How to Liberate America from the Poverty Trap that Is Enslaving Us
This column by ACRU General Counsel Peter Ferrara was published on April 13, 2014 on Forbes.com.
In the latest Bureau of Labor Statistics jobs report, for March, the Obama economy finally reached a long overdue milestone. More than six years after the latest recession began, in December, 2007, the economy has finally at long last recovered all of the jobs lost during the recession.
The gross failure is that in the 11 previous recessions since the Great Depression, the economy recovered all jobs lost during the recession after an average of 25 months after the prior jobs peak (when the recession began). So the job effects of prior post Depression recessions have lasted an average of about 2 years. But President Obama’s supposed recovery has taken three times longer than prior post-Depression recoveries on average to achieve that same result.
That is just further confirmation that President Obama has misled America into the worst recovery from a recession since the Great Depression. And, no, Obamabots cannot say the recovery was so bad because the recession was so bad. America’s historical record is the worse the recession, the stronger the recovery, as the economy races ahead during the recovery faster than normal, to catch up to America’s world leading, long term, economic growth trendline.
These extremely poor results are the direct consequence of Obama’s meticulously anti-growth economic policies. Instead of cutting tax rates, as both Kennedy and Reagan did to such astounding, historic success, Obama has raised the rates of every major federal tax, except for corporate income taxes, where the top marginal tax rate is now the highest in the world for any significant economy. Obama only postures as favoring corporate tax reform to lower those rates, which would be enacted with broad, bipartisan support in his absence.
Instead of deregulation to reduce unnecessary, stifling regulatory burdens and barriers, as both Carter and Reagan did to such fully documented success, Obama regulates mercilessly as if regulation is cost free to the economy, as the most interventionist President in American history.
Most destructively, Obama has stifled the still world leading American energy boom, still straining to completely break out, by shutting down exploration and development of oil and gas on federally controlled lands and seas, and constantly threatening the regulatory shutdown of exploding private energy development. Implementation of that has already begun in regard the coal industry, all of which evidences a President who seems to be at war with his own economy.
This punitive energy overregulation only barely beats out the massively destructive overregulation of Obamacare, which has long been causing havoc and chaos in America’s labor markets, and only threatens to get far worse, as Obama implicitly recognizes with his illegal delays in key components of his own legacy legislation. Exactly contrary to the dense fog of fascist style propaganda of the current times, unprecedented in American history, Obamacare health care overregulation has only sharply increased rather than reduced health costs, further stifling the economy.
The Fed’s wild-eyed monetary policies, which Obama has enthusiastically supported like a football coach orchestrates his team’s offensive and defensive game plans, only further discourage the capital investment that is the lifeblood of capitalism by destabilizing the currency, and planting the seeds for the return of double digit inflation. In a later column, I will explain why the Fed cannot engineer a soft landing from the years long flight of monetary policy fantasy with virtually zero interest rates and money printing to cover the Obama/Democrat record shattering deficits that exploded from the Democrat takeover of Congress in 2007.
Moreover, the revival of runaway federal spending, deficits and debt that exploded with the new Democrat Congress in 2007, further accelerated by Obama’s $1 trillion, so-called stimulus spending bill in 2009, is not pro-growth, as Keynesian witch doctors tell us, but anti-growth, as the real world record, and fundamental logic, tell us. Explaining the double counting illogic of Keynesian policies would just be excessively repetitive of prior columns. The only real question is whether there will be any accountability, and consequences, for blind advocates of these costly, fallacious policies, which have failed regularly for going on nearly 100 years now.
But while Obama’s recovery has at long last reached the jobs milestone of at least getting us back to where we were 6 years ago, America’s jobs market and economy are still deeply troubled. Unemployment at 6.7% nearly 5 years after the recovery began is way too high. Unemployment fell to 4.4% under President Bush in 2006 and 2007. The Bureau of Labor Statistics reports the U6 unemployment rate, which includes those marginally attached to the work force who still cannot find work, and those working part-time because they can’t find full time work, was still well into double digits in March, 2014 at 12.7%. Black unemployment was also still well into double digits, at 12.4%, where it has been during Obama’s entire time in office.
Moreover, the employment rate, which means the proportion of adult Americans who have a job, has fallen from 62.2% in 2007 to 58.9% today. That decline means 10 million Americans currently not working.
The labor force participation rate, which measures the portion of those of working age who are working or actively seeking work, stands today at 63.2%, the lowest level since August, 1978. That rate fell only a quarter of a point during the recession, but it has fallen an additional three percentage points since President Obama’s recovery began in the summer of 2009. Just as the unemployment rate falls during a recovery, the employment rate, and labor force participation, is supposed to rise. The Wall Street Journal in an editorial on April 4 asked why the latter has not happened during this supposed recovery.
Obama apologists are quick to point to the start of the retirement of the baby boom generation. But those born during 1946 and 1947, when the baby boom began, did not reach the full Social Security retirement age, currently 66, until 2012 and 2013. Yet, the recovery is officially dated as starting in the summer of 2009, according to the National Bureau of Economic Research. The Journal noted that it is still problematic if the weak economy is causing older workers to retire early.
Moreover, the declining employment rate and labor force participation have not been limited to older workers, but have declined sharply for those in the prime working ages of 25 to 54 as well. A 2012 study by the Federal Reserve Bank of Chicago estimated that only about one-fourth of the decline in labor force participation since the recession was due to retirements.
Part of the reason for the declining measures of work is simply that the recovery has been so weak. Real economic growth in 2013, the fourth year of the recovery, was still less than 2%, and during Obama’s first term it was the slowest of any Presidential term since the Great Depression.
But there is another predominant factor, going back to before Obama became President, though Obama has greatly added to the problem. Taxpayers are paying mostly the bottom 20% of the income ladder a trillion dollars a year basically not to work, through close to 200 federal means tested welfare programs. Those include Medicaid, Food Stamps, 27 low income housing programs, 30 employment and training programs, 34 social services programs, another dozen food and nutrition programs, another 22 low income health programs, and 24 low income child care programs, among others. The famous Seattle/Denver Income Maintenance Experiments (“SIME/DIME”) conducted from 1971 to 1978 confirmed the impact of such substantial, unconditional, welfare subsidies on the incentive not to work.
Even worse, when those in poverty try to go to work, they are effectively subject to extra, higher, marginal tax rates. Since welfare is phased out as income rises, the loss of welfare benefits is economically the same as a tax on the rising earnings. Art Laffer and Steve Moore call this “The Poverty Trap,” explaining,
“Needs tests, means tests, and income tests exclude people [from welfare] as their incomes progressively increase, ensuring that funds are not squandered on those who are less in need. While ‘needs’ tests may be rationalized on both moral and budgetary grounds, when combined with payroll and income taxes, the phased reduction of welfare benefits has meant that spendable income actually rises very little as gross wages increase, and for some income thresholds, spendable income (total spending power) actually declines as wages increase.”
Laffer examined the total effect of all the needs tests and taxes affecting an inner city family of four on welfare in Los Angeles. He found,
“What was clear from this analysis is that marginal tax rates for inner city inhabitants were prohibitively high–in some cases, the poorest people actually faced the highest marginal tax rates of all income groups. Over the entire range from no wages to wages of $1,300 per month, the family in my analysis faced marginal tax rates that ranged from a low of 53 percent (a poor family gained only $47 in spendable income when its gross monthly wages increased from $0 to $100) to a high of 314 percent (a poor family lost $214 in spendable income when its gross monthly wages increased from $1,000 to $1,100 a month.)”
A 1996 Urban Institute study by Linda Ginnarelli and Eugene Steuerle on the same issue similarly found that the poor faced effective marginal tax rates of 70% to 101%.
President Obama has only made this problem far worse. He has aggressively sought to sign up more and more Americans for these programs, running up the number dependent on them to close to 100 million. He has increased the number on food stamps by nearly 50%, close to 50 million, an all-time record, prompting Newt Gingrich to call him the “food stamp President.” CBO estimates that Obamacare will ultimately increase the number of Americans dependent on Medicaid to 100 million in less than 10 years.
Obamacare also includes new entitlement welfare to help with the high cost of government mandated health insurance for families earning soon as much as $100,000 a year. That subjects all of these families to poverty trap effective taxes as well, because the health insurance welfare is reduced as income rises. This is why CBO recently estimated that Obamacare would reduce the labor force.
The Journal editorial admonished that, “The Republican Party needs policies that address this erosion of work that go beyond the Federal Reserve’s easy money.” Republicans in fact have a readily available, comprehensive, reform alternative that can abolish the poverty trap entirely, building on bipartisan reforms of the past that they already led the way to enacting.
Former House Speaker Newt Gingrich led Congress to enact reforms of the old, New Deal, Aid to Families with Dependent Children (AFDC) program in 1996, which ultimately received more than 100 Democrat votes, and signature into law by Democrat President Bill Clinton. Under those reforms, the old AFDC rolls were reduced by two-thirds nationwide, even more in states that pushed work most aggressively, because the poor formerly on the program went to work, or married someone working. Because of all this renewed work effort, the total income of these low income families formerly on welfare increased by about 25% over this period, as Ron Haskins of the Brookings Institution reports in his 2006 book evaluating the 1996 welfare reforms, Work Over Welfare.
The resulting decline in poverty “was widespread across demographic groups…caused by increased employment and earnings of female headed families.” Poverty among these female headed households declined by one-third, which meant that nearly 4.2 million single mothers and children climbed out of poverty. Haskins cites a study by the liberal Isabel Sawhill of the Urban Institute and Paul Jargowsky concluding,”So great was the decline in poverty that the number of neighborhoods with concentrated poverty fell precipitously, as did the number of neighborhoods classified as underclass because of the concentration of poverty and the high frequency of problems such as school dropout, female headed families, welfare dependency, and labor force dropout by adult males.”
Yet, in real dollars total federal and state spending on TANF by 2006 was down 31% from AFDC spending in 1995, and down by more than half of what it would have been under prior trends. Consequently, poverty declined sharply, while taxpayers saved on 50% of the cost of the program.
These same block grant reforms can and should be extended to all of the remaining nearly 200 federal means tested welfare programs. The states could experiment with all this new power and control over funding by replacing the entire current, outdated, counterproductive, welfare system with a work safety net for the able bodied, where public assistance is provided only in return for work first. Those who report to their local welfare office before 9 am would be guaranteed a work assignment somewhere paying the minimum wage in cash for a day’s work, 8 hours. A private job assignment would be the top priority. But if that is not available for that day, the applicant would be assigned to some government directed and financed activity, serving the community in some way, city, county or state. The worker would be paid in cash at the end of the day. Those who needed more money would come back to work the next day.
The government would provide free day care for those with small children who desired it, which it has done under TANF since 1996. For those who come back regularly, the welfare office would find them a private job assignment. Indeed, states could contract out their welfare offices to private temp companies, in business to provide immediate job assignments to those who show up needing immediate work.
As a result, instead of taxpayers paying a trillion dollars a year to the bottom 20% not to work, as under the current welfare system, private employers would be paying them much more to work, and contribute to economic growth and prosperity for all. This new system would effectively eliminate the poverty trap and incentives for not working. Assistance would be provided only for working (for the able-bodied), so working and earning more would not reduce benefits. Rather, the incentive is to take whatever private sector job is available, since the able bodied will have to work to support themselves anyway, and in the private sector the worker will gain skills, raises, promotions, and new opportunities over time.
For those who do show up for work assignments, their need is likely to be short term, as the incentive is for them to take available private sector jobs that do open up. People are not going to show up for these day jobs for years, as many have done for free welfare. Moreover, for those who continue to show up, their public support will be minimized in any event, as the state agency and associates find them private job assignments that will provide the bulk of their support in place of the taxpayers. That private employment will grow into or lead to permanent employment growing the worker mostly and likely completely out of public assistance with wage gains due to experience, learned skills, promotions, and the new opportunities that work will lead to over time.
Arguably, by abolishing the Poverty Trap, such a new system would ultimately eliminate poverty in America. As I showed in a previous column, already under current law, the minimum wage, plus the Earned Income Tax Credit, plus the Child Tax Credit adds up to more than the poverty line for every possible family combination. The disabled who could not work would be provided assistance under separate programs designed for them, which would not cost much.