Who is better at helping the poor: Charity or Bureaucracy? 

Almost everyone, no matter what your political persuasion, wants to help poor people. When you get right down to it, the political questions usually turn not on whether to help, but how.

I came across an interesting experiment in social entrepreneurship this week - a Panera restaurants spinoff - whose "pay what you can" model may just work feeding the hungry poor.

The national bakery and restaurant chain launched a new nonprofit store here this week that has the same menu as its other 1,400 locations. But the prices are a little different — there aren't any. Customers are told to donate what they want for a meal, whether it's the full suggested price, a penny or $100.

Who knows whether this approach will be successful. It may not succeed. It may even create a lot of dependent consumers, as government programs often do. But the point is not so much whether or not this model will succeed, it is rather that it it is able to fail. Success or failure is what experimentation is all about. When the charity sector does the lion's share of helping the poor, you get more experimentation and less bureaucratic bungling. Over time, you get more of what works. And that's a good thing. 
Government policies rarely fail or go away when they don't work. Most cause perverse effects. Failure can be unfortunate, but it usually signifies that a project isn't working, creates unintended consequences, or is consuming too many resources relative to the value it creates.
A lot of government policies are extremely counterproductive with respect to helping poor people, despite noble intentions. Some of these policies are even designed to help the poor. Consider my top six:

  1. High Taxes - Many of the resources that currently go to higher taxes would otherwise go to social entrepreneurship ventures like the one above. With higher taxes, these civil society ventures never come into existence. Of course, higher taxes also limits economic growth, as there is fewer resources available for savings, investment and growth (you know, the capital that creates jobs.)
  2. Medicaid - Sometimes, people on Medicaid get caught in "low-wage traps" which gives them an incentive not to be upwardly mobile, but rather to stay marginally employed -- lest they lose their government benefits.
  3. "Smart Growth" and Urban Planning - By artificially controlling the number of units people can build on their property, or buying up scarce land for "greenbelts" and other subsidized public works for yuppies, you artificially inflate property values for everyone else. Such properties are certainly out of the reach of the poorest people - even renters - but are often unaffordable for the working poor who could afford them otherwise. Inclusionary zoning also counts as it sets aside for the politically connected and again raises prices for everyone else. (Economist Randall O'Toole writes (pdf) that the places in the US with the strictest smart growth policies had the worst housing bubbles.) 
  4. Municipal Regulations - Sometimes small entrepreneurial ventures are at the genesis of wealth creation. Regulations intended to protect the "public interest" - e.g. bans on street vendors or regs that make it raise the cost of starting up small business - make it more likely people will become more dependent on the state.
  5. Minimum Wage and "Living Wage" Laws - When you raise the minimum wage, you raise the cost of a business to hiring that next employee not mention everyone who they currently employ.
  6. Agricultural Subsidies - We shouldn't forget about ag subsidies, since large numbers of people living in grinding developing nation poverty are actually rural subsistence farmers or dependent on them. These rich nation policies flatten nascent agricultural sectors in the poorest nations of the world and make it difficult to enter markets as a smaller less efficient farmers. 

These policies seem to be immune to the success/failure mechanisms of the philanthropic sector. But clearly these are all policies that need to be changed or scrapped. Government bureaucrats and do-gooders in the voting booth often steamroll over poor people with good intentions. And when they do, it's hard to correct the course.

The new Panera venture should be a lesson: if the government isn't crowding out the millions of experiments for affecting social change, the philanthropic sector might just do a better job helping people. But as long as government continues hogging resources for ends devised by government officials facing far different incentives than social entrepreneurs, we may never know what charity could actually achieve. Millions of experiments in social change will remain untried and untested.
Another great thing about charity is that it's entirely voluntary and feels good. If you don't redirect hand outs to Big Agribusiness or government dependency and redirected your resources to something you value more - like children's charities - men with guns would take you to jail. If you refused to pay for an ineffective charity, you'd be sending a powerful signal for that organization to change or fail.

So I leave you with a question: what if we just inverted the proportion of resources claimed by government in the name of the poor and that which goes to charity? What might America look like?

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Max Borders

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