Hailed by The Economist as a “much admired and emulated anti-poverty program”, the signature legislation of Brazil’s last president Lula da Silva was the Bolsa Família (Family Allowance) program. Aimed at alleviating the misery of the poorest segments of the population, the program provides financial aid to families and free education for children whose parents cannot afford to send them to school. The largest conditional cash transfer in the developing world comes with strings attached, though.
The eleven million families receiving the financial aid – on average $35 per month – commit to keeping their children in school, adhering to the government’s vaccination schedule, and taking them for regular health checkups. In a country plagued by persistent inequality and poverty widely blamed on an unjust system, the popularity of a program of direct wealth transfers to the least privileged should be no surprise. Still, might the superlatives expressed by the likes of The Economist have been a little overdone?
At first glance the numbers seem impressive; extreme poverty has been halved from nearly 10 percent to just over 4 percent, income inequality has fallen, and about one fourth of the population has benefited from the program. In addition, the initiative has been touted for its decentralized nature and target accuracy in reaching those in the most dire of circumstances. As Henry Hazlitt might have pointed out, however, there is more than meets the eye.
It does not take a genius to understand that since the government has no money to spend it has to fund its operations through taxation, the printing press, or by going into debt. In the long term, therefore, the Bolsa Família program cannot be said to contribute to real wealth creation. Worse yet, regardless of the preferred means of funding itself these government programs necessarily extract wealth from the private sector, thereby making society poorer in the long run. Any consumption whose origin is found in the artificial creation of illusory wealth only contributes to a reduction in living standards due to the absence of an increase in general productivity. Sooner or later the market corrects the unsustainable boom, and it’s back to square one.
The irony of government intervention, as famously pointed out by Ludwig von Mises in his critique of interventionism, is the invariable snowball effect of piling on new interventions aimed at solving the problems created by previous ones. History tells us this endless game of government whack-a-mole invariably leads to an economic and humanitarian catastrophe. But in the case of Brazil there is plenty more reason for skepticism besides the objections raised from a more academic standpoint..
The aforementioned fundamental problems are compounded by the fact that would-be contributors to real growth such as a good education system are still lacking. After all, boosting school attendance rates is one thing, creating an environment in which students can get a good education is another. In its Human Capital Report of last year the World Economic Forum ranked the Brazilian education system as among the 35 worst in the world, trailing such nations as Surinam and Botswana while just barely ahead of Bhutan and Kenya. Steady increases in government spending in the last decade have entirely failed to achieve a competitive education system even compared to other, poorer Latin-American nations.
Perhaps a cynic would call Lula’s program and his successor Dilma Rousseff’s support thereof a classical example of vote-buying through government handouts. That might not be so far off.

Join the discussion 4 Comments

  • Carl Milsted says:

    Um. Banks and stock markets don’t create wealth directly either. They “merely” allocate it. So:
    1. Either banks and stock markets are parasitical entities as the conspiracy theorists say
    2. It is theoretically possible for government to create wealth through reallocation.
    Personally, I think banks and stock markets can be useful. And yes, governments sometimes successfully fill in for market failures — where the profit motive fails to properly incent the financial markets. Granted, governments very often fail at this task. By all means point out those failures, as statists love to overlook them.
    But cutting extreme poverty in half is pretty fscking awesome. Seems to me like the government of Brazil got one right for a change.

  • Carl, I’m sorry but your first argument sounds like a non sequitur to me. I don’t think banks and stock markets – in a free market – merely allocate wealth; they can support wealth creation by investing in start-ups, for instance. But even if I accepted the argument that banks and stock markets merely allocate wealth that is beside the point about government’s inability to create wealth.
    Cutting extreme poverty in half is great if it is done by making society more productive – otherwise it is unsustainable. The problem is not just that government extracts resources from the market in the here and now but also that sooner or later the taxation/inflation/sovereign debt chickens come home to roost. In the case of Brazil it seems the government is using a combination of the three.. As a result taxes are sky-high, prices are pushed up by inflation, and the unborn are already in debt before they’re even conceived. While the poor pay little in taxes they are disproportionally affected by higher prices, and nothing is being done to improve their ability to move up the social ladder; schools are terrible and the War on Drugs makes smuggling much more lucrative than more socially acceptable ways of making money.

  • Carl Milsted says:

    Banks also provide transaction recording services, cash storage, and sometimes toasters. But still, the key way banks make money is by figuring out who to loan money to. They allocate capital and get paid for this service. Likewise, those who correctly pick stocks get paid, even though they are not the ones who write code, build cars, drill for oil, etc.
    Reallocating wealth can create wealth — or destroy wealth. When you take wealth from the hands of the productive, you indeed reduce their productivity and reduce production. However, when you take wealth from the well off and give it to the impoverished, that wealth goes to higher priority uses. Utility increases. This is an artifact of the Law of Diminishing Returns. A marginal dollar to the impoverished in the favelas is worth far more utility than it is to Bill Gates — which is why Bill Gates is giving away most of his billions.
    Such arguments are indeed abused by the Left when they call for punitive taxation on the rich and/or outright socialism. But these arguments do start with a kernel of truth. Pure capitalism is not the utilitarian maximum. Up to a certain point, wealth transfer to the poor can increase total utility.
    Here in the U.S. those transfers are ineptly done. Need-based welfare programs discourage productive activity. The Earned Income Credit is malevolently complex.
    Nearly pure capitalism tempered by taxes on externalities and a Basic Income Guarantee would have a much higher utility than pure capitalism.
    If you wish to make a religious argument against such an arrangement, you might succeed, depending on religion invoked. But you invoked something akin to a utilitarian argument, and failed laughably, which makes libertarianism look bad. Thus my quibbles.

  • I don’t see how the argument failed as it is a factual statement: government can’t give you anything it didn’t first steal from someone else. I think capitalism’s track record of improving the lot of the poor is infinitely better than that of government, the institution that killed some 260 million in the last century alone outside of combat and ruined the lives of many hundreds of millions more.
    Regardless of the practical outcome of wealth distribution “for the greater good” though, I oppose aggression against people and their property and that includes taxation. There’s no need for a religious argument, this is simply arguing from morality.

Leave a Reply