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A Necessary Debate


A Necessary Debate




You might remember that Speaker Pelosi promised that the Patient Protection and Affordable Care Act (PPACA) would create 400,000 to 500,000 jobs a year as just one of its many miracles. That was 2010, a time when providing jobs for underemployed Americans was a good thing. Then, lo and behold, we come to 2014 and the Congressional Budget Office reports that because of the PPACA, the equivalent of 2.5 million jobs will be surrendered in the next ten years. Now we are told to rejoice that people can choose leisure over work and not be trapped in earning money, providing for their families, and taking advantage of the opportunity America has offered its citizens since the creation of the Republic. What fools our parents were for wanting us to have a better life than they had. They just didn’t understand the New American Dream…Obama style.


For all of the silliness of the Democrats response to the CBO report, it has brought to the forefront a seminal question that public policy must address: How does the United States provide the essential safety net that some people need from time to time, without trapping those people in government dependency?


The CBO report on the job losses that will be caused by the PPACA requires that we begin to discuss this problem. We should no longer cover it over with rhetoric. Both sides have their myths: Democrats provide help to the poor and unfortunate while Republicans want to shred the safety net; Republicans want to stop the healthy surfers on welfare from treating their friends to lobster dinners while Democrats tax the middle class to pay for it. Neither is the truth and neither attack gets at the real problem that we need to solve.


The truth is that public policy decisions involve trade-offs. (See Keith Hennessey’s blog from February 9, Ladder vs. Safety net) Americans are a generous people who want to help those in need. But safety net programs are best if they provide temporary aid while encouraging the needy to move onto the ladder of opportunity that will improve their lives.


The CBO report on the effect that the PPACA will have on jobs is a simple correlation between the benefits offered, and the cliff faced by people receiving the benefits when they try to move into a job, consequently lose the benefits, and start paying taxes on their job income. (See the WSJ article at http://online.wsj.com/news/article_email/SB10001424052702304680904579367143880532248-IMyQjAxMTA0MDEwODExNDgyWj ) Because of this cliff, they are not getting their foot on the rung of the ladder of opportunity; instead they must slide down to the bottom of the ladder and somehow hope that they will be able to climb to a higher level than their government benefits offer them. Given the weak job recovery in the US over the last five years, this doesn’t seem like a good bet to many people.


Such trade-offs exist anytime there is a charitable program that reduces payments as income increases. To quote Keith Hennessey, “If you give financial assistance to someone in need but tell them you will take it away once they no longer need it, you water down the incentive they have to make the effort to improve their own condition. This diminished incentive has an effect on labor supply. In other words, there’s a trade-off between the ladder and the safety net. The higher we make the safety net the less economic sense it makes for someone in that safety net to grab the bottom rungs of the ladder and begin to climb. Rather than becoming a net that protects us from hitting the hard ground, we get caught in it and cannot escape, not because we don’t want to, but because government policies financially discourage us from doing so.”


Scarce resources mean that subsidies must be phased out as income increases.  The question is how to do this and still limit the size of the cliff as one transfers from government aid to a job.


Happily there is some very promising work being done in this area:


·         Senator Marco Rubio has proposed consolidating programs for the poor into a single flex fund that will be given to the states to fund their own anti-poverty programs. He also suggests a federal wage enhancement to replace the EITC. The wage subsidy would be given out in each paycheck instead of as a lump sum subsidy at tax filing time. These ideas were first proposed by Oren Cass.


·         Michael Strain of the American Enterprise Institute has offered a number of creative ideas for changing the unemployment and minimum wage programs in ways that will encourage job creation and provide more opportunities for people entering or getting back in the job market.


·         Congressman Paul Ryan has spent much of the past year looking at the problems associated with long-term poverty. He is developing proposals that look to engage the private sector in helping people to escape from decades of poverty.


·         Senator Rand Paul has proposed free market enterprise zones to reduce taxes and regulatory burdens and to improve educational opportunities for people in high unemployment and economically distressed areas.


Many of these ideas are in the development stage, but all of them are attempts to wrestle with the problems of persistent poverty and to reduce the disincentives caused by the cliff that people face when moving from government programs into the working economy. They are attempts to manage the inevitable trade-offs that occur.


Maybe we’ve caught a break and the CBO report on job losses caused by the PPACA will force a discussion of these much needed changes. Our anti-poverty programs should provide for the needy but must offer a realistic and achievable step-up onto the ladder of opportunity.  Only by doing so can we help people attain the dignity and self-respect that comes from economic independence.




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