TCS Daily


Bob Herbert Keeps Working Hard, Falling Short

By Tim Worstall - October 15, 2004 12:00 AM

Last week Bob Herbert asked in his New York Times column "How are these millions of poor and low-income families making it?". He was referring to (in tones suspiciously reminiscent of the press release) a report that came out on Tuesday the 12th October, called "Working Hard, Falling Short". It's about the problems that the working poor have in the United States and while it has its good parts it is in the end highly deceptive. The opening line is thus:

"The United States of America is often called the 'Land of Opportunity', a place where hard work and sacrifice lead to economic success. Across generations, countless families have been able to live out that promise. However, more than one out of four American families now earn wages so low that they have difficulty surviving financially."

Well, strike me down with a wet feather. You mean that poor people don't have enough money? Perhaps I have been mislead but I was and am under the impression that that is the meaning of the word "poverty". I'm not sure that it is one of those revelations that require a report from a bevy of (presumably not poor) Beltway Bandits and an NYT column to reveal it to a breathlessly waiting world, although I am as ever open to the idea that I may be wrong.

Tripping lightly through the report we get a series of truths although to my mind the solutions are endearingly silly. They identify lack of education as a cause of this working poverty, making much of the fact that the school system serves many badly. The new idea is that those who have been so failed should be offered further opportunities for education, something I have little problem with; despite this appearance of my being an unfeeling reactionary yes, I do think that adult education is a good idea. I also think that educating children properly in the first place is a good idea so perhaps the solution lies in reform of the school system? Vouchers perhaps, as I know that my preferred solution, the sentencing of teacher's union leaders to the poverty they condemn their charges to will not happen.

I'm similarly sympathetic to their concern over the withdrawal of benefits like Medicare. People struggling up out of poverty can find that a pay rise of a few hundred dollars can lose them a benefit, such as free health insurance, worth many times that raise. This isn't anything that should surprise us of course. Such welfare systems are designed by those who do not believe that marginal tax rates are important. We, however, do know that marginal tax rates are important, and can make the connection between withdrawal of benefit as just as much a disincentive as high income tax rates. If only the economically literate were in charge of the welfare system, we would see lengthy tapers on such benefits so that the poor, just as the rich, did not face marginal rates over, what, say 30%? 40%? Something to argue over but at least we would not be surprised that marginal rates of over 100% tend to have an effect on people's behavior.

In an interesting outline of basic economic theory which they entirely fail to recognize they say:

"Not only does the economic environment fail to provide wages above the poverty threshold for all those that work full-time, it does not provide jobs for all who want to work."

and then go on to note that this percentage of workers under-utilized or not fully employed is highest in Oregon. That would be the place with the highest State enforced minimum wage, eh, which rather blows a hole in one of the report's arguments, that a solution to these myriad problems would be raising the Federal minimum wage.

It would be easy enough to carry on as above, noting little errors and disconnects in their thinking. Easy but not sufficient, as at the heart of their analysis is a gaping hole, one which, to me and to any welfare economist, discredits the entire project. All of the figures they use are before tax and before benefits. They completely ignore the efforts that are already made in US society to close these income gaps, the programs that exist to help the poor, the taxes paid by the rich and the middle classes to enable such help. This decision of theirs, to airbrush out of the picture all of the things that are already being done, makes their prognostications valueless, fraudulent even.

To show what I mean consider this. Much is made of the fact that the median income for a family of four in the US is $63,000 or so, compared with the $18,000 that is the federal poverty level for that same four person family. These are, of course, the pre-tax and pre-benefit numbers. I don't claim to be an expert on the minutiae of the US tax and or benefit systems so these estimates will be a little hazy. That median family is going to pay income taxes, somewhere in the 10-15 thousand range. So their after tax income is, for the sake of argument, $50,000. Our poverty level family will not be paying any income tax of course (and we can leave out FICA and social security as well, for as we are so often told, these are not taxes, but symbols of an intergenerational compact). They will also be getting a certain amount of help from the system.

According to economist Joe Stiglitz it costs $7,500 a year to buy health insurance for a family of four. Medicare provides that for free. There will probably be some non cash benefits such as housing subsidies, perhaps food stamps, which as the Census tells us are not included in poverty definitions. There would also be the major source of Federal help for the working poor, the Earned Income Tax Credit. My lying to the IRS about my situation led to an estimation that our family on $18,000 a year would get $3,671.

It would appear therefore that we have two stories. One about a society in which the majority live it up on $63,000 a year and the struggling poor that support them get $18,000. Another, one in which the majority give up (have taken from them?) a significant portion of their earnings, and the struggling poor receive if not all, at least some, of the help that they need. Or, if you prefer, an income gap, after taxes and benefits, of $50,000 to $29,000, rather than the headline figure given.

Whether you think that there should be more of such help or less, well, I leave that entirely up to you. I do hope you will agree with me that someone telling you that more should be done, while only telling you that first story, not mentioning the second which shows what is already being done, well, I think they're being dishonest. Lying even, if one is allowed to use such an impolite word in such a public manner. I would be perfectly happy with someone telling me that more should be done as long as they outlined to me what was already being done, for I might or might not agree with them but at least I would have all the facts necessary for a rational decision.

One saving grace of such an analysis is that we can in fact answer Herbert's question, just how are these millions of poor and low-income families making it? On our money Bob, on our money.

The author is a TCS contributor. Find more of his writing here.


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