David R. Henderson  

Mark Thoma: Government Welfare Programs Have no Effect on Incentives

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In a blog post today, Mark Thoma shows a graph giving the poverty rate with and without "the safety net," the euphemism for government welfare programs. It is from the Center on Budget and Policy Priorities. The Center looks at all government transfers to low-income people and then asks: What would the incomes of those people look like if there were no such transfers?

That's a pretty good question and one worth asking. The poverty rate was declining fairly steadily before President Johnson, in 1965, started his so-called Great Society programs and increased government transfers to low-income people. Since then poverty has declined, but more slowly. Is it just possible that government anti-poverty programs affect people's incentives to earn income? At a conference I attended at the Hoover Institution years ago, Thomas MaCurdy, who studies welfare programs, said he often talks to welfare recipients who know, to the dollar, the amount of income they can earn up to before losing such benefits as Medicaid, and they make sure they are just below that number.

So the only way the graph of the Center on Budget and Policy Priorities makes sense, given that the Center titled it "Poverty Rate Would Have Been Twice as High in 2010 Without the Safety Net," is if welfare has zero effect on incentives. Does Mark Thoma believe that?


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CATEGORIES: Income Distribution



COMMENTS (19 to date)
david writes:

Surely there are studies on the relevant elasticities.

John Fast writes:

I'd also like to point out that less spending on transfers means lower taxes and/or deficit, which means even more incentives to earn and/or save.

I assume for this discussion that the money not spent on welfare wouldn't have been wasted on crony-capitalist bailout scheme.

(It goes without saying that as a bleeding-heart libertarian I hate transfers to the rich far more than I hate transfers to the poor.)

Lord writes:

That's why there has been such a wellspring of employment since so many no longer receive unemployment, right?

David R. Henderson writes:

@Lord,
If by “wellspring,” you mean "a fair amount" and by “no longer receive unemployment,” you mean “no longer receive unemployment benefits,” then I would not at all be surprised if there has been. I don’t know how good our data are on identifying how many of the millions of people who find work every month previously received unemployment benefits, but I think it’s substantial.

Shane writes:

"The poverty rate was declining fairly steadily before President Johnson, in 1965, started his so-called Great Society programs and increased government transfers to low-income people. Since then poverty has declined, but more slowly."

David, where can I find data to support this? It's an intriguing argument but I'd really like to see some raw data on it if possible. Thanks.

RPLong writes:

You make a good point, but the fact remains that government measures of poverty can be pretty well doctored up to be whatever the government wants them to be. He who sets the poverty line determines the efficacy of the safety net.

Every conceivable analysis of this sort is phoney and disingenuous in my opinion. You can make the numbers look however you want them to.

david nh writes:

So I am assuming that Thoma is also opposed to carbon taxes and subsidies of any kind since incentives don't affect behaviour?

Robert hurley writes:

Exactly what is the value of anecdotal hearsay information? This passes for research here?

Ignacio writes:

"The poverty rate was declining fairly steadily before President Johnson, in 1965, started his so-called Great Society programs and increased government transfers to low-income people. Since then poverty has declined, but more slowly."

Could this not simply be the effect of the law of diminishing returns? selection bias?

It occurs to me that, as there are fewer poor people, those who remain poor do so because their inability to fend for themselves is greater than those who escaped poverty.

David R. Henderson writes:

@Shane,
I’ll look into it and write a further blog post.
@RPLong,
The poverty line was set in 1965 and it’s a little hokey but, whatever its limits, people haven’t “doctored" it in almost 50 years. I’ve never been sympathetic to the idea that “you can make the numbers look however you want them to.” Maybe you can, but a good analyst can see through them. The bottom line of the book, How to Lie with Statistics, for example, is not that one should ignore statistics.
Furthermore, accusing someone of being dishonest is pretty strong. Are you sure you mean to do that?
@Robert hurley,
Whom are you addressing and what particular claim are you addressing?
@Ignacio,
Could be.

Shane writes:

That would be great David, thanks.

Chris Koresko writes:

Shane: It's an intriguing argument but I'd really like to see some raw data on it if possible.

Megan McArdle posted a plot of the poverty rate for families between around 1960 and 2010 on her blog a couple of months ago.

I downloaded that plot, digitized the data, and fitted them with a pair of lines. One line was fitted to the data prior to 1970, and the other to the data after 1970. The two-line fit was very good, and the residuals showed no long-term trend, but only small (~2%) fluctuations which correlated very nicely with the economic situation (high poverty during recessions, low during the dot-com bubble).

The two fitted lines had slopes of about -0.5% per year (for the pre-1970 data) and 0% per year (post-1970). They intersect in late 1968. My interpretation is that poverty was declining pretty steadily before 1968, at which time the decline ceased.

It's natural to ask what changed in 1968. Why did the poverty rate cease its long-term decline? My first guess is that the Great Society did it: that went into effect at just about the right time, and it was specifically targeted at influencing the poverty rate. Of course it's not possible to claim conclusively that it was the cause based only on one plot.

If anybody's interested in seeing my analysis, I'd be happy to send it, assuming we can figure out how to do that.

frankcross writes:

I think a few points should be clear.

First, there plainly are some incentive effects of welfare, though the size is uncertain.

Second, that plotting poverty over time cannot be well used. As Ignacio says, a rapid decline will inevitably slow down. This is not only a general principle but obviously true here, given the weak aptitude of the bottom.

Third, poverty rates are overwhelmingly driven by economic growth. Any assessment of poverty without consideration of economic growth, such as that of McArdle, is pretty meaningless.

steve writes:

"It's natural to ask what changed in 1968. Why did the poverty rate cease its long-term decline? My first guess is that the Great Society did it: that went into effect at just about the right time, and it was specifically targeted at influencing the poverty rate. Of course it's not possible to claim conclusively that it was the cause based only on one plot."

You should break it down by groups. The poverty rate for seniors continued to drop. They were recipients of Medicare and modifications of Social Security. The poverty rate for children, IIRC, leveled off. I would expect this to track with the increase in single head of household families. This could be at least partially tracked to Great Society measures. One could also note that stagnation of income for all but the wealthy starts in the 70s, probably an amplifying effect.

Steve

Robert hurley writes:

How can anyone possibly evaluate the statement "he often talks to welfare recipients who know, to the dollar, the amount of money they can earn up to before losing such benefits as Medicaid and they make sure they are just below that number" . How many? Is that number statistically significant? How was the questioned phrased? I leave it to someone more expert than I to ask further questions. My own anecdotal evidence is that the vast majority of the poor have far fewer opportunities, not that some don't rig the system.

Russ Roberts writes:

The data on poverty over time are complicated by the radical changes in household structure over the time period people here are discussing.

In particular, a surge in divorce rates in the 1970s created a large number of households headed by single men and women. Some of those women hadn't been working when they were married. They suddenly found themselves in the workforce, working at much lower incomes than they had shared with their husbands.

If you break the data up by family structure you find that poverty rates fell dramatically between 1967 and 2003, for example, for every kind of family. But because of the increase in the families with the highest poverty rate (houses headed by single women), the overall poverty rate barely budged.

Go here and see Table 3. Other related points are made in this EconTalk episode with Bruce Meyer.

Robert writes:

Russ,

I would like to just say I really enjoy the podcast.

Personally, I'm from Rochester NY, and it seems to me that for the home of Frederick Douglas, the city is more segregated than it has ever been.

There are two cities in one geographic locations. The cultures are vastly different. There is real resistance to integration. I was downtown at cafe next to a club. While walking to my car, two men were yelling at each other. One guy went to his car and opened the trunk, and the crowd scattered. Also, there were three police cars in the area including one in that parking lot. The police didn't even get out of the car. Based on feedback from my Mom, who worked as a teacher in the city, there are a couple of children per class who are disruptive, but there is no way to deal with them because every child has to be taught the same and the schools do not want to know about the problems. It is all the teachers responsibility. Those children have terrible problems at home because there are constantly new men in and out of their lives. Once in the labor market, they have a hard time holding a job because they are unreliable and have an attitude, which makes it difficult for them to work with others. My wife tried commuting by bus in Rochester when we were first married, but the buses all travel downtown before going other places, and she was taunted every time. We bought a car the next week. Lastly, there is a terrible burden placed on the businesses in these areas in order to support the county government, so Rochester has had a very difficult time creating jobs, which is why I left.

Now maybe what I've learned from antidotal evidence is completely wrong, and the people in the poorer sections of Rochester think, believe, and act in the exact same manner as we do; however, I believe that there are incentives to not gather the data to do a true analysis because of what it might find. For example, teachers were encouraged not to report problems in the classrooms since if the problems were not reported then there were no problems and no principals or administrators would be adversely affected.

Lord writes:

The point is there hasn't been. Unemployment has been stable. Incentives in this case haven't mattered. Yes, incentives can have an effect at the margins and more the longer they are in force, but incentives usually come with high costs so aren't nearly as effective as one hopes or fears.

Bryan Willman writes:

Household structure has changed.

But so has the structure of the economy - how many of the current poor would have been barely employable before the age of robots, and the web?

On the other hand, how many of the current poor, would not be poor except for problems related to drug abuse and the war on drug users?

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