Incentives and Poverty

I've seen two good pieces lately on the impact of government incentives on the poor.  In the first, Abby McCloskey of AEI raises the work of Aspen Gorry and Sita Slavov (also of AEI) on high marginal tax rates as government benefits are phased out:

The tax code should incentivize work, not discourage people from earning a paycheck. Gorry and Slavov recommend transitioning to a proportional tax system to improve transparency and eliminate the variation in marginal and average tax rates within income groups. The system could be made progressive by adding a universal transfer payment or an income exemption.

In the second, Jonah Goldberg highlights the increasing number of Americans receiving disability benefits, with most who go on the disability rolls staying there forever:

That points to the even bigger parts of the story. As the nature of the economy changes, disability programs are sometimes taking the place of welfare for those who feel locked out of the workforce — and state governments are loving it. States pay for welfare, the feds pay for disabilities.

Both pieces are worthwhile.  Liberals are good at coming up with well-intentioned policies.  Conservatives are especially strong on how government policy affects incentives.  We have seen this in the way that lower tax rates on work and investment spurred growth in both areas (to the tremendous benefit of all Americans) between 1983 and 2008.  (We can leave for another blog what wound up derailing that growth.)  Conservatives need to keep focusing on how government policy causes and reinforces poverty.  Staying on welfare or on disability is no way out of poverty, no way to live, and no way to contribute to society, but many will do it if it is provided as the easy path forward for them.

Regulation and Unemployment

It's not just the cost of wages that depresses employment, as discussed in my last post.  It's also the cost of regulation, which increases for an employer with each new employee. 

Jobs exist for a simple reason. A job is created when a person is willing to do a task for less than the amount of money that labor can earn the employer. It is that simple. Employers are not interested in providing health care, life insurance, maternity or paternity leave, helping to correct past discriminatory behavior, or otherwise affecting social change. The employer wants a task done for a lower cost than what the output produced is worth. If the employer cannot make a profit through the addition of that employee, the employer will not hire the person. That is basic Economics 101.

In situations where a prospective employee is willing to work for less than the profit that she could earn the employer, there is room for negotiation with each party hoping to capture a larger share of the profit being produced. The problem with forcing employers to address social problems through employee benefits is that the cost of those benefits reduces the room for negotiation. As the cost of all these benefits (paid leave, health insurance, etc.) adds up, at some point there is no room left and the person does not get hired.

People with good intentions, thinking they are making the world a better place, have added so many mandatory benefits to the cost of an employee that companies are looking for any alternative to hiring more employees. Companies strive to produce and sell more each year while simultaneously reducing their number of employees. Doing more with less is the mantra of the day.

That's from Jeffrey Dorfman on Real Clear Markets, and he's exactly right.  Once again, well-meaning statists come up with programs to help people, motivated either by genuine desire to help or a more cynical desire to create political advantage.  The programs wind up helping some, but the net impact on society is negative.  Unfortunately, these programs can't be undone, because we're so focused on purported motives instead of actual results.  Conservatives need to shift the focus back to results.