We Can Liberate the Poor from Poverty in America, Forever
This column by ACRU General Counsel Peter Ferrara was published on March 24, 2014 on Forbes.com.
House Budget Committee Chairman Paul Ryan (R-WI) cleared away the debris from failed federal poverty programs, leaving the field fertile for promising reforms, with his House Budget Committee Report on the 50th Anniversary of the War on Poverty. (The War on Poverty: 50 Years Later, House Budget Committee Report, March 3, 2014). Senator Marco Rubio (R-FL), another leading possible GOP Presidential candidate for 2016, complemented Ryan’s report with pathbreaking, sweeping, reform proposals, building on what has already proven to work in the real world.
Ryan and Rubio are the only political leaders in Washington offering bold new ideas that offer the prospect of reversing course and sharply reducing poverty in America, which has exploded to record levels under President Obama. That is despite more than 5 years now of the “progressive” President Obama serving in office, more than 7 years of a “progressive” Democrat majority governing the Senate, and more than 7 years of “progressive” Nancy Pelosi leading House Democrats.
Indeed, I will show below, building on anti-poverty concepts pioneered by President Reagan, how the breakthrough ideas advanced by Ryan and Rubio can lead to ultimate victory in the War on Poverty, actually ending the scourge of poverty in America.
The War on Poverty famously began in 1965, and from then to 2008, the total spent only on means tested welfare for the poor in 2008 dollars was nearly $16 trillion. The Heritage Foundation reports that was more than all spending on all military conflicts from the American Revolution to 2008, which cost $6.4 trillion in 2008 dollars. The total cost of World War II in 2008 dollars was $4.1 trillion.
What have we gotten for all of that spending? Before the War on Poverty, the poverty rate was falling sharply after the Depression due to traditional, American, economic growth. It fell from 32% in 1950, to 22.4% in 1959, to 17.3% in 1965. As the War on Poverty programs became effective, the poverty rate continued to fall, to 12.1% in 1969. Progress against poverty as measured by the poverty rate then abruptly stopped.
The poverty rate bounced up and down around that 1969 level throughout the 1970s, before starting to rise again in the late 70s. From 1978 to 1982, the poverty rate rose by almost a third, to 15.0%, reflecting the chaotic economy of the 1970s. It never fell below the 1969 level again, except briefly during the three year period 1999 to 2001.
By 2012, the last year for which official U.S. date is available, the U.S. poverty rate stood at 15%, nearly back to where it was when the War on Poverty began. That reflected 46.5 million Americans in poverty, an all-time record. Of those, an all-time record 20.4 million Americans suffered deep poverty, defined as those with incomes less than half the poverty level. That was despite the expenditure of more than $16 trillion in the War on Poverty, and 4 years of President Obama in office.
Ryan’s report identifies close to 100 federal anti-poverty programs costing $800 billion in fiscal 2012, which was more than spent on national defense that year, or on Social Security, or on Medicare. In fact, my own work, as reflected in my 2012 report for the National Tax Limitation Foundation (NTLF), co-authored with NTLF President Lew Uhler, Restoring Fiscal Order, Block Grant Welfare Entitlements to the States, and my study for the Heartland Institute, Block Grants for All: Liberating the Poor and Taxpayers Alike, identifies close to 200 federal programs, many jointly administered with the states, now costing federal and state taxpayers well over $1 trillion a year.
Bottom line, we fought the War on Poverty, and poverty won.
Why We Lost
One primary reason we lost is that after the War on Poverty began, the poor and lower income population predominantly stopped working. In 1960, nearly two-thirds of households in the lowest income one-fifth of the population were headed by persons who worked. But by 1991, this work effort had declined by 50%, with only one-third of household heads in the bottom 20% working, and only 11% working full-time, year round.
This was not a matter of the poor suddenly not being able to find work. While the economy was chaotic during the 1970s, during the 1980s and 1990s America enjoyed an historic economic boom creating ultimately 50 million new jobs. The proof is in the pudding, or in how people actually voted with their feet. Millions of illegal aliens surged across the border to gain those jobs and participate in America’s economic golden age, with the unemployment rate collapsing to 4.4% under President Bush by 2006.
The ultimate reform discussed below eliminates any issue of the poor not being able to find work. But the real problem here is that the bottom 20% were working and predominantly stopped. Why is discussed below.
We hear much about inequality these days. But one primary reason the top 20% of income earners earn so much more than the bottom 20% is that they work so much more, with nearly six times as many full time workers in the top fifth as in the bottom fifth, as the Census Bureau reports.
Ryan reports that only 2.7% of Americans that work full time, year round, are in poverty. Robert Rector of the Heritage Foundation adds that the typical poor family with children is supported by only 800 hours of work during a year, which amounts to 16 hours of work per week. If work in each poor family increased to 2,000 hours per year, which is the equivalent of one adult working 40 hours per week throughout the year, nearly 75% of poor children would be lifted out of poverty.
The Poverty Trap
As indicated above, under today’s welfare system, taxpayers are paying the bottom 20% of the income ladder more than a trillion dollars a year basically not to work. The famous Seattle/Denver Income Maintenance Experiment (“SIME/DIME”) conducted from 1971 to 1978 confirmed the impact of such substantial, unconditional, welfare subsidies on the incentive not to work.
Under the experiment, the government provided special, even more generous packages of welfare benefits to groups of beneficiaries in Seattle and Denver. The welfare packages basically included everything more liberal policymakers could hope for, effectively providing a generous guaranteed income. The dramatic bottom lime result – for every $1 of extra welfare given to low income persons, they reduced their labor and earnings by 80 cents. No wonder the War on Poverty failed!
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. Take the example of someone suffering in poverty who receives $12,000 a year in welfare benefits. Suppose she gets the opportunity for a job earning $16,000 a year. But if she loses 50 cents in welfare benefits for every dollar earned, that is like a 50% tax taking away $8,000 of the earnings from work. The payroll tax will take another 7.65% of earnings, federal income taxes another 10% on the margin, and state income taxes roughly another 5% on the margin on average. That leaves an effective marginal tax rate of 72.65%, leaving little incentive for the poor to work.
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%. The authors wrote, “A significant portion of the population faces tax rates of 100 percent or more for work at a full-time minimum wage job or for increasing their work effort beyond some minimal level. The net impact of this system, in our view, is pernicious.”
The point is that the current welfare system counterproductively provides powerful incentives for the poor not to work, which too many intellectually lazy, knee-jerk defenders of the status quo have failed to understand, nearly as well as the poor themselves, who are only responding to those incentives rationally.
Out of wedlock births to single mothers are the second key cause of poverty, in addition to nonwork. The poverty rate for female headed households with children is 44.5%, compared to 7.8% for married couples with children. The poverty rate for married black Americans is only 11.4%, while the rate for black female headed households is 53.9%. The Heritage Foundation’s Robert Rector again explains, “If poor women who give birth outside of marriage were married to the fathers of their children, two-thirds would immediately be lifted out of poverty. Roughly 80 percent of all long-term poverty occurs in single-parent homes.”
Family break up and out of wedlock births are again the natural result of the incentives created by our massive, overgrown welfare empire. Most welfare benefits are restricted to families with children. If you are a non-elderly adult in America without children, you are pretty much expected to support yourself. That is a sound principle. But it means that having a baby is the gateway to a generous package of government benefits.
Moreover, if the mother is married to a man who earns a significant income, then the benefits are lost. Indeed, if the mother is married to a man who is not working, but the government requires him to take available work before benefits are paid, then the benefits will be lost in any event, whether he refuses to work, or if he works and earns an income that eliminates benefits.
Once again, it is as if the government is paying women to have children out of wedlock. As Rector again explains, “Welfare …converts the low-income working husband from a necessary breadwinner into a net financial handicap. It transformed marriage from a legal institution designed to protect and nurture children into an institution that financially penalizes nearly all low-income parents who enter into it.”
But the facts show a way out. As Ryan’s report states, “The Brookings Institution’s Ron Haskins and Isabell Sawhill point out that if a person works full time, gets a high school education, and waits until he or she is married to have children, the chances of being poor are just 2 percent.”
Welfare Reform That Worked
If any liberal reform had been as wildly successful as the 1996 welfare reforms spearheaded by then House Speaker Newt Gingrich, every schoolchild in America would have been forced to memorize the details by now. The reforms of the old New Deal era Aid to Families with Dependent Children (AFDC) program involved the ultimate welfare policy dream of President Reagan and his long time, chief welfare policy advisor, Robert Carleson, as explained in Carleson’s posthumously published book Government Is The Problem: Memoirs of Ronald Reagan’s Welfare Reformer. I worked directly for Carleson in the Reagan White House.
The reform returned the share of federal spending on the program to each state in the form of a “block grant” to be used in a new welfare program redesigned by the state based on mandatory work for the able bodied. Federal funding for AFDC previously was based on a matching formula, with the federal government giving more to each state the more it spent on the program, effectively paying the states to spend more. The key to the 1996 reforms was that the new block grants to each state were finite, not matching, so the federal funding did not vary with the amount the state spent. If a state’s new program cost more, the state had to pay the extra costs itself. If the program cost less, the state could keep the savings. The reformed program was renamed Temporary Assistance to Needy Families (TANF).
The reform was opposed bitterly by the liberal welfare establishment. Their view was well expressed by Senator Daniel Patrick Moynihan, the Urban Institute, and others who predicted that the reforms would produce a “race to the bottom” among the states, and that within a year a million children would be subject to starvation.
But quite to the contrary, the reform was shockingly successful, exceeding even the expectations of its most ardent supporters. 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.
As a result, Haskins further reports, child poverty declined every year, falling by 2000 to levels not seen since 1978. “[B]y 2000, the poverty rate of black children was the lowest it had ever been. The percentage of families in deep poverty, defined as half the poverty level…also declined until 2000, falling about 35% during the period,” Haskins adds.
This decline in poverty “was widespread across demographic groups,” and “the decline was caused by increased employment and earnings of females headed families.” Based on total income, 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.
Yet, some Obama Democrats argue that even though the 1996 reform, passed with over 100 Democrat Congressional votes, and signed by President Clinton, did sharply reduce poverty, as well as costs to taxpayers, it was somehow a massive failure. They think that the poor are better off on welfare, with absent fathers, at taxpayer expense, rather than earning more through self- supporting work and marriage. How far your modern Democrat Party has fallen.
Reality Based Reform
There was only one real problem with the 1996 reforms —- they only reformed one federal program. The federal government sponsors close to 200 additional means tested welfare programs, including 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.
All these programs can and should be block granted back to the states just as AFDC was in 1996. This would amount to sending welfare back to the states, achieving the complete dream of Reagan and Carleson in restoring the original federalism and state control over welfare. It also follows the spirit of the Tea Party in restoring power to the states and reducing government spending, deficits and debt. The best estimate of the total cost of these welfare programs is $10.3 trillion for the period 2009 to 2018. So such extended reform could save taxpayers trillions.
While completely eliminating poverty. 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 reported 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. Some of the mothers reporting for work would in fact be assigned to work in the child care facility for the day.
For those who come back regularly, the welfare office would find them a private job assignment. Organizing local employers to offer such jobs would be a function for private charitable efforts, local Chambers of Commerce and other business groups, local churches and their organizations, as well as the welfare administrators. In some prosperous local economies, employers can be ready and available to absorb everyone who shows up needing work. 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. As I showed in a previous column, the current minimum wage, plus the current Earned Income Tax Credit, plus the current child tax credit adds up to more than the poverty line for every possible family combination. Consequently, this work safety net would completely eliminate poverty in America. (The disabled who could not work would be provided assistance under separate programs designed for them, which would not cost much.).
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 employment 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.
Effective incentives for family breakup and out of wedlock births would also be eliminated. No free benefits would be handed out any longer for bearing a child out of wedlock, as long as the Child Tax Credit is tied to work, like the Earned Income Tax Credit is. If the mother has a child without a husband, then the mother must go to work to support the child.
Nothing would be gained under this system by avoiding marriage or by couples splitting up. No benefits are provided to the mother for being unmarried. A government welfare check does not become a substitute for a working husband. If the father has to work to support himself anyway, and will be charged for child support, then he has no economic incentive to stay away from the family either. So this system does not discourage marriage or encourage family breakup.
To the contrary, since living together will reduce living expenses that the couple will have to work to pay for in any event, the incentives are for family unification rather than family breakup. Couples staying together can also help each other by sharing the necessary work if they desire. Indeed, a single mother can avoid work altogether by marrying a working husband, which provides incentives for single males to work and become more productive. Alternatively, a single mother may return to live with her own parents to reduce living expenses and the need to work to pay for them. This is another form of family reunification, which also reduces the dependency burden on taxpayers.
In January, Rubio proposed a form of extending the 1996 block grants of the old AFDC program to all means tested federal welfare programs, through consolidation into one federal agency, which would then distribute “Flex Funds” to the states so that each could carry out their own programs to address poverty and inequality of opportunity. Ryan seems to be in accord, though apparently not explicitly so far. Ryan has included in the last several Republican budgets passed by the House extension of the 1996 AFDC/TANF block grants to Medicaid, the largest federal program to aid the poor.
But neither Rubio nor Ryan have proposed the state policy of using the extended block grant, or Flex Funds, to provide all aid to the able-bodied solely through a work safety net, as discussed above, though that would seem to be permissible under the most extended block grant/flex fund ideas. That state policy is my own extension of these concepts, based on my work in the Reagan White House decades ago, which is a logical extension of the Reagan/Carleson workfare principles. What is most fascinating is the prospect that such extended reforms could, in fact, eliminate poverty in America, while saving the taxpayers trillions. People just need to break down the little Berlin Walls in their minds.