My Books, Essay #4

Reforming the welfare state in *Learning Economics*

The American welfare state consists primarily of Medicare, Medicaid, Social Security, and public education. It also includes food stamps and housing subsidies. In an essay reprinted in Learning Economics, I show how to replace all of this with a negative income tax (actually a negative consumption tax). Note that it is arithmetically the same thing as a universal basic income.

The entire Bleeding-Heart Libertarian Welfare State can be summarized by the equation

T = .4C* - $7000

where T is the total taxes that an individual would pay and C* is the person’s consumption expenditures including spending on education and health.

If you spend $5000, T = -$5000, so you could have zero income and spend that much. So you can think of this as a universal basic income of $5000. Perhaps more precisely, think of it as universal basic consumption of $5000.

A family of four with zero income would be able to spend $20,000. For a family of four, taxes would be less than zero for spending all the way up to $70,000. Beyond that, a family of four would be paying positive taxes.

Note that these figures are from twenty years ago. Since then, the actual American welfare state has ballooned for at least three reasons: inflation has taken place; the demographics of Social Security and Medicare have turned adverse, with more recipients and fewer tax contributors; and new entitlements, primarily Obamacare, have been enacted. Under my alternative, only inflation would have increased the numbers.

My approach eliminates all means-tested benefits, including food stamps, housing assistance, and income maintenance programs. This means that the poorest families receive less, but they get to keep more of what they earn.

A low-income family of four would have quite a struggle…they have to pay for schooling for their children. Also, they have to pay for health insurance. There is no Medicaid. . .with an income of $14,000 supplemented with $16,000 from the government, such a family would have to afford food, shelter, education, health care, and everything else on a budget of $30,000

The big advantage for the working poor is that their effective marginal tax rate plummets. If they earn more, they get to keep 60 percent of what they earn. Today, they get to keep about 20 percent, and in many cases less than that. Marriage is often an economic loser for working poor families today, because with two incomes they lose a lot of government benefits. Marriage would not be a loser under the negative income tax.

To put it succinctly, the Welfare State makes losers out of people who want to get ahead through hard work, thrift, or education.

Of course, as a matter of politics, replacing the existing Welfare State was a non-starter. In another essay, I offered a way to make Social Security sustainable.

the Social Security problem is largely an artifact of the retirement age. Raising the retirement age to something like 73 would make Social Security quite manageable. . .the higher retirement age would not take effect for more than 15 years.

Similarly, for Medicare, I wrote,

I would immediately raise the Medicare eligibility age to 75 for everyone [now] aged 50 and younger. Then, I would index the eligibility age to average longevity

On the topic of health care, I wrote,

People should pay for their own health insurance. The typical policy would be “catastrophic coverage,” meaning that you are covered for large medical expenses.

…Poor people should receive vouchers that enable them to obtain catastrophic coverage.

I argued that people who want health insurance paid for by government or by employers were under the delusion that paying for something collectively makes it more affordable. I said that it is like going to a fancy restaurant with prices that are too high for everyone.

Somebody pipes up and says, “That’s ok. We can just split the check.” Does that make sense?

On college education, I wrote,

the ability of college to provide educational substance at reasonable cost is diminishing. To me, this suggests that in the future colleges will turn increasingly to outsourcing. . .a college might turn to a specialized supplier. That supplier might provide instructional videos and software in addition to live professors.

Colleges did not have to do that. They addressed the cost of providing education with a combination of raising tuition, absorbing student loans which the government does not want to collect, using adjunct professors, and inflating grades while letting students get by with less work.

Concerning K-12 education, I did some arithmetic about my local school district, Montgomery County. A typical classroom teacher provided 30 student-years worth of education. In the year 2000, the county spent $8000 per student, so revenue per teacher was $240,000. Back then, teachers were probably paid less a third of that.

After the book was published, I looked into the school Budget further. It turned out that there were about 4 or 5 non-teaching employees for every classroom teacher. It is a gigantic school district, so that if economies of scale prevailed, there would be a low ratio of overhead labor to teachers, but in fact one finds the opposite.

My later research found that Montgomery County spends far more per student than any other county in Maryland, but its test scores are mediocre. They track the test scores of other counties with similar percentages of students on free and reduced meals (a measure of the prevalence of low-income families).