Wednesday, May 31, 2023

Recommended reading: work requirements and welfare

This is a timely topic given the ongoing debate over raising the debt ceiling. John Cochrane, one of my favorite economists, has a very nice discussion of this at his blog that is a must-read for anyone wanting a comprehensive approach to the problem of welfare and work requirements. Here are some excerpts, but be sure to read the whole thing:

The debate over work requirements for social programs is hot and heavy. I'll chime in there as I don't think even the Wall Street Journal Editorial pages have stated the issue clearly from an economic point of view. As usual, it's getting obfuscated in a moral cloud by both sides: How could you be so heartless as to force unfortunate people to work, vs. how immoral it is to subsidize indolence, and value of the "culture" of self-sufficiency.

Economics, as usual, offers a straightforward value-free way to think about the issue: Incentives. When you put all our social programs together, low income Americans face roughly 100% marginal tax rates. Earn an extra dollar, lose a dollar of benefits. It's not that simple, of course, with multiple cliffs of infinite tax rates (earn an extra cent, lose a program entirely), and depends on how many and which programs people sign up for. But the order of magnitude is right.

Since 1967, average inflation-adjusted transfer payments to low-income households—the bottom 20%—have grown from $9,677 to $45,389. During that same period, the percentage of prime working-age adults in the bottom 20% of income earners who actually worked collapsed from 68% to 36%.

The Foundation for Government Accountability [estimates] that there are four million able-bodied adults without dependents on food stamps, and three in four don’t work at all. Less than 3% work full-time.

It's much more efficient to get people to work by saying "if you earn a dollar, you can keep it," rather than "if you earn a dollar we'll take it away from you but we're going to force you to work."

Is there a better way? I've long played with the idea of limiting help by time rather than by income. That's how unemployment insurance works.

Another wild idea: Good economists all understand that consumption, not income, is the right measure of well being. That's why consumption taxes are a good idea. One advantage of a consumption tax is that it would be easier to condition benefits on consumption rather than income. If you work and save the results, you can keep your benefits.


Benjamin Cole said...

I am in all in favor of consumption and property taxes replacing income taxes (which have become a domestic and international shell game anyway).

I will be in favor of these unimplemented ideas probably long into the afterlife, if I have one.

I dislike social welfare programs, but allowing floods of illegal and desperate labor into the nation is not a good idea either.

A nation with tight labor markets is a happy country.

Salmo Trutta said...

Monkey see. Monkey do. Welfare runs in families' histories.

wkevinw said...

Income tax "is the reason" for the existence of the US Congress nowadays. Their money is tied to lobbyist support, for which they write the IRS code (loopholes, exemptions, deductions).

Consumption and property taxes are indeed better economically, but politically, the usefulness of income tax is higher (to the powerful).

Soft landings (dip in GDP during recessions is MUCH less than many decades ago) are paid for by all the social spending. During recessions, middle-low income consumers still spend enough money to keep the economy from more serious damage.

Interesting is that even during (my definition) of soft landings, e.g. 1987, 1994, 2001 (barely a recession), there were some very significant bear markets in financial instruments (stocks, bonds). Retaining bull market gains and looking for buying opportunities after the bear markets are the reasons to monitor the economic data.

Thanks for the post.

Jim said...

Charlie Munger said he is in the upper levels of "smart" and he always
knew incentives were the most important thing and now realizes that was an understatement.

Salmo Trutta said...

Yeah, legislators should offer low-cost, subsidized loans, for affordable housing.

Chris_in_NJ said...

Liberal Proposals: Tax on ST/LT Capital Gains: 0% Tax on Corporate Income: 0%

But wouldn't a consumption tax drive consumption underground & displace the onus of collections authority from IRS to FBI or to some other State-run collections agency-- a mess...

Thanks for a great blog, Mr. Grannis. You're very generous to share your knowledge like this.

Chris_in_NJ said...

^^ Meant to start with ** MY Liberal Proposals...

wkevinw said...

Chris in NJ-

Yes, your proposal and discussion at least recognizes the "no free lunch" economic truth: every tax (or economic action) has consequences. Taxes tend to drive some behaviors to the ultimate/(iron law of economics) "free market"= the "black market". So people will attempt to avoid any tax, in a variety of ways.

There are already consumption taxes and some law enforcement/collection authorities in place.

There is a whole theory of taxation (legal, economic, etc.), one concept of which is that taxes "should be" kept to a minimum so that compliance is less expensive/more likely. Another vote for minimalist government...

Of course this is at odds with the usual liberal idea that there should be enormous tax rates on rich order to redistribute $. The better approach is a truly healthy economy/job market. The best social program is a (productive/"good") job. (low taxes, low cost to enforce taxes, better "mental health"... and more).

wkevinw said...

Typical example of tax avoidance. It is especially interesting in a situation where it is likely that most of those taking action to avoid taxes were/are in favor of the new tax.

There is nothing new under the sun.

Benjamin Cole said...

M2 is...shrinking.

Salmo Trutta said...

What's shrinking is the "demand for money".

Shadow stats refers to this as: "The most-liquid “Basic M1” (currency plus Demand Deposits) held 118.1% above its Pre-Pandemic Level and is increasing year-to-year, versus the Aggregate M2 Money Supply holding up by 30.0%, but declining year-to-year, amidst no signs of an overheating economy."

Banks don't lend deposits. An increase in bank CDs adds nothing to GDP. But money flowing to the MMMFs increases the supply of loan funds (activates monetary savings), but not the supply of money.