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  Road to the Middle Class
Thursday April 17, 2014 
by Christopher Chantrill Follow chrischantrill on Twitter

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The Poor Without the Welfare State

The first step in the emancipation of the victim class is to raise the victims out of dependency to a secure competence.  Emancipated from the liberal plantation they may then take their place in the political life of the nation.

Suppose the administrative welfare state were to collapse tomorrow, what would happen to the poor and the traditionally marginalized that presently depend on welfare state programs for the basic necessities of life?    How would they get basic schooling for their children?  How would they obtain health care?  How would they survive a sudden loss of income from illness or accident?  Of course, we cannot know how the present dependent classes in the developed countries would fare.  But we do know, from studies of life in the Third World, how poor people in the cities live and cope with the vicissitudes of life without the benefit of a comprehensive administrative welfare state.  

But first, let us rehearse the reason we have a welfare state.  There is no better commentary than the testimony of Helen M. Todd, a factory inspector in Chicago before World War I on “Why Children Work.”1  They worked, before World War I, because their fathers were dead or sick.  That is why we have a welfare state.  To us, it is wrong that the child should be forced to work rather than go to school.  It is therefore disturbing to learn, from the children that Todd interviewed, that they did not regard themselves as marginalized or deprived. They mostly preferred work to going to school.  They hated school because the teachers treated them like morons, hit them and slapped them and kept them in at recess.  Instead of a regular paycheck that their families appreciated, they got lousy report cards that got them in trouble.

Perhaps things are not quite as simple as the welfare state supporter supposes.

We will begin with education.  Everybody knows that we need government for education.  But not in the Third World.  In third-world slums an extensive private education system flourishes today educating fee-paying students, with no government subsidy or assistance.  Its customers are the poor.

It was in 2000 that James Tooley encountered the thriving private education system for the poor in Hyderabad, India.  An education expert working on a project for the World Bank to evaluate private schools for rich kids in the Third World, he was traveling by autorickshaw through the Old City slums and kept noticing advertisements for “English Medium” private schools.  He had just seen the visible part of an iceberg of informal schools for the poor that flourish, unknown to government education bureaucracies, in slums across the world.  These schools were informal businesses that provided schooling for the children of the poor where government schools are sub-standard.  They charged fees of $2 to $3 per week and provided financial aid for the poorest of the poor, typically the children of widowed or abandoned women.  A typical school was run as a for-profit sole proprietorship, hired teachers, and serves about 200 children.  In 2003 Tooley obtained a grant to do a worldwide survey of these schools and found that they typically outperformed government schools and approached the results of formal private schools for the children of the middle class and the rich.  He published the results in his book The Beautiful Tree.

Hernando De Soto’s The Other Path: The Invisible Revolution in the Third World is the product of detailed research into the informal economy in Lima, Peru, conducted originally in the late 1980s.  It focused on three areas where informality — extralegal activity — had become a significant factor in the Peruvian economy: housing, street vending, and mass transit.  In each of these areas, the poor immigrants arriving in Lima from the Andean altiplano had developed a stylized act of violence, an “invasion,” to create a social space in which they could claim and win private property rights from the state.  Resort to violence was necessary, according to De Soto’s research, because the new immigrants from the countryside could not obtain the necessaries of life from the formal economy.  Peru’s economy was mercantilist, in the sense that the political system had politicized everything.

[The] politicization of Peruvian society means that all problems are handled primarily according to the procedures established by the government, rather than according to other standards such as economic efficiency, morality, or justice.  Everything is left in the state’s hands, and society inevitably becomes bureaucratized and centralized.  Politicization, centralization, and bureaucratization can all be traced to the same source: redistributive laws.2

In the political system, of course, the “emphasis is on reconciling different special interests, favoring those which are considered appropriate and redirecting resources to them through legal channels.”3  An “appropriate” special interest inevitably means a powerful and established “redistributive combine.”  

When the peasants from the altiplano, the fertile farmland in the Andes, started appearing in strength in Lima in the mid 20th century, the political system didn’t know what to do with them, for after all, they represented a new interest that, if acknowledged, would demand a share in the distribution of political spoils.  There was no place for them in the established redistributive state, not for employment, not for transportation, not for housing.  The peasants solved their problem in a profoundly impressive way.  They developed the tactic of “invasion,” a stylized act of collective violence, to create a beachhead into the city’s economy that the political system would be reluctant to challenge.  In housing, this invasion would involve a group of people invading a piece of unused state land and immediately occupying it and setting up temporary shelters of woven matting according to a prearranged street plan.  The members of the informal settlement would already have organized a democratic government competent to govern the settlement and perform the functions of the criminal and civil law.  In street vending, the tactic was similar.  Itinerant peddlers would “invade” an area of sidewalk to set up stalls and sell prepared food, groceries, and common consumer durables.  Eventually, the street vendors would combine to build permanent markets and move off the street.  In bus transportation, drivers would “invade” bus routes and deliver bus service to the city.  About 90 percent of Lima’s bus service was informal.

In Off the Books: The Underground Economy of the Urban Poor, Sudhir Alladi Venkatesh describes the result of his sociological research into work and life on the South Side of Chicago; it is the area just to the south of Hyde Park, where a young Barack Obama flourished as an activist and a politician.  Unskilled workers, unsurprisingly, supplement their government benefits with income from work that pays less than minimum wage and doesn’t get reported to the state welfare bureaucracies.  This is not just a question of working casually for cash.  Informal work often involves setting up a small business, defending informal ownership rights in a “pitch,” developing relationships with wholesalers, establishing credit and acquiring stock, and finding a place to store business equipment and stock.  Informal workers do not operate in a social vacuum.  They must negotiate with a variety of interests to be able to trade without harassment.  They must square with police, with formal store managers, with the people living close to their business “pitch” and must find a way to store their business equipment safely when they are not working.

In Portfolios of the Poor: How the World’s Poor Live on $2 a Day Daryl Collins and co-authors relate how the poor in third-world cities, with irregular income, manage to save money: they have to, for with an irregular income from entrepreneurial activities like street trading, they must provide against a rainy day.  Of course, these people use elite-sponsored micro-finance when they can, and the resort to regular money-lenders when they must.  But most of their savings is done by depositing monies on an interest-free basis with friends.  Why?  Because it is safer than keeping all their savings at home, and more convenient than a commercial bank.  Also, it sets up a network of trust in the neighborhood.

In The Better Angels of our Nature Steven Pinker reminds us that, while the middle class enjoys the full benefits of the peace enforced by modern government, the poor do not.  For a number of reasons their homes and their persons are not as safe as those of the middle class.  The poor are not well served by the police, who vacillate between ignoring the poor and coming down hard on them.  But the poor observe a “no snitching” rule, partly due to the mistrust of authority and partly from a genuine fear of the local urban street gang.  There is, of course, the need to maintain a distance from law enforcement when you are engaged in “off-the-books” activity.  The consequence has been, ever since the poor started migrating to the city at the start of the industrial revolution, that a proto-state develops in the immigrant ghetto; the poor are governed at a distance by the legal government, its police, and its bureaucracies, and up close by the criminal gang.  When compared with the soporific routines of middle-class life, the anomalous situation of the poor demands that the modern poor must develop street smarts and adaptation skills utterly superfluous to the ordinary middle-class worker and homeowner.

The reports detailed above give the lie to the notion that the poor represent an underclass lacking in the basic skills needed to survive in the modern world unless materially assisted by a paternalistic elite or unless organized by militant cadres of “educated youth.”  It turns out that the poor are perfectly able to form their own networks of trust, just like businessmen operating in the formal sector.  So why don’t they?

The poor operate within different constraints.  On the one hand, they can’t afford the costs and regulations that the government imposes on the formal economic sector, and consequently judge that they cannot afford to operate in the formal sector.  On the other hand, since the poor participate in the luxuriant hot-house of government benefits, they face penal marginal tax rates whenever they attempt to increase income from the formal sector.  The practical thing to do is to work “off the books” and hide their “off-the-books” income from the government so they can continue to receive their accustomed government benefits.  That way they keep their benefits and avoid the 50 to 100 percent marginal tax rates that would result from formal employment.  The urban poor improvise, with ingenuity, and often with the kind of entrepreneurial skills and determination that are celebrated in the formal business sector.

What does the informal economy look like in liberal Seattle, Washington?  Here is the story of “Hank,” a small-time contractor who builds fences.  Hank employed Mexicans, presumably illegal, and he doesn’t have a bank account, and isn’t a licensed contractor.  So we can assume that “Hank” pays his employees in cash, and probably runs most of his business off the books.  Why would he do that?  The answer is obvious.  If he were to employ formal construction labor in Washington State in 2010 he would have to pay FICA tax of 7.65 percent; he would have to pay unemployment tax of about six percent, and he would have to pay disability premiums to the State Department of Labor and Industries of $1.20 per hour.  If we assume that “Hank” pays his laborers $10 per hour, the disability cost alone is 12 percent of payroll.  Total on-the-books cost of taxes and premiums for his informal employees would be about 25 percent.  

You can see why the tolerance extended to illegal immigrant labor in the liberal “sanctuary” cities is so beneficial to marginal employers like “Hank.”  First of all, “Hank” has limited organizational skills.  Thus a cash business is highly attractive to him.  His illegal immigrant laborers actually prefer getting cash wages since they need to keep a distance from the formal economy.  And he doesn’t have to file any of the complicated forms and reports that he is barely able to understand.  Even though “Hank’s” business is shot through with illegality, it is still built on trust.  He and his employees need each other; they all benefit from his resort to off-the-books informality.

But let us think beyond the immediate needs of a marginal contractor like “Hank” and think deeper thoughts.  The point of the 7.65 FICA tax is to provide for retirement income.  According to the national myth, this money is socked away by the government in a Trust Fund and paid back as retirement income.  In fact, the politicians do not sock the money away; the Social Security Trust Fund is an accounting mirage.  The monies collected in today’s FICA taxes are used to pay today’s payments to retirees.  Any money left over can be spent on existing programs: that is to buy votes at the next election.  

But there is a bigger problem.  Even supposing that the fiction maintained by the government is true, that the monies paid in FICA taxes is sitting in a trust fund waiting for the taxpayer to retire we should ask: should a twenty-something’s savings be sterilized by the government like this?  And consider the unemployment tax that, for landscape workers, is 6 percent in Washington State.  Might not an enterprising construction worker prefer to tuck that money into his own savings account against a rainy day?  And as for disability, is this really the best we can do for our construction laborers? Charge their employers $1.20 per hour?  All these monies, that add up to $2.50 an hour for a $10-an-hour laborer, could be put to other uses.  The laborer could use the money to save up for a home.  He could save the money to start up a business, or for any other good reason.  Savings, capital, nest egg: money is fungible, and can be put to any good use.  Why is the savings of the modern laborer sterilized by the state into bureaucratic government programs?  It can’t be because the average low-paid laborer is unable to organize his life: the off-the-books literature sampled above shows that the poor are in fact highly inventive and capable.  Yet they are said to be the most vulnerable.  Are they?

Perhaps it is time for the ruling class to ask just how vulnerable and how marginal the poor and the low-paid really are.  Because if the poor are not vulnerable and incapable, then why is the power and the force of the state required to support them with welfare programs, to sequester their wages and manage their lives for them — beyond the obvious reason that most everyone, from the illegal laborer to the billionaire crony capitalist, will vote for a politician that promises him free stuff or free money?

1Helen M. Todd, McClure’s, Vol XL, “Why Children Work,” p.68 http://books.google.com/books?id=65NEAQAAIAAJ

2Hernando De Soto, The Other Path, p.191.

3Ibid., p.190.

Christopher Chantrill blogs at www.americanmanifesto.org.

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The Crisis of the Administrative State
It wasn’t supposed to be like this.

Government and the Technology of Power
If you scratch a social reformer, you will likely discover a plan for more government.

Business, Slavery, and Trust
Business is all about trust and relationship.

Freebooters and Freeloaders
The modern welfare state encourages freeloaders.

The Bonds of Faith
No society known to anthropology or history lacked religion.

A Critique of Social Mechanics
The problem with human society reduced to system.

The Paradox of Individualism
The left has always damned individualism as the celebration of selfihsness. But is it?

From Multitude to Civil Society
The larger the government, the smaller the society.

The Answer is Civil Society
In between the separated powers.

The Greater Separation of Powers
If you want to limit power then you must limit power.

Conservatism Three by Three
Conservatism, political, economics, and cultural.

The Culture of Involvement
Imagining lives without the welfare state

The Poor Without the Welfare State
Can the poor thrive without the welfare state?

The Middle Class Without The Welfare State
How would the middle class live without all those middle-class entitlements?

From Freeloaders to Free Givers
The path to the future lies through moral movements.

The Real Meaning of Society
Broadening the horizon of cooperation in the “last best hope of man on earth.”

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At first, we thought [the power of the West] was because you had more powerful guns than we had. Then we thought it was because you had the best political system. Next we focused on your economic system. But in the past twenty years, we have realized that the heart of your culture is your religion: Christianity.
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What distinguishes true Conservatism from the rest, and from the Blair project, is the belief in more personal freedom and more market freedom, along with less state intervention... The true Third Way is the Holy Grail of Tory politics today - compassion and community without compulsion.
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©2011 Christopher Chantrill