Poverty traps, I

A long-standing criticism of anti-poverty programs is that they make work unprofitable by providing a better income if you reject employment. This is the principal line of argument in the Ryan anti-poverty report.

The simplest version of the idea is that when you add up the benefits for which people with no income qualify, it can exceed what they could earn by working, so they choose welfare over work. There are certainly a bunch of anti-poverty programs, so could this be true?

The first question that arises is the extent to which people are eligible for so much in benefits that they are discouraged from working. To answer this you can’t just add up all the money that goes into the programs. The question is the maximum amount somebody could actually receive.

The second question is how many people actually participate in multiple programs, and how many of them are able-bodied adults who could be expected to work. Note that if those who participate are working, despite any alleged work disincentives, it does not follow that the system is obliging them to choose welfare over work. If their incomes are above the poverty line, it does not follow that the system generates poverty.

The third question is, given any such disincentives, what is the evidence that it affects behavior? One type of counter-evidence has already been noted: the extent to which households have labor earnings, notwithstanding any poverty traps.

And the fourth question goes back to our previous post. Suppose somebody does face significant penalties (a high implicit marginal tax rate) for some additional earnings? The arithmetic of the problem leaves solutions to the imagination.

Despite a multiplicity of programs that purport to address poverty, most of the money goes to a few programs that provide cash or near-cash to able-bodied adults. They are Temporary Assistance for Needy Families (TANF, formerly Aid to Families with Dependent Children), Supplemental Nutrition Assistance Program (SNAP, formerly ‘Food Stamps’), the Earned Income Tax Credit (EITC), and housing assistance. Page 9 of Ryan’s report has a graph that shows these programs in terms of benefits relative to earnings. The source is the reliable Eugene Steuerle of the Urban Institute.

So how reasonable is it to conclude that these benefits keep people from working? TANF benefits are conditional on working. That was the whole point of the 1996 welfare reform. So they are not available as a substitute for work. State governments decide that, in which respect the Ryan proposal is superfluous.

Medicaid and subsidized ObamaCare are provided to people who do work. ObamaCare eliminated the Medicaid “cliff” (abrupt loss of eligibility at the program’s income threshold) by providing a transition to subsidized private insurance. Thanks, ObamaCare! It’s true there is a phase-down of the subsidy, but the severity of it is graphically exaggerated. The reason the chart is misleading is that as earnings increase, the availability of employer-provided health insurance is more likely. The value of the tax exclusion for employer-provided health insurance goes up with income. The higher your marginal income tax rate, the more you save from the exclusion of employer-provided health insurance from taxable labor earnings.

The Child Tax Credit, the dependent exemption, and the Child and Dependent Care Credit are also available to those who work, up to earnings of $100,000 and beyond. On its face, the chart exaggerates the number of programs that pertain to a poverty trap. Insofar as benefits are not lost altogether, or at all, if one works, they cannot be work disincentives. Some of them — provisions of the individual income tax — increase along with earnings.

The real action in terms of working versus not working is all about SNAP, the EITC, and housing benefits.

Unlike SNAP and the EITC, housing benefits are not available to everyone who is eligible. Funds for them are limited, so there are relatively few beneficiaries. Fewer than ten million souls get Federal housing benefits, and well over half are the elderly, the disabled, and children — people who would not be expected to work. More than half of the households receiving benefits have some income from work (Table 11). So one half of a limited program’s clientele might be deterred from working by virtue of a housing benefit. The most recent poverty count for 2012 is 46.5 million. There is no way that housing benefits could explain much of the poverty rate.

Ryan professes to like the EITC, so the real focus of his plan is SNAP. Food stamps are the ground zero of the Ryan plan. More on this tomorrow.

Universal Basic Income Recycling

A recent post, prior to the rebirth of MaxSpeak.

UBI will never happen. The justifications for the UBI — which are implicit critiques of the U.S. welfare state — are badly screwed up. My objection to UBI is not about work incentives. It is that UBI advocacy radically misunderstands the problems of anti-poverty assistance and the nature of the current system. Dylan Matthews, who does good work, has another view.

More devolution; I celebrate and cite myself

endofwelfareSo I wrote a post on devolution and forgot to mention that I actually edited a book on the subject. Which sums up my skills at self-promotion.

Jonathan Chait has a useful post on Ryan and notes something else I forgot — that block grants can be used to substitute for own-source state government funds. Suppose you are spending $10 million for job counseling, and your state’s food stamps cost the Feds $10 million. If food stamps are instead provided to the state government as a block grant, they can use it to fund their job counseling and save themselves the ten million bucks. The food stamp recipients still get job counseling, but no food stamps.

Even with full substitution, the Feds are still out the ten million. I maintain that even with no substitution, the level of the grant would still erode over time, given the likely formula devised and the political dynamics of the Congress. That’s the whole point — to reduce Federal spending. It’s also why I find this statement by JC baffling:

The most encouraging thing about Ryan’s plan is that it is not a plan to cut funding for programs benefiting the poor. Instead, Ryan’s poverty plan would keep that overall level constant while shifting funds from some categories to others.

The entire history of block grants argues otherwise. There’s more in my book.

The inescapable arithmetic of anti-poverty aid

Anti-poverty programs are said to be ill-conceived because they make the choice of not-working more lucrative than employment. The poor are thereby ‘trapped’ in aid programs, against their own best interest. Rep. Ryan means to free them from this cage by eliminating such programs and providing the money to state governments in one lump sum. In my previous post I explained why this is a formula for diminishing the funds available, but put that aside for now. This week we will deconstruct the poverty trap claim. The unsubtle implication of this claim is that the current design of anti-poverty programs is at the root of poverty itself. Anti-poverty programs induce people to choose welfare over work and content themselves with poverty-level standards of living.

To start we need a basic, number-light picture of how the alleged ‘trap’ operates. Every anti-poverty aid program can be described as some maximum or standard benefit at zero income, and some “take-away rate” as income increases (an exception is the Earned Income Tax Credit, about which more later). The take-away rate is also known as a benefit reduction rate (BRR) or an implicit marginal tax rate (MTR). If the BRR is zero, it’s not an anti-poverty program; it’s for everybody. If the BRR is negative (benefits increase with income), it’s socialism for the rich. A number of provisions of the individual income tax actually fit the latter description.

Suppose a person receiving aid faces a minimum combined effective ‘tax’ on earnings of the benefit reduction rate plus the payroll tax (7.65%). Suppose the aid is $10K at zero income. Under the current minimum wage of $7.25, a full-time job gets you $14,500 a year, before tax. Suppose the BRR is 25 percent. Then after-tax/after-BRR income for 2000 hours of work is $9,765 — less if you include any costs of working (child care, transportation, work clothes). Less still if you owe any income tax. So work doesn’t appear to pay; you are ‘trapped’ in the aid  program. How to fix this?

One resort is to free you from dependency by eliminating the aid program. Now it’s either work or starve. Are you better off? Maybe no, but maybe yes. Your income is certainly reduced, perhaps a great deal. But once you are working, you might be fortunate enough to enjoy wage increases that eventually put you over $10K, after-tax and after-BRR. In that event, being deprived of the benefit could make you better off, eventually.

The force of this argument depends on the individual being too stupid to see the longer-term benefits of work. She has to be shoved into the workforce. She needs tough love.

But suppose jobs are not available, or they do not provide an upward wage path? In that case, the individual’s choice of welfare over work is the smart decision. Whether the poor are smart or dumb in conservative commentary tends to vary depending on the argument. Since a commitment to work is assumed to pay off eventually, the default assumption about the poor is that they are stupid and myopic. If it is conceded that work doesn’t pay, the grounds shift to that of moral condemnation.

If work doesn’t pay, however, we have bigger problems. The sad trends in stagnant wages have been well-documented. Capitalism isn’t working so well for a lot of folks. The irrationality argument has less currency. Moral condemnation then comes to the fore, mixed in with race prejudice and crank social science alleging pervasive pathologies of the underclass.

There is another option to fix the trap. The BRR could be reduced. This slows down the phase-out of aid as earnings grow. But the inevitable consequence is that the program costs more. Under a lower BRR, more benefits are available for any given income level covered by the program, and a wider range of income expands eligibility for benefits.

The only way to hold spending down with a lower BRR is to reduce the starting point for benefits at income zero. The fundamental trade-off is you can attenuate the effect of the poverty trap with a lower BRR and no reduction in benefits at increased budget expense, or you can reduce both benefits and the BRR in budget-neutral fashion. But you cannot reduce the BRR without either increasing costs or reducing benefits. A lower BRR either costs some aid recipients or it costs the government. The Ryan report is explicit that reducing the maximum benefits available is not a good idea:

But lowering the effective marginal tax rate at the bottom of the income scale by reducing the amount of aid would mean deep cuts for the most vulnerable. (Page 10)

This problem, however, is not solved with a block grant. The same trade-off presents itself if you send any program to state governments, social workers, Catholic Charities, or Santa Claus. There is no avoiding it. A commitment to budget neutrality, much less spending cuts, means that fixing the ‘trap’ with a lower BRR must reduce benefits for those who are stuck, for one reason or another, at the lowest income levels. If we are in the business of providing cash assistance to those with low or no income, there is still a decision to make about how much aid goes with what level of income.

The Ryan remedy for this dilemma is to “customize” assistance to the individual. How exactly this solves the problem is left to the imagination. A work requirement is irrelevant — if you are suffering from the effects of the BRR, you are already working, since for the poor the BRR is triggered by labor earnings. Only if the customization puts you on a wage path that transcends benefit phase-outs is the problem solved. But if such a wage path is available (see ‘capitalism isn’t working,’ above), the BRR is irrelevant in the first place.

With the benefit of this basic arithmetic, we can better evaluate claims about the poverty trap and relevant reforms. About which more tomorrow.