Pethokoukis, Economics, U.S. Economy

A chat with the wonk behind Rubio’s new poverty-fighting plan

Fifty years after LBJ announced the War on Poverty, the poverty rate is as high as ever recorded. At the same time, labor force participation is way down and disability is at record levels. Is this the best we can do? Senator Marco Rubio doesn’t think so and just unveiled a bold anti-poverty, pro-economic mobility agenda.

On this episode of the Ricochet Money & Politics podcasts, I chat with Oren Cass, former domestic policy director of Mitt Romney’s presidential campaign. Cass recently wrote National Review article, which heavily influenced Rubio’s thinking on these issues, including two key ideas: a Flex Fund that would send anti-poverty spending back to the states, and a wage subsidy to replace the Earned Income Tax Credit.

Here are the lightly edited highlights from our chat:

Do you think the War on Poverty failed?

Well, look, I don’t think it’s fair to say that it didn’t work at all.  I think if you go back and look at the types of problems that LBJ was talking about in the 1960s and the kind of poverty that a lot of Americans were facing in the absence of any government programs, we’ve certainly made strides from that point in terms of making sure that people’s basic needs are met.  And I don’t think we should minimize that or suggest that that’s not important.

What I really wanted to focus on was understanding kind of the unfortunate side effects of that, of that really success in some respects, which is that the higher you define the basic of standard of living that we’re able to provide to all Americans, the higher above that you have to make working and the rewards for working if you actually want to have an incentive for people to get out there and work.

And I think what we’re seeing today is that gap, what I call the income gap, between what is available to anyone living in our society versus what is available to those who work.  That gap has shrunk and in some cases disappeared completely.  And what that means is, on the one hand, we have the basic needs of all Americans being met most of the time, but we don’t have that incentive to move people into the workforce and up the ladder of economic opportunity.

And so that’s when you start to see the type of poverty that we’re seeing in the wake of the financial crisis and the weak economy of the last few years.  It’s declining labor force participation, increased reliance on government support.  And so poverty is not as severe as it once was, but, in its own way, it’s just as widespread.

So what we want to do is move less skilled Americans into work, we want them to be self-sufficient.  So to do that, we have to make low-wage work more attractive relative to non-work. And you have two sort of big ideas to get at that, ideas that Senator Rubio has picked up.  Idea number one is something you call the Flex Fund.  Tell me what that is.

So the idea of a flex fund is to essentially try to eliminate the alphabet soup of agencies and programs that currently exist at the federal level and replace it with just a single stream of funding that goes back to each state to do with it what it chooses.

One of the statistics that I was most struck by as I started to work on this issue was that if you add up all the support that we provide through anti-poverty programs today, it’s almost $1 trillion, which means it’s almost $20,000 per person below the poverty line.

The question is why isn’t that any more effective?  Why haven’t we just solved all our problems?  And I think part of the answer is that it doesn’t stay money.  It goes from money to agency programs that are overlapping and conflicting and not at all efficient.  And in lieu of that, I think a better approach would be to say the federal government can play a very effective role in collecting and distributing money but rather than structure countless programs that the states are going to have to run at the end of the day anyway, it’s really the states that should receive that money and figure out how they want to tackle the poverty problem that each of them faces.

What programs would get rolled into the Flex Fund? 

In principle, all of them.  I think you start with Medicaid, which is a huge share of the budget that goes to anti-poverty programs today.  You take the SNAP, which is food stamps; you take SSI disability funding; you take even things like Pell grants, things like TANF which is traditional welfare, Section Eight housing vouchers.

The thing is that most of these programs are already implemented by states today.  It’s not as if a federal agency is directly delivering those programs.  They just hamstring what states can actually do.  And so you take all of that money and just instead let the state figure out how it actually wants to go about funding health care, and nutritional support, and disability and so forth in ways that it might find most effective.

 And how do you determine how the money is allocated and how that changes over time?

So I think as a starting point and to facilitate a transition, you essentially take the amount of money that is currently being spent today and figure out how much of it is going to each state and to the residents of that state.  And in year one, that should essentially be what the state receives.  And I think that’s important both to ensure that support to individuals is not disrupted, but also to ensure that programs themselves are not disrupted.  So, obviously, states can’t all construct their own approach to poverty in a week as they prepare for this.  If in the first year they want to run something that looks an awful lot like Medicaid and food stamps and so forth, we want to make sure that they’re in a position to do that.

Over time, the way that the funding would ebb or flow is essentially based on the number of people in poverty in that state and then the number – the total amount of money the state is receiving per person and you just take that amount of money and let it grow with inflation, which by definition is a measure of how the cost of living for the people in that state is growing.

 So this isn’t a case where you’re saying, listen, we’re going to take all this money, we’re going to block grant it back to the states, cut it by 25 percent, and let them start innovating with less money. So this isn’t necessarily a budget device.  It sounds to me more like a state-laboratories-of-democracy device and see if they can innovate and use this money better to deal with poverty.

That’s exactly right.  And I think that’s an important point that too often, particularly among conservatives, the anti-poverty issue is actually used as a budget issue, that when we think we’re talking about anti-poverty programs, we’re actually talking about ways to cut the budget deficit.  And that’s a fine conversation to have if you’re looking across places to cut from the budget – anti-poverty programs may be one of them, given how big they are – but it’s not a solution to the poverty crisis to cut dollars.  That’s not an inherently productive approach.

And so I think the more productive approach in terms of actually solving the poverty problem is to figure out how to make the dollars go as far as possible.  And if you are successful, you save money anyway.  So if you think about that formula for how much money goes to each state, if there are fewer people in poverty in that state, the amount of funding will naturally decline over time.  But the way to save the money is to move the people out of poverty.  It’s not just to essentially arbitrarily say we’re going to spend less money than we did last year.

 And what have you seen happen at the state level that makes you at all confident that there are innovations to be had out there that will allow this money to be more effective? 

I think I’d say a couple of things about that.  One is there are plenty of examples.  Welfare reform is itself I think the most important.  You know, welfare reform, as important as a policy success as it was, really only addressed very one small piece of anti-poverty spending.

But the way that it came about was that the federal government started waiving the federal requirement for the delivery of the welfare program and states were allowed to try out different approaches and requirements for eligibility and so forth, and some very promising examples started to emerge where applying work requirements turned out to be a much more effective and successful use of dollars.

And so that is something that ultimately flowed up back to the federal level.  The irony is that the chosen reform was therefore to say, well, great, let’s build this work requirement program at the federal level instead of really allowing the states to continue to move forward as they saw fit.

The second point I would make though is that it’s not – it’s not just about experimentation.  I think you will get experimentation, but the reality is that it will take a lot of time.  Frankly, there will be some really bad experiments as well as really good ones.  But states are inevitably going to be the place where anti-poverty programs are implemented.  No matter how federal it might feel today and how many of the decisions are being made in Washington, it’s still people on the ground in the states who are trying to implement these programs.

And so if you want to get effective reform, you have to have the same people who make the implementation decisions be the people who have the accountability and who have the funding authority.  Right now, we have it split so that no one has accountability or the power to effect change, whereas if we concentrate control at the state level, we will actually create the environment for successful policy innovation where there is none today.

Would there really be no strings attached? I mean, there’s flexibility and then there’s flexibility. I mean, you don’t want state building football stadiums with the money.

I think you want some minimum ties to ensure that it remains focused on anti-poverty programs generally. And I think the way to do that is to essentially just require that any use of the money be means tested.  It’s not a perfect filter.  On the one hand, you might filter out some things that would be very effective in terms of funding certain types of education programs.  You also inevitably could find someone who makes the money eligible for football stadiums in low-income neighborhoods.  You’re never going to have a perfect string attached, but ultimately the accountability comes as much from the political forces at the state level.  And those won’t always be productive but they’re not always productive at the federal level anyway.

And if you actually concentrate all of the control the funding, the program design, the eligibility in one place, with the states, you create a very good locus of accountability for the people of that state to make sure that the money is being used effectively.

Now why will folks on the right like this idea and why will they not like this idea? 

It’s a good two-part question. The reasons to like the idea are, first of all, that it is a constructive move away from a failed status quo.  I think it’s very easy to look at the approach to the war on poverty today,  and just throw up your hands.  You know, every proposal to improve things is just creating another program or increasing funding for a program when we’ve already seen that those things don’t work.  And yet by default you’d almost say, well, what else is there?  And I think recognizing that the mode of delivery that we’ve adopted since the war on poverty began simply might not be the right one.

And so I think offering that change of focus is something that’s promising.  I think recognizing that states can actually do things significantly more effectively than the federal government is promising.  And I think it also offers an exciting opportunity to frame – to frame what has to in some respects be a budget discussion in a way that actually stays focused on the actual issue of poverty.  I think too many of the options out there, you can highlight how much money you save but you’re not left actually able to point to any more effective opportunities to help people in need.  And I think this is an option that help people in need in the short run, but does have promising fiscally responsible components in the long run.

On the flipside, I think the big one that a lot of people would focus on is it doesn’t save any money.  It’s not a budget proposal.  And given how big a chunk of the budget is spent on these types of items, it in some respects ties the government’s hands with respect to where it can save money.  And so I think taking anti-poverty programs off the table as the piñata for budget control measures is potentially problematic, but I don’t think that makes it the wrong thing to do.

Now you’ve just dovetailed into my next question, which is, why will liberals like this or hate it. I think why will liberals like it maybe is for the main reason why you just said conservative’s won’t — that it takes those programs off the table for budget cutting. So why won’t my progressive friends like this idea very much?

I think the biggest one is that they don’t trust states.  You know, I think that the liberal perspective on anti-poverty programs has always been to concentrate as much focus on the federal government as possible, partly because I think that, relatively speaking, liberal policy approaches have more sway at the federal level, and partly because I think they see more opportunities at the federal level to create more programs and spend more money than what you’re likely to see at the state level.

And so the idea of really saying, “Look, this is an issue that states should handle” is counterintuitive and I think they would see it as really handcuffing them in their ability to offer new programs.  And as much as conservatives will find it difficult to cut spending in this context, I think liberals will find it difficult to increase spending in this context.  And, frankly, that strikes me as the right balance, but there’s plenty to make either side unhappy in that respect.

So the other big idea is a wage subsidy for low-income workers. Tell me about that.

I think the idea of the wage subsidy is once we’ve created this flex fund, immediately start to shift money out of the flex fund and into a more direct cash form of support for people who are working.  And it goes back to the idea that we started this discussion with, which is that the problem with our anti-poverty programs today is that they ratchet up the benefits for people who aren’t working and the jump from there to an entry-level position just isn’t very high.

And so the question is how do you reestablish that gap?  And I think that the most promising way to do that is to start to take money that is currently spent on something like food stamps for people who are working and people who aren’t working, and say, we’re only going to leave enough money to really use food stamps for people who are not working.  And if you are working, you’re going to get more money in your paycheck, which means you won’t need food stamps.  And it means that you’re now getting the government benefit in a way that you hopefully like much better.

So even if the total amount of dollars being provided to the person not working and the person working aren’t as far apart, the incentive to work still means you get to move away from a food stamp-type program and into an actual bigger paycheck at the end of the day and that that’s one way to actually help make working much more – much more attractive and to increase the incentive to do so.

What is the advantage of this over just simply raising the minimum wage? It’s something we already do.  It seems popular with the American people.  Why not that idea? 

I think this is kind of an econ 101 type of debate that has raged between the left and the right for as long as there have been supply and demand curves.  But the basic problem with the minimum wage is that you’re putting a floor under the price of labor.

And one concern – and there’s certainly plenty of debate back and forth in the literature on this, is that you essentially price people out of the market who are not worth it to the employer to hire at the minimum wage.  And so actually you decrease the number of entry-level jobs.

The second problem that I think is probably less debatable is that if you increase the minimum wage – well, I shouldn’t say it’s not debatable.  There are those who say that will come straight out of corporate profits.  The reality is that that’s going to have to be paid for by price increases at least some of the time, which means the people who are receiving the higher minimum wage are in many cases the same people who are now paying higher prices at those same establishments.  You’re funding your anti-poverty program through consumers as a whole and particularly through consumers who consume things that are provided with minimum wage labor.

If you use a wage subsidy, you get the opposite effect.  So instead of pushing people out of the market, you now make it that much more attractive for employers to hire people.  And are there situations where employers will capture some of part of this subsidy?  Probably, but you get more people working.  And, at the end of the day, you do get more money into their pockets.  You also get the advantage that it’s funded by tax dollars, which means that it is being funded in the same – in a manner that is as progressive as our tax code is.

Frankly, that’s something that you might think liberals like more than conservatives.  I don’t think it’s something conservatives should dislike.  You know, to the extent that our tax code is as progressive as it is, we recognize that that is the appropriate burden to be placing on people to fund things like anti-poverty programs.

There’s kind of a very wonky debate about on-balance-sheet versus off-balance-sheet programs, but it makes it an explicit government cost that we can see and understand what we’re paying for instead of an implicit government cost that the government’s still imposing on the economy through a minimum but that we don’t really understand how much it costs or who’s paying for it.

And this would replace the Earned Income Tax Credit?

So we’re not talking about spending more money.  We’re talking about – so the EITC is one of the major programs that initially would be rolled into the flex fund based on how a flex fund would be defined.  But then when you start to say, where are the pieces we can take out of a flex fund and instead use to fund a wage subsidy, it’s all the money that is in flex fund programs that goes people who work.  So 100 percent of the EITC dollars you would say should come out of the flex fund into the wage subsidy. Something like 40 percent of food stamp recipients are actually working.  So that’s another huge pot of money that you’d rather provide to people through a wage subsidy than through a direct government benefit.

I think you would take the flex fund and scale it down by as much as you were shifting over into the wage subsidy, because at the end of the day the wage subsidy is going to be delivered through the tax code and should be delivered uniformly by the federal government, whereas the remainder is the flex fund that’s intended to be provided directly to recipients and could go to the states.

One counter from folks on the right is that if people want higher incomes, they should get more skills, not a wage subsidy. Your response?

I think that’s a great answer. But I think it’s not based in reality.  I think if you look at the skills that people are actually able to accumulate in today’s economy and the type of wages a lot of those people are therefore earning, you see that they are frankly not very high.

And so you can throw up your hands and say, OK, that’s fine with me and it’s up to them to better themselves if they want, but the problem with that approach is that you end up right back where we started, which is they’re not going to be earning any more money than what we’re providing for them through government programs anyway.

The second counter is that instead of raising the ceiling, why don’t we just lower the floor to make that income gap bigger?

You could – that’s where you could go next.  You could say, well, let’s – you know, let’s get rid of Medicaid.  Let’s stop providing health care to people.  Let’s get rid of food stamps.  You can propose those things, but, first of all, I don’t think that’s a very good idea, and certainly if you look at just across the American political spectrum and what we have signed up for as a society. American society has committed to providing a lot of things to everyone who lives here.  And that means things like food stamps, making sure that people aren’t going to go hungry.  It means things like making sure people have shelter.  We’ve made commitments to those things that want to make, but to keep – to keep the system working, we, therefore, also need to make sure that the kind of job anyone can get is better than those basic things.

 Why not just crank up GDP, grow the economy faster?

I think we’ve seen over multiple business cycles now that this is a trend that’s much bigger than the level of economic growth we might be seeing.  I think where economic growth is very important is creating enough jobs to make sure that everyone can find a job, but if we think about what the – what that person’s productivity is likely to be in that job and what wage they can expect in that job, the rewards provided to someone who maybe has a high school degree is starting at the bottom of the ladder are simply not what they once were, at least relative to what we would set the poverty line as.

And one thing I looked at in the article I wrote is if you just look decade by decade what’s the average income for a male with a high school degree in the 1970s, it was double the poverty line for a family of four.  By the ’90s, it was down to being 60 percent more than the poverty line.  And today it’s only 30 percent more than the poverty line.

So that’s not a – that’s not a business cycle issue.  That’s a structural issue with the nature of our economy, the skills that we look for and people’s productivity levels.  And so we’re not going to solve those things purely through economic growth.  If we want to commit to providing a good livelihood for anyone who has a job, we’re going to have to intervene in the labor market to do that.

I’ve interviewed Tyler Cowen about his book, “Average is Over,” and the idea in the future that you’re going to have a small slice of the population gather all the income gains.  Everybody else is going to have stagnant wages, maybe falling wages because they won’t be able to succeed in a high-tech, IT economy.

Some people have looked at this scenario and said we need to move toward having a guaranteed basic income for all Americans.  Have you given any thought to that idea or how that might play in the future?

I think that the trends that Tyler talks about are in some ways exactly what I was just describing, which is that it is becoming increasingly difficult to make sure that everyone can find a job that pays a wage that is worth earning relative to what government benefits might look like.  I think, you know, we are a wealthy enough society to provide a guaranteed income if we chose to do so, but we would give up on a lot of the values that we really care about in terms of self-sufficiency, in terms of economic independence, in terms of just the scale of government in people’s lives and in the economy as a whole.

Those things are things worth caring about because of what they mean for the structure of our society and the type of country we have.  And so if we want to have a country where work is expected, where work is something that people want to do because it makes for a better life, and where getting into an entry-level job really still has promise at the beginning of the economic ladder to maybe lead to something better, then we have to maintain that income gap.  We have to make sure that an entry-level job still looks better than not having a job.  And we really do have to rethink the way our anti-poverty programs are structured if we’re going to succeed in doing that.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

2 thoughts on “A chat with the wonk behind Rubio’s new poverty-fighting plan

  1. I am interested to hear more discussion on the probability of the wage subisdy also serving as a subsidy for companies providing low-wage jobs. How do we compensate for companies that will take these subsidies and roll them into profits by paying their employees below market wages and relying on the wage subsidy to cover the difference? From a purely economic standpoint, this seems like a rational choice for companies to make. This was briefly mentioned in the conversation but needs a little more attention as a potential rebuttal of this plan.

    • Although the GOP probably won’t go with this idea – What you do is raise funds for a wage subsidy through a small corporate tax. This tax would be reduced for a company if the company has a system for bringing their employees wages up towards a living wage, and could even be eliminated if there is sufficient employee pay. I think a company should be permitted to have entry level minimum wage jobs, but should have to commit to something like a 10%-15% raise per year on those jobs until they are brought up to a decent wage. This way corporations will pay workers more – through a small tax increase or through higher pay for their lowest paid employees.

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