The human case against means testing

Image: A paper food stamp from 1980 (source)


I've already spilled quite a bit of ink (1 2 3) criticizing means testing on administrative grounds. Means testing is an extraordinary waste of resources; it's the reason the administrative costs of TANF are 15 times that of Social Security despite the fact that both programs fundamentally do the same thing (income transfer). And means testing in Obamacare is so irrational that Obamacare essentially spends billions of dollars to prevent millions of people from having health insurance.

But focusing on the administrative issues of means testing ignores the terrible human burden of means testing, which I hope to address now.

Before diving in, a few words about what I'm not writing about. I'm not discussing the cruelty of income or asset tests that are too low;* that injustice is obvious. Nor is this piece about the cruelty of benefits that are too low, or programs that are so poorly funded that the vast majority of eligible individuals don't receive benefits. These injustices are obvious. Less evident, however, are the ways that means testing itself places a burden on individuals and society generally, regardless of where the border between eligible and ineligible lies.

There are an endless number of tragic ways for means testing to destroy people's lives, but they all boil down to two basic issues. First, people who aren't eligible but need benefits must destroy their lives in order to attain and maintain eligibility. Second, means testing is necessarily imperfect. We will never design a perfect means testing bureaucracy, and some eligible people will always be incorrectly found to be ineligible. How many lives are we willing to destroy through imperfect means testing decisions?

"You'll have to get rid of everything"
Go and read this first person account of a family who needed to qualify for Medicaid because a family member became disabled in a horrible car accident in which she was not at fault. Only Medicaid covers the long term care equipment and services mommy needs to live, but Medicaid only covers poor people--so the entire family must live in poverty for the rest of their lives (they have to meet the so-called income and asset tests). The family had to liquidate their 401(k) (and pay the early withdraw tax penalties), sell their cars, empty their bank accounts, and sell all their valuables in order to meet the asset means test. Daddy had to cut his hours at work to 133% of the poverty line to meet the income means test; thereafter, 100% of any wages in excess of this level would be taken by Medicaid. Baby can never attend preschool when she gets older because the family can never earn or possess enough money to pay for tuition; auntie can't pay for baby's preschool because that would be Medicaid fraud. And baby can't have a college fund because any savings would make them ineligible for the Medicaid services that keep mommy alive. The entire story is so totally inane that it doesn't make any sense to blockquote it; it is well worth your time to read in full, even if you think you already understand that cruelty of our welfare system.

This may be an extreme example, but means testing necessarily results in distorted incentives. As the above story makes plain, when people depend on benefits, working more hours or saving any money becomes an impossibility. Thus, at the aggregate level, America's poor are forced to liquidate or forego savings and income in order to remain eligible for programs they depend on. For TANF (more commonly known as "welfare"):

Two of the first states to eliminate asset tests (Ohio and Virginia) actually saw declines in program enrollment and improvements in their overall bottom line.....What our research suggests, [] is that asset limits simply are not necessary to prevent misuse and actually discourage self-sufficiency.

You did not misread that: eliminating asset tests results in lower overall program costs and fewer people in need of benefits. Thus, by preserving asset tests, our political system demonstrates that poverty is a conscious goal: states are willing to pay money to ensure people remain in poverty.

Paul Ryan's new attempt to conceal his attack on the social welfare system

Image: Representative Paul Ryan (R-WI) (source)


Much noise was generated recently about Paul Ryan's supposed evolution on poverty. Every year, Ryan designs his ideal budget for the federal government, always calling for deep cuts to the social welfare system. In more recent iterations of his budget, he focused almost all of his enormous cuts to the social welfare system on antipoverty programs, leaving the parts of the social welfare system used by the nonpoor--like Social Security and Medicare--basically unscathed.

But when Ryan released a poverty plan last week, it featured restructured antipoverty programs--without reduced budgets. Was this an unprecedented change of heart--even a mea culpa--by the Republican wonk-in-chief? Had he reached a new understanding of poverty? Some thought so. Here, for example, is Ezra Klein's gullible write-up of Ryan's poverty plan entitled Democrats should welcome Paul Ryan's poverty plan. At the end, he concludes:

There will be charges of hypocrisy against Ryan's plan, and they're merited: his poverty plan and his budget cannot coexist in the same universe at the same time. Conservatives who spent the last few years cheering Ryan's budget are now cheering his poverty policies need to ask themselves some hard questions.

But more important than the contradictions in Ryan's plans is their progression: Ryan is refocusing himself and, perhaps, the Republican Party on reducing poverty by making the government's anti-poverty programs work better: that's a project that's both more important for the country and more amenable to compromise. Democrats should welcome it.

To his credit, Klein later interviewed a very skeptical Bob Greenstein of the Center for Budget and Policy Priorities, who douses cold water on Klein's hope for an evolution on poverty by Ryan and the Republicans. (Klein should be lauded for his willingness to post interviews with people who convincingly refute each point of his previous columns; most would instead double down.)

Greenstein argues that every word of Paul Ryan's plan is designed to sound like a reform of antipoverty programs--plans to make them work better with the same amount of funding--but are actually designed to create opportunities to gut them in years to come. Ryan's poverty plan is a Trojan horse--a vehicle secretly designed to make a reality the deep cuts to the social welfare state he envisions in his budgets.

Paul Ryan is certainly capable of this type of deceit. As I wrote previously, deceit is utterly foundational to his career. He would be a complete unknown if he hadn't cloaked all of his budget proposals in lies. Each one of the budgets he prepares every year utilizes confusing baselines or incomplete information to hide what he actually wants to do: gut the social welfare state. Ryan's consistent efforts to win support by confusing voters and pundits reveal that even Ryan knows how unpopular his intentions are. His efforts to cloak in his 2010 budget the destruction of Medicare and taxes increases on 95% of all Americans are particularly amusing. Ryan wouldn't be a major figure if he promised budgetary miracles while delivering tax increases on 95% of Americans and a hollowed-out Medicare; he's only a major figure because he promises budgetary miracles while concealing tax increases on 95% of Americans and a hollowed-out Medicare.

No, the "401(k) revolution" was not a "failure"; it was a spectacular success

Image: Wall Street watches out for senior citizens. They can make an awful lot of money off them. (source)


I recommend reading this piece by Lynn Stuart Parramore, as it is among the most clear and concise descriptions of how the "401(k) revolution" (her words) is in the process of upending the retirement security of the vast majority of Americans, but also how it is a major driver of inequality. As she explains, the rise of the 401(k) added a tremendous amount of fuel to the inequality fire (for more, here's a useful Wonkblog summary of a much longer EPI report).

But Parramore makes a mistake very common to many liberals lamenting the rise of the 401(k). I'm not implying that she is in any way unique--this mistake is extremely common across the political spectrum, including liberals. That mistake occurs from beginning to end in the tale of the 401(k). Act one: 401(k)'s are born:

Thirty years ago, as laissez-faire fanaticism took hold of America, misguided policy-makers decided that do-it-yourself retirement plans, otherwise known as 401(k)s, would magically secure our financial future in the face of gyrating markets, economic crises, unpredictable life events, stagnant wages and rampant job insecurity.

Note how the rise of the 401(k) is described as a mistake. Some "misguided" people made a mistake, and we're about to feel the very serious effects of that poor decision. The "misguided policy-makers" honestly thought this was a good idea--but good intentions do not make good policy, and their plan is about to backfire:

Instead of having predictable streams of income from traditional pensions, ordinary people with little financial expertise would suddenly transform themselves into financial gurus, putting money aside and managing complicated investments in tax-deferred accounts.

Note how Parramore explains that "ordinary people" were expected to benefit from 401(k)'s. It's not that 401(k)'s were expected to help only the wealthy or only the investor class. They were designed to--and expected to--help everyone, including "ordinary people."

(By "traditional pensions," Parramore means defined benefit pensions. For those unacquainted, a defined benefit pension is an agreement that an employer will pay an employee a specific dollar amount each month from the date the employee retires to the date the employee dies. 401(k)'s are defined contribution, meaning the employer agrees to contribute a specific percentage (the "employer match") to a bizarre financial instrument, which is invested in the stock market and will pay out money to the employee once she retires. Of course, some employers don't actually offer an employer contribution--in other words, the "employer match" or "defined contribution" is zero.)

She succinctly describes how the entire scheme has already violently backfired:

Reality check: In 2007, the financial crisis destroyed America’s retirement fantasy. Jobs evaporated or were downsized. The stock market took a nosedive. Millions of Americans who had worked hard, straining to sock away a portion of their salary for 401(k)s, watched helplessly as a black cloud formed over their golden years. In October 2008, the Congressional Budget Office revealed that Americans had lost $2 trillion in just 15 months — money that will likely never be recovered.

And, she gets close to the crux of the issue in concisely describing how 401(k)'s have enabled a further rise in inequality--

The report reveals that median retirement savings today stand at a paltry $44,000. But if you start looking at affluent America, the picture changes dramatically. A household at the 90 percentile of the retirement savings distribution had nearly 100 times more socked away for retirement than the median household. And the top 1 percent? Households at that lofty level had stashed more than $1.3 million in retirement account savings.

In a nutshell, the 401(k) revolution created a few big winners and turned most of us into losers.

--but ultimately misses the point. Liberals have the what and the how of 401(k)'s nailed down, but usually miss the why.

Augmenting this understanding with the why of 401(k)'s is of utmost importance, because many liberals assume that pointing out the disastrous results of the 401(k) revolution is a key first step in changing policy. In their minds, if we could only prove that the policies that enabled the rise of 401(k)'s resulted in bad policy outcomes, our political system would be convinced that it's time to reverse course.

The problem is, the movement towards 401(k)'s has not been a mistake, and it certainly has not been a failure. It is going exactly according to plan. 401(k)'s indeed are a vastly inferior system for the vast majority of Americans, but 401(k)'s were not created to help ordinary people save for retirement. They were created and expanded for very different reasons. To the people who ushered in the 401(k) revolution, the retirement "nightmare" beginning to swallow recent American retirees has not been a nightmare at all. It has been an especially enriching and welcome development.

Remember as you're reading: defined contribution pensions are a vastly inferior model to defined benefit pensions. Defined benefit pensions can provide the same retirement security as a defined contribution pension, for 45% less cost. Additionally, research argues that putting money in a 401(k) is generally harmful for low income workers. Whatever the reason to switch from defined benefit to 401(k), it should be a really good reason in order to make up for the enormously higher cost and other weaknesses. You be the judge:

U6 Watch bonus: Can there be any doubt that the point of student loans is to maximize inequality?

While preparing this month's U6 Watch, I kept coming across evidence that student loans are strangling American innovation. First, the in the Wall Street Journal:

Having the student-loan debt “is preventing me from being able to take a lot of chances or risks that are usually necessary when starting a business,” Ms. Carney says…

Some academic experts say leftover loans are the biggest impediment to upstart entrepreneurship by those who recently received college or graduate degrees. “I mentor students all the time,” says Vivek Wadhwa, a fellow at Stanford University Law School. “The single largest inhibitor to entrepreneurship is the student loans.”

Recent graduates and college dropouts account for a disproportionate share of the founders of technology startups that have transformed the economy over the past decade, says Shikhar Ghosh, a senior lecturer at Harvard Business School. Many freshly-minted M.B.A.s “are willing to sleep on a couch for a year or two, but they can’t do it with the burden of student loans,” he adds.

U6 Watch: August 2013

U6 Watch is a monthly feature monitoring the poverty-sustaining compromise of Democrats and Republicans to use the U3 measure of unemployment to obscure the reality of the labor market. Read the first U6 Watch for more background. U6 Watch also highlights other "recovery" and labor market news. All U6 Watches can be found using the U6 Watch tag.

I started U6 Watch back in July in response to the June BLS jobs report. In that jobs report, the most widely-reported measure of unemployment--the U3--fell--while the more accurate U6 unemployment rate increased. Since the U6 is a far more accurate measure of workforce underutilization than the U3, the positive press surrounding the "drop" in unemployment was smoke and mirrors; the situation had actually gotten worse, not better. Since the U3 was misleading while the U6 was not, I named the feature U6 Watch. However, had I started this month, I might have called it something different--for, this month, U3 and U6 are both misleading.

U3 unemployment fell from 7.4% in July to 7.3% in August; U6 unemployment rate fell 14.0% to 13.7%. This certainly sounds encouraging.

Unfortunately, the number of employed persons decreased from 144,285,000 to 144,270,000 (because it's a survey, BLS rounds to the nearest 1,000). The number of people working as a percentage of population fell from 58.7% to 58.6%. The labor force participation rate fell from 63.4% to 63.2%.

Once again, the numerator of the U3 and the U6 only count someone as unemployed if they are actively looking for work. If people stop looking for work (because they give up their job search or retire), the unemployment rate will fall, even if the employment situation hasn't changed. That is exactly what happened this month. Both U3 and U6 are used to report that the situation is getting better--that fewer people are unemployed. In fact, both measures fell only because people left the labor force. People didn't find jobs--fewer people are working this month than they were last month.

It's true that jobs reports are almost always inaccurate, and this one will almost certainly be revised--perhaps reversing these conclusions. Nevertheless, any attempt to make these numbers tell a positive story is an outright lie--and that's the key point. A essential feature of poverty sustainment (policies designed to keep people poor) is obscuring the reality of the situation. This is clearly what both U3 and U6 unemployment rates have done this month--they paint a rosy picture when things are--at best--not getting worse.

Now, BLS statistics suggest that the fall in the labor force participation rate was mainly due to people retiring. While that's better than the alternative--people giving up on their job search--this is no consolation whatsoever to the unemployed, since the data argue that we are losing jobs, not creating them.

On to other labor market news.

I forgot to put this in the July U6 watch: per the Bureau of Labor Statistics, job postings increased in June, but hiring fell. Sure, there's a lot of job postings up, but that doesn't mean employers are actually hiring. Remember that before you poke an unemployed person.

U6 Watch is about to go from bad to worse:

The 1% Consensus

Image: Grand Ayatollah Ali Khamenei, the current Supreme Leader of Iran (source)

So--there's this proposal in Iran that's not very controversial. 71% of the general public support it, with wide agreement among different age and racial groups. There are two political parties. Supporters of one political party favor the policy 91% -9%, and supporters of the other political party are split down the middle (50% in favor, 48% opposed). Since the Iranian government refuses to implement this policy, would you call Iran a democracy?

This doesn't describe Iran, of course; it describes the United States and the incredible, widespread public support for increasing the minimum wage. If a rational person would argue that Iran is not a democracy if it disregarded popular opinion so blithely, why should that not be true of America? How would you not conclude that the American government does not serve its people, but rather its corporate overlords? Remember, the Democrats--whose supporters favor a minimum wage hike 91% to 9%--controlled the Presidency and both houses of Congress from 2009 to 2011 and had a fillibuster-proof majority for most of 2009. Granted, there were other important legislative priorities, like health care reform (though that, too, was a shameless corporate sellout), but when the Democrats were one vote shy of 60 in the Senate, how could they not find one single moderate Senator in a party where 50% of voters support increasing the minimum wage? It's almost like they weren't even trying. And, it's interesting that a minimum wage hike would require breaking a Senate filibuster but the Wall Street bailout didn't.

(for the record, here is my post arguing against the minimum wage)

I started writing this blog when I realized I was having the wrong debates. I thought there was some uncertainty over the best way to fight poverty without sacrificing economic growth or job creation; there isn't. The reason we don't fight poverty is not because we don't know how, but because our political system doesn't want to. The bifurcation of the middle class into the sort-of-wealthy and working poor doesn't have to happen either; there's no controversy over how to prevent that from happening, either.

However, there is significant controversy over our policy goals. This controversy is usually unspoken; not even Republican Ayn Rand disciples would have the nerve to say that they want people to remain poor, even though that is exactly what they want. Our government usually gets the policy outcome it desires, even if that policy goal is unspoken. Poverty remains high because our government does not desire poverty reduction.

Our political system only values the interests of the rich, often at the expense of everyone else. Political science data bear this out:

Gilens has been collecting the results of nearly 2,000 survey questions reaching back to the 1980s, looking for evidence that when opinions change, so too does policy. And he found it--but only for the rich. "Most policy changes with majority support didn’t become law," Hacker and Pierson write. The exception was "when they were supported by those at the top. When the opinions of the poor diverged from those of the well-off, the opinions of the poor ceased to have any apparent influence: If 90 percent of poor Americans supported a policy change, it was no more likely to happen than if 10 percent did. By contrast, when more of the well-off supported a change, it was substantially more likely to happen.

Unfortunately, Gilens' data only allowed him to divide Americans by decile; he was not able to resolve the top 10% to see the opinions of just the top 1%.  More data, about Congressional representatives:

U6 Watch: July 2013

U6 Watch is a monthly feature monitoring the success of the poverty-sustaining compromise of both political parties to use the U3 measure of unemployment.  Read the first U6 Watch for more background.  Other "recovery" news and labor market news is reported as well.

New data is in revising the basis of my frequent exasperation that corporate profits are at record highs, while wages and salaries are at record lows.  I wasn't wrong, it's just that things are more extreme than we thought:

Before the figures were revised, it appeared that wages and salary income in 2012 amounted to 44 percent of G.D.P., the lowest at any time since 1929, which is as far back as the data goes.

But the revisions cut that to 42.6 percent, which matched the revised 2010 figure as the lowest ever.

The flip side of that is that corporate profits after taxes amounted to a record 9.7 percent of G.D.P. Each of the last three years has been higher than the earlier record high, of 9.1 percent, which was set in 1929.

Last month's U6 Watch discussed the declining labor force participation rate.  An Urban Institute report (h/t) breaks down the components of the stagnating labor force participation rate, finding:

U6 Watch: June 2013

Update (8/1/2013): There was a problem with the image I used for the labor force participation rate graph.  Put in a different graph.

Image: A Google image search for "unemployment" found this cartoon (source)

Both political parties have an cynical, poverty-sustaining compromise on the economy.

Both have agreed to use the U3 measure of unemployment in measuring the performance of the economy.  However, this measure makes no sense whatsoever; for June, U3 unemployment rate stayed steady at 7.6%, making it appear that things aren't getting worse.  They are.

The U3 measure divides:

(number of people actively searching for work) / (number people who are working + number of people actively searching for work)

Notice what the U3 measure conveniently leaves out:

Sequestration's Latest Victim: The Constitution

Image: Beneficiaries of the bottom tier of the American welfare system (source)

Updates--see below

I previously wrote about a Wonkblog round-up of media accounts of programs getting axed by the sequester, and how the sequester persists only because these cuts are focused on the bottom tier of the American welfare state.  Contrast the harm the sequester inflicts on the poor with the fact that any sequester cuts that inconvenience the rich were quickly rolled back: few things could more effectively express who our government works for.

Jared Bernstein has been running a "Sequester Watch" on his always excellent blog, and I'm embarrassed to say I haven't been keeping up.  In installment #14, he rounds up accounts of specific programs being cut: various Head Start programs, inner city schools, mental health services for Native Americans, low income housing, Meals on Wheels, federal public defenders, and others.  This is poverty sustainment; not giving poor children the educational opportunities they need to succeed is an endorsement of their poverty.

Here's another link describing the effect on federal public defenders:

Federal defenders already were facing a 5 percent budget reduction when $85 billion in spending cuts began coursing through federal agencies in March, lopping another 5 percent from the budget this fiscal year. Some courts have limited the hours they hear criminal matters. Defenders across the country are taking up to 15 days without pay, forcing postponements in many criminal proceedings...

The court system’s alternative is to hire private, court-appointed attorneys to represent indigent clients, since by law they must get a lawyer. They are paid from the same pool of money as public defenders. But they cost more, and according to some studies, are less experienced and less effective.

Nachnanoff told lawmakers that public defenders are expecting another hit to their budget of more than 20 percent in the fiscal year that starts Oct. 1, which would almost surely result in layoffs.

In a letter to the Judiciary Committee, a group of 40 former judges and prosecutors urged Congress to fully fund the defender program.

“These ill-conceived measures undermine not only the Federal Defender system, but the entire federal judiciary, without achieving any real cost savings,” they wrote of the sequestration cuts.

All American citizens have a Constitutional right to a trial and legal representation.  There can be little doubt this right was being trampled before sequestration; there can be zero doubt now that this is now occurring.

But a closer look reveals the cynicism of the sequester: because public defenders are being furloughed, the federal government is actually paying more money for worse representation for poor criminals.  Can there be any question that this is a feature, and not a bug?  Does the American ruling class really find this a convincing argument:

Poor people accused of federal crimes are more likely to go to prison because of the sequester, and we need to help them get adequate legal representation.

or would they rather that poor people suffer from incompetent representation?  That legislators are willing to pay money to ensure worse representation shows that worsening public representation is a pleasant surprise of sequestration, and not an unfortunate casualty.  Constitutional rights are to be protected, but only for the rich.  Remember, we imprison people at a higher rate than the world's autocratic dictatorships:

Checklist for profitable business: quality product, solid management & marketing teams, and high unemployment

Image: Construction workers "lucky" enough to have the privilege to work for low wages (source)

It's no secret that unemployment is still very high.  There are still 3.1 job seekers for every one job opening.  And things are even "worse" for the construction industry, where there are 12 job seekers for every 1 job opening:

Indeed, construction workers have been especially hard hit by the Great Recession and "recovery."  Setting aside the problems with the measure, the overall unemployment rate is 7.6%; for construction workers, the unemployment rate is 13.2%, and topped out at over 27%.  Most of the drop in unemployment is not due to these workers finding construction jobs, but with huge numbers of workers giving up.  Whether these workers successfully found work in other employment sectors matters little to the point of this post (most didn't)--but the obvious fact remains that huge numbers of workers skilled in construction are ready and willing to work.  Again, with 12 construction job seekers for every one construction job opening--double that number if you count the workers who have given up looking for construction jobs--there is no question that we have more skilled construction workers available than we can possibly use.

So why did the construction lobby fight to bring in foreign construction workers?  Current law caps work visas for immigrant guest workers at 15,000; the construction lobby fought (and failed) to get that cap eliminated.  Why, when there are so many idle, unemployed construction workers ready and willing to work, would the construction lobby possibly want to bring in more?

The reason the construction industry wants more foreign guest workers is because high unemployment keeps wages low.  When unemployment is high and workers are desperate for work, businesses can pay workers less than they're worth.  "You want $30,000 per year, plus health insurance?  Why should I hire you when Bob is willing to work for $20,000 without benefits?"  High unemployment = low wages.  This is basic economics.