The Conservative Response to the War on Poverty Discussion–so far

January 13th, 2014 at 5:13 pm

I’m finding some of the responses by conservative politicians, economists, et al to the War on Poverty discussion to be interesting and revealing.

There’s a lot of silliness, and worse, of course.  I’d assign the Reagan quip (“we fought a war on poverty and lost”) to that category, as well as the misleading $20 trillion talking point (see this Mike Konczal piece out today on this).

But once they get past the canned stuff, there’s some interesting substance.  Progressives have largely been pointing out that, in fact, rigorous analysis shows both significant and even lasting progress against poverty, amidst steep remaining challenges.  The anti-poverty effectiveness of the programs developed and expanded before and since the War on Poverty is easily seen in figures like the one I reprint below, showing the increased divergence between pre-transfer and post-transfer poverty rates (the figure also shows the increasingly irrelevant official rate, which leaves out a lot of what we’ve done to reduce poverty).  Yet the fact remains that 16% remain poor.

Conservatives—again, the ones who at least on occasion visit factville—do not deny the broad accuracy on the trends in the figure.  But they question what is it that we’ve really achieved through all of this social policy?  And their answer is that all we’ve really done is made the poor more comfortable in their poverty.  As Sen. Rubio put it, “…our current government programs offer, at best, only a partial solution. They help people deal with poverty, but they do not help them escape it.”

Robert Samuelson claims that we haven’t done much of anything to “catapult the poor into the economic mainstream.”  Precisely against President Johnson’s warning, we’ve given the poor a handout, not a hand up.

This critique too fails to stand up to scrutiny.  First, the largest expansion of poor support outside of health care has been the Earned Income Tax Credit, a wage subsidy that has been shown to not only reduce poverty significantly (by 10 million in 2012), but is also a strong work incentive.  Moreover, research that follows poor children into adulthood finds that benefits like the EITC and even nutritional support have lasting impacts that improve key outcomes—health, high-school completion, employment and earnings—later in life.  To view these programs as “handouts” misses the fact that they act more like investments in the lives of many of their recipients.

But is there anything to the conservation critique re “comfort not catapult?”  I think there is: we do need to do more to help the economically disadvantaged overcome barriers that prevent them from achieving their potential.  And if that’s truly where this debate is headed, than that’s a positive development.  The problem is what should we do?

It is here, with some interesting exceptions, that the debate breaks down in predictable ways that date back to the English Poor Laws of the 16th century.   Conservatives focus on the poor themselves and ways policy should incentivize them to make better choices; liberals focus more on the economic context within which opportunities to climb out of poverty either exist or don’t.

For example, as Paul Krugman stresses here, many conservatives argue that the biggest problem with the safety net programs is that they have high implicit marginal tax rates.  That is, in order to ensure that these benefits go only to those with low incomes, they phase-out when incomes rise.

It sounds like a technical point, but it’s actually behind the “comfort” critique—it’s the reason Rep. Paul Ryan calls the safety net a “hammock.”  The theory is that because you lose benefits as your income goes up, your incentive to earn more is severely dampened.  So you chill instead of work.

But such theories must be tested.  The most exhaustive work on this question of the extent to which the poor respond to high marginal tax rates finds little to support the comfort-in-the-hammock camp.  I review that research here, but the punch line is that the anti-poverty impact of the safety net—the distance between those top two lines in the figure below are “…only negligibly affected by work incentives which, in the aggregate, have almost no effect on the pre-transfer rates of poverty in the population as a whole.”

The reasons have to do with both the counter-incentives from the EITC, which research finds has large pro-work effects, on net, and the not-too-surprising fact that a lot people would actually prefer to leave poverty behind though work, even if it means losing some benefits.

Still, if this debate leads conservatives to pull for slower phase-outs of means-tested programs, that would be great.  The problem—and it’s a big one—is that it costs more to do this and that comports badly with their budgets, which sharply cut spending on low-income programs.  My first thought the other day when I heard Sen. Rubio talking about how we need more worker training was about Rep Ryan’s House budget, which achieves 60% of its steep spending cuts from low-income programs, including training budgets.

What else is on the R’s anti-poverty agenda?:

–Tax reform: There seem to be two broad ideas here, one of which has a lot of merit.  The first is the old supply-side canard about how lower marginal tax rates will boost growth and jobs, etc.  This is not a serious proposal.

But after presenting a bit of the ole’ supply-side catechism in this piece from a few days ago, former GW Bush administration economist Glenn Hubbard acknowledged that supply-side elixir “…is insufficient for increasing the inclusion of low-wage workers, whose incomes may not benefit fully from economic growth.”

Hubbard goes on to endorse a smart idea that I’ve heard from numerous others in his camp: expand the Earned Income Credit to adult workers without kids.  While the annual credit for working families with kids averages between $2-3,000, the one for childless adults averages less than $300.

Now, Hubbard et al want to trade this expansion for the elimination of the minimum wage, so the idea…um…needs a bit of work.  But the EITC part is a good reform that would incentivize work and lower poverty.

–Block grants: Just wrap up all the damn poverty programs into one big package and dump ‘em all on the states.  OK, maybe that’s not quite how they’d put it, but this is a pretty sure-fire recipe to surgically extract the critical countercyclical function of the safety net.  I explain here, with disapproving reference to Sen. Rubio’s float of this idea last week.

–Other stuff: Here’s a review of how what some conservatives are thinking about in this space, including standard issue stuff—deregulate (e.g., less professional licensing), subminimum wage, more marriage—and some less standard ideas, including helping those with criminal backgrounds get back into the workforce.  Many conservatives also support access to pre-school for disadvantaged kids.

So, nothing exceptionally path-breaking here, but it’s a good conversation, and I’m struck by some conservatives’ interest in raising the EITC for adult workers without kids.  That would be a real advance.

And yes, it’s all rhetoric in a climate where little can move forward and budgets—on both sides—often fail to match rhetoric.  In fact, a good question for a later post is what the D’s agenda for poverty reduction.  I see lots of interest from the admin and the D’s on extended UI, a higher minimum wage, and, in terms of boosting mobility, the President’s universal pre-school program.  All good ideas—I’d say, a good start; but as you’d expect, I’m looking for “full employment” on the list.

altrate

*Alternative rate is based on the Census Bureau’s Supplemental Poverty Measure (which includes the effects of government transfers and taxes), Source: “Trends in Poverty With an Anchored Supplemental Poverty Measure” by Christopher Wimer, Liana Fox, Irv Garfinkel, Neeraj Kaushal, Jane Waldfogel, Columbia Population Research Center.  See also NYT, from which this figure is drawn.

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8 comments in reply to "The Conservative Response to the War on Poverty Discussion–so far"

  1. Robert Bostick says:

    Jared,

    “There is no financial crisis so deep that a sizable tax cut or spending increase cannot resolve it.
    The funds to pay taxes and buy bonds come from Federal government spending.” Warren Mosler

    Poverty is what results when a monetarily sovereign government behaves like a non-monetarily sovereign government. Japan, Australia compared to Spain, Greece.

    Why does a monetarily sovereign government like the U.S., issuing its own fiat, non-convertible currency with a flexible exchange rate, need to tax to spend? IT DOESN’T. Since 1971 Americans have been duped into believing that we should all pay our fair share of Federal taxes to fund Federal services, Social Security, WIC Defense, roads, etc.

    Nothing could be further from the truth.

    NIXON TOOK THE WORLD OFF THE GOLD STANDARD ON AUG. 15, 1971 AND THRUST IT INTO A FIAT CURRENCY SYSTEM, WHERE CENTRAL BANKS CREATED CURRENCY FROM THIN AIR BACKED ONLY BY THE GOOD FAITH AND CREDIT OF THE ISSUING GOVERNMENT.

    Therefore, our Federal Reserve/Treasury never, involuntarily, runs out of its fiat currency/dollars.

    That being indisputable, it follows that the Federal Government can afford to pay any obligation denominated in dollars without the need for tax or borrowing revenue. Why would the sole issuer of our currency need to take some of it back to spend? It wouldn’t. It would simply issue more fiat currency. Moreover, it is illogical for the government to issue its dollar I.O.U.s and then collect them to save them for reissue. Why would it want to keep/save its own I.O.U.s/liabilities?

    The income, payroll and corporate tax serve to manage inflation/aggregate demand, income distribution and acceptance of the otherwise worthless paper currency. When inflation raises its ugly head taxes drain the economy of some of its dollars to take pressure of prices. High marginal tax rates on the 20% (pre 1975 levels) reduces income disparity. And, we have a tax driven currency. You must pay the Federal Tax in the Federal government’s currency or suffer a penalty.

    THE GOVERNMENT DOES NOT TAX TO SPEND.

    Tax revenue is reported, your checking account is debited and there is no net increase in funds available for government spending. All the Federal government needs to complete the act of spending is an appropriation.

    It’s like the points on a scoreboard at FedEx Field. The points are posted on the board out of thin air and when the game is over the scoreboard returns to zero. No one from the bowels of Fed Ex field runs breathlessly to Dan Snyder box to warn him that they have to call the game because there are no more points. The same is true our Federal Government. It issues money out of thin air and when it gets it back it is not added to anything because the Federal government like the Stadium never has nor doesn’t have dollars/points, respectively.

    For the immediate and short term boosts in aggregate demand the Mosler proposals are highly recommended. Congress and the Executive need to suspend the payroll tax for three years since like other taxes it doesn’t pay for anything. That would add from $300-600/m to working/middle class incomes. There would be no cost to the Treasury for this. Budget documents would report a deficit when in fact the gov would be adding financial assets into the economy.

    Corporate and individual tax rates should be reduced to near zero. For income distribution purposes the government should issue to every adult American a one time check of $10,000 to save, invest, spend, hoard. No cost to anyone.

    If the economy approaches 2%-3% unemployment the government could resume a portion of the payroll tax but apply it w/o a cap to reduce the amount of dollars available for spending at all income levels.

    For the longer term the Federal Government should begin infrastructure rehabilitation—a longer start up time to impact income and wages.

    References:

    “The Seven Deadly Innocent Frauds of Economic Policy”, Warren Mosler
    “Modern Money Theory”, L. Randal Wray
    http://www.neweconomicperspectives.com
    http://mythfighter.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/


  2. Brett says:

    Considering what happened with TANF in Georgia in the 2000s, I’m not really enthusiastic about the block grant proposal either. What I suspect would happen is that while some of them might try some stuff out, most of the red states would just take the block grant, cut eligibility as much as they can get away with, and then use the saved money to cut state-level taxes as much as possible.

    Then again, we might get some interesting experiments in blue states and a handful of red states with a history of that stuff.


  3. urban legend says:

    Re full employment, I wish we would see some real analysis of the extent to which neglect of public investment has contributed to our poor labor market performance. Doing rough math and using some arguably informed estimates, it seems that for a generation in which public spending has been demonized as a function of “the problem” (government, according to Reagan and the entire Republican Party), we have been missing something like 3-5 million jobs that should have been devoted continuously to public infrastructure. With a multiplier based on expenditures of income from workers employed in those high-quality, high-paid, non-outsourceable jobs, the total employment hole would seem to be in the neighborhood of 10 million — at which point we would be talking about an employment-to-population ratio a lot closer to historical rates than they are now.

    Looking forward, there are two elements to what is needed: not only the number of jobs needed to simply maintain a bigger public investment, but those also needed over the next 20 years simply to catch up with the rest of the advanced world. Sometime, though, this needs to be analyzed carefully and the public needs to be told in what ways and how far we are falling behind.


  4. smith says:

    So I don’t bury the lead, free day care could be much more valuable than expanded EITC or a higher minimum wage. Currently, the government offers this service but only for children 5 to 18 years of age, or 78%. They also only provide 70% coverage (8:00 am to 3:00 pm), leaving parents 30% short of being able to hold a full time job (a 3:00pm to 6:00pm gap). There’s also a problem with July and August, 2 out of 12 months, leaving only 73% of the year with any coverage. Multiplying the current coverage yields .78 * .7 * .73 = 45%
    Filling the gap is expensive http://www.dccnyinc.org/view/page/market_rates_for_child_care_
    However, what coverage exists, is universal and independent of income. In fact, participation is mandatory, and children are required to work during most of the hours, and take additional work with them to be completed at home. Greater coverage is also available for many based on low income.
    The question is what would be the cost and benefits of socializing the existing gaps in public child day care (55%). It’s similar to the health care question in that either way we pay, someone is already watching the children, just as someone was treating the uninsured (albeit often in emergency rooms).
    Universal social measures like Social Security, ACA, and public schools, are better than targeted benefits only for the poor. Similarly, I’d still argue raising the minimum wage is better than expanded EITC (corporate welfare). The goal is to eliminate EITC and SNAP by assuring jobs and wages for all. The gap in public child care is the new New York City mayor’s signature issue because it also addresses inequality.


    • smith says:

      Correcting my math,
      10/12 months = 83% (not 78%)
      (the 78% * 70% * 73% would yield 40%, so not sure how 45% was derived)
      10/12 months * 7/10 hours * 13/18 years = 42%
      83% 70% 72%

      More conservatively, let’s say we just add 2 years of preschool (for 3 and 4 year olds), thus 13/18 becomes 13/15. Change labor law to create 35 hour work weeks so 9 hours of child care vs. 10 seems reasonable, thus 7/10 becomes 7/9.
      .83 * .7 * .72 now becomes .83 * .78 * .87 = 56% present existing coverage vs. having year round 9 hour/day for 3 to 17 year olds. Dropping 12 – 17 year olds from needing an extra 2 hours (3pm – 5pm) adult supervision raises the current coverage to 63% at a total cost of around $600 billion. The 37% gap translates to $370 billion based on every cost being variable costs, but accounting for fixed costs, the amount would be likely lower (after initial expansion costs). Unlike ACA or current K-12, no mandate is anticipated for 3 and 4 year olds, so some loss of economies of scale might be anticiapted. It’s a $16 trillion dollar economy, so providing full child day care year round for 3 to 17 year olds for $300 billion, is an extra 2% added cost. Obama’s very modest proposal for 4 year olds would come in at less than 1%. The extra 1% in the more comprehensive coverage would make a much more significant difference in people’s lives.
      http://www.nea.org/assets/img/content/NEA_Rankings_And_Estimates-2013_%282%29.pdf


      • smith says:

        Correcting my budget
        Federal discretionary non-defense spending totals about $600 billion/year. So an extra $150 billion/year for universal preschool for 4 year olds is definitely not in the cards. For context, Social Security, Medicare, and Medicaid make up $1.5 trillion, another $.5 trillion is also labeled mandatory (unemployment, food stamps, EITC, pensions), and defense spending around $600 billion, plus interest rounds out the roughly $3.5 trillion (20% of GDP) budget.
        Obama proposed about $7 billion/year targeted at low income families, funded with $1/pack cigarette tax. Fortunately, cities and states are taking up the cause on their own, which is how America’s federal system of government works. High tax states will compete will low tax states for businesses, so they better have something to show for it.
        The complete $370 billion dollar child care gap is still a much bigger issue than people realize.


  5. purple says:

    Washington is stuck in these archaic Reagan-era Welfare Queen debates that bear no relation to where the country is now economically, demographically or politically. 75% of the population has no savings and no retirement. Sound like a hammock ?


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