Poverty in the U.S. Was Plummeting—Until Lyndon
Johnson Declared War On It. Yet again,
government intervention hurts those it is intended to help, by Daniel Mitchell,
10/16/18.
The Welfare State's Effect on the Poor - In Thursday's Wall Street Journal, John Early and Phil Gramm share some depressing numbers about growing dependency in the United States:
The Welfare State's Effect on the Poor - In Thursday's Wall Street Journal, John Early and Phil Gramm share some depressing numbers about growing dependency in the United States:
Encouraging Dependency
One of the more elementary observations
about economics is that a nation’s prosperity is determined in part by
the quantity and quality of labor and
capital. These
“factors of production” are combined to generate national income.
I frequently grouse that punitive tax policies discourage capital. There’s less incentive to invest, after
all, if the government imposes extra layers of tax on income that is saved
and invested.
Bad tax laws also discourage labor. High
marginal tax rates penalize people for being productive, and this can
be especially counterproductive for entrepreneurship and innovation.
Still, we shouldn’t overlook how
government discourages low-income people from being productively employed. But
the problem is more on the spending side of the fiscal equation.
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 the government
pays you not to work? And that
unfortunate cost-benefit analysis is being driven by ever-greater levels of dependency.
Writing for Forbes, Professor Jeffrey
Dorfman echoed these findings:…our current welfare system fails to prepare
people to take care of themselves, makes poor people more financially fragile,
and creates incentives to remain on welfare forever… The first failure of
government welfare programs is to favor help with current consumption while
placing almost no emphasis on job training or anything else that might
allow today’s poor people to become self-sufficient in the future… It is the
classic story of giving a man a fish or teaching him how to fish. Government
welfare programs hand out lots of fish but never seem to teach people how to
fish for themselves. The problem is not a lack of job training programs, but
rather the fact that the job training programs fail to help people… The third
flaw in the government welfare system is the way that benefits phase out as a
recipient’s income increases… a poor family trying to escape poverty pays an
effective marginal tax rate that is considerably higher than a middle class
family and higher than or roughly equal to the marginal tax rate of a family in
the top one percent.
I like that he also addressed problems
such as implicit marginal tax rates and the failure of job-training programs.
Professor Lee Ohanian of the Hoover
Institution reinforces the point that the welfare state provides
lots of money in ways that stifle personal initiative:
Inequality is not an issue that policy
should address… Society, however, should care about creating economic
opportunities for the lowest earners… a family of four at the poverty
level has about $22,300 per year of pre-tax income. Consumption for that
same family of four on average, however, is about $44,000 per year, which means
that their consumption level is about twice as high as their income… We’re
certainly providing many more resources to low-earning families today. But on
the other hand, we have policies in place that either limit economic
opportunities for low earners or distort the incentives for those earners to
achieve prosperity.
I’ve been citing lots of articles, which
might be tedious, so let’s take a break with a video about the welfare state
from the American Enterprise Institute.
And if you like videos, here’s my favorite video about the adverse effects of the
welfare state. Even (Some) Leftists Acknowledge the Problem. 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 works:
…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 policymakers in different areas
experiment with the best ways of preventing serious deprivation while also
encouraging self-sufficiency.
I think we’ll find out that benefits
should be lower, but maybe we’ll learn in certain cases that benefits should be
expanded. But we won’t learn anything so long as there is a one-size-fits-all
approach from Washington.
Let’s close with a political
observation. A columnist for the New
York Times is frustrated that many low-income voters are
supporting Republicans because they see how their neighbors are being harmed by
dependency:
Parts of the country that depend on the
safety-net programs supported by Democrats are increasingly voting for
Republicans who favor shredding that net… The people in these communities
who are voting
Republican in larger proportions are those who are a notch or two up the
economic ladder—the sheriff’s deputy, the teacher, the highway worker, the
motel clerk, the gas station owner and the coal miner.
And their growing allegiance to the
Republicans is, in part, a reaction against what they perceive, among those
below them on the economic ladder, as a growing dependency on the safety
net, the most visible manifestation of downward mobility in their declining
towns… I’ve heard variations on this theme all over the country: people railing
against the guy across the street who is collecting disability payments but is
well enough to go fishing, the families using their food assistance to indulge
in steaks.
It’s not my role to pontificate about
politics, so I won’t address that part of the column. But I will say that I’ve
also found that hostility to welfare is strongest among those who have
first-hand knowledge of how dependency hurts people.
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: The
Canadians can teach us some good lessons about welfare reform. The Nordic
nations also provide valuable lessons, at least from the don’t-do-this
perspective. Last but not least, there’s a Laffer-type relationship between welfare spending and
poverty.
Norb
Leahy, Dunwoody GA Tea Party Leader
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