Showing posts with label anti-poverty programs. Show all posts
Showing posts with label anti-poverty programs. Show all posts

Sunday, December 29, 2013

Welfare Benefits for Big Business?

Copyright, The New York Times Company

News reports have emerged this year that some of the nation’s largest and best-known corporations – like Walmart and McDonald’s – may have disproportionate numbers of their employees taking part in public assistance programs like Medicaid and food stamps. A video that went viral on YouTube criticized McDonald’s for offering its employees assistance with navigating the complex web of federal government assistance programs.

Most public assistance programs are aimed at poor people and limit participants’ incomes to a maximum somewhere around the poverty line (about $20,000 a year for a family of three). Because jobs generate incomes, it’s difficult for a worker to be admitted into antipoverty programs unless he or she works part time or earns near the minimum wage. Thus, it is no surprise that employers like McDonald’s and Walmart offering part-time or minimum-wage positions would have a disproportionate number of their employees in such programs.

One point of view is that employers just want to be helpful, and some of them happen to be in a line of business where they can create job opportunities for low-skilled people, many of whom can also benefit from knowledge about antipoverty programs. But critics assert that low pay is a deliberate corporate strategy to use government program revenues to enhance their bottom line.

Economists have long cataloged the winners and losses from antipoverty programs – we call it the “economic incidence” – and the answer is more subtle than either side acknowledges.

First and foremost, antipoverty programs raise wages and reduce profits in the short run because they implicitly penalize work, especially the full-time work that is most likely to raise an employee above the poverty line. In effect, employers not only have to compete with each other for employees, but they have to compete with the welfare state, too (as a recruiter, Stacey G. Reece, explains in his congressional testimony).

But the welfare state may also give big employers an advantage over small employers. Big employers achieve a scale large enough to host a number of employee benefit programs from education assistance and retirement plans to advice and assistance with welfare programs that small employers cannot afford. Going forward, I expect that large employers will offer more help for employees to navigate the Affordable Care Act than small employers will.

Although the earned-income tax credit is an exception, many safety-net programs permit participation on a part-year basis, which conveys an advantage to seasonal businesses, large and small. Employees at seasonal businesses have two sources of income – an employer paycheck during the parts of the year that they’re on the payroll and government program benefits during the rest of the year – while employees at nonseasonal businesses just have one income source.

Government transfer payments move purchasing power from those who finance the programs – taxpayers and the buyers of government debt – to the transfer programs’ participants. The transfers hurt businesses that serve, or borrow from, the program financers but may help businesses who serve transfer program participants. Walmart and McDonald’s may be among the latter group, too.

On the whole, social safety-net programs make it more costly to do business but nonetheless may confer competitive advantages on particular types of businesses.

Thursday, August 29, 2013

Behind the Big Increase in Food Stamps

Copyright, The New York Times Company

Something unusual has been happening with the food-stamp program, now known as SNAP, for Supplemental Nutrition Assistance Program. Between 2007 and 2012, spending on SNAP more than doubled, adjusting for inflation and population growth.

Paul Krugman and others attribute essentially all of the SNAP spending growth to the depressed economy. They have the general direction right – a more depressed economy will cause unemployment and antipoverty programs to spend more – but have missed the single largest factor increasing program budgets: program rules that are more generous now than they were in 2007.

Veterans benefits, Supplemental Security Income, Medicaid and Temporary Assistance for Needy Families all experienced a depressed economy, too, but they somehow managed through it without doubling their spending. Veterans benefits increased the most among these – 49 percent beyond inflation and population growth – compared with 110 percent for SNAP. (These data, which exclude administrative costs, can be found in the Bureau of Economic Analysis’ National Accounts Table 3.12.) Even state unemployment benefit spending, which is directly linked to layoffs in the economy, increased “only” 24 percent beyond inflation and population growth.

Peter Ganong and Jeffrey Liebman of Harvard have recently found (see Table 2 in their paper) that seven or eight changes in SNAP eligibility have spread across the states in recent years. They have examined county-level data on SNAP participation and other variables in order to estimate quantitative importance of some these rules. They find that between 2007 and 2011, new eligibility rules by themselves added 3.4 million people to SNAP enrollment and naturally tended to increase SNAP spending.

Perhaps 3.4 million seems small for a program that enrolled 26 million people before the recession. However, at the same time, SNAP began to pay more generous benefits to people who enrolled. Although changing benefit formulas is not part of Mr. Ganong’s and Professor Liebman’s paper, the new formulas would have increased SNAP spending more than 25 percent even without any new enrollment. Combined, the spending impact of enrollment and benefit rules is remarkable.

The chart below reports two estimates of the sources of SNAP spending growth: the one on the right, which builds on the Ganong-Liebman enrollment findings, and the one on the left, based on enrollment results I obtained earlier using somewhat different methods. (The Ganong-Liebman paper does not attempt to measure the combined effect of new benefit and eligibility rules between 2007 and 2011). The vertical axis measures the increase in SNAP program spending between 2007 and 2011, measured in 2007 dollars per American per year. All Americans are in the denominator – not just those who participate in SNAP – so that more participation in SNAP increases spending measured this way.

The total increase is $112 per person per year. Part, but not all, of the $112 can be attributed to more generous benefit formulas and more inclusive eligibility rules. That part is shown in red. My estimates say that, without a depressed economy, inflation-adjusted SNAP spending per capita would have increased $77 because SNAP rules changed. Using the enrollment estimates of Mr. Ganong and Professor Liebman together with the changes in benefit formulas suggests the increase would have been $53.

The remaining or unexplained spending increase is potentially attributable to the depressed economy, although it could be attributable to changes in the conduct of the SNAP that have not yet been quantified. For example, the Department of Agriculture has perennially attributed some of the increase in program participation to its outreach efforts – that is, advertising, promotional and other activities that encourage eligible people to join the SNAP program. Mr. Ganong and Professor Liebman note that enrollment itself may react to more generous benefits, as high benefits are likely to have encouraged more households to participate. These are effects that should be included in the red area in the chart but have been left as part of the blue “unexplained” area because of the lack of quantitative estimates.

The United States had a food stamp program before the recession that automatically included more households as circumstances put their incomes near or below the poverty line. The newest estimates suggest that going back to the 2007 SNAP program rules would annually save taxpayers at least $53 per American – that’s $212 for every family of four – and put SNAP spending back in line with spending on other antipoverty programs.

Wednesday, February 6, 2013

Earned Income Ironies

Copyright, The New York Times Company

The “earned income tax credit” is, ironically, more likely to be received by unemployed people than by workers who do not spend any time unemployed.

The credit was created years ago to reduce tax burdens on the poor and to “provide a genuine incentive for working;” a household must have some wage and salary income in order to receive the credit.

However, because the credit is administered on a calendar-year basis and is phased out with calendar-year wages and salaries, it is disproportionately received by people unemployed after a layoff.

As I illustrated in an earlier post, the credit follows a mountain-plateau pattern: an increasing portion for the lowest calendar incomes, a flat portion, a decreasing portion and then a flat portion of zero.

Internal Revenue Service

You might think that unemployed people do not receive the credit because they do not have any wage or salary income, but typically people unemployed from layoff do have wages or salary income during the calendar year of their unemployment from their previous job. Their layoff might have occurred after the beginning of the calendar year. Even a layoff occurring in December of the previous year might generate wage and salary income in the current year because of a severance payment or accumulated sick and vacation pay.

Moreover, an unemployed person might have a spouse with wage and salary income, and the spouse’s income counts toward the credit.

Because unemployment compensation is supposed to be reported on the recipient’s federal individual income tax return, I was able to further investigate this issue by examining a large sample of individual income tax returns for the years 2000-07 provided by the Internal Revenue Service to the National Bureau of Economic Research and other institutions for research purposes.

In 2007, 97 percent of the 7.6 million returns showing unemployment-compensation income (that is, the taxpayer or spouse was unemployed and receiving benefits some time during the calendar year) also had wage and salary income during the year. That percentage was essentially the same in each of the years 2000-06.

Of the same 7.6 million returns with unemployment income in 2007, one quarter received the earned income tax credit. By comparison, the credit was received by only one-sixth of the returns with wage and salary income but no unemployment income.

Among returns with unemployment income, the average earned income tax credit was $486, compared with $347 among the returns with wages but not unemployment income.

For most of the returns with both unemployment income and the earned income tax credit, the credit would have been even greater if the taxpayer had been employed fewer weeks than he or she actually was. Still more returns with unemployment income but no earned income tax credit would have received the credit if the unemployment had lasted longer.

This situation occurs so often because unemployment benefits are based on a person’s weekly work situation while the earned income credit is based on a household’s annual wages and salaries, and because weekly unemployment benefits by themselves are usually less than weekly wages and salaries.

The earned income tax credit is thus a good example of how a so-called tax credit can act like a tax from a working person’s point of view.

Monday, January 28, 2013

Making More Unemployed than Employed

By adding significantly to benefits for unemployed people without commensurate additions to the incomes of workers, the 2009 American Reinvestment and Recovery Act (a.k.a., "stimulus law") changed 100 percent taxation from a rare circumstance to one that presented itself to about five million household heads and spouses. If Congress had heeded the advice of those calling for a "bigger stimulus," as many as 13 million people would have made more unemployed than they would as workers. Watch this 19 min video to see how such high implicit tax rates became reality.

Viewers interested in more information on this topic: please look at

It happens in Japan too (ht Austen Bannan).

Tuesday, January 22, 2013

Welfare Arithmetic Event Tomorrow

EVENT TOMORROW: American Action Forum Event Will Examine Stimulus Spending Effects on Welfare Efficacy


High Res Forum Logo



American Action Forum Event Will Examine Stimulus Spending Effects on Welfare Efficacy


Speakers Include Jared Bernstein, Center on Budget and Policy Priorities; Casey Mulligan, University of Chicago; Shannon Mok, Congressional Budget Office

WASHINGTON - The American Action Forum (@AAF) will host an event tomorrow, Wednesday, January 23 examining the link between stimulus spending and welfare efficacy. University of Chicago Professor Casey Mulligan will first present findings from his recent paper, “The ARRA: Some Unpleasant Welfare Arithmetic.”  Following the presentation, AAF’s Director of Fiscal Policy, Gordon Gray, will moderate a discussion on the paper’s implications between Jared Bernstein of the Center on Budget and Policy Priorities and key contributor to the design of The ARRA and Shannon Mok of the Congressional Budget Office and lead author of a recent CBO report on effective marginal tax rates on low and middle income workers. RSVP here. Watch live online here.


WHEN: Wednesday, January 23th from 9:00AM – 10:30AM


WHAT: Getting Employment Incentives Right: ARRA and Marginal Effective Tax Rates




National Press Club, Holeman Lounge

529 14th Street Northwest

Washington, DC 20045






8:30 AM: Doors open, breakfast will be served


9:00 AM Presentation: “The ARRA: Some Unpleasant Welfare Arithmetic”


Casey Mulligan, University of Chicago




Jared Bernstein, Center on Budget and Policy Priorities

Shannon Mok, Congressional Budget Office


Panel discussion will include time for audience questions.




Gordon Gray, American Action Forum


10:30 AM Conclusion

For press inquiries, contact Noelle Clemente at or 240-888-7310.





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Sunday, January 6, 2013

Do U.S. Welfare Programs have Work Requirements?

I received this question from Kurt Lassberg:
"Did the Obama administration gut the work requirement for welfare reform? I'm hearing some (Chris Matthews for one) say this is a lie. What is the truth?"
If welfare is narrowly defined to be Temporary Assistance to Needy Families, then the point is debatable, although the answer is still probably yes (see this comment).

But food stamps is a much bigger program, and for food stamps there is no debate: the Obama administration did eliminate work requirements with its stimulus law and since the law expired has continued to waive those requirements for any state that requests a waiver (about 45 states requested and received). The legislative and regulatory details are in my book The Redistribution Recession.

I suspect the debaters you see are talking past each other on the work requirement subject: one side with a narrow definition of welfare that excludes food stamps and the other with a broader definition including food stamps.

A key point in my book is that an economic analysis of our current economic woes must consider the government social safety net as a whole.

Saturday, December 22, 2012

Flashback: The Labor Economics of the Individual Mandate

20 years ago, experts used to recognize that "solving" the health uninsurance problem would create labor market problems.

The individual mandate triggers the added problem of confronting low income families with relatively high losses in incremental disposable income as earned income rises. For example, suppose insurance for families at or below the official poverty line were fully subsidized by the government ... [the] melting away of the subsidy is equivalent to a marginal income tax rate for the loss of health insurance subsidies alone of about 35 percent ... Added to federal income taxes, Social Security taxes, and the phaseout of the earned income credit, the individual mandate thus would present millions of low-income American families with total marginal tax rates in excess of 75 percent. Such high marginal tax rates may well make unemployment and welfare an attractive alternative to working. [emphasis added]

The was published in 1994. Guess who wrote it?

...Alan B. Krueger and Uwe E. Reinhardt. Krueger is now Chairman of the President's Council of Economic Advisers. Interestingly, 15+ years later the Administration did not mention high marginal tax rates as one of the unfortunate byproducts of the ACA, and no adjustment has been made for their depressing effects on the labor market and on government revenues.  Moreover, Krueger and Reinhardt (and dozens of other accomplished economists) signed a 2011 letter to congress touting their "strong conclusion that leaving in place the Patient Protection and Affordable Care Act of 2010 will ... promote more rapid economic recovery in the immediate years ahead."

Now it is considered partisan to acknowledge the basic economics of incentives, and that "[ACA propoents] can honestly say that economic and clinical claims made on behalf of the repeal effort are generally viewed as non-substantive."

Wednesday, December 19, 2012

A Tale of Two Welfare States

Copyright, The New York Times Company

In “A Tale of Two Cities,” Dickens wrote, “It was the age of wisdom, it was the age of foolishness.” The governments of the United States and Britain are embarking on different approaches to helping their poor and unemployed, and one of them may regret its policy decisions.

As recently as 2010, Britain had a complex system of antipoverty programs including housing benefits, job seekers’ allowances and mortgage-interest assistance. With so many benefits available, many people found they could make almost as much from the combined programs as they could from working, even while any one of the benefits might not have been all that significant by itself. As Britain’s Department for Work and Pensions described, beneficiaries remained “trapped on benefits for many years as a result.”

Beginning next month, Britain will strive to put its welfare system on a different path by unifying many programs under a single “universal credit” system, what the department describes as an “integrated working-age credit that will provide a basic allowance with additional elements for children, disability, housing and caring.” The department forecasts that its “universal credit will improve financial work incentives by ensuring that support is reduced at a consistent and managed rate as people return to work and increase their working hours and earnings.”

In the United States, the welfare system includes dozens of federal programs, enumerated by Robert Rector of the Heritage Foundation as those “providing cash, food, housing, medical care, social services, training and targeted education aid to poor and low-income Americans.” Beginning in 2014, more programs will be added and expanded by the Patient Protection and Affordable Care Act: new health-insurance premium-support programs, new cost-sharing subsidies for out-of-pocket health expenditures, financial hardship relief from the new individual mandate penalties, new subsidies for small businesses employing low-income people and expansion of Medicaid.

The Congressional Budget Office estimates that the Affordable Care Act’s means-tested subsidies and cost-sharing will implicitly add more than 20 percentage points to marginal tax rates on incomes below 400 percent (see Page 27 of the C.B.O. report) of the poverty line (a majority of families fit in this category) by phasing out the assistance as family incomes increase, although a number of families will not receive the subsidies because they already get health insurance from their employer.

These marginal tax-rate additions are on top of the marginal tax rates already in place because of personal income taxes, payroll taxes, unemployment insurance, food stamps and other taxes and means-tested government programs. In 2014, some Americans will be able to make almost as much from combined benefits as they would by working, and sometimes more.

In summary, the United States intends to move in the direction of more assistance programs and higher marginal tax rates, while Britain intends to move in the direction of fewer programs and lower marginal tax rates.

Either country, or both, may ultimately fail to fully carry out the new programs by granting waivers and exceptions, refusing to administer them or by rewriting its new laws. But if both do follow through, perhaps future empirical economic research comparing the United States and Britain will reveal which country is living an age of wisdom and which one in an age of foolishness.

Monday, December 17, 2012

Work Can be Too Expensive

The U.K. did a survey of non-employed participants in their various anti-poverty programs.  87 percent expressed concerns that going to work, rather than remaining on benefits, would be too expensive.  Here are some more details:

"By far the biggest concerns about leaving benefit were financial. Nearly one quarter (23 per cent)
mentioned the ‘earnings gap’ in one form or another:
• 15 per cent were worried about having to wait for their first pay day;
• seven per cent were concerned about having to pay bills before they started receiving pay;
• one per cent were anxious about getting into debt before they started receiving pay.

Other common financial worries included not having enough money to live on (14 per cent), not being
able to pay bills (14 per cent), the job not paying well (11 per cent), and not earning enough to pay the
rent (nine per cent).
Collectively, nearly nine in ten respondents mentioned some sort of financial concern in this
unprompted format (87 per cent)."

Read the full report here.  Of course, these things do not happen in America.

Friday, December 14, 2012

Did Poverty Rise or Fall?

Adjusted for taxes and benefits.

Aloc Sherman says it was constant.

Jared Bernstein says America had “the deepest recession since the Great Depression and poverty didn’t go up.”

Shawn Fremstad says says "Social insurance and the Obama Stimulus, limited as it was, have and continue to play a fundamentally important role in limiting the damage. But even taking that into account, real poverty really did rise during the recent recession."

Contrary to Mr. Fremstad's claims, my post on this matter clearly explains that I do not have my own estimate and that "The measurement of poverty and its trends is an important and continuing research area, and future research could suggest that the poverty rate had increased."   Perhaps Sherman and Bernstein are wrong. Perhaps they are right. Maybe what Mr. Fremstad really advises is not to rely on Sherman and Bernstein.

Thursday, December 13, 2012

The Microeconomics of Poverty since 2007

Copyright, The New York Times Company

Government safety net programs were put on steroids by the 2009 stimulus law, erasing incentives for a significant fraction of the unemployed.

Last week I noted that poverty, when measured to include taxes and government benefits, did not rise from 2007 to 2011. That result, I contended, indicated that people in the neighborhood of the poverty line faced marginal tax rates of about 100 percent. I also noted that 100 percent marginal tax rates were excessive.

These three statements generated many angry comments, so it’s worth examining them in more detail.

One possibility is that the poverty rate did rise significantly, even when adjusted to reflect taxes and government benefits. That possibility would contradict Jared Bernstein’s work in this area, because he concluded that America had “the deepest recession since the Great Depression and poverty didn’t go up.” It would also contradict Arloc Sherman’s findings that the poverty rate was essentially unchanged (thanks to generous new subsidies).

The measurement of poverty and its trends is an important and continuing research area, and future research could suggest that the poverty rate had increased. However, future research could also point in the other direction.

In 1995, a panel established by the National Research Council to evaluate poverty measurement concluded that it might make sense to recognize not only the monetary resources available to families, but also the amount of free time they had. After 2007, many people found themselves with less pretax income and more free time because they had lost their jobs. Because the official poverty measures consider only the pretax income, adjusting poverty measures to reflect free time would cause the poverty rate to fall more, or increase less, after 2007.

Assuming for the moment that Mr. Bernstein and Mr. Sherman are right about the poverty changes, a second possibility is that poverty failed to rise even while marginal tax rates were significantly less than 100 percent. As one blogger put it, “Just because poverty rates didn’t rise doesn’t mean that the government imposed a 100 percent implicit tax rate.”

One might wonder exactly how, in theory, poverty rates remained fixed when millions of people lost their jobs, and when the government did not essentially replace all the disposable income lost because of layoffs. The magnitude of marginal tax rates imposed by the government is ultimately an empirical question, though. As far as I know, none of my detractors have offered any estimates.

I have been examining marginal tax rates under the American Recovery and Reinvestment Act of 2009, especially as experienced by families near the poverty line. The chart below shows some of my results pertinent to Mr. Bernstein’s poverty measures.

The chart examines households that in 2007 had household income of less than 175 percent of the poverty line and were therefore at risk of falling into poverty if they were later laid off from their job. The chart organizes unemployed heads and spouses in terms of their marginal tax or “job acceptance penalty” rate. With that rate, I mean the fraction of a person’s employee compensation that goes to federal, state and local government treasuries or to expenses associated with commuting to work (I assume that is $5 for each one-way trip) as a consequence of working full time at the same wage as before layoff rather than remaining unemployed. (The remainder of the worker’s compensation, if any, is left to enhance the disposable income of the worker and the worker’s family.)

The chart also organizes unemployed people in terms of what they earned weekly before layoff, with special attention to the group in the $250 to $349 range, which is near the weekly earnings of a full-time minimum-wage job.

Among the unemployed who had earned near minimum wage (shown in red in the chart), a majority had a job-acceptance penalty rate of at least 100 percent, meaning that accepting a job with the same pretax pay as they had before layoff would not increase their disposable income. If they were to accept such a job, all the compensation would go to the Treasury in additional personal income taxes, additional payroll taxes and reduced unemployment insurance benefits (under the stimulus, unemployment insurance benefits alone were more than half of the pretax pay from the previous job), and in some cases reduced benefits from the Supplemental Nutrition Assistance Program, known as SNAP, and Medicaid.

Only 18 percent of those earning near minimum wage had a job-acceptance penalty rate of less than 80 percent.

My results consider the unemployment insurance program and its federal additional compensation and subsidies for Cobra, which gives workers who have lost their jobs the right to purchase group health insurance for a limited period of time; SNAP; Medicaid; the regular personal income tax (both federal and state); the earned-income tax credit, the child tax credit, the additional child tax credit and the “making work pay” tax credit.

Job-acceptance penalty rates of 100 percent or more are probably more prevalent than shown in the chart because I did not include child care costs among employment expenses and did not include programs like disability insurance, Temporary Assistance for Needy Families and Supplemental Security Income, means-tested housing subsidies, means-tested tuition assistance, means-tested energy-assistance programs and other programs that impose positive implicit marginal tax rates.

I agree with Mr. Bernstein that government policy, especially the 2009 stimulus law, is responsible for preventing a rise in the poverty rate. But it achieved that end by erasing incentives for a significant fraction of the unemployed.

Thursday, December 6, 2012

The ARRA: Some Unpleasant Welfare Arithmetic

Food stamps, unemployment insurance, and other subsidies to persons who are unemployed and otherwise with low incomes, have recently been made more generous and available in more situations.  Did extra transfers help prevent a deeper recession, or did it amplify and prolong it?  Economists cannot fully answer these questions without examining the incentives of persons receiving the transfers.  The purpose of this paper is to quantify the number of people who recently had essentially no short-term financial reward from working, and how that number might have been different if safety net program rules had been made more generous, or if they had remained what they were in 2007.
American economists often discuss the unemployment insurance (hereafter, UI) system and its moral hazards as if the penalty for accepting a new job were about 50 percent of compensation,[1] which would suggest that the financial reward to working would be positive and significant in all but a few rare circumstances.  At the same time it is commonly noted that the average weekly unemployment benefit of about $300 barely exceeds the compensation from a full-time minimum wage job, and for this reason alone UI is almost always inferior to a real paycheck.  These claims are incorrect because they ignore payroll taxes, income taxes, and other safety net programs.  The tax arithmetic suggests that many UI participants would, even under 2007 rules and even ignoring all safety net programs aside from UI and the personal income tax, keep about 30 percent – and maybe as little as ten percent – of the compensation generated by accepting a new above-minimum-wage job because taxes typically took as much of the reward from working as foregone unemployment benefits did.  These thin margins essentially disappeared under the American Recovery and Reinvestment Act of 2009 (hereafter, ARRA).
Even when helping the poor is a primary policy motivation and the wage elasticity of labor supply is low, optimal tax theory frowns on labor income tax rates that equal or exceed one hundred percent (as long as work is not socially harmful) because at a one hundred percent rate there is no longer a tradeoff between efficiency and government revenue.  From a positive point of view, economists expect that employment rates will be low, if not zero, in groups of people who are aware that they receive no financial reward from working.  These are a couple of more reasons to quantify the prevalence of marginal tax rates that are near or exceed one hundred percent.[2]
The paper begins with a brief overview of the major safety net programs affecting the financial reward to working.  The first quantitative results are 2009 marginal tax rates and their components for some of the more common tax situations encountered by American workers and their families.  The rates are calculated for three scenarios: actual benefit and tax rules, benefit and tax rules as they would have been if they had not been changed since 2007, and benefit and tax rules as they might have been in a bigger stimulus.  The following section considers the rich and complicated variety of possible tax situations in order to arrive at estimates of the number of household heads and spouses with little or no financial reward to accepting a new job.  A “demand shocks and job search gambles” section shows how job acceptance rewards are nonlinear in the amount of a job offer, and the final section concludes.


            Before the recession began, going from unemployment back to work did not pay that well for someone eligible for unemployment benefits, but almost always paid a little something, with at least twenty percent of compensation from a job going toward enhancing the new employee’s disposable income above what it was during the spell.  Despite its inclusion of a “making work pay” tax credit and its expansion of the “earned income tax credit,” the ARRA increased marginal tax or “job acceptance penalty” rates for the vast majority of the unemployed and essentially erased the short-term financial benefits from working for two to three million non-elderly and unemployed household heads and spouses.  About five million had their job acceptance penalty rates increased above 80 percent by the ARRA.
Layoffs have also long been subsidized by unemployment insurance and other safety net programs, but again typically public treasuries would pay for less than 90 percent of the compensation lost from a layoff, while employer and employee had to absorb the rest.  When the ARRA was in full force, over three million workers could be laid off with a subsidy of 90 percent or more, and another five million with a subsidy rate of 80 to 89 percent.  A bigger stimulus would have put as many as 30 million workers in that situation.
To the degree that unemployment responds to the financial incentives for working, the ARRA and other programs assisting the unemployed interact with demand shocks in determining the number unemployed: an adverse demand shock increases unemployment more under the ARRA than it would if the same demand shock were experienced under 2007 tax and subsidy rules.
None of these results hinge on the increase of the duration of unemployment benefits from 26 to 99 weeks, which was achieved by legislation separate from the ARRA (United States Department of Labor 2011).  I count each unemployed person only when they are laid off; the results here reflect the level of benefits delivered by tax and subsidy programs to unemployed persons beginning to receive UI.  UI and other program eligibility rule changes are not considered in this paper but are important for quantifying changes in marginal tax rates between 2007 and 2009, and comparing such changes across demographic groups.
My findings of large, even confiscatory, job acceptance penalty rates are not the result of “cliffs” in transfer program formulas in which many dollars of benefits are lost for earning a particular marginal dollar (Yelowitz 1995) because I look at the consequence of more “discrete” decisions of accepting a job, or initiating a layoff, that change calendar year income by thousands of dollars.  Instead, my large rates reflect the combination of tax and subsidy rules, especially unemployment insurance.  Not surprisingly, my rate estimates exceed those of previous studies of transfer program marginal tax rates that omit unemployment insurance (Holt and Romich 2007) and exceed those of previous studies of unemployment insurance that ignored taxes (Chetty 2008).  But taxes, unemployment insurance, and other transfer programs have recently contributed significantly to the living standards of the poor and unemployed (Sherman 2011), so we cannot have a full understanding of the magnitude of marginal tax rates without considering the safety net broadly.
I have likely somewhat under-estimated the number of people with marginal tax rates in excess of one hundred percent because I have omitted a number of other possible sources of implicit taxes.  They include other means-tested cash assistance programs such as Disability Insurance, TANF and Supplemental Security Income; means-tested housing subsidies; means-tested tuition assistance; and means-tested energy assistance programs.  They also include court-enforced wage garnishment associated with the collection of delinquent consumer, tax, and child support debts.
            At the same time that incentives to retain and accept jobs were erased for millions, millions were laid off from their jobs and remained unemployed for an extended duration.  I estimate that 2.3 million additional non-elderly household heads and spouses were laid off in 2009 than would have been laid off if the 2000-2007 average number of layoffs had persisted through 2009.  The number of unemployed household heads and spouses were about 5 million greater than normal.  In other words, the extraordinary numbers of persons laid off and unemployed are of roughly the same magnitude as the numbers of persons having their incentives essentially erased by the ARRA.  The fact that more persons would have had incentives erased if the ARRA had been more generous to the unemployed suggests that it is possible that a bigger stimulus would have resulted in more unemployment than the actual stimulus did.
            It is beyond the scope of this paper to quantify the impacts that the large penalties for work from the ARRA (or other legislation) had on the labor market for people laid off during the recent recession.  Nor do I attempt to determine whether increasing marginal tax rates beyond 100 percent matters more or less than increasing them beyond, say, 70 percent.  But even before obtaining such estimates we should not expect that a labor market would function normally while the private benefit to working was zero or negative.  For this reason, the arithmetic presented in this paper is indeed unpleasant, and disturbingly similar to discredited welfare program rules of the distant past.  As James Tobin put it in 1965,
“[A 100 percent tax rate] does just that, causing needless waste and demoralization.  This application of the means test is bad economics as well as bad sociology.  It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.” (Tobin 1965, 890)

[1] Chetty (2008) estimates the U.S. UI replacement rate as 50 percent for the purposes of demonstrating that it might be slightly less than optimal.  See also Fujita (2010).
[2] Behavior in the neighborhood of 100 percent tax rates would be especially interesting if it were true that (a) when tax rates are lower and more typical of their historical values, the amount of unemployment were insensitive to the amount of the UI benefits and (b) unemployment would be high if unemployment paid better than working.  To see this, try drawing a graph of the relationship between unemployment and the size of UI benefits that satisfies the properties (a) and (b): it must turn or jump sharply toward high unemployment as the benefit approaches the amount of pay from working.

Wednesday, December 5, 2012

Poverty Should Have Risen

Copyright, The New York Times Company

When measured to include taxes and government benefits, poverty did not rise between 2007 and 2011, and that shows why government policy is seriously off track.

When somebody earns, say, $10,000 by working, he should keep some of it for himself and his family rather than handing it all over to the government. By the same reasoning, when someone loses $10,000 by not working, he should get some help from the government or from others in the forms of reduced taxes and enhanced benefits but still should bear a portion of that loss himself.

Economists debate the fraction of wages that workers should keep for themselves, because the optimal fraction is a trade-off between incentives, insurance, support of public goods, freedom and other factors. Libertarians and other believers in small governments might set the fraction at 80 percent or more. Other economists think that incentives have an effect on behavior, but incentive effects are small, so we can safely set the fraction at 30 percent, or even a bit less.

But I thought economists agreed that the fraction should not be zero, so that people losing money by not working would bear a portion of the loss. If people with declining incomes found them entirely replaced by government help, that amounts to 100 percent taxation (providing more benefits as income falls is sometimes called “implicit taxation”).

As James Tobin, a John F. Kennedy adviser, Nobel laureate and leading Keynesian economist of his day, said in a 1965 article, a 100 percent tax rate causes “needless waste and demoralization,” adding:

This application of the means test is bad economics as well as bad sociology. It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.

Professor Tobin called the 100 percent tax situation demoralizing because the affected people find that all of the benefits of their hard work and success go to the government in the form of more tax receipts and fewer benefit payments. The unintended result would be less work and more families earning less than the poverty line, which is why Professor Tobin described such policies as perpetuating poverty.

If, as economists recommend, everybody’s tax rate is effectively less than 100 percent, then someone with disposable income of, say, 110 percent of the poverty line should find himself falling into poverty when he loses his job. His living standards would not fall to zero because he should be getting some help in terms of reduced taxes and increased benefits. But optimally his disposable income would fall to 80 percent of the poverty line, and perhaps below, until he found a new job.

Under the Obama administration, workers with disposable income in the neighborhood of the poverty line did not, on average, see their job losses during the recession translate into significant reductions in their disposable income.

As Jared Bernstein put it, America had “the deepest recession since the Great Depression and poverty didn’t go up.” He shows that the percentage of people in households with disposable income less than the poverty line was 15 percent in 2011, just as it was in 2007 before the recession began. In fact, the percentage fell a bit after 2008 when the stimulus law went into effect.

The results suggest that the government was helping too much. If they had been following the advice of Professor Tobin and all other economists who say they believe that tax rates should be less than 100 percent, the fraction of households with disposable income below the poverty line would have risen as a consequence of millions of lost jobs, just less than it would have without any government help.

Mr. Bernstein, one of the Obama administration advisers who designed the stimulus law and said it would quickly push the unemployment rate below 8 percent, appears to be unaware that it is possible for the government to help too much by creating the kind of situation Professor Tobin described and depress the economy in the process. Mr. Bernstein fails to mention incentives in any way and instead describes the poverty results as “a real accomplishment and a sign of a far more civilized society.”

Erasing incentives is not the way to a civilized society but rather to an impoverished one.

Sunday, December 2, 2012

Why Doesn't Poverty Rise During a Deep Recession?

Because government benefits replace almost every dollar that people (in the neighborhood of the poverty line, at least) lost in the labor market. That's a 100 percent tax -- for every dollar a person earns (loses) he loses (gains) a dollar in government benefits, respectively.

Jared Bernstein presents the facts, especially this chart.

The official measure is cash income, and the alternative measure adjusts the official measure for all of the government taxes and benefits people pay or receive.

Bernstein thinks that the government has done well here, when it fact this reveals how excessive the benefits are.

Sunday, November 25, 2012

Recession by Redistribution

Doubt of the benefit
Why increasing unemployment aid is prolonging the recession


More families used food stamps this past Thanksgiving than ever in history, while Congress is pushing to extend benefits — again — for the longterm unemployed.

But what if such aid isn’t helping us weather the recession, but instead prolonging it?

The White House, and other believers in Keynesian policy refer to subsidies to the unemployed, poor and financially distressed as “automatic stabilizers” and insist that subsidies have a large positive effect on national income.

Yet when the subsidy spigots were opened wide in 2008 and 2009, labor market activity contracted sharply, and stubbornly refuses to rebound.

Getty Images
It is time to reconsider the old-school economic idea that paying people to be unemployed reduces employment. The more we pay poor people, the more poor people we will have. The more we help people and institutions in financial distress, the more financial distress there will be.

It is easy to look at a particular instance of redistribution — say, unemployment benefits — and conclude that its aggregate effects are minimal, or approximately zero. But policymakers did not expand just one provision of one program.

Food-stamp recipients were given a big raise in October 2008, and then another raise six months later. Thanks to the elimination of asset-testing by the majority of states, just about anyone who is the sole earner in their household now find themselves eligible for food stamps during periods of unemployment.

The American Recovery and Reinvestment Act, popularly known as the stimulus, gave unemployment insurance recipients a weekly bonus, and offered to pay for the majority of their health insurance expenses. FDIC and Treasury reduced some “unaffordable” mortgage payments, which means that successful people need not apply. The list goes on and on.

The essential consequence for all of these is the same: a reduction in the reward to activities and efforts that raise incomes.

I’ve studied how redistribution affects the “reward” for working.

We start with a monthly index of government benefits. Before the recession began, an unemployed person typically received about $10,000 a year in government benefits. By the end of 2009, program rule changes alone had increased the typical benefit to almost $16,000.

Plot that against the hours an average American adult spends away from work in a year (the difference between total hours in a year and hours at work). Largely because of the increase in the number of people without jobs, the average work hours were about 120 fewer at the end of 2009 than they were at the end of 2007 — a 10% decline.

But things start to change at the beginning of 2010. Slowly, the number of hours of work by the average American begins to climb. Not coincidentally, the average annual government benefit for the unemployed dropped to $14,000.

The increase in benefits provides a disincentive to work. From 2007 until 2009, I found a startling 13% decline in the “reward” for working — that is, how much better the average job would be over collecting benefits.

Considering that, why is the labor market still so far from a full recovery? Because government benefits are still far from returning to pre-recession levels.

But wait, a Keynesian would say. Unemployment benefits are good for the economy overall, since it is money spent and not saved.

It’s true that the poor and unemployed tend to quickly spend what they have on basic needs. Yet Keynesians have gone further to claim that spending patterns of the poor are why redistribution raises total spending and thereby employment. Redistribution changes the composition of spending and employment in the direction of industries like discount groceries and low-cost retail that disproportionately serve poor customers and away from industries like, say, airlines. The stimulating effects of benefit spending for the overall economy is limited.

Redistribution is not free. Redistribution depresses employment, aggregate spending and GDP, by implicitly punishing the successful and implicitly rewarding the unsuccessful.

We don’t like to see people suffer, and it’s a natural instinct to want to increase redistribution in a time of recession. But the better economic solution reduces the implicit penalties of government aid, and gets more people working, so they don’t need the help.

Casey B. Mulligan is a professor of economics at the University of Chicago and author of the new book “The Redistribution Recession” (Oxford University Press);

Thursday, November 22, 2012

USDA edits food stamp report, but embarrassing stats remain

For at least 7 consecutive years (going back at least to FY 2004), the USDA had explained in its annual food stamp report how the program was growing because of new eligibility rules and USDA outreach efforts. They would also comment on how the state of the economy was an additional factor expanding program spending and participation or, in some of the economic-expansion years, how the economy by itself was a factor that would have reduced participation and spending.

Here is a typical (FY2009) example from the executive summary:

"The continued growth in SNAP participation from 2008 to 2009 is likely attributable to the deterioration of the economy, expansions in SNAP eligibility, and continued outreach efforts." [emphasis added] (FY2009, p. xiii)

See also FY 2010 (p. xv), FY 2008 (p. xiii), FY 2007 (p. 11), FY 2006 (p. 10), FY 2005 (p. 10), and FY 2004 (p. 9).

Now, for the first time in years, such discussion is absent from the SNAP report. The words "expansion" and "outreach" are now absent from the report. But look at the very first chart in the report (click to enlarge).

Our labor market has not been doing well lately, but it did not contract in FY 2010 as it did in, say, FY 1991, FY 2001, or FY 2002. Nevertheless, SNAP participation grew more in FY 2010 than it did in those years. I suggest that USDA add this sentence to its executive summary:

"The continued growth in SNAP participation from 2010 to 2011 is likely attributable to expansions in SNAP eligibility and continued outreach efforts."

Although the USDA does not offer an opinion as to the reasons for SNAP participation growth, they do cite some facts that scholars might find useful:

In fiscal year 2011, Colorado, Hawaii, and Iowa adopted BBCE policies for the first time. California, Maryland, and Minnesota expanded existing BBCE policies, increasing SNAP eligibility in those States, while Idaho and North Dakota restricted existing BBCE policies, decreasing SNAP eligibility in those States. In particular, California and Maryland expanded their policies to include households without children, and Minnesota expanded their policy by dropping their asset test and raising their gross income limit to 165 percent of the poverty guideline for all households. Conversely, Idaho and North Dakota restricted their policies by adding an asset test and gross income test, respectively.

For more on the mutual feedbacks between the economy and the food stamp program, see my new book.

Tuesday, November 13, 2012

An Old School Keynesian on Marginal Tax Rates

"Our present system of welfare payments does just that [with 100 percent taxes], causing needless waste and demoralization. This application of the means test is bad economics as well as bad sociology. It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate."
Tobin, James. “On Improving the Economic Status of the Negro,” Daedalus (Fall 1965), 94(4).

Another interesting quote on the marriage tax implicit in welfare programs:

All too often it is necessary for the father to leave his children so they can eat. It is bad enough to provide incentives for idleness but even worse to legislate incentives for desertion.

Wednesday, October 24, 2012

Food Stamp Stats

During the typical week of FY 2010, 8 million non-elderly female household heads were not employed. 7 million of them were on food stamps/SNAP.

The annual food stamp report is usually released in September, yet it is late October and the FY 2011 report is still not released.

There are elections in 13 days.

Are these facts related?

Monday, October 22, 2012

Make More by Working Less? Not as Uncommon as You'd Think

Consider a married dual-earner couple with two young children.  Both adults earn $600 per week when at work full-time, which is near the left-middle of the full-time earnings distribution.[1]  When both are employed all year, as they normally are, the family’s income exceeds $60,000, is about triple the poverty line, and exceeds the income of a majority of families in America.  Nevertheless, this couple illustrates how just a small bit of program participation can completely erase the financial reward from working.
When at work, they spend $100 per week for the care of the children and each spend $50 commuting (about $5 for a one way trip to work).[2]  If one of the adults were not at work, these costs fall by a total of $150 per week as the non-employed spouse takes care of the children and does not commute to work.
In the middle of 2009 (26 weeks into the year, with 26 weeks to go), one of the spouses is laid off, and is entitled to $289 per week for the first ninety-nine weeks that she is unemployed.[3]  The best job she can find in the short term pays $500 per week: a 17% pay cut.  What would she and her family gain financially by starting a job immediately, rather than waiting until 2010 to seriously consider going back to work?
First of all, working the second half of 2009 would provide $500 per week in pre-tax income, and $461.75 weekly after payroll taxes.  As compared to not working receiving $289 UI per week, that’s a difference of $172.75 after payroll taxes.  But working will require some expenditures on childcare and commuting, which I have estimated as a combined $150 per week.  Without accounting for any other federal or state income taxes, we have that working a full-time work week adds a mere $12.75 to the family’s disposable income.  In case you are looking at this on hourly basis, that’s about 32 cents per hour, and we have not yet begun to count personal income taxes!
Working the second half of 2009 would make taxable income of $36,850 ($59,800 family earnings minus a standard deduction of $8,350 minus $3,650 for each of the four family members) rather than $28,964 ($46,800 family earnings plus the $5114 worth of UI that is taxable minus the aforementioned deduction and exemptions).  Ignoring tax credits for the moment, working involves $1,183 more federal income taxes (i.e., this family is in 15 percent bracket regardless of the work decision) and about $237 more state income taxes for calendar year 2009.  That’s $54.62 extra taxes for each week worked.
Regardless of when the laid off spouse goes back to work, this family has calendar year earned income of less than $110,000 and therefore qualifies for the full “Making Work Pay” credit and the full amount of the child tax credits (totaling $2,000).  The Earned Income Tax Credit is zero regardless of the work decision because family calendar year wages exceed $41,000.  So the bottom line financially for this family is that sending the laid off spouse back to work immediately results in less disposable income ($32 per week less if income tax withholding coincides with the actual tax liability) for the remainder of calendar year 2009 than they would have if the spouse remained unemployed for the remainder of the year.  Of the pre-tax $500 that would be earned per week, $50 goes to commuting, $100 to childcare, and $38 to payroll taxes, and $55 for extra personal income taxes that would not be owed on unemployment benefits, leaving $257 after work expenses and taxes that could be avoided by not working.  Unemployment insurance pays better – $289 per week – for up to ninety-nine weeks.
Tens of millions of people participate in Medicaid and SNAP (food stamps) when a bread-winner is unemployed, but to be conservative and keep the illustration simple, above I assume that this family does not participate in dozens of government anti-poverty programs: they only participate in UI and claim any credits that are available to them on Form 1040.  Nevertheless, their financial reward to working is negative – they have to spend less in order to be able to afford to work more.  This illustrates why government safety net programs have quite a large effect on work incentives, and why even a small program can turn work from a net financial positive to a net financial negative.
If the person losing her job in this example had not been married, but still had the two kids and still had the same earnings opportunities, not working would provide even more disposable income because the person would be on the phase-out portion of the EITC schedule as a result of being unmarried.  Even if childcare were free, work would still have no financial reward.
The Redistribution Recession has many more examples like these, and estimates how common they are in the non-elderly U.S. adult population.

[1] Among non-elderly household heads and spouses employed full-time during the reference week and sampled by one of the twelve 2007 CPS monthly surveys, $600 was at the 35th percentile of their weekly earnings.  Among heads and spouses less than age 40 (and thereby more typical of persons with young children), $600 was at the 40th percentile.
[2] For simplicity, my tax calculation below does not explicitly consider the child care expense tax credit; the $100 weekly child care expense should be interpreted as net of the credit (if any).
[3] The typical replacement rate is 44%, plus the $25 per week Federal Additional Compensation bonus provided by the ARRA.