David R. Henderson  

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In a July post, Matt Bruenig estimates that in the absence of government programs to alleviate poverty, the percent of Americans who would be officially classified as poor would be a whopping 23.8% versus what it actually is: 15%.

Go to his article and figure out how he estimated this. It's relatively straightforward--it's straight arithmetic.

Now put on your economist's hat and see if you can find anything wrong with his methodology. I don't mean that you might find some government program he failed to take account of: he already admits that his measure isn't perfect from that viewpoint.

Here's a hint: what is he assuming about human behavior? Or, to hone the question further, what is he assuming about the effects of these programs on human behavior? Finally, is his assumption justified? Why or why not? ("Why or why not?" is my version, on problem sets and exams, of Bryan Caplan's "Show your work.")

HT to Stephen Roth.


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COMMENTS (14 to date)
pyroseed13 writes:

The assumption is that without these programs, no one would alter their behavior to raise their incomes?

David R. Henderson writes:

@pyroseed 13,
Correct.
Now to the last question. The more specific, the better. To answer, think through what you know about particular government programs. That’s the “Why or why not?” part or the “Show your work” part.

Daniel Kuehn writes:

One tricky thing about this is the EITC, which makes up a big share of the anti-poverty transfers. If that were removed people would even be less likely to work, except the people in the phase-out region who could be more likely to work. The net effect of all these programs would turn to a large extent on how big a share of total transfers came from the EITC.

Kevin Erdmann writes:

Between 1967 and 2003, the poverty rate among single mother households fell dramatically, from 51% to 37%. But, on net, for every single mother household that rose out of poverty, 6 new single mother households were formed, of which, 2 now are in poverty.

http://idiosyncraticwhisk.blogspot.com/2014/08/the-absurdity-of-blaming-capitalism-for_14.html

Every day in this country, some version of this conversation happens countless times:

"Hey Sam. I've got some extra work down at the shop, if you want to come earn some spending money."

"Sorry, I can't. I might lose my disability support."

I don't point this out to disparage Sam, but to say, what kind of monsters would put Sam in a position where he has to say this?

Charley Hooper writes:

pyroseed13 only addressed half of the problem.

If less money was taken from taxpayers' pockets to pay for anti-poverty programs, which often have abysmal overhead rates, then those same taxpayers would have more money to put into the market economy. So we would get a twofer: there would be more demand for the services of employees and entrepreneurs and there would be more people wanting to be employees and entrepreneurs.

And, the remaining anti-poverty programs would be privately run, leading them to be more successful on a per-dollar basis.

So we might end up with a far lower poverty rate overall.

David R. Henderson writes:

@Daniel Kuehn,
Good point about EITC, but good only in isolation. IIRC, when they designed the EITC in the 1970s, it was intended to offset the Social Security and Medicare Taxes. For more on the early EITC, see Jodie T. Allen, “Negative Income Tax,” in David R. Henderson, ed., The Concise Encyclopedia of Economics, 1st ed. (Note, though, that she doesn’t make my point about the offset. I remember that from something I read in the 1980s or early 1990s.)

Matt B writes:

Recent estimates of the costs of social programs put them at:

Social Security: 24% of the budget
Medicare, Medicaid, CHIP: 22%
Safety Net Programs (EITC, SNAP, etc): 12%

This is a total of a whopping 58% of the national budget spent on “anti-poverty programs”.

In 2013, the year this data was taken, the federal budget was about $3.5 trillion. 58% of that is just over $2 trillion dollars. You can’t just assume that $2 trillion dollars of federal spending disappears, this money would not be collected in taxes in the first place so everyone would have more money to spend, on savings, on private charity, on taking care of grandma now that she didn’t have social security, on all sorts of things.

The fact that this money would be spend by private citizen and businesses instead of the government would also result in less waste and more efficient use of the money as well.

John Becker writes:

Counterfactual. How many people aren't working and making a market income because they are collecting benefits instead?

john hare writes:

One major problem is that pointed out by Kevin. People that have a disincentive to move forward often don't. Being penalized for being responsible will result in many being less responsible.

Kevin Erdmann writes:

I want to be clear about my comment. My point isn't that we can look at these numbers and make broad judgments about people. It's the opposite. My point is that we can't just look at these numbers and make broad judgments about people.

In the single mother household example, there are millions of narratives there, each unique. Some of these households might have been in abusive situations, and our level of wealth and social support have allowed women to escape those situations by forming households that would have been too economically vulnerable in the past. Some of these households may simply be making what they think is the best decision for them, among their alternatives. Some households may be making decisions that we would all agree are self-destructive, but that are enabled by social support. All of these outcomes are there.

It's the same as having air bags and seat belts in cars. They may cause some people to be objectively too reckless. But, regardless, reasonable people will drive more aggressively now because of these safety devices.

Humans make adjustments.

My point isn't that the extra poor families are all abusing the system. My point is that there might be a sort of equilibrium, through which a broad set of social policies, or lack thereof, would all produce a similar level of official poverty. So, I agree with David's point - the Peltzman Effect may even practically counteract all of the possible changes in poverty that come about from these public programs. But, in many cases, these programs are still improving families' options in ways that are morally and ethically positive, even if they aren't lowering the official poverty rate.

Altruistic posturing that assumes no human adjustments isn't helpful, but it also wouldn't be helpful to ignore the added value that some families receive from being able to make those adjustments.

Kent Lyon writes:

Bottom line: The government only creates moral hazard, and the more it tries to "help" the more moral hazard it creates. Remember Reagan's statement about the scariest words in the English language: "We're from the government and we're here to help you."
Government expansion is destroying civil society (private economic activity) in America. Evidence: consider how "civil" are politics are currently...

Sean Leal writes:

Keven makes a valid point -- the system is designed (hopefully unintentionally) to trap rational people. This chart is from 2012, but it well illustrates how difficult it is to 'jump' out of the system.

In some circumstances, a single mother would need to increase earnings from under $30k to nearly $70k to merely 'break even.'

http://danieljmitchell.files.wordpress.com/2012/07/welfare-trap.jpg

Jacob from Kent writes:

He's assuming that anti-poverty programs have no income effect on the choice of poor people to work. By my own back-of-the-envelope calculations, Matt Bruenig should be exiled to Siberia (translation: it's a *very* bad assumption)

Joel Eaton writes:

You get the behavior you subsidize. Always. Every time.

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