capitalists Who Love Them
Yes, it looks like a wedding announcement out of The Onion, but when it comes to making a killing off the never-ending “War on Poverty,” the marriage of convenience between the financial services industry and federal bureaucrats is no laughing matter.
The idea that government welfare programs could eliminate poverty, rather than temporarily alleviate its worst impacts during hard times, took root during Lyndon Johnson’s Great Society initiative. From modest beginnings, a panoply of federal welfare programs expanded and multiplied to the point where they now consume one-sixth of the federal budget—some $588 billion last year, according to the Congressional Budget Office.
This is a lot of spending—even by contemporary standards—and this figure doesn’t even include the current explosion in unemployment benefits, as these are considered social “insurance” payouts rather than welfare. Nor does it include Social Security or Medicare, our largest and most rapidly growing federal expenditures. To make matters worse, these programs, which were designed to keep the elderly out of poverty, are entitlements not yet subject to means testing, so payments go to rich, middle class, and poor alike.
With anti-poverty programs enjoying meteoric growth thanks to the economic policies of the current and previous administrations, we may someday look back fondly on the days when we “only” had to fork over half a trillion a year to support the longest and least successful “war” in American history, with no sign of stopping.
How many civil servants with good pay and benefits does it take to do all this poverty fighting? Try as I might to discover the answer I finally gave up, surprised that I couldn’t locate a definitive study enumerating the number of federal, state, and government-funded private employees whose livelihood depends on administering the ever expanding stream of tax dollars flowing to the poor. Is it any wonder that these entrenched bureaucrats have managed to slowly expand the definition of poverty to include a standard of living that would have been considered middle class back when the war on poverty started?
I didn’t do much better in trying to figure out what fraction of the money appropriated to be given away is consumed in administrative overhead. For most private philanthropic organizations, you can easily get that number by looking it up in Charity Navigator, but good luck uncovering it for most government programs. (If someone out there knows of a comprehensive study containing the administrative costs of all government means-tested programs please pass it on.)
What impact does this have on the economy? If you listen to Keynesian economists, giving away money is the easiest way to make an economy grow! That’s because when that money is spent on goods and services it fuels aggregate demand, which pumps up the Gross Domestic Product (GDP). Just like the cleanup from hurricane Sandy, expanding welfare programs creates economic vitality, never mind that both hurricanes and welfare drain money from other parts of the economy. So don’t even think about asking all those people who make a living giving away chunks of your paycheck to do something productive instead. Keynesians will warn you that such reckless austerity will drive us into a depression, just like firing all those government workers did in Greece.
It’s not just government employees who profit from this growing sector of our distorted economy. Today’s food related anti-poverty programs, such as food stamps and foreign food aid, were created during the Great Depression more to help American farmers than the poor. Today, agricultural interests are still among the biggest advocates for these programs, but other industries are learning that they too can make a buck by promoting America’s war on poverty.
It takes big business to process the distribution of so much “free” money, and that’s where the financial crony capitalists come in.
Consider the Supplemental Nutrition Assistance Program, otherwise known as food stamps. One in six Americans now use the Electronic Benefit Transfer (EBT) cards that replaced the old printed coupons to purchase everything from groceries to fast food. Three card processing contractors, J.P. Morgan, Affiliated Computer Services, and eFunds make money every time they swipe. With $85 billion in swipes last year, the numbers add up.
Details are hard to come by as they are not broken out in earnings reports, but a 2012 study from the Government Accountability Institute “Profits From Poverty” indicates that since 2004, 18 of the 24 states that contract with J.P. Morgan to provide welfare benefits have paid over half a billion dollars in fees. That may not sound like much relative to the size of some of these firms, but it provides a nice steady income for an industry happy to shower members of the House and Senate Agricultural Committees with annual campaign donations now exceeding $300,000 per year.
Yet it doesn’t seem like the poverty professional have much reason to worry. A record-shattering 50 million Americans now live below the poverty line, a number likely to grow as Obamanomics drives more people out of the work force and onto one assistance program or another. What could be better for the myriad civil servants and wing-tipped bankers who dole out benefits as ever more “clients” join the ranks of the poor and unemployed? While the Bible observes that the poor will always be with us (Matthew 26:11) it sure didn’t count on the millions more making a living off their misery.
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Bill Frezza is a fellow at the Competitive Enterprise Institute and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here. If you would like to have his columns delivered to you by email, click here or follow him on Twitter @BillFrezza. If you would like Bill to speak at your event or conference drop him an email at bfrezza@cei.org.