[nickff]

Some see the main problem here as being moral hazard, which causes social welfare programs to become very expensive, with most of the resources going to people who have been lured in by the promise of 'money for nothing'. This is a normative argument which is what I think you are critiquing here.

I would put forward another criticism of need based programs which is positive, and has recently been made with increasing frequency. This argument is that the nature of many programs induces dependence among the recipients; the principal example of this being US federal disability benefits. These benefits can be permanently forfeited if the recipient earns more than a given amount over a certain time frame, which forces the recipient to consider trading in a long term cash flow (disability benefits) for greater income with uncertain future prospects (a job). The result is that many people with difficulty working, who could do some limited work are disincentivized from ever taking a job; this is especially apparent during recessions. [ http://economics.mit.edu/files/7388 ]

The other problems you can have when you begin to hand out government aid are moral ones, which you may agree with. Those who are lazy and collect benefits get to take from those who work hard; even more troubling is that the workers have no way to force the slackers to do anything, while the slackers can use regulation and taxation to manipulate the workers. This argument does not address people who are unable to support themselves.

[SapphireSun]

The real problem with these programs is that they are designed with a hard cut-off point rather than reducing the compensation at a slightly slower speed than private employment ramps up. For instance our tax system works in a rational fashion: you pay say 0% on the first 8k, 10% on the next several thousand and so on. In this manner, you are never disincentivised from trying to get more money because it's always positive (though more inefficient money accumulation wise).

What I don't understand is why we don't have programs (say unemployment benefits) where when you finally get work, the money you earn above the cut off replaces need based compensation dollar for dollar until you're free of the system. It makes no sense to cut people off the soon as they get a job when the job pays less than the program.

[nickff]

You're talking about what has been called a "negative income tax"; the idea has a long history, but was popularized in the USA by Milton Friedman. A form of this was implemented as the "earned income tax credit", but only as a supplement to traditional welfare programs.

http://en.wikipedia.org/wiki/Negative_income_tax

[SapphireSun]

Thank you for the link!