Continued from Is Welfare Working?

The number of people in the US who are in poverty is on the rise.  In recent years, the “richest country in the world” has seen record numbers of people living in poverty.  The ranks of the working-age poor are approaching the levels last seen in the 1960’s which led President Johnson to declare a War on Poverty.  While some of this can be attributed to the Great Recession of 2007, we have seen a more disturbing trend over a much longer time period of decreasing disposable income, increased household costs, higher inflation and less personal income growth.  Coinciding with this has been an expansion of welfare costs and programs that have helped to swell the Federal budget. 

Despite the apparent evidence that we are losing the war on poverty, many validly claim that welfare programs help to soften the impact of poverty on the economy.  We will look at this in just a moment; but, I want to take this opportunity to point out a truth about welfare.  Welfare does not end poverty.  Welfare is not capable of ending poverty nor was it ever intended to end poverty.  Poverty isn’t just created by a lack of money.  Welfare helps alleviate some of the symptoms of poverty; but, to address the causes requires a much more comprehensive overhaul of economic, monetary and sociopolitical policies. 

So, if it doesn’t end poverty, what does it do?  Welfare is, and has always been, intended to be an economic stimulus program.  We call it a safety net; but, it works more like a trampoline.  To understand this, we must keep in mind that in our industrialized economy a spending citizen is a productive citizen.  This goes back to one of the reasons we fought the Civil War; but, that interesting discussion will have to wait for another day.  When our household situation is such that we are not able to spend above a certain level, we are not adequately helping the economy to grow and prosper.  Welfare assistance helps us to increase our spending level.  Like a trampoline, when our spending falls, the social safety net helps to spring it back up again. 

This may sound like a cold way to look at welfare because we want to feel good by seeing it as an act of charity rather than a calculated function of capitalism.  We can still feel good about it though because it does help to relieve suffering by providing greatly needed resources to families that desperately need them.  Just as the progressive tax policy is designed to allow lower income families to retain more disposable income for spending purposes, welfare assistance directly injects disposable income into households.  This has some benefit for all us so long as:
  • the income tax rate remains equitable (which it hasn’t)
  • corporate tax rates remain competitive (which they aren’t)
  • trade balance remains positive (which it isn’t)
  • average home income continues to rise (which it has until recently)
  • disposable household income continues to increase (which is now in jeopardy)
  • inflation is not the primary economic growth engine (which it has become)
The reason it has benefit is because our economy is primarily fueled by consumer spending; so, theoretically, the increased spending by those in poverty helps to create greater job security for us all.  The way this works is that it cushions the decline of disposable income.  To show you what this means, the graph below charts the overall impact of government spending through programs like welfare, tax cuts and stimulus packages compared to actual disposable income rates from 2007 to 2010.
The solid line represents income earned through non governmental sources – private income.  As you can see, through the recession there is a steep decline.  People were losing jobs and there was less money to be spent in the economy overall.  The broken line represents income from both private plus government sources (benefit programs and tax cuts).  The Great Recession is officially recorded as lasting from October of ’07 through July of ’09.  The graph shows that private income dropped by a little over 6% during that time.  The combination of private and government sources, however, allowed disposable income to increase by almost a percentage point.

When the President states that the stimulus packages “worked” this is what he means.  Increased government benefit payments have kept total disposable incomes from falling as fast as private incomes when considered in the aggregate effect of spending occurring in the economy.  While the average household consumption reduced due to the recession and the reduction of personal wealth, government benefits helped sufficiently boost spending that would have been lost by those who lost their jobs.  Along with this, the “Bush Era Tax Cuts” that were the subject of so much heated debate helped higher income families (middle and upper income tax brackets) to continue spending despite the loss of wealth that was occurring.  From this perspective, both the stimulus and Bush tax cuts “worked” to keep the recession from being more severe.    

The spending and tax cuts certainly helped to soften the descent.  Did they actually help, though?  That is debatable; and, a matter of one’s point of view.  While the stimulus and expanded welfare programs added to the available disposable income, the overall trend was still down.  The massive amount of spending is unsustainable which means the tax cuts will eventually have to expire and/or tax increases may be required (both of which the President’s budget calls for this year).  Even without increased taxes, inflation is exceeding income growth; the net effect of which is still less real disposable income.  In addition to those factors, the level to which the government is spending cannot be made up even at 100% tax rate, so we either go even deeper in debt or Federal spending will have to decrease – pick your poison.  Moreover, since the US is running a trade deficit, more spending means more wealth actually leaving the country to sustain and create jobs in other countries.  All of these factors, when combined together, make for a very slow and prolonged economic recovery.

Did the actions allow the decline to be less steep; or, do they simply expand the length of time of the fall?  That is the debate for the economists.  Some say we have hit bottom and are on the road to recovery.  Others say we haven’t finished falling yet.  What is clear is that welfare is intended to increase household spending which is the primary driver of the economy.  Welfare programs do fulfill this function.  What is also clear is that our current path is not sustainable; and so, reforms are necessary in order to keep the entire economic system from collapsing in on itself – a very real risk. (see related article: Is the US on the Verge of Collapse?)  Beyond the state of the economy and mixed up governmental priorities, welfare comes with some risks all its own. 

To be continued…Up Next: The Dangers of Welfare

09/15/2013 9:36am

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05/27/2014 9:27pm

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