Tag Archives: welfare

Poor man’s game theory

Happy St. Patrick’s Day!  Due to the holiday, I am holding off revising a previous post for when I can give it a more thorough treatment, and will instead motivate that post with this one.  The report “Work vs. Welfare” from the Cato Institute tries to assert that the welfare system in the United States provide such lucrative benefits that there is a disincentive to work.  This couldn’t be more inaccurate.  After correcting some of the paper’s mistakes, it will be clear that the solution is not to cut welfare benefits, but raise the minimum wage.

The 2013 report inflates the figures as much as possible; every number is the maximum possible award for that program.  More over, it assumes that every program is qualified for.  I am not sure if such a person exists!  There is also no mention of the time limits on some of the benefits.  While SNAP (food stamps), and many of the other programs have no limits, the much-maligned TANF (cash assistance) is limited to 24 months consecutively, and a lifetime limit of 60 months.  This cash assistance can’t be a significant incentive not to work, as it truly is temporary (Thats what the “T” stands for!).  It is also questionable to consider Medicaid, since even if they where working they may still receive it. Also, no other measures of income (hourly wage, salary, ect.) include healthcare.

Adjusting for these values, we get a more accurate picture.  Using the same family of three used in the paper, and taking Michigan as an example, we see that the amount available to entice people away from work is 5868(TANF) + 8344(Housing) +980 (WIC) + 750(utility credits) =15,942.  The poverty level is 19530.  Adding back in the temporary cash benefits of $6,312 provides $22,254.  In actuality the Cato’s Institute’s typical welfare family is spending time falling in and out of poverty with the availability of their cash benefits, assuming of course they qualify for the maximum in every single program.

Breaking this down to hourly rates, we see that on cash assistance, working 40 hours a week (the national average is 34.2), and working every week in the year, the family make $10.70/hr, and when they are without the TANF money, the family makes $7.66/hr.  The minimum wage in Michigan at $7.40/hr.

The minimum wage is far to low in the United States.  While the above analysis shows that it is technically possible to beat the minimum wage with benefits, even at the maximum amount it is only by 16 cents an hour, which is not much of an incentive.  What it does show however is a drastic shortcoming in the minimum wage.  Franklin Roosevelt championed a minimum wage as a living wage, proclaiming “No Business which depends for existence on paying less than a living wage to its workers has any right to continue in this country.”  In my next post, I will consider the economic ramifications of a minimum wage that would ensure the average full-time working American at such a wage would exceed the poverty threshold.

[Revised] Don’t Fear the Reaper (of Unemployment Benefits)

So the GOP met today to discuss strategy for the upcoming House and Senate elections. I encourage you to read the whole piece; it’s full of hidden gems (“policies incentivizing people to work” may be one of my all-time favorite euphemisms). One of the things that people seemed to like was the implementation of “tough love tactics” (that one also immediately made the list). Call me European (no really, that’s okay; I am German, after all), but what are certain people afraid of when it comes to making sure everybody has a baseline income to fall back to? What’s so bad about indefinite unemployment insurance? Is everybody just going to stop working? Will total economic collapse ensue?

While I get that the “paying people to be unemployed won’t help the economy“-argument holds a lot of sway with a lot of people (horrible article, by the way), it’s quite frankly wrong. Let’s take a look at labor force participation rates around the ‘developed’ world (although if you really want high participation rates, look at who’s leading the charge in 2009-2013: Tanzania and Madagascar, both with rates above 89%. Now there’s some role-model labor market policies). The US makes its appearance in the lower middle of the pack, with a solid 63% participation rate. Sure, you scroll past countries such as Iceland, Norway and Sweden on your way there (at 74%, 66% and 64% respectively). These places all have a pretty decent welfare state, which doesn’t seem to make all their citizens want to stay at home, smooching and mooching their lives away. Also, take a look at their unemployment rates compared to the US:

Sure, there may be some measurement issues here, although a more generous welfare state will, if anything, mean that you’ll estimate a higher unemployment rate. That’s because everyone who receives benefits will be counted as unemployed, rather than some of them eventually just dropping out of the statistics as their benefits expire. And even allowing for some measurement error, these countries are, if anything, doing better than the US rather than worse.

But is this a fair comparison to begin with? I’ll grant you the benefit of the doubt and say these countries are much smaller than the US, Norway is extremely resource rich, they’re sparsely populated… let’s pretend they’re exceptions.

Moving on to some more “core” European states then. Now I won’t compare the US to countries that are still in recession, such as Spain or Greece. That’s a pointless frame of reference. Let’s take some of those that were fortunate enough – like the US – not to have to undergo completely crippling austerity. Germany comes to mind, so does Switzerland and the Netherlands. All three have more generous welfare states than the US, but look at how they stack up unemployment-wise:

Not doing so bad, are they? Granted, Germany’s labor force participation rate is three percentage points below the US. But Switzerland gets 68% of its working age population to apply themselves, and the Netherlands brings it in at a whopping 83%! Must be their socialist working spirit.

By the way, even countries that are still in recession and have substantially higher unemployment rates than the US at the moment still don’t do much worse for labor force participation. Portugal is at 61%, Ireland at 60%, Spain at 59%, and even Greece (Greece, I tell you!) is still at 53% (and those guys are currently at 27.8% unemployment). And these countries should be doing worse than the four mentioned above, if anything. Not only are they still in recession, not only should their own welfare states be providing incentives for people to stay off work, their citizens can also freely move to other countries and live there if they feel like it, whether to work or to collect benefits.

And sure, the US is set to spend a little under $530 billion on welfare. But that’s easily trumped by the roughly $830 billion it’s going to spend on defense! Even leaving aside veterans’ payments (funny how that’s not part of welfare spending, but I’ll go along with it), there’s still $626 that’s being spend on the US military, which is 39% of global military spending! So maybe, just maybe, unemployment benefits and the broader welfare state aren’t the costliest items on the menu here.

Now this was a blog post, not a formal economic analysis. And if you can show me a detailed economic analysis showing how providing for the unemployed is going to ruin the United States, I’ll take that into consideration. But I think it’s a little too simple to say that unemployment benefits = paying people to be unemployed = a really, really bad idea. And so far, I’ve only been trying to show that other countries, which have more extensive unemployment benefits, aren’t doing worse than the US. That’s not even making the argument that unemployment benefits are probably actually beneficial, especially in an economy operating below potential.

The War on Anti-Poverty (Slightly Mathy)

Paul Ryan has a column in the Wall Street Journal today attacking the type of anti-poverty programs President Johnson introduced 50 years ago, essentially saying that welfare programs encourage people to stay poor:

And Washington is deepening the divide [between the poor and middle class]. […] because these programs are means-tested—meaning that families become ineligible for them as they earn more—poor families effectively face very high marginal tax rates, in some cases over 80%. So the government actually discourages them from getting ahead.

The first problem with his argument here goes back to econ 101: the marginal benefit of money tends to be very high at low income levels and lower at high income levels. That means that even if poor families face an effective marginal tax rate rate of 80% (which I’d like to see evidence on, but whatever), the extra 20% that families do get by earning above the poverty line is worth a lot.

What is more, even if the marginal tax rate were 100%, it seems unlikely that people would choose to stay impoverished. Why? Because even if the effective marginal tax rate for moving from a poverty income to a non-poverty income is very high (presumably because people lose their anti-poverty benefits), it will quickly fall again.

Consider, for instance, an impoverished family of three, just at the threshold of poverty — ie they make $19,530 per year, and their actual income is $19,530 + B where B is benefits received from the government. Ryan’s argument is that people are discouraged from earning $19,530 + B + 1 (before benefits) next year because this will cause their benefits to be taken away, canceling out much of the gain in income. But what Ryan conveniently forgets is that after this point the effective marginal tax rate is much smaller again because people have already lost their benefits (ie they will see much more marginal benefit on any money they make above $19,530 + B + 1). So it doesn’t stand to reason that the impoverished are continually discouraged to climb the income ladder.

Bottom line: with little exception, nobody has an incentive to stay poor.

So what effect has Johnson’s War on Poverty had? That’s definitely debatable, but this data from the US Census Bureau tells us a lot:

Capture

The War on Poverty was announced in 1964 and many of the programs we know today came shortly afterward (Medicaid, for instance, was created in 1965). The decline in the poverty seems to have accelerated after 1964, but I don’t have hard data on whether Johnson’s War on Poverty caused that, so I can only speculate here. But what this graph tells us we can’t say is that the War on Poverty that Ryan attacks caused greater poverty rates. Common sense would have us think that, too.

 

Don’t Fear the Reaper (of Unemployment Benefits)

Our classmate gaochen has an interesting post on unemployment benefits. I feel the need to engage with this in a more detailed way than a comment, so consider this post a reply, of sorts, but also just part of my own personal musings on the matter. We’ve actually had quite a few posts on the latest jobs report, minimum wages and macro policy in general (I especially enjoyed this one but can’t comment on it, so if anyone knows what’s going on there, feel free to let me know); this might make for a good ongoing discussion throughout the semester.

Anyway, turning to unemployment benefits and the US job market situation. While I see the appeal that the “paying people to be unemployed won’t help the economy“-argument (by the way, how horrible was that article?) has to some people, it’s quite frankly wrong. Let’s take a look at labor force participation rates around the (developed) world (although if you really want high participation rates, look at who’s leading the charge in 2009-2013: Tanzania and Madagascar, both with rates above 89%; now there’s some role-model labor market policies). The US makes its appearance in the lower middle of that pack, with a solid 63% participation rate. Sure, you scroll past places such as Iceland, Norway and Sweden on your way there (at 74%, 66% and 64% respectively). These places all have a pretty decent welfare state, which doesn’t seem to make all their citizens want to stay at home, smooching and mooching their lives away. Also, take a look at their unemployment rates compared to the US:

Sure, there may be some measurement issues here, although a more generous welfare state will, if anything, mean that you’ll estimate a higher unemployment rate. That’s because everyone who receives benefits will be counted as unemployed, rather than not receiving anything and dropping out of the statistics. And even allowing for some measurement error, these countries are, if anything, doing better than the US rather than worse. But is this a fair comparison to begin with? I’ll grant you the benefit of the doubt though and say these countries are much smaller than the US, Norway is extremely resource rich, they’re sparsely populated… let’s pretend they’re exceptions.

Moving on to some more “core” European countries then. Now I won’t compare to the US to countries that are still in recession, such as Spain or Greece. That’s a pointless frame of reference. Let’s take some of those countries that were fortunate enough – like the US – to not have to undergo crippling austerity. Germany comes to mind, so does Switzerland and the Netherlands. All three have more generous welfare states than the US, but look at how they stack up unemployment-wise:

Not doing so bad, are they? Granted, Germany’s labor force participation rate is three percentage points below the US. But Switzerland gets 68% of its working age population to apply themselves, and the Netherlands brings it in at a whopping 83%! Must be their socialist working spirit.

And even countries that are still in recession and have substantially higher unemployment rates than the US at the moment still don’t do much worse for labor force participation. Portugal is at 61%, Ireland at 60%, Spain at 59%, and even Greece (Greece, I tell you!) is still at 53% (and those guys are currently at 27.8% unemployment). And these countries should be doing worse than the four mentioned above, if anything. Not only are they still in recession, not only should their own welfare states be providing incentives for people to stay off work, their citizens can also freely move to other countries and live there if they feel like it, whether to work or to collect benefits.

And sure, the US is set to spend a little under $530 billion on welfare. But that’s easily trumped by the roughly $830 billion it’s going to spend on defense! Even leaving aside veterans’ payments (funny how that’s not part of welfare spending, but I’ll go along with it), there’s still $626 that’s being spend on the US military, which is 39% of global military spending! So maybe, just maybe, unemployment benefits and the broader welfare state aren’t the most pressing concerns facing the CBO and the Treasury.

Now this was a blog post, not a formal economic analysis. And if you can show me a detailed economic analysis showing how providing for the unemployed is going to ruin the United States, I’ll take that into consideration. But I think it’s a little too simple to say that unemployment benefits = paying people to be unemployed = a really, really bad idea. And so far, I’ve only been trying to show that other countries, which have more extensive unemployment benefits, aren’t doing worse than the US. That’s not even making the argument that unemployment benefits are probably actually beneficial, especially in an economy operating below potential.