I’ve written about the negative relationship between government spending and economic performance, but most of my focus is on “macro” issues such as the overall diversion of resources from the productive sector to government.
This leads to the misallocation of labor and capital, I’ve explained, which means the economy isn’t as efficient and living standards stagnate.
But, with the exception of some posts about the harmful impact of unemployment insurance (including evidence that Paul Krugman and Larry Summers used to be on the right side before politics clouded their judgment), I’ve rarely explained this story from a “micro” perspective.
Fortunately, Professor Casey Mulligan of the University of Chicago has done some very solid work on this issue, some of which he recently wrote about in the New York Times.
The social safety net became more generous under Presidents George W. Bush and Barack Obama, and as a result massively altered employment patterns in the labor market. …public moneys have recently been used to help the unemployed, the poor and the financially distressed endure the recession, but at the same time have dramatically eroded incentives for people to maintain their own living standards by seeking, accepting and retaining jobs, as well as incentives for employers to create jobs that are attractive to workers.
This makes sense to me. After all, Bush was a reckless big spender, just like Obama. And we also know that if you make work less attractive and idleness more attractive, bad things will happen.
But Prof. Mulligan actually measures the net impact.
As a result of more than a dozen significant changes in subsidy program rules, the average middle-class non-elderly household head or spouse saw her or his marginal tax rate increase from about 40 percent in 2007 to 48 percent only two years later. Marginal tax rates came down in late 2010 and 2011 as provisions of the American Recovery and Reinvestment Act expired, but still remain elevated – at least 44 percent. …A few households even saw their marginal tax rates jump beyond 100 percent – meaning they would have more disposable income by working less. …work incentives were eroded about 20 percent for unmarried household heads…in the middle of the skill distribution, while they were eroded about 12 percent among married heads and spouses…with the same level of skill.
So what’s the bottom line? Well, Prof. Mulligan concludes that government policy hurt everybody, but it did the most damage for those least able to endure hardship, the low-skilled and unmarried.
The fact that marginal tax rates rose so differently for various groups means not only that redistributive public policy depressed the labor market but has also sharply, and arbitrarily, altered the composition of the work force in the direction of people who are married and more skilled.
This final point is worth contemplating for those who are still in post-election-analysis mode. Welfare state programs trap people in dependency. People in that situation naturally worry about who will take care of them, which makes them easily susceptible to snake-oil politicians who promise endless handouts financed by taxes on the so-called rich.
Some otherwise sensible politicians are reluctant to say no when asked to expand the welfare state because they fear it will hurt them at the polls. That’s definitely a possibility, but creating more dependency is a guaranteed way of making it harder to win future elections.
The moral of the story: Big government is bad for the poor.
Second moral of the story: Entitlement reform is good policy…and good politics.
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Great comments here. The fact of the matter is that many voters, ie, poor inner city and low income people have no incentive to get a job. “The economy stupid” historical election behaviour did not work this time. Obama did not get voted out for this terrible 4 years of little to no growth. His brand appeared “less evil” than Romney who could have helped this economy turn around. That would create jobs for people that need them. But these voters dont think or know the economy is important if work is not one of their values, and if the government continues to give them food stamps, welfare, and free services that cost them nothing. The cost is something they cannot see or know without a “new vision and new persepective.” They have become dependent and lack motivation. That is a huge cost to our nation. We need someone that can share the NEW VISION, inspire and truly communicate the value of hard work, exceptionalism and success. Mark Rubio, we hope you are listening.
[…] Daniel J. Mitchell – How the Welfare State Hurts the Poor and Causes Unemployment […]
The sad thing to me is that they all claim to hate the rich, but they don’t, not really. If they actually hated the rich, none of them would want to be rich, and yet they all do. What they really are is jealous. They’re jealous that others went out and worked hard to get what they don’t have, and it eats them up inside. Instead of figuring out how to get their own, they convince themselves that the wealth was stolen, not earned, so that they feel justified when they demand the government steal that wealth in turn to give to them, or if the government won’t steal it, then they feel that no one should have it because it wasn’t gotten fairly … unless of course, they find a way to get rich themselves.
It makes me sick really because I have never felt that anyone better off than I am did something wrong to get their wealth. But then, I’ve learned to be content and thankful for what I have, and I understand that if I want more our of life, it’s my responsibility to go out and bust my butt for it.
IMO, smart people will either be getting ready to fight over this or figuring out how to get well clear of what’s coming here.
Excellent post Zorba. I see the same story playing out. What’s truly amazing to me is how exceptionalism and success have become frowned upon. I actually had a friend claim that every rich person has broken the law, somehow, to become rich and should therefore be penalized via higher taxation. What scares me is not that a friend said this but that so many others seem to believe the exact same thing.
…and , living off the one percent is a fantasy. The one percent does not nearly have the money necessary to satisfy the entitlement expectations of HopNChage. So the 1% will become 10% then 49% then 70% … and then VAT.
In numbers, seems like the higher tax rates on the rich will only raise about 80 billion annually (and that is the classic static calculation where higher tax rates don’t affect productive behavior). That is about $270 per American in redistribution money and it is not even a clear cut redistribution check but “benefits” trimmed down by the bureaucratic inefficiency of the government machine. Does that satisfy the HopNChange entitlements and ambitions of “the people”? What difference in your life do you realistically expect $270 in government provided services to deliver? “Whatever it is it is better than nothing” says the average voter. But that something does not come for free. It comes at the expense of lowering American effort-reward curves to the same level as the rest of the world. It comes at the expense of erasing American exceptionalism and thus American decline as average incentives to produce will inevitably lead to average economic performance, a really long way down from where America is now. The $270 in redistribution government services would be enough only if viewed as the beginning of more to come. Hence, you will pay for the welfare state you voted for and be mired in the irreversible one to two percent growth rates that are ushering Europe into decline, surrounded and drowned by an aggregate world of six billion souls growing at four times that rate. You, Americans, have now stepped on the European banana peel and are now being sucked into the same vortex of decline. The tea party raucous is the predictable scream of a minority that can hear the waterfall.
Finally, wait to see what marginal tax rates will be under ObamaCare, especially for the middle class and the self employed. And given the incentives, many more million will become self employed. But it is inaccurate to portray high marginal tax rates as hurting the middle class in an immediate sense. If you try to insulate people from the consequences of mediocrity, you get more mediocrity, your country is no longer exceptional, you all decline after a few short years where you burn the furniture to keep warm. That is the systemic detrimental effect. History repeats.
Yes, but few prominent politicians have the cojones (or suicidal tendencies) to say so in front of the typical electorate. The typical person instinctively drives to self destruction through the hope of prosperity through redistribution. It’s irresistible! The few cultures that escape this fate can only do so by historical serendipity. And seems like American serendipity is finally over. Things are reverting to the norm, the entropy of hope in redistribution, central planning, relentlessly compounding low growth and DECLINE.
But I also don’t think that “occupy” protesters hate work (or at least will not openly admit so). But work for the sake of work is useless when it comes to prosperity. What “occupy” protesters want is work easy enough to get and do that three billion people on this planet can also do it. But the occupy protesters want to be paid six times the world average for doing it. Therein lies the great delusion sold by HopNChange.
In a variant incarnation, the “occupy” protesters want someone exceptional to do all the high caliber work to prepare a chair in an office so that they can easily earn six times the average world income. It is the old “one day machines will do all the work and humans will relax” hippie dream, colored with the colors, flags and hopes of the twenty first century. Alas what passed as comfortable living fifty or one hundred years ago is now grossly substandard. The high value products offered at low prices we have today are the result of exceptional work, the ingenuity of exceptional people and the motivation of unadulterated effort-reward curves. Occupy workers want the exceptional but not the exceptionalism. They want someone else to do the high quality work. They want exceptional living on average effort and talent, or an easy path to magically high talent just because they happen to have been born in America. That is plainly impossible on a sustainable basis. Plainly impossible under the sustained low incentives of the welfare state where exceptional products are created by mediocre motivation plus altruism and the guiding light of enlightened central planners . They want to have available the same job that one billion people in China can do but get paid six times more. That is only possible by either directly or indirectly tapping into the talents of those whose work cannot be done in China. And that is not sustainable, as HopNChage will soon find out.
That is the mentality Obama was elected to advance. So, once again, if I had to summarize Obama in two sentences I would say:
The president that will drive the accumulated American advantage off the cliff by temporarily attempting to insulate the American middle and lower class from the price, personal effort, and ambition signals necessary to compete in the global marketplace, and doing so by destroying incentives amongst the fewer remaining Americans who can still can compete and win in the global marketplace. He will then top disincetivisation with the unimaginative homogenizing and harmonizing bureaucracy of centralized planning – the wellspring of political motivation and power. The destiny of decline seems now cast in stone, down the vicious cycle of desperation and entitlement to ever flatter effort-reward curves.
Good post. However, cutting welfare while leaving the vast web of the regulatory state intact will cause problems and hurt the cause of advocates of smaller government. The rules, regulations, prohibitions, etc. that emanate from government at all levels have played an unappreciated role in the lack of productive job formation the past few decades.
Welfare/entitlement reform must go hand-in-hand with regulatory reform so that entrepreneurs can create productive jobs.
Additionally, taxes must be cut and interest rates must rise so that savings can grow to provide the capital necessary for employment growth.
The only way to lift people out of welfare is to increase the amount of capital per person. The reforms listed above are necessary, but by no means sufficient, steps to accomplish this.
Augustus Van Dusen
http://thinkingmachineblog.net/