Today we come to probably the most controversial role government plays in the market, redistributing income. In the broadest sense, every time something is taxed, regulated or subsidized, income gets redistributed. Here I’m focusing particularly on redistributing income to the poor.
There are some who believe government has no role to play in alleviating poverty. Others believe government has an enormous role to play. I sense the most folks are somewhere in between. They believe government has at least a prudent interest … if not moral obligation … to address some aspects of poverty.
And that raises another question. If poverty is simply the bottom X% of the income distribution, then there is no way to eliminate poverty. There will always be people in the bottom X%. More typically, I think poverty is understood as insufficient resources to regularly obtain the basics of life (food, shelter, and clothing) as well as being able to partake of some the basic amenities of contemporary life. The challenge is assigning a dollar value that indicates a poverty threshold.
And still another complicating factor is the persistence and causes of poverty. Our poverty statistics can include relatively well-off people who are in temporary poverty (Retirees living on savings, grad students, and the temporarily un- or underemployed.) They also include people who are simply unable to provide for themselves economically. They also include people trapped in sub-cultures of poverty. And they include people who make bad choices. However, the stats exclude those who are just above the poverty level who are at great risk. “Poverty” is frequently a more complex term than it first appears.
From an economic standpoint, it is desirable to have as many economically productive people as possible. There are positive spillovers to society in reducing the number of poor. That means less resources diverted to their care and more productivity by them, leading to more resources for their own care and the care of others. But let’s start with the assumption that that there are also moral obligations for society to help the poor through government redistribution. And let’s also assume that there are personal obligations that each of us individually has for the poor as well. With these assumptions, two externalities present themselves.
If aid to the poor is treated purely as a private affair, then many will do much less than their fair share to meet society’s obligations while a few conscientious folks will be saddled with doing much more. The slackers externalize their obligations. However, it is also possible to take the position that it is government’s responsibility to take care of the poor and, because I have paid my taxes, I am under no further obligation to aid the poor. Aid that government can’t provide (or provide well) is externalized to more conscientious folks. Whether by externalizing personal responsibility to other people or to the government, many will not aid the poor as they should.
The next question is how much aid is too much aid. There is a deeply held assumption that each member of society should take economic responsibility for themselves and be charitable toward others. Some, for any number of reasons, will never be able to provide for themselves economically and have limited support networks. There seems to be a widely shared sense that society has a responsibility for these folks. But others, with education, changes in behavior, and aid, can be highly productive members of society. Then there is a whole continuum of people in between. Which folks are which? There is a measure of triage involved.
Certainly with enough aid and personal investment some will be able to excel. Yet, as countless social scientist have noted, too much aid can create a culture of dependency. When aid significantly exceeds what a person might get in the short-run as they pursue of a better education and job experience for the long-run, most people will never take the initiative to go through the short-run changes. How much aid is the right amount for any given circumstance?
There is an enormous information problem here. Each individual and family is unique. There is no way a vast centralized government can nurture each case in all its particularities. But it is also true that it requires a significant investment of time by private individuals and agencies to know folks at this level as well. The way the poor have become increasingly segregated from the rest of society doesn’t help.
Governments have taken different strategies toward this. Many European nations have more extensive social safety nets. That means a more secure living standard across all of society. But relative to the U.S., this has historically meant higher rates of unemployment, reduced job mobility, less mobility up and down the economic ladder, and lower levels of entrepreneurship and innovation. The U.S. has offered less economic security but usually less unemployment, more mobility, and greater innovation. (One forty-eight month study in ‘90s showed that half the people that said they were in poverty at any point during the study were in poverty for 2-4 months. Only 7% were in poverty for thirty-six months or more. A Treasury Department study that followed actual individuals from 1996-2005 found that 58% of people who started in the bottom quintile moved to a higher quintile, and that 30% moved to the top three quintiles.)
American society has involved government in redistributing income through a variety of means. First, there are direct cash transfers. The Earned Income tax credit is probably the most notable. Second, there are indirect transfers through programs like Aid to Families with Dependent Children, food stamps, Medicare, school lunch programs and the like. Third, there are skills development programs like Head Start and jobs training programs. Fourth, there is a progressive tax system. The top 50% of earners pay 97% of federal income taxes. Fifth, there are wage laws that require employers to pay at least a certain base wage. All this is expected to function alongside a strong voluntary network of aid to the poor as well.
I’m not interested in debating the merits of these various strategies at this point. There are some who think we need to do away with all or most of these measures. There are others who think we ought to do much more. The vast majority seem to be somewhere between these two, believing we have some responsibility for the poor through government intervention but are not to completely subsidize the lives of most poor people. So while the debate goes on, there does appear to be a strong consensus that some market intervention is both economically and morally necessary. This is another way in which the market is modified with government intervention.
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