Programs exacerbate poverty trap
Some say that if a person opposes social programs, like I do, he or she is selfish and has no regard for the less fortunate. While I am certainly selfish at times, I care about others a lot. In fact, it is sympathy that leads me to oppose government welfare measures. They, like many things people do for others, have effects opposite than those that were intended. It's called the poverty trap.
A big problem with programs to help low income earners is defining what “low income” is and then phasing people out of the program as they make more. And if that's all there was to it, it would be fine. A person might not want to work as hard because he or she would give up some government benefits by gaining extra income, but generally, the desire to improve one’s situation will likely hold up under that small disincentive.
Unfortunately it never ends there. Multiple programs are enacted. And this is where the problem really kicks in. Social programs stack on top of each other and expire over the same income range, making work in that range less and less appealing.
There are two ways to combat this. You could stop programs earlier, leaving workers with a long, grueling climb through the poverty trap, not to mention failing to help a portion of the target population. Or you could stop programs later, which starts the drawn out trap further up the income scale and spends a lot of money on people who are fine on their own.
Neither of these solutions do the trick. The result is a system like the United States’. Medicaid, Section 8 housing, welfare, child care and the Earned Income Tax Credit all decrease as a worker moves out of the poverty range.
Exact subsidy numbers are not published. But, consider a single mother at the poverty line. She makes $1,214 per month, according to the 2010 Federal Poverty Guidelines. That’s taxed at 7.65 percent through Social Security and Medicare taxes. According to the 2009 Arizona Child Care Report, if her child is 4 years old, the value of government-sponsored childcare is $552.16 per month, which is in danger if she moves beyond poverty.
Section 8 covers expenses over 30 percent of what a person earns, so earning $10 extra results in $3 less in payments. The EITC goes down by her tax bracket — 10 percent for poverty-level earners — so she loses some of her tax refund as she earns more. Childcare subsidies taper off from 100 to 300 percent of the poverty line, so assuming they also decrease by 10 percent of income, she effectively loses 57.65 percent in benefits of any money she earns. This even assumes that Medicaid and welfare payments do not respond to higher income, which is not the case. By contrast, the wealthiest among us, who do not receive any benefits from government based on their income, lose only 35 percent of their income through taxes.
Greg Mankiw of Harvard has done calculations suggesting, astoundingly, losses in benefits of over 100 percent in certain situations. That means people trying to earn more money end up with fewer resources than those who were content to take advantage of the government safety net.
Would you work hard, with your child in daycare, to try to improve your situation when you end up with significantly less than half your wages? Me either. And that's why it's a trap. When government policies make it hard to escape poverty, your best option is to stay poor.
Ben is gnawing off his leg to escape. Help him at email@example.com