Tag Archives: Maine

What else can the government do for America’s poor?

This year marks the 20th anniversary of the 1996 welfare reforms, which has generated some discussion about poverty in the U.S. I recently spoke to a group of high school students on this topic and about what reforms, if any, should be made to our means-tested welfare programs.

After reading several papers (e.g. here, here and here), the book Hillbilly Elegy, and reflecting on my own experiences I am not convinced the government is capable of doing much more.

History

President Lyndon Johnson declared “War on Poverty” in his 1964 state of the union address. Over the last 50 years there has been some progress but there are still approximately 43 million Americans living in poverty as defined by the U.S. Census Bureau.

Early on it looked as if poverty would be eradicated fairly quickly. In 1964, prior to the “War on Poverty”, the official poverty rate was 20%. It declined rapidly from 1965 to 1972, especially for the most impoverished groups as shown in the figure below (data from Table 1 in Haveman et al. , 2015). (Click to enlarge)

poverty-rate-1965-72

Since 1972 the poverty rate has remained fairly constant. It reached its lowest point in 1973—11.1%—but has since fluctuated between roughly 11% and 15%, largely in accordance with the business cycle. The number of people in poverty has increased, but that is unsurprising considering the relatively flat poverty rate coupled with a growing population.

census-poverty-rate-time-series-2015

Meanwhile, an alternative measure called the supplemental poverty measure (SPM) has declined, but it was still over 15% as of 2013, as shown below.

poverty-rate-time-series

The official poverty measure (OPM) only includes cash and cash benefits in its measure of a person’s resources, while the SPM includes tax credits and non-cash transfers (e.g. food stamps) as part of someone’s resources when determining their poverty status. The SPM also makes adjustments for local cost of living.

For example, the official poverty threshold for a single person under the age of 65 was $12,331 in 2015. But $12,331 can buy more in rural South Carolina than it can in Manhattan, primarily because of housing costs. The SPM takes these differences into account, although I am not sure it should for reasons I won’t get into here.

Regardless of the measure we look at, poverty is still higher than most people would probably expect considering the time and resources that have been expended trying to reduce it. This is especially true in high-poverty areas where poverty rates still exceed 33%.

A county-level map from the Census that uses the official poverty measure shows the distribution of poverty across the 48 contiguous states in 2014. White represents the least amount of poverty (3.2% to 11.4%) and dark pink the most (32.7% to 52.2%).

us-county-poverty-map

The most impoverished counties are in the south, Appalachia and rural west, though there are pockets of high-poverty counties in the plains states, central Michigan and northern Maine.

Why haven’t we made more progress on poverty? And is there more that government can do? I think these questions are intertwined. My answer to the first is it’s complicated and to the second I don’t think so.

Past efforts

The inability to reduce the official poverty rate below 10% doesn’t appear to be due to a lack of money. The figure below shows real per capita expenditures—sum of federal, state and local—on the top 84 (top line) and the top 10 (bottom line) means-tested welfare poverty programs since 1970. It is from Haveman et al. (2015).

real-expend-per-capita-on-poverty-programs

There has been substantial growth in both since the largest drop in poverty occurred in the late 1960s. If money was the primary issue one would expect better results over time.

So if the amount of money is not the issue what is? It could be that even though we are spending money, we aren’t spending it on the right things. The chart below shows real per capita spending on several different programs and is also from Haveman et al. (2015).

expend-per-cap-non-medicaid-pov-programs

Spending on direct cash-assistance programs—Aid for Families with Dependent Children (AFDC) and Temporary Assistance for Needy Families (TANF)—has fallen over time, while spending on programs designed to encourage work—Earned Income Tax Credit (EITC)—and on non-cash benefits like food stamps and housing aid increased.

In the mid-1970s welfare programs began shifting from primarily cash aid (AFDC, TANF) to work-based aid (EITC). Today the EITC and food stamps are the core programs of the anti-poverty effort.

It’s impossible to know whether this shift has resulted in more or less poverty than what would have occurred without it. We cannot reconstruct the counterfactual without going back in time. But many people think that more direct cash aid, in the spirit of AFDC, is what’s needed.

The difference today is that instead of means-tested direct cash aid, many are calling for a universal basic income or UBI. A UBI would provide each citizen, from Bill Gates to the poorest single mother, with a monthly cash payment, no strings attached. Prominent supporters of a UBI include libertarian-leaning Charles Murray and people on the left such as Matt Bruenig and Elizabeth Stoker.

Universal Basic Income?

The details of each UBI plan vary, but the basic appeal is the same: It would reduce the welfare bureaucracy, simplify the process for receiving aid, increase the incentive to work at the margin since it doesn’t phase out, treat low-income people like adults capable of making their own decisions and mechanically decrease poverty by giving people extra cash.

A similar proposal is a negative income tax (NIT), first popularized by Milton Friedman. The current EITC is a negative income tax conditional on work, since it is refundable i.e. eligible people receive the difference between their EITC and the taxes they owe. The NIT has its own problems, discussed in the link above, but it still has its supporters.

In theory I like a UBI. Economists in general tend to favor cash benefits over in-kind programs like vouchers and food stamps due to their simplicity and larger effects on recipient satisfaction or utility. In reality, however, a UBI of even $5,000 is very expensive and there are public choice considerations that many UBI supporters ignore, or at least downplay, that are real problems.

The political process can quickly turn an affordable UBI into an unaffordable one. It seems reasonable to expect that politicians trying to win elections will make UBI increases part of their platform, with each trying to outdo the other. There is little that can be done, short of a constitutional amendment (and even those can be changed), to ensure that political forces don’t alter the amount, recipient criteria or add additional programs on top of the UBI.

I think the history of the income tax demonstrates that a relatively low, simple UBI would quickly morph into a monstrosity. In 1913 there were 7 income tax brackets that applied to all taxpayers, and a worker needed to make more than $20K (equivalent to $487,733 in 2016) before he reached the second bracket of 2% (!). By 1927 there were 23 brackets and the second one, at 3%, kicked in at $4K ($55,500 in 2016) instead of $20K. And of course we are all aware of the current tax code’s problems. To chart a different course for the UBI is, in my opinion, a work of fantasy.

Final thoughts

Because of politics, I think an increase in the EITC (and reducing its error rate), for both working parents and single adults, coupled with criminal justice reform that reduces the number of non-violent felons—who have a hard time finding employment upon release—are preferable to a UBI.

I also support the abolition of the minimum wage, which harms the job prospects of low-skilled workers. If we are going to tie anti-poverty programs to work in order to encourage movement towards self-sufficiency, then we should make it as easy as possible to obtain paid employment. Eliminating the minimum wage and subsidizing income through the EITC is a fairer, more efficient way to reduce poverty.

Additionally, if a minimum standard of living is something that is supported by society than all of society should share the burden via tax-funded welfare programs. It is not philanthropic to force business owners to help the poor on behalf of the rest of us.

More economic growth would also help. Capitalism is responsible for lifting billions of people out of dire poverty in developing countries and the poverty rate in the U.S. falls during economic expansions (see previous poverty rate figures). Unfortunately, growth has been slow over the last 8 years and neither presidential candidate’s policies inspire much hope.

In fact, a good way for the government to help the poor is to reduce regulation and lower the corporate tax rate, which would help economic growth and increase wages.

Despite the relatively high official poverty rate in the U.S., poor people here live better than just about anywhere else in the world. Extreme poverty—think Haiti—doesn’t exist in the U.S. On a consumption rather than income basis, there’s evidence that the absolute poverty rate has fallen to about 4%.

Given the way government functions I don’t think there is much left for it to do. Its lack of local knowledge and resulting blunt, one size fits all solutions, coupled with its general inefficiency, makes it incapable of helping the unique cases that fall through the current social safety net.

Any additional progress will need to come from the bottom up and I will discuss this more in a future post.

Municipalities in fiscal distress: state-based laws and remedies

The Great Recession of 2008 “stress tested” many policies and institutions including the effectiveness of laws meant to handle municipal fiscal crises. In new Mercatus research professor Eric Scorsone of Michigan State University assess the range and type of legal remedies offered by states to help local governments in financial trouble.

“Municipal Fiscal Emergency Laws: Background and Guide to State-Based Approaches,” begins with some brief context. Most municipal fiscal laws trace their lineage through the 1975 New York City fiscal crisis, the Great Depression and the 19th century railroad bankruptcies. Writing in 1935, attorney Edward Dimock articulated three pieces to addressing municipal insolvency:  1) oversight of the municipality’s financial management 2) stop individual creditors from undermining the distressed entity and 3) put together a plan of adjustment for meeting the creditor’s needs.

These general parameters are at work in state laws today. The details vary. Some states are passive and others much more “hands-on” in dealing with local financial troubles. Scorsone documents these approach with a focus on the “triggers” states use to identify a crisis, the remedies permitted (e.g. can a municipality amend a collective bargaining agreement?), and the exit strategies offered. Maine has the most “Spartan” of fiscal triggers. A Maine municipality that fails to redistribute state taxes, or misses a bond payment triggers the state government’s attention. Michigan also has very strong municipal distress laws which create, “almost a form of quasi-bankruptcy” allowing the state emergency manager to break existing contracts. Texas and Tennessee, by contrast, are relatively hands-off.

How well these laws work is a live issue in many places, including Pennsylvania. In 1987 the state passed Act 47 to identify distressed municipalities. While Act 47 appears to have diagnosed dozens of faltering local governments, the law has proven ineffective in helping municipalities right course. Many cities have remained on the distressed list for 20 years. Recent legislation proposes to allow a municipality that can’t “exit Act 47” the option of disincorporating. Is there a middle ground? As the PA State Association of Town Supervisors put it, “If we can’t address the labor issues, if we can’t address the mandates, if we can’t address the tax exempt properties, we go nowhere.”

Municipalities end up in distress for a complex set of reasons: self-inflicted policy and governance failures, uncontrollable social and economic shifts, and external shocks. Unwinding the effects of decades of interlocking problems isn’t a neat and easy undertaking. The purpose of the paper isn’t to evaluate the effectiveness various approaches to helping municipalities out of distress, it is instead a much-needed guide to help navigate and compare the states’ legal frameworks in which municipal leaders make decisions.

 

 

 

The New York Times Database on Government Granted Privilege

Louise Story of the New York Times has earned her salary many times over this week. She and her colleagues have created a searchable database of targeted incentives (read: privileges) that states offer particular firms. To my knowledge, it is the most comprehensive database on the subject to date, containing information on over 150,000 awards.

Among her findings: Alaska, West Virginia, and Nebraska give up more per resident than any other state and Oklahoma and West Virginia “give up amounts equal to about one-third of their budgets, and Maine allocates nearly a fifth.”

Here is the database.

Also check out her articles, “How Taxpayers Bankroll Businesses,” “Winners and Losers in Texas,” and “When Hollywood Comes to Town.”

Readers of this blog know where to go for more information on the economic and social costs of government-granted privilege.

New Research on Streamlining Commissions

Tomorrow I’ll be at the Association for Public Policy Analysis and Management Fall Research Conference to present research on streamlining commissions with Carmine Scavo. Carmine and I have written one paper developing a methodology for studying these commissions, and we’re now working on case studies of commissions in nine states.

Well over half of states have appointed one or more streamlining commissions in efforts to find budget savings or to improve state programs. We’re studying streamlining efforts in California, New Mexico, Louisiana, Alabama, Colorado, New York, Maine and Virginia. We hope to get an idea of how effectively these commissions have reduced the size of state government and found efficiencies in existing programs. We also hope to identify the characteristics that make commissions most likely to meet their goals.

In our first paper, we hypothesized that commission success would depend on the following characteristics:

1) clearly defined objectives regarding their final product;

2) a clear timeline for this deliverable with an opportunity to publish interim advice. Preliminary findings indicate that the commission should have at least one year to work;

3) adequate funds to hire an independent staff to study some issues in depth;

4) a majority of the commission members from outside the government. The commission chair certainly should be from outside the government in order to help to get around the challenges that inherently restrict the ability to find streamlining opportunities while working in government. Preliminary findings indicate that representatives from the state legislature and administration should be involved as a minority of the membership to ensure that the commission’s recommendations have buy-in from policymakers.

So far, our research indicates that funding for commissions may not be as important as we’d though. Some commissions have achieved successes with essentially no budgets while others that were well-funded developed recommendations that didn’t go anywhere.

Tomorrow we will be presenting our preliminary findings on the California Commission on the 21st Century Economy, the Colorado Pits and Peeves Roundtable Initiative, and the Virginia Commission on Government Reform and Restructuring. Once we finish this research I will write up our findings in more depth here. If any of you will be attending the APPAM conference, I hope to see you there.

New Edition of Rich States, Poor States out this Week

The fifth edition of Rich States, Poor States  from the American Legislative Exchange Council is now available. Utah took the top spot in the ranking of states’ economic competitiveness, as it has every year the study has been produced. Utah excels in the ranking system because it is a right-to-work state, it has a flat personal income tax, and no estate tax, among other factors considered in the study.

The other states that round out the top ten for Economic Outlook include South Dakota, Virginia, Wyoming, North Dakota, Idaho, Missouri, Colorado, Arizona, and Georgia. On the bottom end of the ranking, the states with the worst Economic Outlook are Hawaii, Maine, Illinois, Vermont, and New York at number 50 for the fourth year in a row.

Several measures of economic competitiveness offer supporting evidence that these states have some of the worst policies for business including Mercatus’ Freedom in the 50 States and the Tax Foundation’s State Business Tax Climate Index.

The authors of Rich States, Poor States, Arthur Laffer, Stephen Moore, and Jonathan Williams demonstrate Tiebout Competition in action. They find a strong correlation between the states that have high Economic Outlook rankings with the states that are experiencing the highest population growth through domestic migration. Likewise, the states that experienced the largest losses due to out-migration include Ohio and New York, ranking 37th and 50th respectively.

The study draws attention to the role that unfunded pension liabilities play for states’ future competitiveness, as this debt will require difficult and unpopular policy decisions as current tax dollars have to be used to fund past promises. Laffer, Moore, and Williams draw a comparison between Wisconsin’s recent reforms that put it on a more sustainable path compared to its neighbor Illinois:

In stark contrast to Wisconsin’s successes, the story in Illinois is not so uplifting. Over the last 10 years, Illinois legislators have continuously ignored the pension burden in their state—so much so that Illinois has one of the worst pension systems in the nation, with an estimated unfunded liability ranging from $54 billion to $192 billion, depending on your actuarial assumptions. Furthermore, the official state estimates do not include the $17.8 billion in pension obligation bond payments that are owed. In addition, Illinois policymakers have spent beyond their means, borrowed money they don’t have, and made promises to public employee unions that they cannot fulfill. Not only did Illinois face significant unfunded pension liabilities, but also lawmakers had to confront large deficits and potential cuts to state programs.

While the policies that improve state economic competitiveness are clear, the path to achieving them is difficult after voters grow accustomed to programs that their states cannot afford. However the bitter medicine of reform is worthwhile, as we know that economic freedom is not only better for business, but evidence shows it also improves individuals’ well-being.

To Lessen Pension Troubles Maine Looks to Social Security

In addition to collecting a pension, most public employees also participate in Social Security. A few states, such as Maine, never integrated with the program, which means their public sector workers don’t collect Social Security, nor are they subject to the 6.2% payroll tax.

Mary Williams Walsh reports that in an effort to solve their pension underfunding Maine is considering changing its Social Security holdout status. Maine’s state employees would begin paying into and collecting Social Security without having contributed to the system over their working lives. While reducing Maine’s risk of paying for large losses, the move doesn’t address the $4.1 billion hole in Maine’s pension plan (a hole already underestimated since assumes a 7.75% return on assets). And there is the instability of the Social Security program which is projected to begin running a deficit in 2017.

However, integrating with Social Security could be part of a transition to an improved state retirement system. Joshua Rauh explains at the New York Times‘ Room for Debate how the federal government might step in to head off the state pension crisis.

Legal Plunder

How does law enforcement finance operations? Increasingly, police departments across the country pay for their activities, equipment and supplies by seizing the assets of people who have never committed a crime. It’s a process called civil forfeiture, and it’s at best, controversial. At worst, it provides direct monetary incentive for states and the federal government to steal property from innocent citizens. Gives a whole new meaning to Bastiat’s “legal plunder.”

Radley Balko explains how civil forfeiture perverts the “protect and serve” motto by introducing a profit motive: Continue reading