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Starved of New Ideas, the GOP Goes Back to “Starve The Beast”

“Starve the Beast”

The GOPs tax plan was the first part of a two-tiered approach to reduce the size of the government–it was never supposed to “pay for itself“. In order to keep the deficit from growing after cutting taxes, spending cuts–with “welfare” the common whipping boy–are necessary, or so the thinking goes. This method of governance, developed by the Republicans in the late 70s and 80s, is known as “starve the beast“.

History tells us that “starve the beast” does not work–it is a tried and failed policy. It turns out that when you get down to the actual programs involved, “welfare” is quite popular; it aligns with America’s collective moral compass, helps promote the “American Dream” (social mobility), and stimulates short-term economic growth. While there are reforms that could improve our welfare system, doing so responsibly requires complementary policies (more on this later).

There are again signs that the GOP will fail to fully implement its “starve the beast” agenda. The tax code is already the law of the land, yet the GOP does not seem to have the political will to tackle welfare reform. Far from starving the beast, Congress has just agreed on a budget deal that will increase spending by $300 billion dollars over the next two years.

I’m sure the GOP will come back to entitlement reform and overall government downsizing after the 2018 midterm elections. At this point the GOP will no longer have to worry about immediate electoral backslash from enacting unpopular welfare reforms, and probably believes the link between their tax cuts and the fiscal need to enact such reforms will have been severed in the average voters mind. But even when the political will to “starve the beast” resurfaces, I doubt the GOP will have sufficient Congressional support to actually implement the plan. Whether they have sufficient support will largely depend on the outcome of the 2018 elections–after all, “elections have consequences”.

Make no mistake, the likelihood that “starve the beast” will again fail is a good thing. The real crime is that the GOP passed a huge tax cut knowing it would not pay for itself, while also knowing that it would not be able to “starve the beast”. The results are ballooning deficits and insufficient resources to address America’s many needs. Sure, budgets may pass with small increases to existing programs, but new programs will not even be considered in this climate of huge (and increasing) national debt, rising interest rates on said debt, and much lower tax receipts.

Perhaps this is the true purpose of “starve the beast”–to restrict our country’s collective “policy imagination” (i.e. “fiscal space“). Instead of thinking about how to make America better, we will be stuck with the status-quo that people across the political spectrum are unhappy with (only now with even more inequality and debt).

Common Sense Welfare Reform

As mentioned before, there are some worthwhile welfare reforms to consider. Let’s look at a few of them, as well as the complementary policies needed to ensure they actually promote desirable results and don’t just place undue burden on America’s most vulnerable people.

SNAP

Let’s promote a healthy diet and save on our country’s medical spending! Why not go one step further and promote local produce wherever possible. Such a plan would benefit smaller farmers and local economies, promote greater public health, and reduce emissions from shipping food around the world.

Drug Testing for Welfare

I am not completely against drug testing people on welfare programs, or other oversight measures, but let’s be clear–such measures would require more spending to implement. It is entirely possible that the nation would spend more money on enforcement than it would save in rooting out welfare fraud–this has largely been the experience when states have experimented with such programs.

But money isn’t everything; in a democracy public support is the lifeblood of any policy, and clearly many people do not approve of our current welfare system. Surely even the most progressive person can see there is some benefit to addressing the concerns of a large portion of the electorate regarding our current welfare system. Addressing these concerns should ultimately increase public support for welfare programs.

The costs and benefits (monetary and otherwise) of various oversight measures are something we should study, so the American people can make an informed decision about whether such policies are truly worth pursuing.

Responsibly Reforming Welfare Programs

How else can we responsibly reform our welfare system, reduce disincentives to work, and promote gainful employment?

First of all, programs that benefit children, the non-wealthy elderly, persons with disabilities (including serious mental illnesses), and other vulnerable groups do not need more requirements–society’s most vulnerable do not need more hoops to jump through. Admittedly, just coming to an agreement on who should be considered ”able-bodied” is a difficult task itself.

But certain recipients, like healthy, prime working age people, can be reasonably expected to meet certain socially beneficial criteria in exchange for welfare benefits. One such example is a new “community engagement” requirement for Medicaid in Kentucky. Progressives may not like this plan, but as long as sufficient waivers exist for vulnerable groups, why should someone in the prime of their life not be working, looking for work, volunteering, and/or in a job training program for 80 hours a month? Such a change should lead to improved employability and mental health outcomes. This is a completely reasonable requirement, and the type of idea that responsible, bipartisan welfare reform can be built upon—leveraging welfare benefits to drive positive recipient behavior.

Aside from reforming welfare programs, other complementary programs targeting the labor market could help reduce reliance on government assistance. Higher minimum wages would reduce government spending on welfare programs, as we currently subsidize companies that do not pay a living wage. An expanded earned income tax credit (EITC) could help reduce disincentives to work by smoothing high marginal tax rates for people coming off welfare programs. We also need more job training and apprenticeship programs; we can’t just say there are job training requirements for welfare eligibility, but then not make these programs available! Just like with welfare oversight measures, expanding the EITC and sufficiently scaling up job training programs would both require significant government resources.

Simply put, there are upfront costs to responsibly reforming our welfare system. Unilaterally cutting welfare programs and hoping for the best will not work; any savings would ultimately be lost due to increased spending on the criminal justice system and decreased long term economic growth, as even more Americans would fail to reach their full economic potential.

Ideally, reducing the size of the “welfare state” would be an organic process by which we invest enough in our people, particularly early in life, to promote equality of opportunity. The complementary policies outlined above can help at the margins, but the real heavy lifting involves addressing the root developmental causes of poverty (early childhood development, housing, healthcare, education, etc.).

Progress Frozen in Time

This brings me to the main reason why the new tax plan is so regressive in the first place. It is not because it will be bad for the average American consumer or economic growth in the short-run; if anything, it should have positive short-term impacts in those regards. Those are, however, poor criteria for assessing the merits of a tax plan that will likely be in place for a long time and is directly related to our ability to fund programs that drive long term growth and social progress. In other words, what did we give up in exchange for these tax cuts?

Due to lower tax revenue, it will be very difficult to fund the aforementioned complementary programs needed to responsibly reform our welfare system, much less the more costly investments needed to promote equality of opportunity and drive long term economic growth (infrastructure, R&D, healthcare, education, job training and early childhood development).

On the topic of infrastructure, Trump’s “trillion dollar infrastructure plan” (now $1.7 trillion, if you still believe a word he says), will reportedly only use $200 billion in federal funds. The idea that $200 billion can leverage that much funding in mostly state and local tax money (as well as some private investment)–the crux of Trump’s plan–was a dubious claim when he made it while campaigning. With the caps on SALT deductions in the new tax code, and the resulting strain on state and local budgets, it can’t even be called wishful thinking–it is just a flat-out lie.

The results will be obvious in the type of infrastructure that ends up being built. Non-revenue producing infrastructure will fall almost completely to the wayside. There will not be enough funding for expanding broadband internet access and affordability in underserved areas, which would unlock better K-12 schooling and access to online job postings. In a sad irony, these underserved areas are mostly in “Trump country”.

EPA Chief Scott Pruitt has said combating lead poisoning is a top priority of his, but has offered no plan for how he will do it. Instead, he has undermined programs that protect children from lead based paint, and supported an overall downsizing of the EPA. In all likelihood there will not be enough funding for new water pipes to prevent people from getting lead poisoning, which stunts cognitive development in children. Stunted development compromises the future earning potential of those affected, increasing reliance on welfare programs–talk about being short-sighted.

Our country likely needed more tax revenue, not less, to promote equality of opportunity, meritocracy and social mobility–to make America fair again. People–albeit the minority of the electorate–elected Trump as a populist because they felt like they were being left behind. Trump has betrayed his base with his policies, whether they realize it yet or not.

The Same Old Blame Game

Absent the resources to actually address the needs of the average American, you will instead hear the GOP repeat its same old tired lines. Lets consider some of these talking points:

People are lazy

Well sure some are, but no more-so than they used to be…

It is true that labor force participation rates are down overall from highs in the 1990s, but this is less true among prime working-age people; the majority of labor force participation decline is due to an aging population.

Furthermore, many people collecting government assistance already work. As stated before, increasing the minimum wage and expanding the EITC would help promote gainful employment.

Traditional marriages / family structures / “values” are breaking down

This is really a societal shift, and in some ways is a natural consequence of a freer society. For example, a wife who is being beaten can more easily leave her husband now than she could decades ago.

This phenomenon is at the cross-section of many deeply personal, multifaceted, and interrelated choices people make (to get married or not, to have kids or not, to get divorced or not). As such, there is really very little the government can do to steer society back towards more traditional family structures. The common conservative call to block access to family planning services, contraception, and abortion, however, will only exacerbate these issues (and yes, likely lead to increased future welfare spending).

We Can Rely on the Private Sector to Fix Everything

Guess what, the private sector won’t just deliver on infrastructure, but job training too! Trickle-down economics! That sure sounds nice, too bad it has never actually worked out that way.

I listened to an event kicking off “National Apprenticeship Week” at the Department of Labor, and not once was government funding or a public-private partnership (PPP) mentioned. It was all about what the private sector can do; well guess what, the aren’t doing it! Absent some change in incentives, there is little reason to think that the private sector will all of a sudden start to prioritize job training programs. What America needs is drastically scaled-up apprenticeship programs developed and financed by community colleges, universities, and industry leaders.

Instead, “Jobs President” Trump has proposed cutting the DOL budget by 21% (from $12.1 billion to $9.6 billion), and the Department of Education budget by 13.5% (from $69.4 billion to $60 billion). Such a plan effectively rules out more funding for apprenticeships, as these would be the departments to administer such programs.

At the same time, the GOP will increase military spending by $82 billion, to $716 billion, by 2019. Imagine the impact that type of additional funding would have on our drastically underfunded job training programs and community colleges.

Hail the Almighty Job Creators! 

We need to stop treating companies as if they are doing some sort of public service by hiring people. Companies create jobs to maximize profits. Publicly traded companies operate to maximize stock prices. Private companies are not doing a public service by being in business.

A company’s social contributions are the taxes they pay. We should not be subsidizing jobs through direct subsidies to companies and unlivable minimum wages that drive people to welfare programs. We should not have reduced the tax burden of the wealthiest Americans in the hope that some scraps will trickle down to the average person. Absent such policies the American economy would still work, just with less extreme inequality.

Until there is a clear understanding on this across the political spectrum, the greedy will continue to use scare tactics to hold enough of the electorate hostage to perpetuate their position of power. We need politicians that will stand up to these people and call their bluffs, not politicians who will sell the American public out to the highest bidder.

Concluding Thoughts

Investing in human development takes time to manifest itself in positive outcomes, just as it takes time for a child to grow up. Therefore a responsible, holistic approach to welfare reform means there will be an overlap period where we will be paying more for both welfare reform and human development initiatives (which in some cases, like CHIP, are one in the same).

If, as a country, we are OK with $1 trillion more in debt (what Trump’s tax plan will cost us), this is the way to spend it—not another war or military buildup, not another trickle-down Hail Mary, but a real plan to promote economic opportunity and responsibly reform our welfare system. This new “Great Society”, with the benefit of 50+ years of lessons learned, could build upon the successes and avoid the shortcomings of the original, and ultimately make America greater than it ever has been.

Instead we are stuck with half a “starve the beast” strategy. This means more debt while cementing in place the status-quo that has failed too many Americans for too long. Thanks, GOP!

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Economic Outlook: When Gauging Support for Raising the Minimum Wage, Poll its Biggest Opponents

Trend: Minimum Wage -- Real and Nominal Value, 1938-2013

There has been a strong push this holiday season (really dating much farther back) by a variety of labor groups seeking higher minimum wages. Specifically, Walmart employees, Fast-Food Workers, and most recently low-level financial sector employees have taken to the streets to make their demands for “livable wages” heard.

As one who believes in the positive externalities of a more egalitarian society, as well as a proponent of collective action, I am happy to see people using the tools at their disposal to overcome power-asymmetries that have persisted for decades. It would appear that I am not alone in this sentiment–according to Gallup polling, 76% of Americans support raising the minimum wage to $9/hr (69% support raising the minimum wage to $9/hr and indexing the minimum wage to cost of living increases).

Furthermore, the main fear associated with raising minimum wages–that it will lead to higher unemployment–has been debunked:

The idea of fairness has been at the heart of wage standards since their inception. This is evident in the very name of the legislation that established the minimum wage in 1938, the Fair Labor Standards Act. When Roosevelt sent the bill to Congress, he sent along a message declaring that America should be able to provide its working men and women “a fair day’s pay for a fair day’s work.” And he tapped into a popular sentiment years earlier when he declared, “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country.”

Support for increasing the minimum wage stretches across the political spectrum. As Larry M. Bartels, a political scientist at Vanderbilt, shows in his book “Unequal Democracy,” support in surveys for increasing the minimum wage averaged between 60 and 70 percent between 1965 and 1975. As the minimum wage eroded relative to other wages and the cost of living, and inequality soared, Mr. Bartels found that the level of support rose to about 80 percent. He also demonstrates that reminding the respondents about possible negative consequences like job losses or price increases does not substantially diminish their support.

It is therefore not a surprise that when they have been given a choice, voters in red and blue states alike have consistently supported, by wide margins, initiatives to raise the minimum wage. In 2004, 71 percent of Florida voters opted to raise and inflation-index the minimum wage, which today stands at $7.79 per hour. That same year, 68 percent of Nevadans voted to raise and index their minimum wage, which is now $8.25 for employees without health benefits. Since 1998, 10 states have put minimum wage increases on the ballot; voters have approved them every time. But the popularity of minimum wages has not translated into legislative success on the federal level. Interest group pressure — especially from the restaurant lobby — has been one factor.

The social benefits of minimum wages from reduced inequality have to be weighed against possible costs. When it comes to minimum wages, the primary concern is about jobs. The worry comes from basic supply and demand: When labor is made more costly, employers will hire less of it. It’s a valid concern, but what does the evidence show?

For the evidence, lets turn to Dr. Krugman, who succinctly explains the evidence against this valid concern, and how “good” this evidence is:

Still, even if international competition isn’t an issue, can we really help workers simply by legislating a higher wage? Doesn’t that violate the law of supply and demand? Won’t the market gods smite us with their invisible hand? The answer is that we have a lot of evidence on what happens when you raise the minimum wage. And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.

It’s important to understand how good this evidence is. Normally, economic analysis is handicapped by the absence of controlled experiments. For example, we can look at what happened to the U.S. economy after the Obama stimulus went into effect, but we can’t observe an alternative universe in which there was no stimulus, and compare the results.

When it comes to the minimum wage, however, we have a number of cases in which a state raised its own minimum wage while a neighboring state did not. If there were anything to the notion that minimum wage increases have big negative effects on employment, that result should show up in state-to-state comparisons. It doesn’t.

So a minimum-wage increase would help low-paid workers, with few adverse side effects.

But what do these “egg-heads”, in their “ivory-towers” know? They are out of touch with the real world! The person who suffers from minimum wage increases is not the academic, or even the large corporation. It is the small business owner who suffers–Mom and Pop! Well, Gallup polled small business owners on their thoughts of minimum wage increases, and responses were not as overwhelmingly negative as one would think:

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They were also polled on the effects of a minimum wage increase on how they invest back into their business:

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The majority of small business owners responded they would not reduce their current workforce (64%) or reduce worker benefits (60%) if the minimum wage was increased. The largest negative effect would be a reduction in capital spending (38%). However, in the context of a divergence of worker compensation from productivity, and a declining share of income going to labor (in favor of capital), perhaps such a re-balancing is not such a bad thing.

Small business owners are not thrilled about the prospect of a minimum wage increase–they are not expected to be. However, the fact that nearly half support raising the minimum wage says something about small business owners.

Perhaps they recognize peoples purchasing power is tied to their wages, so increasing wages will eventually lead to higher sales (especially considering minimum wage employees have a much higher marginal propensity to consume than wealthier people). Or perhaps these people are simply more in touch with what happens in the communities they live in than their big-business contemporaries. They know people living on the minimum wage aren’t lazy people waiting for a government handout; they are their friends, family, and customers. Perhaps they believe that more egalitarian communities are friendlier, safer places, and are willing to pay a little extra in order to achieve that goal. 

Increasing the minimum wage is overwhelmingly popular, and more popular among small business owners than one would expect. Furthermore, it would save billions of dollars in Welfare programs by ending an implicit subsidy for businesses who pay non-livable wages and stimulate the economy by redistributing income to people who are more likely to spend it.

The time to act has come; people are literally taking to the streets. It is also important to index the minimum wage to cost of living increases, so we do not experience the declining real minimum wage we have had for the past 4 decades. Indexing also avoids a political battle every-time the cost of living changes (which it constantly does).

I for one am interested and excited to see the myriad benefits that decreasing poverty rates and reversing the trend of increasing income inequality have on American society as a whole.