Are we better off today than we were six years ago? Apparently not. The US Census Bureau finds the pretax income of the median US family nearly 10% lower today — four years into a supposed economic recovery — than at the Great Recession’s start.
Except that alarming statistic on “market income” is deceptive. The federal government’s income definition misses a lot of stuff such as food stamps, subsidized school lunches, Medicare, Medicaid, and Earned Income Tax Credit benefits. Add in all that, factor for taxes, and you’ll find, as e21 economist Scott Winship has, middle-income buying power is essentially back at its 2007 peak — which was an all-time high. “In short, while the middle class—and especially the poor—saw declines in market income after 2007, the safety net appears to have performed just as we would hope, mitigating the losses experienced by households,” Winship concludes.
And while the recovery’s glacial pace, both in terms of GDP and jobs, is unacceptable, the safety net’s performance is encouraging. The pain from the Great Recession, as bad it was, would have been far worse for middle- and low-income Americans if we were still in a sort of 1920s, Coolidgean world that many on the right these days seem to long for. As Arthur Brooks, AEI’s president, puts it:
One of the things, in my view, that we get wrong in the free enterprise movement is this war against the social safety net, which is just insane. The government social safety net for the truly indigent is one of the greatest achievements of our society. And we somehow want to zero out food stamps or something, it’s nuts to want to be doing something like that. We have to declare peace on the safety net.
Now declaring peace isn’t the same thing as surrendering to the status quo. As currently structured, the US safety net is financially unsustainable and retards economic growth too much, promotes dependency over work, and discourages family formation. If there are any limits on the welfare state’s expansion, the left only speaks of them sotto voce if at all. But the welfare state needs thoughtful and thorough reform. And that doesn’t mean just slapping arbitrary spending caps on federal programs and block granting them back to the states. Rather, it means restructuring programs so they are both better targeted towards those who truly need help and give a lift to those trying to get on or stay on the ladder of economic opportunity. Oh, and making programs affordable. We cannot redistribute more wealth than we create, after all.
Two examples: first, Social Security. Putting aside the New Deal program’s demographic-driven fiscal challenges, it doesn’t work so well in giving all seniors a decent standard of living. As AEI’s Andrew Biggs points out, we spend over $700 billion each year on Social Security benefits, yet 9-10% of seniors in America are living in poverty. In theory, we could give every retiree in America a poverty level benefit for half the cost of the current Social Security program. Biggs would combine such means testing — via a flat poverty-level benefit — with universal savings accounts where workers would be enrolled automatically in an employer-sponsored retirement account and contribute at least 1.5% of pay, matched dollar for dollar by their employers.
Then there’s the Earned Income Tax Credit, an effective anti-poverty program for working parents but one that is also overly complex and creates a marriage penalty. Economist Edward Glaeser would alter the EITC by making it a clear and transparent wage subsidy to all workers making less than $9 an hour. (Along similar lines, AEI’s Michael Strain has advocated allowing firms to hire the long-term unemployed at less than the current minimum wage and supplementing their income with an EITC-like payment.) Management consultant Oren Cass, a domestic policy adviser for the Romney presidential campaign, would use the payroll tax system to create a direct-to-worker wage subsidy. Cass: “The effect in many ways would mirror a substantial increase in the minimum wage. But whereas a price control would to tend to decrease the size of the labor force, a subsidy would tend to increase it.”
There are lots of other center-right ideas out there: expanding the child tax credit, providing lump-sum bonus payments to unemployed workers who find a job, relocation vouchers to the long-term unemployed in high-unemployment areas, premium-support Medicare reform, expanding healthcare access through tax credits and well-funded high-risk pools. Given the aging of America and the strong possibility that technology will seriously thin the middle part of the US labor market, we will have to spend more on a (work-encouraging, wage-subsidizing) safety net in the future than in the past. And tax more and smarter to support it, such as through an efficient, pro-growth progressive consumption tax.
At the same time, the liberal left will have to acknowledge that we cannot tax our way to non-means tested, universal welfare state solvency — certainly not by just dinging the top 2%. Democrats must “finally come clean, 80 years after launching the New Deal, about the cost and consequences of their ambitions, ” writes political scientist William Voegeli. They will need to concede the safety net needs to be modernized and better focused – — and that federal spending isn’t going anywhere near 30% of GDP or higher (the current trajectory) vs. about 20% historically.
There will be no Grand Bargain until both sides in Washington and their supporters across America accept these political and policy realities, as well as the nature of the economic challenges facing 21st century America. The safety net isn’t going away, nor should it, but it will need to look a different tomorrow than it does today.
Follow James Pethokoukis on Twitter at @JimPethokoukis