Sunday, November 29, 2009

What If . . . ?

Last night, in a conversation regarding the economy and fiscal policy, I was asked, “What would happen if the United States stopped paying for welfare programs?” I responded that people would die. But the question asked—though a stark and cold one—is a good one. The inquirer was concerned that the money spent by the United States on social welfare programs could be better directed by individual; he was curious whether taking the money that funds those programs and returning it to the tax payers that earned them would result in more jobs.

Above is a chart comparing the highest individual income tax with the annual unemployment rate and change in annual real gross domestic product from 1940-2008.* In the post-War era, the Eisenhower administration featured the highest individual tax rate (91%) while the George H.W. Bush and George W. Bush administrations hosted the lowest and second lowest highest individual income tax rate regimes. While during the Eisenhower administration the unemployment rate averaged 4.875%, during the George H.W. Bush administration it averaged 6.14% and during the George W. Bush administration it averaged 5.265%.

It is of course a truism that the economy is more complicated than to lend itself to full description with just GDP, highest income tax rate, and unemployment. The above describes only that merely lowering the highest individual tax rate does not yield greater employment levels. And, in reviewing the chart, it appears that lowering the highest individual income tax rate does not generate GDP growth. A more complete analysis should include a discussion of the amount of tax payers that actually pay that highest individual tax rate.

Turning now to an actual welfare program, when asked about cutting social welfare I immediately thought of WIC. So, what would happen were WIC eliminated? In 2007, WIC cost the federal government $5.4 billion. Also in 2007, 1.1 million tax returns were filed at the highest individual rate (35%). Now, distributing the cost of WIC over the income tax brackets at the same proportion it was taxed, and dividing those values by the number of returns filed in that bracket tells us that by eliminating WIC, each of the 1.1 million filers in the highest tax bracket would have saved $577.49, or 2/10 of a percent of the lowest earner captured by the 35% bracket. On the other hand, WIC service 8.3 million pregnant women and infant mothers.


Colin said...

First off, I think the belief that "people would die" is rather extreme. Did the reduction in welfare during the 1990s produce a spike in deaths? Not that I am aware of. In fact it corresponded with a marked improvement in several social indicators.

Second, I think your correlation between marginal tax rates and unemployment is misleading, as you also need to look at what point you get hit with the tax rate.

For example let's imagine two countries. The first taxes everyone at a 30% bracket until $100K and then at 40% after. The second taxes everyone at 25% until 100K, 30% until $5 million, 35% until $10 million and 90% after $10 million.

Which country really has the higher tax burden? Obviously the first, as realistically only a handful of people are subject to the 90% tax.

This isn't just theoretical. In 1960 the highest tax rate kicked in at an inflation adjusted point of $3 million. Today? $360,000.

Ben said...

Thanks for responding, Colin. I absolutely agree that the analysis isn't complete, which is why I pointed it out myself--the broader point I was making is that it's not clear that reducing the highest individual income rate does not necessarily increase or decrease GDP or exacerbate or reduce unemployment.

As far as death--I don't think that it's too extreme to say that eliminating WIC altogether would lead to some death.

Colin said...

In all seriousness, how much death do you think would really occur? And what is your basis for this? Is it mainly a gut instinct? Are there studies which support this? I am genuinely curious.

I ask because I really find it a rather astonishing proposition. WIC is basically just food stamps, and I have a difficult time thinking it is all that keeps people from literal starvation. After all, let us remember that one of the problems which plagues lower incomes is *obesity* (which I realize can result from a bias towards cheap calories in food that is bad for you).

I just find it rather astonishing to think that in the richest country in the world people would starve to death or meet some other grim fate absent a government program. This, mind you, in a country so wealthy that over 97% of the poor own a stove, color TV and refrigerator according to government statistics.

It's also a rather startling indictment of the American people, who presumably would not reach out and increase assistance to charities to ensure this does not occur.

Ben said...

You're right, it is astounding. And yet, as one of the richest countries in the world, the United States has a higher infant mortality rate than Belarus, Lithuania, and Cuba among others.

Colin said...

You might find this worth a read:

I would also recommend the chart on the second page of this article:

Ben said...

According to the WebMD article, the full term birth mortality rate is still higher in the US than the rest of the industrialized world.

Colin said...

Really? The way I read it we rank #10.

Also, according to this NYT article:

Dr. MacDorman said prematurity was not the only factor behind infant mortality in the United States. She said full-term babies in this country also had higher death rates than those in Europe from sudden infant death syndrome, accidents, assaults and homicides.

It should be noted that none of those factors listed are due to a lack of resources, but rather behaviors.

The infant mortality rate does not seem to offer any insights into why people would die from a lack of WIC, as there doesn't seem to be evidence babies are dying due to a lack of funding.

The WIC question also merits examining whether people died of starvation before it was established. I don't recall seeing any literature which indicated starvation and hunger death was common before its implementation. But perhaps I am wrong.