Forget Welfare: Give People Cash

Most students who fail my classes are too busy roaming the halls or watching soccer videos to finish their work. But some fail because they are working full time, to help their families meet rent and buy food. What can be done to help these students?

The US currently offers 80 different programs that provide goods and services ranging from food stamps to subsidized housing. Critics decry this welfare system as inefficient, complex and corrupt and say that it discourages recipients from working. Other welfare systems around the world suffer from similar imperfections. Could we provide the same safety net, with fewer of these shortcomings?

Andrew Yang advocates a universal basic income—a guaranteed, monthly payment from the government to every citizen. The principle behind UBI—that we should simply give people cash—is worth considering.

In contrast to a UBI, Milton Friedman recommends implementing a “negative income tax,” in his book Capitalism and Freedom. Instead of a positive tax on earnings, under Friedman’s proposal, low-income individuals would receive a negative tax: a payment from the government if their earnings failed to meet a certain threshold.

For example, were Congress to set a threshold of $20,000, with a negative tax rate of 50%, anyone making $0 would get 50% of $20,000: $10,000. If they were to take a part-time job at $5,000 a year, they’d get 50% of $15,000 back—the difference between their income and the threshold—i.e. $7,500, on top of their earned income. The cash payment would decrease as they earned more money, until they topped the $20,000 threshold and began to pay a standard tax. This system has bipartisan appeal and could achieve the same ends as welfare, with fewer drawbacks.

Robert A. Levin is a former economist with the RAND corporation and a chief planner during the War on Poverty. His 1970 book The Poor Ye Need Not Have with You reviews the successes and failures of President Johnson’s anti-poverty legislation. After years struggling to implement a holistic welfare system, Levin concluded that some method of income maintenance was essential—ideally, a negative income tax (NIT).

This appealed to him for its simplicity. Levine laments that a welfare system, “must necessarily be arbitrary and inefficient. It is a system of rules within rules in which national policy is expressed in detail … interpreted by state and county regulation, and applied by individual social workers.” Conversely, to implement an NIT would require only the modification of a preexisting tax policy within a preexisting bureaucracy: the IRS or similar agency in other countries. While standard welfare is a complex system, often stressful to negotiate, an NIT provides a hassle-free, guaranteed income delivered in the mail.

Under such a system, my students, who currently spend fifty hours a week earning poverty-level wages, would be freed from their immediate necessities and could focus on the longer goal of escaping poverty. Levine writes that, “a guarantee of some minimum level of income to a family may well help to stabilize that family, and the income and stability will, in turn, contribute to the success of family members.”

There have been few studies of a negative income tax. Perhaps the most notable focused solely on the effect that an NIT would have on work incentives. It found some disincentives to seek employment—but any system of welfare or guaranteed income will have this effect, and NIT fared better than welfare.

The reason for this relative advantage is the structure of the negative tax. Under standard welfare, an individual who works risks losing the food stamps and subsidized housing that help her meet her basic needs: the regulations punish her for working. Once on welfare, there’s a strong incentive to stay on it—creating a potential poverty trap. With NIT, an individual will always earn more if she works more. There’s always an incentive to seek employment.

Studies on poverty relief can provide some insights into the potential effectiveness of an NIT. Studies have found that supplying cash—rather than water, food or supplies—is cheaper and does not lead to a significant difference in the quality of food consumed, nor are the cash transfers wasted on illicit substances. A 2013 survey by the Canadian Foodgrains Bank found that cash transfers actually led to healthier diets than in-kind transfers.

NIT is also cheaper than welfare. Researchers at the American Enterprise Institute have estimated that, if the government dissolved the entire current $522 billion welfare program, every individual over the age of eighteen could receive a $13,000 check. That is enough money to provide a UBI to every American. Since an NIT would only be provided to those under a specific income, the per person amount could be substantially higher. Alternatively, the government could retain some aspects of welfare and still save immense sums of money.

Any welfare system should assist those who are out of work through no fault of their own, without overburdening the taxpayer or enabling pathological behaviors. A negative income tax is ideal in this respect. It simplifies the process, cuts costs, provides people with an incentive to work, and—perhaps most importantly—allows people to spend their money on the things they need, not just on the predetermined goods that welfare currently dictates.

Andrew Yang’s success is a manifestation of deeper political currents. People are looking for a centrist who will promote effective policies—not just indulge in self-promotion. As both US political parties realign, many moderate liberals and centrist conservatives are beginning to feel politically homeless. Friedman’s negative income tax proposal may not win a presidential election, but there’s a demographic out there who want to support such policies.

A NIT should appeal to both liberals and conservatives. As Robert Moffitt comments, “from an economist’s perspective, the negative income tax is the perfect design … the only reason an economist would oppose it would be from a strict libertarian perspective—opposition to any kind of government-managed welfare.”

A libertarian case can, however, be made for NIT. Many economists at libertarian institutions such as CATO would prefer some method of guaranteed income over the current welfare state. Friedrich Hayek and Milton Friedman advocated guaranteed income, not just as an alternative to the welfare state, but as an ideal in itself, arguing that, while a progressive government couldn’t centrally plan every part of an economy, a libertarian government couldn’t account for every imperfection in the market. An NIT, then, could rectify infringements on personal rights.

A straightforward proposal for a negative income tax would probably fall flat. It would represent too dramatic and sudden a change. But the policy lends itself to incrementalism: we could repeal one piece of the current welfare state at a time, as the threshold for the NIT increased. Conversely, individual states or cities could implement a localized NIT, without affecting the rest of the country.

The left say that we need policies to help the poor—they’re right. Some of my own students are too poor to pass their classes: their families either make too much money to qualify for the right programs or struggle to jump through bureaucratic hoops. Why make things harder on them? Just give them cash.