The Battle between the “hand up vs hand out”

By Oren Cass,

How can an anti-poverty program encourage people to work?

America long ago committed to providing for the basic needs of all its citizens, constructing a so-called safety net of government programs to catch those unable to support themselves. But an effective safety net must be positioned at the right height—safely above the rock-hard floor yet still well below the tightrope.

The War on Poverty is in its 50th year, and yet the poverty rate today is as high as any previously recorded-and 30 percent higher than it was in the 1970s.

Hand Up vs Hand Out.

Proposals to reform existing programs, create new ones, increase spending, or decrease spending are flying from all sides. None of these ideas are likely to second unless they are built atop a new framework, one that establishes a benefit-delivery system capable of clearly separating those who work from those who do not, and one that maintains a substantial income gap between the two.

But simple transferring enough resources to someone so that he is no longer “poor” treats only the symptom; it does not move him toward self-sufficiency or a foothold at the bottom of an economic ladder that could lead to better opportunities. To the contrary, it hinders that process. Therein lies the paradox at the heart of anti-poverty policy. Every dollar spent to reduce the suffering of an impoverished person reduces the incentive for that person to improve his own condition bu earning an income – not only because the need has become less pressing, but also because the system will in fact punish him for any success by taking the dollar away once he earns one of his own. The “handout” is locked in perpetual battle with the “hand up”.

The Income Gap.

The annual expenditures for all federal, state, and local anti-poverty programs total $1 trillion. That excludes Medicare & Social Security, which amount to more than $1 trillion in additional spending each year! Each of the nearly 50 million Americans living in poverty could get an annual cash payment of more than $20,000. A single mother of two children, could receive more than $60,000. Median household income in this country is only $52,000.

And, of course, not every dollar of the $1 trillion is spent on Americans living below the poverty line.

In most states the value of a package of welfare benefits exceeded earnings from a minimum-wage job. In half of all states, the benefit package brought the family up to at least 80 percent of the state’s median salary.

The problem is that with such high baseline benefit levels – benefits that fall away as the recipient begins to earn income – the income gap is too low.

The Congressional Budget Office reviewed the impact of key federal programs and found that a hypothetical single mother with one child would have $20,000 of disposable income if she earned $0 in wages, but less than $30,000 of disposable income if she earned $30,000 in wages. From her perspective, she receives less than $10,000 in reward for her $30,000 of work – the equivalent of a 70 percent tax rate.

At the same time as expectations rise, the standard of living offered by low-skilled work continues to decline. In 1970, the average income for a male with a high-school degree amounted to more than double the poverty line for a family of four. In 1990, it exceeded the poverty line by only 60%. Today it clears the threshold by only 30%! But that upward mobility requires that the initial leap into the work force be made. Without sufficient income gap, it may never be.

The system through which $1 trillion flows each year from taxpayers to beneficiaries appears designed to stifle reform, increase spending, expand bureaucracy, and avoid accountability.

The tangle of strings attached to each program prevents any harmonizing or consolidation among programs.

Outputs vs Outcomes.

Year after year the entrenched bureaucracies of separate agencies shovel their separate funds down separate chutes, each striving to secure the largest possible shovel for the next year by establishing just how acute is the need for its program. None are required to show the reduction in demand for their services that actual success would entail.

An Effective Alternative.

An effective anti-poverty program requires reform in two ways:

– first, restructuring the funding system to give state-level policymakers the incentives and authorities they will need if substantive reforms are to succeed;

– second, sharply dividing programs designed to provide a safety net for those not working, from programs designed to increase the incomes of those who are working, coupled with establishing an income gap by increasing the relative generosity of the latter.

The restructuring process should begin with an acknowledgement that the federal government is well situated for only one of its present tasks: collecting and distributing funds.

The goal should be to create two separate sets of lower income programs – a state-administered safety net for those who are not working and a direct federal wage subsidy for those who are.

The wage subsidy would function as a reverse payroll tax, increasing the effective wage associated with a given job in a predictable and transparent way.

On this foundation, efforts to attack the causes of poverty and yo improve the effectiveness of anti-poverty programs might actually succeed

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