Mobility, Safety Nets & Sticky Webs

23 Thursday Jun 2016

Posted by pnuetz in Big Government, Welfare State

Tags

Affordable Care Act, Andrei Schleifer, Basic Income Guarantee, Christopher Jencks, Curley Effect, David Henderson, Dependent Class, Don Boudreaux, Earned Income Tax Credit, Edward Glaeser, Employment Incentives, Extreme Poverty, Henry Hazlitt, Kathryn Edin, Labor Force Participation, Luke Shaefer, Marginal Revolution, Medicaid expansion, Michael Tanner, Milton Friedman, Mises Wire, Obamacare, Social Safety Net, Tyler Cowan, Universal Basic Income, Veronique de Rugy, War on Poverty, Welfare State, work incentives

We’re unlikely to reduce the share of the U.S. population living in economic dependency under the current policy regime. So many aspects of tax law, regulation and aid programs are designed as if to perpetuate or perhaps even worsen the situation. I’ve discussed this topic before on Sacred Cow Chips in “Degrees of Poverty and the Social Safety Trap“, and “Minority Politics and the Redistributionist Honey Trap“.

Many supporters of aggressive anti-poverty efforts take umbrage at any suggestion that government aid might discourage the poor from engaging in productive activities. They imagine an implication that the poor are “lazy”, perfidious or otherwise undeserving of assistance. Whether that is a misunderstanding or merely rhetorical bite-back, the fact is that it is rational to respond to incentives and there is no shame in doing so. Unfortunately, many assistance programs contain incentive traps or income “cliffs” that discourage work effort. This applies to food stamps, rent subsidies, Obamacare subsidies, and many more of the 120+ federal aid programs and other state and local programs.

Here’s a new example from a research abstract posted at Marginal Revolution: The Medicaid expansion had very negative effects on labor force participation. The funding for Medicaid expansion at the state level was authorized by the Affordable Care Act (ACA) — aka Obamacare, but only about half the states went along with it. From the abstract:

“I find a significant negative relationship between Medicaid expansion and labor force participation, in which expanding Medicaid is associated with 1.5 to 3 percentage point drop in labor force participation.“

The direction of impact is hardly unique, and as Tyler Cowen notes at the link:

“Work is good for most people, and it is even better for their future selves, and their future children too.“

The negative impact of Obamacare is more massive than the estimate above might suggest. Veronique de Rugy at Reason.com discusses how “Federal Programs Keep People Poor“. While most of her article is about the negative impact of high marginal tax rates on the employment prospects of the poor, she also recalls an ugly CBO estimate of the ACA’s impact:

“In 2014, the Congressional Budget Office—Congress’ official fiscal scorekeeper—revised its original estimate to report that because of the law, by 2024 the equivalent of 2.5 million Americans who were otherwise willing and able to work will have exited the labor force.“

There are several different channels through which the negative effects of the ACA operate: Small employers are incented to limit their hiring and the hours of employees, and federal subsidies (and sometimes state benefits) are available to individuals only so long as they remain below certain income thresholds. Again, this is typical of many government aid programs (the Earned Income Tax Credit (EITC) being an exception). More from de Rugy:

“When the government takes away a person’s benefits as his income goes up, it has the same effect as a direct tax. And remember, when you tax something, you usually get less of it. That means these programs can actually hinder income mobility: In order to continue receiving their government cash, individuals are forced to limit the amount they earn. Thus, they have an incentive not to try to climb the income ladder by putting in extra hours or signing up for job training and educational programs.“

Mises Wire recently carried a reprint of an essay by the great Henry Hazlitt, “How To Cure Poverty“. The gist of Hazlitt’s argument is that government largess simply cannot create wealth for society, but only diminish it. The mere process of redistributing the current “pie” consumes resources, but that is minor compared to the future reduction in the size of the pie brought on by the terrible incentives inherent in income taxation and many government benefit programs:

“The problem of curing poverty is difficult and two-sided. It is to mitigate the penalties of misfortune and failure without undermining the incentives to effort and success. … The way to cure poverty is … through … the adoption of a system of private property, freer trade, free markets, and free enterprise. It was largely because we adopted this system more fully than any other country that we became the most productive and hence the richest nation on the face of the globe. Through this system more has been done to wipe out poverty in the last two centuries than in all previous history.“

Harvard professors Edward Glaeser and Andrei Schleifer have written about “The Curley Effect: The Economics of Shaping the Electorate“, which posits that redistributive policies that are harmful to constituents can be rewarding to politicians. The paper deals with policies that encourage emigration of affluent voters away from cities, but which nevertheless reward politicians by increasing the proportion of their political base in the remaining constituency. It seems to apply very well to many major cities in the U.S. However, it certainly applies more broadly, across states and nations, when affluent people and their capital are mobile while the less affluent are not, especially when benefits are at stake. It’s no secret that promises of benefits are often attractive to voters in the short run, even if they are harmful and unsustainable in the long run.

The welfare state appears to have helped to sustain many of the poor at an improved standard of living after accounting for benefits, or it has prevented them from falling into “deep poverty”. However, it hasn’t succeeded in lifting the poor out of dependency on the state. Pre-benefit poverty rates are about the same as they were the late 1960s. In addition, Christopher Jencks observes that the “Very Poor” have in fact become poorer. That’s discussed in his review of “$2.00 a Day: Living on Almost Nothing in America” by Kathryn Edin and Luke Shaefer. Jencks presents statistics showing that those in the lowest two percentiles of the income distribution have suffered a fairly sharp decline in income since 1999. Many of these extremely poor individuals do not avail themselves of benefits for which they could qualify. In addition, the EITC requires earned income. A job loss is a wage loss and, if it goes on, a loss of EITC benefits. Unfortunately, work requirements are more difficult to meet in the presence of wage floors and other distortions imposed by heavy-handed regulation.

A guaranteed national income has become a hot topic recently. Michael Tanner weighs in on “The Pros and Cons…” of such a program. There are many things to like about the idea inasmuch as it could sweep away many of the wasteful programs piled upon each other over the years. It is possible to construct a sliding-scale guarantee that would retain positive incentives for all, as Milton Friedman demonstrated years ago with his negative income tax concept. However, as Tanner points out, there are many details to work out, and the benefits of the switch would depend upon the incentive structure built into the guarantee. As a political plaything, it could still be dangerous to the health of the economy and an impediment to income mobility. Don Boudreaux has registered objections to a guaranteed income, one of which is based on strengthening the wrongheaded argument that we derive all rights from government. Even more interesting is David Henderson’s take on a basic income guarantee. He finds that the budgetary impact of a $10,000 guarantee would equate to a 30% increase in government spending, and that assumes that it replaces all other assistance programs! Henderson also discusses the public choice aspects of income guarantees, as well as moral objections, and he concludes that there are strong reasons to reject the idea on libertarian grounds.

The economy is riddled with too many subsidies, penalties and bad incentives that distort the behavior of various groups. The well-to-do often benefit from subsidies that are every bit as distortionary as those inherent in many public assistance programs. They should all be swept away to restore a dynamic economy with the potential to lift even more out of poverty. There could be a role for a guaranteed income on the grounds that it is better than what we’ve got. But we should recall the words of Hazlitt, who reminded us that we’ve come so far on the strength of property rights, private initiative, and free trade. Left unfettered, those things can take us much farther than the ugly pairing of beneficence and coercion of the government behemoth.

Poverty Maintenance Is Not A Win

01 Wednesday Apr 2015

Posted by pnuetz in Poverty, Uncategorized

≈ 2 Comments

Tags

AFDC, CATO Institute, Child Tax Credit, Christopher Jencks, Earned Income Tax Credit, Food Stamps, Lyndon Johnson, Malinvestment, Marginal tax rates, Martha Bailey, Poverty, Private charity, Sheldon Danziger, Supplemental Security Income, TANF, War on Poverty, Welfare reform, work incentives

Merely keeping a patient alive is inferior to curing the disease. Likewise, merely allowing the impoverished to live under tolerable conditions is inferior to eliminating the underlying causes of poverty. Evidence for the former is used by Harvard Professor Christopher Jencks to proclaim the war on poverty a success. That is the upshot of his recent article in The New York Review of Books. But does the maintenance of a permanent dependent class constitute success? I believe that our goals should be loftier, and President Johnson’s original goals for the War on Poverty went much farther than Jencks suggests.

Ostensibly a review of other work by Martha Bailey and Sheldon Danziger, Professor Jencks devotes most of his essay to arguing that the official poverty rate published by the Census Bureau is distorted, and that a “corrected” measure has declined since the “war” was initiated by Johnson in the 1960s. The official rate has fluctuated in a range of 11-15% since the mid-1960s. Jencks corrects the 2013 rate of 14.5% for 1) the value of non-cash benefits received by certain program recipients (-3%); 2) the omission of refundable tax credits from the official incomes of employed individuals below the poverty line (-3%); and 3) a change in the price index used to adjust the official poverty thresholds over time to one that does not overstate changes in the cost of living (-3.7%). These three adjustments would reduce the poverty rate in 2013 to just 4.8%.

Taken at face value, that reduction is impressive, but the third adjustment is not directly attributable to antipoverty programs. It could also be due to economic growth or other factors. Jencks notes the following:

“Both liberals and conservatives tend to resist the idea that poverty has fallen dramatically since 1964, although for different reasons. Conservatives’ resistance is easy to understand. They have argued since the 1960s that the federal government’s antipoverty programs were ineffective, counterproductive, or both.

Liberals hear the claim that poverty has fallen quite differently, although they do not like it any better than conservatives do. Anyone, liberal or conservative, who wants the government to solve a problem soon discovers that it is easier to rally support for such an agenda by saying that the problem in question is getting worse than by saying that although the problem is diminishing, more still needs to be done.”

For my own part, I believe that many antipoverty programs succeed only as palliatives. They have not succeeded in breaking the cycle of poverty and dependence on the state. In other words, successful programs must foster self-sufficiency, which is a superior goal from a humanitarian and a Libertarian perspective. Jencks plans a follow-up on the “successes and failures specific anti-poverty programs”, but merely paying alms to the poor establishes a very low threshold for success.

In fairness to Jencks, anti-poverty programs serve a large number of individuals who are incapable of providing for themselves for a variety of reasons such as age, physical and mental disabilities. While it is beyond the scope of this post, some argue that private charities are more effective at providing for these individuals as well as the able poor. A greater role for charity could even be facilitated via public funding, but in any case, a larger role for private charity should always be on the menu of policy options.

A basic failing of many welfare programs is an incentive problem: able recipients perceive a penalty for work effort (additional hours or even kinds of employment) if rising earned income is associated with reduction or elimination of program benefits. This means that participants face a very high effective marginal tax rate on earned income.

This article from The CATO Institute contains a good overview of the federal welfare system, which consists of 126 separate programs. The article contains somewhat more detailed on the largest anti-poverty programs, such as Refundable Tax Credits (the Earned Income Tax Credit (EITC), and Child Tax Credit (CTC)), Supplemental Security Income (SSI – for aged, blind and disabled), SNAP (food stamps), housing subsidies, child nutrition (WIC), Temporary Assistance For Needy Families (TANF) and unemployment insurance. Social Security is also included since it pays benefits to many low income seniors.

The CATO analysis shows that by one measure, refundable tax credits are by far the most cost efficient at lifting people out of poverty at a point in time, at least among the large programs, followed by SSI and using subsidies. In-kind programs such as SNAP and WIC tend to be less targeted and less effective by this measure. There is fairly widespread agreement that the tax credits have better incentives for work effort, but there are still high marginal tax rates in the phase-out range, a marriage penalty, and the credits are paid only once a year as tax refunds. Some contend that the phase-out of the EITC discourages labor supply even more than the credit increases labor supply at lower incomes. Still others believe that adding certain work requirements would make the EITC a more effective measure:

“The [EITC] clearly does reduce poverty, but it raises work levels far less than some of the statistical studies of the past decade claim, and it appears to do so by encouraging working people to keep working, rather than driving the non-working poor toward jobs. If we wish the credit to promote work as well as raise incomes, we … must add other suasions to promote and enforce work, such as those found in the more successful work-incentive experiments…. These include mandating participation in work programs and setting some threshold of working hours that claimants have to achieve to get benefits.”

The incentive effects of other programs are more negative than the tax credits. This paper found that the food stamp program reduces employment and hours worked. The TANF program, which was the successor to Aid To Families With Dependent Children (AFDC), also exposes recipients to high marginal tax rates. While CATO has been criticized for analyzing the combined impact on marginal tax rates of up to eight different programs, there is little question that the incentive problem is compounded for participants in multiple programs.

There are many different approaches that can be explored for eliminating poverty, supporting those who can’t work and ending dependency for those who can. Certainly, the work incentives of existing anti-poverty programs can be improved in a number of ways. More inventive approaches can be tested at the state level. However, programs such as guaranteed incomes should be eschewed, as they tend to aggravate the incentive problem and encourage dependency.

There are many other approaches to attacking poverty and its causes that do not strictly qualify as “welfare reform.” These include measures that would improve education and employment prospects, including apprenticeship and other training programs. School choice is a fundamental reform with enormous potential to improve the quality of education among poor children. Transitioning to market-based health care reform, including competition among health insurers, would reduce medical costs across the board. Eliminating costly regulation of business can encourage economic growth, which is basic to lifting the incomes of the working poor. Minimum wage legislation should be avoided as it simply eliminates opportunities for the least productive members of society and it is not well-targeted at the poor. Tax reform that encourages saving and investment, including corporate tax reform, will increase the economy’s long-term growth potential, as would a general reduction in the size of the public sector. An end to wasteful subsidies to “privileged” industries can minimize malinvestment and release resources to uses that pass a true market test, leading to a more general prosperity.