Free Money for the Poor

Browse enough liberal blogs and eventually you’ll find an article along the lines of: “If we would just stop fighting in [insert war here], we’d have enough money to completely eliminate poverty!” That is, if you took the money currently used to fight a particular war (or arms race), and divided it up among all the nation’s poor, there would be enough money to lift every poor person out of poverty. To be more precise mathematically: for each poor person compute the difference between that person’s income and the poverty rate. Sum up these differences over all poor people. The result is less than the defense budget by a comfortable margin.

Too poor for shoes

The argument is compelling. The numbers do indeed add up. Slash the defense budget and give the proceeds to the poor and you will eliminate poverty – for at least a few weeks. After that, millions of almost poor people will wonder why they are working so hard to make a few hundred dollars per year over the guaranteed dole. And those on the dole will wonder why they should work at all. Ending poverty takes more money that it appears at first glance.

Lest you think I am picking on liberals, many conservatives make the same economic error. They complain that if you took the entire social welfare budget and just handed it out to the poor, you’d be able to give every poor person $100,000 a year thereabouts. Once again, the numbers do add up, and you could do more than eliminate poverty – for a few minutes. Then the economy would collapse as everyone below upper middle class would quit work and line up for the dole.

You cannot cure poverty by just giving money to the poor. Such money is not free money! If you give to people because they are poor, you are paying them to be poor.

Politicians have halfway learned this lesson. This is why our welfare state system is so large. To get welfare to the poor, our politicians have created a wide array of programs, tax breaks and subsidies to the not-so-poor in order to have some incentive for the poor to better themselves. The system works…better than the simplistic solutions above. But it isn’t perfect, or even all that nice. Members of the underclass are still being paid to be poor. Many who are truly needy fall in the cracks between programs. Finally, the current “system” of welfare, tax breaks and middle class entitlements is driving our government into bankruptcy. We are running huge budget deficits when we should be running surpluses to prepare for Baby Boomer retirement.

Simplistic welfare fails. We have advanced beyond simplistic social services but have done so in a very ugly evolutionary fashion. Our politicians have applied several layers of Band Aids to each generation of social programs as problems arose. To have a more streamlined welfare system we need to go back to first principles and look at the alternatives to simply handing out money to the poor:

1. Give out free money to people who were poor. For example, divide up the welfare budget to all who were poor as of January 1, 2010. As long as we don’t have time machines, you cannot change your past status, so this prior need money would indeed be free money. Since yesterday’s poor correlate strongly with today’s poor, most of today’s needy would receive benefits, but they wouldn’t be penalized for making their lives better. This solution would be as cheap and efficient as the simplistic solutions above, but would degrade over time. New people become poor. Many of yesterday’s poor will graduate to middle class status or better. Continuing this retroactive entitlement would create a sort of lower class nobility. (But the underlying principle could be used quite effectively in special situations, such as bootstrapping impoverished Third World villages out of poverty.)

2. Target the demonstrably needy. If you are blind, retarded, cripple, etc. you are entitled to help, regardless of other sources of income. If it turns out you can manage to work anyway, all the better. As long as our criteria for needy are sufficiently stringent, this solution is affordable. But it is inherently incomplete. Many borderline disabilities are easy to fake. People will fake them if we are too generous. Many borderline disabilities are disabling only some of the time. (Think of the many mentally ill Hollywood stars or the banged up NFL players who play through pain.) Finally, this solution can catastrophically break down in very poor countries. Give money to the crippled in a very poor country, and people will intentionally cripple themselves or their children to receive largesse.

3. Be a Grinch. Make the poor jump through some unpleasant hoops in order to get help. Make them wait in long lines, listen to self-important social workers or do mindless make-work. Let them live in mental institutions, crime-filled public housing or Newt Gingrich’s orphanages. We do a fair amount of this today, and it does work. But it also causes quite a bit of hardship, and many liberals object to this method of gate keeping. And the gate keeping also requires an army of government workers, which conservatives and libertarians should find objectionable.

4. Have a negative income tax. Make the personal exemption so high that the poor have a negative taxable income, and have the IRS send them money based on this negative figure times the bottom tax bracket. The proposals I have seen set the bottom bracket around 50%. For every dollar you earn you lose 50 cents of benefits. To eliminate poverty at this rate, you need to set the personal exemption to twice the poverty rate, which means many people above the poverty line will get some money from the government as well. This approach would work, but it requires the government have income information on everyone. This is no biggie as long as we have an income tax, but the more liberty-minded dream of a day of no income tax…

5. Give free money to all citizens. Replace the array of social programs and tax breaks with a citizen’s dividend. Every citizen gets the same amount. Set it high enough and no one is poor unless they spend the money stupidly or have special needs. (For the latter, see Solution 2.) Such a solution acts much like a negative income tax, but it could be funded with other, simpler taxes. The Fair Tax people advocate a national sales tax. Herein, we shall explore a combination of excise taxes, user fees and property taxes. But for starters, we can use a simplified version of the current income tax. Merge the income tax, FICA and Medicare taxes together into a simple 30% bottom tax bracket that runs from day laborer through doctor salaries.

Without income information, we cannot have a clawback for those clearing the poverty line. Free money would end up in the hands of the middle class as well as the poor. The resulting wealth transfer would be greater than a negative income tax. But though the wealth transfer is greater, though the government must nominally collect more money, free money for all is the most liberty-friendly long term solution to poverty. We could dismantle the IRS as we know it and send most of the social workers to the private sector.