Will Biden Make Poverty Hucksterism Official Policy?

There are three troubling things about the politics of poverty.

First, I frequently grouse and complain that some folks on the left don’t actually care about helping poor people. Instead, as explained in my Eighth Theorem of Government, they simply use poor people as props so they can expand the size and scope of the welfare state.

Second, I sometimes speculate that our friends on the left are more motivated by a disdain for the rich than they are by any desire to help the less fortunate (something that Margaret Thatcher observed many decades ago).

Third, some people knowingly (or perhaps in a few cases, unknowingly) lie by asserting that income inequality is the same thing as poverty – even if it means absurd conclusions such as there being more poverty in the United States than in Mexico.

For purposes of today’s column, we’re going to focus on this third group because lying about poverty may soon become official government policy.

In a column for the Wall Street Journal, the American Enterprise Institute’s Kevin Corinth warns that the Biden Administration is thinking about turning poverty hucksterism into official government policy.

A new report from the National Academy of Sciences seeks to redefine poverty. …the report’s real purpose could be to expand the welfare state. If the Census Bureau adopts the new poverty definition, millions more Americans could automatically be made eligible for benefits—leading to at least $124 billion in additional government spending over the next decade… It would also break with more than 50 years of precedent by establishing a relative standard. People could become better off and still be classified as “poor”; poverty would decline only if income at the bottom of the distribution increases more quickly than in the middle class. …Redrawing the official poverty line would be a nakedly political move without any scientific basis that could alter the scope of the safety net overnight.

I suspect readers won’t be surprised to learn that the report was put together by a very biased panel.

The 13 authors of the recent NAS paper appear to have been selected along partisan lines: 12 of them have contributed to Democratic causes or worked for Democratic administrations.

And I also suspect that nobody will be surprised to learn that a secondary effect will be to steer more redistribution to left-wing states.

As consequential is the potential reallocation of government assistance across states. The poverty line under the Supplemental Poverty Measure is higher in states like California and New York…and lower in states like West Virginia and Mississippi.

Adding $124 billion of additional cost to the welfare state would be bad news for taxpayers.

But the worst thing about this scheme is that it would enshrine dishonesty into Washington’s welfare state.

As I wrote a few years ago, it would be “insanely dishonest.” That’s because “everyone’s income could double and the supposed rate of poverty would stay the same.” Or that “a country could execute all the rich people and the alleged rate of poverty would decline.”

And now the Biden Administration is thinking about turning this type of dishonesty into official policy (which is hardly a surprise since the Obama Administration thought this awful idea was the right approach).

P.S. For anyone who actually wants to help poor people, we already know what works.

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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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Another Poverty Huckster

There are some policy fights that focus on technical disagreements (for instance, how much do deadweight losses increase when tax rates go up?) and other policy fights that involve moral disagreements (for instance, should drugs be legalized when that may lead some people to harm themselves?).

Other policy fights, however, involve dishonesty.

Poverty hucksters might be the most irritating example. These are the people who push an utterly dishonest definition of poverty, which I first wrote about back in 2010. But this article from 2019 has the best summary.

…folks on the left have decided to use an artificial and misleading definition of poverty. One that depends on the distribution of income rather than any specific measure of poverty. Which is insanely dishonest. It means that everyone’s income could double and the supposed rate of poverty would stay the same. Or a country could execute all the rich people and the alleged rate of poverty would decline. No wonder the practitioners of this approach often produce absurd data, such as the OECD’s assertion that there’s more poverty in the United States than in basket case economies such as Greece and Italy.

Sadly, the many complaints from me and others have not stopped the poverty hucksters.

Here’s a chart I just downloaded from the Organization for Economic Cooperation and Development, one of the organizations pushing the dishonest measure of poverty.

As you can see, they want people to believe that there’s more poverty in the United States than in nations such as Turkey, Italy, and Greece.

Heck, they also want people to think the wealthy nations of Luxembourg and Switzerland have more poverty than Hungary.

I’m sharing this information because it’s time to add a new member to our collection of poverty hucksters.

Timothy Noah of the New Republic has a column in the Washington Post that utilizes the OECD’s inaccurate definition of poverty. Here are some excerpts from his article.

How can the richest nation on Earth have so much poverty? …The Bible tells us that the poor are always with us. But devout resignation can’t explain why the United States, with the world’s largest economy (gross domestic product: $26.15 trillion) should house more poverty than many much poorer countries. In 2021, the Organization for Economic Cooperation and Development ranked 37 member nations by poverty rate. Costa Rica had the highest rate, followed by Bulgaria, but way up there at No. 10 was the United States. …We may not have the means to eliminate poverty. But we can certainly do better than Estonia.

If you read Noah’s entire article, you’ll quickly see why he uses the OECD’s dishonest data.

Like Biden, he wants a massive expansion of class-warfare taxation and a big increase in the welfare state, so it is in his interest to portray America as a dystopian hellscape of suffering and deprivation.

It would be nice, however, if he relied on accurate data. Then again, accurate data would backfire on him.

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The Adverse Economic Consequences of Busting Social Security’s Wage Base Cap

Today we are going to look at proposals to expand the burden of Social Security payroll taxes, and let’s start by recycling this 2008 video.

All of the analysis in the video is still accurate, but two of the numbers need to be updated.

• Social Security’s long-run deficit is now $56 trillion rather than $24.9 trillion as was the case back in 2008.
• Social Security payroll taxes now apply to income up to $162K rather than $102K as was the case back in 2008.

If you don’t have time to watch a 9-minute video, I can summarize the issue by noting that Social Security was designed as an “earned benefit,” which means workers contribute to the system in exchange for future benefits. The more you earn, the more you pay, and the more benefits you receive.

But because Social Security is supposed to be akin to an insurance program, there’s a limit on both the amount of benefits any retiree can receive and the amount of taxes that any worker must pay (the same principle applies in many other nations).

Some politicians want to get rid of the limit (the “wage base cap”) on the amount of taxes workers must pay. Instead of applying the 12.4 percent Social Security payroll tax on the first $162,000 of income, they want to impose the tax on all income.

In some cases, they want this big increase in marginal tax rates in order to prop up the Social Security system while in other cases they actually want to expand the program.

In either case, the economic consequences would be very bad.

In today’s Wall Street Journal, Travis Nix explains why this would be counterproductive.

…lawmakers in both parties are mulling the idea of lifting the payroll tax cap. The resulting increase in revenue would do little more than delay the inevitable by extending the program’s life a few more years. …European countries cap payroll taxes at much lower incomes than the U.S. does. Germany caps payroll taxes for health insurance at about $62,000 and the Netherlands caps theirs for social security at $40,370. Uncapping the payroll tax in the U.S. would only widen the disparity and make America a less attractive country in which to work and invest. …Uncapping the payroll tax would raise the top tax rate on Americans’ labor income—income and employee payroll tax combined—to as high as 43.2%. This excludes state taxes and the employer payroll tax, which make the rate even higher. The U.S. hasn’t seen labor tax rates that high since before Ronald Reagan. …European countries that cap their payroll taxes at relatively low incomes understand that you can’t fund a social-safety net without providing an incentive to work. The U.S. should too.

Let’s also look at what Mark Warshawsky of the American Enterprise Institute wrote last year.

…imposing a massive tax increase — 12.4 percentage points — on the earnings of about 10 million highly productive, mostly middle-class workers earning more than $160,200 would have several notable consequences. It would reduce their support for the program, severely discourage their labor market participation, and encourage payroll tax avoidance through converting earnings to incentive stock options and other forms of employee stock ownership. …In many instances, these workers would have their wages taxed at federal, state and local levels at rates exceeding 70 percent. …almost 20 percent of current and future covered workers are projected to earn above the taxable maximum in any one year.

And here is some of Allison Schrager’s analysis from 2020.

When it comes to financing the future of Social Security, many Democrats have a simple and wrong solution: lift the cap on earnings subject to the payroll tax. …there are costs to these plans. A 12.4% marginal tax increase is significant. If the cap is eliminated, an individual who makes $250,000 a year would see their Social Security tax liability increase by 88%. …many households—especially those in states with high state taxes—will be paying more than 60% in federal, state, and local income and payroll taxes… only 6% of the population earns more than the cap. But income varies over people’s lives: 36% of Americans will be in the top 5% of earners at least one year of their career.

I’ll close by observing that it we’ve had big fights under Bush, Obama, Trump, and Biden about whether the top personal income tax rate should go up by about 3 percentage points or down by 3 percentage points.

Since keeping marginal tax rates low helps encourage productive behavior, those were important fights.

Now we face a fight that should be far more important since some politicians want to raise the marginal tax rate by 12.4 percentage points.

It is true that Social Security is in deep financial trouble, but propping up (or expanding) the current system would be bad news for the economy and it would produce a bleaker future for young people.

It would be far better to begin a transition to personal retirement accounts.

P.S. Chile and Australia have created personal retirement accounts. You can also learn about reforms in Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.

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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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Thanksgiving, Property Rights, and Redistribution

I normally share this video from Reason every Thanksgiving.

But this year I’m going to recycle instead a video from John Stossel.

The moral of the story is that societies based on collectivism do not succeed.

People don’t work hard when the rewards of their labor go to others. Even in small communities, that approach does not work.

By contrast, they have a much greater incentive to be productive when the benefits accrue to themselves and their families.

In a nutshell, redistributionism does not work. This is why the original Plymouth Colony was failing. And it’s why places such as Cuba today are so miserably poor.

This is a lesson to keep in mind when people on the left or right try to tell you that bigger government is a good idea.

Let’s conclude with some Thanksgiving-themed humor about libertarians.

There  are lots of jokes about a Trump-loving uncle causing discord over turkey, but libertarians have similar abilities.

They even relish the opportunity.

Two more items for our collection.

P.S. This column from the archives shows how politicians might ruin Thanksgiving.

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The Scottish Version of Great Moments in Human Rights

Redistribution is a bad idea primarily because of economics.

People getting handouts have less incentive to be productive and people paying taxes to finance that spending have less incentive to be productive.

That translates into less economic output, which means lower living standards.

But there’s another reason to be concerned about redistribution. I worry that it erodes societal capital (i.e., the traits such as work ethic, self reliance, etc, that are associated with successful societies).

What happens, for instance, when politicians convince people that have a “human right” to other people’s money?

It would be very difficult to be optimistic about a society where most people have that mindset.

This is why I’m very pessimistic that there will ever be a meaningful economic rebound in nations such as Greece and Argentina.

Simply stated, too many people thing they have a right to government-provided goodies. Which means, of course, that they think they have the right to live off the labor of others.

Let’s look at an example.

Remy Tumin reports in the New York Times that Scottish politicians have decided that there is a human right to tampons and sanitary pads.

Period products are now free to anyone in Scotland who needs them, nearly two years after the country’s Parliament approved a landmark piece of legislation. The initiative makes Scotland the first country in the world to provide free sanitary products, part of a global effort to end “period poverty”… The 2020 legislation in Scotland came on the heels of an earlier law that provided free access to tampons and sanitary pads in schools, colleges, universities and other public buildings. …People can find the nearest location with free period products through a mobile app… Seventeen states and Washington, D.C., have passed laws that require free access to period products for students.

As an economist, I’m irked that the story keeps referring to “free.”

Period products will still have a cost. All that’s happening is that taxpayers are paying instead of users.

I’m also dismayed (but not surprised) that there is no discussion about the potential impact of “third-party payer.” In all likelihood, producers will take advantage of this new entitlement by increasing prices.

But the most depressing part of the story is that this idea seems quite popular. So what comes next? Well, food is even more important to human existence, so why not make food “free” as well?

That’s a recipe for creating a nation filled with people like Obama’s Julia and Biden’s Linda.

And Margaret Thatcher warned us where that leads.

P.S. Here are some other not-so-great moments in human rights.

• In Canada, there’s now a right to be an employed alcoholic.
• Across Europe, a satellite dish is now a human right.
• The Department of Housing and Urban Development asserts there is a right to “emotional support animals” in college dorms.
• In Finland, broadband access is a basic right.
• In France, it is against the law to say your husband is under-endowed or that your wife is fat.
• There’s now an entitlement for free soccer broadcasts in Europe.
• In Italy, you have the right to…um…your testicles.
• Both the United Nations and the Obama Administration think there’s a right to taxpayer-financed birth control.
• In the United States, the elderly have the right to taxpayer-financed sex-change operations.
• There’s even a right to a “special accommodation” if you’re a pee-shy worker in America.

P.P.S. Today’s column revolves around the battle between what some call “positive” and “negative” rights and liberties.

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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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More Evidence Against Basic Income

Some people argue the government should give everyone a “basic income.”

The problem with that approach (and the problem with other types of redistribution) is that some people will choose not to work if they can simply rely on handouts from the government.

That’s not good for the overall economy because total output is determined by the quality and quantity of labor and capital being utilized.

Some supporters of basic income claim that basic income would not discourage work.

They point out that giving the handouts to everyone would solve the problem that exists with most forms of redistribution, which is punitive, implicit marginal tax rates if recipients try to become self-sufficient.

It would be great to solve that problem, but I’m skeptical that basic income would be a net positive.

Let’s review some new evidence about no-strings handouts. Allysia Finley of the Wall Street Journal summarized the key findings of some new academic research.

Did pandemic stimulus payments harm lower-income Americans? That’s the implication of a new study by social scientists at Harvard and the University of Exeter. Liberals argue that no-strings-attached handouts encourage better financial decisions and healthier lifestyles. …The Harvard study put this hypothesis to the test and found the opposite.During a randomized trial conducted from July 2020 to May 2021, researchers assigned 2,073 low-income participants to receive a one-time unconditional cash transfer of either $500 or $2,000. Another 3,170 people with similar financial, demographic and socioeconomic characteristics served as a control group. …The top-line result: Handouts increased spending for a few weeks—on average $26 a day in the $500 group and $82 a day in the $2,000 group—but had no observable positive effect on any individual outcome. …Handout recipients fared worse on most survey outcomes. They reported less earned income and liquidity, lower work performance and satisfaction, more financial stress, …and anxiety than the control group.

The main takeaway is that redistribution does not work. It’s bad for taxpayers and it is bad for recipients.

But I fear our friends on the left will not learn any lessons.

These findings contradicted the predictions of 477 social scientists and policy makers the researchers surveyed. That’s not surprising. Most liberal academics and politicians believe government handouts are the solution to all problems. If transfer payments were a ticket to the middle class, the War on Poverty would have succeeded long ago. …It’s no surprise that people who received a large percentage of their monthly income for doing nothing were less motivated to work and less satisfied with their work.

Very true. The so-called War on Poverty certainly showed government is capable of redistributing money.

But it has not produced good results, at least if one values economic independence and self-sufficiency for the less fortunate.

P.S. Ms. Finley’s column also mentioned another study that found a negative link between food stamps and diet quality.

…the study isn’t a one-off in documenting a link between transfer payments and worse outcomes. A 2018 study in the Journal of the American Medical Association examined the diet quality of food-stamp beneficiaries from 2003 to 2014, a period in which average benefits increased more than 50%. Similar low-income people who didn’t get food stamps ate more healthily than those who did. The non-food-stamp group consumed significantly fewer sugar-sweetened beverages, and their diets improved more over time.

P.P.S. Finland experimented with basic income and decided it did not work, while Swiss voters overwhelmingly rejected a scheme for universal handouts in their country.

P.P.P.S. Joe Biden expressed skepticism about basic income back in 2017, but that did not stop him from proposing per-child handouts after taking office.

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The OECD’s Despicably Dishonest Campaign for Redistribution

The past two days have featured columns about Estonia, with the first one focusing on the nation’s impressive rebound after decades of communist enslavement and the second one criticizing the Organization for Economic Cooperation and Development (OECD) for suggesting tax-and-spend policies that would undermine the country’s prosperity.

Both columns used data from a recent OECD report. Today, I’m going to write a third column using data from that report, but I won’t be focusing on Estonia. Instead, I want to address the OECD’s ongoing efforts to promote redistribution by lying about poverty.

Here’s a chart that ostensibly shows poverty rates in various member nations.

Any sentient person should immediately recognize that the chart is garbage. Notice, for instance, that that United States supposedly has the second-highest poverty rate among OECD nations.

Yet does any rational person actually think poverty is a bigger problem in America than it is in Mexico or Turkey? Or Italy, Hungary, or Greece?

Of course not. Heck, poor people in the United States often have incomes that are equal to or higher than average incomes in other nations.

So what’s going on?

Well, if you read the fine print, you’ll find that the chart doesn’t actually measure poverty. At all.

Instead, it’s a measure of income distribution. The OECD’s bureaucrats have decided that anybody who makes less than 60 percent of a nation’s average income is poor.

This is an absurd approach.

Heck, the OECD’s dishonest approach would show that there’s almost no poverty in the world’s poorest nations, such as North Korea, Haiti, Cuba, and Congo. After all, if almost everyone is equally destitute, then almost nobody will be below 60 percent of the median.

Here’s another example that exposes the OECD’s scam. Imagine that everyone in the United Sates suddenly had three times as much income as today. That would seem like great news, especially for lower-income Americans. Yet based on the OECD’s dishonest approach, the poverty rate would not change.

So why is the OECD publishing nonsensical and dishonest numbers?

I answered that question back in 2012.

The main thing to understand, though, is that this new approach is part of an ideological campaign to promote bigger government and more redistribution. Which is very much consistent with the OECD’s overall agenda.

The fact that this type of agenda hurts poor people doesn’t seem to bother our friends on the left. So long as rich people are hurt even more, that’s a good thing from their perspective.

Remember, they are motivated by equality of outcomes.

Good people, by contrast, seek policies that enable poor people to improve their lives (as captured by the Eighth Theorem of Government).

P.S. Here’s my collection of other hucksters that peddle dishonest poverty data.

P.P.S. Here’s a story from Sweden about what happens when the ideology of equality produces very bizarre outcomes.

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Stadium Subsidies, Reverse Redistribution, and Cronyism

Redistribution is bad economic policy.

As the great Thomas Sowell observed, the people who finance redistribution are hurt because they get taxed for working and producing. And the people on the receiving end often are hurt because they get lured into dependency.

But not all forms of redistribution are equally bad.

For instance, I don’t like America’s welfare state, which redistributes from the rich to the poor.

But I utterly despise government programs that redistribute from the poor to the rich (such as the Export-Import Bank, the National Endowment for the Arts, bailouts for student loan deadbeats, ethanol subsidies, etc).

Amazingly, some politicians even want to subsidize millionaires and billionaires. It’s happening in my state!

Sarah Rankin of the Associated Press summarizes a sweetheart deal that Virginia politicians have prepared for the local NFL team (formerly the Redskins, now the Commanders).

Virginia lawmakers are advancing a measure intended to lure the Washington Commanders to the state by allowing the NFL team to forgo what could be $1 billion or more in future tax payments to help finance a potential new football stadium. The move…is intended to help Virginia secure its first major pro sports franchise. …“They’re going to go someplace. Absent some kind of incentive, they’re likely not to be here,” Tray Adams, a lobbyist representing the team, told a panel considering the legislation. …The House and Senate passed differing versions of the measure this month with broad bipartisan support… Both versions of the legislation would create a Virginia Football Stadium Authority tasked with financing the construction of a stadium and related facilities. The nine-member authority would be allowed to issue bonds, then recapture certain tax revenues to pay down that debt. …Virginia’s newly inaugurated Republican governor, Glenn Youngkin, seemed to throw support to the idea… In an interview with the AP, Youngkin said he hoped he and the Legislature could reach agreement on a bill that would “best reflect the interests of Virginia taxpayers and hopefully bring the Washington Commanders to Virginia.”

As a Virginia taxpayer, I can assure the Governor that it’s not in my interest if I have to pay taxes while millionaire players and a billionaire owner get a sweetheart deal.

In a column for the Washington Times, Michael Farren and John Mozena explain why taxpayers are the big losers when politicians subsidize sports stadiums.

Proving that bipartisan ideas can be just as bad as those cooked up by a single party, legislation just passed in both the Virginia House and Senate to create a “Virginia Football Stadium Authority” — a government entity that would fund construction of a new stadium… Here’s what most people don’t understand about Virginia’s multibillion-dollar proposal: …it looks like nearly all taxes — sales, corporate income and personal income — collected at the stadium and entertainment complex will go to the stadium authority, not Richmond. The stadium authority then funnels the tax revenue back to the team, meaning the legislation creates a miniature tax haven for the team owners. In other words, ..other Virginia residents and businesses will have to compensate for the fact that the Commanders will pay almost nothing at all. …three leading sports economists — J.C. Bradbury, Dennis Coates and Brad Humphreys — just threw a penalty flag. Their recent research summarizes more than 120 academic studies from the past 30 years regarding the effects of stadium subsidies… “The large subsidies commonly devoted to constructing professional sports venues are not justified as worthwhile public investments.” That confirms the results of a University of Chicago survey of some of the nation’s leading economists, including seven Nobel Laureates. The consensus was that subsidies cost communities more than they deliver in economic benefits. Only 4% disagreed. …Maybe a better team name would be the Washington Tax Demanders.

For what it’s worth, I think the Washington Leeches would have been the best name. And I’ve thought that ever since I moved to Virginia in the 1980s.

Though I confess that’s simply because so many member’s of D.C.’s parasite class root for the team.

But I’m digressing. The message of today’s column is that cronyism is bad, but the worst kind of cronyism is upside-down redistributionism that gives special preferences to the rich and powerful.

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The Zero-Sum Fallacy

There are many well-meaning people who support statist policies such as punitive taxation because they believe in the zero-sum fallacy, which is explained in this short video by Madsen Pirie of London’s Adam Smith Institute.

The zero-sum fallacy is especially noxious because it naturally leads to all sorts of misguided policies. Not just class-warfare taxation, but also protectionism and the welfare state.

But I can understand why people are drawn to such ideas. If they sincerely believe that people like Jeff Bezos and Elon Musk only become richer because the rest of us become poorer, it’s hard to blame them.

This is why I repeatedly share evidence showing that the zero-sum fallacy is, well, a fallacy.

• Data showing that Americans today are far richer than previous generations – and this didn’t happen at the expense of people at the bottom.
• Data showing that Western Europeans became rich during the 1800s and early 1900s – and this didn’t happen at the expense of the poor.
• Data showing the entire world is far richer today than in the past – and this didn’t happen at the expense of the less fortunate.
• Data showing that China’s partial liberalization made that society richer – and this didn’t happen at the expense of low-income people.

Indeed, one very powerful lesson from the above examples is that poor people have been huge winners from economic growth.

As shown by U.S. Census Bureau data, there’s a strong correlation between rising income and falling income among all groups.

Given the importance of this issue, let’s take a closer look at the zero-sum fallacy.

In an article for the Foundation for Economic Education, John Williams used the example of a poker game to explain this cornerstone of bad economics.

Economic activity is depicted in terms of a poker game. One player’s chips are observed to have increased. Immediately one concludes that some other player has lost chips. Poker is, as they say, a zero-sum game: Gains enjoyed by one party must be balanced by losses suffered by another. So it is, people embracing the fallacies of “static wealth” and “the zero-sum game” insist, with economic exchanges. “Winners” must be balanced by corresponding “losers.” …According to the mercantilists, wealth was a constant, a given—like the chips in a poker game. If one community—and typically the mercantilists thought in terms of communities—improved its overall economic situation, another community must have lost out. …What Adam Smith perceived, essentially, was first that “wealth” was not something static and given like gold, or, indeed, poker chips, but rather consisted of goods and services that could be created, and second that both parties to an economic exchange could improve their respective situations. …There are two winners, not one. This is a positive-sum, rather than a gem-sum game.

This type of thinking may even be hard-wired in our brains, as explained by Professor Paul Rubin of Emory University in a column for the Wall Street Journal.

…the worldview of Marxists and woke leftists alike is fundamentally primitive. …It is the economic view of the world that evolved in our brains before the development of the modern economy. …Zero-sum thinking was well-adapted to this world. Since there was no economic growth, incomes and wealth didn’t grow. If one person had access to more food or other goods, or greater access to females, it was likely because of expropriation from others. Since there was little capital, a “labor theory of value”—the idea that all value is created by labor alone—would have been appropriate… Adam Smith and other economists challenged this worldview in the 18th century. They taught that specialization of labor was valuable, that capital was productive, and that labor and capital could work together to increase income. …the creation of wealth would benefit everyone in a society, not only the wealthy. …Members of the woke left want to return to policies based on this primitive economic thinking. One of their major errors is thinking that the world is zero-sum. …Dislike of the rich makes sense in a world where one can become rich only by exploiting others, but not in a society full of creativity and useful inventions.

Prof. Rubin also wrote about this topic back in 2010.

P.S. The good news is that very few left-leaning economists believe in the zero-sum fallacy. They recognize that growth benefits all income groups. Where they go wrong is thinking that bigger government is needed for growth and/or thinking that less growth is okay if rich people suffer more than poor people (they tend to be so fixated on inequality that they overlook very good news).

P.P.S. Just as poor people aren’t poor because of rich people (at least the ones that get rich by markets rather than cronyism), poor nations aren’t poor because of rich nations.

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More Nonsense from the OECD’s Poverty Hucksters

I created the Eighth Theorem of Government to illustrate the difference between well-meaning people (who want to help the poor) and zero-sum people (who seem to think some people are poor because other people are rich).

This raises the interesting question of whether folks in the latter group are misguided or malicious?

For what it’s worth, I assume most people who fixate on inequality simply don’t understand the issue.

I like to think that they would change their minds if – for instance – they were shown Scott Winship’s devastating, slam-dunk response to Gabriel Zucman.

But there are others (like Zucman) who almost certainly know better, yet they push the inequality narrative for political or ideological reasons.

The bureaucrats at the Organization for Economic Cooperation and Development definitely also belong in the malicious category.

I first exposed the OECD’s disingenuous approach back in 2012, noting that the Paris-based bureaucrats used an utterly dishonest definition of poverty to make the laughably inaccurate claim that there was more poverty in the United States than in nations such as Greece, Hungary, Turkey, and Portugal.

Well, the OECD is still being dishonest. Here’s a look at the bureaucracy’s latest “poverty” measurement.

For those of us who actually pay attention to details, the data in the above chart have nothing to do with poverty.

Instead, the OECD is showing a particular way of measuring how income is distributed (in this case, the share of the population with less than half of the average income).

To see why it is profoundly absurd to measure poverty by looking at the distribution of income, consider these two examples.

1. Haiti is a wretchedly poor nation, with per-capita yearly income of $1729. But since almost everyone (other than the political elite) in the country is equally destitute, Haiti would have almost no poverty according to the OECD’s perverse definition.
2. Poor people in the United States have income equal to (or greater than) than middle class people in other developed nations, yet OECD bureaucrats want people to think poverty is a bigger problem in America than in a backward economy like Mexico’s.

I’ll close by pointing out the greatest absurdity of all.

If something miraculous happened and everyone in the United States somehow wound up with ten times as much income next year, guess what would happen to America’s poverty rate, as measured by the OECD? How much would it decrease?

Give yourself a gold star if you correctly answered that it would not change. At all.

What a crock of you-know-what.

P.S. The OECD is not the only guilty party when it comes to lying about poverty. Others who (willingly or unwittingly) misrepresent distribution data as poverty data include:

• The United Nations
• The New York Times
• The Equal Welfare Association
• Eduardo Porter of the New York Times
• Germany’s Institute of Labor Economics
• The Obama Administration
• The European Commission
• Professor Noah Smith
• The Economist

P.P.S. It’s also worth noting that poor nations aren’t poor because rich nations are rich.

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Economic Freedom and “Positive Liberty”

Back in May, as part of a discussion about the tradeoff between free markets (efficiency) and redistribution (equity), I put together a chart to show how poor people are better off in the long run if policy makers focus on the former rather than the latter.

I made sure to assume that pro-market policies would generate only a small increase in growth.

However, thanks to “the miracle of compounding growth,” even that tiny increase results in the poor being better off when compared to a world with less growth and more redistribution.

But I was just providing a theoretical example, and it would be easy to change some assumptions to show that the poor would have better lives (as measured by consumption levels) with bigger government.

Fortunately, there’s a new study, authored by Justin Callais of Texas Tech University and Vincent Geloso of George Mason University, that looks at hard data to see which approach is best for poor people.

Here’s a description of their methodological approach, which uses the positive liberty vs negative liberty construct.

While it is true that economic freedom speaks directly to negative liberty, it also speaks indirectly to positive liberty because of its well–documented effects on economic growth, health outcomes and education. …We build on these works by using a rich dataset of estimates of income mobility of people born in the 1980s. …the dataset employed includes a larger number of poor and rich countries. Combining these data with those of the Fraser Institute’s Economic Freedom of the World (henceforth EFW) index, we try to measure its indirect effect (through growth and income levels) on intergenerational income mobility in a horse race with income inequality.

For all intents and purposes, they want to see which effect dominates in this flowchart.

And here’s the way they describe the chart.

…the true effect of economic freedom on intergenerational mobility is 𝛽1 + 𝛼1𝛽2. As long as 𝛽1 + 𝛼1𝛽2 > β3, economic freedom’s effects outweigh those of income inequality on positive liberty (as intergenerational income mobility is a stand–in for positive liberty).

So what did they find?

We find that economic freedom has both a direct and indirect effect on intergenerational income mobility. More importantly, those effects are more important than those of income inequality. We argue that our results militate for the claim that good institutions matter more to securing positive liberty than income redistribution does. …we find that the lifetime institutional environment is a strong predictor of incomes today. The indirect effect of economic freedom (through income levels) on mobility is again strong and negatively correlated (indicated greater income mobility). …economic freedom has both a direct and indirect effect on intergenerational income mobility. …Economic freedom provides the legal right to engage in commerce, but through economic freedom’s impact on income, the institutional environment speaks to increasing the practical and realistic choice sets of people to better their situation.

The bottom line is that the poor are better off with economic freedom (i.e., negative liberty). Free markets lead to more upward mobility and higher living standards.

So if you want less poverty, push for more capitalism.

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Should the United States “Shrink the Gap” with Europe by Increasing Childcare Subsidies?

Let’s look today at one of main arguments for Biden’s tax-and-spend agenda.

A column in the New York Times, authored by Spencer Bokat-Lindell, suggests that the United States needs to increase government spending on child care to “shrink the gap” with other nations.

The main evidence for this proposition is a chart showing the United States at the bottom.

The obvious goal is to convince readers that the United States is doing something wrong.

And that comes across in the text of the article.

If you’re active on social media there’s a decent chance you came across this chart…about how much less the U.S. government spends on young children’s care than other rich countries. The infrastructure and family plan that President Biden proposed and that’s now being negotiated in Congress is an attempt to shrink the gap through four key policies: a federal paid family and medical leave program, an extension of the child tax credit (in the form of a monthly payment) that debuted this year, subsidized day care, and universal pre-K.

But why is it bad to be at the bottom of this list when all the nations above the U.S. have lower living standards?

I’ve repeatedly made the point that we don’t want to “catch up” to nations that have lower levels of prosperity.

• Household consumption is 50 percent higher in the United States than the average of other developed nations.
• The bottom 20 percent of Americans have higher living standards than the average European
• The bottom 10 percent of Americans enjoy better lives than the average citizens of OECD nations.

But maybe this isn’t just about living standards.

The article also suggests that childcare subsidies are needed to avert demographic decline.

…Why does the United States have such an exceptional approach to family and child care benefits…? European and Latin American countries began enacting these policies…the end of World War II accelerated the process, particularly in Europe… “Part of it had to do with fears of demographic decline…the need to recover from those years and to ensure that there was a strong work force going forward,” Siegel told the BBC.

For what it’s worth, I agree that demographic decline is a major issue.

Falling birth rates and increased life expectancy are a very worrisome combination for government budgets.

Which leads to the hypothesis that childcare subsidies can help deal with this problem by enabling higher levels of fertility.

That’s theoretically possible, I’ll admit, but we certainly don’t see it in the data. Here’s the chart from the New York Times, which I’ve augmented by showing fertility rates.

As you can see, the United States has a higher fertility rate than almost every other nation on the list, which certainly suggests that childcare subsidies are not an effective way of encouraging more babies.

Moreover, U.S. fertility of 1.71 is higher than the OECD average of 1.61.

And when you compare the United States to peer nations (“OECD rich nations” and “EU-15 nations”), the fertility gap is even larger, 1.71 to 1.52.

One moral of the story is that government handouts are not an effective way of increasing fertility.

And the other moral of the story is that it’s not a good idea to copy nations that are economically weaker.

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Biden’s Budget: Affordable Isn’t Sensible

A couple of days ago, I shared the most-recent data about “actual individual consumption” in nations that are part of the Organization for Economic Cooperation and Development.

My goal was to emphasize my oft-stated point about people in the United States enjoying higher living standards – in large part because European nations are saddled with a bigger fiscal burden of government.

President Biden, however, wants to make the United States more like Europe.

• More taxes
• More spending

What’s happening this week in Congress may determine whether he succeeds.

Since I’m policy wonk rather than a political pundit, I don’t pretend to have any great insight on matters such as vote counting.

But I feel compelled to warn that adoption of Biden’s plan would have a negative economic impact.

And I’m not the only one raising alarm bells.

Professor Greg Mankiw of Harvard opined for the New York Times about Biden’s fiscal plan. He starts be noting that Biden’s plan is affordable.

President Biden and many congressional Democrats aim to expand the size and scope of government substantially. …People of all ages are in line to get something… If there is a common theme, it is that when you need a helping hand, the government will be there for you. …Western European nations have more generous social safety nets than the United States. The Biden plan takes a big step in that direction. Can the United States afford to embrace a larger welfare state? From a narrow budgetary standpoint, the answer is yes.

But affordable is not the same as sensible.

He points out that a bigger government will mean a smaller economy.

The costs of an expanded welfare state…extend beyond those reported in the budget. There are also broader economic effects. Arthur Okun, the former economic adviser to President Lyndon Johnson, addressed this timeless issue in his 1975 book, “Equality and Efficiency: The Big Tradeoff.” …As policymakers attempt to rectify the market’s outcome by equalizing the slices, the pie tends to shrink. …Which brings us back to Western Europe. Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 percent lower in France and 26 percent lower in the United Kingdom. …In other words, most European nations use that leaky bucket more than the United States does and experience greater leakage, resulting in lower incomes. By aiming for more compassionate economies, they have created less prosperous ones.

And less prosperous economies mean lower living standards, as honest folks on the left (such as Okun) openly admit.

That’s bad news for everyone, including lower-income people who theoretically are supposed to benefit from the various new and expanded redistribution programs in Biden’s fiscal plan.

Yes, they may get money from government in their pockets in the short run, but even a small reduction in economic growth will lead to larger income losses in the long run.

The bottom line is that the American experiment has been successful. Why put it at risk by copying nations that aren’t as successful.

After all, you don’t want to “catch up” to countries that are lagging.

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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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Political Alchemy, Part II: Turning Spending Increases into Tax Cuts

More than 10 years ago, I wrote about President Obama’s disingenuous strategy of pretending that spending increases were tax cuts.

Politicians in Washington have come up with something far more impressive than turning lead into gold or water into wine. Using self-serving budget rules, they can increase the burden of government spending and say they are cutting taxes instead. This bit of legerdemain is made possible…by adopting or expanding refundable tax credits. But in this case, “refundable” does not mean the government is returning money to taxpayers. Instead, it means that money is being redistributed to people who do not earn enough to be subject to the income tax. This is hardly a trivial issue. …the amount of income redistribution being laundered through the tax code is now so large that the bottom 40 percent of the population has a negative “effective” income tax rate.

Indeed, the IRS is now the biggest redistribution agency in the world, in charge of giving away a massive amount of money.

Far more than is spent on traditional welfare (what used to be called aid to families with dependent children and was reclassified as temporary aid to needy families), as illustrated by the chart.

The so-called earned income tax credit is the biggest redistribution program, though there’s also a large amount of spending on child credits.

And the cost of the so-called child credits is going to explode if President Biden’s plan for per-child handouts is approved.

Matt Weidinger of the American Enterprise Institute opined on Biden’s version of political alchemy.

Democrats are fond of saying their massive $3.5 trillion spending bill includes significant “tax cuts.” They are referring to the effects of continuing the expanded child tax credit… President Biden said it was “one of the largest-ever single tax cuts for families with children.” …The facts say otherwise. …Such payments to those who do not owe federal income taxes are known as “refundable” credits, or in budget terms “outlays” — the same as benefits provided under welfare, Medicaid, food stamps, and similar spending programs. The outlay portions of these tax credits are not “tax cuts” for the simple reason that the payments exceed any taxes the recipient owed in the first place. Put another way, it is impossible to “cut taxes” if you do not owe taxes.

And here’s the relevant table from the Joint Committee on Taxation.

By the way, note how the spending estimates decline after 2025.

This is a budget gimmick. To make Biden’s expansion of the welfare state seem less extravagant, supporters designed the proposal so the expanded per-child handouts disappear in 2026.

But they openly argue that they will be extended because of the assumption that many Americans will get hooked on “free” money from Washington.

P.S. I’m not a fan of child credits, even for families that pay taxes. Simply stated, there are other types of tax cuts that will do a much better job of boosting after-tax family income.

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High Implicit Tax Rates Trap Poor People in the Quicksand of Government Dependency

The welfare state and the so-called war on poverty has been very bad news for taxpayers.

But it’s also very bad news for poor people, in part because various redistribution programs can lure them out of the productive economy and into total dependency on government (and this will become an even bigger problem if Biden’s per-child handouts are approved).

But it’s also bad news because redistribution programs can result in very high implicit tax rates for low-income people who try to improve their lives by climbing the economic ladder.

I shared an example back in 2012, which showed how a single mother in Pennsylvania would be worse off with $57,000 of income instead of $29,000.

In other words, she would be dealing with a de facto marginal tax rate of more than 100 percent.

If you want to understand how this happens, Professors Craig Richardson and Richard McKenzie wrote about this topic in an article for The Library of Economics and Liberty.

…by expanding public assistance programs, the President’s plan will unavoidably impose a higher, hidden tax rate—known as an “implicit marginal income tax rate” (which we shorten to implicit tax rate)—on low-wage workers who receive welfare benefits. Those workers will pay an implicit tax rate because many welfare benefits are reduced as earnings rise. Ironically, the poorest Americans often pay implicit tax rates that are far higher than the IRS’s explicit marginal income-tax rates imposed on the country’s highest income earners. …Consider a household that receives benefits from only two welfare programs, with one tapering off at 20 cents for each added dollar earned and another tapering off at 40 cents for each added dollar earned. Those cuts create an implicit tax rate of 60 percent, which means the worker has only 40 cents in additional spendable income for each added dollar earned. This implicit tax rate can be expected to affect work incentives in much the same way that a federal income tax rate does.

The authors cite a real-world example.

…consider a real-life, low-income single mother of two children in Forsyth County, North Carolina earning $10 an hour in a full-time job, which means she has a monthly earned income of $1,600 (or $19,200 annually). Suppose the single mother receives monthly benefits from five welfare programs: $425 in food stamps, $1,471 in subsidized childcare, $370 in housing subsidies, $180 in WIC benefits, and $493 in an earned income tax credit (EITC). Her monthly welfare benefits will total $2,939 (or $35,271 a year). Now, suppose the single mother takes a new job paying $15 an hour, a 50 percent increase. Her monthly earned income will rise by $800 to $2,400 (with her annual income rising to $28,800 a year, an annual earnings increase of $9,600). However, she will face decreases in four out of her five monthly benefit streams, with each benefit reduction based on the same $800-increase in earnings (a problem known among welfare researchers as the “cumulative stacked effect”). The single mother will lose $231 in food stamps, $80 in childcare benefits, $216 in housing benefits, and $166 in EITC. Her total decrease in monthly benefits will reach $694 (which means her annual benefit total will drop by $8,328).4 Her implicit tax rate on her added monthly earnings of $800 is 87 percent—more than two times the highest explicit marginal tax rate proposed for the rich. …In addition, the single mother will be required to pay an added $185 a month in federal and state income taxes on her added earned monthly income of $800, which is an explicit tax rate of 23 percent. Adding the 87 percent implicit tax rate to the 23 percent explicit tax rate leads to an overall tax rate of 110 percent. Her raise has left her $79 per month poorer in lost wages and benefits—surely a strong disincentive for her to take the higher paying job.

Here’s a table showing those results.

If you want more evidence, check out Chart 7 from this column and Figure 8 from this column.

And the same problem exists in other nations as well.

P.S. Obamacare may have lured as many as 2 million people into full dependency.

P.P.S. I already mentioned how Biden’s per-child handouts could lure many more into full dependency, but “basic income” could be far worse.

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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 Economics of Redistributionism

Back in 2016, I created a 2×2 matrix to illustrate the difference between redistributionism (tax Person A and give to Person B) and state planning (politicians and bureaucrats trying to steer the economy, either through direct ownership or industrial policy).

The main point of that column was to show that countries should try to be in the top-left section, where there is less redistribution and less government control.

But I also wanted to help people understand that redistributionism and socialism are not the same thing.

For instance, Sweden (in the bottom-left box) is a capitalist economy with a big welfare state, whereas China (in the top-right box) doesn’t have much redistribution but government has substantial control over economic activity.

From an American perspective, the good news is that the U.S. currently is in the top-left box.

The bad news is that President Biden wants the country in the bottom-left box. So, if we want to be technically accurate, we should not accuse him of socialism.

Instead, as Antony Davies and James Harrigan explained in a column for the Foundation for Economic Education, the real threat to the nation is “transferism.”

Socialism is state control of the means of production. …By contrast, capitalism is simply private ownership of the means of production. …more than four in ten Americans think “some form of socialism” is a good thing. But what is “some form of socialism?” A society is either socialist or it isn’t. The state either owns the means of production or it doesn’t. There is no middle ground. …It appears that what Americans really have in mind when they think about socialism is not an economic system but particular economic outcomes. …they are advocating what we should really call “transferism.” Transferism is a system in which one group of people forces a second group to pay for things that the people believe they, or some third group, should have. Transferism isn’t about controlling the means of production. It is about the forced redistribution of what’s produced.

Davies and Harrigan are correct.

Moreover, they deserve credit for predicting the future since they wrote the column in 2019!

Now let’s consider whether redistributionism (or transferism) is a good idea.

I’ve previously explained that a big welfare state causes economic damage, even if a nation otherwise is very pro-capitalist.

Consider, for instance, the remarkable data showing how Swedish-Americans and Danish-Americans generate much more prosperity than Swedes and Danes who still live in Scandinavia.

Or consider the income data showing how average Americans enjoy much higher living standards than their European counterparts (either in Nordic nations or elsewhere).

What’s worrisome is that Biden wants a much bigger welfare state and he doesn’t seem to understand that European-sized government means anemic European-style economic performance.

This is the message that Bret Stephens shared in one of his recent columns for the New York Times.

He starts by describing Biden’s agenda.

President Biden charts a course toward the largest expansion of government since Lyndon Johnson’s Great Society. After signing a $1.9 trillion Covid-19 relief bill in March and proposing a $1.5 trillion discretionary budget in April (a 16 percent increase from this year, on top of what’s likely to be at least $3 trillion in mandatory spending on programs like Medicare and Medicaid), the president wants $2.3 trillion more for infrastructure and $1.8 trillion for new social programs. That’s $7.5 trillion in discretionary spending. To put the number in perspective, we spent $4.1 trillion in inflation-adjusted dollars over nearly four years to wage and win the Second World War. What will America get for the money?

He then points out the potential consequences.

…before the U.S. takes this leap into a full-blown American social-welfare state, moderates in Congress like Senator Joe Manchin or Representative Jim Costa ought to ask: What’s the catch? …The real catch is that massive government spending has hidden costs that are difficult to capture in numbers alone. Take another look at Europe. Why does R&D spending in the European Union persistently lag that in the U.S. …Why does Europe’s tech start-up scene…so notably lag its competitors…? Perhaps…social safety nets typically come at the expense of risk-taking and economic dynamism. And why is France, which, according to the Organization for Economic Cooperation and Development, spends more on social welfare than any other nation in the developed world, such an unhappy place, with chronically high unemployment, endless labor unrest, a decades-old brain drain, rising political extremism, a wealth tax that failed and a medical system that was on the brink of collapse long before Covid struck? …Beyond the gargantuan cost, Congress should think very hard about the real catch: transforming America into a kinder, gentler place of permanent decline.

Amen.

Biden’s agenda inevitably will erode societal capital, leading to less work (because of lavish freebies such as per-child handouts) and lower levels of entrepreneurship (because of tax penalties on investment and risk-taking).

And this can lead to a tipping point, which is illustrated by my Theorem of Societal Collapse.

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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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Arthur Okun, Class Warfare, Redistribution, and Income Growth

There are all sorts of long-running battles in the economics profession, perhaps most notably the never-ending dispute about Keynesian economics.

Another contentious issues is the degree to which society should accept less growth in order to achieve more equality, with Arthur Okun – author of Equality and Efficiency: The Big Tradeoff – being the most famous advocate for prioritizing equity.

I don’t agree with Okun, but I applaud him for honesty. Unlike many modern politicians, as well as most international bureaucracies (and even the occasional journalist), he didn’t pretend that big government was a free lunch.

Let’s take a closer look at this issue in today’s column.

We’ll start by perusing a working paper, published by Spain’s central bank, that explores the optimal tax rate for that nation. The author, Dario Serrano-Puente, concludes that society will be better off if tax rates are increased.

Many modern governments implement a redistributive fiscal policy, where personal income is taxed at an increasingly higher rate, while transfers tend to target the poorest households. …In Spain there is an intense debate about…so-called “fiscal justice”, which is putting on the table a tax rate increase for the high-income earners… once the theoretical framework is defined, a bunch of potential progressivity reforms are assessed… Then a Benthamite social planner, who takes into account all households in the economy by putting the same weight on each of them, discerns the optimal progressivity reform. The findings suggest that aggregate social welfare is maximized when the level of progressivity of the Spanish personal income tax is increased to some extent. More precisely,in the optimally reformed scenario (setting the optimal level of progressivity), welfare gains are equivalent to an average increase of 3.08% of consumption.

I have a fundamental problem with the notion of government acting as a “Benthamite social planner,” but I don’t want to address that issue today.

Instead, I want to applaud Senor Serrano-Puente because he openly acknowledges that higher tax rates and more redistribution will lead to less growth.

Here’s some of what he wrote about that tradeoff.

For each reformed economy evaluated in the progressivity gridτ={0.00, …,0.50}, the main macroeconomic aggregates are calculated. …the evolution of these magnitudes on progressivity is depicted in Figure 4. …Broadly speaking, it is clear that aggregate capital and output are decreasing in progressivity in a (almost) linear pathway, with the drop in capital being more pronounced than in output. …aggregate consumption and aggregate labor are also decreasing in progressivity.

Here’s a look at the aforementioned Figure 4, and it is easy to see that the economy suffers as progressivity increases.

Kudos, again, to the author for acknowledging the tradeoff between equity and efficiency. But applauding the author for honesty is not the same as applauding the author’s judgement.

Simply stated, he is trying to justify a policy that will hurt poor people in the long run. That’s because even small differences in growth can have a big effect over time.

Let’s illustrate how this works with a chart showing the life-time earnings of a hypothetical low-income Spaniard.

• The orange line shows how much money the workers gets if he starts with an extra 3.08 percent of income thanks to higher taxes and additional redistribution, but the economy grows 2.0 percent per year.
• The blue line shows income for the same worker, which starts at a lower level because tax rates have not been increased to fund additional redistribution, but the economy grows 2.2 percent per year..

As you can see, that low-income worker is a net beneficiary of bigger government for about 10 years. But as time goes on, the worker would be far better off with smaller government and faster growth.

Different assumptions will lead to different results, of course. My goal is simply to help readers understand two things.

• Bigger government leads to less economic growth.
• Less growth leads to big income losses over time.

P.S. To illustrate the high cost of big government, let’s shift from hypothetical examples to real-world data. Most relevant, OECD data shows that the average low-income person in the United States is better off than the average middle-class person in Spain.

P.P.S. The study cited above considers what happens if Spanish politicians raise taxes on the rich. That would be a mistake, as illustrated by the chart, but let’s not forget that Spanish politicians also over-tax low-income people.

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Consolation Humor: When Leftists Finally Understand Economics and Morality

I have three types of humor I periodically share.

1. Libertarian Humor
2. Gun Control Humor
3. Socialism/Communism Humor

Today, we’re going to venture into “consolation humor.” At least that’s the best term I can think of for the following two memes, both of which show what happens when leftists suddenly grasp reality.

In our first example, a woman learns that envy actually is a negative personality trait.

Maybe she’ll also learn at some point that spending other people’s money isn’t compassion (another person needs to learn that lesson as well).

In our second example, a young woman is bereft after learning that there isn’t a magic money tree to finance never-ending goodies from government.

Maybe she should watch this video as part of her therapy?

P.S. This great cartoon from Chuck Asay shows what happens when people don’t learn about scarcity.

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Defending Bill Clinton’s Welfare Reform

Here are four things to understand about poverty and dependency.

• Throughout most of human history, harsh material deprivation was the norm for the vast majority of people.
• The development of free enterprise and economic liberty led to dramatic increases in living standards.
• The poverty rate declined significantly in the 1800s and early 1900s when there was no welfare state.
• After the welfare state was created, poverty and dependency stopped declining.

Now let’s add a fifth item.

• The United States adopted welfare reform in the mid-1990s.

Today’s column examines whether this was a bad development or good development.

We’ll start with a harsh critic.

In his column for the New York Times, Charles Blow wants Democrats to repeal Clinton’s welfare reform.

Clinton’s record, particularly with respect to Black and brown Americans and the poor, was marked by catastrophic miscalculation. …the welfare reform bill, …Clinton promised would “end welfare as we know it.” One of its central provisions was block-grant assistance to the states. …the Center for Budget and Policy Priorities pointed out in 2020, the block grant to states “has been set at $16.5 billion each year since 1996; as a result, its real value has fallen by almost 40 percent due to inflation.” …With the passage of the “American Rescue Plan,” the Democrats, alone, took another major step away from the mistakes of the Clinton legacy by increasing aid to families with children and to workers.

Reading the column, it seems like blacks must have suffered immensely because of the 40 percent reduction in the block grant.

But now let’s consider whether welfare reform was a good thing.

According to the data, the answer is yes. This chart, based on the Census Bureau’s data (specifically Table B-5), shows that the poverty rate for African Americans has declined since welfare reform was enacted.

To be sure, one could argue that the post-welfare reform decline was simply a continuation of a positive trend. But that doesn’t change the fact that there’s certainly no evidence that the 1996 legislation led to bad results.

Moreover, research from the Brookings Institution makes a persuasive case that welfare reform deserves credit for some of the post-1996 progress.

Why? Because it sent a message – both practically and rhetorically – that permanent dependence on Uncle Sam was a bad thing. As a result, more people entered the workforce and poverty dropped.

That seems like a result that should be celebrated.

Unfortunately, Biden’s so-called American Rescue Plan contains big per-child handouts that are not dependent on being in the workforce.

The only silver lining to that dark cloud is that the handouts are only for 2021.

But the pro-redistribution crowd already is clamoring to make that provision a permanent giveaway. To paraphrase Bill Clinton, they want to “restore welfare as we knew it.”

P.S. Based on what I’ve read in his columns, Charles Blow is a hard-core leftist on economic issues. But he’s semi-reasonable on gun rights, so that’s one point in his favor.

P.P.S. Welfare reform is just one example of the good policies that were enacted during the Clinton years.

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

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Expanding the Welfare State with Per-Child Handouts

Two days ago, I shared data showing that people in the big nations of Western Europe only have about 75 cents of income for every $1 that Americans earn.

That’s a remarkable gap, and it’s getting larger rather than smaller, even though theory says that shouldn’t happen.

But what’s even more shocking is that a poor person in the United States would be middle class in most European nations.

And a low-income person in America is better off than the average European.

When I see numbers like this (and lots of other data I have shared over the years, all of which tells the same story), I have two reactions.

• First, I want to laugh at anyone who thinks Europeans have a better distribution of income.
• Second, I want to scream at anyone who things we should copy the European economic policy.

But my laughing and screaming obviously has no effect because Washington politicians are poised to enact a giant expansion of the welfare state.

And there’s plenty of support for this risky concept from both Democrats and Republicans.

On the GOP side, Senator Mitt Romney has proposed a big tax increase to pay for a big increase in redistribution spending in the form of universal handouts for families with children, an idea that I criticized early last month.

And Oren Cass, a former campaign aide for Romney, has a slightly different plan to impose higher taxes to fund handouts for families with children. I recently critiqued that plan in an article co-authored with Veronique de Rugy of the Mercatus Center. Here’s some of what we wrote.

…the proposal for a Family Income Supplemental Credit (Fisc) from Oren Cass and Wells King is misguided, mostly because it would raise tax rates and expand the burden of government spending. …the Fisc would cost $200 billion annually. …$80 billion per year, would be financed with tax increases. …this fact alone should make the Fisc a non-starter as a matter of fiscal policy. …Income tax rates already are too high, and President Biden wants to raise them further. Self-styled conservatives should not be aiding and abetting the push for class-warfare taxation by adding to the collection of proposed tax-rate increases on workers, investors, entrepreneurs, and business owners. …it would be desirable for families to have more economic opportunity and financial security. However, it doesn’t follow that conservatives should support subsidizing child-bearing and -rearing. We do not think copying Europe and imposing more redistribution is the right approach. Americans enjoy far-higher living standards than people on the other side of the Atlantic Ocean, thanks in part to our smaller fiscal burden.

As you might expect, folks on the left are very excited about expanding the welfare state.

Biden’s so-called stimulus plan also contains a big one-time handout to households with children (with proponents hoping the lure of free cash will lead those households to demand that Washington make such giveaways a permanent part of American life).

Scott Winship of the American Enterprise Institute pours cold water on all the above proposals. Except he focuses not on fiscal policy, but on the fact that these schemes will subsidize dependency and encourage out-of-wedlock births – thus undermining the very successful welfare reform of the 1990s.

A child allowance would send unconditional cash benefits to nearly all families on a per-child basis. …Child allowances run a very real risk of encouraging more single parenthood and more no-worker families, both of which could worsen entrenched poverty in the long run—an overreliance on government transfers, poverty over longer stretches of childhood, intergenerational poverty, and geographically concentrated poverty. …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. This was a period in which policy reforms encouraged work, by imposing time limits and work requirements on receipt of cash welfare and expanding benefits to low-income workers. …We should strive to reduce child poverty further, but it matters how we do so. Reducing this year’s poverty while exacerbating entrenched poverty and reversing the progress we have made since welfare reform would be a hollow victory indeed. So much the worse if a child allowance leads to irresistible calls for a universal basic income, which would also increase nonwork among the childless.

Michael Barone is similarly perplexed that lawmakers are so intent on reversing the progress of welfare reform.

When public policies have produced disastrous results, and when alternative policies have resulted in immediate, seemingly miraculous improvement, why would anyone want to go back to the earlier policies? …births to unwed mothers and welfare dependency rose…from 1965 to 1975, violent crime and welfare dependency, both heavily concentrated among blacks, nearly tripled — tripled. For two more decades, crime and welfare dependency remained at the same high levels, sometimes zooming higher. …Reform, first by Thompson in Wisconsin and then by Newt Gingrich and Bill Clinton in the 1996 welfare bill, required mothers to work. Social workers’ focus was changed from handing out more checks to helping moms get and hold jobs. The results: Welfare rolls plummeted; teen births plunged; kids raised by working moms did better in school and in life. Liberals have tried to stealthily roll back the reforms. They’ve been joined by some cultural conservatives, worried about population decline… These include Sen. Mitt Romney, who supports a child allowance that is fully refundable — which is to say that government will send a check to parents, married or unmarried… A version of this, limited to one year, has been inserted in the “COVID relief” bill of President Joe Biden’s administration. A single parent with two kids, working or not, could qualify for $7,200 a year plus $6,400 in food stamps. …Mickey Kaus…argues that…”(A) large subset of recipients will go from one worker to zero workers.” That means “millions of kids growing up in fatherless homes, where nobody goes into the labor force, where the mainstream world of employment is a foreign country.” Past experience says he’s right and that…the people most hurt will be black Americans.

So is there a real danger that per-child handouts will become law?

The obvious answer is yes since they are included in Biden’s faux stimulus.

But that’s just a one-year giveaway. It’s unclear whether households will get addicted to that free cash and thus demand that the handouts get extended (based on my Second Theorem of Government, I’m pessimistic).

Robert VerBruggen has some polling data on this topic.

Here’s how he characterized the results.

So, what does the average person think…? The 2019 American Family Survey, a poll covering 3,000 adults from the Center for the Study of Elections and Democracy, tested four different child tax credit proposals… The results give us a sense of how the public—and some key segments of it—see the issue. Interestingly, none of the ideas had majority support… Nearly half of Americans can support a credit sold as tax relief that’s either broad-based (CTC1) or targeted to the lower-income (CTC3), but an across-the-board handout to parents just for being parents (CTC4) can’t even garner one-third support. …the major takeaways are these: 1) The child tax credit, in general, is not as popular as one might think — even in questions that don’t mention the taxes needed to pay for it, it never manages a majority; and 2) despite some energy on the pro-family intellectual right for flat, universal child allowances (CTC4), Republicans and even independents among the general public are really not fond of the idea.

This data is semi-encouraging. I’m definitely glad people are suspicious of big per-child handouts. And I suspect opposition will grow when people learn about the European-style taxes that would be needed to finance such a huge giveaway.

But it doesn’t help the fight for sensible policy when some self-styled conservatives advocate for big expansions of the welfare state – especially when such ideas inevitably will erode societal capital.

P.S. As indicated by the above excerpt, Scott Winship’s article concludes with a warning that universal per-child handouts could be the camel’s nose under the tent for a “basic income,” which is the crazy notion that government should give everyone money. That’s an additional reason to reject the idea, as even Joe Biden once realized.

P.P.S. Some proponents use the term “child tax credit” to describe per-child handouts, but that’s disingenuous at best. A handout doesn’t magically become a tax cut just because the recipient happens to pay tax. Moreover, the handouts in these proposals generally are “refundable,” which is simply fiscal jargon for handouts that also go to people who don’t pay any tax.

P.P.P.S. The real-world evidence casts considerable doubt on the notion that per-child handouts will increase birthrates.

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