April 5, 2017

When the Right Surrenders, Part 3

Two Washington-based think tanks, American Action Forum and American Enterprise Institute, keep pumping out papers and op-eds promoting the idea of Paid Family Leave. The idea behind this entitlement program is lifted directly from the Scandinavian welfare states, and is one of only three major entitlement programs that institutionally separate the American welfare state from its Scandinavian brethren. Now, apparently, these two think tanks have decided that time is ripe to close the gap between our egalitarian project, and the role model according to which it was designed. 

The primary proponents of Paid Family Leave are Ben Gitis, director of labor market policy at the American Action Forum and Angela Rachidi, research fellow in poverty studies at the American Enterprise Institute. Gitis has promoted a broad-scale Paid Family Leave program in a separate publication; for now, he and Rachidi have decided to focus on one part of the Paid Family Leave conglomerate, namely paid parental leave from work to care for a newborn baby. 

In an op-ed in the Washington Examiner on April 3, Rachidi introduces their idea as the logical expansion of the welfare state it is - provided that one does not care about the massive fiscal and macroeconomic problems that come with a welfare state in the first place. The same enthusiasm for expanding the egalitarian project we know as the welfare state, is found in the policy paper that Gitis and Rachidi published in March. They explain their idea: 
This proposal follows up on the American Action Forum's proposed Earned Income Leave Benefit (EILB), a highly targeted program that would provide paid parental, family care, and medical leave to workers in low-income households. In this paper, we narrow our focus on paid parental leave for the birth or adoption of a new child and outline a proposal to provide paid leave to low-income and lower-middle-income working households. This proposal is intended to supplement what the private market already provides, as well as to offer job protection and paid leave to those who do not currently receive it. 
Unfortunately, their entitlement program is littered with the exact same problems that characterize every single corner of the egalitarian welfare state. It is clear that Gitis and Rachidi have not done their homework on this subject.

Let us begin with the notion that an entitlement program can be restricted to poverty relief. History has proven otherwise, over and over again. For example, when Social Security was introduced in 1935 it was meant to be a supplement to private retirement plans, providing poverty relief in the spirit of conservative paternalism. Yet over the years the program has expanded and is now the nation's backbone of retirement security. In 2013, 64 percent of all eligible Americans received at least half of their income from Social Security.

Another example is the Food Stamp program, also created strictly for poverty relief. Over the decades it has expanded enrollment and slowly morphed into an entitlement program with broader reach than just those living in poverty. As recently as during the Great Recession, 2008-2013, the program increased its enrollment three times faster than the poverty population.

SCHIP is a third example. It was introduced by then-U.S. Senator Ted Kennedy (D-MA) and used the same architecture as a poverty-relief health insurance program in Massachusetts. In other words, SCHIP was intended for the poor. Yet already in 2002, five years into its life, the program enrolled 24 percent of all kids younger than 18. The poverty rate among this demographic was 16 percent. 

In 2012, right at the end of the Great Recession, the poverty rate among children had risen to 21 percent, but SCHIP enrollment had increased to 35 percent.

These are only three examples of how entitlement programs have expanded far beyond their initially defined scope - which in all three cases happens to be to ease the hardship of poverty. It is therefore only logical to expect that the Gitis-Rachidi entitlement program will also expand far beyond its original purpose, thus drastically raising the cost to taxpayers. 

Are Gitis and Rachidi happy with this?

On a related note, Gitis and Rachidi suggest that their model would provide paid-leave benefits to workers who do not have such benefits now. With a means-tested program, they say,
the federal government would provide the benefit to only low- and moderate-income workers, who are the least likely to have paid parental leave in the first place, reducing the chances that many employers will drop more generous packages. 
As they continue,  they make a point out of the government program being more stingy than private-sector offerings:
Phasing out the benefits at higher [income] levels also ensures that more moderate-income families are less likely to receive better benefits from the government than what is available through their employer.
This idea of keeping the government program stingy creates a conflict of purpose, which I discussed in an earlier article on this issue. Aside solving that conflict - which is no small feat in itself - there is also the ever-present problem of marginal disincentives. At no point in their report do Gitis and Rashidi mentiond this problem.

Another institutional problem with this paid parental leave program is that it does not even succeed in its core purpose, a purpose that Gitis and Rachidi define as:
paid parental leave for the birth or adoption of a new child and outline a proposal to provide paid leave to low-income and lower-middle-income working households. 
The entitlement is provided "to workers in households under 325 percent of the federal poverty threshold". 

Since it is aimed at economically facilitating child birth and its immediate aftermath, one would assume that the entitlement program would be constructed in such a way that it benefited households that are most likely to have a child. In the past 25 years, the U.S. fertility rate has hovered around 2.0 (slightly lower during the Great Recession), which means that the households that are most likely to add a child are those with no kids, or one kid. Therefore, it would be logical that Gitis and Rachidi would design their program to benefit specifically those households.

Curiously, that is not the case. On the contrary, a comparison between median household income and the benefit threshold shows that the Gitis-Rachidi model is least generous toward households that are most likely to have children. 

Here is how their model fails. We start with median income, which is the "half way" point of income for a population group: half of all households in that group make less than median income, while half of them make more. In other words, if Gitis and Rachidi used median income as its eligibility cap, they would make exactly half of a specific demographic eligible for their entitlement.

If the eligibility cap exceeds median income in the defined demographic, then more than half the population of that demographic is covered; less than half is covered if the cap falls short of median income.

Table 1 shows how Gitis and Rachidi fail to target their entitlement program to those they say they want to provide for. In the demographic groups that are most likely to have more kids, their program can be expected to cover the fewest households. The last column of Table 1 divides median income with the income that equals 325 percent of the federal poverty limit for that demographic:

Household size Median income 325 percent of FPL Median/325
1  28,800  39,267 136%
2  63,850  50,021 78%
3  73,990  62,004 84%
4  87,739  78,117 89%
5  78,662  91,930 117%

On page 5 in their report, Gitis and Rachidi claim that their model targets "those who need it the most". Table 1 shows that they actually target those families that are the least likely to have a baby, namely single-individual households and families with three or more children.  

Perhaps the biggest problem with their proposed program is a classic, and endemic problem with egalitarian entitlement ideas: discouraging self determination. Part of this problem is that entitlement programs tend to give private employers a good reason to drop privately provided benefits and instead dump their employees into tax-paid programs. Gitis and Rachidi beat about this bush quite a bit, only providing speculative thoughts on how private employers might react. 

However, we do not have to resort to speculation. All we need to do is look at what happened when Obamacare went into effect. As soon as individual health plans were available, employers both small and large began dropping health benefits, expecting their employees to find new, tax-subsidized plans through the ACA exchanges.

As if to top off the list of problems with their entitlement program, Gitis and Rachidi manage to put together an entitlement program that can actually provide a stronger financial disincentive toward self determination than even the EITC. A key element of their program is, as mentioned, that the benefit is phased out with household income rising above a certain point. 

Since this entitlement program is meant to provide a benefit at a specific, and relatively rare, occasion in people's lives, it de facto functions like a savings account. Just like parents could use their savings to cover income loss while caring for a newborn, they use the benefit in the Gitis-Rashidi entitlement program. 

Suppose a family is considering having another child. In the meantime, the father is offered a promotion that will increase the family's income from $35,000 to $40,000. It also means they have to move to the other side of town, an expense they will cover out of their savings account.

On the one hand, they now have more money in their pockets per month, thanks to the raise; on the other hand, they have less money in the bank, making it tougher to get through the weeks and months after their new baby is born.

The difference, of course, is that unlike the Gitis-Rachidi entitlement program, a savings account would not discourage people from making other important life choices beside having a child. Suppose that a family, having access to the Gitis-Rachidi program, is considering two simultaneous decisions: to have a baby and to accept a promotion that will allow one of the parents to earn $5,000 more per year. 

At an annual income of $35,000 - equal to $673 per week - this family gets $388 per week in parental benefits. If the parent that has been offered a promotion decides to accept it, their weekly earnings increase to $769. At the same time, the parental-leave benefit falls to $342 per week. 

Does the parental-leave program help the promotion-offered parent to give a thumbs up or thumbs down to the offer?

The answer is no, and here is why. Almost half, or $46 of the $96, of the raise is lost because, during the parental-leave period they would get a lower benefit if the promotion goes into effect before the child is born. 

Add to this the federal income tax, which goes up by $15. The weekly pay raise is now reduced to $35. Then they lose $21 worth of Earned Income Tax Credit, and the family is left with a meager $14, or approximately 14.5 percent, of the initial raise. 

The Gitis-Rachidi entitlement program is responsible for 56 percent of the evaporation of the pay raise. This means, bluntly, that Gitis and Rachidi have constructed an entitlement program that:

a) does not primarily benefit those it says to wants to benefit;
b) risks becoming significantly more expensive than they estimate;
c) has no clear funding source; and
d) builds up significant disincentives toward career development and self determination.

In other words, their Parental Leave entitlement program is a pure-bred egalitarian idea, true to the ideological foundation of the Scandinavian and American welfare states. It is a program with the same potential to do major fiscal harm to the federal government, and significant macroeconomic damage to the economy as a whole. 

Perhaps Gitis and Rachidi had been more careful in their proposals if they had taken the time to study the macroeconomic consequences of the welfare state. Maybe the would change their minds if they studied income-security programs in other countries?

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