Schansberg: Before the Cradle Until After the Grave

February 6, 2015

By Eric Schansberg, Ph.D.

Government is supposed to help individuals with life, liberty and the pursuit of happiness. Using this metric, let’s see how our government often struggles and how people are damaged as a result, especially the most vulnerable in society. We’ll look at a host of economic and social policies, chronologically — from before the cradle to beyond the grave.

Before the cradle, we start with abortion, where life is snuffed out before it reaches the cradle. Archaic knowledge of science and certain metaphysical views can lead one to believe that life does not begin in the womb. But if one has any doubts, we should obviously err on the side of life, rather than risk fatal errors. (We must go “beyond a reasonable doubt” to put the most serious criminals to death. Why not apply the same “reasonable” standard here?)

A civilized society should protect the vulnerable. But abortion has a disproportionate impact on the poor and “disadvantaged” minorities. According to the Alan Guttmacher Institute, 42 percent of abortions are for women below the poverty line — 30 percent are black; 25 percent are Hispanic. At present, there is a great focus on African-Americans and the police. But hundreds more are killed by citizens and thousands more are killed by abortion.

Once out of the womb, we offer “welfare” policies to poorer parents and children — redistribution of wealth based on income and family structure. As a society, we want to help those with fewer resources in more vulnerable family structures — most notably, single-parent households. The problem is that when you provide big resources for those in state x, you inevitably encourage people to enter and remain in state x. As such, our policies have encouraged the poor and lower middle class to bear and raise children in single-parent households. The resulting family instability has caused a range of serious, long-term problems for these children.

Charles Murray ably describes this in his book “Coming Apart.” In the middle- and upper-income classes, marriage and two-parent households have faded a bit over the last 40 years but have generally remained strong. But in the lower income classes, the vast majority of children are born and raised in single-parent households — the new norm.

With childhood, we have our government’s education system. In pre-kindergarten, government offers Head Start for poor children. Unfortunately, research has shown that it’s quite expensive ($8,000 per student) and generally ineffective.

For kindergarten through grade 12, parents are usually offered a free education at the government-run school in their neighborhood. The education is free, but the school is assigned. Poorer people, as a captive audience, are prone to abuse by the monopoly power of the local school. Where else can they go?

Of course, there are profound challenges concerning teaching in poorer areas. They have a far higher concentration of the social pathologies that generally follow from the single-parent households subsidized by the government. Still, one would not expect a government-run entity with tremendous monopoly power to be the height of efficiency or effectiveness.

Our war on drugs naturally leads to Prohibition-style violence and gangs, especially in inner cities. The artificially high profits are a temptation for teens to work in that sector. Sentencing guidelines allow children to engage in crimes with the promise that their records will be expunged when they become adults. Combined with poverty, the prevalence of single-parent households and less-than-optimal education, the current drug policy provides a wide road from school to prison.

If one tries to get a legal job, we have many laws that make it more expensive to hire workers. In particular, when productivity is low, artificial increases in compensation can make it prohibitively expensive to hire less-skilled workers. From workers’ compensation to the Affordable Care Act, the flip side of trying to help workers is making them more expensive and less employable.

The most famous of these interventions is the minimum wage — in which we try to help heads of households who need a “living wage” by making millions of workers more expensive to hire. Even with the policy’s benefits, the costs are troubling and the policy is clearly not well-targeted.

Other laws serve to lock out workers directly. For example, taxicab medallions erect artificial barriers to entry into a profession that would be ideal for many low-skilled workers. (Uber and Lyft are now rapidly eroding this monopoly power.) Occupational licensing makes it more difficult to get into dozens of professions — for example, hair braiding and working on nails.

If you’re fortunate enough to get a job, many of the working poor get to pay local and state income taxes. In 2013, the National Center for Children in Poverty reports that 16 states impose income taxes on workers at and below the poverty line. In 2011, the Center for Budget and Policy Priorities reported that 24 states imposed income taxes on workers within 125 percent of the poverty line.

The federal government won’t make you pay income taxes if you’re poor (unless you’re a one-person household). But they’ll nail you with payroll (Federal Insurance Contributions Act or FICA) taxes on income to finance entitlement programs for retirees: 15.3 percent of every dollar earned — no deductions, no exemptions, no credits. If you’re at the poverty line, you lose about $3,000 per year to FICA.

Government redistribution is often used to “reverse Robin Hood” — taking money from those with less income to redistribute to those with more income. Two huge examples:

First, the federal government subsidizes the purchase of health insurance through employers. This policy causes the bulk of our problems in health insurance and health care, but that’s a topic for another day. Here, the problem is that the subsidy is pricey (more than $250 billion per year; $3,250 from the average family of four). And it is regressive, disproportionately helping those with more income. Second, the home mortgage interest deduction is also regressive and pricey (another $130 billion — $1,700 per family).

What about spending your legal take-home pay? Unfortunately, there are a range of policies that drive up the price of food (farm policy), clothing (trade protectionism), shelter (regulations in housing) and health care (dozens of policies).

When you retire, you can hope to receive Social Security and Medicare from people who are then paying their FICA taxes. Well, Medicare is OK, but they’re reducing it now — and will cut it much more in the future. And the rate of return on Social Security now averages 0 percent — and is less for the poor and disadvantaged minorities (since they die earlier than average).

Beyond the grave, estate taxes are famous for taxing the same money for a second or third time at death. But for more marginal people, Social Security is their nest egg. In addition to its anemic low rate-of-return, Social Security is only a stream of income, not an asset that can be passed along to descendants — quite a death tax on those with lower incomes.

From before the cradle to beyond the grave, government imposes huge costs on people, even the most marginal in our society.

Eric Schansberg, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is a professor of economics at Indiana University Southeast.

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