Incentives and Disincentives: They Really Do Matter!

The Best Way to Reform Welfare Programs Is to Eliminate Them

“If you encourage something, you get more of it. If you discourage something, you get less of it.” Whoever first said that deserves a medal for putting to words one of the most profoundly important elements of human nature. Human beings respond—often powerfully—to both incentives and disincentives.

An understanding of this great truth is critical for sound public policymaking. When lawmakers ignore it, they raise taxes and then wonder why people don’t work as hard or save as much. Or they give people welfare checks for not working and then wonder why they’re not polishing their résumés.

Indeed, the welfare reforms of the 1990s came about largely because Americans saw the tremendous toll that welfare had exacted on families and on virtues like work and self-reliance. We came to realize, for example, that one outcome of boosting handouts when the father left the home was that fathers often disappeared. We also discovered how counterproductive it was to cut a dollar of welfare benefits for each dollar of earned income—in effect, imposing a 100 percent marginal tax rate on welfare recipients who found jobs. Clearly, we had to stop penalizing work and rewarding nonwork!

Robert Rector and William F. Lauber offered a stark but accurate assessment in a 1995 publication from the Heritage Foundation, America’s Failed $5.4 Trillion War on Poverty. In their view, a half-century of welfarism produced substantial “behavioral poverty” because it subsidized illegitimacy, divorce, and idleness. Family disintegration encouraged by the dole in turn spawned dramatic increases in crime and other social problems. According to Rector and Lauber,

The anti-marriage and anti-work effects of welfare are simple and profound. The current welfare system may be conceptualized best as a system that offers each single mother with two children a “paycheck” of benefits . . . . The mother has a contract with the government. She will continue to receive her “paycheck” as long as she fulfills two conditions: She must not work and she must not marry an employed male.

Thus, the welfare system . . . has transformed marriage from a legal institution designed to protect and nurture children into an institution that financially penalizes nearly all low-income parents who enter into it.

Unfortunately, in spite of some notable reforms at the national and state levels, a wide array of programs here in Michigan (and probably in all other states as well) are undoubtedly still sending the wrong signals. Over the years, we’ve piled one well-intentioned means-tested program on top of another—the cumulative effect of which may well be to say to untold numbers of families, “If you earn less than a certain amount, you’re eligible for lots of things but if you start to earn much more than that, you can lose it all.”

Every means-tested program state or local government offers has the unintended effect of reducing incentives for most able people to become self-reliant. Get a job and surpass the program’s income threshold and the aid disappears. Stay below this level and government pays you to stay unemployed or to remain in a low-paying job. And surely, some hard-working people who are earning slightly above the maximum allowed for certain benefits have days when they wonder if their efforts to take care of themselves are all worth it.

In Michigan, families below certain income limits qualify for a laundry list of benefits. The other way to look at it is as a list of the freebies low-income workers can get if they just work less.

  • A family of four whose income rises above about $573 a month loses Family Independence Agency (FIA) cash subsidies for living expenses (actual limit depends on recipient tier, shelter area, and employment deductions). The same household also loses state-provided employment and training services when its income exceeds that threshold (again, actual limit depends on FIA classification).
  • A family of four earning more than $755 a month no longer qualifies for cash subsidies provided by the State Emergency Relief program to cover housing and utility costs.
  • Households of four with monthly incomes exceeding $1,783 may no longer receive food stamps.
  • Unemployment benefits disappear when per-week earnings reach $450.
  • Subsidized housing eligibility for a family of four vanishes when annual income exceeds approximately $24,725 (actual limit depends on city and income grouping).
  • A household of four gets subsidized child day care until its monthly income grows beyond $2,586 ($31,032 per year).
  • A family of four grossing more than $2,876 a month ($34,512 a year) loses aid from the Low Income Energy Assistance Program to cover heating costs.
  • State-subsidized low-interest mortgage loan availability goes away when annual income exceeds $43,575.

Recently, a commission appointed by Governor John Engler proposed a “Postsecondary Access Student Scholarship” (PASS) program. If enacted, it would offer two years’ free tuition for the pursuit of an associate’s degree to students coming from families earning $40,000 or less.

It’s not precisely scientific, but it’s fair to say that under the current panoply of aid programs, at somewhere around the $25,000-$35,000 annual family income level lots of benefits disappear. For some citizens, that means it may be more lucrative to accept a low paying job than it is to accept a higher paying one because the value of government benefits more than offsets the loss of income from more gainful employment.

Careful empirical surveys might illuminate the extent to which current programs are having unintended, negative effects. Suffice it to say for now that simply recognizing that incentives and disincentives matter would be progress in the public-policy discussion, and it just might make a few legislators think twice before adding more programs to the problem.

The ultimate answer to this dilemma is not some reconfiguration of public welfare laws. As long as government is taking from some and giving to others, “reforming” the system in any fashion still leaves a relatively indifferent and unaccountable public bureaucracy spending other people’s money on behalf of people who need something much more fulfilling than a government check. They need the uplifting effects of thoughtful and efficient private initiative—either their own or that of others who really care about them.

The best way to reform government welfare programs is to eliminate them. Excise the middleman of government and stimulate the direct civil-society approach of people helping people. Ultimately, there’s no reason to believe that politicians are more compassionate than the people who elect them, and judging by the effects of the politicians’ programs, there’s not much reason to think they’re any smarter either.

More by Lawrence W. Reed