Today, let’s look at another visual that captures what’s wrong with the Washington welfare state. As you can see, taxpayers are footing the bill for a system that spends more than twice what would be required to eliminate all poverty.
The chart comes from a new report by Matt Dickerson for the Economic Policy Innovation Center. And the purpose of the chart is to show that the welfare system is grotesquely inefficient.
Here’s some of what he wrote.
…the welfare bureaucracy is broken, making it more difficult for millions of people to achieve the American Dream. …It is demeaning to believe that many Americans are simply unable to be successful and should be relegated to a life of dependence on perpetual government subsidization of their basic needs. …the welfare bureaucracy undermines and discourages employment. Only 18% of able-bodied adults receiving Food Stamps, who are expected to meet work requirements, actually work 20 hours or more per week. …Many welfare programs undermine the institution of the family — and the benefits brought by stable two-parent households — by including marriage penalties. …The principle of subsidiarity dictates that the independent sector, communities, and local and state governments should be empowered rather than the distant and bureaucratic central government. …The welfare bureaucracy is also filled with duplication and overlapping programs. According to the Congressional Research Service, there are 15 different food aid, 13 housing, 12 health care, and five cash aid programs. …Welfare is one of the largest categories of the federal budget, comprising about 20% of annual spending. …the federal government spent more than $28,100 per person in poverty — providing benefits $15,000 above the poverty threshold for individuals
So why does it exist? This clever cartoon tells part of the answer.
But this is only a partial explanation.
Don’t forget all the bureaucrats, consultants, and contractors who make a lot of money administering the programs. Walter Williams called them “poverty pimps” and they have an obvious incentive to maintain the current system.
I augment those visuals with other analysis, such as my two-part series (here and here) on the right and wrong way to reduce poverty (Hint: the ultimate goal should be reducing dependency).
And I just read a sobering article by John Goodman that I’ll add to my list. Here are two shocking/depressing findings that he shared.
First, in many cases, households that mooch get more money than households that work.
…the bottom fifth of households in 2017 had an average (after tax and after transfer) income of $33,653 per person. …The per capita income of second fifth in 2017 was $29,497; and for the middle fifth it was $32,574. Those with the least earned income had more actual total income than those in the next two higher quintiles! The average household in the bottom fifth received 14 percent more income than the average second-fifth household and 3.3 percent more than the average middle-income household.
As you might predict, people respond to incentives. John reports that the excessive welfare state has greatly undermined incentives to be productive.
Since the War on Poverty started in 1965, the labor force participation of the bottom one-fifth of households has dropped from 70 percent to 36 percent. As a group, this one-fifth now receive more than 90 percent of their income from government. For this group, our welfare system has substituted in-kind benefits for labor market income.
These two sets of numbers are horrific. We basically have a system that tells people they are chumps if they work. Their reward for work is to pay taxes.
But if they become wards of the state, they can play video games all day and get lots of freebies.
P.S. For readers who want some international evidence, I have a three-part series (here, here, and here) on how the welfare state is hurting European nations.
More specifically, I shared some academic research showing how it led to a big increase in dependency on government.
Let’s expand on that topic today by looking at a column published last week by National Review.
Authored by Angela Rachidi of the American Enterprise Institute, it compares the two ways of reducing poverty and deprivation. Here are some excerpts.
President Johnson introduced his Great Society agenda, setting the stage for the vast federal anti-poverty bureaucracy that we have today. Passage of programs such as Medicaid, Head Start, and a nationalized Food Stamp Program followed, and today, the federal government funds more than 80 means-tested programs or services… Unsurprisingly, this approach set the federal government on a disastrous fiscal path. Federal expenditures on means-tested programs have increased eightfold since the War on Poverty started, equating to an additional $800 billion per year in today’s dollars. …expanding transfer payments to reduce the poverty rate was simply a mathematical achievement. Fundamentally improving the lives of poor families has proved an entirely different task. …the key to the problem of poverty in this country was a failure among young people to achieve key life milestones. …when young people graduated high school, worked full-time, and married before having children, their odds of living in poverty dramatically reduced. …Analyzing 15 years of longitudinal data consisting primarily of poor unmarried mothers…, I find that many disadvantaged unmarried mothers were able to rise out of poverty when they later achieved success sequence milestones, even though they started on a different path. For example, 15 years after giving birth to a child outside of marriage, only 9 percent of mothers who earned a high school education, worked full-time, and later married were in poverty. Among mothers who failed to complete any of those three steps, the poverty rate was 79 percent.
Those “success sequence milestones” sounded familiar.
Sure enough, they are similar to what my late, great, friend Walter Williams wrote many years ago.
As you might expect, folks on the left have a different perspective. Or, to be more precise, they have two different perspectives.
Some left-leaning people assert that that the post-1965 lack of progress is evidence that we need to have even more redistribution.
But some of them instead assert that there has been a lot of progress, but not the kind that shows up in the official measure of poverty.
Today, let’s examine the second argument.
We’ll start with a chart showing many different ways to measure poverty.
The official poverty rate (“Official Poverty Measure”) comes from the Census Bureau and it gets the most attention in the media and elsewhere.
But is it the right measure, and does it show the impact of redistribution programs?
In a study published by the Journal of Political Economy, Richard V. Burkhauser, Kevin Corinth, James Elwell, and Jeff Larrimore put together a “full poverty measure” that captures the value of various handouts.
Based on their approach, there is almost no material deprivation in the United States. Their poverty rate as of 2019, shown in the above chart, was just 1.6 percent.
Here’s some of what they wrote.
Almost 60 years have passed since President Johnson declared his War on Poverty. Even so, academics and policy makers still debate its outcome. …disagreement over progress in the War on Poverty stems from disagreements over how poverty should be defined… We…create a poverty measure…which we refer to as the absolute full-income poverty measure (FPM)… We include both cash and in-kind programs designed to fight poverty, including food stamps (now the Supplemental Nutrition Assistance Program [SNAP]), the school lunch program, housing assistance, and health insurance. Finally, we hold poverty thresholds constant in inflation-adjusted terms using the Personal Consumption Expenditures (PCE) price index. Using this poverty measure, we find substantial reductions in poverty based on President Johnson’s standards. Specifically, we find that the absolute FPM poverty rate in 2019 was 1.6%, well below the official poverty rate of 10.5%.
Incidentally, the official poverty rate is now 11.5, so perhaps the authors’ FPM measure also has increased a bit.
But that’s not important for our discussion today. Instead, let’s consider whether their FPM measure shows that the War on Poverty has been a success.
The answer depends, at least in part, of whether you think government dependency is an acceptable outcome.
Here are some further excerpts from the study.
…we evaluate the extent to which poverty has fallen as a result of increases in market income versus increases in government transfers. As President Johnson further stated in his State of the Union address on January 8, 1964, “The War on Poverty is not a struggle simply to support people, to make them dependent on the generosity of others”… Contrary to this goal of President Johnson, we estimate that dependence—which we define as receiving less than half of full-income from market sources—among working-age individuals increased from 4.7% to 11.0% between 1967 and 2019. Likewise, dependence among children increased from 6.0% to 13.1%. …Success in reducing material hardship has come at the cost of having a greater share of the population dependent on government for at least half of their incomes.
Here are some charts from the JPE article, all of them showing how dependency increased for just about all groups in society.
Here’s one final excerpt, showing the difference between the right way and wrong way of reducing poverty.
…the War on Poverty…was not won by making people more self-sufficient, as President Johnson sought. Dependence (defined as receiving less than half of household income from market sources) among working-age adults and children more than doubled from 1967 to 2019. However, the rise in dependence was not uniform over the entire period, with dependence falling substantially, especially among children and non-aged Black individuals, from 1993 to 2000. This period is coincident with welfare reforms that required and encouraged work as well as a strong labor market.
Last month, I shared data on per-capita welfare spending in American states.
The big takeaway was that states such as New York and California were spending more tan twice as much as states such as Texas and Florida. And I concluded that “Florida and Texas presumably are reducing poverty while states such as New York and California are subsidizing it.”
Are there similar numbers for the entire world? Can we see which countries have the most redistribution spending, on a per-capita basis?
I did something like that in 2019, but the comparisons were based on social welfare spending as a share of economic output, not on a per-capita basis. And the data only covered industrialized nations.
My (admittedly cursory) online search did not unearth any comprehensive country-by-country data, but this a good opportunity to share data on the Europe’s welfare spending as a share of the world’s total.
Here’s a shocking graph from a 2012 World Bank report.
Keep in mind, as you look at this data, that Europe’s population is only about 10 percent of the world total.
This has to be Europe’s most depressing chart. People have quibbled about these numbers, and we also have to assume that there may have been some changes over the past 10 years.
But it’s a safe guess that any “improvement” in Europe’s numbers would be because other nations expanded redistribution, not because European government became more fiscally prudent.
The bottom line is that European welfare states are too burdensome and that won’t end well.
P.S. By some measures, the U.S. is more redistributive than Europe. But that’s only because so much redistribution in Europe is financed by huge tax burdens on lower-income and middle-class households.
P.P.S. The World Bank study cited above also had some powerful data on the harmful impact of excessive government spending.
Back in 2010, I put together a “Moocher Index” based on the percentage of non-poor people in each state getting government handouts.
Based on that back-of-the-envelope calculation, Vermont, Mississippi, and Maine were the biggest moocher states and Nevada, Colorado, and Arizona were the most self-reliant states.
Then, in 2013, I shared some data looking at the value of welfare benefits in each state, compared to both the median wage and to the federal poverty rate.
Sadly, those numbers showed it was more lucrative in many states (especially in the Northeast and Hawaii) to live off the government rather than work.
Today, let’s look at which states are the most generous with handouts. The Committee to Unleash Prosperity shared this table yesterday, which ranks states based on the level of per-capita spending on public welfare.
The folks at CTUP highlighted California and Florida. Since I usually do New York-vs-Florida and California-vs-Texas comparisons, I added a couple more numbers.
Ronald Reagan has many famous quotes, including “government is the problem” and “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.'”
Channeling Reagan’s wisdom, I have repeatedly shared examples of how government makes things worse rather than better.
If it is any comfort, however, politicians in other nations routinely also make the mistake of thinking (or claiming) that more government can solve problems.
A report in the New York Times by Constant Méheut asks why there is ongoing discontent in French neighborhoods where the government has spent billions of euros.
After the 2005 riots, the French government invested billions of euros to revamp its immigrant suburbs, or banlieues, to try to rid them of run-down social-housing blocks. But the similarity of the recent riots, and what spurred them, almost a generation later has raised questions about whether the efforts to improve conditions in the banlieues have failed. …The reasons for the failure, they say: Change has come too slow, and, perhaps more important, the government programs have done little to address deeper, debilitating issues of poverty… Clichy-sous-Bois embodies the challenges facing France. The city was the center of the 2005 riots and has since become something of a laboratory for the changes promised by various governments. New social housing has sprung up in many neighborhoods. A government-funded cultural center opened in 2018… But when riots broke out across the country after the recent police shooting, Clichy-sous-Bois was hit hard again… A 2018 parliamentary report noted that the successive governments’ efforts to improve life in the suburbs had mostly failed, in part because they did not focus enough on helping residents escape poverty.
The article does not say how many billions were spent, but France has the highest burden of government spending in Europe. Which is saying something.
It is also a country where poor people get plenty of handouts, but the article reminds us that that government spending to “help” the poor has an unfortunate consequence of trapping them in poverty (a problem that also exists in the United States).
There are three troubling things about the politics of poverty.
First, I frequently grouse and complain that some folks on the left don’t actually care about helping poor people. Instead, as explained in my Eighth Theorem of Government, they simply use poor people as props so they can expand the size and scope of the welfare state.
Second, I sometimes speculate that our friends on the left are more motivated by a disdain for the rich than they are by any desire to help the less fortunate (something that Margaret Thatcher observed many decades ago).
For purposes of today’s column, we’re going to focus on this third group because lying about poverty may soon become official government policy.
In a column for the Wall Street Journal, the American Enterprise Institute’s Kevin Corinth warns that the Biden Administration is thinking about turning poverty hucksterism into official government policy.
A new report from the National Academy of Sciences seeks to redefine poverty. …the report’s real purpose could be to expand the welfare state. If the Census Bureau adopts the new poverty definition, millions more Americans could automatically be made eligible for benefits—leading to at least $124 billion in additional government spending over the next decade… It would also break with more than 50 years of precedent by establishing a relative standard. People could become better off and still be classified as “poor”; poverty would decline only if income at the bottom of the distribution increases more quickly than in the middle class. …Redrawing the official poverty line would be a nakedly political move without any scientific basis that could alter the scope of the safety net overnight.
I suspect readers won’t be surprised to learn that the report was put together by a very biased panel.
The 13 authors of the recent NAS paper appear to have been selected along partisan lines: 12 of them have contributed to Democratic causes or worked for Democratic administrations.
And I also suspect that nobody will be surprised to learn that a secondary effect will be to steer more redistribution to left-wing states.
As consequential is the potential reallocation of government assistance across states. The poverty line under the Supplemental Poverty Measure is higher in states like California and New York…and lower in states like West Virginia and Mississippi.
Adding $124 billion of additional cost to the welfare state would be bad news for taxpayers.
But the worst thing about this scheme is that it would enshrine dishonesty into Washington’s welfare state.
As I wrote a few years ago, it would be “insanely dishonest.” That’s because “everyone’s income could double and the supposed rate of poverty would stay the same.” Or that “a country could execute all the rich people and the alleged rate of poverty would decline.”
So you can understand why I get upset when the rich and powerful use the coercive power of government to line their pockets at the expense of ordinary taxpayers.
Now I have a new reason to be angry.
Reporting for the New York Times, Neil MacFarquhar describes a scandal involving Mississippi bigwigs feeding at the public trough.
John Davis, who served as executive director of the Mississippi Department of Human Services under former Gov. Phil Bryant, pleaded guilty to both federal and state charges of embezzling federal welfare funds. Millions of dollars were transferred to friends and relatives, court documents say. According to a lawsuit filed by the state in May, around $5 million was diverted to Ted DiBiase, a flamboyant retired wrestler once known as “The Million Dollar Man,” and two of his sons… Much of the money went to fictitious services, bogus jobs, first-class travel arrangements and even one son’s stay at a luxury rehab center in Malibu, Calif., that cost $160,000, the suit claims. Similarly, the state claims that Marcus Dupree, a former high school football phenom and professional running back, who was paid to act as a celebrity endorser and motivational speaker, did not perform any contractual services toward the $371,000 he received to purchase and live in a sprawling residence with a swimming pool and adjacent horse pastures in a gated community. Mr. Favre, who earned more than $140 million in his Hall of Fame career, was paid $1.1 million for speeches he never gave, the suit said. He also orchestrated more than $2 million in government funds being channeled to a biotechnology start-up in which he had invested, according to the suit. …The case follows a state audit released in May 2020 suggesting that as much as $94 million of TANF funds might have gone astray.
That’s certainly true, but some of our friends on the left argue that it is also evidence that Bill Clinton’s welfare reform backfired.
Experts said the fraud was rooted in changes enacted in such programs in 1996, when cash benefits paid to poor families were replaced by block grants issued to states.
In a piece for the American Enterprise Institute, Angela Rachidi explains the underlying issues.
A scandal involving former NFL quarterback Brett Favre and the federal welfare program Temporary Assistance for Needy Families (TANF) exploded…following new revelations that Mississippi officials, including the former governor, misdirected federal TANF money to enrich themselves, their celebrity friends, and other well-connected individuals. …the scandal draws attention to the TANF program. Critics have partly blamed the welfare reform law from 1996, which created TANF, for allowing such fraud. …Instead of an entitlement where government officials distribute money to all eligible people, TANF is a block grant provided… As awful as this scandal is, the fraud and abuse on display in Mississippi is not unique to TANF and not caused by its block grant structure. The Government Accountability Office (GAO) estimated that from 2015–2017 the annual average amount of Supplemental Nutrition Assistance Program (SNAP) benefits (or food stamps) “trafficked,” meaning retailers taking a fraudulent profit, was $1.2 billion. The GAO also found that improper payments in Medicaid, including payments for services not provided, totaled $36.7 billion in 2017. Earlier this month, the Department of Justice charged a nonprofit organization in Minnesota with a $250 million scheme that took federal pandemic-relief money earmarked for a child nutrition program and instead pocketed the funds.
In other words, corruption is an inherent part of government programs, whether the money is distributed as block grants or sent directly to recipients.
Ms. Rachidi points out that welfare reform produced good results. I don’t know if it saved money for taxpayers, but it led to progress as measured by variables such as labor force participation and child poverty.
None of this excuses what happened in Mississippi, but the context is important. Welfare reform, which created TANF, transformed a broken entitlement program—Aid to Families with Dependent Children—into a more effective system that gives states flexibility to address the underlying causes of poverty, including limited employment and unmarried parenthood. These reforms have significantly reduced dependence on cash welfare and increased employment among single mothers, which helped dramatically lower child poverty over the past two decades.
The obvious takeaway, as I pointed out back in 2015, is that we should we should be expanding on Bill Clinton’s success by replacing other federal entitlements with block grants.
The federal government maintains a Byzantine maze of redistribution programs, so there are lots of opportunities for progress. Medicaid is an obvious example, along with food stamps. Especially since both programs are riddled with fraud.
But this Reason video with Amity Shlaes shows why Lyndon Johnson also is among the worst of the worst.
You should watch every second of the video, but if you don’t have 33 minutes to spare, here’s a helpful summary.
Johnson declared war on poverty, jacked up federal spending on education, and pushed massive new entitlement programs, including Medicare and Medicaid, which promised to deliver high-quality, low-cost health care to the nation’s elderly and poor. …But did the Great Society achieve its goals of eradicating poverty, sheltering the homeless, and helping all citizens participate more fully in the American Dream? In Great Society: A New History, Amity Shlaes argues that Lyndon Johnson’s bold makeover of the government was a massive failure.
And his so-called War on Poverty was a disaster for both taxpayers and poor people.
How much of a disaster?
Let’s augment Amity’s analysis with these excerpts from Jason Riley’s column in the Wall Street Journal.
Entitlement programs were dramatically expanded in the 1960s in the service of a war on poverty, yet poverty fell at a slower rate after the Great Society initiatives were implemented, and overall dependency on the government for food, shelter and other basic necessities increased. …Liberals pitch these social programs in the name of helping underprivileged minority groups and reducing inequality, but the lesson of the 1960s is that government relief can put in place incentives that have the opposite effect. Between 1940 and 1960 the percentage of black families living in poverty declined by 40 points… No welfare program has ever come close to replicating that rate of black advancement… Moreover, what we experienced in the wake of the Great Society interventions was slower progress or outright retrogression. Black labor-force participation rates fell, black unemployment rates rose, and the black nuclear family disintegrated. In 1960 fewer than 25% of black children were being raised by a single mother; within four decades, it was more than half. …The welfare state is often discussed in relation to its effect on racial and ethnic minorities, yet crime, single parenting and drug abuse also increased among poor whites in the aftermath of the Great Society. When the government indulges and subsidizes counterproductive behavior, we tend to get more of it.
Ten days ago, I shared some data and evidence illustrating how redistribution programs result in high implicit tax rates and thus discourage low-income people from climbing the economic ladder.
Or why work at all if the governments provides enough goodies?
But don’t ask such questions if you’re in the same room as Helaine Olen of the Washington Post. She is very upset that some people think welfare payments discourage work.
It’s a dangerous myth, this idea that government help causes some people to just loaf off. It’s also untrue.Reminder: Before the pandemic, most working-age people receiving benefits like food stamps worked. They just didn’t earn enough money. …the temporary child tax credit signed into law this year by President Biden demonstrates the opposite. It is an extraordinary success. Almost 90 percent of families with children under age 18 are eligible to receive a monthly check from the federal government through the end of the year. …Many other developed nations offer almost all residents a child allowance of some sort.
If you read the entire column, you’ll notice that she provides very little evidence, particularly considering her very bold assertion that a negative link between redistribution and labor supply is “a dangerous myth.”
Yet we know from the experience of welfare reform in the 1990s that work requirements did boost labor supply.
And she wants us to believe that everyone will continue to work, even if they can get $3000-plus for each kid, along with all the other goodies that are provided by Uncle Sam (often topped up by state governments).
For what it’s worth, I think she admits her real agenda toward the end of her column.
…an argument can be made that the children of the irresponsible deserve more support from us, not less. Children can’t push their parents to get with the work-and-education program. As a result, you’re not “helping” children if you insist on financially punishing their parents for not making an “effort.” …human infrastructure matters too.
In other words, Ms. Olen seems to share Rep. Ocasio-Cortez’s view that money should be given to people “unwilling to work.”
Which is how some of our friends actually view the world. They think there is a right to other people’s money. Which is why they support big handouts, including so-called basic income.
The bottom line is that Biden’s per-child handouts and other expansions of the welfare state clearly would make work less attractive for some people.
More than 10 years ago, I wrote about President Obama’s disingenuous strategy of pretending that spending increases were tax cuts.
Politicians in Washington have come up with something far more impressive than turning lead into gold or water into wine. Using self-serving budget rules, they can increase the burden of government spending and say they are cutting taxes instead. This bit of legerdemain is made possible…by adopting or expanding refundable tax credits. But in this case, “refundable” does not mean the government is returning money to taxpayers. Instead, it means that money is being redistributed to people who do not earn enough to be subject to the income tax. This is hardly a trivial issue. …the amount of income redistribution being laundered through the tax code is now so large that the bottom 40 percent of the population has a negative “effective” income tax rate.
Indeed, the IRS is now the biggest redistribution agency in the world, in charge of giving away a massive amount of money.
Far more than is spent on traditional welfare (what used to be called aid to families with dependent children and was reclassified as temporary aid to needy families), as illustrated by the chart.
The so-called earned income tax credit is the biggest redistribution program, though there’s also a large amount of spending on child credits.
And the cost of the so-called child credits is going to explode if President Biden’s plan for per-child handouts is approved.
Matt Weidinger of the American Enterprise Institute opined on Biden’s version of political alchemy.
Democrats are fond of saying their massive $3.5 trillion spending bill includes significant “tax cuts.” They are referring to the effects of continuing the expanded child tax credit… President Biden said it was “one of the largest-ever single tax cuts for families with children.” …The facts say otherwise. …Such payments to those who do not owe federal income taxes are known as “refundable” credits, or in budget terms “outlays” — the same as benefits provided under welfare, Medicaid, food stamps, and similar spending programs. The outlay portions of these tax credits are not “tax cuts” for the simple reason that the payments exceed any taxes the recipient owed in the first place. Put another way, it is impossible to “cut taxes” if you do not owe taxes.
And here’s the relevant table from the Joint Committee on Taxation.
By the way, note how the spending estimates decline after 2025.
This is a budget gimmick. To make Biden’s expansion of the welfare state seem less extravagant, supporters designed the proposal so the expanded per-child handouts disappear in 2026.
But they openly argue that they will be extended because of the assumption that many Americans will get hooked on “free” money from Washington.
P.S. I’m not a fan of child credits, even for families that pay taxes. Simply stated, there are other types of tax cuts that will do a much better job of boosting after-tax family income.
But it’s also very bad news for poor people, in part because various redistribution programs can lure them out of the productive economy and into total dependency on government (and this will become an even bigger problem if Biden’s per-child handouts are approved).
But it’s also bad news because redistribution programs can result in very high implicit tax rates for low-income people who try to improve their lives by climbing the economic ladder.
I shared an example back in 2012, which showed how a single mother in Pennsylvania would be worse off with $57,000 of income instead of $29,000.
In other words, she would be dealing with a de facto marginal tax rate of more than 100 percent.
If you want to understand how this happens, Professors Craig Richardson and Richard McKenzie wrote about this topic in an article for The Library of Economics and Liberty.
…by expanding public assistance programs, the President’s plan will unavoidably impose a higher, hidden tax rate—known as an “implicit marginal income tax rate” (which we shorten to implicit tax rate)—on low-wage workers who receive welfare benefits. Those workers will pay an implicit tax rate because many welfare benefits are reduced as earnings rise. Ironically, the poorest Americans often pay implicit tax rates that are far higher than the IRS’s explicit marginal income-tax rates imposed on the country’s highest income earners. …Consider a household that receives benefits from only two welfare programs, with one tapering off at 20 cents for each added dollar earned and another tapering off at 40 cents for each added dollar earned. Those cuts create an implicit tax rate of 60 percent, which means the worker has only 40 cents in additional spendable income for each added dollar earned. This implicit tax rate can be expected to affect work incentives in much the same way that a federal income tax rate does.
The authors cite a real-world example.
…consider a real-life, low-income single mother of two children in Forsyth County, North Carolina earning $10 an hour in a full-time job, which means she has a monthly earned income of $1,600 (or $19,200 annually). Suppose the single mother receives monthly benefits from five welfare programs: $425 in food stamps, $1,471 in subsidized childcare, $370 in housing subsidies, $180 in WIC benefits, and $493 in an earned income tax credit (EITC). Her monthly welfare benefits will total $2,939 (or $35,271 a year). Now, suppose the single mother takes a new job paying $15 an hour, a 50 percent increase. Her monthly earned income will rise by $800 to $2,400 (with her annual income rising to $28,800 a year, an annual earnings increase of $9,600). However, she will face decreases in four out of her five monthly benefit streams, with each benefit reduction based on the same $800-increase in earnings (a problem known among welfare researchers as the “cumulative stacked effect”). The single mother will lose $231 in food stamps, $80 in childcare benefits, $216 in housing benefits, and $166 in EITC. Her total decrease in monthly benefits will reach $694 (which means her annual benefit total will drop by $8,328).4 Her implicit tax rate on her added monthly earnings of $800 is 87 percent—more than two times the highest explicit marginal tax rate proposed for the rich. …In addition, the single mother will be required to pay an added $185 a month in federal and state income taxes on her added earned monthly income of $800, which is an explicit tax rate of 23 percent. Adding the 87 percent implicit tax rate to the 23 percent explicit tax rate leads to an overall tax rate of 110 percent. Her raise has left her $79 per month poorer in lost wages and benefits—surely a strong disincentive for her to take the higher paying job.
Here’s a table showing those results.
If you want more evidence, check out Chart 7 from this column and Figure 8 from this column.
And the same problem exists in other nations as well.
For today’s topic, though, I want to call attention to a recent report by the Democratic staff of the Joint Economic Committee. It relies on the sloppiest and most disingenuous analysis imaginable.
To recycle a term from 2015, let’s call it primitive Keynesianism.
Here’s the relevant excerpt.
The Treasury Department released information on how much money went to each state, which allows us to estimate the impact of the newly expanded CTC on local economies. Using an estimated multiplier of 1.25—or how much additional spending each $1 in CTC payments will generate, as people use their funds to buy goods and services that in turn generate income for other people and businesses—implies that the expanded CTC will generate nearly $19.3 billion in spending in local economies each month. This increased economic activity is a boon to local businesses, creating jobs in communities across the United States.
Honest Keynesians acknowledge that there’s no magic money tree. They know the government can’t put money in our right pocket without first removing from our left pocket.
So they make arguments about things such as the “marginal propensity to consume.”
In this discussion with Ross Kaminsky of KHOW in Denver, I warn that the President’s proposal for per-child handouts is an especially bad idea.
In part, my opposition to per-child handouts is motivated by a desire to protect the welfare reform law enacted in the 1990s.
As I noted in the interview, that reform reduced dependency and it reduced poverty. And Biden’s plan, for all intents and purposes, will repeal that law since it will be possible to get big chunks of money while not working, simply by having kids.
But since I’m a public finance economist, I’m also motivated by opposition to a massive new entitlement program.
At the risk of understatement, we don’t need to spend another $1.1 trillion when we can’t even afford all the programs that already are burdening taxpayers.
Others share my concern about the impact of Biden’s plan.
Matt Weidinger dissects per-child handouts in an article for National Review.
This year, parents don’t need to have paid taxes at all to collect an annual allowance of up to $3,600 per child. …According to the New York Times, “more than 93 percent of children — 69 million” will benefit from the new federal giveaway. …No work is expected from parents collecting them. That’s reminiscent of welfare programs before bipartisan 1996 reforms that required parents to work or attend training in order to receive government checks. In fact, the biggest beneficiaries of the new child allowance will be parents who earn less than $2,500 per year — including those who don’t work or pay taxes at all. …As explained in a 2019 report proposing child allowances in the U.S., the idea comes “from other countries.” …American policy-makers could merely be following suit. But it seems more likely that they’re just searching for a palatable way to package their current explosion of new spending, a spin on a return to the failed policies of the past: bigger benefits, for more people, funded by others’ tax dollars. After all, calling such payments “welfare” just wouldn’t do, would it?
David Henderson of the Hoover Institution also explains why Biden’s scheme is misguided.
Child allowances are a bad idea. It’s wrong to forcibly take money from some and give to others simply because they have children. Moreover, child allowances would create increased dependence, are not targeted at the needy, could reduce the work effort of lower-income women, and would add to the already huge federal budget… Scott Winship, the director of poverty studies at the American Enterprise Institute…worries that child allowances will undercut the successful welfare reform of the mid-1990s and thereby cause a substantial number of unmarried low-income mothers to stop working. …in the 1990s he thought welfare reform would increase child poverty and he now admits that he was wrong. He writes that in the United States, “Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s.” …the urgent need is to get federal spending under control. This means slowing the growth of Medicare, Medicaid, and Social Security, the three programs most responsible for the coming federal deficits. But it also means not adding major new programs.
By the way, Henderson’s column focuses on Mitt Romney’s plan, but his criticisms apply equally (actually, even more) to Biden’s proposal.
I’ll close with some encouraging polling data that was shared by G. Elliott Morris of the Economist.
Biden’s plan has only 29 percent support (versus 43 percent opposition).
I suspect that polling data would look even better if the pollsters had been honest and asked whether people favored expanded redistribution payments based on number of kids (“refundable” tax credits are simply spending that gets laundered through the tax code).
The bottom line is that the United States already has a big problem with government dependency. Per-child handouts will make a bad situation even worse.
P.S. Some advocates of the handouts say we need to copy Europe, but they never explain why “catching up” is a good idea when Europeans have much lower living standards.
But some of our friends on the left think it is bad news that the United States isn’t more like Europe.
They want more redistribution in America and they may get their wish if Congress approves Biden’s so-called American Families Plan.
The Economist has an article about Biden’s radical proposal, which would, as they correctly note, “Europeanise the American welfare state.”
President Joe Biden is proposing an ambitious reweaving of the American safety-net, which the White House says will cost $1.8trn. The American Families Plan has bits of the European welfare state that have long been missing in the country—a child allowance, paid family leave, universal pre-school, subsidised child care and free community college—but contains no reference to work requirements. …So how did Democrats go from Clintonism—which implicitly conceded the Reaganite critique that too much governmental assistance is a very bad thing—to its present-day unconcern about (even relish for) deficit-financed expansions of the safety-net?
This would bring America more in line with the rest of the developed world: the average government spending on benefits such as child allowances, family leave and early education is 2.1% of GDP in the OECD club of mostly rich countries. In America, it is just 0.6%. …A generous child allowance is the main anti-poverty tool in most rich countries—and also one that America lacks. One such scheme was created this year as part of the covid-19 relief bill that the president signed in March. It will pay most families $3,000 per year per child ($3,600 for young children)… The president’s plan proposes to extend these payments until 2025. Some Democrats think they should simply be made permanent.
The Wall Street Journalopined about Biden’s plan last month.
It’s more accurate to call this the plan to make the middle class dependent on government from cradle to grave. The government will tell you sometime later, after you’re hooked to the state, how it will force you to pay for it. We’d call the price tag breathtaking, but by now what’s another $2 trillion? …But the cost, while staggering, isn’t the only or even the biggest problem. The destructive part is the way the plan seeks to insinuate government cash and the rules that go with it into all of the major decisions of family life. The goal is to expand the entitlement state to make Americans rely on government and the political class for everything they don’t already provide. …This is now about mainlining benefits to middle-class families so they become addicted to government—and to the Democratic Party that has become the promoting agent of government.
For my contribution to this discussion, I want to make two points about the practical implications of Biden’s plan to “Europeanise” the United States.
First, it is impossible to have a European-sized government without massive tax increases. And since there aren’t enough rich people to finance big government, that inevitably means low-income and middle-class taxpayers will have to be hit with much bigger fiscal burdens. Which is exactly what has happened in Europe (and lots of honest people on the left openly admit a bigger welfare state would requiresimilar policies in the United States).
Second, it is impossible to have a European-sized government and still maintain a big economic advantage over Europe. Higher spending and higher taxes will combine to reduce work, saving, investment, and entrepreneurship. Simply stated, European fiscal policy will lead to European economic results, and that will be very bad news for ordinary Americans since living standards are 30 percent-40 percent lower on the other side of the Atlantic Ocean.
In Part I of this series, I explained why it’s absurd to think illegal immigration can be stopped by sending foreign aid to less-developed countries, such as many of those in Central America.
Like most libertarians, I want to solve the problem by getting rid of the welfare state.
Immigrants are a big net plus so long as they are coming to work and be productive.
Indeed, because of their entrepreneurial skills and work ethic, immigrants from many nations wind up earning more than native-born Americans.
That’s something to celebrate. The American Dream in action!
But will that story of success continue if the welfare state is expanded?
Two advocates of increased immigration are worried. First, Jason Riley of the Wall Street Journalrecently explained that Biden’s agenda is a recipe for immigrant dependency.
…it is a growing belief on the political left that people should be allowed to enter the U.S. on their terms rather than ours, and that it is our collective responsibility to take care of them if they can’t take care of themselves. Milton Friedman said that open immigration and large welfare states are incompatible, and today’s progressives in Congress and the White House are eager to test that proposition. …Another concern is the left’s determination to sever any connection between work and benefits, something all the more worrisome since it is occurring while destitute foreign nationals with little education are being lured here en masse. …Earlier this month, the Biden administration quietly announced that it would no longer enforce a policy that limited the admission of immigrants who were deemed likely to become overly dependent on government benefits. What could go wrong? …In countries like Italy and France, generous aid programs have attracted poor migrants who are more likely than natives to be heavy users of welfare and less likely to be working. It’s a mistake to think it can’t happen here.
In a column last year for Reason, Shikha Dalmia warned that welfare programs undermine support for immigration.
…economists Alberto Alesina, Armando Miano, and Stefanie Stantcheva…administered online questionnaires to 24,000 respondents in six countries: U.S., U.K., France, Germany, Italy, and Sweden. The explicit aim was to study attitudes toward legal, not illegal, immigration. …restrictionists have succeeded most spectacularly is in depicting immigrants as welfare queens. …In America, over 25 percent of respondents said the person with the ..immigrant-sounding name would pay less in taxes than he collected in welfare… The study’s findings pose a particular dilemma for Democrats like Sen. Elizabeth Warren (D–Mass.), who wants to combine grandiose welfare schemes like free health care, pre-K, and college for everyone with generous immigration policies, because the mere mention of immigration reduces support for such schemes. Respondents who were asked about immigration became less concerned about inequality and less supportive of soak-the-rich schemes. …as long as immigrants are seen as succeeding through their own grit, natives may have no real objection to them. What is most likely to sour the public on immigration are the grandiose universal freebies… Immigrants should be wary of Democrats bearing gifts.
Both Riley and Dalmia raise good points.
My modest contribution to this discussion is to provide a practical example.
In his so-called American Rescue Plan, Joe Biden included a huge giveaway program that will shower $3,000-$3,600 to non-rich households for every kid they have.
This is a one-year, one-time handout, but many Democrats (and some Republicans!) want to make these enormous per-child payments a permanent part of America’s welfare state.
If that happens, the incentive to move to the United States almost surely will skyrocket.
Here’s a map I made, showing the annual handout for two children in the United States and the average per-capita income in some nearby nations.
At the risk of stating the obvious, there will be a huge incentive to migrate to America – but not for the right reasons. And my little example doesn’t include the value of any of the dozens of other redistribution programs in Washington.
The bottom line is that we shouldn’t have a welfare system that rewards dependency, whether for people in the country legally or illegally.
And if you like immigration in theory, you should be especially opposed to handouts that will undermine public support for newcomers in practice.
After the welfare state was created, poverty and dependency stopped declining.
Now let’s add a fifth item.
The United States adopted welfare reform in the mid-1990s.
Today’s column examines whether this was a bad development or good development.
We’ll start with a harsh critic.
In his column for the New York Times, Charles Blow wants Democrats to repeal Clinton’s welfare reform.
Clinton’s record, particularly with respect to Black and brown Americans and the poor, was marked by catastrophic miscalculation. …the welfare reform bill, …Clinton promised would “end welfare as we know it.” One of its central provisions was block-grant assistance to the states. …the Center for Budget and Policy Priorities pointed out in 2020, the block grant to states “has been set at $16.5 billion each year since 1996; as a result, its real value has fallen by almost 40 percent due to inflation.” …With the passage of the “American Rescue Plan,” the Democrats, alone, took another major step away from the mistakes of the Clinton legacy by increasing aid to families with children and to workers.
Reading the column, it seems like blacks must have suffered immensely because of the 40 percent reduction in the block grant.
But now let’s consider whether welfare reform was a good thing.
According to the data, the answer is yes. This chart, based on the Census Bureau’s data (specifically Table B-5), shows that the poverty rate for African Americans has declined since welfare reform was enacted.
To be sure, one could argue that the post-welfare reform decline was simply a continuation of a positive trend. But that doesn’t change the fact that there’s certainly no evidence that the 1996 legislation led to bad results.
Moreover, research from the Brookings Institution makes a persuasive case that welfare reform deserves credit for some of the post-1996 progress.
Why? Because it sent a message – both practically and rhetorically – that permanent dependence on Uncle Sam was a bad thing. As a result, more people entered the workforce and poverty dropped.
That seems like a result that should be celebrated.
The only silver lining to that dark cloud is that the handouts are only for 2021.
But the pro-redistribution crowd already is clamoring to make that provision a permanent giveaway. To paraphrase Bill Clinton, they want to “restore welfare as we knew it.”
P.S. Based on what I’ve read in his columns, Charles Blow is a hard-core leftist on economic issues. But he’s semi-reasonable on gun rights, so that’s one point in his favor.
P.P.S. Welfare reform is just one example of the good policies that were enacted during the Clinton years.
P.P.P.S. We can learn lessons about welfare and dependency by looking at data from Europe and Canada.
Two days ago, I shared data showing that people in the big nations of Western Europe only have about 75 cents of income for every $1 that Americans earn.
That’s a remarkable gap, and it’s getting larger rather than smaller, even though theory says that shouldn’t happen.
But what’s even more shocking is that a poor person in the United States would be middle class in most European nations.
And a low-income person in America is better off than the average European.
Second, I want to scream at anyone who things we should copy the European economic policy.
But my laughing and screaming obviously has no effect because Washington politicians are poised to enact a giant expansion of the welfare state.
And there’s plenty of support for this risky concept from both Democrats and Republicans.
On the GOP side, Senator Mitt Romney has proposed a big tax increase to pay for a big increase in redistribution spending in the form of universal handouts for families with children, an idea that I criticized early last month.
And Oren Cass, a former campaign aide for Romney, has a slightly different plan to impose higher taxes to fund handouts for families with children. I recently critiqued that plan in an article co-authored with Veronique de Rugy of the Mercatus Center. Here’s some of what we wrote.
…the proposal for a Family Income Supplemental Credit (Fisc) from Oren Cass and Wells King is misguided, mostly because it would raise tax rates and expand the burden of government spending. …the Fisc would cost $200 billion annually. …$80 billion per year, would be financed with tax increases. …this fact alone should make the Fisc a non-starter as a matter of fiscal policy. …Income tax rates already are too high, and President Biden wants to raise them further. Self-styled conservatives should not be aiding and abetting the push for class-warfare taxation by adding to the collection of proposed tax-rate increases on workers, investors, entrepreneurs, and business owners. …it would be desirable for families to have more economic opportunity and financial security. However, it doesn’t follow that conservatives should support subsidizing child-bearing and -rearing. We do not think copying Europe and imposing more redistribution is the right approach. Americans enjoy far-higher living standards than people on the other side of the Atlantic Ocean, thanks in part to our smaller fiscal burden.
As you might expect, folks on the left are very excited about expanding the welfare state.
Biden’s so-called stimulus plan also contains a big one-time handout to households with children (with proponents hoping the lure of free cash will lead those households to demand that Washington make such giveaways a permanent part of American life).
Scott Winship of the American Enterprise Institute pours cold water on all the above proposals. Except he focuses not on fiscal policy, but on the fact that these schemes will subsidize dependency and encourage out-of-wedlock births – thus undermining the very successful welfare reform of the 1990s.
A child allowance would send unconditional cash benefits to nearly all families on a per-child basis. …Child allowances run a very real risk of encouraging more single parenthood and more no-worker families, both of which could worsen entrenched poverty in the long run—an overreliance on government transfers, poverty over longer stretches of childhood, intergenerational poverty, and geographically concentrated poverty. …Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s. This was a period in which policy reforms encouraged work, by imposing time limits and work requirements on receipt of cash welfare and expanding benefits to low-income workers. …We should strive to reduce child poverty further, but it matters how we do so. Reducing this year’s poverty while exacerbating entrenched poverty and reversing the progress we have made since welfare reform would be a hollow victory indeed. So much the worse if a child allowance leads to irresistible calls for a universal basic income, which would also increase nonwork among the childless.
Michael Barone is similarly perplexed that lawmakers are so intent on reversing the progress of welfare reform.
When public policies have produced disastrous results, and when alternative policies have resulted in immediate, seemingly miraculous improvement, why would anyone want to go back to the earlier policies? …births to unwed mothers and welfare dependency rose…from 1965 to 1975, violent crime and welfare dependency, both heavily concentrated among blacks, nearly tripled — tripled. For two more decades, crime and welfare dependency remained at the same high levels, sometimes zooming higher. …Reform, first by Thompson in Wisconsin and then by Newt Gingrich and Bill Clinton in the 1996 welfare bill, required mothers to work. Social workers’ focus was changed from handing out more checks to helping moms get and hold jobs. The results: Welfare rolls plummeted; teen births plunged; kids raised by working moms did better in school and in life. Liberals have tried to stealthily roll back the reforms. They’ve been joined by some cultural conservatives, worried about population decline… These include Sen. Mitt Romney, who supports a child allowance that is fully refundable — which is to say that government will send a check to parents, married or unmarried… A version of this, limited to one year, has been inserted in the “COVID relief” bill of President Joe Biden’s administration. A single parent with two kids, working or not, could qualify for $7,200 a year plus $6,400 in food stamps. …Mickey Kaus…argues that…”(A) large subset of recipients will go from one worker to zero workers.” That means “millions of kids growing up in fatherless homes, where nobody goes into the labor force, where the mainstream world of employment is a foreign country.” Past experience says he’s right and that…the people most hurt will be black Americans.
So is there a real danger that per-child handouts will become law?
The obvious answer is yes since they are included in Biden’s faux stimulus.
But that’s just a one-year giveaway. It’s unclear whether households will get addicted to that free cash and thus demand that the handouts get extended (based on my Second Theorem of Government, I’m pessimistic).
So, what does the average person think…? The 2019 American Family Survey, a poll covering 3,000 adults from the Center for the Study of Elections and Democracy, tested four different child tax credit proposals… The results give us a sense of how the public—and some key segments of it—see the issue. Interestingly, none of the ideas had majority support… Nearly half of Americans can support a credit sold as tax relief that’s either broad-based (CTC1) or targeted to the lower-income (CTC3), but an across-the-board handout to parents just for being parents (CTC4) can’t even garner one-third support. …the major takeaways are these: 1) The child tax credit, in general, is not as popular as one might think — even in questions that don’t mention the taxes needed to pay for it, it never manages a majority; and 2) despite some energy on the pro-family intellectual right for flat, universal child allowances (CTC4), Republicans and even independents among the general public are really not fond of the idea.
This data is semi-encouraging. I’m definitely glad people are suspicious of big per-child handouts. And I suspect opposition will grow when people learn about the European-style taxes that would be needed to finance such a huge giveaway.
But it doesn’t help the fight for sensible policy when some self-styled conservatives advocate for big expansions of the welfare state – especially when such ideas inevitably will erode societal capital.
P.S. As indicated by the above excerpt, Scott Winship’s article concludes with a warning that universal per-child handouts could be the camel’s nose under the tent for a “basic income,” which is the crazy notion that government should give everyone money. That’s an additional reason to reject the idea, as even Joe Biden once realized.
P.P.S. Some proponents use the term “child tax credit” to describe per-child handouts, but that’s disingenuous at best. A handout doesn’t magically become a tax cut just because the recipient happens to pay tax. Moreover, the handouts in these proposals generally are “refundable,” which is simply fiscal jargon for handouts that also go to people who don’t pay any tax.
P.P.P.S. The real-world evidence casts considerable doubt on the notion that per-child handouts will increase birthrates.
Bernie Sanders was considered a hard-core leftist because his platform was based on higher taxes and higher spending.
Elizabeth Warren also was considered a hard-core leftist because she advocated a similar agenda of higher taxes and higher spending.
And Joe Biden, even though he is considered to be a moderate, is currently running on a platform of higher taxes and higher spending.
Want to know who else is climbing on the economically suicidal bandwagon of higher taxes and higher spending? You probably won’t be surprised to learn that the pro-tax International Monetary Fund just published its World Economic Outlook and parts of it read like the Democratic Party’s platform.
Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence… Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income… Some fiscal resources…should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. …social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage…social spending measures…strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households), expanding social insurance (relaxing eligibility criteria for unemployment insurance…), and investments in retraining and reskilling programs.
And here’s a partial list of the various class-warfare taxes that the IMF is promoting.
Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. …Efforts to expand the tax base can include reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes.
Where fiscal rules may constrain action, their temporary suspension would be warranted
Needless to say, any time politicians have a chance to expand their power, temporary becomes permanent.
When I discuss IMF malfeasance in my speeches, I’m frequently asked why the bureaucrats propose policies that don’t work – especially when the organization’s supposed purpose is to promote growth and stability.
The answer is “public choice.” Top IMF officials are selected by politicians and are given very generous salaries, and they know that the best way to stay on the gravy train is to support policies that will please those politicians.
P.S. I wish there was a reporter smart enough and brave enough to ask the head of the IMF to identify a single nation – at any point in history – that became rich by expanding the size and cost of government.
P.P.S. There are plenty of good economists who work for the IMF and they often write papers pointing out the economic benefits of lower taxes and smaller government (and spending caps as well!). But the senior people at the bureaucracy (the ones selected by politicians) make all the important decisions.
I think this is a great introduction to the issue, particularly since you learn how “public choice” (i.e., politicians engaging in self-serving behavior) played a key role in the development of today’s welfare state.
But if you don’t have the time to watch a long video, here are four key things to understand.
Entitlements (budget geeks sometimes use the term “mandatory spending”) are programs that automatically give people money if they meet certain requirements (such as reaching a certain age or having income below a certain level).
Since these programs automatically give people money, they are not part of the annual appropriations process (the “discretionary spending” parts of the budget that are determined on a yearly basis).
Some entitlement programs are “means tested” and designed to funnel money to low-income individuals. This type of spending is sometimes referred to as “unearned benefits.”
Some entitlement programs are “social insurance” since people pay specific tax in exchange for specific benefits. This type of spending is sometimes referred to as “earned benefits” (though in many cases recipient receive much more than they paid).
By the way, there’s one additional thing to understand.
Indeed, it may be the most important thing to understand if you care about America’s fiscal and economic future.
Let’s look at a new study authored by James Capretta of the America Enterprise Institute. He also has some sobering observations on the history of entitlement programs.
The growing expense of entitlement programs has occurred steadily for more than a half century and is reflected in the shifting distribution of federal spending activity. …by the early 1960s, two-thirds of all spending continued to require approval by the House and Senate appropriations committees each year, and less than a third was spent on entitlement programs. … By 2019, nearly two-thirds of all spending in the budget was for entitlement programs, and less than a third went to annually appropriated accounts.
If you prefer this information visually, here are a couple of pie charts from the study.
The largest entitlement programs are Social Security, Medicare, and Medicaid. Together, they now make up nearly half of all federal spending. Their combined growth over the past half century is the primary source of intensifying fiscal pressure. …In 2019, combined federal spending on them was 9.8 percent of GDP, up from 3.7 percent in 1970. CBO expects them to cost 17.2 percent of GDP in 2050, which is almost equal to the average annual revenue collected by the federal government from 1970 to 2019.
And here’s how they’ve been consuming ever-larger shares of America’s economic output.
What’s driving this ever-increasing fiscal burden?
Capretta points out that uncontrolled entitlement spending may lead to a debt crisis.
I don’t disagree, but I think that’s a secondary concern. The real problem is that government spending will become an ever-larger economic burden. And that will hinder growth whether it’s financed by borrowing or taxes.
Speaking of taxes, here’s the chart from the study that deserves our close attention. It shows the relationship between demographics, benefit generosity, and tax burdens.
Here’s how Capretta describes the relationship.
…for each of the stipulated replacement rates (25, 50, and 75 percent), the tax rate necessary to keep the program solvent rises with increases in the aged dependency ratio. This explains why social insurance taxes in many aging societies have been increased to high levels in recent decades.
I’ve taken the liberty of augmenting the chart to show how these factors interact (though the order of #1 and #2 doesn’t matter).
The bottom line is that the United States is on track to become a high-tax, European-style welfare state if fiscal policy is left on autopilot.
In other words, unless there’s genuine entitlement reform, future Americans will be condemned to lower living standards.
P.S. Here’s some more history. In a column for the American Institute for Economic Research, Richard Ebeling looked at British history to explain how the private sector played a role in social insurance before being displaced by government.
Throughout the 19th century, a primary means for the provision of what today we call the “social safety nets” was by the private sector outside of government. The British Friendly Societies were mutual assistance associations that emerged to provide death benefits for the wives and children of the breadwinner who had passed away. But they soon offered a wide array of other mutual insurance services, including health care coverage, retirement pension programs, unemployment insurance, savings clubs to purchase a family house, and a variety of others. …by the end of the 19th century around two-thirds to three-quarters of the entire British population was covered by one or more of their programs and insurances. The research also discovered that a large majority of the subscribers were in the lower income brackets of the time… What stands out is that these were all private and voluntary associations and exchanges, in which the government paid little or no role.
But I also pointed out that the poor are penalized because they get trapped in dependency.
In large part, this is because they face bad incentives when they work and try to become self sufficient. Not only do they get hit by federal and state taxes, but they also can lose access to various redistribution programs. And the combination of those two factors can produce very high implicit marginal tax rates.
I cited an astounding example of this phenomenon in 2012, showing that a single mother in Pennsylvania would be better off earning $29,000 rather than $57,000. In other words, her implicit marginal tax rate on an extra $28,000 would be 100 percent (thus fulfilling FDR’s odious dream, albeit against a different set of victims).
How pervasive is this problem?
A new study published by the National Bureau of Economic Research gives us the answer. Authored by David Altig, Alan J. Auerbach, Laurence J. Kotlikoff, Elias Ilin, and Victor Ye, it estimates implicit marginal tax rates for various segments of the population.
A plethora of federal and state tax and benefit policies jointly determine Americans’ incentives to work. …complex and often arcane provisions that condition tax payments and benefit receipts on labor income, asset income, total income, and the level of assets. …The myriad features of our fiscal system raise this paper’s central questions: What are the typical levels of marginal net tax rates facing Americans of different ages and resource levels, taking the entire federal and state fiscal system into account? …How much does one’s choice of the state in which to live impact one’s incentive to work? …We address these questions by running 2016 Survey-of-Consumer-Finances (SCF) data through The Fiscal Analyzer (TFA).
The five economists discovered that lower-income people are often hit by very high marginal tax rates on work (τL).
Our main findings, which focus on the fiscal consequences of SCF household heads earning $1,000 more in our base year – 2018, are striking. One in four low-wage workers face lifetime marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent. …marginal net lifetime tax rates are generally higher for those in the lowest quintile than for those in the middle three quintiles… The potential poverty trap arising under our fiscal system is highlighted by the 75th τL-percentile values for the bottom quintiles. Moving from the youngest to the oldest cohorts, these values are 67.4 percent, 75.9 percent, 69.3 percent, 76.5 percent, 74.4 percent, and 73.9 percent. Hence, one in four of our poorest households, regardless of age, make between two and three times as much for the government than they make for themselves in earning an extra $1,000.
This graph from the study shows how poor people can even face marginal tax rates of more than 100 percent (which I’ve highlighted in red). The vertical axis is the tax rate and the horizontal axis is household prosperity.
Subjecting poor people to very high implicit tax rates is horrible economic policy, just like it’s horrible policy to hit any other group of people with high marginal tax rates.
Simply stated, when people are punished for engaging in productive economic behavior, they respond by reducing their work, their saving, their investment, and their entrepreneurship.
Interestingly, some states are better (or less worse) than others.
One’s choice of state in which to live can dramatically affect marginal net tax rates. Across all cohorts, the typical bottom-quintile household can lower its remaining lifetime marginal net tax rate by 99.7 percentage points by switching states! …The typical household can raise its total remaining lifetime spending by 8.1 percent by moving from a high-tax to a low-tax state, holding its human wealth, housing expenses, and other characteristics fixed. …To illustrate how τL varies from state to state, we calculate the median τL for households in the 30-39 age cohort in the lowest resource quintile in each state. …Figure 11 shows the cross-state variation in median lifetime marginal tax rates. …median rates varies between a low of 38.8 percent in South Carolina and a high of 55.0 percent in Connecticut. Clearly, where people live can matter a lot for their incentives to work.
Here’s a map showing the marginal tax rate on people in the bottom 20 percent. The obvious takeaway is that you don’t want to be a poor person in Connecticut, Minnesota, or Illinois.
For what it’s worth, tax rates are still too high in the best states (South Carolina, Texas, Indiana, and South Dakota).
Building on the success of state-level reforms in Kansas, Maine, Wisconsin, Alabama, and Georgia, the Trump Administration has proposed to tighten rules that impose work requirements on childless and able-bodied adults who receive food stamps.
Here’s some of what National Reviewwrote about the proposal.
Our food-stamp program has some bizarre loopholes… In theory, the program has a strict time limit for “ABAWDs,” or able-bodied adults without dependents… But in practice, the executive branch has broad discretion to waive the limit for large geographic areas with weak labor markets — and previous administrations used that discretion promiscuously. As of 2017, about a third of the U.S. population lived in waived areas. …Under the new rule, effective in April of next year, these waivers won’t be granted to areas with unemployment below 6 percent. And states will be far more limited in the geographical configurations they can request waivers for. …Many on the left complain about the rule simply because it will reduce the number of people on food stamps — by about 700,000, roughly 2 percent of total food-stamp enrollment… But…there is clearly room for cuts. (Despite the recovery, total enrollment is about double what it was in 2000.) …The 1996 welfare reform proved the effectiveness of this approach.
As you might expect, this proposal is causing angst for some lawmakers.
Congresswoman Marcia Fudge condemned the proposal in a column for the Washington Post.
…taking food from the tables of hungry Americans during the holidays…that’s the latest act of cartoonish villainy by the Trump administration. …the Agriculture Department played the part of the Grinch, finalizing a rule to cut billions of dollars from the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps. The rule will remove nearly 700,000 from the program…, representing a callous escalation of the Trump administration’s war on people in need. …both red and blue states want the flexibility this rule will eliminate. The rule will dramatically reduce the flexibility of states to decide how best to serve the needs of their own citizens.
So if Congresswoman Fudge wants her state to give goodies to able-bodied adults with no children, that would be a decision for Ohio’s politicians (or, even more relevantly, Oregon’s politicians).
I’m fine with that type of flexibility, but there’s a catch that Ms. Fudge doesn’t mention. She wants taxpayers from across the country to subsidize that decision.
By the way, work requirements are not just an issue for the food stamp program.
There are also discussions about whether people getting Medicaid should have an obligation to work.
Writing for the Federalist, John Daniel Davidson applauds an initiative from the White House to move in that direction.
The Trump administration…will allow states to impose work requirements on abled-bodied adults to qualify for Medicaid. …it’s about time. …imposing work requirements on able-bodied adults will…help enrollees far more than Medicaid coverage will, mostly by giving them a strong incentive to secure full employment. …By putting millions of able-bodied adults on the Medicaid rolls, Obamacare created perverse incentive for those enrollees to limit their income so they could keep their Medicaid coverage. …Work requirements are a proven way to unwind perverse incentives and improve people’s lives. …progressives consider work requirements insulting and demeaning.
It was also a major focus of the very successful 1996 welfare reform legislation.
In an article for City Journal, Kay Hymowitz points out that law is still yielding big dividends.
…the Census Bureau released its report on the nation’s income, poverty, and health-insurance coverage for 2018. …poverty in single-mother households sank to its lowest rate . . . ever. What’s more, the decline took place entirely among black and Hispanic single-mother families. …this is a “Wow!” moment. …More black and Hispanic women have jobs and are working more hours. “The rise in full-time, year-round work led to an increase in incomes and earnings at the household level,” the Census Bureau found. Better yet, the growing number of hours worked by single mothers led to a decline in child poverty of 2.5 percentage points. …the 1996 welfare-reform law…overturned Aid to Families with Dependent Children, which had entitled poor single mothers to cash benefits. As a result, unemployment among the growing number of single mothers was high. Essentially, welfare reform said no more free lunch, instituting work requirements and replacing open-ended AFDC with a time-limited grant to poor mothers (TANF, or Temporary Assistance to Needy Families). …full-time, year-round work can reduce poverty and…poor minority women can improve their lives and the lives of their children through nine-to-five labor. Any “welfare-reform-is-a-failure” narrative should collapse under the weight of such demonstrated facts.
And it’s worth pointing out that one of America’s major redistribution programs – the EITC – is entirely based on work.
Recipients only get a handout if they also earn some money.
Regarding the desirability of work requirements, we can learn from what’s happened in other countries.
In an article from last year, Ryan Streeter of the American Enterprise Institute found good news from work-oriented reforms, especially in Nordic nations.
A majority of Americans, including 55 percent of people living in poverty, believe the purpose of welfare is to help people get on their feet, not just to dispense benefits. Eight in 10 low-income respondents believe working should be required to receive welfare benefits. …Welfare reformers might draw some lessons from unlikely places…the Scandinavian welfare systems are arguably more pro-work than ours… For instance, to deal with declining labor force participation, Denmark eliminated permanent disability benefits for people under 40 and refashioned its system to make employment central. Sweden reformed its welfare system to focus on rapid transitions from unemployment to work. Their program lowers jobless assistance the longer one is on welfare. …Similarly, the British government combined six welfare programs with varying requirements into a single “universal credit.” …An evaluation of the new program, which encourages work, found that 86 percent of claimants were trying to increase their work hours and 77 percent were trying to earn more, compared to 38 percent and 55 percent, respectively, under the previous system.
Regarding the reforms in the United Kingdom, here are some excerpts from a report by Emily Top for E21.
The UK overhauled its welfare system with the Welfare Reform Act 2012. …In addition to simplifying the programs into one, the Act required claimants to agree to a “Claimant Commitment,” in which they sought the services of a work coach to improve their job prospects and get hired. …the program has led to an increase in UK labor force participation as well as a decrease in dependence on benefits. During the same period that the labor force participation rate in the U.S. declined from 84 percent to 82 percent for prime age workers, the rate in the UK increased from 84 percent to 86 percent.
Let’s close by looking at some academic research on work requirements in the United States.
Three professors studied the impact of Bill Clinton’s welfare reform on recipients and found significant societal benefits.
The US Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, often referred to as ‘welfare reform’, was a major policy shift in the US that sought to dramatically reduce dependence of single parents on government benefits by promoting work… The key strategy for reducing dependence was to promote employment by imposing work requirements as a condition for receiving benefits in concert with a lifetime limit on receipt of cash assistance. …The reforms have been successful in that welfare caseloads have declined dramatically – 78% since their peak in 1994. …In a series of recent papers, we investigated the effects of welfare reform in the US – which is still in effect today – on women’s illicit drug use and other types of crime… We found robust evidence that welfare reform led to a 10%–21% decline in illicit drug use among women at risk of relying on welfare, as well as associated declines in drug-related arrests (6%–7%), drug-related hospital emergency department episodes (7%–11%), and possibly drug-related prison admissions (11%–19%). These findings provide some support of the ‘mainstreaming’ argument underlying welfare reform. …We found that welfare reform led to decreases in female arrests for property crime – which is the type of crime women are most likely to commit (Campagniello 2014) – by 4–5%… The findings from this study point to broad-based work incentives – and, by inference, employment – as an important determinant of female property crime…
These are all good outcomes.
Though the best news – both for taxpayers and poor people – is contained in this chart from their research.
P.S. While the Trump proposal is not my ideal policy, it does compare well with the Obama Administration’s efforts to expand food stamp dependency – including bribes for states that signed up additional recipients.
P.P.S. With all redistribution programs, there is an ever-present challenge – highlighted by Thomas Sowell – of how to avoid trapping people in dependency with high implicit marginal tax rates.
P.P.P.S. There’s also a moral issue of whether people should feel ashamed for taking government handouts.
When non-libertarian audiences ask my opinion about immigration, I generally point out that it is a very good sign that so many people want to come to the United States.
Almost everyone agrees with that statement, but that doesn’t put them in the pro-immigration camp. Instead, I find that many people have a “what’s in it for us” attitude.
They like the underlying concept of programs such as the EB-5 visa that attract immigrants with money, and they are broadly sympathetic to immigrants with skills and education. At the risk of over-simplifying, they want immigrants who won’t rely on handouts and they like immigrants who presumably will increase the nation’s per-capita GDP (and there certainly is strong evidence that this happens).
They’re skeptical of mass immigration by people with low incomes. This is mostly because they fear such migrants will impose higher costs on taxpayers, though Republican types also seem motivated by concerns about future voting patterns. The notable exception to this pattern is that business audiences are somewhat sympathetic to mass migration because they believe labor costs will fall.
When I deal with people in category #2, I sometimes ask them about Tyler Cowen’s idea of allowing limitless migration from nations with bigger welfare states. After all, I doubt people such as “Lazy Robert” will move from Denmark to the United States.
But what about poor people from poor nations? Would they like to migrate to rich nations to get handouts, rather than for economic opportunity?
Taxpayers in many nations are worried about that possibility and are not very welcoming to immigrants who will collect benefits.
Indeed, that’s motivated the Trump Administration to consider tightening rules for who gets in the country.
The Trump administration announced long-awaited “public charge” immigration regulations this week, and the furor immediately kicked up to derangement level. …But immigration regulation of this sort has been a part of our laws for more than a century…the 1882 act declared that “any convict, lunatic, idiot, or any person unable to take care of himself or herself without becoming a public charge…shall not be permitted to land.” …The 1952 revisions to immigration law maintained the idea that the government may exclude “paupers, professional beggars, or vagrants” and those who are “are likely at any time to become public charges.” …In 1996, Congress strengthened the public charge provisions…why would anyone call the Trump administration’s interpretation “un-American?” …the regulations—which do not apply to refugees, asylum-seekers, and various other groups—propose guidance to determine if an immigrant would be likely to use the welfare system for more than 12 months during a three-year period.
But it’s not just a controversy in the United States.
Taxpayers in the Netherlands, for instance, are becoming less tolerant of immigrants who want handouts rather than work.
Non-Western immigrants and their descendants also depend on welfare to a much greater extent than the native Dutch. They are half of all welfare recipients but only 11% of the total population. Among recent Somali refugees granted asylum, 80% are on welfare. Holland is truly a welfare state, and the Dutch are proud of it. …This type of open and yet highly regulated society can function only if it is carried by a disciplined and well-educated citizenry… That is what the fuss is about. To put it in abstract terms: Can a welfare state become an immigration state? You know the answer: A welfare state with open borders will one day run out of money.
As early as 2016, German newspapers have been reporting on migrants with recognized refugee status having holidays in countries that they “fled,” such as Afghanistan, Lebanon, and Syria. Because Hartz IV, the welfare system that certain migrants granted refugee status receive, permits 21 days per year of “local absence,” those who have recognized refugee status and have no income or assets simply leave Germany for vacation and continue to receive money from German taxpayers.
There are also concerns that welfare spending hinders economic integration and independence in Sweden.
…only 20 percent of the Somali immigrants in Sweden have jobs, according to a report released on Monday by the government’s Commission… In an opinion article published in the Expressen newspaper, the author of the report, Benny Carlsson of Lund University, explained that Sweden would be well served to let community-based organizations do more…rather than relying on public agencies… Carlsson explained that…Sweden’s rigid labour market and labour protection laws also create “higher risks” for employees which amount to “higher thresholds” for Somali jobseekers. …Carlsson also cited Sweden’s social safety net which “lets people live at a decent level even if they don’t work, while the same can’t be said of the United States”.
Speaking of Sweden, stories of welfare dependency help to explain this report in the New York Times.
…four years after the influx, growing numbers of native-born Swedes have come to see the refugees as a drain on public finances. …Antipathy for immigrants now threatens to erode support for Sweden’s social welfare state. “People don’t want to pay taxes to support people who don’t work,” says Urban Pettersson, 62, a member of the local council here in Filipstad, a town set in lake country west of Stockholm. “Ninety percent of the refugees don’t contribute to society. These people are going to have a lifelong dependence on social welfare. This is a huge problem.” …Under the Nordic model, governments typically furnish health care, education and pensions to everyone. The state delivers subsidized housing and child care. When people lose jobs, they gain unemployment benefits… But the endurance of the Nordic model has long depended on two crucial elements — the public’s willingness to pay some of the highest taxes on earth, and the understanding that everyone is supposed to work. …Sweden’s sharp influx of immigrants — the largest of any European nation, as a share of the overall population — directly tests this proposition. …The unemployment rate was only 3.8 percent among the Swedish-born populace last year, but 15 percent among foreign-born… Roughly half of all jobless people in Sweden were foreign-born. …these sorts of numbers are cited as evidence that refugees have flocked here to enjoy lives of state-financed sloth. …The average refugee in Sweden receives about 74,000 Swedish kronor (about $7,800) more in government services than they pay into the system, Joakim Ruist, an economist at the University of Gothenburg, concluded in a report released last year and commissioned by the Ministry of Finance. Over all, the cost of social programs for refugees runs about 1 percent of Sweden’s annual national economic output
But is it true that migrants are looking for handouts? Are the afore-cited stories just random anecdotes, or do they suggest some countries are “welfare magnets”?
I’ve already shared some evidence that welfare recipients inside the United States gravitate to places that provide bigger benefits.
And this seems to be the case for migrants that cross national borders. Here are some findings from some new academic research showing that the generosity of Denmark’s welfare state has a significant impact on migration choices.
We study the effects of welfare generosity on international migration using a series of large changes in welfare benefits for immigrants in Denmark. The first change, implemented in 2002,lowered benefits for immigrants from outside the EU by about 50%, with no changes for natives or immigrants from inside the EU. The policy was later repealed and re-introduced. The differential treatment of immigrants from inside and outside the EU, and of different types of non-EU immigrants, allows for a quasi-experimental research design. We find sizeable effects:the benefit reduction reduced the net flow of immigrants by about 5,000 people per year, or 3.7percent of the stock of treated immigrants, and the subsequent repeal of the policy reversed the effect almost exactly. Our study provides some of the first causal evidence on the widely debated “welfare magnet” hypothesis. …our evidence implies that, conditional on moving, the generosity of the welfare system is important for destination choices.
Here’s the relevant graph from the study, based on two different ways of slicing the data.
As you can see from the red lines, migration fell when benefits were reduced, then immediately jumped when benefits were increased, and then immediately fell again when they were again lowered.
For what it’s worth, scholars believe that support for the welfare state in Europe is declining for these reasons. Taxpayers are tolerant of subsidizing their long-time neighbors, but are much less sympathetic when giving away money to newcomers.
From my perspective, the solution is obvious. I generally like immigration and generally don’t like redistribution.
So why not reduce benefits, ideally for everyone, but just to migrants if that’s the only possible outcome. That way nations are more likely to attract people (especially from low-income societies) who are seeking economic opportunity.
But I also feel sorry for taxpayers, who are bearing ever-higher costs to finance redistribution programs.
Today’s column won’t focus on those issues. Instead, we’re going to utilize new OECD data to compare the size of the welfare states in developed nations.
We’ll start with the big picture. Here it total redistribution spending, measured as a share of economic output, for selected countries that are members of the Organization for Economic Cooperation and Development.
Nobody will be surprised, I assume, to see that France, Finland, Belgium, Denmark, and Italy have the biggest welfare states.
The United States is in the middle of the pack. American taxpayers might be surprised to learn, though, that they finance a bigger welfare state than the ones that exist in Canada, Iceland, and the Netherlands.
The overall numbers are important, but it’s also educational to consider the various components.
And the largest chunk of social spending in most nations is for their old-age programs. The biggest burdens are found in Greece, Italy, France, Portugal, and Austria. The United States, once again, is in the middle of the pack.
By the way, keep in mind that there are many factors that determine why some nations spend more than others.
How generous are benefits? – This is often measured as the “replacement rate,” which compares retirement benefits to income during working years.
When can people retire? – Some countries allow people, or some classes of people, to get benefits while relatively young. Others are more stringent.
Does a country have an aging population? – Demographic changes already are beginning to have a large effect on the finances of some systems.
Is there a private savings system? – Nations such as Switzerland, Australia, Chile, and the Netherlands have significant private retirement savings.
Now let’s look at government spending on health.
Here’s the area where the United States is more extravagant than almost every other nation. Only France spends more money.
Actually, since per-capita GDP is significantly larger in the United States than in France, American taxpayers spend more on a per-person basis.
Some people will observe, with great justification, that the data for the United States may be a measure of the inefficiency of the American system rather than taxpayer generosity. This is a topic for another day.
Last but not least, let’s look at traditional welfare. In other words, cash assistance to the working-age population.
The fiscal burden of this spending is highest in Belgium, Finland, the Netherlands, Norway, and Luxembourg. The United States, meanwhile, is comparatively frugal.
P.S. Here are a couple of caveats for number crunchers and policy wonks.
First, there are methodological challenges when comparing OECD nations. Eastern European nations tend to be significantly less prosperous than Western European nations, thanks to decades of communist enslavement. So looking at this data does not really allow for apples-to-apples comparisons. Moreover, there are a handful of developing nations that belong to the OECD, such as Mexico and Turkey, so comparison are effectively meaningless. And Chile is on the cusp of becoming a fully developed nation so it’s in its own category.
Second, as I briefly mentioned above, nations have different levels of per-capita GDP. If we look at the last chart, Austria and Spain spend a similar share of GDP on welfare, but since Austria is a richer nation, its taxpayers actually finance a lot more per-capita welfare spending. The same is true if you compare Canada and Estonia, Sweden and Slovenia, and Germany and Greece.
P.P.S. There was virtually no welfare state in OECD nations prior to the 1930s and very small welfare states until the 1960s. For what it’s worth, the huge reduction in poverty in those nations occurred before the welfare state.
One of the more elementary observations about economics is that a nation’s prosperity is determined in part by the quantity of quality of labor and capital. These “factors of production” are combined to generate national income.
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?
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.
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 Timesis 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.
And I noted that this progress happened during a time when the “Washington Consensus” was resulting in “neoliberal” policies (meaning “classical liberal“) in those nations (confirmed by data from Economic Freedom of the World).
In other words, pro-market policies were the recipe for poverty reduction, not foreign aid or big government.
To add insult to injury, some people now want to rewrite history and argue that free markets don’t deserve credit for the poverty reduction that already has occurred.
Esteban Ortiz-Ospina, writing for Our World in Data, wants readers to conclude that redistribution programs deserve credit.
…the share of people living in extreme poverty around the world has fallen continuously over the last two centuries. …many often say that globalization in the form of ‘free-market capitalism’ is the main force to be thanked for such remarkable historical achievement. …this focus on ‘free-market capitalism’ alone is misguided. …Governments around the world have dramatically increased their potential to collect revenues in order to redistribute resources through social transfers… The reach of governments has grown substantially over the last century: the share of total output that governments control is much larger today than a century ago.
And for evidence, Mr. Ortiz-Ospina included this chart.
I shared a version of this data back in June, asserting that the explosion of social welfare spending made this “the western world’s most depressing chart.”
So does Ortiz-Ospina have a compelling argument? Does poverty go down as welfare spending goes up?
Nope. Johan Norberg points out that there is a gaping flaw in this argument. An enormous, gigantic hole.
Wow. This isn’t just a flaw. It’s malpractice. It’s absurd to argue that welfare spending in developed nations somehow led to poverty reduction in developing countries.
I hope Mr. Ortiz-Ospina is just an inexperienced intern, because if he really understands the data, one might be forced to conclude that he’s dishonest.
But let’s set that issue aside. Johan closes his video by explaining that poverty in rich nations declined before modern welfare states. I want to expand on that point.
Johan cited Martin Ravallion, so I tracked down his work. And here’s the chart he put together, which I’ve modified to show (outlined in red) that extreme poverty basically disappeared between 1820 and 1930.
And guess what?
That was the period when there was no welfare state. Not only is that apparent from Our World in Data, it’s also what we see in Vito Tanzi’s numbers.
Here’s Tanzi’s table, which I first shared five years ago. And I’ve circled in red the 1880-1930 data to underscore that there was virtually no redistribution during the years poverty was declining.
The bottom line is that poverty in the western world fell during the period of small government. Yet some people want to put the cart before the horse. They’re making the absurd argument that post-1950s welfare spending somehow reduced poverty before the 1930s.
P.S. For those who want U.S.-specific data, it’s worth noting that dramatic reductions in American poverty all occurred before Washington launched the so-called “War on Poverty.”
For all intents and purposes, people are being paid not to be productive.
Guided by the spirit of Calvin Coolidge, we need to reform the welfare state.
Professor Dorfman of the University of Georgia, in a column for Forbes, pinpoints the core problem.
The first failure of government welfare programs is to favor help with current consumption while placing almost no emphasis on job training or anything else that might allow today’s poor people to become self-sufficient in the future. …It is the classic story of giving a man a fish or teaching him how to fish. Government welfare programs hand out lots of fish, but never seem to teach people how to fish for themselves. The problem is not a lack of job training programs, but rather the fact that the job training programs fail to help people. In a study for ProPublica, Amy Goldstein documents that people who lost their jobs and participated in a federal job training program were less likely to be employed afterward than those who lost their jobs and did not receive any job training. That is, the job training made people worse off instead of better. …Right now, the government cannot teach anyone how to find a fish, let alone catch one.
And Peter Cove opines on the issue for the Wall Street Journal.
…the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame. More than a fifth of American men of prime working age are on Medicaid. According to the Census Bureau, nearly three-fifths of nonworking men receive federal disability benefits. The good news is that the 1996 welfare reform taught us how to reduce government dependency and get idle Americans back to work. …Within 10 years of the 1996 reform, the number of Americans in the Temporary Assistance for Needy Families program fell 60%.
Interestingly, European nations seem to be more interested in fixing the problem, perhaps because they’ve reached the point where reform is a fiscal necessity.
Let’s look at what happened when the Dutch tightened benefit rules.
A fascinating new study from economists in California and the Netherlands sheds light on how welfare dependency is passed from one generation to the next – and how to save children from lives of idleness.
A snowball effect across generations could arise if welfare dependency is transmitted from parents to their children, with potentially serious consequences for the future economic situation of children. …there is little evidence on whether this relationship is causal. Testing for the existence of a behavioural response, where children become benefit recipients because their parents were, is difficult… Our work overcomes these identification challenges by exploiting a 1993 reform in the Dutch Disability Insurance (DI) programme… The 1993 reform tightened DI eligibility for existing and future claimants, but exempted older cohorts currently on DI (age 45+) from the new rules. This reform generates quasi-experimental variation in DI use… Intuitively, the idea is to compare the children of parents who are just over 45 years of age to children whose parents are just under 45. .
Here’s the methodology of their research.
The first step is to understand the impact of the 1993 reform on parents. Figure 1 shows that parents who were just under the age 45 cut-off, and therefore subject to the harsher DI rules, are 5.5 percentage points more likely to exit DI by the year 1999 compared to parents just over the age 45 cut-off. These treated parents saw a 1,300 euro drop in payments on average. …the reform changed other outcomes as well. There is a strong rebound in labour earnings.
This chart from their research captures the discontinuity.
Here are the main results.
The second step is to see how children’s DI use changed based on whether the reform affected their parents. We measure a child’s cumulative use of DI as of 2014, by which time they are 37 years old on average. Figure 2 reveals a noticeable jump in child DI participation at the parental age cut-off of 45. There is an economically significant 1.1 percentage point drop for children if their parent was exposed to the reform, which translates into an 11% effect relative to the mean child participation rate of 10%. …welfare cultures, defined as a causal intergenerational link, exist.
This second chart illustrates the positive impact.
But here’s the most important part of the research.
Reducing access to redistribution to parents is a good way of boosting income and education for children.
…we examine whether a child’s taxable earnings and participation in other social support programmes change. Cumulative earnings up to 2014 rise by approximately €7,200 euros, or a little less than 2%, for children of parents subject to the less generous DI rules. In contrast, we find no detectable change in cumulative unemployment insurance receipt, general assistance (i.e. traditional cash welfare), or other miscellaneous safety net programs. Looking at a child’s educational attainment, there is intriguing evidence for anticipatory investments. When a parent is subject to the reform which tightened DI benefits, their child invests in 0.12 extra years of education relative to an overall mean of 11.5 years. …these findings provide suggestive evidence that children of treated parents plan for a future with less reliance on DI in part by investing in their labour market skills.
And it’s also worth noting that taxpayers benefit when welfare eligibility is restricted.
These strong intergenerational links between parents and children have sizable fiscal consequences for the government’s long term budget. Cumulative DI payments to children of the targeted parents are 16% lower. This is a substantial additional saving for the government’s budget, especially since there is no evidence that children substitute these reductions in DI income for additional income from other social assistance programmes. Furthermore, there is a fiscal gain resulting from the increased taxes these children pay due to their increased labour market earnings. Overall, we calculate that through the year 2013, children account for 21% of the net fiscal savings of the 1993 Dutch reform in present discounted value terms. This share is projected to increase to 40% over time.
Ryan Streeter of American Enterprise Institute explains that other European nations also are reforming.
Welfare reformers might draw some lessons from unlikely places, such as Scandinavia. While progressives like to uphold Nordic democratic socialism as a model for America, the Scandinavian welfare systems are arguably more pro-work than ours… For instance, to deal with declining labor force participation, Denmark eliminated permanent disability benefits for people under 40 and refashioned its system to make employment central. Sweden reformed its welfare system to focus on rapid transitions from unemployment to work. Their program lowers jobless assistance the longer one is on welfare. The Nordic model is more focused on eliminating reasons not to work such as caregiving or lack of proper training than providing income replacement. Similarly, the British government combined six welfare programs with varying requirements into a single “universal credit.” The benefit is based on a sliding scale and decreases as a recipient’s earnings increase, replacing several differing formulas for phasing out of welfare programs with one. An evaluation of the new program, which encourages work, found that 86 percent of claimants were trying to increase their work hours and 77 percent were trying to earn more, compared to 38 percent and 55 percent, respectively, under the previous system. …Scandinavia and Britain learned a while ago that successful welfare reform is not just about how much money a country spends on people who earn too little. It’s really about how to help them find and keep a good job. It’s time for America to catch up.
In effect, block grant all means-tested programs to the states and then phase out the federal funding. That would give states the ability to experiment and they could learn from each other about the best way of helping the truly needy while minimizing incentives for idleness.
P.S. This WIzard-of-Id parody is a very good explanation of why handouts discourage productive work.
I’ve repeatedly expressed skepticism about the idea of governments providing a “basic income” because I fear the work ethic will (further) erode if people automatically receive a substantial chunk of money.
Given these concerns, I should be happy about this report from the New York Times.
For more than a year, Finland has been testing the proposition that the best way to lift economic fortunes may be the simplest: Hand out money without rules or restrictions on how people use it. The experiment with so-called universal basic income has captured global attention… Now, the experiment is ending. The Finnish government has opted not to continue financing it past this year, a reflection of public discomfort with the idea of dispensing government largess free of requirements that its recipients seek work. …the Finnish government’s decision to halt the experiment at the end of 2018 highlights a challenge to basic income’s very conception. Many people in Finland — and in other lands — chafe at the idea of handing out cash without requiring that people work. …Finland’s goals have been modest and pragmatic. The government hoped that basic income would send more people into the job market to revive a weak economy. …The basic income trial, which started at the beginning of 2017 and will continue until the end of this year, has given monthly stipends of 560 euros ($685) to a random sample of 2,000 unemployed people aged 25 to 58. Recipients have been free to do as they wished… The Finnish government was keen to see what people would do under such circumstances. The data is expected to be released next year, giving academics a chance to analyze what has come of the experiment.
The reason I’m conflicted is that the current welfare state – both in the United States and other developed nations – is bad for both taxpayers and poor people.
Indeed, one of my arguments for radical decentralization in America is that states will try different approaches and we’ll have a much better chance of learning what works and what doesn’t.
And maybe we’ll learn that there are some benefits of providing a basic income. But, as reported by the U.K.-based Guardian, it’s unclear whether the Finnish experiment lasted long enough or was comprehensive enough to teach us anything.
The scheme – aimed primarily at seeing whether a guaranteed income might incentivise people to take up paid work by smoothing out gaps in the welfare system…it was hoped it would shed light on policy issues such as whether an unconditional payment might reduce anxiety among recipients and allow the government to simplify a complex social security system… Olli Kangas, an expert involved in the trial, told the Finnish public broadcaster YLE: “Two years is too short a period to be able to draw extensive conclusions from such a big experiment. We should have had extra time and more money to achieve reliable results.”
I will be interested to see whether researchers generate any conclusions when they look at the two years of data from the Finnish experiment.
That being said, there already has been some research that underscores my concerns.
The OECD is not my favorite international bureaucracy, but its recent survey on Finland included some sobering estimates on the cost of a nationwide basic income.
In a basic income scenario, a lump-sum benefit replaces a number of existing benefits, financed by increasing income taxation by nearly 30% or around 4% of GDP. …the basic income requires significant increases to income taxation. …Financing a basic income at a meaningful level thus would require considerable additional tax revenue, and heavier taxation of income would at least partially undo any improvement in work incentives.
And in a report on basic income last year, the OECD poured more cold water on the idea.
…large tax-revenue changes are needed to finance a BI at meaningful levels, and tax reforms would therefore need to be an integral part of budget-neutral BI proposals. …abolishing tax-free allowances and making BI taxable means that everybody would pay income tax on the BI, and on all their other income. Tax burdens would go up for most people as a result, further increasing tax-to-GDP ratios that are currently already at a record-high in the OECD area. …There are also major concerns about unintended consequences of a BI. An especially prominent one is that unconditional income support would reduce the necessity for paid work.
Indeed, it’s difficult to see how work incentives aren’t adversely affected. Why go through the hassle of being employed when you can sit at home and play computer games all day?
Welfare reform – If my friends and contacts on Capitol Hill are feeding my accurate information, we may see a bigger and better version of the 1996 welfare reform in 2018. The core concept would be to abolish the dozens of means-tested programs (i.e., redistribution programs targeted at low-income people) in Washington and replace them with a “block grant.” This could be good news for federal taxpayers if the annual block grant is designed to grow slowly. And it could be good news for poor people since state government would then have the ability and flexibility to design policies that help liberate recipients from government dependency.
Collapse of Venezuela – Given the disastrous deterioration of the Venezuelan economy, it’s difficult to envision how the Maduro dictatorship can survive the year. Yes, I know the regime is willing to use the military to suppress any uprising, but I suspect hungry and desperate people are more likely to take chances. My fingers are crossed that the corrupt government is overthrown and Venezuela becomes another Chile (hopefully without a transition period of military rule).
Here are two things I fear may happen in 2018.
Pulling out of NAFTA – America dodged a bullet in 2017. Given Trump’s protectionist instincts, I worried he would do something very dangerous on trade. But pain deferred is not the same thing as pain avoided. The President has made some very worrisome noises about NAFTA and it’s possible he may use executive authority to scrap a deal that has been good for the United States.
A bad version of Brexit – Given the statist mindset in Brussels and the continent’s awful demographics, voting to leave the European Union was the right decision for our British friends. Simply stated, it makes no sense to stay on a sinking ship, even if it sinking slowly. But the net benefits of Brexit depend on whether the United Kingdom seizes the moment and adopts pro-growth policies such as tax cuts and free-trade pacts. Sadly, those good reforms don’t appear likely and it appears instead that the feckless Tory leadership will choose to become a satellite member of the EU, which means living under the thumb of Brussels and paying for harmonization, bureaucratization, and centralization. The worst possible outcome in the short run, though at least the U.K. is better positioned to fully extricate itself in the future.
I’m adding a new feature to my hopes-and-fears column this year.
These are issues where I think it’s likely that something consequential may occur, but I can’t figure out whether I should be optimistic or pessimistic. I sort of did this last year, listing Obamacare reform and Italian fiscal crisis as both hopes and fears.
It turns out I was right to be afraid about what would happen with Obamacare and I was wrong (or too early) to think something would happen with Italy.
Here are three things that could be consequential in 2018, but I can’t figure out whether to be hopeful or fearful.
Infrastructure reform or boondoggle – I put an “infrastructure boondoggle” as one of my fears last year, but the President and Congress postponed dealing with the issue. But it will be addressed this year. I’m still afraid the result may be a traditional pile of pork-barrel spending, but it’s also possible that legislation could be a vehicle for market-based reform.
Normalization of monetary policy – I try to stay clear of monetary policy, but I also recognize that it’s a very important issue. Indeed, if I was to pick the greatest risk to the economy, it’s that easy-money policies (such as artificially low interest rates) have created a bubble. And bursting bubbles can be very messy, as we learned (or should have learned) in 2008. The Federal Reserve supposedly is in the process of “normalizing” monetary policy. I very much hope they can move in the right direction without rattling markets and/or bursting bubbles.
A China bubble – Speaking of macroeconomic risks, I’m very glad that China has partially liberalized and I’m ecstatic that reform has dramatically reduced severe poverty, but I also worry that the government plays far too large a role in the banking sector and interferes far too much in the allocation of capital. I’m guessing this eventually leads to some sort of hiccup (or worse) for the Chinese economy, and all I can do is cross my fingers and hope that the government responds with additional liberalization rather than the bad policies being advocated by the OECD and IMF.
By the way, I fully expect the Democrats to sweep the 2018 elections. And since the Party is now much farther to the left than it used to be, that could lead to very bad news in 2019 – particularly if Trump unleashes his inner Nixon.
Only 18% of able-bodied adults receiving Food Stamps, who are expected to meet work requirements, actually work 20 hours or more per week. …Many welfare programs undermine the institution of the family — and the benefits brought by stable two-parent households — by including marriage penalties. …The principle of subsidiarity dictates that the independent sector, communities, and local and state governments should be empowered rather than the distant and bureaucratic central government. …The welfare bureaucracy is also filled with duplication and overlapping programs. According to the Congressional Research Service, there are 15 different food aid, 13 housing, 12 health care, and five cash aid programs. …Welfare is one of the largest categories of the federal budget, comprising about 20% of annual spending. …the federal government spent more than $28,100 per person in poverty — providing benefits $15,000 above the poverty threshold for individuals
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