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Posts Tagged ‘Redistribution’

Led by Speaker Paul Ryan, House Republicans have put forth an anti-poverty agenda.

It’s definitely worth reading just for the indictment of the current welfare state. There are some excellent charts, including versions of ones that I’ve already shared on the $1 trillion-plus fiscal burden of current welfare programs, as well as the “bloated, jumbled, and overlapping bureaucracy” that administers all that money.

But there are some charts that deserve to be reproduced, either because they contain new insights or because they make very important economic points.

Regarding the former, here’s a chart that indirectly shows that the most effective anti-poverty program is work. Specifically a full-time job.

So the real challenge is why there are some households with persistent multi-generational poverty.

And, as Thomas Sowell already has told us, that’s a behavioral problem.

But it’s somewhat understandable behavior because government in many cases makes dependency more attractive than self-sufficiency.

Here’s a chart showing the implicit marginal tax rates that apply if a poor household tries to climb out of poverty. The bottom line is that handouts are so generous that it’s very difficult for a poor person to be better off by working instead of mooching.

No wonder dependency is a growing problem!

Some folks say the solution to this problem is to reduce the “phase-out” of benefits, but that’s a recipe for making the welfare state vastly more expensive and giving handouts to people who are not poor. That’s the approach in some European nations and it hasn’t worked.

Here’s another chart that basically makes the same point about the upside-down incentive structure created by redistribution programs. It shows that a poor household can enjoy a much higher standard of living with low earnings than with high earnings.

The bottom line is that the current welfare state is a disaster for both poor people and taxpayers.

And this video is an excellent introduction to that topic.

But let’s focus on the GOP anti-poverty plan. They put together a powerful indictment of what we have now, but what are they proposing as a solution?

Here’s where we get good news and bad news. The good news is that there is a focus on work, as explained in a column for Forbes by Scott Winship of the Manhattan Institute.

…the report declares that “Our welfare system should encourage work-capable welfare recipients to work or prepare for work in exchange for benefits, and states should be held accountable for helping welfare recipients find jobs and stay employed.” The blueprint points toward greater use of work requirements and time limits for food stamp recipients and beneficiaries of federal housing benefits who are able to work. …This emphasis on work generalizes the experience from the landmark 1996 welfare reform legislation, which increased work among single-parent families, reduced welfare receipt and (most importantly) lowered poverty.

So far so good, and Scott also notes that the key to work is reducing the appeal of being on the dole.

Most of the success of welfare reform in encouraging work can be attributed to the ways that it has made receipt of benefits less attractive relative to work. People largely left welfare or chose not to enroll independently of state work promotion efforts.

But here’s the problem. There’s no big attempt to reduce benefits in the GOP proposal.

Indeed, it doesn’t even turn programs over to the states, which presumably would lead to better policy since sub-national governments wouldn’t want to be overly generous lest they attract welfare migration.

But the dog that didn’t bark in the new agenda is the consolidation and block granting proposed in Speaker Ryan’s Budget Committee discussion draft from 2014. Rather, the blueprint appears to envision increased use of state waivers in the various programs… It is worth recalling that in the 2014 discussion draft, the “opportunity grants” that would have combined a dozen federal programs and funded them at a fixed level were proposed as a pilot program in a few states.

Though at least the plan apparently doesn’t increase the fiscal burden of the welfare state by further expanding the EITC, which already is the federal government’s most costly redistribution program.

The antipoverty blueprint mentions the Earned Income Tax Credit (EITC)…only in passing. On the one hand, the report points out that an expanded EITC would be one way to reduce some of the high marginal tax rates that recipients of federal aid face when they contemplate working. On the other, the program’s high rate of improper payments is also emphasized, rightfully, as a problem that must be addressed.

Scott also points out that the Republican plan also foresees a much more aggressive attempt to measure what works and doesn’t work. Which is good, though hardly necessary since we already know that a one-size-fits-all approach from Washington is a recipe for ever-higher costs and ever-increasing dependency.

Indeed, there’s even a Laffer Curve-type relationship between welfare spending and poverty.

Let’s check out a couple of other reactions.

From the left, Jordan Weissman of Slate is predictably unimpressed.

As part of his effort to convince Americans that the Republican Party is [not] a band of nihilistic anti-government lunatics—House Speaker Paul Ryan unveiled…an anti-poverty plan. Which is a laugh riot. …Most of the agenda is a rehash of, or at least a variation on, material Ryan has trotted out before. Inspired by the welfare reforms of the 1990s, the speaker still wants to push more safety net beneficiaries to go to work, devolve more program control down to state and local officials, and yet somehow increase accountability and carefully monitor results… There’s also some talk about increasing the Earned Income Tax Credit for low-wage workers—which is one of those nice, liberal-conservative consensus positions that never seems to go anywhere.

From the right, Kevin Williamson sympathizes with the GOP/Ryan approach, but also makes a more important point in his National Review column.

Paul Ryan has just introduced a welfare-reform proposal… We already knew what was going to be in it — work requirements and time limits for able-bodied adults — because there are only so many meaningful avenues of reform. We also know what the Left’s response is going to be: that this is cruel, callous, punitive, etc. But there are really only two choices: Get people moving toward economic self-sufficiency or sustain them forever in the soul-killing state of dependency. There isn’t a third option. Not really. This is only partly about money. We are a very, very rich society, and we can afford to provide decently for people who cannot care for themselves, including children and those who are physically or mentally disabled. But that isn’t our problem: Our problem isn’t people who are physically disabled but people who are morally disabled, people who wouldn’t take a bus 15 minutes to work at a gas station, much less walk 15 miles to do so.

My view, for what it’s worth, is that the only good welfare reform is one that shifts all programs to the states as part of a block grant. But since funding redistribution is not a function of the federal government, that block grant should then disappear over time.

Last but not least, we need to understand that economic growth is easily the most powerful and effective anti-poverty program. That’s why the poverty rate fell from 90 percent to 15 percent in America before we had a welfare state.

And it’s no coincidence that we stopped making progress once the so-called War on Poverty began.

P.S. On the topic of poverty, it’s worth remembering that the White House has tried to redefine poverty as part of a dishonest campaign to promote class warfare policies. And the leftist bureaucrats at the OECD are pushing the same disingenuous approach.

P.P.S. If you want to know which states have the highest welfare benefits, click here. And if you want to know which ones have the highest overall levels of redistribution, click here.

P.P.P.S. There’s at least one honest leftist who understands the human cost of redistribution.

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Like America’s Founders, I like constitutional constraints on government and dislike untrammeled majoritarianism.

So my gut instinct is to reject Swiss-style direct democracy as a governing system.

Yet I have to give credit to the Swiss people for being very sensible when asked to vote in national referendums. Here are some recent results.

And don’t forget they voted by a landslide margin in favor of a spending cap back in 2001.

Now they’ve done it again.

Voters were asked today to decide whether every adult should automatically receive more than $2,500 per month as part of a guaranteed basic income.

Sounds like a nice free lunch, right? That offer might be very attractive in a place like France, but Swiss voters apparently understand that government can’t give all that money to people without first taking that amount of money from people. They rejected Bernie-nomics by an overwhelming margin.

In Switzerland, there don’t appear to be left-wing blue states and right-wing red states. Instead, the entire nation favors limited government. Even the French-speaking parts of the country voted against the scheme.

I’d like to take credit for these results. I was in Switzerland early last month to discuss and debate this plan. Here’s what I said (click here to watch the entire panel discussion).

In reality, I’m sure my remarks didn’t have any impact on the outcome. Nonetheless, it’s nice to be on the winning side.

Though you may have noticed that I said some nice things about a guaranteed basic income in my presentation. That’s because, as I wrote back in 2013, these plans also would get rid of the current dysfunctional welfare state.

Writing in the Wall Street Journal a couple of days ago, Charles Murray of the American Enterprise Institute makes the best possible case for an automatic government-provided income.

The UBI has brought together odd bedfellows. Its advocates on the left see it as a move toward social justice; its libertarian supporters (like Friedman) see it as the least damaging way for the government to transfer wealth from some citizens to others. Either way, the UBI is an idea whose time has finally come… First, my big caveat: A UBI will do the good things I claim only if it replaces all other transfer payments and the bureaucracies that oversee them. If the guaranteed income is an add-on to the existing system, it will be as destructive as its critics fear.

Here are the highlights of Murray’s plan.

…the system has to be designed with certain key features. In my version, every American citizen age 21 and older would get a $13,000 annual grant deposited electronically into a bank account in monthly installments. …The UBI is to be financed by getting rid of Social Security, Medicare, Medicaid, food stamps, Supplemental Security Income, housing subsidies, welfare for single women and every other kind of welfare and social-services program, as well as agricultural subsidies and corporate welfare. As of 2014, the annual cost of a UBI would have been about $200 billion cheaper than the current system. By 2020, it would be nearly a trillion dollars cheaper. …Under my UBI plan, the entire bureaucratic apparatus of government social workers would disappear.

And while he acknowledges that some people will stop working and live off their handouts, he makes a reasonably persuasive argument that some people will be encouraged to enter the labor force.

Under the current system, taking a job makes you ineligible for many welfare benefits or makes them subject to extremely high marginal tax rates. Under my version of the UBI, taking a job is pure profit with no downside until you reach $30,000—at which point you’re bringing home way too much ($40,000 net) to be deterred from work by the imposition of a surtax. Some people who would otherwise work will surely drop out of the labor force under the UBI, but others who are now on welfare or disability will enter the labor force.

Sounds good, but then consider all the leftists who support a basic income scheme and imagine how such a system would work if they were in charge.

That’s what worries me. If Charles Murray was economic czar and there was never a risk of his plan being modified, I’d be sorely tempted to say yes.

But that’s not a plausible scenario. In the real world, a guaranteed basic income might start small and the current welfare state might be curtailed as part of the original deal, but I would be very worried about subsequent reforms that would expand the size of the handout (much as the EITC has been expanded in America) and reinstate misguided redistribution programs.

Perhaps this is why, in a column for the Financial Times, John Kay is not very sanguine about the numbers.

Bernie Sanders, a candidate for the Democratic presidential nomination, has expressed sympathy for basic income while stopping short of endorsement. Yanis Varoufakis, the former finance minister of Greece, is a proponent. …Yet simple arithmetic shows why these schemes cannot work. Decide what proportion of average income per head would be appropriate for basic income. Thirty per cent seems mean; perhaps 50 per cent is more reasonable? The figure you write down is the share of national income that would be absorbed by public expenditure on basic income. The Swiss government reckoned spending on social welfare would approximately double. To see the average tax rate implied, add the share of national income taken by other public sector activities — education, health, defence and transport. Either the basic income is impossibly low, or the expenditure on it is impossibly high.

Exactly.

P.S. On a separate topic, the death of Mohamed Ali, the larger-than-life superstar boxer, has generated a lot of reminiscing.

Well, courtesy of Mike Flynn, here’s my favorite Ali historical flashback.

P.P.S. Speaking of athletic superstars (at least in our fantasies), the Beltway Bandits finally prevailed in a 2016 softball tournament. Here’s our team photo after winning the Crabtown Classic.

P.P.S. Returning to the main topic of today’s column, here’s an amusing cartoon strip on the notion of a basic income.

It’s from the same person who put together the “magic boats” cartoon strip about the minimum wage.

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Incentives matter.

Sometimes that can be explained with wonky discussions of marginal tax rates or welfare traps.

But that may not be the best approach when trying to convince someone with no aptitude for economics. So what’s the best way of introducing such concepts to, say, a Bernie Sanders supporter?

You can point to the economic chaos in places such as Greece and Venezuela and explain that Margaret Thatcher was right when she warned that socialists eventually run out of other people’s money.

But that’s probably not too effective because they’ll simply point to Sweden and Denmark and you’ll have a hard time educating them that those countries became successful when government was small and that they’ve been falling behind ever since big welfare states were imposed.

So perhaps we first need to help them understand very simple notions.

That’s why, when trying to introduce basic concepts, I’ll often share clever images and cartoons.

Here’s a great addition to that collection (h/t: Zero Hedge). It basically shows why redistributionism is doomed to failure because a lot of people inevitably will decide that life is easier when you’re a consumer rather than a producer.

Definitely worth sharing, I hope you’ll agree.

I view this cartoon as being very similar to the second frame of the famous riding-in-the-wagon cartoons I first posted back in 2011.

Which gives me an opportunity to end today’s column with a very serious point. When redistribution programs are first created, politicians generally argue that they make sense because a lot of people will pay very small amounts to help a handful of folks who are genuinely needy.

That sounds compassionate and affordable. And perhaps it is, but there are two reasons why programs that sound reasonable in the beginning eventually morph into modern welfare states.

  1. Politicians figure out they can buy votes by making the wagon more comfortable and attractive (i.e., public choice economics).
  2. A growing number of people figure out that it’s better to ride in the wagon rather than pull the wagon (i.e., erosion of social capital).

And when you combine these two factors with changing demographics, it’s easy to understand why the future is so grim for so many countries.

P.S. Here’s the Danish version of why redistributionism fails.

P.P.S. Since “keep half” was a big part of today’s image, I can’t resist sharing again this satirical lesson about fairness for a supporter of Bernie Sanders.

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One of the more interesting policy debates, both in America and around the world, is whether convoluted and counterproductive welfare states should be scrapped and replaced with a “basic income” payment from the government.

Finland is experimenting with the concept.

Authorities in Finland are considering giving every citizen a tax-free payout of €800 (£576) each month. Under proposals being draw up by the Finnish Social Insurance Institution (Kela), this national basic income would replace all other benefit payments, and would be paid to all adults regardless of whether or not they receive any other income. …the basic income is intended to encourage more people back to work. At present, many unemployed people would be worse off if they took on low-paid temporary jobs due to loss of welfare payments.

This idea has been, or will be, tried in a few places.

…previous experiments where a basic income has been successfully trialed. The Canadian town of Dauphin experimented with a basic income guarantee in the 1970s and the results – both social and economic – were largely positive. …The Dutch city of Utrecht is also planning to introduce a basic income, albeit solely for welfare recipients. From next month more than 250 unemployed residents of the city will be given a monthly sum to live on, with researchers monitoring the outcome to determine what effect it has on employment.

In a column for City Journal, Guy Sorman has a positive assessment of the Finnish plan.

…each citizen will be free to use the money as he or she sees fit. The idea is that people are responsible for their actions. If someone decides to spend their €800 on vodka, that is their decision, and has nothing to do with the government. In return for the UBI, however, the public accepts the elimination of most welfare services. Currently, the Finnish government offers a variety of income-based assistance programs for everything from housing to children’s education to property insulation. Axing these programs should free up enough public resources to finance the UBI. The bureaucracy that currently governs welfare payments will disappear. …The Left is cheered by the socialistic idea of government-assistance-for-all. The Right looks forward to the unprecedented drop in bureaucratic control over citizens… The Finnish government is expecting the negative income tax to have a beneficial effect on employment and growth.

Though apparently the scheme will have a limited rollout.

Finland’s trial of a basic income model is set to start in 2017 and will involve a payment of 550 euros to those selected to participate.

And those selected will be a limited group.

…the full, unconditional basic income proposal would be too expensive. Instead the trial will target people already in receipt of benefits and offer a basic income at the same level to replace them. …People would then be able to take on new work without losing their social security payments, which could remove one of the disincentives to employment. People with income-linked unemployment benefits, which are higher than the state-provided basic unemployment benefit, would continue to receive them. …The trial will focus on individuals aged 25 to 63 with low incomes as that group will provide the best data on whether or not the basic income increases employment.

Here’s more reporting about the potential Dutch experiment.

…in Utrecht, one of the largest cities in the Netherlands, and 19 other Dutch municipalities, a tentative step… “We don’t call it a basic income in Utrecht because people have an idea about it – that it is just free money and people will sit at home and watch TV,” said Heleen de Boer, a Green councillor in that city, which is half an hour south of Amsterdam. Nevertheless, the municipalities are, in the words of de Boer, taking a “small step” towards a basic income for all by allowing small groups of benefit claimants to be paid £660 a month – and keep any earnings they make from work on top of that. Their monthly pay will not be means-tested. They will instead have the security of that cash every month, and the option to decide whether they want to add to that by finding work. …The motivation behind the experiment in Utrecht, according to Nienke Horst, a senior policy adviser to the municipality’s Liberal Democrat leadership, is for claimants to avoid the “poverty trap” – the fact that if they earn, they will lose benefits, and potentially be worse off.

The concept is also gaining traction in New Zealand.

Leader of the opposition Andrew Little said his Labour party was considering the idea as part of proposals to combat the “possibility of higher structural unemployment”. …Mr Little confirmed his party would debate the idea at its conference on employment at the end of March. He said significant changes to way people worked were “unavoidable” and “we expect that in the future world of work there will be at least a portion of the workforce that will rapidly move in and out of work”.

You’ll have noticed that some of the arguments for basic income seem very reasonable. Improve incentives to work and reduce bureaucracy.

Indeed, this is why the idea has support among some sensible people. I cited some of them in my article back in 2013, but there are several more.

Sam Bowman explains his support for the concept in a column for the London-based Adam Smith Institute.

For me, it’s about improving the capitalism we already have. …it would be an improvement, for three main reasons.

His first reason is that some people would benefit from more money, though I’m not sure this has anything to do with “improving capitalism.”

Our existing welfare system is designed for a world where finding a job would be enough to give most people a tolerable standard of living. But in-work poverty is an increasing problem…a basic income would reorient the whole system towards helping people who don’t have enough money, irrespective of why that is.

His second reason is that it would be good to streamline the welfare state.

Our existing welfare system has built up a large amount of unnecessary complexity that could be streamlined. …benefits are fundamentally about giving money to people who do not have enough of it. Housing benefit, the pension credit, jobseeker’s allowance, income support and tax credits all do this. …Reducing complexity is valuable but not the only, or indeed the main, appeal of the basic income.

And his third reason is that a basic income could be matched with other reforms that would boost economic performance.

Many other policies that would increase total wealth are not very progressive…doing these things ends up making lower earners pay more tax than we would like. …An easy way to correct that would be to redistribute the overall wealth gain to those poor natives so that they too are made better off in the short run as well as the long run.

Writing for National Review, Iain Murray adds his sympathetic analysis.

Anyone who wants some creature comforts, which most of poor do…would be encouraged to work rather than the reverse. …Most people will use money to make their lives better. Indeed, there is some evidence that most poor people suddenly presented with what amounts to capital will become capitalists. This is surely a good thing. …The lack of a welfare bureaucracy will also encourage charity and mutual aid for the really hard cases.

Though he does recognize that there are “two big, and possibly irresolvable, caveats.”

…unless we were to find some way of exempting this from the political process, politicians would…turn it into a UBI plus extra, targeted, welfare system.  …it still relies on robbing Peter to pay Paul, even if Peter gets some of the money back.

Now let’s shift back from theory to the real world. Switzerland is poised to vote early next month on a referendum that would provide a rather generous government-guaranteed income every month.

Switzerland will become the first country in the world to vote on the introduction of unconditional income at the national level. But it has not won much support from traditional politicians, even those on the left. …The federal government estimates the cost of the proposal at 208 billion francs a year. Around 153 billion taxes would have to be levied from taxes, while 55 billion francs would be transferred from social insurance and social assistance spending.

Why is the cost so expensive? Because, as explained in another article, the referendum would provide “a basic income of about 2,500 francs ($2,600) a month.”

Which may explain why it appears the traditionally sensible Swiss voters almost certainly will vote against the scheme by an overwhelming margin.

Seventy-two percent were against establishing the unconditional stipend, which the initiators say would “enable the entire population have a decent existence and participate in public life,” the survey found. Just 24 percent support it, while 4 percent were still undecided, had voting been conducted this month. “Support for the ‘no’-camp is expected to increase as the campaign progresses,” pollster gfs.bern said in its survey for broadcaster SRG published on Friday. “This indicates a clear rejection on the day of the ballot.” The basic income vote will take place on June 5.

For what it’s worth, I’m at a conference in Switzerland, where I spoke earlier today on this topic as part of a panel that included my colleague Michael Tanner, along with former Labor Secretary Robert Reich and Swiss Professor Reiner Eichenberger.

I urged the audience to oppose the referendum because of what I called a nope-hope-dope argument.

  1. The “nope” part is my rejection of the belief on the left that technology will destroy jobs. We’ve had major changes in the economy, leading first to big losses in agricultural jobs and then significant losses in manufacturing jobs. But those changes didn’t lead to less employment. Instead, those jobs were lost as part of changes that made all of us much wealthier. So while I have no idea what will happen in the future, I have considerable faith that market forces will create productive options for people.
  2. The “hope” part is my admiration of the private initiatives that are taking place and my semi-support for the local experiments that are taking place. I want poor people to have more money and I want them to have hope. And these experiments by private charities and local governments may teach us useful things that help us reform the very inefficient welfare states operated by central governments.
  3. And the “dope” part of my presentation was my description of the people who think that we would get good results with a basic income scheme operated by central governments. Simply stated, I fear that such a proposal would be too generous, thus reducing over time incentives to work (perfectly captured by this Wizard-of-Id parody). I also fear it would require economically destructive tax rates, either explicitly to fund a basic income for everyone, or implicitly because it would be phased out like the EITC and therefore drive a larger wedge between pre-tax income and post-tax consumption for a huge number of taxpayers.

Here, for posterity, is a photo of the panelists.

I did mention, by the way, that it would be very interesting to see an individual Swiss canton conduct an experiment, replacing all current redistribution schemes with a basic income.

And since the supporters of the referendum tweeted that statement, I’ll interpret that as a sign that I’m a consensus builder!

But I have to confess that the organizers of the conference probably should have cast me aside and instead invited Professor David Henderson of the Naval Postgraduate School.

In a new article for the Independent Institute, he looks the real-world numbers for the United States and throws very cold water on the idea of the basic income guarantee. Here’s an excerpt of his calculation of the fiscal cost of such a scheme.

The annual BIG expenditure for U.S. citizens, then, would be approximately $2.068 trillion. This expenditure estimate does not include any expenditure for administering the program or for monitoring for fraud. In other words, it is a minimum estimate. …Assume, as Zwolinski advocates, that such a program would displace all 126 federal antipoverty programs and all state and local government antipoverty programs. …Notice what would happen. A $2.068 trillion program would replace programs whose total expenditures in 2012 were $952 billion. Even rounding up the $952 billion to $1 trillion, the program that Zwolinski advocates is more than twice as costly in budgetary terms as current antipoverty programs. …How would Zwolinski fund this major increase in federal spending? …he would need to have the federal government increase taxes from their estimated $2.993 trillion to $4.361 trillion, an increase of 45.7 percent.

Those fiscal costs could be reduced with a clawback mechanism (i.e., means testing the basic income grant), but that would require very high implicit marginal tax rates.

Zwolinski suggests a way around the huge tax increases that I have laid out: the way proposed by Charles Murray in his book In Our Hands: A Plan to Replace the Welfare State (2006). That method is to tax $5,000 of the $10,000 grant with a 20-percentage-point increase in the marginal tax rate on people who make $25,000 or more. At the $50,000 income level, $5,000 of the grant would be paid back. This method does reduce the amount of other taxation required, but, of course, it increases marginal tax rates over a range of incomes by 20 percentage points. …This increase would be a substantial disincentive to work and a substantial incentive to make money in the underground economy.

And he also cites what I fear would be an enormous problem, which is that we couldn’t trust politicians to keep the basic income grant at a modest level, and we also couldn’t trust them to permanently eliminate other redistribution problems.

…there is another major problem: the “public-choice” problem. …those who advocate further government programs…must show that there is a high probability that such government programs will not grow further. …in the case of a BIG, they must show that there is a high probability that a scaled-down BIG really would replace all of the existing programs for the poor and near poor. This is hard to do because the various interest groups that favor the existing programs will not sit back: they will fight to keep some or all of those programs. Zwolinski…writes that if the BIG “were implemented via a constitutional amendment, many of the public choice considerations could be reduced, I think, to an acceptable level.”11 Yet, as Randy Barnett (2004) and Robert Levy and William Mellor (2008) show, even strict constitutional limits on federal government power have yielded to the U.S. president, Congress, and the courts.

Think of this as presenting the same challenge presented by a national sales tax or value-added tax. There are good arguments for those proposals, but the most powerful objection is that politicians can’t be trusted to permanently eliminate or reduce existing income taxes.

So if a basic income isn’t the answer, what should we do?

I agree with the scholars from the Austrian School that decentralization is the right approach. We already did that for basic welfare payments during the Clinton years, and we should do it for all other forms of income redistribution, perhaps starting with food stamps and Medicaid.

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The welfare state is bad news. It’s bad for taxpayers and it’s bad for recipients.

It’s also bad for the economy since prosperity is in part a function of the quantity of labor that is productively employed. As such, government programs that lure people into dependency obviously reduce national economic output.

We can get a sense of how the nation is being hurt by reviewing some of the scholarly literature.

Writing for the Cato Journal, Lowell Gallaway and Daniel Garrett explore the relationship between redistribution spending and poverty reduction.

They start by pointing out that more welfare spending used to be associated with reductions in poverty. But when President Johnson launched his so-called War on Poverty and dramatically increased the level of redistribution, the link between welfare spending and poverty reduction substantially weakened.

…the real per capita cost in the United States of federal public aid rose 70 percent in the 11 years between 1953—the first year the federal government reported an official poverty rate—and Johnson’s 1964 remarks. In the 11 years that followed, however, that same real per capita cost increased by an astonishing 434 percent—that is, more than six times faster than in 1953–64. …in 1953–64, every 10 percentage point increase in public aid was associated with a 1 percentage point drop in the official poverty rate. Compare that with the experience of the 11 years following the outbreak of hostilities in the War on Poverty. During that interval, every 1 percentage point fall in the poverty rate was accompanied by a 50 percentage point increase in real public aid. …the relationship between public aid and the poverty rate is subject to the principle of diminishing returns.

Not just a diminishing return. There’s a point at which more redistribution actually leads to an increase in poverty.

Just like there’s a point at which higher tax rates lead to less revenue. And the authors recognize this link.

This is a Laffer Curve type relationship, which is to say that while public aid initially decreases poverty, there eventually comes a point at which additional increases in public aid increase poverty. …the effectiveness of additional real public aid expenditures, as a policy instrument designed to reduce the poverty rate, had been exhausted by the mid-1970s. Indeed, any additional public aid beyond the mid-1970s levels would result in an increase, not a decrease, in the poverty rate.

Gallaway and Garrett crunch the numbers.

…to calculate the impact of public aid expenditures on the incidence of poverty in the United States. The greatest poverty-reducing effect occurs at $1,291 of per capita expenditures on public aid, which produces a 6.07 percentage point reduction in the overall poverty rate. However, as the level of real per capita public aid rises beyond $1,291, the poverty reducing effect is eroded. …at $2,407 of per capita public aid, all of the initial reductions in the poverty rate have disappeared. …By 2010, real per capita aid stood at $2,697—a level that produces a 2.52 percentage point increase in the poverty rate. Thus, the impact of per capita public aid in 2010 being $1,406 greater than the optimal, poverty-reducing level was to increase the poverty rate by 8.59 percentage points, according to our analysis.

Here’s the relevant table from their article.

Unfortunately, they didn’t create a hypothetical curve to show these numbers, so we don’t have the welfare/poverty version of the Laffer Curve.

But they do estimate the negative human impact of excessive redistribution spending.

Since the official poverty rate in 2010 was 15.1 percent, this implies that in the absence of that extra $1,406 of per capita public aid, the official poverty rate in 2010 would have been 6.5 percent. …Taking dynamic factors into consideration would probably lower the figure to less than 6 percent. This implies that the actual poverty rate in 2010 was more than two and-one-half times higher than it could have been were it not for the excessive use of public aid income transfers as an instrument of policy. In other words, it may be argued that public aid overreach was responsible for approximately 30 million extra people living in poverty in 2010.

And children are among the biggest victims.

…one in every eight American children is living below the poverty line because public aid payments exceed the level that would minimize the poverty rate.

Ugh, this is terrible news. Children raised in government-dependent households are significantly more likely to suffer adverse life outcomes, in large part because of very poor social capital.

Last but not least, the authors also speculate that excessive redistribution may be one of the reasons why the distribution of income has shifted.

…up to the mid- 1970s, government cash income transfers (public aid) were increasing the incomes of those in the bottom quintile of the income distribution by more than work-disincentive effects were reducing them. The result was a reduction in the official poverty rate. …However, as the volume of public aid payments continued to increase, the work-disincentive effect more than offset the income enhancements generated by the flow of public aid. As this happened, the poverty rate began to drift upward and the percentage share of all income received by those in the bottom quintile of the income distribution began what would turn out to be a long and steady decline.

By the way, I don’t think that there’s a “correct” or “proper” level of income distribution. That should be a function of what people contribute to economic output. I’m concerned instead with boosting growth so everyone has a chance to rise.

Which is why it is especially tragic that redistribution spending is trapping less-fortunate people in long-term government dependency by undermining their incentives to earn income.

The bottom line is that it’s time to reduce – and ideally eliminate – the Washington welfare state.

Though that involves a major challenge since the real beneficiaries of the current system are the “poverty pimps” in Washington.

P.S. This Wizard-of-Id parody contains a lot of insight about labor supply and government-distorted incentives. As does this Chuck Asay cartoon and this Robert Gorrell cartoon.

P.P.S. If you want to see sloppy and biased analysis (paid for with your tax dollars), take a look at efforts to rationalize that redistribution is good for growth from the International Monetary Fund and Organization for Economic Cooperation and Development.

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For a wide range of reasons, the federal government should get out of the redistribution racket.

Welfare programs are costly, but they’re also not among the enumerated powers granted to the federal government by the Constitution.

But for those who don’t care whether the nation abides by its legal rule book, there’s also a very compelling argument that better policy can be achieved by ceding responsibility for anti-poverty initiatives to state and local governments.

As shown by the 1996 welfare reform, you’re likely to get changes that are good for both taxpayers and poor people.

We even see some glimmers of progress now that states have more ability to police the fraud-riddled food stamp program.

The Heritage Foundation recently published a report on what happened in Maine when the state started to impose a modest work requirement on childless beneficiaries.

Food stamps is one of the government’s largest means-tested welfare programs, with roughly 46 million participants and costing $80 billion a year. Since 2009, the fastest growth in participation has occurred among able-bodied adults without dependents (ABAWDs). …Maine implemented a work requirement for ABAWDs. As a result, their ABAWD caseload dropped by 80 percent within a few months, declining from 13,332 recipients in December 2014 to 2,678 in March 2015.

And here’s a very powerful chart from the study.

Wow, more than 4 out of 5 recipients decided to drop off the rolls rather than get a job.

Which shows that they never needed the handouts in the first place, already had a job in the shadow economy, or got a new job.

Investor’s Business Daily summarizes the situation with characteristic clarity.

The number of childless, able-bodied adult food stamp recipients in a New England state fell by 80% over the course of a few months. This didn’t require magic, just common sense. …This is a remarkable change and needs to be repeated in government programs across the country. How Maine achieved this is no mystery. Gov. Paul LePage simply established work requirements for food stamp recipients who have no dependents and are able enough to be employed.

This type of reform should be replicated, with big savings for taxpayers and even bigger benefits for those who shake off the emotionally crippling burden of dependency and become self sufficient.

The Heritage report says that if the Maine policy were repeated nationally, and the caseload dropped “at the same rate it did in Maine (which is very likely), taxpayer savings would be over $8.4 billion per year.” “Further reforms could bring the savings to $9.7 billion per year: around $100 per year for every individual currently paying federal income tax.” On top of the savings, there would be the added benefit of increasing the number of productive members of the economy, and cutting the cycle of government dependence that is ruinous to a society. …putting the able-bodied in position to be self-sufficient is a service to them, helping them shake their soul-strangling dependency on the state.

By the way, Maine isn’t the only state that is trying to be responsible and proactive.

Wisconsin also is taking some modest steps to curtail dependency. Here are some blurbs from a story in the Wisconsin State Journal.

The 2013-15 state budget created a rule for some recipients of the state’s food stamp program known as FoodShare: If you’re an able-bodied adult without children living at home, you must work at least 80 hours a month or look for work to stay in the program. That rule went into effect in April, and between July and September, about 25 percent of the 60,000 recipients eligible to work were dropped from the program when the penalty took effect, according to DHS data.

That’s good news for taxpayers.

But there’s also even better news for some of the recipients.

…about 4,500 recipients found work.

Yup, sometimes a bit of tough love is what’s needed to save people from life-destroying dependency.

That’s the good news.

The bad news is that these reforms in Maine and Wisconsin are just drops in the bucket. The federal government mostly has been a destructive force in recent years, working to expand the welfare state (in some cases using utterly dishonest means).

And even when Washington hasn’t been trying to make things worse, many state and local governments are perfectly content to watch federal money flow into the their state, even if the net result is to trap people in poverty.

Which bring us back to the main policy lesson. We need to get Washington out of the business of redistributing income. To the extent government involvement is necessary, state and local governments should be responsible for both raising and spending the money.

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Let’s dig into the issue of whether the United States should become more like France.

In a 2014 study for the National Bureau of Economic Research, Stanford University’s Robert Hall wrote about America’s sub-par economic performance. His opening line was basically a preemptive refutation of Obama’s claim – made during the State-of-the-Union Address – that the economy is strong.

The years since 2007 have been a macroeconomic disaster for the United States of a magnitude unprecedented since the Great Depression.

I don’t know that I would use “disaster” to describe the economy. That word would be much more appropriate for failed welfare states such as Italy and Greece.

But Professor Hall was definitely correct that the U.S. economy has been sputtering, as illustrated by comparative business-cycle data from the Minneapolis Federal Reserve.

So what accounts for America’s anemic economy? Hall has about 50 pages of analysis, but since brevity is a virtue, let’s look at some of what he wrote in his final paragraph.

Labor-force participation fell substantially after the crisis, contributing 2.5 percentage points to the shortfall in output. The decline showed no sign of reverting as of 2013. …an important part may be related to the large growth in beneficiaries of disability and food-stamp programs. Bulges in their enrollments appear to be highly persistent. Both programs place high taxes on earnings and so discourage labor-force participation among beneficiaries. The bulge in program dependence…may impede output and employment growth for some years into the future.

In other words, he pointed out that a large number of people have left the labor force, which obviously isn’t good since our economy’s ability to generate output (and boost living standards) is a function of the degree to which labor and capital are being productively utilized.

And his work suggests that redistribution programs are a big reason for this drop in labor-force participation.

Now let’s look at another study from NBER, this one from 2015 that was authored by economists from the University of Pennsylvania, University of Oslo, and Stockholm University.

They examine the specific impact of unemployment insurance.

We measure the effect of unemployment benefit duration on employment. …Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. …we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

Wow, that’s a huge impact.

To be sure, I’ll be the first to admit that empirical work is imprecise. Ask five economists for an estimate and you’ll get nine answers, as the old joke goes.

Professor Hall, for instance, found a smaller impact of unemployment insurance on joblessness in his study.

But even if the actual number of people cajoled back into employment is only 500,000 rather than 1 million, that would still be profound.

Though at some point we have to ask whether it really matters whether people are being lured out of the labor force by food stamps, disability payments, unemployment insurance, Obamacare, or any of the many other redistribution programs in Washington.

What does matter is that we have a malignant welfare state that is eroding the social capital of the country. The entire apparatus should be dismantled and turned over to the states.

But not everyone agrees. You probably won’t be surprised to learn that the White House is impervious to data and evidence. Indeed, notwithstanding the evidence that the left was wildly wrong about the impact of ending extended unemployment benefits, the White House is proposing to expand the program.

Here’s some of what’s being reported by The Hill.

The president’s three-pronged plan includes wage insurance of up to $10,000 over two years, expanded unemployment insurance coverage… The plan comes on the heels of Obama’s final State of the Union address on Tuesday, in which he committed to fighting for expanded out-of-work benefits during his last year in office. …The plan would also extend benefits to part-time, low-income and intermittent workers who can’t already take advantage of the out-of-work programs. And it would mandate states provide at least 26 weeks of coverage for those looking for work.

The part about mandating that all states provide extended coverage is particularly galling.

It’s almost as if he wants to make sure that no states are allowed to adopt good policy since that would show why the President’s overall approach is wrong.

I joked in 2012 about a potential Obama campaign slogan, and I suggested an official motto for Washington back in 2014.

Perhaps we should augment those examples of satire with a version of the Gospel according to Obama: Always wrong, never in doubt.

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