A Very Different Cliff — December 31, 2012

The chart below (click it to enlarge) tells us volumes about the state of our economy, our society, and our politics.  It’s from a very useful study by the Pennsylvania Department of Public Welfare, and I encourage you to read the whole presentation here.


What you’re seeing is a representation of the after-tax disposable income of a single mother in this country at various levels of employment income.  The blue bars represent the net salary income after taxes are taken out.  The other colors represent different kinds of government support: food, housing, medical care, energy, child care and the rest. These benefits are all tied to income level, which explains why they drop off as the individual’s income increases.

I think a liberal would view this illustration as proof of the benevolent effects of government policy.  After all, it enables a woman making only $10,000 or so to have a purchasing power five times her income level.  That puts food on the table and a roof over her head, so she and her family are protected from the severest privation.

Even a true-blue progressive, however, might have qualms at some aspects of this.  The very fact that these benefits are income-dependent means that they stop as the woman’s earning power increases, and the sudden drop-offs look jarring; clearly there is room for improvement in the policy design.

Also, it does rather undermine the perennial liberal arguments for hikes in the minimum wage and other types of redistribution.  It appears that when all is said and done, one can live rather comfortably indeed on a pretty low salary, and a doubling of pay from, say, $15,000  to $29,000 has little effect on real purchasing power.  Ironically, it is only when the gross pay (the red line) reaches about $45,000 does the disposable income of this single mother fall below that figure as various benefits fall away.

Where a progressive might view this chart as an illustration of government’s success, a conservative would view it with horror – not, as liberals might charge, because the poor single mother is getting so much money that she did not earn (conservatives are not really that Scrooge-like), but because it shows a system that is riddled with pernicious incentives that have pathological effects for both the individual and for society in general.

The most obvious one is illustrated by what the writer describes as “welfare cliffs”.  At various points, but most grievously at income levels of $30,000 and $44,000, the step up in salary income of $1,000 means a loss of disposable income of $7,000 and $10,000, respectively.  In the second case it costs her almost 20% of her purchasing power to make that extra $1,000 at her job.  Which begs the obvious question – who would want that raise?  She’s much better off letting somebody else take on the greater responsibility, the greater career potential, the chance to really get ahead, because it is just too expensive for her to take that step.

In fact, as the chart indicates, the point of maximum purchasing power occurs at a work pay of $29,000.  Any promotion to a bigger job will cost her money relative to that maximum, and she would have to more than double her gross pay to get back to the same level of prosperity.  She has very strong incentives to stay at her current job – however boring and repetitive it might be – and take home the same hourly paycheck for decades rather than to pursue her ambitions and become truly successful.

The same perverse incentives work on another level.  As noted, increasing the work pay from $15,000 to $29,000 – on a straight hourly job, that’s working nearly twice as many hours – results in a net income gain of only about $4,000, less than 10%.  So it’s not just the big welfare cliff events that suppress the ambitions of the recipients.  At every step along the way, the extra effort to do more, make more, improve oneself is less and less rewarded.  This is how our benevolent government traps people in underpaying jobs.

But that’s not the end of this misguided generosity.  While the folks at the Pennsylvania Department of Public Welfare did not do a similar analysis for married parents, you can be sure that the benefits are not nearly as generous as they are for the single mom.  Nor, by the logic of government planners, should they be – it is, after all, meant to be compensation for the special hardships of the single mother that many of these programs exist.

But incentives work here as well, and exceedingly strongly.  Just as it is costly for a single mother to accept a raise from $29,000 to $30,000, so is it expensive for her to marry the father of her children.  The inevitable result is that government subsidizes and thus encourages single-parent families.  And it is well-documented that growing up without married parents is one sure-fire way to stack the cards against any young person in today’s economy.

This is not to say that government is responsible for the epidemic of fatherless children that currently afflicts us; one can equally blame no-fault divorce, birth control/abortion, and a culture of seed-spreading machismo in certain realms of society.  But there’s no denying that government policy positively encourages this pathology where it should be making efforts to fight it.

Finally, this illustration shows why it is so difficult to get government spending under control.  Benefits like this for the neediest among us only ever grow; the need never diminishes because the benefits themselves effectively perpetuate the problem.  We see it in Obama’s economy, and we have seen it everywhere else it has been tried.  Despite the best efforts and most solemn promises of future fiscal probity, once a program is begun, beneficiaries of the program multiply and the need only goes up – people quite naturally follow incentives.  Lyndon Johnson launched the War on Poverty nearly fifty years ago, and by the looks of current conditions, poverty has won.

From a political standpoint, this nexus is one key to the argument over spending.  Democrats will wail that we must not “balance the budget on the backs of the poor.”  Yet spending on the poor – crucially, ineffective spending on the poor – is one of the reasons we are so broke as a nation.

Our current benevolence keeps people trapped in career stasis; it dampens the whole economy by depriving businesses of the efforts of millions who would otherwise improve productivity; it directly feeds the pathology of fatherless children, and it presents policy makers with the apparent choice of going broke or spreading starvation.

This makes the Clinton-Gingrich welfare reform of 1996 so remarkable.  For once, rules were put in place that put incentives on the side of the angels, and welfare rolls were reduced by 60% – and not by casting more poor mothers out into the streets.  I’ll talk about examples of successful reforms like this next week, and hopefully offer up some ideas about how we handle the welfare cliffs.

But it all comes down to incentives – something too many in Washington know nothing about.

Happy New Year

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2 Responses to A Very Different Cliff — December 31, 2012

  1. Steve Calk says:

    truly terrifying. Thanks for brining this to light in such a lucid manner

  2. Ted says:

    Good one Fred….it’s a problem that I have often considered (how to help out and motivate at the same time), and this chart clarifies the challenge. I also appreciate that you avoided placing blame… simply stating it as a problem that the society as a whole faces. I’m looking forward to your reading your suggestions for a fix that is both equitable and motivating…and hopefully written with similar equanimity.

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