Two options for solving the "disincentive to work" problem

A recent op-ed by Nobel prize-winning economist Paul Krugman resulted in a personal epiphany over how we might begin to approach one of the biggest problems in our country: the struggles of the working poor.

Despite the occasional snarky comments you hear about poor people being lazy, there are tens of millions of American families where both spouses are working full-time, or even multiple jobs, and still struggling to make ends meet. One thing Krugman admits in his column is that the current safety net has huge disincentives for improving one’s economic situation. This is not because America’s working poor are lazy. It’s because the current system of public assistance tapers too rapidly. Working more hours, taking a second job, or sending your spouse into the workplace could result in an effective tax rate on that new income of up to 80%, as the government takes away assistance almost at the same rate as income increases. If the system penalizes you for improving yourself, it will of course affect the choices you make. The Affordable Care Act makes an honest attempt to remedy this situation in regards to access to health care (in the states where Republicans allow it to function), but in general, it’s still true that those who are on full public assistance are sometimes better off than those who are working hard to try to support themselves.

There are theoretically only two ways to remedy the above incentive problem:

  1. Dramatically reduce or eliminate public assistance. If there is little or no public assistance for poor Americans, the tapering question is moot.

  2. Reduce the rate of change for tapering public assistance from earned income sources, with an eye toward eliminating the disincentive for self-improvement. This could be done many different ways; through the tax code (such as making the earned income tax credit more generous), through temporary “underemployment” benefits, or direct assistance.

The first proposal would result in an increase in human suffering, especially for children, and arguably would hurt the economy by reducing already suppressed consumer demand.

The second proposal successfully solves the incentive problem, while reducing human suffering and adding demand dollars to the economy. It would be one of the simplest ways to begin to address what President Obama has rightly called the challenge of our time: persistent income inequality and the separation of Americans into economic classes with little economic mobility.

The second solution does have one drawback: It would cost more. And by definition, given what we’re trying to accomplish (removing disincentives for self-improvement among the working poor), that cost would have to be borne by higher income Americans.

Conservatives would obviously balk at the second idea. But there is one argument that they could not make: That it would be just another government give-away to lazy freeloaders. The people who would be helped by this approach are the hardest working Americans of us all. The whole idea would be to ensure their efforts at self-improvement are not in vain.

It remains to be seen if the President or any mainstream elected Democrats out there are courageous enough to pick up the gauntlet that Professor Krugman has thrown down.



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