Keeping off the Welfare Cliff — 14 January 2013

Two weeks ago, I wrote about the “welfare cliff”, by which people who are recipients of various forms of income support are given powerful and perverse incentives to stay on welfare instead of seeking employment.  I reproduce the chart below (click to enlarge):


As a reminder, the chart is an illustration of how much a single mother with two small children would collect through various programs, depending on her private employment income.  The implications are shocking: first, it doesn’t much matter whether she makes $5,000 or $45,000, her disposable income ranges between $50,000 and $57,000, thanks to the minions of Uncle Sam.  Second, the support drops off precipitously at certain income levels, such that she would have to earn nearly $70,000 on her own to have the same disposable income as she would have at $29,000 courtesy of the government.

There are two consequences that flow from this.  First, it gives rise to an insatiable demand for government support programs, which leads inexorably to out of control welfare spending.  How could it be otherwise?  If Washington is going to guarantee you a middle-class income regardless of whether you work, why work?  Secondly, the loss of spending power as your actual earned salary goes up is a strong incentive not to make more money.  This stunts ambition and robs the economy of the kind of energy for self-improvement that provides the dynamic for capitalism’s success.  We all suffer when that happens.

I promised at the time that I would offer some solutions to the “welfare cliff,” and here are a few thoughts.

First, the welfare spending problem has a straightforward and well-documented solution.  It has been tried and it works.  For reasons due more to politics and ideology than efficacy, however, it has little chance of being enacted.

Washington should provide block grants to the states: provide the money but let the states figure out how to deliver the services.

This is a standard policy prescription among Republicans, and indeed in Paul Ryan’s budgets of the last couple of years this has been a major feature to control entitlement spending.  Naturally, Democrats  demonize this notion as nothing more than a way to cut back the flow of assistance to those who need it.  Their problem is that it works, and has worked in no less a Democratic state than Rhode Island.

This is detailed in the presentation from which the “welfare cliff” illustration was taken, which was prepared by Pennsylvania’s Secretary of Public Welfare, Gary Alexander.  Rhode Island in 2009 was granted a waiver by the Federal government that allowed it unprecedented flexibility to administer Medicaid, subject to a federal cap over its total spending for the program.

As revolutionary as this waiver was, the Obama government denied much that was requested: Rhode Island at first asked for broad authority to manage all the compound, conflicting, and inefficient welfare programs that Washington has fomented over the years.  That was denied.  The state also asked for the ability to establish Health Savings Accounts to give each aid recipient an incentive to improve behavior and health decisions; also rejected.

Nevertheless, the waiver and cap compelled Rhode Island to redesign programs, incentives, and organization, and change the culture of heedless spending.  The results were unambiguous: nearly $2 billion in savings in just two years, with projections to cut spending nearly in half over the five-year waiver window.  At the same time, an independent audit found that the reform improved access to more appropriate services for Medicaid recipients, and sharply reduced emergency room visits, a major cost driver.

Expanding the Rhode Island model to the rest of the states will produce a number of virtuous outcomes.  First, delivery and management of Medicaid and other programs will be streamlined and more co-ordinated; second, because different states will devise different solutions, there will be a plethora of examples of reform from which other states can choose, with the most efficacious rising to the surface.  Finally, if the cap is well-controlled, states can produce positive outcomes while at the same time saving the taxpayer hundreds of billions over current projections.

What’s not to like about this?  I try hard to be charitable, but I can’t escape the conclusion that Democrats hate this solution because it dilutes power – both their power as dispensers of governmental benefices, and more generally Washington’s position as the central locus of power, patronage, and payment in our increasingly centralized society.  What’s inescapable, however, is that centralization leads not to simplification but rather to its opposite, along with waste, corruption, and poor results.

What about the problem of pathological incentives?  In part, it’s the same problem – programs overlap without co-ordination, so there is no unified impulse that moves the welfare recipient toward the point where she can stand on her own.  Moreover, in classic Washington style, many of these programs are designed to pay in full until a certain income level is reached, at which point they stop entirely – as if the full measure of assistance is needed until the day that it’s not needed at all.

If one were designing a program from scratch, one obvious objective would be that the recipient should have a positive incentive to make money on her own; in other words, as her income rises, her net disposable income rises as well.  The government assistance should gradually diminish until she stands on her own – but never suffers an income loss along the way.

One glance at the above chart shows the problem with this, however: in order for the total income level to rise inexorably, it must start at a low level – much lower than today’s $46,000 – or benefits must continue beyond the level they currently stop, which is something we can’t afford.

I think the government should ensure a certain minimum level of purchasing power to give the poor an assist while they are working their way up the ladder.  But it should be a level that leaves them dissatisfied, and ideally hungry for self-improvement.  There are other ways to make life on the dole undesirable as well, such as restrictions or conditions on the receipt of aid.  The 1996 welfare reform contained potent conditions that recipients had to seek actively to find work, and it succeeded in driving down welfare rolls dramatically.

The idea ought to be that welfare and income support programs should be available for those who need them, but not so comfortable that they become a substitute for ambition. We should also emphasize programs that help the poor prepare themselves for the working world – the adage about giving a man a fish versus teaching a man to fish holds true.

Our overlapping and disorganized entitlement programs, most particularly in health care, threaten the future of this country.  We cannot afford them, and we cannot afford to have their beneficiaries consider themselves so well off they don’t need to seek employment.  Security blankets are all well and good, but it’s the “lean and hungry” who will bring us prosperity in the years ahead.

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