Work requirements

By John Cochrane. 

"The debate over work requirements for social programs is hot and heavy. I'll chime in there as I don't think even the Wall Street Journal Editorial pages have stated the issue clearly from an economic point of view.  As usual, it's getting obfuscated in a moral cloud by both sides: How could you be so heartless as to force unfortunate people to work, vs. how immoral it is to subsidize indolence, and value of the "culture" of self-sufficiency. 

Economics, as usual, offers a straightforward value-free way to think about the issue: Incentives. When you put all our social programs together, low income Americans face roughly 100% marginal tax rates. Earn an extra dollar, lose a dollar of benefits. It's not that simple, of course, with multiple cliffs of infinite tax rates (earn an extra cent, lose a program entirely), and depends on how many and which programs people sign up for. But the order of magnitude is right. 

The incentive effect is clear: don't work (legally). As Phil Gramm and Mike Solon report, 

Since 1967, average inflation-adjusted transfer payments to low-income households—the bottom 20%—have grown from $9,677 to $45,389. During that same period, the percentage of prime working-age adults in the bottom 20% of income earners who actually worked collapsed from 68% to 36%.

36%. The latter number is my main point, we'll get to cost later. Similarly, the WSJ points to  a report by Jonathan Bain and Jonathan Ingram at the Foundation for Government Accountability that

there are four million able-bodied adults without dependents on food stamps, and three in four don’t work at all. Less than 3% work full-time.

3%. 

Incentives are a budget constraint to government policy, hard and immutable. Your feelings about people one way or another do not move the incentives at all. A gift of money with an income phase-out leads people to work less, and to require more gifts of money.  That's just a fact. 

What to do? 

One answer is, remove the income phaseouts. Give food stamps, medicaid, housing subsidies,  earned income tax credits, and so forth, to everyone, and don't reduce them with income. Then the disincentive to work is much reduced. (There is still the "income effect," but in my judgement that's a lot smaller for most people in this category.) 

Rather obviously, that's impractical. Even the US, even if r<g or MMT are true, would run out of money quickly. That's the problem with Universal Basic Income. Even $20,000 x 331 million = $6.6 trillion, essentially the entire federal budget right there, and $20,000 of total support is a lot less than people with $0 income get right now. (Gramm, Ekelund and Early, and Casey Mulligan estimate about $60,000 is the right number here.)  Put another way, to eliminate the work disincentive in the social programs, we would have to jack up marginal tax rates on everyone to such stratospheric levels that nobody works. You can't escape disincentives. 

So, support for the unfortunate must be limited somehow. That's why we limit it to people below a certain income level. But even if each individual program maintains a reasonable marginal phaseout, they add up across programs, and next thing you know we're back to 100% phase out. 

Posit that work is still desirable,  to earn some money, to contribute to your fellow citizens, to reduce the need for income assistance, and to build human capital.  (Plus the more ephemeral goals all sides of the debate ascribe to work -- self reliance, life meaning, self-respect, participation in society, and so forth. I promised no moral or sociological arguments, but these values being shared by both sides of the debate, I can make a little exception. Nobody thinks that an entire lifetime of living on a government check, doing nothing but drink take drugs and play video games all day, makes for a desirable society, no matter who they vote for.)  

If so, if the social safety net creates a 100% marginal tax rate on work, and if abandoning income phaseouts will bankrupt the state, then we have a problem. 

Work requirements are an imperfect method to try to replace the incentive to work that social programs eliminate. Our government does this sort of thing all over to transfer income but contain the disincentives: Subsidize gas, and then regulate against its use for example. 

It is inefficient, as you can tell from the brouhaha. It's much more efficient to get people to work by saying "if you earn a dollar, you can keep it," rather than "if you earn a dollar we'll take it away from you but we're going to force you to work." As the WSJ details here and often, the rules are complex, and people and governments game them. Just who should work? Progressives will quickly find a sick single mother taking care of elderly parents and commuting to some horrible fast food job who falls through the cracks, and they are right. Rules and bureaucracies are very rough substitutes for market incentives. More importantly, if you're working for money, you find the best job you can, you work hard, you look for better opportunities. If you're working to satisfy a bureaucratic work requirement in the face of a 100% tax rate, you find the easiest job you can, you don't care about the money and thereby the social productivity of the work, and you do as little as possible. 

So I'm not defending work requirements as a perfect offset to a 100% marginal tax rate. But they are there for a reason, as a very rough offset to some of the huge disincentives that means-tested programs pose. The point today is that we should start to understand and debate work requirements in this framework. If you're going to remove market incentives, you need some replacement. 

By the way, supposedly socialist Europe, after its experience with "the dole" in the early 1990s, is much more heard-hearted about these sorts of incentives than we are. Progressives who think we should both emulate nordic countries and also expand our safety net should go look at nordic countries. 

Is there a better way? I've long played with the idea of limiting help by time rather than by income. That's how unemployment insurance works. We understand that replacing people's paycheck forever if they lose their job has bad incentive effects. Unemployment is understood as a temporary misfortune, and understanding the incentives, you get unemployment checks for a limited amount of time. Could not many other programs aimed at misfortune also be limited by time -- but then allow you to keep each extra dollar of earnings? Perhaps even unemployment should be a fixed amount of time, and you can keep receiving it for the full (normally) 26 weeks even if you get a job. 

The trouble with that, of course, is that some people will not get their acts together in the required time, and then you have to be heartless. But is it not just as heartless to say to a person who had been on food stamps, earned income tax credit, social security disability and housing voucher, "well, congrats on getting  a job, and a good one, that pays $60,000 per year. Now we're taking away all your benefits. Enjoy the $1?" 

Also, the safety net does include a detailed bureaucracy to determine who is needy. Disability, unemployment, and so forth look hard at these issues. Replicating that with a different set of rules for each program seems mighty wasteful. 

Another wild idea: Good economists all understand that consumption, not income, is the right measure of well being. That's why consumption taxes are a good idea, and we should measure consumption diversity not income diversity. (I don't use the word "inequality" anymore as it prejudices the right answer.) One advantage of a consumption tax is that it would be easier to condition benefits on consumption rather than income. If you work and save the results, you can keep your benefits. 

One last point, which maybe should be the first point. It is a bit scandalous that income phase outs in social programs take away benefits based on market income, but not social program income. If you have food stamps and earn an extra $10,000 of income, you can lose your foods stamps. If you get housing worth $10,000, you don't lose anything. Ditto in the entire social program system. This is an immense distortion towards putting effort into obtaining more social programs rather than working. Phasing out based on consumption, including cash and non cash benefits, would make a lot more sense. But one could phase out benefits based on which other benefits you receive too. Disincentives come from the social program and tax system overall, and any hope of continuing disincentives and saving money must take a similar integrated system approach. 

The argument also is over how much money the programs cost. That leads to "how could you be so heartless" vs. "but the country will go broke," also going nowhere. A focus on incentives offers the way out. Fix the incentives, and we end up helping people who need it a lot better, we end up with a lot fewer people who need help, and spend a lot less money. Win win win. 

There is no clean answer. A main lesson of economics is that there is always a tradeoff between help and disincentives, between insurance and moral hazard. We can make this tradeoff a lot more efficient than it is, but we can't totally eliminate the tradeoff. 

The bottom line remains, this discussion would be a lot more productive discussion if we talked about the constraint posed by incentives, rather than the usual moral mudslinging."