Pethokoukis

Don’t expect reforming the anti-poverty safety net to save money

Image Credit: Shutterstock

Image Credit: Shutterstock

The US, both federal and state, spends about a trillion dollars a year on programs for poor and low-income people. The War on Poverty reduced material deprivation but social mobility is stuck. Republicans, such as Mike Lee, Paul Ryan, and Marco Rubio are calling for reform. But neither those guys nor anyone else in Washington should assume that a “new war on poverty” is going reduce federal spending overall anytime soon. It might even cost more.

While some programs need more limited eligibility, such as disability insurance, some should be expanded. Consider: a fifth of Americans eligible for the Earned Income Credit don’t participate, partially due the complexity of the refundable tax credit. And the EITC needs to be expanded and made more generous. On top of that, widening the gap between work and welfare would be helped by a direct wage subsidy to increase the reward for being in the labor market.

Here is what Oren Cass — who’s idea for a “Flex Fund” (government welfare dollars with state control) was picked up by Rubio — said about the fiscal implication of fighting poverty in a recent Q&A:

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.

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.

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

4 thoughts on “Don’t expect reforming the anti-poverty safety net to save money

  1. From a purely microeconomic standpoint, expansion of EIC is preferable to increasing the minimum wage or other politically sexy suggestions that have recently been floated. And Milton Friedman’s original idea of a “negative income tax”, which provided the theoretical basis for EIC, is sound.
    But as a retired tax preparer with H&R Block, I can attest to the fraud and abuse so prevalent in the current EIC program. So many people have cleverly figured out how to cheat on the EIC rules, and IRS’s own statistics reveal the large amount of fraudulent EIC payments made each year. IRS should not be in the welfare business, which it essentially is with EIC. Perhaps a more fraud-proof means can be designed to distribute EIC payments to those who legitimately deserve these entitlements–via the states or whatever.

  2. Interesting post, good ideas…but $1 trillion a year is also what we spend on DoD, VA, DHS and intelligence…why is the topic never how get better results for less money from the warfare state?
    If federal deficits are a problem, should not we be asking how to cut both welfare and warfare waste?

    • “…why is the topic never how get better results for less money from the warfare state?”–Benjamin Cole

      That’s a constant political topic, one that’s always fashionable in the halls of the Congress.

      So you gotta ask yerself, honey, what else are you wrong about?

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