Vice President Joseph R. Biden Jr. unwittingly spoke economic truth Tuesday when he let slip that the middle class has "been buried the last four years." It sure has. The middle class and working poor have seen their incomes shrink from an inflation that has eaten away at their wallets. Just about everything is at least 10 percent costlier now than three years ago, while economic growth has slowed to just 1.3 percent.
Compounding the problem, government feels the need to step in and "help" during such bad times. That just makes the situation worse. University of Chicago economist Casey Mulligan recently analyzed the impact the recent expansion of the safety net has had on marginal tax rates for people at or below the median income level. He found all too many Americans "saw their marginal tax rates increase by more than 5 percent in less than two years."
Mr. Mulligan focused on changes in the three big programs for non-elderly households -- unemployment insurance, food stamps (now known to bureaucrats as the Supplemental Nutrition Assistance Program) and Medicaid. Unemployment benefits depend on income earned when employed. Medicaid and food stamps, in contrast, are fixed amounts, regardless of income when employed. These subsidies also depend on household income, and therefore they vary considerably for the married and the unmarried and are estimated separately.
The rules have changed significantly since the start of the Great Recession in 2007. In addition to lengthening benefit eligibility for unemployment, the Obama stimulus increased the amount of compensation, the size of the tax exemption and paid 65 percent of the cost for people who wanted to stay on their former employer's health plan. Eligibility rules were also relaxed.
This might seem compassionate, but the effect was anything but. Once employed, workers -- especially those near the median income -- have these benefits yanked. Anyone with income in excess of 130 percent of the poverty line loses food stamps and Medicaid. The loss of these subsidies functions like a marginal tax on any income earned from employment. In other words, it's a penalty for working. Mr. Mulligan calculated the price of finding a job is a marginal tax rate of anywhere from 5 to 10 percent of their income, with the poorer employees facing the highest rates. That is because they lose their eligibility for food stamps and Medicaid, while the poorest do not.
The report showed between 2007 and 2010, changes in hours worked closely tracked regulatory changes. For example, when the unemployment eligibility duration was doubled from 26 weeks to 52, there was a big jump in unemployment insurance participation.
We certainly have a demand-side problem, in that there are too few jobs being created. We also, however, have a supply-side problem, in that "incentives to work . . . remain significantly less than they were five years ago." A social safety net is to be commended, but it needs to remain exactly that: a safety net, not a dependence trap.
Nita Ghei is a contributing Opinion writer for The Washington Times.
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