"The progress of man's welfare"
Milton Friedman, liberalism, and the negative income tax: An excerpt from the new biography by Jennifer Burns.
Adapted from Milton Friedman: The Last Conservative (Macmillan, 2023).
In the spring of 1947, as his inaugural year teaching at Chicago wound down, Milton Friedman took his first trip out of the country, crossing the Atlantic on the ocean liner RMS Queen Elizabeth to attend the first meeting of the Mont Pelerin Society. The conclave had been organized by Friedrich Hayek, the Austrian economist whose 1944 book The Road to Serfdom had proved an unexpected bestseller in the United States, giving Hayek a platform to revive what he saw as the flagging classical liberal tradition.
Friedman’s group stopped briefly in London and Paris before arriving in the small lakeside town of Vevey, Switzerland. A funicular railway pulled them up to the mountaintop hamlet of Mont Pelerin. The conference was held in the belle époque Hotel du Parc, graced with a stunning chandelier in the lobby and views of Lake Geneva from the front terrace. Here they joined an eclectic group, including the British economist Lionel Robbins and the philosophers of science Karl Popper and Michael Polanyi.
In a discussion of the group’s agenda, Friedman argued that liberalism should be “dynamic and progressive. We want to make sure that our manifesto is concerned in the progress of man’s welfare.” Similarly, Friedman’s brother-in-law and fellow economist Aaron Director began the meeting with an address that emphasized the “humanitarian tradition of liberalism,” yet noted serious conflicts “between what liberals consider the social interests and the results of free enterprise.” The problem the society needed to address was that “the liberal had no solution to offer derived from their fundamental philosophy.”
Friedman offered a specific example of an updated liberalism, touting the idea of “progressive negative taxation.” The idea of setting some sort of income floor under the poorest Americans had long been part of Friedman’s thinking. In fact, the very first policy proposal he ever crafted was for a guaranteed income in 1939, at the tail end of the Depression. The idea had bubbled up in conversations between Friedman and the Swedish socialist Gunnar Myrdal, later famous for An American Dilemma: The Negro Problem and Modern Democracy. In the late 1930s, both men were part of a broad universe of scholars orbiting around Columbia’s economics department. A long weekend conversation about poverty yielded “a plan for guaranteeing a minimum income to all,” as Friedman titled a follow-up paper.
The never-published paper was a revealing window into Friedman’s early thinking about poverty. In one version, he began with a biblical allusion—“the poor are always with us”—before asserting that “poverty is reprehensible no matter whom it hits. It should be attacked by general measures.” The advantage of a guaranteed income, he argued, was its very generality. Programs aimed at specific groups both “involved detailed intervention into economic activity” and “leave large groups unaided.” In an extended version, Friedman drew on his background at the Study of Consumer Purchases to argue that breakthroughs in consumption economics and nutrition made it possible, for the first time ever, to arrive at an “objective method of determining a ‘minimum standard of living.’” The minimum income could be pegged to the nutritional needs of a family and therefore calculated scientifically.
At the first meeting of the Mont Pelerin Society, Friedman insisted poverty was a critical issue for the group to tackle. “No democratic society is going to tolerate people starving to death, if there is food with which to feed them.”
At Mont Pelerin, Friedman offered several reasons why a minimum income was a liberal policy. “This would give an incentive to getting additional income,” he argued. Here, Friedman seemed to be thinking of the traditional poor law, which removed benefits as income increased. By contrast, his approach provided a guaranteed minimum that could supplement any earned income. At the same time, Friedman stressed this approach would act as a “substitute, not as an addition, to present social policy,” while noting that essential social services, such as “funds for orphans,” would continue. This was important because cash grants would avoid the private-market impacts of public-sector job and relief programs. Finally, he suggested that individual income support would have positive macroeconomic consequences: “If you manage to have a liberal society with this flexibility, it would be very good from a cyclical point of view.” When wage earners fell beneath the basic-income line due to recession, they would find their income supplemented, stanching the deflationary spiral. In good times, the income supplement would be needed by far fewer people.
Throughout the meeting, Friedman insisted poverty was a critical issue for the group to tackle. Partially this was because other proposals to raise low incomes—like labor unions—had negative consequences for the competitive order. But he also insisted that poverty was a basic social reality liberals needed to address. “Even if we had completely free access to different employments, and to capital, there would still be the problem of poverty,” he told the group. Amplifying his thoughts, Friedman asserted: “Men are not born equal … There are definitely people who cannot earn, in the marketplace, an income even that we could consider to be a minimum.” But Friedman went on to discuss this vexing social problem in an engineering idiom, noting, “Other people have to pay for this help. Therefore we have progressive taxation. No democratic society is going to tolerate people starving to death, if there is food with which to feed them.” Was this a good thing or a bad thing? Friedman presented it as a basic social fact, drained of ethical content.
Aside from touting it at Mont Pelerin, Friedman didn’t do much with the minimum income idea for decades. But he included it in Capitalism and Freedom, his 1962 general-audience manifesto, where the idea appeared as a negative income tax – or NIT. As Friedman framed it, the NIT “would fit directly into our current income tax system and could be administered along with it.” He laid out a few scenarios in which existing welfare programs could be repurposed into cash grants to the poorest 10 percent, 20 percent, or even 30 percent of Americans.
By the mid-1960s, the time was ripe for a new policy addressing poverty, of whatever vintage. The NIT appeared to straddle the divide between John F. Kennedy’s growth liberalism, in which a rising tide would lift all boats, and newer, structural understandings of poverty that emphasized persistent disadvantage. Its greatest advocates were economists, who appreciated its efficiency and the potential stimulus effect of cash. But it could also be advertised as a civil rights idea—despite the fact that leaders of major civil rights organizations favored structural remedies, such as a higher minimum wage, public works programs, or anti-discrimination legislation. Many observers also believed that if automation had fundamentally changed the labor market, a cash grant might help. “Because of the onslaught of automation, class boundaries are becoming more rigid,” summarized a Cornell student in an essay on poverty that jumped off from Friedman’s proposal. “Without a diploma or at least some technical training there is little hope or opportunity.” Whatever the concern, be it lack of purchasing power, a flawed labor market, or the onslaught of technology, cash grants seemed to strike at the heart of the problem with clarity and directness. The very simplicity of a cash transfer disguised the policy’s tendency to be all things to all policymakers.
What made Friedman’s NIT so ideologically unique was its fundamental grounding in economic theory. True, celebrations of the free market and ritualized distrust of government had long been important to American conservatives—part of the folk vernacular, or “Main Street” conservatism, as The Washington Post called it. But these had been intuitions or instincts or reactions, unformalized and rarely, the Post noted, “expressed as a complete system.” By contrast, Chicago price theory translated these normative beliefs into a coherent logical system with efficiency at its core. Importantly, price theory lacked the more obvious moral content of conservatism—the judging, censure, and condemnation. Indeed, when introducing the idea in Capitalism and Freedom, Friedman called the NIT an “arrangement that recommends itself on purely mechanical grounds.” And he emphasized that the NIT, unlike other remedies such as a minimum wage, did not “distort the market or impede its functioning.” Rather, the NIT intended to bolster low-income Americans’ participation in market exchange.
Friedman argued that the present system involved an “‘intolerable degree of paternalism,” transforming social workers into “police officers and spies.” By contrast, the mechanistic NIT would leave the poor with their dignity and privacy intact.
At the same time, Friedman’s NIT did have veiled moral content—a dedication to individual freedom, that “delicate flower” which Capitalism and Freedom praised in its opening pages. At a basic level, as Friedman openly noted, the NIT let the market be, honoring one of his core principles. But in his public discussion of the idea, he developed another idea latent in Capitalism and Freedom. At a U.S. Chamber of Commerce symposium, Friedman argued that the present system involved an “‘intolerable degree of paternalism,” transforming social workers into “police officers and spies.” By contrast, the mechanistic NIT would leave the poor with their dignity and privacy intact. This was not mere window dressing; Capitalism and Freedom was suffused with a general horror of anyone telling anyone else what to do. But in typical conservative rhetoric it was businessmen, not welfare recipients, who felt the brunt of federal force. Friedman loved to flip the script by pointing out plenty of businesses took “welfare” from the federal government but were not judged. Why couldn’t poor individuals do the same?
Friedman did admit that a cash grant could impact incentives. Potentially, it could turn recipients into “a gaggle of lazy bums,” as The Washington Post mused. But he also noted an income subsidy might make work more attractive: “An extra dollar earned always means more money available for expenditure.” The suggestion that a cash grant might have a salutary effect upon the recipient—perhaps even strengthening rather than sapping the work ethic—represented another striking departure in American discussions of poverty. On some level, Friedman recognized the durability of old attitudes. In public forums, he made an important modification to the proposal: capping the grant at 50 percent of a specified income level. The recipients would get not a free ride but a subsidized one.
Friedman’s NIT wore its radicalism openly, promising to sweep away the old apparatus of state support and replace it all with a price mechanism. True, in the first blush of excitement over a new idea, this aspect of Friedman’s NIT was often overlooked. Johnson administration staffers generally presented the NIT as an add-on to current or even expanded government programs. By contrast, Friedman hoped it would ultimately shrink the size of government. He never hid this aspect of his proposal. Nor did he emphasize his profound differences with liberals, preferring instead to keep the conversation going. Over time, this gap between left and right would prove fatal.
For all the press, the NIT never became a centerpiece of Johnson’s anti-poverty program. First out of the gate were “services” programs in the model of New Deal liberalism, like Head Start and Community Action. Further innovation was foreclosed by Democratic losses in the 1966 congressional elections, and by Johnson’s declining popularity. Driven by the optimistic hopes of the administration’s early months, the NIT fell into temporary neglect as the political mood changed.
The next big push for the negative income tax came not from the center-left, but the center-right.
Richard Nixon’s Family Assistance Plan (FAP), the eventual name of the shifting proposals that incorporated the NIT, sought to address the so-called welfare mess. Over the 1960s, caseloads in the nation’s signature welfare program, Aid to Families with Dependent Children (AFDC), had exploded. Influential governors and mayors, whose budgets bore the brunt, were begging for fiscal relief. The original FAP would have federalized much welfare and established more uniform nationwide benefit levels. Its most revolutionary idea, however, was to extend eligibility to working families, not just the unemployed. Nixon hoped to defuse the idea that federal programs only benefited poor African Americans at the expense of white taxpayers. Crucially, benefits would come as cash (or government checks), with the amount linked to income.
Nixon’s proposal owed much to Friedman—but it was also touted by another man, Daniel Patrick Moynihan. Rumpled and professorial, favoring cable-knit sweaters over a suit and tie, Moynihan came with a long history of government service and almost as long a history of controversy. A former cabinet-level appointee in the Kennedy and Johnson administrations, he had inflamed liberal opinion with a 1965 report on African-American family breakdown that was widely read as blaming the victim. Moynihan retreated from the heat to a position at Harvard. A few years later, while still remaining a Democrat, he agreed to join Nixon’s administration, chairing the Urban Affairs Council. He knew all about Friedman’s negative income tax, which he called “a spanking good idea, with much of the clarity and symmetry of the economic vision of the time.” Although Moynihan did not have a direct hand in the original proposal, he quickly became a supporter.
But not all of Nixon’s advisers were so enthused. The economist Arthur Burns, a counselor to the president whom Friedman had long seen as a mentor, thought his student had gone astray. In his private diary, he vowed to quickly end the “mad adventure” of a guaranteed income, which he called “reminiscent of the social dreaming and histrionics of FDR.” In a long memo, Burns’s staffer Martin Anderson offered a history of British poor laws, alleging they had destroyed those they intended to help: “Their productive capacity was drained, their independence destroyed, their self-respect shattered.” Then Burns countered with his own proposal, calling for expanding AFDC, requiring welfare recipients to work, and establishing a vast network of government run day-care centers. It was a proposal antithetical to the views of Friedman on every dimension, from its punitive approach to its call for a vast new federal program.
The original NIT vision soon received reinforcements from Secretary of Labor George Shultz, a confidant of Friedman’s since their time together on the Chicago faculty. Shultz and Moynihan crafted a compromise plan that added work incentives to the FAP. Where Burns wielded the stick, Shultz offered a carrot. In the existing system, earned income reduced benefit levels. To Shultz this was perverse; no wonder once on welfare, people stayed there. Under the revised FAP, income was partially sheltered from taxes and benefit reductions. Following Friedman, Shultz hoped to make work pay. Burns counterattacked with a doomsday memo warning the plan would endanger “the moral fiber of America” and trap “self-reliant working people in a state of dependency.” Eventually the administration proposed legislation that mushed together elements favored by Shultz, Moynihan, and Burns.
Amid the sausage-making, Friedman himself lost enthusiasm. Having no idea of Burns’s role, he saw the final FAP proposal as old-fashioned logrolling. Food stamps had been added in to satisfy “the well-fed farm bloc,” he fumed in Newsweek. Worse of all, when food stamps and state supplements were combined with the FAP, “many families would be better off to earn less than to earn more,” Friedman argued. This was the problem Shultz had tried to solve; given variations in state programs, he had not succeeded in all cases, as Friedman demonstrated with a simple chart.
Ultimately, the FAP made it through the House of Representatives, before stalling in the Senate. There were multiple reasons for its failure. As a creature of both the left and the right, the FAP ended up politically homeless, with no clear champions and opponents from both sides. Built into the policy was a contradiction: The FAP criticized the existing welfare system even as it proposed to expand it. Finally, the active opposition of Burns was devastating. His objections reduced Nixon’s willingness to flaunt the program’s innovations, meaning it emerged into public view as yet another flawed welfare program.
Jennifer Burns is Associate Professor of History at Stanford University and a member of the Niskanen Center advisory board. Her first book was Goddess of the Market: Ayn Rand and the American Right (Oxford, 2009). She tweets @profburns.