A New Member of the Poverty Huckster Club

Genuine material deprivation is almost nonexistent in rich nations such as the United States. This is a huge improvement compared to how people lived just 100 or 20o years ago.

Yet public policy fights about poverty will probably never end for the simple reason that people have different goals.

• Is the goal to reduce poverty or to reduce dependency?
• Is the goal to reduce poverty or to reduce inequality?

The cartoon is a good illustration of the first question.

And my Eighth Theorem of Government summarizes the second question.

To elaborate on the second question, some of our friends on the left have blurred the distinction between poverty and inequality.

Let’s look at some excerpts from a Project Syndicate article by Teresa Ghilarducci of the New School for Social Research.

America’s retirement system isn’t working. It is failing older workers, pensioners, and would-be retirees, and if we don’t fix it soon, it will also fail future generations, lowering living standards and increasing the risk of poverty. …Already, America’s elderly suffer a far higher rate of poverty – defined as half the median income or lower – than their peers in other high-income countries. …the old-age poverty rate in the US is 23%, compared to about 15% in the United Kingdom, 12% in Canada, 4.4% in France, and just 3.1% in the Netherlands.

Since there are massive problems with Social Security, I agree with Ms. Ghilarducci that America’s retirement system isn’t working.

But her numbers on old-age poverty seem very strange. How can the poverty rate be much higher in the United States when the other countries she mentions have much lower living standards?

Notice, though, that she wrote that poverty is “defined as half the median income or lower.”

So if you were a millionaire and lived in a house with Jeff Bezos, Elon Musk, and Bill Gates, you would be poor based on this definition.

Needless to say, that’s crazy. Poverty should be a concrete number.

And it usually is. The World Bank (which is concerned about genuine material deprivation) measures poverty based on whether people are subsisting at very low levels, such as $1.90 per day. In the United States, the poverty rate is a specific calculation of what a household needs to subsist at a modest level.

Ms. Ghilarducci’s numbers, however, come from the left-leaning bureaucrats at the Paris-based Organization for Economic Cooperation and Development.

And they have a make-believe measure of poverty based on the distribution of income.

I’m not joking, if you go to their website, you will find these crazy numbers.

• There’s supposedly more old-age poverty in the United States than there is in countries such as Costa Rica, Greece, Italy, Poland, and Turkey.
• There’s supposedly more overall poverty in the United States than there is in countries such as Hungary, Mexico, Portugal, Slovenia, and Turkey.

These are garbage numbers, at least for the purpose of measuring poverty.

The average senior (or average person) in the United States is much better off than their counterparts in other countries.

So congratulations to Ms. Ghilarducci, who is now a member of the Poverty Hucksters Club.

P.S. In fairness to Ms. Ghilarducci, her article does make some good points about overall retirement policy. I’m sure we disagree on many things, but she favorably cites nations with private Social Security systems, such as Denmark and the Netherlands.

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The Right and Wrong Way to Reduce Poverty, Part II

In Part I of this series, I explained that the War on Poverty, launched by Lyndon Johnson and expanded by other profligate presidents, has been bad news for both taxpayers and poor people.

More specifically, I shared some academic research showing how it led to a big increase in dependency on government.

Let’s expand on that topic today by looking at a column published last week by National Review.

Authored by Angela Rachidi of the American Enterprise Institute, it compares the two ways of reducing poverty and deprivation. Here are some excerpts.

President Johnson introduced his Great Society agenda, setting the stage for the vast federal anti-poverty bureaucracy that we have today. Passage of programs such as Medicaid, Head Start, and a nationalized Food Stamp Program followed, and today, the federal government funds more than 80 means-tested programs or services… Unsurprisingly, this approach set the federal government on a disastrous fiscal path. Federal expenditures on means-tested programs have increased eightfold since the War on Poverty started, equating to an additional $800 billion per year in today’s dollars. …expanding transfer payments to reduce the poverty rate was simply a mathematical achievement. Fundamentally improving the lives of poor families has proved an entirely different task. …the key to the problem of poverty in this country was a failure among young people to achieve key life milestones. …when young people graduated high school, worked full-time, and married before having children, their odds of living in poverty dramatically reduced. …Analyzing 15 years of longitudinal data consisting primarily of poor unmarried mothers…, I find that many disadvantaged unmarried mothers were able to rise out of poverty when they later achieved success sequence milestones, even though they started on a different path. For example, 15 years after giving birth to a child outside of marriage, only 9 percent of mothers who earned a high school education, worked full-time, and later married were in poverty. Among mothers who failed to complete any of those three steps, the poverty rate was 79 percent.

Those “success sequence milestones” sounded familiar.

Sure enough, they are similar to what my late, great, friend Walter Williams wrote many years ago.

The problem, of course, is that government penalizes you if you get a job or get married.

Though I’m guessing the problem is worse in places like New York in California than in states like Florida and Texas.

P.S. Biden and other folks on the left want to bastardize the definition of poverty in hopes of further expanding the welfare state and creating more dependency.

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The Right and Wrong Way to Reduce Poverty, Part I

I’ve previously pointed out that the so-called War on Poverty is a failure, both for poor people and for taxpayers.

My main argument is that poverty was steadily declining throughout American history, but that progress ground to a halt once politicians in Washington decided to spend trillions of dollars.

As you might expect, folks on the left have a different perspective. Or, to be more precise, they have two different perspectives.

1. Some left-leaning people assert that that the post-1965 lack of progress is evidence that we need to have even more redistribution.
2. But some of them instead assert that there has been a lot of progress, but not the kind that shows up in the official measure of poverty.

Today, let’s examine the second argument.

We’ll start with a chart showing many different ways to measure poverty.

The official poverty rate (“Official Poverty Measure”) comes from the Census Bureau and it gets the most attention in the media and elsewhere.

But is it the right measure, and does it show the impact of redistribution programs?

In a study published by the Journal of Political Economy, Richard V. Burkhauser, Kevin Corinth, James Elwell, and Jeff Larrimore put together a “full poverty measure” that captures the value of various handouts.

Based on their approach, there is almost no material deprivation in the United States. Their poverty rate as of 2019, shown in the above chart, was just 1.6 percent.

Here’s some of what they wrote.

Almost 60 years have passed since President Johnson declared his War on Poverty. Even so, academics and policy makers still debate its outcome. …disagreement over progress in the War on Poverty stems from disagreements over how poverty should be defined… We…create a poverty measure…which we refer to as the absolute full-income poverty measure (FPM)… We include both cash and in-kind programs designed to fight poverty, including food stamps (now the Supplemental Nutrition Assistance Program [SNAP]), the school lunch program, housing assistance, and health insurance. Finally, we hold poverty thresholds constant in inflation-adjusted terms using the Personal Consumption Expenditures (PCE) price index. Using this poverty measure, we find substantial reductions in poverty based on President Johnson’s standards. Specifically, we find that the absolute FPM poverty rate in 2019 was 1.6%, well below the official poverty rate of 10.5%.

Incidentally, the official poverty rate is now 11.5, so perhaps the authors’ FPM measure also has increased a bit.

But that’s not important for our discussion today. Instead, let’s consider whether their FPM measure shows that the War on Poverty has been a success.

The answer depends, at least in part, of whether you think government dependency is an acceptable outcome.

Here are some further excerpts from the study.

…we evaluate the extent to which poverty has fallen as a result of increases in market income versus increases in government transfers. As President Johnson further stated in his State of the Union address on January 8, 1964, “The War on Poverty is not a struggle simply to support people, to make them dependent on the generosity of others”… Contrary to this goal of President Johnson, we estimate that dependence—which we define as receiving less than half of full-income from market sources—among working-age individuals increased from 4.7% to 11.0% between 1967 and 2019. Likewise, dependence among children increased from 6.0% to 13.1%. …Success in reducing material hardship has come at the cost of having a greater share of the population dependent on government for at least half of their incomes.

Here are some charts from the JPE article, all of them showing how dependency increased for just about all groups in society.

Here’s one final excerpt, showing the difference between the right way and wrong way of reducing poverty.

…the War on Poverty…was not won by making people more self-sufficient, as President Johnson sought. Dependence (defined as receiving less than half of household income from market sources) among working-age adults and children more than doubled from 1967 to 2019. However, the rise in dependence was not uniform over the entire period, with dependence falling substantially, especially among children and non-aged Black individuals, from 1993 to 2000. This period is coincident with welfare reforms that required and encouraged work as well as a strong labor market.

This echoes my view that Bill Clinton’s welfare reform (replacing an entitlement with a block grant) was very successful and that it should be extended to other redistribution programs such as Medicaid and food stamps.

And it reinforces my view that Biden’s proposal for per-child handouts would be very harmful. The goal should be employment and self-sufficiency, not dependency and bigger government.

P.S. We can learn lessons about welfare and dependency by looking at data from Europe and Canada.

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The Failure of Bidenomics, Part VIII

This series has reviewed Biden’s dismal record with regards to subsidies, inflation, protectionism, household income, fiscal policy, red tape, and employment.

Today, let’s add poverty to the mix.

We’ll start with a very depressing chart from Kevin Hassett about worsening poverty in the United States.

The chart appeared in National Review. Here are some excerpts from the accompanying article.

…the latest poverty figures…extremely grim. Inflation makes the purchase of necessities more costly, forcing those with less means to make difficult trade-offs. Poverty and deprivation can also create secondary effects driven by despair or necessity. …overall poverty increased in the short period between 2021 and 2022 from 7.8 percent of the U.S. population to 12.4 percent. While that top-line number is a stunning increase, the cross-sectional detail of the numbers highlights that specific groups have been hit harder than others. Female-headed households saw their poverty rate increase from 11.7 percent to 22.6 percent. Individuals without a high-school education saw their poverty increase from 19.7 to 29.7 percent. …Why the big jump? …When goods get more costly, the same amount of income gets spread thinner and thinner. While income could in principle rise to offset the higher cost of goods, that did not happen on average… The inflationary policies that contributed to the crisis were driven recently by President Biden and the Democrats… The latest numbers are only through 2022, and they likely worsened in 2023.

Kevin points out that some of the increase in poverty was caused by reduced redistribution (such as no more pandemic-era “stimulus” goodies and presumably no more per-child handouts).

So it would be interesting to find out if there was a breakdown of how much poverty rose for a bad reason (declining inflation-adjusted income) and how much it rose for a different reason (fewer goodies from Uncle Sam).

The goal, of course, is so have poverty decline because of economic growth and people becoming self-sufficient. It’s not progress, though, if poverty falls simply because people get a lot of handouts (something Biden used to understand).

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Mirror, Mirror, on the Wall, Which State Provides the Most Handouts of All?

Back in 2010, I put together a “Moocher Index” based on the percentage of non-poor people in each state getting government handouts.

Based on that back-of-the-envelope calculation, Vermont, Mississippi, and Maine were the biggest moocher states and Nevada, Colorado, and Arizona were the most self-reliant states.

Then, in 2013, I shared some data looking at the value of welfare benefits in each state, compared to both the median wage and to the federal poverty rate.

Sadly, those numbers showed it was more lucrative in many states (especially in the Northeast and Hawaii) to live off the government rather than work.

Today, let’s look at which states are the most generous with handouts. The Committee to Unleash Prosperity shared this table yesterday, which ranks states based on the level of per-capita spending on public welfare.

The folks at CTUP highlighted California and Florida. Since I usually do New York-vs-Florida and California-vs-Texas comparisons, I added a couple more numbers.

P.S. Looking at the above numbers, keep in mind that there is a Laffer Curve-type relationship between redistribution spending and the poverty rate. So states like Florida and Texas presumably are reducing poverty while states such as New York and California are subsidizing it.

P.P.S. Compared to other industrialized nations, the United States has a relatively low level of welfare spending.

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This Is What Happens When People Think Government Solves Problems

Ronald Reagan has many famous quotes, including “government is the problem” and “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.'”

Channeling Reagan’s wisdom, I have repeatedly shared examples of how government makes things worse rather than better.

• America’s dependency-creating welfare state.
• America’s job-destroying unemployment system.
• America’s anti-achievement education monopoly.
• America’s lifespan-reducing regulatory apparatus.
• America’s inflation-creating monetary policy.
• America’s boondoggle-producing infrastructure laws.

If it is any comfort, however, politicians in other nations routinely also make the mistake of thinking (or claiming) that more government can solve problems.

A report in the New York Times by Constant Méheut asks why there is ongoing discontent in French neighborhoods where the government has spent billions of euros.

After the 2005 riots, the French government invested billions of euros to revamp its immigrant suburbs, or banlieues, to try to rid them of run-down social-housing blocks. But the similarity of the recent riots, and what spurred them, almost a generation later has raised questions about whether the efforts to improve conditions in the banlieues have failed. …The reasons for the failure, they say: Change has come too slow, and, perhaps more important, the government programs have done little to address deeper, debilitating issues of poverty… Clichy-sous-Bois embodies the challenges facing France. The city was the center of the 2005 riots and has since become something of a laboratory for the changes promised by various governments. New social housing has sprung up in many neighborhoods. A government-funded cultural center opened in 2018… But when riots broke out across the country after the recent police shooting, Clichy-sous-Bois was hit hard again… A 2018 parliamentary report noted that the successive governments’ efforts to improve life in the suburbs had mostly failed, in part because they did not focus enough on helping residents escape poverty.

The article does not say how many billions were spent, but France has the highest burden of government spending in Europe. Which is saying something.

And it has the biggest welfare state. Along with stifling taxes.

Have those policies worked? Of course not.

Like many European welfare states, France is economically lagging.

It is also a country where poor people get plenty of handouts, but the article reminds us that that government spending to “help” the poor has an unfortunate consequence of trapping them in poverty (a problem that also exists in the United States).

P.S. None of this is a surprise to people who understand economic history.

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The Horrendous Tax Implications of Basic Income

In past columns on the topic of basic income, most of my attention has focused on how universal handouts would undermine the work ethic.

To be succinct, I fear that a non-trivial share of the population would exit the labor force if they received a big chunk of guaranteed money from government.

But there’s another side to the fiscal equation, which is the tax burden would be needed to finance a basic income.

Thanks to some research from Germany, we have at least one answer to that question.

But I suspect that most people won’t like the results, which were put together by a team led by Professor Frank C. Englmann of the Institute of Economics and Law (IVR) at the University of Stuttgart.

…introducing a UBI that guarantees a livelihood while eliminating social benefits (e.g., unemployment benefits, old age security, and family allowance) would considerably simplify the German social system and greatly reduce the administrative burden. However, compared with the legal status in 2021, state transfer payments would have to be greatly increased. “According to our calculations, public expenditure on a living UBI would be up to EUR 900 billion. Considerable tax increases would be necessary in order to finance this,” says Professor Frank C. Englmann of the IVR. If the state introduced a flat tax of 66.1% for all citizens, a UBI of EUR 1,000 per month for adults and EUR 500 for children could be financed. …Compared with the status quo, there would be a considerable redistribution.

I like the flat tax, but I’ve always assumed a low tax rate.

Needless to say, a flat tax of 66.1 percent would be absurdly destructive.

How many people – either in Germany or any other nation – would choose to work when faced with such punishment? Especially when instead they could sit on a couch all day and collect a basic income?

No wonder Swiss voters overwhelmingly rejected the idea in a 2016 referendum.

P.S. Joe Biden at one point understood the downsides of universal payments. Given his support for per-child handouts, he’s obviously since moved in the wrong direction.

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More Evidence Against Universal Basic Income

I’ve repeatedly expressed opposition to “universal basic income” and I repeated those concerns as part of a conference at the Acton Institute earlier this week.

If you don’t want to spend two minutes to watch the video, all you need to know is that I’m worried that more redistribution will lead to more dependency and less work.

This is captured in this Wizard-of-Id parody, with the only difference being that UBI is a big handout for everything rather than a set of handouts for specific reasons (food stamps, welfare, housing subsidies, etc).

There’s already academic evidence against UBI, as I wrote in 2021 and 2022.

Now we have new evidence this year. Three European academics – Timo Verlaat, Federico Todeschini, and Xavier Ramos – produced a study on the consequences of an experiment in Barcelona.

Here are their main findings, published by the Germany-based Institute of Labor Economics, all of which confirm that a basic income would be bad news.

…we aim to advance the literature on unconditional transfer programs by describing their employment effects in the context of an advanced welfare state. Our analysis uses data from a field experiment in Barcelona (Spain), trialing a generous and unconditional municipal cash transfer program. …we find strong evidence for sizeable negative labor supply effects. After two years, households assigned to the cash transfer were 14 percent less likely to have at least one member working compared to households assigned to the control group; main recipients were 20 percent less likely to work. …Another important finding concerns the persistence of effects. Employment rates in the treatment group remain lower even six months after the last transfer, indicating that households’ labor supply decisions may be hard to reverse.

I have to give credit to Matt Weidinger of the American Enterprise Institute. I did not know about this new study until I saw his article, which also merits a few excerpts.

That program is similar in many respects to universal basic income (UBI) programs proposed in Congress and being tested in multiple locations across the US. It also bears similarities to the unconditional expanded child tax credit payments temporarily made to tens of millions of households with children in 2021, which President Joe Biden’s latest proposed budget seeks to revive. Those similarities suggest American policymakers should take heed of the study’s findings… As Jon Baron, a longtime expert on evidence-based policy, recently described, the findings of the “high-quality” randomized control trial reflected in the study “suggest a need for caution in the design of anti-poverty programs, to avoid discouraging work effort.”

Since I’m a policy wonk rather than an academic, I don’t need qualifiers such as “a need for caution.” I can bluntly state that redistribution programs have a very negative impact on labor supply.

The moral of the story is that a basic income would make a bad situation even worse, especially when you consider that politicians almost surely won’t get rid of the handout programs that already exist (this is the “public choice” problem I mentioned in the above video).

Instead of moving in the wrong direction, existing redistribution programs need to be scaled back. But that’s just part of the solution. The federal government should get out of the way.

It’s time to shift all of these programs back to the state level, building on the success of Bill Clinton’s welfare reform from the mid-1990s.

P.S. Back in 2017, Joe Biden said some sensible things about work and dependency. Given what he’s now pushing, he obviously was not being sincere back then. Or maybe he doesn’t remember.

P.P.S. I can’t claim perfect memory. Regarding the Swiss referendum on basic income, I was wrong about the margin of victory (77 percent rather than 78 percent), wrong about the year (it was in 2016 not 2015), and the proposed handouts were even bigger than I remembered.

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Government vs. Poor People

My Fourteenth Theorem of Government explains that when government intervenes for the ostensible purpose of providing help to poor people in the short run, it is all but inevitable that such policies will hurt poor people in the long run.

It is hardly a revelation that bigger government causes problems, but it is particularly discouraging when such policies victimize the least fortunate members of society.

I’m discussing this issue today because I recently discovered a 2018 article by Brian Balfour.

Published by the Foundation for Economic Education, the article lists seven ways that government traps people in poverty.

At the risk of over-simplifying, four of those policies directly hurt poor people.

1. The “quicksand effect” of the welfare state, which discourages self-advancement.
2. Minimum wage laws that remove the bottom rungs of the economic ladder.
3. Green energy policies that make basic utilities needlessly expensive.
4. Protectionist trade policies that increase the price of essential products.

And three of those policies indirectly hurt poor people.

1. Punitive tax policies that discourage job creation and productivity advances.
2. Regulatory policies that impose high costs and cause inefficiency.
3. Inflationary monetary policies by central banks that cause higher prices.

There’s nothing in the article that’s wrong, but I’m going to conclude today’s column by pointing out a big sin of omission.

The author’s list should have included the government education monopoly. Especially since poor families tend to live in the areas with the worst-performing government schools.

Failing government schools have a very direct and very negative impact on the life prospects of low-income kids.

So I’ll end by noting that I’m very excited that school choice is beginning to sweep the nation.

P.S. There are many other government policies that have a disproportionately negative impact on poor people. Everything from Social Security to revenue policing, but don’t forget government lotteries, licensing laws, and nanny state protections (all of which may help to explain why poor people are skeptical about the supposed benefits of bigger government).

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The Tradeoff Between Government Dependency and Self-Sufficiency

When writing about employment and jobs, I often try to remind people about a handful of important observations.

1. A nation’s economic output is determined in part by the number of people gainfully employed.
2. The share of working-age people with jobs may be more important than the unemployment rate.
3. Worker compensation is determined by productivity and productivity is driven by investment.
4. Government redistribution programs can make joblessness more attractive than employment.

Regarding the final point, a new report from the Committee to Unleash Prosperity contains some very depressing data. Authored by Prof. Casey Mulligan of the University of Chicago and E.J. Antoni or the Heritage Foundation, it shows how Americans can be lured into unemployment.

…with existing unemployment benefits and the dramatic recent expansion of ObamaCare subsidies, a spouse would have to earn more than $80,000 a year from a 40 hour a week job to have the same after-tax income as certain families with two unemployed spouses receiving government benefits. In these states, working 40 hours a week and earning $20 an hour would mean a slight reduction in income compared to two parents receiving unemployment benefits and health care subsidies. …In 24 states, unemployment benefits and ACA subsidies for a family of four with both parents not working are the annualized equivalent of at least the national median household income. …In more than half the states, unemployment benefits and ACA subsidies exceed the value of the salary and benefits of the average firefighter, truck driver, machinist, or retail associate in those states.

For American readers, here’s a look at how some states make it very attractive to rely on government.

The good news (if we’re grading on a curve) is that some of the numbers are not as bad as they were during the pandemic, when politicians decided to provide super-charged unemployment benefits.

On the other hand, Obamacare subsidies are becoming an ever-bigger drag on the job market.

The big takeaway is that the numbers above reflect the impact of just two social insurance programs. The numbers would look worse if various means-tested programs were included.

For those interested in that data, here are state estimates from back in 2013, before Obamacare was fully in effect.

And for those who like international comparisons, here’s a look at the nations with the biggest handouts.

P.S. If Biden’s proposal for per-child handouts is approved, it would become far easier for people to leave the labor force and rely on handouts.

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The Economic and Societal Case Against Per-Child Handouts, Part I

The worst piece of legislation in 2021 was Biden’s so-called stimulus, which added $1.9 trillion to America’s fiscal burden.

The worst provision of that legislation almost certainly was a temporary per-child entitlement of $3,000-$3,600.

Biden then wanted to make this entitlement permanent as part of his $5 trillion plan to “build back better.”

Fortunately, that boondoggle sank under its own weight and the slimmed-down (but still bad) version that ultimately was enacted earlier this year did not include any per-child handouts.

That’s the good news, at least relatively speaking.

The bad news is that Congress and the White House have renewed their push for a permanent per-child entitlement.

And, because Republicans will control the House of Representatives starting in January, they are trying to push the policy through next month.

The Wall Street Journal editorialized today about per-child handouts.

A core Democratic priority in Congress is resurrecting a $3,000 child tax credit for dependents ages six and up, with a $600 bonus for younger children. …The Internal Revenue Service is now another turnstile of the welfare state. That’s because over time Congress made more of the credit “refundable,” which means available to those who don’t owe federal income taxes. …a universal basic income for people with children. …The full Democratic allowance would cost $1.6 trillion over 10 years… Low-income voters are always assumed to support cash benefits, but 46% of those earning less than $50,000 opposed the payments. That may be because Americans understand that poverty in the U.S. is now less about material deprivation and more about idleness, addiction, mental illness and other destructive realities that can’t be cured with a bigger check.

There were many arguments against these per-child handouts (reversing Bill Clinton’s welfare reform, setting the stage for universal basic income, etc).

But those topics are not playing a big role in this debate.

Instead, the White House and Congress are engaged in a naked vote-buying scheme.

They want to create more dependency, regardless of the economic and societal consequences.

What are some of those consequences? Those are discussed in a column by Scott Hodge, which also is in today’s Wall Street Journal.

He starts with a mea culpa about his role in creating child credits and also warns about the risks of creating a system where the IRS is a dispenser of goodies rather than a tax-collection agency for almost half the population.

I was one of the inventors of the child tax credit, nearly 25 years ago—and I think it’s a bad idea. …Key elements of this plan made their way into the 1994 House Republicans’ Contract with America. Congress enacted the $500 child tax credit as part of the Taxpayer Relief Act of 1997, and it grew from there. …The Bush tax cuts in 2001 temporarily doubled the credit to $1,000… The 2017 Tax Cuts and Jobs Act doubled the credit again, to $2,000… Each expansion meant fewer households on the tax rolls. …The expanded credit…contributed significantly to increasing the number of households with little or no income-tax liability. …some 74 million tax filers—or nearly half (48.3%) of all filers in 2021—had no income tax liability. …Can we have a sustainable tax system if the number of nonpayers continues to grow?

Since I’m mostly worried about the economic consequences, here’s the part of Scott’s column that grabbed my attention.

…recent studies estimating the economic effects of the proposed expansion suggest that it would cause people to leave the workforce, reduce work effort, and lower capital investment, ultimately shrinking economic output. A recent study by economists at the University of Chicago determined that without any changes in behavior, expanding the credit would reduce child poverty by 34% and “deep” child poverty—families whose income is less than half the poverty level—by 39%. But those gains would come at a cost: the diminution of the workforce by 1.5 million people. …A new study by Congress’s Joint Committee on Taxation…determined…the policy would reduce the labor supply by 0.2% and reduce the amount of capital by 0.4%. As a result of the reduced supply of labor and capital investment, gross domestic product would shrink by 0.2%.

I’m guessing that some readers will be shrugging their shoulders because numbers such as 0.2 percent and 0.4 percent don’t sound very big.

But keep in mind that we have dozens of bad policies in Washington that have this type of effect, and their cumulative impact is very big.

And for those who like comparisons, it’s worth observing that living standards in Europe are significantly below American levels precisely because politicians in places such as Greece, France, and Italy have made even more of these mistakes.

The bottom line is that free enterprise is the best way of helping poor people, not government dependency.

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Cry for Argentina

When I write about Argentina, I normally have bad things to say.

• The world’s worst-performing economy over the past 100 years.
• A nation victimized by a version of modern monetary theory.
• An example of how big government erodes societal capital.
• A case study of bad policy causing a decline in living standards.

Today, for only the second time, I’m going to say something positive about Argentina. At least in a back-handed way.

I’m currently in Buenos Aires for a conference. And because Argentinian monetary policy is even worse than U.S. monetary policy, the dollar is very strong and I’m able to enjoy great steak dinners for about $15.

Unfortunately, my gain is Argentina’s loss.

In a column for the Wall Street Journal, Dave Seminara discusses that nation’s long-run decline.

Argentina was one of the world’s seven richest countries at the turn of the last century thanks to its agricultural abundance. “People used to say someone is as rich as an Argentine.” …But bad governance has taken a heavy toll. More than a third of Argentines live in poverty and tens of thousands of small businesses closed during the pandemic. …nearly every young person…is plotting an escape to Europe or North America. …Argentina ranks 126th in the World Bank’s ease of doing business index and 96th on Transparency International’s corruption perception index, behind developing countries like Ethiopia, Tanzania and Kosovo. A bloated public sector weighs down Latin America’s third-largest economy. Roughly half the country either works for the government or depends on it for social welfare benefits. …The left’s mistakes in Argentina…profligate social spending, high taxes, and too many restrictions on commerce—are eerily similar to the priorities of the American left.

The most important passage in the above excerpts is that “Roughly half the country either works for the government or depends on it for social welfare benefits.”

How can you save a country when such a high percentage of the population has a direct incentive to vote for more government?

But it’s possible the outlook is even worse if you compared private sector workers to government bureaucrats.

Writing for National Review, Antonella Marty is very dismayed by Argentina’s trajectory.

Argentina’s annual inflation rate now exceeds 70 percent — a 30-year high. Its monthly inflation (just under 8 percent) is comparable to the U.S.’s annual inflation… Argentina is starting to resemble Venezuela — and no country wants to resemble Venezuela. How did things get this bad? The answer is actually quite simple: a big government that loves printing money. For decades, government intervention in Argentina’s economy has ballooned to such an extent that the state basically dictates the overwhelming majority of private-sector activity either directly or indirectly. The public sector’s meddling is notorious, crowding out the entrepreneurship, innovation, and job creation that keeps markets free and healthy. While Argentina’s population exceeds 45 million people, only about six million Argentines are employed in the private sector, while 55 percent of the country’s registered workers are employed by the government.

I don’t know which factoid is more depressing. Is it that “only about six million Argentines are employed in the private sector” or is it that “55 percent of the country’s registered workers are employed by the government”?

For what it’s worth, I assume “registered workers” does not include people in the underground economy. And because taxes and red tape are such a nightmare in Argentina, a lot of economic activity has been forced into the shadows.

But that does not change the fact that the country has a far-too-heavy burden of government. Politicians have turned a rich country into a basket case. And the situation seems to get worse every year, even when supposedly right-leaning governments occasionally get elected.

P.S. There’s an interesting debate whether Woodrow Wilson or Franklin Roosevelt was the worst president in U.S. history. In Argentina, there’s no ambiguity.

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The Depressing Reincarnation of Build Back Better

One of the best things about 2021 was the fact that Congress did not approve Joe Biden’s economically debilitating plan to raise taxes and expand the welfare state.

His so-called Build Back Better plan was a very bad mix of class-warfare tax policy and redistributionist spending policy.

But one of the worst things about 2022 may be the reincarnation of a slimmed-down version of Biden’s plan.

Simply stated, the “slimmed-down version” of a terrible piece of legislation is bad news – even if it is possible to envision something even worse.

The Wall Street Journal‘s editorial on the package illustrates why it is bad news that Senator Joe Manchin is trying to rescue Biden’s statist agenda.

As the economy slouches near recession, Majority Leader Chuck Schumer and West Virginia Sen. Joe Manchin…unveiled a tax-and-spending deal that they call the Inflation Reduction Act. Is their aim to reduce inflation by chilling business investment and the economy? …A more accurate name would be the Business Investment Reduction and Distortion Act since that will be the result of its $433 billion in climate and healthcare spending, and $615 billion in new taxes and drug price-control “savings.”

The editorial highlights four terrible provisions.

First, there’s a big tax hike on American companies, with the biggest tax hike on firms that make new investments.

…the 15% minimum tax on corporate book income…will slam businesses whose taxable income is lower than the profits on their financial statements owing to the likes of investment expensing.

For all intents and purposes, politicians would be creating a second type of corporate income tax.

Heavy compliance costs for the business community, of course, but the rest of us probably care more about the estimated loss of 218,000 jobs according to the National Association of Manufacturers.

Second, there are corrupt “green energy” provisions that will degrade America’s energy efficiency and security.

…the bill’s $369 billion in climate spending, most of which is corporate welfare. …All of this will steer private investment into green energy at the cost of reduced investment in fossil fuels. Wind and solar subsidies are already creating distortions in power markets that make the electric grid less reliable and energy more expensive. The expansion of subsidies will compound these problems.

If you want to know why this is bad, just remember Solyndra.

Third, the legislation imposes back-door price controls on the pharmaceutical industry.

The bill will require the Health and Human Services Secretary to “negotiate” Medicare prices—i.e., impose price controls—for dozens of drugs. But the $288 billion in putative savings are fanciful. Manufacturers will hedge potential future losses by launching drugs at higher prices. …The bill will also discourage investment in innovative treatments that could reduce future healthcare spending.

For those of us who value the development of new drugs to fight problems like cancer and Alzheimer’s, this is very bad news.

Fourth, a very corrupt internal revenue service is rewarded for its bad behavior.

Speculative revenue of $124 billion will also come from an $80 billion boost for the IRS. Most of this will finance more audits. The rich can afford more tax lawyers, but middle and upper-middle class Americans will be inclined to settle IRS claims, however meritless, lest they spend even more to defend themselves.

P.S. I can’t resist sharing one final bit of information.

If you peruse the Joint Committee on Taxation’s analysis of the bill, you’ll find that Joe Biden is breaking his promise not to raise taxes on people making less than $400,000 per year.

Not that anyone should be shocked. I have repeatedly explained that the big spenders need to pillage lower-income and middle-class household if they want to finance bigger government.

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A Dependency Lesson from Argentina

Back in 2017, I shared my Second Theorem of Government to warn why it is so important to resist new government giveaway programs.

And I used Obamacare as a costly example.

Simply stated, it’s much easier to block new handouts than it is to take away goodies once people have been conditioned to think they can and should rely on government.

In some sense, this is not just about economics. It’s also about preserving societal capital.

All of which helps to explain why it is so important to resist some of Biden’s proposed giveaways, such as parental leave and per-child handouts.

And if you want some extra evidence, look at places where people have become accustomed to living off others.

In her column for the Wall Street Journal, Mary Anastasia O’Grady writes about the basket case of Argentina.

Socialist ideologues know that the welfare state is addictive. New entitlements create dependencies that, once born, demand to be fed and to grow no matter the party in power. Argentina proves the rule. The Argentine electorate may be about to throw out the hard-left Peronists… The bad news is that even if peronismo loses its unchecked power in Argentina’s National Congress, it’s probably too late to avoid another fiscal and monetary crisis. …Both legislative chambers are likely to remain heavily populated by advocates of European socialism.

She shares some history about Argentina’s descent from prosperity to dependency, and points out how the entitlement mindset makes much-needed reforms very difficult.

Even when supposedly right-of-center governments win elections.

One hundred years ago Argentina was one of the world’s most prosperous nations. But as the roaring ’20s wound down, continental fascism gained cachet. …Gen. Juan Perón, who ruled from 1946 through 1955 and again briefly in 1973-74, was especially fond of Benito Mussolini’s Italy. …statism sticks once it’s in place. …fiscal profligacy endured and support for rigid labor laws remained intransigent. …even with Argentine inflation above 50%, widespread price controls and the economy sputtering for a decade, a viable alternative to populism hasn’t emerged.

For more information about the economic tragedy of Argentina, you can click here, here, and here.

To be frank, however, I’m not overly concerned about that country. Like Greece, I view it as a lost cause.

What worries me is that the United States may wind up on a slippery slope if more entitlements are added to our already-creaky and burdensome welfare state.

P.S. Argentina probably wouldn’t be such a basket case if the IMF didn’t provide endless bailouts.

P.P.S. It wasn’t too long ago that Biden seemed to understand the importance of societal capital.

 

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Linda and Leo, Wards of the State

During his 2012 reelection campaign, Barack Obama created a fictional character named Julia and showed how she could mooch off taxpayers from cradle to grave.

Given Biden’s reputation as a plagiarizer, I guess we shouldn’t be surprised that the White House has reincarnated Julia as part of a push to trap more people in government dependency.

Here is the story of Linda and Leo.

The shocking part of the story, right at the start, is that Linda actually has a job in the private sector.

But Linda soon figures out that she can use the coercive power of government to take money from her neighbors.

She starts with Biden’s per-child handout.

She then puts her son into government-subsidized child care (with no discussion, of course, of how third-party payer causes prices to skyrocket).

I can only imagine the nursery rhymes he’ll hear in that setting.

She then enrolls him in a “free” pre-K program, presumably unaware that such programs have no evidence of success (but at least Biden will be happy that this program creates more unionized teachers to fight against quality education).

Next, her son enters taxpayer-funded community college (another third-party payer problem).

After college, he gets a job, which is nominally in the private sector, but which largely exists because of government distortions (all jobs are not created equal).

Last but not least, Linda gets to rely on taxpayers in her old age, thanks to other programs that are designed to produce additional overpaid government employees.

Let’s close this depressing celebration of dependency by shifting to humor.

Here’s a tweet about Biden’s people plagiarizing Obama’s people.

While I appreciate the satire, I’m quite worried about the long-run impact of Biden’s agenda (i.e., becoming Greece).

P.S. Regarding Obama’s Julia, here’s a great Michael Ramirez cartoon and here’s some clever Iowahawk satire.

P.P.S. And here’s my two-cartoon set on what happens as more and more people are lured into the wagon of government dependency.

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The Negative Relationship between Welfare and Work

Ten days ago, I shared some data and evidence illustrating how redistribution programs result in high implicit tax rates and thus discourage low-income people from climbing the economic ladder.

Simply stated, why work harder or work more when an additional dollar of income only leads to a net benefit of 10 cents or 20 cents? Or why work harder or work more when you can actually wind up being worse off?

Or why work at all if the governments provides enough goodies?

But don’t ask such questions if you’re in the same room as Helaine Olen of the Washington Post. She is very upset that some people think welfare payments discourage work.

It’s a dangerous myth, this idea that government help causes some people to just loaf off. It’s also untrue. Reminder: Before the pandemic, most working-age people receiving benefits like food stamps worked. They just didn’t earn enough money. …the temporary child tax credit signed into law this year by President Biden demonstrates the opposite. It is an extraordinary success. Almost 90 percent of families with children under age 18 are eligible to receive a monthly check from the federal government through the end of the year. …Many other developed nations offer almost all residents a child allowance of some sort.

If you read the entire column, you’ll notice that she provides very little evidence, particularly considering her very bold assertion that a negative link between redistribution and labor supply is “a dangerous myth.”

Yet we know from the experience of welfare reform in the 1990s that work requirements did boost labor supply.

And don’t forget about the very recent evidence that turbo-charged unemployment benefits encouraged more joblessness.

We also have evidence from overseas showing that there’s a negative relationship between handouts and idleness.

Including research from the Netherlands and the Nordic nations such as Denmark. And the same is true in Canada. And the United Kingdom.

Ms. Olen seems primarily motivated by her support for permanent per-child handouts, as President Biden has proposed.

And she wants us to believe that everyone will continue to work, even if they can get $3000-plus for each kid, along with all the other goodies that are provided by Uncle Sam (often topped up by state governments).

For what it’s worth, I think she admits her real agenda toward the end of her column.

…an argument can be made that the children of the irresponsible deserve more support from us, not less. Children can’t push their parents to get with the work-and-education program. As a result, you’re not “helping” children if you insist on financially punishing their parents for not making an “effort.” …human infrastructure matters too.

In other words, Ms. Olen seems to share Rep. Ocasio-Cortez’s view that money should be given to people “unwilling to work.”

Which is how some of our friends actually view the world. They think there is a right to other people’s money. Which is why they support big handouts, including so-called basic income.

The bottom line is that Biden’s per-child handouts and other expansions of the welfare state clearly would make work less attractive for some people.

Not all people, of course, because it takes time to erode societal capital.

But why would we want a society where a growing number of people think it’s okay to live off of others?

P.S. There is scholarly research that redistribution programs lure older people out of the workforce.

P.P.S. There is also scholarly research showing redistribution programs discourage households from building wealth.

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Primitive Keynesianism from the Joint Economic Committee

Washington is filled with dishonest and self-serving analysis. Much of that shoddy output is driven by privileged groups seeking bailouts, subsidies, protectionism, or a tilted playing field.

• The health insurance and pharmaceutical companies supported Obamacare.
• Big agribusiness firms support farm subsidies.
• The big Wall Street Firms supported Dodd-Frank.

But that’s not the only type of dishonest and self-serving you find in Washington.

Let’s take the example of President Biden’s proposal to gut welfare reform with per-child handouts.

The micro-economic problem with that policy is that it reduces incentives to work – as illustrated by this Wizard-of-Id parody or this cartoon about socialism.

The macro-economic problem with that policy is that it’s part of a radical expansion in the burden of government that will make the U.S. more like Europe.

For today’s topic, though, I want to call attention to a recent report by the Democratic staff of the Joint Economic Committee. It relies on the sloppiest and most disingenuous analysis imaginable.

To recycle a term from 2015, let’s call it primitive Keynesianism.

Here’s the relevant excerpt.

The Treasury Department released information on how much money went to each state, which allows us to estimate the impact of the newly expanded CTC on local economies. Using an estimated multiplier of 1.25—or how much additional spending each $1 in CTC payments will generate, as people use their funds to buy goods and services that in turn generate income for other people and businesses—implies that the expanded CTC will generate nearly $19.3 billion in spending in local economies each month. This increased economic activity is a boon to local businesses, creating jobs in communities across the United States.

You’ll notice an astounding omission.

Nowhere in the JEC “report” is there any acknowledgement that politicians can’t “inject” money into local economies without first taxing or borrowing the money from the private sector.

Honest Keynesians acknowledge that there’s no magic money tree. They know the government can’t put money in our right pocket without first removing from our left pocket.

So they make arguments about things such as the “marginal propensity to consume.”

I disagree with that argument, but at least the folks making that case are being ethical.

The JEC report, by contrast, is utter garbage.

• No recognition of the negative consequences of higher taxes.
• No recognition of the adverse consequences of more debt.
• No recognition of the harmful consequences of bigger government.
• No recognition of the deleterious consequences of more dependency.

But I guess we shouldn’t be surprised. They’re trying to sell very bad policy, so the staff have no choice but to produce nonsensical “research.”

P.S. Arthur Okun would be very disappointed.

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The Case Against Biden’s Per-Child Handouts

Joe Biden wants to dramatically expand the welfare state (more than $5 trillion of new spending over the next 10 years).

In this discussion with Ross Kaminsky of KHOW in Denver, I warn that the President’s proposal for per-child handouts is an especially bad idea.

In part, my opposition to per-child handouts is motivated by a desire to protect the welfare reform law enacted in the 1990s.

As I noted in the interview, that reform reduced dependency and it reduced poverty. And Biden’s plan, for all intents and purposes, will repeal that law since it will be possible to get big chunks of money while not working, simply by having kids.

But since I’m a public finance economist, I’m also motivated by opposition to a massive new entitlement program.

At the risk of understatement, we don’t need to spend another $1.1 trillion when we can’t even afford all the programs that already are burdening taxpayers.

Others share my concern about the impact of Biden’s plan.

Matt Weidinger dissects per-child handouts in an article for National Review.

This year, parents don’t need to have paid taxes at all to collect an annual allowance of up to $3,600 per child. …According to the New York Times, “more than 93 percent of children — 69 million” will benefit from the new federal giveaway. …No work is expected from parents collecting them. That’s reminiscent of welfare programs before bipartisan 1996 reforms that required parents to work or attend training in order to receive government checks. In fact, the biggest beneficiaries of the new child allowance will be parents who earn less than $2,500 per year — including those who don’t work or pay taxes at all. …As explained in a 2019 report proposing child allowances in the U.S., the idea comes “from other countries.” …American policy-makers could merely be following suit. But it seems more likely that they’re just searching for a palatable way to package their current explosion of new spending, a spin on a return to the failed policies of the past: bigger benefits, for more people, funded by others’ tax dollars. After all, calling such payments “welfare” just wouldn’t do, would it?

David Henderson of the Hoover Institution also explains why Biden’s scheme is misguided.

Child allowances are a bad idea. It’s wrong to forcibly take money from some and give to others simply because they have children. Moreover, child allowances would create increased dependence, are not targeted at the needy, could reduce the work effort of lower-income women, and would add to the already huge federal budget… Scott Winship, the director of poverty studies at the American Enterprise Institute…worries that child allowances will undercut the successful welfare reform of the mid-1990s and thereby cause a substantial number of unmarried low-income mothers to stop working. …in the 1990s he thought welfare reform would increase child poverty and he now admits that he was wrong. He writes that in the United States, “Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s.” …the urgent need is to get federal spending under control. This means slowing the growth of Medicare, Medicaid, and Social Security, the three programs most responsible for the coming federal deficits. But it also means not adding major new programs.

By the way, Henderson’s column focuses on Mitt Romney’s plan, but his criticisms apply equally (actually, even more) to Biden’s proposal.

I’ll close with some encouraging polling data that was shared by G. Elliott Morris of the Economist.

Biden’s plan has only 29 percent support (versus 43 percent opposition).

I suspect that polling data would look even better if the pollsters had been honest and asked whether people favored expanded redistribution payments based on number of kids (“refundable” tax credits are simply spending that gets laundered through the tax code).

The bottom line is that the United States already has a big problem with government dependency. Per-child handouts will make a bad situation even worse.

P.S. Some advocates of the handouts say we need to copy Europe, but they never explain why “catching up” is a good idea when Europeans have much lower living standards.

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The Left’s Dependency Agenda, Part I

Over the past couple of years, one of the most disturbing – and also revealing – things to happen in Washington is when Congresswoman Alexandria Ocasio-Cortez proposed giving more money to people “unwilling to work.”

As discussed in this interview, the left seems to want more dependency.

This is a very unfortunate development. Just four years ago, Joe Biden rejected no-strings-handouts such as “basic income.”

But now he’s proposing a massive expansion of the welfare state, including huge per-child handouts that effectively would repeal Bill Clinton’s very successful welfare reform.

The obvious takeaway is that many politicians in Washington want to create a society where government dependency is normal and desirable.

That may be a good vote-buying strategy, but it has horrible consequences. Both morally and economically.

Let’s address one of the specific issues from the interview.

Regarding bonus unemployment benefits. I warned that we should be careful about over-interpreting short-run data. And that’s especially true because the states providing extra payments for joblessness are generally the states that also had the most onerous lockdown policies during the pandemic.

So, if unemployment is dropping in a state, is it because extra benefits have been cancelled, or is it a result of relaxed lockdown policies? Or is it something else, like lower tax rates?

One obvious way of trying to answer these questions is to ask people why they’re not working.

Here are the results of a recent poll, as reported by Λxios.

About 1.8 million out-of-work Americans have turned down jobs because of the generosity of unemployment insurance benefits, according to Morning Consult poll results released Wednesday. …U.S. businesses have been wrestling with labor supply shortages as folks capable of working have opted not to work for a variety of reasons. … Morning Consult surveyed 5,000 U.S. adults from June 22-25, 2021. Of those actively collecting unemployment benefits, 29% said they turned down job offers during the pandemic. In response to a follow-up question, 45% of that group said they turned down jobs specifically because of the generosity of the benefits.

So our friends on the left tell us that bigger handouts have no adverse economic consequences while the people getting the payments openly admit that they aren’t working because they can live off the taxpayers.

I know which group I believe.

P.S. Both this Wizard-of-Id parody and this cartoon do a great job of showing the economics of incentives.

P.P.S. Since the interview also included some discussion of basic income, here’s a recent study showing how those universal handouts would cripple work incentives.

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The Adverse Economic Consequences of “Basic Income”

When I first looked at the issue of “basic income,” back in 2013, my gut reaction was deep skepticism.

That’s because I feared many people would drop out of the labor force if they could live off government handouts (as illustrated by this Wizard-of-Id parody).

It’s true that the current amalgamation of welfare programs also discourages work and creates dependency, but a government-provided basic income could make a bad situation worse.

Especially if politicians didn’t get rid of other redistribution programs (a very realistic concern).

That being said, what’s the evidence, either pro or con?

There was an experiment in Finland, which poured cold water on the concept.

And now we have some U.S.-focused research. Four economists from the University of Chicago (Mikhail Golosov, Michael Graber, Magne Mogstad, and David Novgorodsky) investigated this topic in a new study from the National Bureau of Economic Research.

Here’s a description of their methodology, which used lottery winnings as a proxy for the effect of government handouts.

How do Americans respond to idiosyncratic and exogenous changes in household wealth and unearned income? Economists and policymakers are keenly interested in this question. …the earnings responses to such shocks are important…to assess the effects of public policy such as…universal basic income. However, giving a credible answer to this question has proven difficult. …We analyze a wide range of individual and household responses to lottery winnings and explore the economic implications of these responses for a number of key questions. …our analyses are based on a population-level panel data set which is constructed by combining the universe of worker tax records with third-party-reported lottery winnings. 

And here are some of their results.

We find that Americans respond to an exogenous increase in household wealth by significantly reducing their employment and labor earnings. For an extra 100 dollars in wealth, households reduce their annual earnings by approximately 2.3 dollars on average. …the introduction of a UBI will have a large effect on earnings and tax rates. For example, even if one abstracts from any disincentive effects from higher taxes that are needed to finance this transfer program, each dollar of UBI will reduce total earnings by at least 52 cents.

At the risk of understatement, this data should be the death knell for this bad idea.

Especially when you consider the impact of the higher tax rates that would be necessary to fund the basic income.

As illustrated by Figure 5.1 from the study, tax-financed handouts would be bad news for America’s economy.

P.S. Swiss voters overwhelmingly rejected a referendum for basic income back in 2016 (perhaps my speech in Switzerland convinced a few people?).

P.P.S. Interestingly, Joe Biden expressed skepticism about the idea back in 2017, but he obviously has had a change of heart, given his current support for big, per-child handouts.

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The Double-Barreled Danger of Biden’s Plan to Expand the Welfare State

The United States has a big economic advantage over Europe in part because the burden of welfare spending is lower.

This means fewer people trapped in government dependency in America. And it means a smaller tax burden in America.

But some of our friends on the left think it is bad news that the United States isn’t more like Europe.

They want more redistribution in America and they may get their wish if Congress approves Biden’s so-called American Families Plan.

The Economist has an article about Biden’s radical proposal, which would, as they correctly note, “Europeanise the American welfare state.”

President Joe Biden is proposing an ambitious reweaving of the American safety-net, which the White House says will cost $1.8trn. The American Families Plan has bits of the European welfare state that have long been missing in the country—a child allowance, paid family leave, universal pre-school, subsidised child care and free community college—but contains no reference to work requirements. …So how did Democrats go from Clintonism—which implicitly conceded the Reaganite critique that too much governmental assistance is a very bad thing—to its present-day unconcern about (even relish for) deficit-financed expansions of the safety-net?

Here are some of the specific details from the story, including discussion of Biden’s plan for per-child handouts.

This would bring America more in line with the rest of the developed world: the average government spending on benefits such as child allowances, family leave and early education is 2.1% of GDP in the OECD club of mostly rich countries. In America, it is just 0.6%. …A generous child allowance is the main anti-poverty tool in most rich countries—and also one that America lacks. One such scheme was created this year as part of the covid-19 relief bill that the president signed in March. It will pay most families $3,000 per year per child ($3,600 for young children)… The president’s plan proposes to extend these payments until 2025. Some Democrats think they should simply be made permanent.

The Wall Street Journal opined about Biden’s plan last month.

It’s more accurate to call this the plan to make the middle class dependent on government from cradle to grave. The government will tell you sometime later, after you’re hooked to the state, how it will force you to pay for it. We’d call the price tag breathtaking, but by now what’s another $2 trillion? …But the cost, while staggering, isn’t the only or even the biggest problem. The destructive part is the way the plan seeks to insinuate government cash and the rules that go with it into all of the major decisions of family life. The goal is to expand the entitlement state to make Americans rely on government and the political class for everything they don’t already provide. …This is now about mainlining benefits to middle-class families so they become addicted to government—and to the Democratic Party that has become the promoting agent of government.

I agree with the WSJ. Biden wants to create more dependency, even if that means eviscerating Bill Clinton’s very successful welfare reform.

For my contribution to this discussion, I want to make two points about the practical implications of Biden’s plan to “Europeanise” the United States.

First, it is impossible to have a European-sized government without massive tax increases. And since there aren’t enough rich people to finance big government, that inevitably means low-income and middle-class taxpayers will have to be hit with much bigger fiscal burdens. Which is exactly what has happened in Europe (and lots of honest people on the left openly admit a bigger welfare state would require similar policies in the United States).

Second, it is impossible to have a European-sized government and still maintain a big economic advantage over Europe. Higher spending and higher taxes will combine to reduce work, saving, investment, and entrepreneurship. Simply stated, European fiscal policy will lead to European economic results, and that will be very bad news for ordinary Americans since living standards are 30 percent-40 percent lower on the other side of the Atlantic Ocean.

It’s also worth noting that the United States ranks very high in societal capital, and that presumably will erode if more people are lured into government dependency.

P.S. Biden used to oppose a government-guaranteed income, correctly realizing it would undermine the work ethic.

P.P.S. The United States already faces a huge long-run challenge because of entitlement spending, so it’s remarkable – in a bad way – that Biden wants to step on the gas rather than hit the brakes.

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Subsidized Unemployment and the Work Ethic

I wrote two days ago about subsidized unemployment, followed later in the day by this interview.

This controversy raises a fundamental economic issue.

I explained in the interview that employers only hire people when they expect a new worker will generate at least enough revenue to cover the cost of employment.

There’s a similar calculation on the part of individuals, as shown by this satirical cartoon strip.

People decide to take jobs when they expect the additional after-tax income they earn will compensate them for the loss of leisure and/or the unpleasantness of working.

Which is why many people are now choosing not to work since the government has increased the subsidies for idleness (a bad policy that began under Trump).

The Wall Street Journal editorialized about this issue a couple of days ago.

White House economists say there’s no “measurable” evidence that the $300 federal unemployment bonus is discouraging unemployed people from seeking work. They were rebutted by Tuesday’s Bureau of Labor Statistics’ Jolts survey, which showed a record 8.1 million job openings in March. …But these jobs often pay less than what most workers could make on unemployment. That explains why the number of job openings in many industries increased more than the number of new hires in March. …The number of workers who quit their jobs also grew by 125,000. …some quitters may be leaving their jobs because they figure they can make more unemployed for the next six months after Democrats extended the bonus into September.

Dan Henninger also opined on the issue for the WSJ. Here’s some of what he wrote.

President Biden said, “People will come back to work if they’re paid a decent wage.” But what if he’s wrong? What if his $300 unemployment insurance bonus on top of the checks sent directly to millions of people (which began during the Trump presidency) turns out to be a big, long-term mistake? …Mr. Biden and the left expect these outlays effectively to raise the minimum wage by forcing employers to compete with Uncle Sam’s money. …Ideas have consequences. By making unemployment insurance competitive with market wage rates in a pandemic, the Biden Democrats may have done long-term damage to the American work ethic. …The welfare reforms of the 1990s were based on the realization that transfer payments undermined the work ethic. The Biden-Sanders Democrats are dropping that work requirement for recipients of cash payments.

Amen.

I made similar arguments about the erosion of the work ethic last year when discussing this issue.

And this concern applies to other forms of redistribution. Including, most notably, the foolish idea of big per-child handouts.

P.S. The WSJ editorial cited above mentioned the Labor Department’s JOLT data. Those numbers are also useful if you want proof that federal bureaucrats are overpaid, and you’ll also see that the same thing is true for state and local government employees.

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Immigration, Part II: Turning America into a Welfare Magnet

In Part I of this series, I explained why it’s absurd to think illegal immigration can be stopped by sending foreign aid to less-developed countries, such as many of those in Central America.

Simply stated, government-to-government handouts have never been a successful strategy for turning poor nations into rich nations. Indeed, aid actually discourages countries from following the recipe that does deliver prosperity.

In today’s column, let’s address Milton Friedman’s famous dilemma about the incompatibility of open borders and welfare.

Like most libertarians, I want to solve the problem by getting rid of the welfare state.

Immigrants are a big net plus so long as they are coming to work and be productive.

Indeed, because of their entrepreneurial skills and work ethic, immigrants from many nations wind up earning more than native-born Americans.

That’s something to celebrate. The American Dream in action!

But will that story of success continue if the welfare state is expanded?

Two advocates of increased immigration are worried. First, Jason Riley of the Wall Street Journal recently explained that Biden’s agenda is a recipe for immigrant dependency.

…it is a growing belief on the political left that people should be allowed to enter the U.S. on their terms rather than ours, and that it is our collective responsibility to take care of them if they can’t take care of themselves. Milton Friedman said that open immigration and large welfare states are incompatible, and today’s progressives in Congress and the White House are eager to test that proposition. …Another concern is the left’s determination to sever any connection between work and benefits, something all the more worrisome since it is occurring while destitute foreign nationals with little education are being lured here en masse. …Earlier this month, the Biden administration quietly announced that it would no longer enforce a policy that limited the admission of immigrants who were deemed likely to become overly dependent on government benefits. What could go wrong? …In countries like Italy and France, generous aid programs have attracted poor migrants who are more likely than natives to be heavy users of welfare and less likely to be working. It’s a mistake to think it can’t happen here.

In a column last year for Reason, Shikha Dalmia warned that welfare programs undermine support for immigration.

…economists Alberto Alesina, Armando Miano, and Stefanie Stantcheva…administered online questionnaires to 24,000 respondents in six countries: U.S., U.K., France, Germany, Italy, and Sweden. The explicit aim was to study attitudes toward legal, not illegal, immigration. …restrictionists have succeeded most spectacularly is in depicting immigrants as welfare queens. …In America, over 25 percent of respondents said the person with the  ..immigrant-sounding name would pay less in taxes than he collected in welfare… The study’s findings pose a particular dilemma for Democrats like Sen. Elizabeth Warren (D–Mass.), who wants to combine grandiose welfare schemes like free health care, pre-K, and college for everyone with generous immigration policies, because the mere mention of immigration reduces support for such schemes. Respondents who were asked about immigration became less concerned about inequality and less supportive of soak-the-rich schemes. …as long as immigrants are seen as succeeding through their own grit, natives may have no real objection to them. What is most likely to sour the public on immigration are the grandiose universal freebies… Immigrants should be wary of Democrats bearing gifts.

Both Riley and Dalmia raise good points.

My modest contribution to this discussion is to provide a practical example.

In his so-called American Rescue Plan, Joe Biden included a huge giveaway program that will shower $3,000-$3,600 to non-rich households for every kid they have.

This is a one-year, one-time handout, but many Democrats (and some Republicans!) want to make these enormous per-child payments a permanent part of America’s welfare state.

If that happens, the incentive to move to the United States almost surely will skyrocket.

Here’s a map I made, showing the annual handout for two children in the United States and the average per-capita income in some nearby nations.

At the risk of stating the obvious, there will be a huge incentive to migrate to America – but not for the right reasons. And my little example doesn’t include the value of any of the dozens of other redistribution programs in Washington.

The bottom line is that we shouldn’t have a welfare system that rewards dependency, whether for people in the country legally or illegally.

And if you like immigration in theory, you should be especially opposed to handouts that will undermine public support for newcomers in practice.

P.S. It’s much better to have immigration policies such as the ones proposed by former Congressman Jared Polis and current George Mason University Professor Tyler Cowen.

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Part IV: Poverty Is a Problem, Not Inequality

My series on poverty and inequality (see here, here, and here) focuses on why we should try to help the poor rather than hurt the rich.

We’ll continue with that theme in Part IV, which begins with this video by Russ Roberts of Stanford University’s Hoover Institution.

Russ makes some great points throughout the video about the importance of creating the conditions for upward mobility.

Here are some of the main takeaways.

1. The rich are getting richer and the poor are getting richer as well.
2. Cronyism is bad, especially when it winds up subsidizing the rich.
3. We should focus on reducing poverty rather than fixating on inequality.

Regarding that final point, my favorite part is when he said that, “Focusing on inequality as something inherently bad can blind us to the problems of poverty. Inequality and poverty aren’t the same thing.  …I’m much more concerned about those at the bottom who are left behind.”

In effect, he was stating his version of the Eighth Theorem of Government. At least the first half of it (he’s probably too nice to impugn the motives of those who focus on inequality).

I also like the fact that he points out the need to get rid of licensing.

And he repeatedly argues that we need to improve the quality of education, though I wish he had explicitly stated that this means we have to replace the government’s failed education monopoly with a choice-based system.

But no need to nit-pick. The video is great, as are his other videos that I have shared over the years (see here, here, here, and here).

P.S. For those who have trouble believing that the poor, middle class, and rich can all simultaneously enjoy rising incomes, click here, here, and here for evidence.

P.P.S. I also think this data from China is very powerful.

P.P.P.S. The people who fixate on inequality favor policies that would make the United States more like Europe, so it’s worth noting that lower-income people in America are usually better off than middle-class people on the other side of the Atlantic.

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Redistribution Programs and Work Requirements

Building on the success of state-level reforms in Kansas, Maine, Wisconsin, Alabama, and Georgia, the Trump Administration has proposed to tighten rules that impose work requirements on childless and able-bodied adults who receive food stamps.

Since I want to get Washington out of the business of redistribution, this is not the ideal solution.

But are work requirements better than the status quo?

Here’s some of what National Review wrote about the proposal.

Our food-stamp program has some bizarre loopholes… In theory, the program has a strict time limit for “ABAWDs,” or able-bodied adults without dependents… But in practice, the executive branch has broad discretion to waive the limit for large geographic areas with weak labor markets — and previous administrations used that discretion promiscuously. As of 2017, about a third of the U.S. population lived in waived areas. …Under the new rule, effective in April of next year, these waivers won’t be granted to areas with unemployment below 6 percent. And states will be far more limited in the geographical configurations they can request waivers for. …Many on the left complain about the rule simply because it will reduce the number of people on food stamps — by about 700,000, roughly 2 percent of total food-stamp enrollment… But…there is clearly room for cuts. (Despite the recovery, total enrollment is about double what it was in 2000.) …The 1996 welfare reform proved the effectiveness of this approach.

As you might expect, this proposal is causing angst for some lawmakers.

Congresswoman Marcia Fudge condemned the proposal in a column for the Washington Post.

…taking food from the tables of hungry Americans during the holidays…that’s the latest act of cartoonish villainy by the Trump administration. …the Agriculture Department played the part of the Grinch, finalizing a rule to cut billions of dollars from the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps. The rule will remove nearly 700,000 from the program…, representing a callous escalation of the Trump administration’s war on people in need. …both red and blue states want the flexibility this rule will eliminate. The rule will dramatically reduce the flexibility of states to decide how best to serve the needs of their own citizens.

My view on food stamps (as well as other redistribution programs) is that Washington should have no role.

So if Congresswoman Fudge wants her state to give goodies to able-bodied adults with no children, that would be a decision for Ohio’s politicians (or, even more relevantly, Oregon’s politicians).

I’m fine with that type of flexibility, but there’s a catch that Ms. Fudge doesn’t mention. She wants taxpayers from across the country to subsidize that decision.

That’s not the way it should work. I’m all in favor of “the flexibility of states,” but that principle should apply to both raising money and spending money.

By the way, work requirements are not just an issue for the food stamp program.

There are also discussions about whether people getting Medicaid should have an obligation to work.

Writing for the Federalist, John Daniel Davidson applauds an initiative from the White House to move in that direction.

The Trump administration…will allow states to impose work requirements on abled-bodied adults to qualify for Medicaid. …it’s about time. …imposing work requirements on able-bodied adults will…help enrollees far more than Medicaid coverage will, mostly by giving them a strong incentive to secure full employment. …By putting millions of able-bodied adults on the Medicaid rolls, Obamacare created perverse incentive for those enrollees to limit their income so they could keep their Medicaid coverage. …Work requirements are a proven way to unwind perverse incentives and improve people’s lives. …progressives consider work requirements insulting and demeaning.

It was also a major focus of the very successful 1996 welfare reform legislation.

In an article for City Journal, Kay Hymowitz points out that law is still yielding big dividends.

…the Census Bureau released its report on the nation’s income, poverty, and health-insurance coverage for 2018. …poverty in single-mother households sank to its lowest rate . . . ever. What’s more, the decline took place entirely among black and Hispanic single-mother families. …this is a “Wow!” moment. …More black and Hispanic women have jobs and are working more hours. “The rise in full-time, year-round work led to an increase in incomes and earnings at the household level,” the Census Bureau found. Better yet, the growing number of hours worked by single mothers led to a decline in child poverty of 2.5 percentage points. …the 1996 welfare-reform law…overturned Aid to Families with Dependent Children, which had entitled poor single mothers to cash benefits. As a result, unemployment among the growing number of single mothers was high. Essentially, welfare reform said no more free lunch, instituting work requirements and replacing open-ended AFDC with a time-limited grant to poor mothers (TANF, or Temporary Assistance to Needy Families). …full-time, year-round work can reduce poverty and…poor minority women can improve their lives and the lives of their children through nine-to-five labor. Any “welfare-reform-is-a-failure” narrative should collapse under the weight of such demonstrated facts.

And it’s worth pointing out that one of America’s major redistribution programs – the EITC – is entirely based on work.

Recipients only get a handout if they also earn some money.

Regarding the desirability of work requirements, we can learn from what’s happened in other countries.

In an article from last year, Ryan Streeter of the American Enterprise Institute found good news from work-oriented reforms, especially in Nordic nations.

A majority of Americans, including 55 percent of people living in poverty, believe the purpose of welfare is to help people get on their feet, not just to dispense benefits. Eight in 10 low-income respondents believe working should be required to receive welfare benefits. …Welfare reformers might draw some lessons from unlikely places…the Scandinavian welfare systems are arguably more pro-work than ours… For instance, to deal with declining labor force participation, Denmark eliminated permanent disability benefits for people under 40 and refashioned its system to make employment central. Sweden reformed its welfare system to focus on rapid transitions from unemployment to work. Their program lowers jobless assistance the longer one is on welfare. …Similarly, the British government combined six welfare programs with varying requirements into a single “universal credit.” …An evaluation of the new program, which encourages work, found that 86 percent of claimants were trying to increase their work hours and 77 percent were trying to earn more, compared to 38 percent and 55 percent, respectively, under the previous system.

Regarding the reforms in the United Kingdom, here are some excerpts from a report by Emily Top for E21.

The UK overhauled its welfare system with the Welfare Reform Act 2012. …In addition to simplifying the programs into one, the Act required claimants to agree to a “Claimant Commitment,” in which they sought the services of a work coach to improve their job prospects and get hired. …the program has led to an increase in UK labor force participation as well as a decrease in dependence on benefits. During the same period that the labor force participation rate in the U.S. declined from 84 percent to 82 percent for prime age workers, the rate in the UK increased from 84 percent to 86 percent.

Let’s close by looking at some academic research on work requirements in the United States.

Three professors studied the impact of Bill Clinton’s welfare reform on recipients and found significant societal benefits.

The US Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, often referred to as ‘welfare reform’, was a major policy shift in the US that sought to dramatically reduce dependence of single parents on government benefits by promoting work… The key strategy for reducing dependence was to promote employment by imposing work requirements as a condition for receiving benefits in concert with a lifetime limit on receipt of cash assistance. …The reforms have been successful in that welfare caseloads have declined dramatically – 78% since their peak in 1994. …In a series of recent papers, we investigated the effects of welfare reform in the US – which is still in effect today – on women’s illicit drug use and other types of crime… We found robust evidence that welfare reform led to a 10%–21% decline in illicit drug use among women at risk of relying on welfare, as well as associated declines in drug-related arrests (6%–7%), drug-related hospital emergency department episodes (7%–11%), and possibly drug-related prison admissions (11%–19%). These findings provide some support of the ‘mainstreaming’ argument underlying welfare reform. …We found that welfare reform led to decreases in female arrests for property crime – which is the type of crime women are most likely to commit (Campagniello 2014) – by 4–5%… The findings from this study point to broad-based work incentives – and, by inference, employment – as an important determinant of female property crime…

These are all good outcomes.

Though the best news – both for taxpayers and poor people – is contained in this chart from their research.

P.S. While the Trump proposal is not my ideal policy, it does compare well with the Obama Administration’s efforts to expand food stamp dependency – including bribes for states that signed up additional recipients.

P.P.S. With all redistribution programs, there is an ever-present challenge – highlighted by Thomas Sowell – of how to avoid trapping people in dependency with high implicit marginal tax rates.

P.P.P.S. There’s also a moral issue of whether people should feel ashamed for taking government handouts.

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Andrew Yang’s Dependency Dividend

While he’s not as outwardly radical as Elizabeth Warren, Bernie Sanders, and Kamala Harris, Andrew Yang has joined together two very bad ideas – universal handouts and a value-added tax.

Needless to say, I was not overflowing with praise when asked to comment.

At the risk of understatement, giving every adult a $12,000-per-year entitlement would be a recipe for bigger government and more dependency.

Even Joe Biden understands that this would erode societal capital.

And the ever-sensible Swiss, in a 2016 referendum, overwhelmingly rejected universal handouts.

Needless to say, it also would be a catastrophic mistake to give Washington several new sources of revenue to finance this scheme. A big value-added tax would be especially misguided.

Let’s take a closer look at Yang’s plan. As I noted in the interview, the Tax Foundation crunched the numbers.

Andrew Yang said he wants to provide each American adult $1,000 per month in a universal basic income (UBI) he calls a “Freedom Dividend.” He argued that this proposal could be paid for with…a combination of new revenue from a VAT, other taxes, spending cuts, and economic growth. …We estimate that his plan, as described, could only fund a little less than half the Freedom Dividend at $1,000 a month. A more realistic plan would require reducing the Freedom Dividend to $750 per month and raising the VAT to 22 percent.

If you’re interested, here are more details about his plan.

…individuals would need to choose between their current government benefits and the Freedom Dividend. As such, some individuals may decline the Freedom Dividend if they determine that their current government benefits are more valuable. The benefits that individuals would need to give up are Supplemental Nutritional Assistance Program (SNAP), Temporary Assistance for Needed Families (TANF), Supplemental Security Income (SSI), and SNAP for Women, Infants, and Child Program (WIC). To cover the additional cost of the Freedom Dividend, Yang would raise revenue in five ways: A 10 percent VAT…A tax on financial transactions…Taxing capital gains and carried interest at ordinary income rates…Remove the wage cap on the Social Security payroll tax…A $40 per metric ton carbon tax.

By the way, Yang has already waffled on some of his spending offsets, recently stating that the so-called Freedom Dividend wouldn’t replace existing programs.

In any event, the economic and budgetary effects would be bad news.

…his overall plan would reduce the long-run size of the economy and the tax base. The three major taxes in his plan (VAT, carbon tax, and payroll tax increase), while efficient sources of revenue, would tend to reduce labor force participation by reducing the after-tax returns to working. Using the Tax Foundation Model, we estimate that the weighted average marginal tax rate on labor income would increase by about 8.6 percentage points. The resulting reduction in hours worked would ultimately reduce output by 3 percent. We estimate that Yang would lose about $124 billion each year in revenue due to the lower output.

Here’s how the Tax Foundation scores the plan.

As you can see, the VAT, the financial transactions tax, the higher capital gains tax, and the increase in the payroll tax burden don’t even cover half the cost of the universal handout.

P.S. When the Tax Foundation say a tax is an “efficient source of revenue,” that means that it would result in a modest level of economic damage on a per-dollar-collected basis. This is why they show a rather modest amount of negative revenue feedback (-$124 billion).

I think they’re being too kind. Extending the Social Security payroll tax to all income would result in a huge increase in marginal tax rates on investors, entrepreneurs, and other high-income taxpayers. As explained a few days ago, those are the people who are very responsive to changes in tax rates.

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Foreign Aid Won’t Reduce Illegal Immigration from Central America

Even though I (correctly) doubted the Trump Administration’s sincerity, I applauded proposed reductions in foreign aid back in 2017.

I very much want to reduce poverty in poor nations, of course, but the evidence is very strong that government handouts don’t do a very good job.

Moreover, we also have lots of data showing poor nations can enjoy dramatic improvements in living standards so long as they adopt good policy.

Hong Kong, Singapore, Chile, and Botswana are very good examples.

Yet some people haven’t learned this lesson. Consider the current debate over Trump’s threat to end aid to Central America if illegal immigration isn’t reduced.

A column in Fortune makes the case that handouts to Central America are necessary to reduce human smuggling.

President Donald Trump ordered the State Department to cut funding for Guatemala, Honduras, and El Salvador this weekend in retaliation for the recent influx of migrants from these nations, reversing a longstanding policy that says aid helps abate immigration. …According to Liz Schrayer, president and CEO of the U.S. Global Leadership Coalition—a nonprofit coalition of businesses and NGOs dedicated to American development and diplomacy—pulling back aid “exasperates the exact root causes that are creating the migration numbers’ increase.” …“It will only result in more children and families being forced to make the dangerous journey north to the U.S.-Mexico border,” said the five Democratic lawmakers in a statement.

A piece in the New York Times makes the same argument.

The Trump administration’s decision to cut off aid to El Salvador, Guatemala and Honduras to punish their governments for failing to curb migration is a rash response to a real policy dilemma. …it will exacerbate migration from the region without twisting Central American politicians’ arms. …The decision to cut off aid is bound to drive up migration numbers.

Ironically, the author admits that aid is ineffective.

…we shouldn’t pretend that the aid itself was doing much good… it is mostly distributed inefficiently in large blocks by foreign contractors.

Though he seems to share the naive (and presumably self-interested) arguments of international bureaucrats about the potential efficacy of aid.

Central American governments and elites have gotten away with abdicating their fiduciary, social and legal responsibilities to their citizens. They have failed to collect tax revenue and to invest in social programs and job creation that alleviate the plight of their poor.

Even some small-government conservatives seem to think that more aid would make recipient nations more prosperous and thus reduce illegal immigration.

What President Trump is doing now — cutting aid — is wrong. …As former White House Chief of Staff and SOUTHCOM Commander, General John Kelly, has noted, “If we can improve the conditions, the lot in life of Hondurans, Guatemalans, Central Americans, we can do an awful lot to protect the southwest border.” …We risk undermining our longterm national interests by cutting foreign aid. We should, instead, spend it wisely in those countries to ensure stable governments that view us as allies and work with them to root out crime, corruption, and cartels. The present policy to cut foreign aid cuts off our national nose to spite our face.

This is not an impossible prescription.

But it’s also the triumph of hope over experience.

In the real world, we have mountains of evidence that foreign aid weakens recipient economies by subsidizing corruption and larger burdens of government.

Let’s look at some analysis on this issue.

In a piece published by CapX, Matt Warner recommends less redistribution rather than more.

…the poor know how to get themselves out of poverty. They just need more opportunity to do it. The question we must ask ourselves is: to what degree are our current development aid strategies aligned with this insight? …If the intervention itself is part of the problem, what can outsiders really do to help? Today there are at least 481 research and advocacy organisations in 92 countries pushing reform agendas to provide more economic opportunity and prosperity for all. The “Doing Business” report provides a blueprint for change. Local reform organisations, supported by private philanthropy, provide the leadership to achieve it and the world’s poor will show us their own paths to prosperity if we will all just learn to get out of their way.

Writing for Barron’s, Paul Theroux notes that Africa regressed when it was showered with aid.

Africa receives roughly $50 billion in aid annually from foreign governments, and perhaps $13 billion more from private philanthropic institutions… Africa is much worse off than when I first went there 50 years ago to teach English: poorer, sicker, less educated, and more badly governed. It seems that much of the aid has made things worse. …Zambian-born economist Dambisa Moyo calls aid a “debilitating drug,” arguing that “real per-capita income [in Africa] today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades.” The Kenyan economist James Shikwati takes this same line on aid, famously telling the German magazine Der Spiegel, “For God’s sake, please stop.”

Brad Lips of the Atlas Network explains why aid often is counterproductive.

The international community has donated more than $1.8 trillion to poor countries since 2000 – but this development aid hasn’t lifted many people out of poverty. Arguably, it has made some recipient nations poorer. …the aid has bred corruption, fostered dependence and impeded reforms that deliver sustainable economic growth. …Between 1970 and 2000 – a period in which aid to Africa skyrocketed – annual gross domestic product growth per capita on the continent fell from about 2 percent to zero growth, according to a study by an economist at New York University.

A column in the U.K.-based Times is very blunt about what all this means.

…the international development secretary should have abolished her department as soon as she was appointed to it… We kid ourselves that this aid works, to salve our consciences about being better off. But as we know, the money benefits charities, quangos, bureaucrats, tyrants and the predatory elite, and all these years later your average African is no better off.

Let’s close by looking at a thorough 2005 study from the International Policy Network. Authored by Fredrik Erixon, it documents the failure of foreign aid.

…the ‘gap theory’…assumes that poor countries are trapped in a vicious cycle of poverty because they are unable to save and hence have insufficient capital to invest in growth-promoting, productivity-enhancing activities. But there simply is no evidence that this savings/investment ‘gap’ exists in practice. As a result, aid has failed to ‘fill the gap’. Instead, it has, over the past fifty years, largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty. …The reason countries are poor is…because they lack the institutions of the free society: property rights, the rule of law, free markets, and limited government. … many studies point to the fact that government consumption in SubSaharan Africa has increased when aid has increased.

Here’s the evidence showing has more development assistance is associated with weaker economic performance.

By the way, the International Monetary Fund deserves unrestrained scorn for recommending higher tax burdens on Africans, thus making economic growth even harder to achieve.

Now let’s look at how two Asian regions have enjoyed growth as aid lessened.

Last but not least, here’s some very encouraging data from Africa.

I already mentioned that Botswana is an exception to the rule. As you can see, that nation’s success is definitely not the result of more handouts.

The bottom line is that President Trump is right, even if his motives are misguided.

Foreign aid is not the recipe for prosperity in Central America.

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Work, Dependency, and the Welfare State

One of the more elementary observations about economics is that a nation’s prosperity is determined in part by the quantity of quality of labor and capital. These “factors of production” are combined to generate national income.

I frequently grouse that punitive tax policies discourage capital. There’s less incentive to invest, after all, if the government imposes extra layers of tax on income that is saved and invested.

Bad tax laws also discourage labor. High marginal tax rates penalize people for being productive, and this can be especially counterproductive for entrepreneurship and innovation.

Though we shouldn’t overlook how government discourages low-income people from being productively employed. Only the problem is more on the spending side of the fiscal equation.

In today’s Wall Street Journal, John Early and Phil Gramm share some depressing numbers about growing dependency in the United States.

During the 20 years before the War on Poverty was funded, the portion of the nation living in poverty had dropped to 14.7% from 32.1%. Since 1966, the first year with a significant increase in antipoverty spending, the poverty rate reported by the Census Bureau has been virtually unchanged. …Transfers targeted to low-income families increased in real dollars from an average of $3,070 per person in 1965 to $34,093 in 2016. …Transfers now constitute 84.2% of the disposable income of the poorest quintile of American households and 57.8% of the disposable income of lower-middle-income households. These payments also make up 27.5% of America’s total disposable income.

This massive expansion of redistribution has negatively impacted incentives to work.

The stated goal of the War on Poverty is not just to raise living standards, but also to make America’s poor more self-sufficient and to bring them into the mainstream of the economy. In that effort the war has been an abject failure, increasing dependency and largely severing the bottom fifth of earners from the rewards and responsibilities of work. …The expanding availability of antipoverty transfers has devastated the work effort of poor and lower-middle income families. By 1975 the lowest-earning fifth of families had 24.8% more families with a prime-work age head and no one working than did their middle-income peers. By 2015 this differential had risen to 37.1%. …The War on Poverty has increased dependency and failed in its primary effort to bring poor people into the mainstream of America’s economy and communal life. Government programs replaced deprivation with idleness, stifling human flourishing. It happened just as President Franklin Roosevelt said it would: “The lessons of history,” he said in 1935, “show conclusively that continued dependency upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber.”

In another WSJ column on the same topic, Peter Cove reached a similar conclusion.

America doesn’t have a worker shortage; it has a work shortage. The unemployment rate is at a 15-year low, but only 55% of Americans adults 18 to 64 have full-time jobs. Nearly 95 million people have removed themselves entirely from the job market. According to demographer Nicholas Eberstadt, the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame. …insisting on work in exchange for social benefits would succeed in reducing dependency. We have the data: Within 10 years of the 1996 reform, the number of Americans in the Temporary Assistance for Needy Families program fell 60%. But no reform is permanent. Under President Obama, federal poverty programs ballooned.

Edward Glaeser produced a similar indictment in an article for City Journal.

In 1967, 95 percent of “prime-age” men between the ages of 25 and 54 worked. During the Great Recession, though, the share of jobless prime-age males rose above 20 percent. Even today, long after the recession officially ended, more than 15 percent of such men aren’t working. …The rise of joblessness—especially among men—is the great American domestic crisis of the twenty-first century. It is a crisis of spirit more than of resources. …Proposed solutions that focus solely on providing material benefits are a false path. Well-meaning social policies—from longer unemployment insurance to more generous disability diagnoses to higher minimum wages—have only worsened the problem; the futility of joblessness won’t be solved with a welfare check. …various programs make joblessness more bearable, at least materially; they also reduce the incentives to find work. …The past decade or so has seen a resurgent progressive focus on inequality—and little concern among progressives about the downsides of discouraging work. …The decision to prioritize equality over employment is particularly puzzling, given that social scientists have repeatedly found that unemployment is the greater evil.

Why work, though, when government pays you not to work?

And that unfortunate cost-benefit analysis is being driven by ever-greater levels of dependency.

Writing for Forbes, Professor Jeffrey Dorfman echoed these findings.

…our current welfare system fails to prepare people to take care of themselves, makes poor people more financially fragile, and creates incentives to remain on welfare forever. …The first failure of government welfare programs is to favor help with current consumption while placing almost no emphasis on job training or anything else that might allow today’s poor people to become self-sufficient in the future. …It is the classic story of giving a man a fish or teaching him how to fish. Government welfare programs hand out lots of fish, but never seem to teach people how to fish for themselves. The problem is not a lack of job training programs, but rather the fact that the job training programs fail to help people. …The third flaw in the government welfare system is the way that benefits phase outs as a recipient’s income increases. …a poor family trying to escape poverty pays an effective marginal tax rate that is considerably higher than a middle class family and higher than or roughly equal to the marginal tax rate of a family in the top one percent.

I like that he also addressed problems such as implicit marginal tax rates and the failure of job-training programs.

Professor Lee Ohanian of the Hoover Institution reinforces the point that the welfare state provides lots of money in ways that stifle personal initiative.

Inequality is not an issue that policy should address. …Society, however, should care about creating economic opportunities for the lowest earners. …a family of four at the poverty level has about $22,300 per year of pre-tax income. Consumption for that same family of four on average, however, is about $44,000 per year, which means that their consumption level is about twice as high as their income. …We’re certainly providing many more resources to low-earning families today. But on the other hand, we have policies in place that either limit economic opportunities for low earners or distort the incentives for those earners to achieve prosperity.

I’ve been citing lots of articles, which might be tedious, so let’s take a break with a video about the welfare state from the American Enterprise Institute.

And if you like videos, here’s my favorite video about the adverse effects of the welfare state.

By the way, it isn’t just libertarians and conservatives who recognize the problem.

Coming from a left-of-center perspective, Catherine Rampell explains in the Washington Post how welfare programs discourage work.

…today’s social safety net discourages poor people from working, or at least from earning more money. …you might qualify for some welfare programs, such as food stamps, housing vouchers, child-care subsidies and Medicaid. But if you get a promotion, or longer hours, or a second job, or otherwise start making more, these benefits will start to evaporate — and sometimes quite abruptly. You can think about this loss of benefits as a kind of extra tax on low-income people. …Americans at or just above the poverty line typically face marginal tax rates of 34 percent. That is, for every additional dollar they earn, they keep only 66 cents. …One in 10 families with earnings close to the poverty line faces a marginal tax rate of at least 65 percent, the CBO found. …You don’t need to be a hardcore conservative to see how this system might make working longer hours, or getting a better job, less attractive than it might otherwise be.

To understand what this means, the Illinois Policy Institute calculated how poor people in the state are trapped in dependency.

The potential sum of welfare benefits can reach $47,894 annually for single-parent households and $41,237 for two-parent households. Welfare benefits will be available to some households earning as much as $74,880 annually. …A single mom has the most resources available to her family when she works full time at a wage of $8.25 to $12 an hour. Disturbingly, taking a pay increase to $18 an hour can leave her with about one-third fewer total resources (net income and government benefits). In order to make work “pay” again, she would need an hourly wage of $38 to mitigate the impact of lost benefits and higher taxes.

Agreeing that there’s a problem does not imply agreement about a solution.

Folks on the left think the solution to high implicit tax rates (i.e., the dependency trap) is to make benefits more widely available. In other words, don’t reduce handouts as income increases.

The other alternative is to make benefits less generous, which will simultaneously reduce implicit tax rates and encourage more work.

I’m sympathetic to the latter approach, but my view is that welfare programs should be designed and financed by state and local governments. We’re far more likely to see innovation as policy makers in different areas experiment with the best ways of preventing serious deprivation while also encouraging self-sufficiency.

I think we’ll find out that benefits should be lower, but maybe we’ll learn in certain cases that benefits should be expanded. But we won’t learn anything so long as there is a one-size-fits-all approach from Washington.

Let’s close with a political observation. A columnist for the New York Times is frustrated that many low-income voters are supporting Republicans because they see how their neighbors are being harmed by dependency.

Parts of the country that depend on the safety-net programs supported by Democrats are increasingly voting for Republicans who favor shredding that net. …The people in these communities who are voting Republican in larger proportions are those who are a notch or two up the economic ladder — the sheriff’s deputy, the teacher, the highway worker, the motel clerk, the gas station owner and the coal miner. And their growing allegiance to the Republicans is, in part, a reaction against what they perceive, among those below them on the economic ladder, as a growing dependency on the safety net, the most visible manifestation of downward mobility in their declining towns. …I’ve heard variations on this theme all over the country: people railing against the guy across the street who is collecting disability payments but is well enough to go fishing, the families using their food assistance to indulge in steaks.

It’s not my role to pontificate about politics, so I won’t address that part of the column. But I will say that I’ve also found that hostility to welfare is strongest among those who have first-hand knowledge of how dependency hurts people.

P.S. If you want evidence for why Washington should get out of the business of income redistribution, check out this visual depiction of the welfare state.

P.S. The Canadians can teach us some good lessons about welfare reform.

P.P.S. The Nordic nations also provide valuable lessons, at least from the don’t-do-this perspective.

P.P.P.S. Last but not least, there’s a Laffer-type relationship between welfare spending and poverty.

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Lessons from Europe on Welfare, Dependency, and Self-Reliance

America has a major dependency problem. In recent decades, there’s been a significant increase in the number of working-age adults relying on handouts.

This is bad news for poor people and bad news for taxpayers. But it’s also bad news for the nation since it reflects an erosion of societal capital.

For all intents and purposes, people are being paid not to be productive.

Guided by the spirit of Calvin Coolidge, we need to reform the welfare state.

Professor Dorfman of the University of Georgia, in a column for Forbes, pinpoints the core problem.

The first failure of government welfare programs is to favor help with current consumption while placing almost no emphasis on job training or anything else that might allow today’s poor people to become self-sufficient in the future. …It is the classic story of giving a man a fish or teaching him how to fish. Government welfare programs hand out lots of fish, but never seem to teach people how to fish for themselves. The problem is not a lack of job training programs, but rather the fact that the job training programs fail to help people. In a study for ProPublica, Amy Goldstein documents that people who lost their jobs and participated in a federal job training program were less likely to be employed afterward than those who lost their jobs and did not receive any job training. That is, the job training made people worse off instead of better. …Right now, the government cannot teach anyone how to find a fish, let alone catch one.

And Peter Cove opines on the issue for the Wall Street Journal.

…the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame. More than a fifth of American men of prime working age are on Medicaid. According to the Census Bureau, nearly three-fifths of nonworking men receive federal disability benefits. The good news is that the 1996 welfare reform taught us how to reduce government dependency and get idle Americans back to work. …Within 10 years of the 1996 reform, the number of Americans in the Temporary Assistance for Needy Families program fell 60%.

Interestingly, European nations seem to be more interested in fixing the problem, perhaps because they’ve reached the point where reform is a fiscal necessity.

Let’s look at what happened when the Dutch tightened benefit rules.

A fascinating new study from economists in California and the Netherlands sheds light on how welfare dependency is passed from one generation to the next – and how to save children from lives of idleness.

A snowball effect across generations could arise if welfare dependency is transmitted from parents to their children, with potentially serious consequences for the future economic situation of children. …there is little evidence on whether this relationship is causal. Testing for the existence of a behavioural response, where children become benefit recipients because their parents were, is difficult… Our work overcomes these identification challenges by exploiting a 1993 reform in the Dutch Disability Insurance (DI) programme… The 1993 reform tightened DI eligibility for existing and future claimants, but exempted older cohorts currently on DI (age 45+) from the new rules. This reform generates quasi-experimental variation in DI use… Intuitively, the idea is to compare the children of parents who are just over 45 years of age to children whose parents are just under 45. .

Here’s the methodology of their research.

The first step is to understand the impact of the 1993 reform on parents. Figure 1 shows that parents who were just under the age 45 cut-off, and therefore subject to the harsher DI rules, are 5.5 percentage points more likely to exit DI by the year 1999 compared to parents just over the age 45 cut-off. These treated parents saw a 1,300 euro drop in payments on average. …the reform changed other outcomes as well. There is a strong rebound in labour earnings.

This chart from their research captures the discontinuity.

Here are the main results.

The second step is to see how children’s DI use changed based on whether the reform affected their parents. We measure a child’s cumulative use of DI as of 2014, by which time they are 37 years old on average. Figure 2 reveals a noticeable jump in child DI participation at the parental age cut-off of 45. There is an economically significant 1.1 percentage point drop for children if their parent was exposed to the reform, which translates into an 11% effect relative to the mean child participation rate of 10%. …welfare cultures, defined as a causal intergenerational link, exist.

This second chart illustrates the positive impact.

But here’s the most important part of the research.

Reducing access to redistribution to parents is a good way of boosting income and education for children.

…we examine whether a child’s taxable earnings and participation in other social support programmes change. Cumulative earnings up to 2014 rise by approximately €7,200 euros, or a little less than 2%, for children of parents subject to the less generous DI rules. In contrast, we find no detectable change in cumulative unemployment insurance receipt, general assistance (i.e. traditional cash welfare), or other miscellaneous safety net programs. Looking at a child’s educational attainment, there is intriguing evidence for anticipatory investments. When a parent is subject to the reform which tightened DI benefits, their child invests in 0.12 extra years of education relative to an overall mean of 11.5 years. …these findings provide suggestive evidence that children of treated parents plan for a future with less reliance on DI in part by investing in their labour market skills.

And it’s also worth noting that taxpayers benefit when welfare eligibility is restricted.

These strong intergenerational links between parents and children have sizable fiscal consequences for the government’s long term budget. Cumulative DI payments to children of the targeted parents are 16% lower. This is a substantial additional saving for the government’s budget, especially since there is no evidence that children substitute these reductions in DI income for additional income from other social assistance programmes. Furthermore, there is a fiscal gain resulting from the increased taxes these children pay due to their increased labour market earnings. Overall, we calculate that through the year 2013, children account for 21% of the net fiscal savings of the 1993 Dutch reform in present discounted value terms. This share is projected to increase to 40% over time.

Ryan Streeter of American Enterprise Institute explains that other European nations also are reforming.

Welfare reformers might draw some lessons from unlikely places, such as Scandinavia. While progressives like to uphold Nordic democratic socialism as a model for America, the Scandinavian welfare systems are arguably more pro-work than ours… For instance, to deal with declining labor force participation, Denmark eliminated permanent disability benefits for people under 40 and refashioned its system to make employment central. Sweden reformed its welfare system to focus on rapid transitions from unemployment to work. Their program lowers jobless assistance the longer one is on welfare. The Nordic model is more focused on eliminating reasons not to work such as caregiving or lack of proper training than providing income replacement. Similarly, the British government combined six welfare programs with varying requirements into a single “universal credit.” The benefit is based on a sliding scale and decreases as a recipient’s earnings increase, replacing several differing formulas for phasing out of welfare programs with one. An evaluation of the new program, which encourages work, found that 86 percent of claimants were trying to increase their work hours and 77 percent were trying to earn more, compared to 38 percent and 55 percent, respectively, under the previous system. …Scandinavia and Britain learned a while ago that successful welfare reform is not just about how much money a country spends on people who earn too little. It’s really about how to help them find and keep a good job. It’s time for America to catch up.

Amen.

For what it’s worth, I think we’ll be most likely to get good results if we get Washington out of the redistribution business.

In effect, block grant all means-tested programs to the states and then phase out the federal funding. That would give states the ability to experiment and they could learn from each other about the best way of helping the truly needy while minimizing incentives for idleness.

P.S. This WIzard-of-Id parody is a very good explanation of why handouts discourage productive work.

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Good News on Unemployment, but So-So News on Jobs and Dependency

There is a lot of good news about the job market in America.

The official unemployment rate, released just yesterday, is down to 4.1 percent, which is the lowest its been since the end of the Clinton years. Even more impressive, the number of people getting unemployment benefits (i.e., getting paid not to work) has dropped to the lowest level since the early 1970s.

I don’t want to rain on this parade, but the numbers aren’t as good as they seem.

Back during the Obama years, I repeatedly pointed out the real health of the labor market should be measured by looking at either the rate of labor force participation or the employment-population ratio.

These are the numbers that give us a more accurate picture of the extent to which labor is being productively utilized (remember, national income is determined by the quality and quantity of labor and capital in the economy).

So let’s dig into the government’s database on labor force statistics and see where we stand when examining these more-insightful numbers.

We’ll start with the data on the rate of labor force participation, which is basically a measure of those working and looking for work as a share of the adult population. As you can see, that rate dropped significantly at the end of the Bush years/beginning of the Obama years. And it hasn’t recovered even though the recession ended back in 2009.

By the way, we shouldn’t expect this rate to be 100 percent, or even anywhere close to that high. After all, the 16-and-up population includes plenty of full-time students, retired people, disabled, stay-at-home moms (or dads), and others.

But I worry about the downward trend.

Now let’s look at the employment-population ratio, which is slightly more encouraging. We see a precipitous drop during the recession, but at least the number has been trending in the right direction for several years.

Though it’s nonetheless semi-depressing that the increase has been rather slow and we haven’t come anywhere close to recovering from the downturn.

To help understand the rate of joblessness, here’s a video from the Mercatus Center.

And to better understand the rate of employment, here’s a video from Nicholas Eberstadt at the American Enterprise Institute.

As far as I’m concerned, the key factoid is near the end, where he points out that we would have 10 million additional working-age men productively employed if the rate of employment today was the same as it was in 1965.

And that’s largely the fault of government programs – such as unemployment insurance, disability, Obamacare, licensing, etc – that make it easier for people to choose to be unproductive.

Speaking of which, let’s close with some excerpts from one of Jason Riley’s columns in the Wall Street Journal.

Peter Cove dropped out of a graduate program at the University of Wisconsin-Madison more than 50 years ago to enlist in Lyndon Johnson’s War on Poverty. These days, he’s fighting a war on dependency. …Mr. Cove moved to New York in 1965 to work for the city’s new Anti-Poverty Operations Board… Mr. Cove…noticed… “The government’s unprecedented expenditures failed to bring about the decline in poverty that Johnson had promised. Instead, they made things worse.” Between 1962 and 2012, the percentage of the U.S. population receiving government assistance in the form of cash transfers almost doubled to 21% from 11.7%. …Between 1965 and 2011, the official poverty rate was essentially flat, while government spending per person on poverty programs rose by more than 900% after inflation. “…But as welfare spending soared, the decline in poverty came to a grinding halt.” …Mr. Cove…came to understand that the answer to poverty is prosperity, that the private sector is the better generator of prosperity, and that the best antipoverty program is a job. “Not only does big government get in the way when it provides disincentives to work, it also has a profoundly negative effect on community,”… The increase in government dependency that Mr. Cove laments predates President Obama by decades, but it did accelerate on Mr. Obama’s watch.

Great points, particularly about how the welfare state actually undermined progress on reducing poverty and also eroded societal capital.

All of which is captured in this Wizard-of-Id satire.

P.S. Some honest leftists admit that the welfare state has caused collateral damage.

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