• Policies create permanent underclass
    December 17,2013

    A business owner recently told me a story about an employee who recently came to him to resign from his job. The job was a good-paying blue-collar position. The employee was, according to his boss, “one of my best workers.” The reason for quitting: A welfare officer explained to the employee’s wife that their family could collect more in benefits if he earned less money. It paid more to work and earn less.

    A friend who owns a business in Chittenden County is hearing from his employees that they don’t want to work any overtime because, if they do, the extra income will disqualify them for health care subsidies under Obamacare. Again, it pays more to work and earn less.

    A recent article in The Atlantic by Garance Franke-Ruta got a lot of attention highlighting the story of Nona and Aaron Cassara, a married couple actually considering divorce because they could more easily remain under the poverty thresholds and draw down more health care subsidies if they were single.

    What do all of these people have in common? They are making conscious economic decisions to remain poor for the rest of their lives. When whole swaths of the population are prodded into making these same choices, the result is tragic — a permanent underclass in American society.

    How so? Because, if it doesn’t make sense to earn more money now — to take the promotion, or gain the extra experience, or create the extra opportunity to move “up the ladder” — it never will. If you’ve made the decision to live below the poverty thresholds with a keen eye on not violating them for fear of losing benefits, at what point will it ever make sense to break out? You’re trapped. The safety net has become a spider’s web.

    This is why it is so upsetting, but not at all surprising, to see recent statistics from the Pew Research Center finding that 43 percent of Americans born into the bottom quintile of household income ($28,900 or less) are still stuck there a generation later. This is exactly the opposite of what the United States is supposed to be about. People come here to escape these conditions.

    This dynamic also explains a lot about the much-discussed growing gap between the richest and poorest. Of course those on the bottom are earning less. We’re rewarding them to earn less through the progressive social welfare systems, punishing them if they earn more through the progressive tax system, and they are responding predictably to these perverse incentives.

    Government has created so many “carrots” not to generate income, and so many “sticks” for those who do, for many it just doesn’t make any short-term economic sense to move solidly into the middle class. The Pennsylvania Department of Public Welfare recently calculated that a single mother is better off earning a gross income of $29,000 with $57,327 in net income and benefits than to earn a gross income of $69,000 with a net income and benefits after taxes of $57,045. There’s a significant incentive not to take the raise from $29,000 a year to $30,000. There’s also a significant incentive, if you’re earning $30,000, to somehow get your wages down below $29,000. Couple this with government policies that discourage employers from hiring full-time workers in the first place, and we wonder why the wages of the poorest Americans appear to be stagnating.

    Here in Vermont, where we have the most progressive tax system in the nation and, by some measures, the most generous public benefits, we shouldn’t be surprised to learn that, “From 2002 to 2012, Vermont’s wages at the high end (80th percentile) rose 6.3 percent after adjusting for inflation. Wages at the low end (20th percentile) shrank 6.2 percent. And those in the middle (50th percentile) saw their wages grow just 2 percent over the decade,” according to the Public Assets Institute.

    At the beginning of the last legislative session in January, Gov. Shumlin described the welfare system we have created as being “cruel and unusual.” It’s an apt description. A truly moral and compassionate social welfare policy is one designed to break the cycle of poverty, not perpetuate it.

    Robert Roper is president of the Ethan Allen Institute.

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