Safety Nets and Slippery Slopes

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There’s been a theme hammered in dull thuds recently by the establishment media: anyone who opposes expansion of the welfare state is a hypocrite because everyone is on the dole. The New York Times has run several such stories; lesser outlets have followed suit.

Before you gag on this rancid bit of partisan meat, let me say that I think this is a hopeful sign. The hacks are framing the argument in this way because they expect criticism of the welfare state to pick up through the course of this election cycle. As it should. They hope to inoculate the administration against such criticism; in the process, though, they’ll draw attention to related issues that don’t help their cause. These related issues include:

  • the sloppy logic and language of welfare advocacy,
  • the growing role of moral hazard in public policy,
  • the effect of high marginal tax rates on productivity, and
  • the slippery slope of unintended consequence.

Let me sketch out quickly how these all connect with one another.

The recent charges of hypocrisy are merely the latest example of the establishment media’s obtuseness and doublespeak on the topic of welfare. In the statist catechism, the terms “safety net” and “earned entitlement” are supposed to refer to sharply distinct sorts of programs — the former involves straightforward income redistribution, the latter involves a group of programs into which beneficiaries have paid. But the two are often confused. The headline of one Times article reads “Even Critics of Safety Net Increasingly Depend on It.” The article proceeds to focus on the effects of growing middle-class dependence on Social Security and Medicare, which are supposed to be “earned entitlements” and not part of the “safety net.”

The jargon is all so imprecise and indirect that the headline-writing mediocrities at the Times might be forgiven for getting confused.

Of course, there might be a more devious impulse at work — intentionally confusing programs into which people have paid with those into which they have not might be an attempt to blur important distinctions. To make “middle-class” recipients of earned entitlements the moral equivalents of the “poor” recipients of safety-net money. And if everyone’s the same, statist catechism goes, no one can criticize.

The “moral” in this equivalence gets to my next point. The sloppy logic and fuzzy language — intentional or not — may create only an ersatz version of moral equivalence but it encourages very real moral hazard.

Moral hazard has been an interest of mine for a number of years. It takes various forms in various circumstances, but the common conclusion is simple: If people are insulated from the effects of bad outcomes, they produce more bad outcomes.

In matters of public policy, the most evident example of moral hazard is a high marginal tax rate. And this is more closely related to welfare policy than it might seem on first glance.

On the low end of the income spectrum, a high marginal tax rate creates a permanent underclass; on the high end of the income spectrum, it encourages productive people to go Galt. More important, the moral hazard of taxing people stupidly creates a slippery slope; when a person drops down the socio-economic ladder, it becomes harder for him to climb back up.

If a person’s annual income falls from $40,000 to $20,000 because of a lost job or a business reversal — but that person picks up $15,000 in benefits as a result — he’s being insulated from the effects of his lower income. The benefits, which he’ll lose if his income recovers, become part of the effective marginal tax rate that discourages the climb back to $30,000 or $40,000. He’s more likely to accept his reduced circumstances and welfare benefits. Said another way: the same mechanism that acts like a safety net to someone sliding down the slope can act like a barrier to someone scrambling back up.

The problem with managing marginal tax rates is that tax systems are crude tools. The U.S. income tax tables create a roughly-hewn “stair-step” system of increasing rates. And the government benefits made available to low-income earners exaggerate the steps. At some points, a slight increase of income results in a much larger effective tax rate. In these cases, the slope isn’t just slippery — it’s negative. One solution to a negative slope would be modify the tax table to include thousands of tiny steps rather than a few rough ones; another would be to reject the step system entirely and move to a nonlinear formula for calculating the income tax rate each earner pays.

If the establishment media is right and everyone is on the dole, we need to criticize the welfare state more. Not less.

In the 1970s, Milton Friedman suggested a third option that he called the “negative income tax” (based on earlier proposals by Henry Hazlitt and Juliet Rhys-Williams). This negative tax would replace all other benefits; instead of numerous programs subsidizing food, shelter, child care, health care, etc., there would just be one lump-sum payment which would be phased out gradually as a person’s income increased. His idea was mauled and transformed into what we know today as the Earned Income Tax Credit; but the current incarnation is a far cry from what Friedman had in mind. His goal was to minimize bureaucracy and control fraud in the welfare apparatus. Our system today, an income redistribution scheme that pretends to be an “earned entitlement” program, maximizes all of that.

We’ve always known that income redistribution strips all parties — sponsors and beneficiaries — of their humanity and, especially the beneficiaries, of their dignity. Forty years ago, Daniel Patrick Moynihan predicted that the U.S. welfare state would damage beneficiaries, precisely as it has. If the establishment media is right and everyone is on the dole, we need to criticize the welfare state more. Not less. And we need to get rid of any administration that enables it, even if the alternatives aren’t inspiring.

This sharp truth will cut through hacky charges of hypocrisy from outfits like The New York Times.




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Comments

Visitor

Great article! But it needs to be expanded upon.

There is no such thing as "welfare" today. There are those that receive SS disability, and there are those that are the "working poor" who receive huge "tax returns", which are just pay offs for being irresonsible and having many childern they can't afford.

But still, as a percentage of the federal budget, these people pale in comparison to the mooches of social security and medicare recpients. Who, most of the time can actually afford the services they are stealing.

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