Economic policy advice for the NDP, Part V: Give money to low-income households

Here is what I would like some staffer to ask next time NDP strategists are kicking around ideas for goods to subsidise or services that governments to provide at a discount in order to advance their agenda of reducing poverty and inequality:

"Why don't we just give low-income households money and let them spend it on what they need most?"

Because one you start asking yourself this question regularly, you're less likely to come up with policy proposals that are inefficient, inegalitarian and regressive.

There are cases for offering subsidies or for providing goods and services at a discount, but that low-hanging fruit has already been picked. The most common argument is based on goods that have positive externalities, that is, those that benefit people other than the person who purchases it. In such a case, the free market will provide too little of the good: the consumer must pay the full cost, but receives only part of the benefit. The government can correct this misallocation by offering subsidies or by providing it at a discount. Some example of goods with positive externalities are education and R&D, both of which are already subsidised.

So unless you're prepared to make the case that the good or service in question is generating positive spillovers to third parties, then this

1. We want to help low-income households.
2. Low-income households find it difficult to buy X.
3. Therefore, we should subsidise X.

doesn't follow. Unless X has positive externalities, the problem is not that X is expensive: the problem is that low-income households have low incomes. The solution is to give them money.

See also:

• Why in-kind benefits?: "[I]t is hard to escape the conclusion that paternalism remains a fundamental underlying rationale for in-kind transfers."
• The progressive politics of pricing publicly-provided products: "[There] are examples in which universality provides outcomes that are progressive. Not as progressive as targeted transfers, but since the benefits are spread across a broader base, there is less of a chance that the median voter will defect from the coalition. But this does not mean that universal programs are always and everywhere progressive. If that point is not immediately obvious to you, ask yourself if a publicly-funded universal program to provide free yacht maintenance would be a considered to be a progressive policy."

This approach doesn't require much in the way of a new administrative apparatus: the GST rebate and the Working Income Tax Benefit are already in place. These can be the basis for a more coherent policy of directed transfers, maybe even a Guaranteed Annual Income.

This is part of a series:

• Economic policy advice for the NDP, Part I: Inequality
• Economic policy advice for the NDP, Part II: Defending big government
• Economic policy advice for the NDP, Part III: The GST
• Economic policy advice for the NDP, Part IV: Corporate income taxes
• Economic policy advice for the NDP, Part VI: Climate change
  

 

Comments

[Brett]

Well, the argument from Filthy Lucre, which you recommended earlier, would be that many low-income families will make poor choices about how to spend the money and not end up any better off than they were before you gave it to them. "Trying to increase the financial wealth of the population by spreading money around is like pouring water into a sieve" (p. 274).

[Jim Rootham]

First, you seem to be conflating publicly supplied goods with subsidized goods. Not necessarily the same. Also, there are a number of ways to supply goods. Co-ops and non profits as well as government services and private enterprise.

Frankly, sometimes a healthy dose of paternalism is a good thing. There are some pretty clear cases of that in the co-op that I am living in.

Not all the low hanging fruit has been picked by any means. We know there are things better delivered outside the profit driven market, electrical power, hospitals, and child care to name three.

But yes, a Guaranteed Annual Income would be a good thing.

Question, what is the chance of getting it in a FPTP system with a functioning centrist party?

[Stephen Gordon]

Well, the argument from Filthy Lucre, which you recommended earlier, would be that many low-income families will make poor choices about how to spend the money and not end up any better off than they were before you gave it to them. "Trying to increase the financial wealth of the population by spreading money around is like pouring water into a sieve" (p. 274).

Yeah, that's a part I never got. I'm not sure if the proper distinction between wealth and income is being made, and Joseph Heath seems to be more comfortable with the argument for paternalism than I am.

Clearly, people whose poverty is due to problems like substance abuse and mental illness will not likely be made better off by direct cash transfers, and it is perhaps to this group that he is referring.

[Stephen Gordon]

We know there are things better delivered outside the profit driven market, electrical power, hospitals, and child care to name three.

We know no such thing. Electrical power delivery is already public; there's no corresponding story for power generation. Public health insurance is already public; there's no corresponding story for hospital administration. And the child care story is simply a fantasy. ETA: And a regressive one at that.

Question, what is the chance of getting it in a FPTP system with a functioning centrist party?

None, so long as no-one puts it forward. Why not force someone to make the case *against* the GAI?

[Don the libertarian Democrat]

I am glad to see this being proposed. I am for a Guaranteed Income/ Negative Income Tax. Many of the questions that people have about this proposal are answered by Milton Friedman in "The Case for a Negative Income Tax". Charles Murray also has a plan in his book "In Our Hands". Hayek was also for just giving the poor an income. I believe that it might also help reduce inequality.

I would be happy if this was simply being debated.

PS Friedman also explains, in his essay "A Monetary and Fiscal Framework for Economic Stability", why a NIT would be a very good Economic Stabilizer during an economic downturn.

[Mike Moffatt]

"PS Friedman also explains, in his essay "A Monetary and Fiscal Framework for Economic Stability", why a NIT would be a very good Economic Stabilizer during an economic downturn."

It'd be an even better one if the amount paid out was tied to a leading economic indicator such as the yield curve? Though I suspect the Lucas Critique would cause problems.

For what it's worth, the Green Party has included a GAI in several of their campaign platforms in the past.

[Stephen Gordon]

Really? I didn't know.

[Andrew F]

Has anyone ever produced an analysis of how a GAI might be implemented in Canada? How would the tax rates change, how much social spending might be offset, what kind of social impacts we might see and how much it would cost? I've looked but been unable to find anything.

[Too Much Fed]

"This approach doesn't require much in the way of a new administrative apparatus: the GST rebate and the Working Income Tax Benefit are already in place."

I'm not in favor of it if it increases gov't debt. If it does increase gov't debt, is that just another way of attempting to grow an economy with more debt?

[westslope]

Putting aboriginal Canadians on government handouts has for the most part had an extremely negative impact.

On the other hand, perhaps if poor aboriginals had been permitted to hit the concrete early in the game without the benefit of so many dominant-society liberal professionals monitoring the situation and constantly wringing their hands, they would have developed conventions and community laws that worked against dysfunctional substance abuse, familial violence, etc.

Compare the economies of Newfoundland to New Zealand and Iceland. Canadian paternalism has poisoned Newfoundland.

Then there is fetal alcohol spectrum disorder (FASD) and similar..... Should we automatically incarcerate women who drink, smoke tobacco, smoke crystal meth, etc., or give them more money so they can buy even better drugs? In the struggle against paternalism should we allow parents the freedom to absue their children as they see fit?

[Mike Moffatt]

From the 2008 Green Party platform (Vision Green):

"The Green Party of Canada believes it is time to re-visit a major policy initiative -- the use of a negative income tax, or Guaranteed Livable Income (GLI) for all. The use of a GLI could eliminate poverty and allow social services to concentrate on problems of mental health and addiction. The essential plan is to provide a regular annual payment to every Canadian without regard to a needs- test. The level of the payment will be regionally set at a level above poverty, but at a bare subsistence level to encourage additional income generation."

In fact, various Green Parties in Canada have advocated your policies 1, 3 and 4 as well. Are you sure you're targeting your advice to the right political party? :)

[Stephen Gordon]

Huh. I never got around to looking at the Green platform last time around; I guess I should pay closer attention next time.

[Mike Moffatt]

"Huh. I never got around to looking at the Green platform last time around"

You and about 33 million other Canadians. :)

[Patrick]

Substance abuse is a problem for some people, and it's undeniably a problem in aboriginal communities. I don't think it's an argument against GAI though. Especially not a GAI that pays a premium to the working poor.

People with substance abuse problems need to deal with their substance abuse problems. Poverty isn't a cure for addiction. And leaving them poor isn't going to fix their addiction problems. Economic prosperity is not a proxy for moral rectitude.

My understanding is that the problems in aboriginal communities have more to do with the legacy of the residential schools and the general attempt to obliterate aboriginal culture. Again, I don't see how poverty restores their culture or helps victims deal with the horrors they experienced.

[Patrick]

I could be wrong about this, but I suspect that Newfoundland's plight has more to do with the mechanization and subsequent mismanagement of the fishery than with policies of the welfare state.

A single factory trawler can do the work of hundreds of traditional fishermen. So those fishermen found themselves out of work and the economy of Newfoundland (and Nova Scotia and PEI) went down the tubes because of the resulting unemployment and it's effects on communities.

[Andrew F]

Furthermore, many of NFLD's problems stem from chronic unemployment and welfare dependency. GAI gives ample incentive to take work and keep it, rather than working enough hours to qualify for 45 weeks of unemployment benefits (until the next season). Without this subsidy for unproductive resource extraction industries, NFLD might be able to increase the number of service jobs. There's not reason why all kinds of back-office functions in accounting, finance, insurance, IT, etc. couldn't be done in Nfld.

[MattM]

This probably isn't the right place to put it, but I'd like to see some commentary on this story from either Nick or Stephen:

http://www.cbc.ca/money/story/2009/08/22/carney-powers.html

Particularly this bit:

"Carney's remarks suggest he favours a change to the bank's mandate that would permit it to implement flexible inflation targets after 2011. He said the bank is considering price-level targeting, which would allow it to miss the target one year if it made up for it in the future."

As I recall, this is something that Stephen's advocated in the past (?).

[Andrew F]

That sounds like great news to me. It would help retirees immensely if they could save and invest with knowledge of what the price level will be in 20 years (given any degree of confidence). It would also make annuities less of a scary option.

[MattM]

As I understand it, that is not the compelling reason to want the central bank to commit to a price path rather than an inflation target; rather, it is a way for the central bank to avoid a liquidity trap.

[Matthew]

As a gubmint bureaucrat with some experience in social programming, I am amazed at how much money (federal, provincial, municipal) is spent on anti-poverty initatives of various types. Problem is, once you pay people like me, the social workers, the layers of contractors and subcontractors to deliver the program, cover overhead and other program expenses, it is truly scandalous how little money is actually left for the poor. For this reason alone I would support some kind of guaranteed national income.

[Declan]

"Why don't we just give low-income households money and let them spend it on what they need most?"

I believe the answer can be found in the essay, 'Reciprocity and the Welfare State'

Politically, support for giving money to the poor is contingent on the notion that people aren't being given money 'for nothing' or just for being lazy. To the extent that money goes to those who are 'legitimately' prevented from working, those who 'want to work' and just need a hand while they get back on their feet, and so on, people support it. To the extent that people feel they are being taken for suckers, working hard to pay taxes to support people who are only poor due to their bad habits or poor work ethic, there is no support for it.

Of course, in reality, if all the unemployed people were to magically find themselves jobs, the first recommendation of every economist would be to raise interest rates and return all those people to unemployment before we got stuck with inflation, so as a practical matter, we're always going to have a certain reserve army of unemployed who bear our stable prices on their uncompetitive backs. But people don't really appreciate this fact, so it makes policies to support the poor and unemployed politically tricky.

Sadly, the problem with a guaranteed income is that it is guaranteed. You're practically rubbing people's noses in the fact that the government is guaranteeing people money for nothing and they don't have to prove to the case workers that they're trying to find a job, or that they're really disabled or mentally ill etc. to get it. You talk of forcing people to make the case against a guaranteed income, I feel certain that politicians would only be so happy to have such an easy target provided by a politically naive opposition.

Of course, as the authors of the essay I mentioned above note, there are lots of ways to design welfare policies to come less into conflict with this notion of reciprocity (the plausible idea that I'm willing to help people as long as I believe they actually need help and aren't taking advantage of my generosity) - some ideas I can think of are policies to reduce the 'welfare wall' of high marginal effective tax rates in the low income brackets (i.e. smaller welfare benefits that are phased out more slowly as people increase their income), and minimum wage laws.

My own opinion is that that is the way forward for the NDP is policy that champions the working poor and middle class. Naturally (for the NDP!), these policies should also be designed to help the unemployed and the destitute but, politically, the NDP's best bet is to come to bury such people rather than to praise them or, worse, to give them 'my hard earned money'.

[Patrick]

You'd sell the policy as a reward to those who work. And start with families; it's hard to argue that kids deserve to be poor.

Here's an example: Say the poverty line is $40K for a family of four in an big urban center like Toronto. The kids are young and mom stays home. Dad was an engineer or accountant back home, but after immigrating to Canada he found he could only get work as a janitor or night watchmen. He works full time 40 hours @ $12/hr. That's about $24K a year. In Toronto, they'd be better off with dad on welfare, not working or paying taxes! Instead of having them go on welfare, let's top up the $24K with another $16K (about $300 a week) and reward work!

[Stephen Gordon]

Indeed. One of the main features of GAI is to reduce the marginal tax rates for people with low incomes, so that they will always be unambiguously better off if they work. (See this old post for a discussion of the marginal tax rates faced by low-income households.)

In the standard social assistance model, the support is conditional, and the condition takes the form: "If you start working, we stop helping you". The 'G' in GAI removes dumb conditions like this.

[Matthew]

I think the efficiency of a GAI is pretty compelling. There is a poverty industry in Canada (middle class government and non-profit bureaucrats, and for-profit contractors who make their livings managing the poor and don't have an interest in actually reducing poverty). Get rid of these people and their ineffective programs and just give the money to the poor!

[Matthew]

Declan:

I think most of these people are already employed. The problem is that they arn't making enough money. For example, in BC the minimum wage was $7.15 when I was in high school. I'm almost 30 now and the minimum wage is only $8 an hour, and the cost of living in the province has exploded.

[westslope]

Patrick, Colonized aboriginal people share similar social problems around the world. It is not one specific aspect of the Canadian experience or another. Though confiscating their natural assets with the liberal support of settler open-access ideology certainly did not help.

[Matthew]

Stephen:

I have been enjoying your posts on the NDP.

I can't seem to remeber, have you or Nick done a piece on the consequences of rising public debt in, say, the US, Britain, Canada, etc., yet? Krugman and Nial Ferguson seem to be having an accademic dick measuring contest about this. May be interesting:

http://business.timesonline.co.uk/tol/business/economics/article6806419.ece

[reason]

This argument has always appealed, for one because it has supporters on both the right and left (but I don't see Cato pushing for it - low taxes are much more important than real freedom it seems). I do think like westslope, though they is an increased need for paternalism in some cases, particularly where children are involved. But if the income associated with children belonged by rights to the children (not their parents/guardians) and the decreased admininistrative burdens on social security departments meant that they could employ more social workers....

[Patrick]

Economic prosperity is not a proxy for moral rectitude.

An anecdote: a family friend recently died from serosis of the liver. He was in his early 60's. Very, very successful guy: very wealthy, big house on the beach in Florida, fancy cars, big boat, etc ... BUT he was a total alcoholic and it killed him. Everyone but him saw it coming.

But few would argues that the state ought to have confiscated his wealth, assigned a social worker, taken away his kids, etc ... Why is it any different for people with low incomes?

You can't make people good, legislate away stupidity, or force people to make good choices. By all means, make substance abuse treatment available for those who seek it, but I would be against more paternalism. Seems to me there is little evidence that it works.

[Patrick]

Ouch. Atrocious spelling. Of course I meant cirrhosis.

[reason]

Patrick,
the advantage the rich guy has is that he can afford to drink himself into an early grave AND feed his kids. And clearly, he could still function well enough, enough of the time, that is not always the case.

[reason]

If the kids really are at risk then there should be intervention (a la Britney).

[tyronen]

In the early 1990s, Bob Rae's government did indeed float the idea of a pilot GAI program. It was reported in the media as "the NDP wants to give welfare even to people who have jobs!!" The government quickly had to back down.

Paradoxically, a Conservative government would find it easier to implement a GAI than an NDP government.

[Matthew]

Tyronen:

Manitoba actually implmented a GAI in the 1970s, as a pilot experiment at the behest of the federal gov't. It was discontinued in 1979 I believe - not so much because it didn't work, but because of it became politically unpopular.

[Andrew F]

So I guess the question becomes how do you introduce, structure or market a GAI so that it gains political support. It is extremely susceptible to grandstanding with arguments like "they can collect welfare while working" and "they don't really deserve our support to loaf around like a hippy".

Could you roll it out as a pilot for people who apply for and are granted welfare? I guess it might be easier to take an incrementalist approach with the goal of eventually phasing out things like welfare, low-income housing, 'employment insurance' (where this is just income support rather than true insurance).

[reason]

No,
you need politicians who are prepared to treat voters as adults, accept that there will be some abuse, but point out that the abusers are hurting themselves in the long run and are likely to be the least productive members of society anyway (and may well have become criminals without income support).