The one thing that the American welfare system does not need is a middle‐class expansion. This year, the federal government will spend more than $1.1 trillion to fund 134 welfare or anti‐poverty programs, and because many of those programs are jointly administered and funded with states and localities, those governments will contribute an additional $744 billion. In total, we will spend roughly $1.8 trillion on welfare this year. When you consider that this amounts to roughly $49,700 per person below the poverty level, it is obvious that welfare spending reaches well into the middle‐class.
Of course, we wouldn’t want to cut off program eligibility at the poverty level. Doing so would create an enormous welfare cliff—a marginal tax rate that discourages work, savings, and family formation through a rapid drop‐off in benefits as individuals earn additional income. Still, our welfare system is not narrowly targeted.
None of this, of course, includes one‐time expenditures like those designated as pandemic relief. Nor does it include middle‐class entitlements such as Medicare and Social Security, which while not purely welfare, nevertheless represent transfer payments from the government and are cornerstones of the modern welfare state. Overall, government payouts, including middle‐class entitlements, now account for more than a third of all wages and salaries in the United States.
One form of middle‐class welfare being widely discussed on both the left and right are various forms of wage supplements. There may indeed be an argument for wage supplements as a second‐best solution for low‐income workers, notably for changing the Earned Income Tax Credit (EITC) from the largely natalist child subsidy it is today, to more of a pure wage supplement. But even here, there are trade‐offs involved. Such a subsidy limits labor mobility and imposes substantial compliance costs on businesses. Employers often lower wages and absorb the subsidy, shifting labor costs to taxpayers. There is also a high fraud and unintentional error rate. Those negatives may be preferable to the alternatives (such as a higher minimum wage or the existing structure of the EITC) for low‐income workers facing steep welfare cliffs, payroll tax burdens, and low wages.
All the negatives of wage supplements are as applicable, if not more so, as those supplements expand into the middle‐class, but without any of the potential benefits that might apply to low‐wage workers. Moreover, while changes to the EITC could be made cost neutral by limiting the child‐subsidies embedded in it, an expansion of welfare, including wage supplements into the middle‐class, would need to be paid for, most likely through either higher debt or increased taxes. Either approach would be likely to lead to slower economic growth, lower wages, and fewer jobs (as well as potentially higher inflation). In that way, the expansion would end up becoming self‐defeating.
No doubt many working‐ and middle‐class families are struggling in today’s economic environment. But there are many ways to help those families without a massive expansion of the welfare state. Many of those solutions will be featured in a new book from Cato to be released this Fall. Be on the lookout for Empowering the New American Worker: Market‐based Solutions for Today’s Workforce, edited by Scott Lincicome.
