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Obama’s “Poverty Trap”

The House Budget Committee, chaired by Rep. Paul Ryan (R-Wisc.) released a report today demonstrating that welfare programs are keeping people in poverty by reducing incentives to work.

In short, Ryan’s report notes that the poverty rate, at 15 percent, is not much different than the 17.3 percent rate we had in 1965, when Lyndon Johnson launched to war on poverty.

The reason? Poor people are poor, but not stupid.

That is, they are currently presented with a system under which increasing their earnings forces them to lose benefits, essentially taxing their new earnings at rates that make working a dumb economic choice. And so people stay on welfare, and stay poor. But at least they don’t have to set the alarm clock.

From the report:

Today, the federal government’s anti-poverty programs are duplicative and complex. There are at least 92 federal programs designed to help lower-income Americans. For instance, there are dozens of education and job-training programs, 17 different food-aid programs, and over 20 housing programs. The federal government spent $799 billion on these programs in fiscal year 2012.

The very disarray among all these federal programs has created what’s known as the poverty trap. Because the federal government created different programs to solve different problems—at different times—there’s little to no coordination among them. And because these programs are means-tested—meaning that benefits decline as recipients make more money—poor families face very high implicit marginal tax rates. The federal government effectively discourages them from making more money.

Gene Steuerle of the Urban Institute has done extensive work on this issue.22 For example, he looks at the example of a single mother with two children living in Colorado. If her income jumps from $10,000 to $40,000, she will not keep much of that extra $30,000. Instead, she will lose most of it to higher taxes and benefit cuts.

According to Steuerle’s calculations, if she is enrolled in programs like food stamps, Medicaid, and SCHIP, her implicit marginal tax rate will be as high as 55 percent. And if she is enrolled in other programs—like housing assistance and welfare—the rate will reach above 80 percent.

So to increase your salary from $10,000 to $40,000, which is no easy feat for anyone, you may have to incur a de facto tax rate of 80 percent.

Ryan is hardly a libertarian, arguing that some programs are helpful. But we have somehow moved from using welfare as a safety net – because no one in the United States should go hungry – to making it a rational lifestyle choice.

Obama wants to pile on more welfare spending.

And incredibly, the Obama White House in recent weeks has embraced disincentivizing work, celebrating the notion that Obamacare and increasing the minimum wage help people work less and give them the option to take up painting or something.

That attitude ensures that today’s labor force participation rate of 62.8 percent, a 36-year low, isn’t going up. In fact, the Congressional Budget Office projects it will decline further, to 60.8 percent, over the next decade.

And Obama isn’t going to change that. Because in order to do so, you have to first think it’s a problem.

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25 Responses to Obama’s “Poverty Trap”

  1. There are millions of Americans who will never hold a job.
    While the welfare type programs are a dis-incentive to holding a minimum wage job, the reality is that these people are unemployable by today’s standards.
    They’re one notch above the illiterate scale, have no marketable skills, and lack the will or desire to do what it takes to better their lives. The stigma that once made using government food stamps is gone, and politicians point fingers at each other to blame racism, sexism, anti-everything that allow the non-working to excuse their lack of ambition.

    If, or maybe we should think when, the government runs out of funds for these programs, or some free-thinker puts the kibosh on them, those who depend on the programs for their very food and shelter will riot in the streets demanding help. There’s no easy way to end these programs, or to convince the ones who need them to survive that work is their only salvation when there is no “work” for them to do.

    • Years ago………… Food Stamps were counted out in front of the world to see. Now they flash a card.
      Inside of the basket is not the needed food items people use to purchase years ago. It is a lot of Food that some people who work for a living do without.
      The same type of trash my parents could afford, but did not load up with sodas, chips, etc. She bought snacks to do, but not overload for us kids to devour.
      Years…….ago it seemed people who used them, really needed them, and at the same time were bettering their job situation.
      Now as Keith stated it has become a lifetime deal.
      I believe someone, somewhere has this all planned out for years.

    • A good analysis. How can we find jobs for the illiterate? Those jobs, digging ditches, simple factory work, have been shipped to China and India or been taken over by one person working with a machine.

      This is the unspoken truth behind the notion that everyone wants jobs and needs jobs — can these people do a job? Many yes, but the ones who are part of a dynasty of welfare cannot do any jobs anymore.

      • Let me play devil’s advocate here.

        If that’s the case–if these welfare dynasties have nothing of worth to contribute to society, and they can only survive by leeching off the producers of society, and if they will blindly vote for politicians who will allow them to continue doing so, to the detriment of society–then wouldn’t society be better off without them?

  2. Does the report also consider the affect on those of the Middle Class who also pay much of that $799 Billion? The overall tax on the next mariginal dollar of income between Payroll Taxes, Federal and State Income taxes is well over 50%. It’s simply not worth it to have a lower paying spouse work.

  3. I remember reading, about 20-25 years ago, that our country had achieved a new milestone–children whose parents AND grandparents never held a job and lived off government largess.

    Now we no doubt have great grandchildren and even great great grandchildren.

    I can’t imagine how large a number that is now.

  4. Every welfare child who graduates high school should go to a 2 year tech or trade school. I much rather the taxpayers foot that bill than another generation of welfare.

    • I’ll take it a step further…the last two years of high school should be tech or trade ready courses. Half the day in academics and the other half prepping these youngsters for the world at 18. Not everyone is college material.

      • Very true, they have no reason to continue learning the history of western civilization, or a foreign language, or higher math. All it does is demoralize them and make them feel stupid. They end up taking junk courses and wasting their time. My county’s tech program was 2 weeks in school and then 2 weeks at the tech school. That way they were able to work on longer projects. My brother did the auto mechanic class. He fixed cars for years and then moved up to financing, now he owns his own used car dealership.

  5. I know this is going to sound heartless, but…

    Cut down the safety nets. Every last one of them, except those which have been earned through work. Either you work, or you starve.

    It worked in colonial times, and it can work again.

    • Yeah, it is a tough call and hard not to sound heartless. I don’t mind paying more and doing more. For me it comes down to this: children can’t pick their parents. Oddly we have a situation where children are used selfishly by too many “parents”.

      And remember…. when you pay the government to do something the government gets paid first.

      • With a bit of advance planning, all of the religious groups would more than fill the gap left by the government getting out of the welfare business. And when you have to look someone in the eye and take their money there may be a bit more incentive to stop taking it.

      • Well, okay, let’s talk about “the children.”

        If they grow up in poverty, knowing no other lifestyle, how likely are they to break out of the poverty trap? Not very, I submit.

        So, first they’re used as bargaining chips, then once they’re on their own, they use their children as bargaining chips, and so on, in perpetuity.

        Enough is enough.

  6. The biggest mistake was to make having a baby tied to getting one’s own apartment, free pre-natal care, and post-natal food programs. Bingo! Having an illegitimate baby became a rational choice to a teen who wants to be all grown -up with her own home and cute little baby to show off. Of course, it doesn’t work out that way, but it takes her nine months to begin to figure that out ….

    • And then, in another fifteen years, perhaps less, that cute little baby is running with the wrong crowd, and on and on it goes.

      Rinse and repeat several thousand times, and next thing you know, Baltimore is a no-go zone.

    • I haven’t seen them first-hand, but I understand some high schools now have day care for babies and children of young teen-age mothers. How did this ever happen in America…and what message is it sending to young girls?

      Daniel Greenberg (Sultan of Knish) has a great column on ‘The End of the Welfare State’…citing the fact that the majority of babies are born to mothers who can least afford them. The cycle continues with their children who then become welfare dependent.
      The middle class is being destroyed and soon there will be no one left to pay for the permanent underclass.

      Illegal immigration is a major factor. In fact, I consider it to be THE primary factor in the decline and fall of America. The anchor baby policy (not a ‘law’) should be abolished asap. to break the cycle. We are the only country on the planet with such an idiotic policy.
      If we pass amnesty, it means grandma and grandpa will be arriving on our doorstep – ready to collect SS in their golden years.
      We do not need any outside forces to destroy this country – it’s happening right under our nose. Obama lectures Putin on borders and sovereignty while he allows our borders to remain unchecked and our sovereignty violated by millions of illegals.

  7. I do not agree with your point about increasing the minimum , but I do agree with you in general. I was a tutor at a Southern California Community College, and had witnessed students on assistance distracted from their studies with reams of paper work and frivolous appointments that apparently involve duplication of effort. Moreover, Obama’s inclusion of Medicaid into his health care program is an unmitigated disaster that provides many greedy families with ways of burdening the taxpayer by getting an elderly relative on Medicaid and private or public assistance to preserve what was never theirs to begin with or the elder’s personal and real property.Gee what help !