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Posts Tagged ‘Redistribution’

It seems like every Democrat in the country plans to run against Trump in 2020 and presumably all of them will feel compelled to issue manifestos outlining their policy agendas.

Which gives me lots of material for my daily column. I’ve previously written about statist initiatives from Bernie Sanders and bizarre ideas put forth by Elizabeth Warren.

Today, let’s review the two big ideas that have been unveiled by Kamala Harris, the Senator from California who just announced her bid for the White House.

We’ll start with her idea to create a federal subsidy for rent payments. I wrote about this new handout last year, and warned that it would enrich landlords (much as tuition subsidies enrich colleges and health subsidies enrich providers).

Here’s some of what Professor Tyler Cowen wrote for Bloomberg about the proposal.

One of the worst tendencies in American politics is to restrict supply and subsidize demand. …The likely result of such policies is high and rising prices, restricted access and often poor quality. If you limit the number of homes and apartments, for example, but give buyers subsidies, that is a formula for exorbitant prices. That is what makes early accounts of Senator Kamala Harris’s economic plans so disappointing. …Consider Harris’s embrace of subsidies for renters, as reflected by her recent sponsorship of the Rent Relief Act of 2018. Given the high price of housing in many parts of the U.S., it is easy to see why the idea might have appeal. But the best and most sustainable way of producing cheaper housing is to build more homes and apartments. The resulting increase in supply will cause prices to fall… That is basic supply and demand, with supply doing the active work. The Harris bill, in contrast, calls for tax credits to renters. …There is an obvious problem with this approach. If you subsidize renters, that will push up the price of apartments. Furthermore, economic logic suggests that big rent increases are most likely in those cases where the supply of apartments is relatively fixed, a basic principle of what is called “tax incidence theory.” In sum, most of the gains from this policy would go to landlords, not renters.

In other words, this is a perfect plan for a politician who understands “public choice” theory.

Ordinary voters think they’re getting a freebie, but the benefits actually go to those with political influence and power.

Now let’s look at her $2.7 trillion tax cut. I believe that people should be allowed to keep the lion’s share of any money they earn, so my gut instinct is to cheer.

But it’s always good to be skeptical when a politician is offering something that sounds too good to be true.

Kyle Pomerlau of the Tax Foundation has done the heavy lifting and looked closely at the details. He has a thorough explanation of her plan and its likely impact.

The “LIFT the Middle-Class Act” (LIFT) would create a new refundable tax credit available to low- and middle-income taxpayers. …LIFT would provide a refundable credit that would match a maximum of $3,000 in earned income ($6,000 for married couples filing jointly). …The credit would begin to phase out for single taxpayers starting at $30,000 of adjusted gross income (AGI) and $80,000 for single taxpayers with children, and begin phasing out for married taxpayers at $60,000 of AGI. The phaseout rate for all taxpayers would be 15 percent. …LIFT’s impact on the economy is primarily through its effect on the labor force. LIFT phases in from the first dollar of earned income to the maximum credit of $3,000 per tax filer. It then phases out starting at different levels of income, depending on a tax filer’s marital status and whether they have children. These phase-ins and phaseouts create implicit marginal subsidies and tax rates that impact individuals’ incentive to work.

At the risk of oversimplifying, Harris is proposing a new version of the earned income credit.

And that means some taxpayers get subsidized for working and some taxpayers get penalized.

For taxpayers in the credit phaseout range, tax liability would increase by 15 cents for each additional dollar earned. This means that these taxpayers would face an additional implicit marginal tax rate of 15 percent, which would reduce these taxpayers’ incentive to work additional hours. In contrast, taxpayers in the phase-in range of the credit would get $1 for each additional $1 of income they earn. As such, these taxpayers would benefit from an effective marginal subsidy rate, or negative marginal tax rate, of 100 percent. A negative tax rate of 100 percent would increase the incentive for these taxpayers to work additional hours.

Kyle crunches the numbers to determine the overall economic impact.

While the positive labor force effects of the phase-in of the credit could offset the negative effect of the phaseout, we find that, on net, the size of the total labor force would shrink under this policy. This is primarily due to the large number of taxpayers that would fall in the phaseout range of the credit relative to the number of individuals that would benefit from the phase-in. …We estimate that the credit…would reduce economic output by 0.7 percent and result in about 825,906 fewer full-time equivalent jobs.

Here’s the relevant table from the Tax Foundation’s report.

This is remarkable. It would seem impossible to design a $2.7 trillion tax cut that actually hurts the economy, but Sen. Harris has succeeded in that dubious achievement.

For all intents and purposes, she has figured out how to have an anti-supply-side tax cut.

And there are two other problems that deserve attention.

  • First, as noted in Kyle’s paper, the tax cut is “refundable.” This means that money goes to people who don’t pay taxes. In other words, it is government spending being laundered through the tax code. So Harris claims to be cutting taxes, but part of what she’s doing is expanding redistribution and making government bigger (and encouraging more fraud).
  • Second, Harris is very cagey about how the numbers work in her proposal. Does she want the tax cuts (and new spending) financed by more borrowing? By printing money? By offsetting class-warfare tax increases? Some combination of the three? Whatever the answer, the negative economic damage will be substantially higher if financing costs are included.

Considering the poor design and upside-down economics of the rent subsidy scheme and the new tax credit, the bottom line is rather obvious: Kamala Harris wants to buy votes, and she has decided that it is okay to hurt the economy in hopes of achieving her political ambitions.

No wonder she fits in so well in Washington!

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There was a book last decade by Thomas Frank, What’s the Matter with Kansas?, that asked why lower-income voters in the state didn’t vote for greater levels of redistribution.

The author claimed these voters were sidetracked by cultural issues, which may very well be part of the story. I like to think that these Kansans also were motivated by ethics and that they realized it would be wrong to use government coercion to take money from other people.

And maybe, unlike the folks at the IMF, they were not motivated by envy and they realized that high taxes and more redistribution would make them worse off over time because of the negative impact on overall prosperity.

Well, it appears that the folks in Kansas aren’t that different from people in India, Morocco, Nigeria, Mexico, and South Africa. At least that’s the takeaway from some new research that Christopher Hoy wrote about for the World Bank. Here’s the issue he investigated.

Social commentators and researchers struggle to explain why, despite growing inequality in many countries around the world,  there is often relatively limited support among poorer people for policies where they are set to benefit (such as increases in cash transfers or in the minimum wage). …Conventional theories of preferences for redistribution, such as the Meltzer-Richard Hypothesis, imply that if poor people were made aware they were relatively poorer than most other people in their country, they would become more supportive of redistribution. Yet there is little empirical evidence that evaluates this prediction. …empirical evidence is needed to understand how poorer people’s misperceptions of their relative position in the national income distribution effects their support for redistribution.

Here’s the methodology he used.

I conducted the first cross country survey experiment on preferences for redistribution in the developing world… The experiment involved over 16,000 respondents in five developing countries that make up almost 25% of the global population (India, Nigeria, Mexico, South Africa and Morocco). …To test whether informing poor people of their relative position in the national income distribution makes them more supportive of redistribution, I randomly allocate half of the respondents in each country to be told which quintile their household belongs to in the national income distribution (based upon their reported household income and the number of household members). …After the treatment they were asked if they thought the gap between the rich and poor was too large and whether the government was responsible for closing this gap.

And here are some of the results.

People tend to think they are in the middle of the income distribution, regardless of whether they are rich or poor. …poor people who perceived themselves to be in the bottom two quintiles of the distribution were between 15 to 28 percentage points more likely to prefer lower levels of inequality than poor people who perceived themselves to be in the top two quintiles. …Surprisingly, telling poor people that they are poorer than they thought makes them less concerned about the gap between the rich and poor in their country…there was no effect from the treatment on these people’s support for the government to close the gap between the rich and poor.

Here’s a chart showing how people became less sympathetic to government-coerced redistribution after learning more about their own economic status.

The author speculates on possible reasons for these results.

A plausible channel that is causing this effect is people using their own living standard as a ‘benchmark’ for what they consider acceptable for others. …people…realise two points. Firstly, there are fewer people in their country with a living standard they considered to be relatively poor than they had thought. Secondly, what they had considered to be an ‘average’ living standard (their own standard of living) is actually relatively poor compared to other people in their country. I show how both of these points would lead people to respond by being less likely to be concerned about the gap between the rich and poor in their country. …there are opposing channels through which poorer people’s preferences for redistribution respond to information about their relative position. On the one hand, poorer people may be more supportive if they are set to benefit from redistribution. However, on the other hand they may be less supportive if they are less concerned about the absolute living standard of people who are relatively poor.

These are all plausible answers.

Though I have the same questions about this research as I did about Frank’s book. Do people in these five developing nations have any level of moral aversion to redistribution and/or do they understand (at least implicitly) that a tax-and-redistribute model is a recipe for national economic decline?

Perhaps a more practical way of looking at the issue is to ask whether lower-income people care most about economic growth or economic inequality.

Many of the professional left, including the ideologues at the IMF, are fixated on the latter and they’re willing to hurt the poor if the rich suffer even greater harm (in other words, Margaret Thatcher was right about their motives).

By contrast, I strongly suspect the average lower-income person is far more interested in more prosperity for their family and far less concerned about the prosperity of the rich family on the other side of town. They presumably are unaware of the powerful Chinese data on poverty reduction and inequality, but they instinctively understand that a rising tide lifts all boats.

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Washington is a place that gets infatuated with trendy ideas. A few years ago, everyone was talking about a “universal basic income” because of the strange assumption that millions of people will be unemployable in the future.

That idea was mostly embraced by folks on the left (though not Joe Biden), but there’s now a related idea on the right to provide “wage subsidies” so that unemployable (or difficult to employ) people can get work.

A leading proponent is Oren Cass of the Manhattan Institute, who wrote The Once and Future Worker: A Vision for the Renewal of Work in America.

National Review published an excerpt from his book.

Work has enormous social value for the individuals who engage in it and for the formation and stability of their families, the opportunities of their children, and the vibrancy of their communities. Ideally, the labor market would settle in a place where productive, family-supporting work was available to all people in all places. But nothing in the theory of economics guarantees such an outcome… If we really want to “pay for jobs” — and we should — then we should do it directly. …a…“Federal Work Bonus,”…an additional $3 into your check for every hour worked? That would be a wage subsidy. …a wage subsidy aims to produce that effect in the labor market. Workers unwilling to sell their labor for less than $12 per hour may be worth only $9 per hour to an employer. No job will emerge in that scenario. With the insertion of a $3-per-hour wage subsidy, by contrast, the employer can pay the $9 per hour that the work is worth and the worker can receive the $12 per hour that he demanded. Thus will appear a job where none existed before. …The value of the subsidy would be set relative to a “target wage” of, say, $15 per hour and would close half the gap between the market wage and the target. A worker would initially receive a subsidy of $3 per hour in this case, equal to approximately $6,000 per year if he worked full-time.

The wage subsidy Cass advocates is similar to the “earned income tax credit,” which is basically a redistribution program that is administered through the tax code.

But Cass wants the EITC to be universally available rather than primarily targeted at households with children.

The federal earned income-tax credit (EITC) already operates something like a wage subsidy, offering low-income households large tax refunds that can exceed what they paid in taxes to begin with. But the EITC gets paid long after the income is earned — at tax time the following year — based on an opaque formula. It creates none of a wage subsidy’s immediate, transparent effect in the labor market. …The EITC also skews its benefits heavily toward households with children. A single person working full-time at minimum wage would get a credit of $41, less than 1 percent of what his colleague with kids can expect.

For what it’s worth, Cass acknowledges that employers might capture some of the benefits of a wage subsidy.

If the government offers a $3 subsidy atop a $9-per-hour job, the result will not necessarily be a $12-per-hour job. The employer might instead cut the market wage to $8, to which the government would add $3.50 — half the $7 gap to the target wage of $15 — leaving the worker with $11.50. …How workers and employers respond to the subsidy will vary based on labor-market conditions. What we do know from studies of the EITC and a similar program in the United Kingdom is that, in those instances, roughly 75 percent of the financial benefit accrued to workers.

Now let’s discuss the policy implications.

Cass openly admits that a wage subsidy is a form of redistribution, and – much to my dismay – he doesn’t object if at least some of that new spending is financed by higher taxes.

Subsidizing wages is a particularly well-tailored response to the challenges that globalization presents for American workers. First, the wage subsidy is the appropriate mechanism for redistributing gains from the economy’s “winners” to its “losers.” It comes closest to doing this directly, by taking tax revenue drawn from higher earners and inserting it directly into the paychecks of lower earners. …it is redistribution. And yes, high-income taxpayers will finance it. …The roughly $200 billion price tag for a wage subsidy might require some new tax revenue, but its funding could come largely from the existing safety net, which already dedicates more than $1 trillion annually to low-income households — including many with workers.

The following excerpt also rubbed me the wrong way since he seems to be saying that it would be better if Washington had expanded redistribution instead of lowering the corporate tax rate.

…in debates over the 2017 tax-reform package, which ultimately increased the ten-year federal deficit by $1.5 trillion for the sake of reducing the corporate tax rate, while failing to deliver even the small EITC increase for childless workers that Ryan had once championed. Indeed, while the Khanna proposal in its 2017 form is not a serious one, even it could have been implemented more cheaply than the tax reform that ultimately passed. The deficit spending would have been equally costly, but at least the labor market and its low-wage workers would have been the chief beneficiaries. …the Republican party’s relative disinterest in the labor market is made apparent by its preference for a tax cut over a wage subsidy.

This is very troubling. In the long run, faster growth is much better for low-income workers.

I’m not the only skeptic of this plan.

Writing for the Week, AEI’s Jame Pethokoukis argues that Cass bases his idea on a misreading of the economy.

One of his innovative analytical insights is that economic growth from globalization is bad for workers. …This is a terrible reading of history… America would be worse off today if it had somehow kept the closed “golden age” economy of the 1950s and 1960s. Its lack of openness greatly harmed American workers… Too much of American industry became complacent, unproductive… Likewise, would America have a more thriving economy today without Silicon Valley? …Cass’ reading of the data isn’t much better as he adopts the stance of many leftists that most Americans are no better off than decades ago. Yet a recent Congressional Budget Office study shows a nearly 50 percent increase in middle-class incomes since 1970, with incomes for the bottom fifth up some 80 percent.

And Michael Strain, also with the American Enterprise Institute, was similarly critical in a column for Bloomberg.

Economic growth is under attack. Or, more specifically, the idea that public policy should place a large amount of emphasis on the economy’s rate of growth is under assault… Traditionally, conservatives have placed a premium on growth as the best way to advance the fortunes of all Americans. But in recent years, some on the right have [been] playing down the importance of growth to the well-being of many working-class Americans. The latest argument for that position comes from Oren Cass… Cass argues that the results from decades of policies designed to encourage GDP growth are “embarrassing” and have “steered the nation off course.” …conservatives have been right in their traditional focus on growth. Let’s recall why. …the hot U.S. economy is the best jobs program available for lower-wage and vulnerable workers. …this strength is benefiting low-wage workers more than other groups. …Growth doesn’t just help low-income and working-class households in the short term. Over longer periods, seemingly small changes in the growth rate have large consequences. In the past four decades, for example, real GDP per person has increased from about $28,000 to over $55,000, growing at about 1.7 percent per year. If growth instead had been 1 percent, average GDP per head would be about three-quarters what it is today.

Needless to say, I strongly agree with Strain’s final point about the importance of faster growth.

Though I confess to being at a disadvantage when judging these anti-Cass columns since I haven’t read the book.

However, to the degree that Cass truly has given up on growth (i.e., accepting some form of the “secular stagnation” hypothesis), then I side with Pethokoukis and Strain.

But that’s not my main concern. Here are the four reasons that motivate my objection to wage subsidies.

  1. Redistribution should not be a responsibility of the federal government. Indeed, I want all redistribution devolved to state and local governments (or to the private sector).
  2. Cass says the program will cost $200 billion. Like with most government programs, I assume the actual fiscal burden will wind up being much higher. Especially after the left starts a bidding war.
  3. Existing wages subsidies are riddled with fraud because the government effectively gives people lots of money simply for filing a tax return, yet rarely bothers to confirm they actually earned the income.
  4. Wage subsidies actually turn into wage penalties (i.e., punitive implicit marginal tax rates) when income rises above the target level and the handouts are withdrawn.

The bottom line is that Cass is right that it’s better to subsidize work rather than idleness.

However, Americans already are too dependent on Uncle Sam. It would be even better if we simply achieved more growth by adopting the tried-and-tested recipe for prosperity.

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Imagine being a poor person and getting to choose your country. Which one would you select?

The answer probably depends on your goals in life. If you want to emulate “Lazy Robert” and be a moocher, you could pick Denmark. You’ll surely get more than enough money to survive.

Denmark’s also not a bad choice if you have a bit of ambition. It ranks #16 in the latest edition of Economic Freedom of the World, largely because it has a very laissez-faire approach on trade, regulation, and other non-fiscal policies. So there’s a decent chance you could climb the economic ladder.

But if you have lots of ambition and definitely want a better life for your children and grandchildren, you’d presumably pick a nation such as Singapore, which routinely gets very high grades from Economic Freedom of the World.

There’s a lot of economic liberty, which has resulted in huge improvements in living standards. Indeed, people in Singapore are now much richer than Americans.

The last thing you would do, however, is pick a stagnant country such as Greece. Or a miserably impoverished nation such as Zimbabwe.

Unless you’re one of the buffoons at Oxfam. That “charity” just produced an inequality study that says Singapore is one of the world’s worst nations, ranking far below places where people are very poor with very bleak lives.

Here’s how Oxfam describes its report.

In 2015, the leaders of 193 governments promised to reduce inequality under Goal 10 of the Sustainable Development Goals (SDGs). Without reducing inequality, meeting SDG 1 to eliminate poverty will be impossible. In 2017, …Oxfam produced the first index to measure the commitment of governments to reduce the gap between the rich and the poor. The index is based on a new database of indicators, now covering 157 countries, which measures government action… The report recommends that all countries should develop national inequality action plans to achieve SDG 10 on reducing inequality. These plans should include delivery of universal, public and free health and education and universal social protection floors. They should be funded by increasing progressive taxation and clamping down on exemptions and tax dodging.

In other words, the study is a measure of whether nations have punitive welfare states, not whether poor people have better lives.

The assertion in the second sentence that poverty can’t be reduced without reducing inequality is especially absurd. Unless, of course, you choose a dishonest definition of poverty (which is what we get from leftist groups like the UN and OECD, not to mention the Equal Welfare Association, Germany’s Institute of Labor Economics, and the Obama Administration).

But let’s focus on Singapore. Here are some excerpts from a Reuters story on the controversy over that nation’s poor score.

Oxfam on Wednesday rejected Singapore’s defense of its low taxes after the NGO ranked the wealthy city state among the 10 worst-offending countries in fuelling inequality with its low-tax regime. Oxfam’s Commitment to Reducing Inequality (CRI) index ranked Singapore 149th of 157, below Afghanistan, Algeria, and Cambodia, and marginally higher than Haiti, Nigeria and Sierra Leone. …Oxfam’s head of inequality policy, Max Lawson, said the impact of Singapore’s tax policy went beyond its borders, serving as a tax haven for the rich and big corporations. …Singapore Social and Family Development Minister Desmond Lee said on Tuesday…“Yes, the income tax burden on Singaporeans is low. And almost half the population do not pay any income tax,”…“Yet, they benefit more than proportionately from the high quality of infrastructure and social support that the state provides,” he said. “In Oxfam’s view, Singapore’s biggest failing is our tax rates, which are not punitive enough.” Lee also said 90 percent of Singaporeans owned their homes and home ownership was 84 percent even among the poorest 10 percent of households. “No other country comes close,” he said.

Minister Lee is correct, of course.

Singapore is a great place to be poor, in part because the bottom 10 percent in Singapore would be middle class or above in many of the nation’s that get better scores from Oxfam’s ideologues. But mostly because it’s a place where it’s possible to become rich rather than remain poor.

There are some other aspects of the Oxfam study that merit attention, including the curious omission of some of the world’s most left-wing nations, such as Venezuela, Cuba, and North Korea.

In the case of North Korea, I’m willing to believe that there simply wasn’t enough reliable data. But why aren’t there scores for Cuba and Venezuela? I strongly suspect that authors deliberately omitted those two hellholes because they didn’t want to deal with the embarrassment of incredibly poor nations getting very high scores (which is what made Jeffrey Sachs’ SDG Index an easy target for mockery)

Also, I’d be curious to learn why Hong Kong isn’t ranked? Taxes are even lower and there’s even less redistribution in Hong Kong, so maybe it would have been last rather than merely in the bottom 10.

Was Oxfam worried about looking foolish, so they left prosperous Hong Kong out of the study?

That’s my guess. The last thing the left wants is for people to understand that poor nations only become rich nations with free markets and small government.

The bottom line is that Oxfam is an organization that has been hijacked by hard-left activists. Given it’s track record of shoddy reports, it’s now a joke rather than a charity.

P.S. The OECD also produced a shoddy study that grossly mischaracterized Singapore and totally ignored Hong Kong.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Writing for Forbes, Professor Jeffrey Dorfman echoed these findings.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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I’m happy to discuss theory when debating economic policy, but I mostly focus on real-world evidence.

That’s because my friends on the left always have a hard time answering my two-question challenge, which simply asks them to name one success story for big government.

They usually point to Sweden and Denmark, but get discouraged when I point out that those nations became rich when government was relatively small.

And I’m embarrassed to admit that some of my fellow economists once thought that communist nations grew faster than capitalist nations.

But let’s not digress. I raise this topic because there are many critics of capitalism who admit that free markets generate more wealth, but they assert that society would be better off if incomes were lower so long as rich people suffered more than poor people.

This strikes me as morally poisonous. But it also gives me an opportunity to cite a new study from the International Monetary Fund that allows us to further analyze this issue.

The IMF report starts by noting that globalization (free trade, liberalization, etc) has been good for global prosperity.

Over the course of the last decades the world economy has witnessed rapid integration. Most countries have opened up their economies and experienced an unprecedented rise in the flow of goods and capital across borders. This phenomenon – now widely known as economic globalization – was coincident with rising living standards in a large number of countries. Many developing countries have experienced episodes of strong economic growth and substantial poverty reduction as they integrated their economies with the rest of the world.

Sounds like good news, right?

It is good news, but those who fixate on inequality are worried.

…while globalization might on average be good for growth, more might not always be better for all. …When we shift the analysis to how income gains from globalization are distributed within countries, we also find globalization to have different effects on different incomes…gains are, however, distributed unequally both across and within countries. …Within countries, income inequality increases as a consequence of globalization. The income gains resulting from globalization tend to go primarily to the top of the national income distributions.

In other words, rich people are getting richer at a faster pace.

This phenomenon is captured in these two charts, which show that globalization is associated with more growth and more inequality.

But what’s important is that poor people also are getting richer.

In the subsample of developing countries where the gains from globalization are generally larger, however, they also reach the bottom of the income distribution and reduce poverty. … We find…some evidence of a poverty reducing effect of globalization in developing countries.

Consider, for example, the remarkable data I shared about China. Income inequality increased at the same time that poverty dramatically declined.

And those results seem to hold for the rest of the world, especially in developing nations.

So now let’s look at the most important chart from the IMF study, which shows that all income groups enjoy more prosperity with globalization.

Yes, rich people benefit the most, so official inequality numbers will increase.

But put yourself in the shoes of a poor person. Would you be willing to forego your additional income in order to deny additional income for a rich person? I suspect the vast majority of poor people would think that’s a crazy question.

But, as Margaret Thatcher pointed out, there are plenty of folks on the left who think that’s a perfectly reasonable position. Including, incidentally, some of the people at the IMF.

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I’ve repeatedly argued that faster growth is the only effective way of helping the less fortunate.

Class warfare and redistribution, by contrast, are not effective. Such policies are based on the fallacy that the economy is a fixed pie, and proponents of this view fixate on inequality because they mistakenly believe that additional income for the rich means less income for the poor.

Today, let’s look at some numbers that prove that a fixation on inequality is misguided. The Census Bureau this week released its annual report on Income and Poverty in the United States. That publication includes data (Table A-2) showing annual inflation-adjusted earnings by income quintile between 1967-2017.

To see if my left-leaning friends are right about the rich getting richer at the expense of the poor, I calculated the annual percent change for each quintile. Lo and behold, the data actually show that there’s a very clear pattern showing how all income quintiles tend to rise and fall together.

The lesson from this data is clear. If you want policies that help the poor, those also will be policies that help the middle class and rich.

And if you hate the rich, you need to realize that policies hurting them will almost certainly hurt the less fortunate as well.

One other lesson is that all income quintiles did particularly well during the 1980s and 1990s when free-market policies prevailed.

P.S. Many people (including on the left) have pointed out that the Census Bureau’s numbers under-count compensation because fringe benefits such as healthcare are excluded. This is a very legitimate complaint, but it doesn’t change the fact that all income quintiles tend to rise and fall together. For what it’s worth, adding other forms of compensation would boost lower quintiles compared to higher quintiles.

P.P.S. Here’s an interesting video from Pew Research showing how the middle class has become more prosperous over the past few decades.

P.P.P.S. The Census Bureau’s report also has the latest data on poverty. The good news is that the poverty rate fell. The bad news is that long-run progress ground to a halt once the federal government launched the ill-fated War on Poverty.

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