Serving the Poor (It’s a Cookbook!!)

Motivation: even the Danes realize when the welfare state has gone too far.

It turned out, however, that life on welfare was not so hard. The 36-year-old single mother, given the pseudonym “Carina” in the news media, had more money to spend than many of the country’s full-time workers. All told, she was getting about $2,700 a month, and she had been on welfare since she was 16.

… Carina was not the only welfare recipient to fuel the sense that Denmark’s system has somehow gotten out of kilter. Robert Nielsen, 45, made headlines last September when he was interviewed on television, admitting that he had basically been on welfare since 2001.

Mr. Nielsen said he was able-bodied but had no intention of taking a demeaning job, like working at a fast-food restaurant. He made do quite well on welfare, he said. He even owns his own co-op apartment.

Does it really make sense to serve the poor by giving them social benefits that are taken away once they get a job? The policy name for this is “means testing” and it is one of the worst aspects of the war on poverty. Indeed, it’s fair to say that after half a century of the LBJ inspired war on poverty in the U.S., poverty is winning. Curtailing benefits as recipients get jobs is a big reason why. It punishes work, and effectively makes low-income workers face the highest marginal tax rates. High marginal tax rates approaching or exceeding 100%!  Where is the Republican outrage?  The Democratic shame?

My friend Bryan Caplan disagrees.  In fact, he laid down a very good challenge in a March 1 blog post that I have been unable to fully meet. Sorry, Bryan.  This is a  great debate, and I’ll leave it for others to color in the lines.  All I can do for now is respond with a sketch.  First, here’s Bryan:

 “So should we extend all currently means-tested programs to the entire population?”  Listeners often admit that it’s a persuasive challenge.  At our last lunch, however, Tim Kane, one of my favorite libertarian economists, bit the bullet.  In his view, any program that we make available to the poor should be available to everyone.

If I understand Tim correctly, his main argument is that means-testing is a high implicit tax rate, with all the standard effects.  As a behavioral economist, I suspect this a serious overstatement.  Framing and transparency matter.

Even if Tim is right, though, we face a choice of evils.  With means-testing, we’ll have a high implicit marginal tax rate on everyone who might plausibly collect benefits.  Without means-testing, however, we’ll have a high implicit marginal tax rate on everyone.  Why the difference?  Because means-testing saves a ton of money, allowing lower average tax rates.

Or so it seems to me.  My challenge for Tim and anyone who agrees with him: Offer a plausible estimate for the total cost of expanding all means-tested programs to the entire population – year in, year out.  Start with Medicaid, then add unemployment insurance, TANF, and everything else.  Even ignoring disincentive effects, can you really come up with a figure under 10% of GDP?

I think Bryan is right that making a universal welfare grant — perhaps a baseline amount of a few hundred dollars per month per person (regardless of marital status, gender, family structure, etc.) — will be expensive. For each $100/month, the annual national outlay would equal roughly $100 x 12 months x 300 million people = $360 billion.  That’s $3 per day, right, which is what economists say was the typical daily income for most of human history. Americans would probably want to do better than that, so let’s say triple, which is $1 trillion per year.

Yes, in a $15 T economy, the cost of a guaranteed income would be hefty. But what would it replace?  I don’t know, but it would be interesting to consider ending TANF, job training, UI, disability. And then, dynamically, what would the boost be to labor force participation, private income generation, and overall GDP?  I’d bet it would be a one-time $1T GDP level adjustment upwards.  But I would support the program even if there were neutral GDP level effects, out of dedication to simple human dignity.  A safety net, yes, a poverty trap, no.

One response to “Serving the Poor (It’s a Cookbook!!)

  1. Daniel Carroll

    Guaranteed income is a variant of the negative income tax idea, which in its simplest form is that everybody starts out on January 1 with a tax refund, then as they work or consume, they pay taxes. The numbers either add up or don’t add up depending on the assumptions about what happens to the tax code as well as the expenditures you cited. For instance, the standard deduction and dependent deductions could be converted into credits (at say 1/4 their deductive value). The mortgage interest/property tax deduction could be converted into a housing credit, at a fixed value equal to 1/4 the average basic housing cost per capita. Social security could be replaced by a credit, graduated by age, not contingent on not working. HSA credit, in place of “national heath care”. I would not eliminate the charitable deduction, as it replaces government social spending, though I would restrict it to actual charities. Substituting deductions with credits wouldn’t offset completely, since poor people don’t pay taxes and deductions phase out at high income levels, but it would partially offset, and progressivity could offset the phase outs (since a phase out is just a higher marginal tax rate in disguise).

    $1 trillion = 6.7% of GDP. Government spending (federal, state, and local) ~36% of GDP, excluding tax expenditures. With the substitutions on both the tax and spending side, I think it could add up. However, I’m doubtful the politics would add up.

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