Perverse Incentives LXXVII – Welfare State Edition
|We don’t need no welfare state…everybody pulled their weight…|
If you pay attention to the debate on food stamps, earned income tax credits, section 8 housing, extending unemployment, etc…conservatives argue that it creates a disincentive to work and liberals call them mean-spirited and selfish, that it’s good for the economy and everyone wants to work, but there aren’t opportunities out there. Dr. J. saw this over at Zero Hedge, submitted by our friend Tyler Durden
Gary Alexander, the Secretary of Public Welfare in the Commonwealth of Pennsylvania made this graph that shows that a single mom earning $29K plus the largesse of the government makes the equivalent of someone who earns $69K before taxes. When you look at the graph you can see the economic downside to earning more until the individual makes a quantum leap in income. They actually lose buying power as previously ‘free’ necessities begin to eat into their disposable income (sneakers, flat screen TVs, phones. They do not recoup that until a gross increase in income of $40K, more than doubling their salary.
In other words the individual who is dependent on government assistance has to tighten their belt and live leaner as they begin wean from the teat of government on the road to economic independence.
Is there any wonder why the labor force participation rate is dropping for men? When the traditional bread-winners have found it easier to win bread by staying out of the work-force, why would they reenter it? Seriously. Their goal is to provide, and if getting back in the game (to use an erectile dysfunction drug ad catch phrase) puts them in the position of providing less, in their mind, paradoxically, doing the right thing results in providing less. For young men, staying home and playing X-Box is now the preferable pathway.
This is a clear cognitive dissonance for folks transitioning as many will resent the initial opportunity cost of getting off the dole. This is doubly so as we’ve, in the words of Ben Franklin and ‘Puter, made folks comfortable in their poverty.
Dr. J. remembers watching Little House on the Prairie, Angela’s Ashes, and even Good Times, and in each of those shows/movies, there was a stigma to handouts. Pa wouldn’t even open a line of credit unless under duress. There was a bigger stigma to getting in the food lines in Ireland. And even though the Evans family lived in public housing on the South Side of Chicago, James and Florida worked for a living and eschewed the idea of going on welfare. Despite ups and downs in the show due to the rising prominence of JJ (Jimmie Walker) and patronizing liberal writers, ultimately through hard work, James and Florida’s children ‘got out’ of the ghetto due to hard work.
Now, hard work sets you back, unless you can more than double your income.
The welfare cliff needs to be flattened so that those who can’t provide for themselves have a means of subsistence, but that working hard and earning more is rewarded.
This is where progressive tax structures and generous government benefits for the needy kill incentive.
America has historically been a land where incentive is rewarded. When Dr. J. was growing up (not long ago) he was taught that success comes form hard work. He saw it in his grandparents raising kids who did a little bit better, and it was passed on to him who likewise, through hard work, was able to to a little bit better. Dr. J. worries that his children will be spinning their wheels in first gear either to stay in place, or to spread the fruits of their labour around, so to speak. We clearly need to get back to basics and the extensive welfare benefits to the poor as seen in first graph is the best example of how we’ve come off the rails. Flattening the left side of the curve, by decreasing government outlays to a subsistence level, so as to remove the welfare cliff would be a good start in how to fix it.