A Welfare Reform That Can Save Budget and Reduce Poverty

Every year there is a heated battle between the left and right over the budget. Welfare reforms are always a politically sensitive issue. The left decries them as “hurting the poor to benefit the wealthy” and the right takes a fiscally conservative approach that we simply cannot afford it. They’re both right and wrong for their own reasons, but they almost never address actual structural reform that can ultimately benefit everyone.

To Republicans, they rightly believe that cash subsidies discourage work and that bloated government programs are inevitably wasteful and littered with fraud. Democrats are also right that simply “cutting spending” can harm the poor for a number of reasons, but I don’t think they see past the political rhetoric. Structural welfare reforms should be widespread and dramatic, but that does not mean spending needs to be cut drastically right from to start.

Economists view the world in two different ways. Normative economics illustrates how things ought to be, whereas positive economics is the way things are today. For successful welfare reforms, we must consider both. You cannot simply end the programs, as much as I would like to.

The best anti-poverty program is a job. Long term income gains and increased human capital produce results. However, the minimum wage has created such a strong price floor that millions of people are simply unemployable.

If you were to cut their cash subsidies today, they would not be able to provide for themselves and become a deadweight on society. Yes, private charity could serve to remedy this, but not nearly on the scale and urgency that would be required.

In other words, our positive scenario inhibits an immediate change to a normative system. The key here is to realize the difference between the two and make reforms as painless as possible.

So what changes can we make?

As previously stated, the minimum wage serves as a big problem. By removing it and instituting a reverse income tax, more people will be employable. If someone makes $2 an hour, a reverse income tax will supplement their needs. As that person gains experience and earns more money, their reverse income, or subsidy, will reduce until it is zero.

For example, at $2 an hour, they would be supplemented $10 an hour. At $5 an hour, they would be supplemented $7 an hour. They still have enough to provide for themselves and family, but working for income gains is more beneficial.

This achieves two significant outcomes. For one, it removes the disincentive to work. As it stands, direct cash subsidies act as competition to labor. The subsidy is often more valuable than the work and earning too much will completely eliminate the subsidy. People on welfare literally refuse to work, even though they are willing and able, because their income will sharply decline. On the contrary, a reverse income tax would gradually reduce their subsidy as opposed to an absolute threshold.

Secondly, we have increased our economy’s productive capacity. Transactions are occurring that increase our total output and create wealth. The labor market has expanded and activity is happening that previously was not. Everyone benefits when our total productivity increases.

Of course, details of the program would be left up to bureaucrats and I unfortunately see no way around that. Even with inevitable legislative flaws it would be more effective than our current system. Anti-poverty programs originating from the Great Society have wildly expanded and failed to produce any mentionable results.

To be clear, I am not implying that this would eradicate poverty. The goal here is to address our massive fiscal deficit and growing debt. There would still be people that, even with an increase in privatized charity, require cash subsidies or transfer payments. I think this would be better handled at the state and local levels in order to reduce overhead and bureaucracy.

Fighting poverty is a noble cause, but simply giving people money exempts them from the requirements of civil society. That never ends well. We have dug ourselves a deep fiscal hole and I see very few ways out of it. If we can reward value-add activity by encouraging employment, our long term fiscal status will be much more sustainable. Recklessly expanding welfare programs under the guise of “helping people” does very little help them and comes at an enormous expense to everyone else.

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