Income Policy #3: Welfare Payments

We shouldn't incentivize unemployment, but we do.

Original Proposal: The Myth of American Inequality: How Government Biases Policy Debate

-John Early, Phil Gramm, Robert Ecklund

Policy Proposal: Restrict all welfare programs, both federal and state, to low-income Americans whom to quality, must be actively looking for work or advancing their education.

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This wasn't the plan. Welfare was created as a path towards employment. Now it competes directly with jobs.

Welfare can be so debilitating, its birth came with a warning. FDR, The mother of the welfare state, cautioned us, "continued dependence on relief induces a spiritual and mental disintegration fundamentally destructive to the national fiber. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of sound policy. It is in violation of the traditions of America. Work must be found for the able-bodied but destitute workers." Unfortunately, today we love dolling out narcotics.

Unemployment pays. Casey Mulligan, an economist at University of Chicago, documents in a New York Post article how welfare programs provide a middle-class lifestyle for the unemployed. His new study with the Committee to Unleash Prosperity found the following:

1. In 24 states, unemployment benefits and ObamaCare subsidies for a family of four with no one working are the annualized equivalent of at least the national median household.

2. A family making almost a quarter of a million dollars annually still qualifies for ObamaCare subsidies in every state.

3. In a dozen states, the value of unemployment benefits and ObamaCare subsidies exceeds the salary and benefits of the average teacher, construction worker, electrician, firefighter, truck driver, machinist, or retail associate.

4. In New Jersey, a family of four can receive benefits equal to an annualized earned income of $108,000 with no one working.

5. In Connecticut and New Jersey, a family earning $300,000 a year can receive ObamaCare subsidies.

6. New Jersey is a state where a family can earn the equivalent of $100,000 a year if both parents are collecting unemployment benefits and ObamaCare subsidies for health care. In Connecticut, the benefits can reach $80,000.

The incentives are all wrong. Working aged people in the 5th income quintile today are half as likely to seek employment than their counterpart in the 4th quintile. If they do, they work half as much per week. Working more disqualifies those in the 4th quintile for 18k in transfer programs and taxes them 4k more in payroll taxes (Early et al. 2022). All said and done, the 4th quintile walks away with just $1,500 more.

Clinton tried to prevent this timeline when he, "ended welfare as we know it," in 1996. Passage of The Personal Responsibility and Work Opportunity Reconciliation Act and the Welfare Reform Act were bipartisan efforts to get people back to work. The bills mandated welfare recipients actively seek employment or advance their education. It worked. Among welfare recipients, the percentage that reported earnings from employment increased from 6.7 percent in 1990 to 28.1 percent by 1999. Since then, entitlement programs outside those covered in the above laws have grown immensely, evidenced by Mulligan's work.

Policy Analysis

You get what you incentivize. To prove this self-evident truth, and prove my degree not a waste of time, let's analyze a benefits law passed in Kentucky. In 1980, Kentucky gave high income people more paid time off (PTO). Nothing changed for middle and low-income earners, which stinks for them but is great for us as it sets up a nice difference in differences (DiD) study. Policies that mark a cutoff point in a distribution, i.e. drinking age, test grades for advanced school programs, or in this case, high income earners, set up a natural DiD causal inference study.Assumedly, any changes in the PTO high income would take in the next year would be reflected in all othere workers as well. There would be no discrepancy in the PTO of high income and low income earners, and any changes would effect all income earners equally. So, to quantify the impact of the policy, we can look at the difference in the changes (slopes) of the two groups before and after the policy. Difference in differences is aplty named as it literally means to find the difference in the differences of each groups before and after period values.Statistical packages make this very simple. All we need to do is set up the regression:Weeks of PTO ~ high income earners + after 1980 + (high-income earners*after 1980)The coefficient on the highearn*after_1980 interaction term displays the change attributed to the policy. As log duration is interpreted as percent, the coefficient of 0.19 means the policy attributed to a 19% increase in time taken off by workers comp recipients post 1980.

The lower line is the average weeks low-income earners took off before and after 1980. If the policy didn't have any impact, high income earners would have the same slope, displayed by the dotted line. The difference between the dotted and the blue line is the impact of the policy. The result is obvious. If you pay people to stay home, they'll stay home. I'm using this example because the data was available, but it's not a long shot by any means to assume similar outcomes to anyone offered better unemployment benefits.This is bad economics. Turning would be taxpayers into welfare recipients is a double hit to our pocketbook. As we have an aging population, this isn't tenable.France is burning. Protests erupted in opposition to the government raising the retirement age. Unable to pay the coming retirement entitlements, France reneged on its promise and sent senior citizens back to work. Unless we heed FDR's warning, we could be next.

Evoking the spirit of Clinton's welfare reform by mandating welfare recipients are actively seeking work or advancing their education will go a long way in bolstering a healthier working aged class of people.