What’s Wrong with the US Welfare State?

Here are two surprising facts about welfare and poverty in the United States: (1) we are spending an enormous amount of money on people at the bottom of the income ladder and 2) all that spending does a very poor job of meeting human needs.

And here is a surprising opportunity: if we took all of the money we are currently spending on anti-poverty programs and gave it in cash to poor families, there would be no problem of poverty in this country.

We might still have some homelessness – reflecting mental illness or drug abuse. But conventional poverty would be a thing of the past.

The first important finding: the bottom fifth of households in 2017 had an average (after tax and after transfer) income of $33,653 per person. As I show below, almost all of this “income” is in the form of noncash welfare benefits. But if all those benefits were converted to cash, a family of four in the bottom fifth of the (earned) income distribution would have $134,652 a year to spend, after taxes!

The second important finding: The per capita income of second fifth in 2017 was $29,497; and for the middle fifth it was $32,574.

Those with the least earned income had more actual total income than those in the next two higher quintiles! The average household in the bottom fifth received 14 percent more income than the average second-fifth household and 3.3 percent more than the average middle-income household.

So, if people in the bottom fifth of the income distribution are consuming more each year than those who are supposedly better off, why is there a problem?

Since the War on Poverty started in 1965, the labor force participation of the bottom one-fifth of households has dropped from 70 percent to 36 percent. As a group, this one-fifth now receive more than 90 percent of their income from government. For this group, our welfare system has substituted in-kind benefits for labor market income.

Medicaid money goes to doctors, hospitals, and other suppliers of medical services. Food stamp money goes to agribusiness. Education subsidies go to teachers and the public-school bureaucracy. Housing subsidies go to landlords. Throughout most of its history, War on Poverty programs gave very little cash to poor people.

It doesn’t take too much imagination to understand that if you give money to impersonal bureaucracies, it is more likely to be spent in ways that benefit bureaucrats rather than in ways that benefit poor families.

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