What Does It Mean To Be A Welfare Queen?

Ask my father’s generation what it means to be a ‘welfare queen’, and perhaps they will reference the infamous Linda Taylor, who reportedly “used 80 names, 30 addresses, [and] 15 telephone numbers to collect food stamps, Social Security, veterans’ benefits for four nonexistent deceased veteran husbands, as well as welfare.” The subset of America being referred to is clear. Welfare queens are poor, black women with a heightened proclivity to trade pregnancy for welfare benefits. They are parasitical, producing nothing of value while taking gratuitously from the public coffer that the hardworking fill. Irrespective of job market participation and by the virtue of occupying a particular space in the distribution of ownership and goods, they are lavished with material things. The welfare queen is a textbook rent-seeker.

The conservative strategy of invoking variants of the welfare queen to drum up political support among whites is well-documented. Perhaps hopeful that white support rested more on tax fairness than on racial animosity, the left has appropriated ‘welfare queen’ for its own purposes. Instead of targeting poor, black women, the left increasingly uses ‘welfare queen’ to indict very large businesses that pay very low wages. Because welfare programs are designed to ensure some basic level of welfare, government covers the difference between wages and that basic level. Wal-Mart employees, for example, rely on $2.66 billion in government assistance every year. Absent these programs, the Walton family would have to pay laborers a wage sufficient for reproducing their labor. Thus in effect, welfare programs allow business to lower their labor costs without any corresponding fall in labor supply. Just like the (imagined) welfare queens of yesteryear, Wal-Mart captures an effective rent.

It may seem counterintuitive that subsidies granted to workers can be captured by non-workers, but ‘tax incidence’ (as the phenomenon is referred to in the academy) is an established economic reality. Underlying the theory is that more important than who a tax or subsidy is levied on is how sensitive quantities supplied and quantities demanded are to price changes. If you absolutely need to eat exactly one apple per day to continue living, then the quantity of apples you consume will not change when the price of apples increases tenfold. Similarly, if government levies a tax on apple producers to the effect of $1 per apple, apple producers will raise their price by $1 and consumers will shoulder the entire tax burden. This is true whether the tax is on producers or consumers. It’s a hyperbolic example, and it doesn’t consider income, but you get the picture.

We can understand the ‘welfare queen’ argument by applying tax incidence to the labor market. Below is a generalized graph of the labor market and how it responds to the Earned Income Tax Credit* (EITC), where S(w) shows labor supply pre-EITC and S’(w(1+e)) shows labor supply with EITC accounted for (EITC benefit = e = (w + e) – (w’)).

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The graph shows us two things. First, (w+e) > (w), meaning the EITC increases the wages of workers it directly affects. Second, (w) > (w’), meaning the EITC lowers the wage businesses pay affected workers. Whereas previously business paid the ‘initial wage (w)‘, they now pay only the ‘market wage with employee subsidy (w’)‘. Workers received a subsidy, and so does business.

Thus, it appears there is some truth to the left’s appropriation of ‘welfare queen’. For equivalence, it should be noted that low-wage workers, to whom the EITC applies, also receive a benefit, lest we turn public opinion against programs that reduce poverty.

*I use the EITC because its a direct wage supplement. Programs like food stamps probably allow for big business to pay workers less, but those programs affect the shape of the labor supply curve (more elastic) rather than shifting the curve.                                                               **I should preface this entire post. Tax incidence assumes a baseline that doesn’t exist. Government doesn’t levy the EITC onto the labor market because the labor market doesn’t exist without government. The EITC is part of a larger set of institutions that establish what the distribution of resources is. Economic populism – to which ‘welfare queen’ belongs – is useful, but the arguments are hardly ever intellectually coherent.

The Imperial Presidency Examined

Texas Senator Ted Cruz, gentleman and scholar, penned a glorious op-ed in the WSJ following President Obama’s State of the Union address. As can be expected with Cruz, the piece was more timely hyperbole than reasoned critique. His thesis, that the Obama presidency’s most dangerous aspect is “his willingness to disregard the written law and instead enforce his own policies via executive fiat”, relies on a series of executive orders - hiking the minimum wage for federal contractors, deferred action, and choosing to not uphold the unconstitutional Defense of Marriage Act. Like any great conservative polemic, the argument is strong on procedural warnings of a despotic future and weak on historical accuracy.

Because I care for my weak readership, I put the 44th president beside his predecessors as it relates to their proclivity for executive action.

ImageThe graph depicts executive orders per year – a principal form of executive action – by presidential administrations since Grover Cleveland. Unilateral action peaked with Calvin Coolidge and FDR and since then, short of a brief surge by renowned anti-imperialist Ronald Reagan, has continuously decreased. If, as Cruz suggests, executive action is a measure of Constitutional adherence, President Obama holds up well comparatively.

For what it’s worth, I generally believe, as others have put forth, that procedural arguments surface only to mask substantive disagreements. Instead of a policy debate on whether federal contractors should be guaranteed $10.10/hour, we get handwaving over the President’s decision to avert further negotiations with history’s most unproductive Congress. Cruz speaks directly to this, admitting “Mr. Obama may be right that some of those laws should be changed”, but that “the typical way to voice that policy disagreement, for the preceding 43 presidents, has been to work with Congress to change the law.” The graph above shows that Obama works without Congress less than any other president of the 20th and 21st century, and we all know Cruz doesn’t believe Obama is right about laws being changed. But, of course, if Cruz had to engage the President on policy, then he would have to deal with the 71% of Americans that support raising the minimum wage. It’s quite obvious why we get procedural posturing instead.

The Poverty Rate is Nonexistent

In my last post, I made the argument that references to pre-tax income are incoherent because pre- and post-tax income are indivisible. Tax structures carry with them a long set of incentives that determine the pre-tax income the same tax structure is set upon. Making adjustments to the tax system thus changes both pre- and post-tax income. Government and taxes are equally indivisible, so short of a counterfactual with pre-government society compared against modern reality circumscribed analysis commits the era of fetishizing the current contrived distribution.

Shortly thereafter, it came to my attention via The Facebook that my philosophical musings were cute, yet irrelevant. Or, so the criticism went, which was hilariously followed by a textbook pre-income fetishization about the true purpose of taxes, namely to maximize economic output given pre-tax income. With my youthful arrogance restored, I thought I would take the time to provide a real life example of how we consistently misunderstand the nature of taxes and the distortions of public policy that ensue.

Enter the official poverty rate, courtesy of the Census Bureau. For the past 40 years, the US Government has calculated a poverty rate through a set of income thresholds varying by family size and composition. Income is constructed to include private earnings, transfers, and public cash transfers (Social Security, unemployment insurance, disability insurance etc.). Noticeably absent are noncash transfers like food stamps, Medicare/Medicaid, and housing subsidies that function as cash equivalents*. Further, the rate is calculated before taxation. Because so much distribution takes place through the tax code** in the form of tax credits, the official poverty measure – using the same income thresholds – overstates the ranks of the impoverished. Consider the following graph – taken from Wonkblog - which shows the official poverty rate and a newly minted alternative rate that includes the aforementioned in-kind transfers and post-tax incomes:

The graph shows a sizable disparity between pre- and post-tax/transfer poverty rates. Further, the disparity increases post-2007 recession, which I would hypothesize to be the effect of greater unemployment insurance expenditures. So, what are we to make of all this? The more conservatively-inclined observers might respond with accusations of liberal dishonesty, downplaying the severity of poverty in America. After all, even the poor have refrigerators. To those who are actually interested in eradicating poverty however, the graph confirms a fundamental belief: government transfers lift people out of poverty!

Moreover, the noble lie that permeates the official poverty rate is that pre-tax income is something that can be isolated and measured. But, as we know, tax systems – particularly robust ones like the US’s – come with incentives and disincentives towards specific forms of accumulation. When ‘pre-tax incomes’ are realized, they are done so under the assumptions of the prevailing tax system. Trying to find a poverty rate that doesn’t include the full effect of government is searching for the nonexistent, it puts the cart before the horse. My friend was wrong when he wrote off the distinction as unimportant. The poverty rate is symptomatic of a view that disassociates the private from public so that the public intervenes to correct market failure. We need a more systemic approach that considers public and private as inseparable parts of a larger thing with you and I at the helm. Then, perhaps the folks who truly care about poverty will accept the most basic and unexciting solution of all.

*Noncash transfers are essentially cash such that if we distributed $200 in cash instead of $200 worth of food stamps, the recipient would spend that money on food. If you plan on spending $200 on food per month, it doesn’t matter whether you receive it as an in-kind transfer or as paper money. Of course, it is possible that the in-kind transfer exceeds the amount the recipient would spend on the good absent the in-kind transfer.
**Earned Income Tax Credit, Child Tax Credit, and Homeowners (extremely regressive) being the big ones. Check out The Submerged State for a more holistic picture.

How To Think About Taxes

Nothing in this world can be said to be certain, except death and taxes, so the adage goes. A quick observation of modern political debate brings forward a host of issues whose controversy can be reduced to differing tax philosophies. The conventional wisdom considers taxes to be the means through which government funds public programs. To this category goes national defense, welfare programs, and education, to name a few. Solidifying the conventional wisdom is the circus around the dreaded national debt, where one’s political disposition can be deduced from support of either reduced spending or increased taxes.

Believe it or not, while funding public programs is an important characteristic of taxes, it is hardly its sole feature. For instance, the taxing authority is also used to regulate economic growth. In times of excessive growth, governments issue new taxes to quell consumer demand and inflation. Conversely, during recessions, governments provide subsidies (negative taxation) to struggling economic actors in a bid to increase demand and national product. Alternatively, it has long been recognized that market equilibriums – prices and quantities absent government intrusion* – do not always reflect social goals, at times either producing too much or too little of some good. Private actors internalize private costs when making decisions and disregard the concurrent external cost their action imposes on society. For example, the amount of gasoline you consume is primarily a function of its market price, although the true price of gasoline consumption factors in pollution and accordingly is much higher. In light of market prices that do not reflect social prices, governments may issue taxes/subsidies to nudge consumer behavior towards the social optimum (i.e. carbon tax).

Lastly, and the feature all too often forgotten, is the function of taxes as a distributive tool. Truly understanding the enormity of taxes as a distributive tool requires a bit of abstraction. It directs us toward the grandest of counterfactuals, namely what would individual welfare (well-being) be in absence of government? The easiest – and in my opinion accurate – conception of society minus government refers to Hobbes “state of nature” as expressed in his seminal Leviathan. In the “state of nature”, humankind finds itself in constant war with each other, unable to agree upon issues of morality and justice. Welfare is low if at all existent, and even then solely a function of brute force. When establishing the distributive implications of taxes and government, we can use the distribution of resources in the “state of nature” as our baseline. Compared to our baseline, it so follows that barring enslavement the rise of government and taxes makes all persons better off.

For the counterfactual to be at all useful however requires us to explore what the “rise of government” implies. Perhaps the most integral feature of government through which it accrues power is its ‘monopolization of violence’. Through claiming violence, government affords itself the exclusive right to establish the rules and regulations of the society it presides over. For example, that which an individuals can claim dominion over – his/her property – becomes meaningful only to the extent that the sole disposer of violence will acknowledge and protect it. You may have the most intricate philosophical arguments for why the schools rightfully belong to students, but unless you can prove your case before a court of law, realizing your claim to ownership is a fantasy. If in the “state of nature”, students pool their capacities to lay forceful claim to the object of their desire, though their maintaining ownership would be highly tentative, then the “rise of government” distributes ownership of schools away from students and towards some other entity.

Taxes as a distributive tool are best understood under this rules and regulations framework. The market allocation of goods requires a functioning market, which in turn requires a strong property rights framework, the only source of which is government. Contrary to the romanticized story you received in your introductory microeconomics class, markets are fundamentally a creation of government. That said, we can only conceive of government in conjunction with taxes, for how else would it pay for protective services? The intuitive tendency to consider markets as neutral distributors and government/taxes as redistributors falls flat upon itself when we realize that markets are an effect of government. Therefore taxes, as an inseparable feature of government, serve coincidentally as a distributive tool of government.

Accepting taxes as a distributive tool has serious implications for the aforementioned political debates. Taxes are no longer reduced to “who can pay for this public program?” Instead, we adopt a systemic view whereby taxes help determine the resources individuals lay claim to. A tax rate on capital half that of labor may suffice to pay the bills, but it equally determines to whom national income is directed. For whatever distribution we desire we establish taxes that orient resources from some individuals and towards others. Taxes take on a justice component when it is recognized they determine who gets what.

Public Services Losing Money? Good.

In our modern, mixed-market economy, the goods and services we consume are largely provided by either private firms or government. Within the former, think of your last trip to the bookstore, and within the latter, if you are like me, the T you took to get there. A lot of pop commentary holds the two providers of goods and services to the same standard. Why should bureaucrats have the privilege of running an unprofitable business indefinitely, often with great barriers to competition?, you might ask.

Well, the answer is really quite straightforward. Public services exist to close some gap the private sector – left to its own accord – does not rectify even when fulfilling its highest potential. Private firms set a price to maximize their profits, but it makes no guarantee that price is within reach to all or even a majority of consumers. So it goes, we cannot all buy designer clothes. But, as is obvious, the private sector produces things much less conspicuous than leather jogging pants.

Take for example urban transportation. Left to itself – and for the time ignoring the logistical nightmare private subways would entail – private transportation firms will devise some system of buses/trains/etc. throughout a metro and set prices accordingly to maximize profit, given some demand for transportation. Suppose it is financially feasible for 70% of the city population without access to personal transportation to afford the market price for urban transportation. One, that would be really impressive. Two, 30% of the folks reliant upon transportation other than a personal automobile are left stranded on the East Side from job opportunities on the West Side.

Enter government. Given some mandate to make decisions (democratic, theocratic, autocratic), government recognizes the need for cost-accessible urban transportation, claims the exclusive right to operate an urban transportation system, and builds a series of bus and rail lines to best serve the needs of its clientele. Notice the intentions motivating government (need for cost-accessible service, and need to serve constituents) and notice what is not included (need to maximize profit).

After the infrastructure is built, government has to decide at what price – if any – to operate at, and how to plug the gap between revenues and expenses. For the case of public transportation, two issues are worthy of consideration. First, the public transportation system presumably complements other forms of private transportation, and they work together as the city’s circulatory system. You want people to get from A to B as quickly as possible for efficiency reasons. Game theory shows us more isn’t always better in this regard, so it is best to act wisely and strategically. Second, public transportation has to fulfill its primary goal of being affordable. If affordable transportation is indeed something the private sector cannot provide exhaustively, that price will be lower than what the private sector would charge and may be lower than what is necessary to break even.

STOP! yells the fiscally conservatives, socially liberal yuppie. How can a business be ran at a loss, short of robbing citizens of their hard-earned income? Well, we could issue municipal bonds, but the interest rate would surely be too high to be a solvent plan, so we’ll do just what Mr. Yuppie fears most: we will expropriate a portion of the product of Mr. Yuppie’s expropriation. Because we must appear reasonable, we will call said meta-expropriation taxes. Of course, because taxes come from the city residents and public transportation is open to the public it may be that the individual’s tax liability eradicates any surplus gain the lower ticket price affords. But, as we saw earlier, usage of public transportation disproportionately comes those without affordable access to cars. Those people tend to be poorer and because their use is disproportionate, they receive in value more than they pay in taxes. Conversely, wealthy folks who drive to work pay more into the pot than they withdraw, allowing the city to break even. Add in a progressive income tax and the effect is multiplied.

Voila, we have managed to provide affordable transportation to everyone in the city, run a business at a loss, and live to see another day. Next time someone dishes out the classic “What if business tried to operate like government?”, you can retort “They would fail, and people on the East Side still wouldn’t be able to commute to their jobs on the West side.” Public services are supposed to lose money, otherwise they wouldn’t be public. Government has at its disposal a very powerful distributive tool in the form of taxation, and its finest days are those when it uses it to help the people the market leaves behind.

Hoping for Higher Interest Rates

As most of you probably know, last night Congress passed the deadline to pass a new budget for the fiscal year with nothing to show, and Americans woke up to the reality of government shutdown. All services not deemed ‘essential’ are temporarily suspended and federal employees indefinitely furloughed. There is a lot of politics at play here that frankly bores me, but it seems safe to assume Republicans think public opinion during the shutdown can turn in their favor and can be exploited for a rollback of Obamacare and more austere budget cuts. On that, I will say no more.

Magnifying the seriousness of a shutdown is the coupling of it with a breach of the debt ceiling on October 17th. Contrary to public perception, the debt ceiling is not a mechanism that allows us to spend more money absent additional revenue. The ability to borrow is a power the federal government reserves and would exist with or without a debt ceiling. The debt ceiling limits how much we can borrow, but because spending springs from separate Congressional legislation the debt ceiling only allows the federal government to pay for spending it has already authorized. So, if Congress passes a bill whose components cost $10 and the debt ceiling stands at $9, without tax revenue Congress will only be able to borrow and service their spending commitments by raising the ceiling.

Most folks – rightly, in my opinion – consider the consequences of breaching the debt ceiling more dire than the consequences of a temporary government shutdown. While our inability to pass a budget surely embarrasses us internationally, defaulting on our debt obligations could have huge ramifications for the world economy. I say ‘could’ because the possibility of the largest player in the global financial system defaulting for political reasons has never been considered a serious concern.

At the heart of the decades long divide are disagreements over the proper fiscal size of government and the consequences of incurring debt. If we keep digging a deeper hole and financing it through issuing new debt, eventually – so the argument goes – the domestic and international investors fueling our spending addiction will fear our ability to pay back past debt. This new fear will surface in higher interest rates. Because we take out new debt to pay back old debt, higher interest rates makes it that much harder to maintain fiscal responsibility. So on and so forth until astronomical levels of national debt and thus stagnated economic growth (note the causality).

The proper response to this line of reasoning is that the United States through the Federal Reserve controls the issuance of its currency. Because control the dollar we can print money appropriately to pay back past debt. Because we control the dollar we don’t even need to borrow to finance spending. We can just print dollars.

While I find the proper response convincing, the discussion misses an important point on interest rates and debt. Interest rates on ten-year Treasury notes haven’t been stuck at historically low levels because the international investors have more faith in the US government to pay back their debt than they did ten years ago. Consider the following: in August 2011 the big credit rating agencies downgraded the US Government’s credit rating. Accordingly, we would expect investors to shy away from US Treasuries and demand a higher interest rate when they do purchase them. But we saw the exact opposite. In the same month the rating agencies downgraded the US, interest rates fell to historic lows.

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Are we supposed to believe investors had more confidence in the US government to fulfill its debt obligations because Moody downgraded their debts? No, that would be counter-intuitive and stupid.

Investors demand less interest for the investment because the US Government is relativelysafe. They have a pool of money they would like to invest rather than stuff under their mattress and it just so happens a depressed global economy makes it really risky to park it anywhere but here. In this world, the options investors have to place their money are basically substitutes. Really depressed consumer demand makes investing in businesses unbearably risky, so they all flock to US Treasuries. This new demand drives down interest rates, explaining the historic low we are experiencing.

Previously I made mention of the implicit causal relation between debt (and thus interest) and growth disseminated by pundits and economists alike. But, if it is true – as I have attempted to show – that interest is low because Treasury notes offer the best relative return and not because of absolute confidence in the US Government, it follows that causality actually runs from growth to interest. Thus, if and when interest rates on Treasuries rise, it will not be an indictment of the US Government’s financial stability, but a sign of its economic health. We should greet it with a smile.

Claiming ‘Self-Interest’ Deserves No Interest

Hardly a week passes without some friend in conversation reducing the world with some broad platitude about everyone being motivated by ‘self-interest’. It is very possible I just need new friends, but I think the general claim is indicative of a broader disposition towards the world. Usually, the alleged brings up ‘self-interest’ as born of some state of human nature. People are naturally driven by self-interest and their choices can be explained thoroughly through self-interest. That may very well be so, but luckily for you – the reader – my focus here deviates from a discussion I am woefully unprepared for about human nature.

More importantly for my purpose is the dual meaning self-interest acquires in our unsophisticated ruminations about the meaning of things. I implore you to listen carefully when the center of discussion turns toward self-interest, for you will often find your friend engaging in a gross equivocation. On the one hand, self-interest will be used to analyze decisions where some actor enriches their interests with a scope limited to the individual. For example, some boss actively chooses to reward their intern with as little compensation as possible because for every dollar the intern earns is one dollar less in that boss’s pocket. Say what you will about such naked self-interest, but it is probably analytically useful at times.

On the other hand, self-interest will be used to explain situations where decisions are clearly not made for the benefit of the individual. For example, one might ask why in certain cultures people are less inclined to move far distances away from their family, even when such a relocation is clearly beneficial to their individual (independent of their family) interest. Surely, the same framework that justified a boss enriching their individual self cannot be used to explain a family member consciously acting against their individual interest. But, alas, self-interest will be used, probably with the qualification that that individual defines self-interest differently.

When a word is used so frequently and to explain such radically different acts, that word and its argument becomes tautological. Reducing two people’s different courses of action in similar situations to “they have a different meaning of self-interest” leaves us just as clueless as to why they acted differently as before we made that enlightened claim. If self-interest has no common, applicable meaning, if it can nimbly orient itself to accommodate all action, it is useless in understanding motivation. I fully confirm that my first definition of naked self-interest can explain a lot of actions, but it shouldn’t be broadened to explain behavior that deviates from the very individual self. We need new words and ideas to describe different behaviors. Please stop devaluing self-interest, you are wasting both of our time.