FREEDOM vs POVERTY

The War on Poverty and the Decline of Marriage

As Chart 2 shows, throughout U.S. history, marriage was the norm. Prior to the mid-1960s, nearly all children were born to married couples. When the War on Poverty began in 1964, only 7 percent of children were born to unmarried women. However, over the next four-and-a-half decades the share of non-marital births exploded. In 2013, 41 percent of all children born in the U.S. were born outside marriage.

A Two-Caste Society

Non-marital child bearing is not uniformly spread across U.S. society. Most non-marital births occur to women who will have the hardest time going it alone as single parents: young adult women with a high school degree or less. As Chart 4 shows, nearly two-thirds of births to women who were high school dropouts occurred outside marriage. Among women who had only a high school degree, well over half of all births were outside marriage. By contrast, among women with at least a college degree, only 8 percent of births were to single women, while 92 percent of births occurred to married couples.

The U.S. is steadily separating into a two-caste system with marriage and education as the dividing line. In the high-income third of the population, children are raised by married parents with a college education; in the bottom-income third, children are raised by single parents with a high school degree or less.

Welfare and the Decline of Marriage

It is no accident that the collapse of marriage in America largely began with the War on Poverty and the proliferation of means-tested welfare programs that it fostered. When the War on Poverty began, only a single welfare program—Aid to Families with Dependent Children (AFDC)—assisted single parents. Today, dozens of programs provide benefits to families with children, including the Earned Income Tax Credit (EITC), Temporary Assistance for Needy Families (TANF), the Women, Infants and Children (WIC) food program, Supplemental Security Income (SSI), food stamps, child nutrition programs, public housing and Section 8 housing, and Medicaid. Although married couples with children can also receive aid through these programs, the overwhelming majority of assistance to families with children goes to single-parent households.

The burgeoning welfare state has promoted single parenthood in two ways. First, means-tested welfare programs such as those described above financially enable single parenthood. It is difficult for single mothers with a high school degree or less to support children without the aid of another parent. Means-tested welfare programs substantially reduce this difficulty by providing extensive support to single parents. Welfare thereby reduces the financial need for marriage. Since the beginning of the War on Poverty, less-educated mothers have increasingly become married to the welfare state and to the U.S. taxpayer rather than to the fathers of their children.

As means-tested benefits expanded, welfare began to serve as a substitute for a husband in the home, and low-income marriage began to disappear. As husbands left the home, the need for more welfare to support single mothers increased. The War on Poverty created a destructive feedback loop: Welfare promoted the decline of marriage, which generated a need for more welfare.

Penalizing Marriage

A second major problem is that the means-tested welfare system actively penalizes low-income parents who do marry. All means-tested welfare programs are designed so that a family’s benefits are reduced as earnings rise. In practice, this means that, if a low-income single mother marries an employed father, her welfare benefits will generally be substantially reduced. The mother can maximize welfare by remaining unmarried and keeping the father’s income “off the books.”

For example, a single mother with two children who earns $15,000 per year would generally receive around $5,200 per year of food stamp benefits. However, if she marries a father with the same earnings level, her food stamps would be cut to zero. A single mother receiving benefits from Section 8 or public housing would receive a subsidy worth on average around $11,000 per year if she was not employed, but if she marries a man earning $20,000 per year, these benefits would be cut nearly in half. Both food stamps and housing programs provide very real financial incentives for couples to remain separate and unmarried.

Overall, the federal government operates over 80 means-tested welfare programs that provide cash, food, housing, medical care, and social services to poor and low-income individuals. Each program contains marriage penalties similar to those described above. Low-income families generally receive benefits from several programs at the same time. The marriage penalties from multiple programs when added together can provide substantial financial disincentives to marriage. For example, if a single mother who earns $20,000 per year marries a man who earns the same amount, the couple will typically lose about $12,000 a year in welfare benefits. In effect, the welfare system makes it economically irrational for most low-income couples to marry.

The anti-marriage aspect of the welfare state can be illustrated by comparing means-tested welfare with the federal income tax code. For example, under a progressive income tax system with only a single schedule of tax rates indiscriminately covering both single persons and married couples, nearly all individuals would experience an increase in taxes owed when they married and lower taxes if they remain separate or divorce. The current federal income tax system mitigates this anti-marriage effect by having separate tax schedules for singles and married couples.

By contrast, the means-tested welfare system, in most cases, does not have a separate schedule for married couples. When a low-income mother and father marry, they will generally experience a sharp drop in benefits, and their joint income will fall. The anti-marriage penalty is often most severe among married couples where both parents are employed.

It is an obvious fact that severe poverty has disappeared in the most industrialized countries. Nations like the US, UK, Switzerland, and Japan industrialized within what were predominantly laissez-faire free-market conditions. Even the so-called social democracies, like Sweden and Germany, developed in free-market conditions, and adopted extensive state welfare and regulatory programs only after achieving high levels of economic development and industrialization. World Bank data shows that there is inequality, but this inequality is between the free-market nations and the crony-capitalist and socialistic nations.1

The idea that domestic laissez-faire causes poverty is unfounded. It is a historical fact that India, China, and Kenya never tried capitalism, so this system was never given a chance to work. Furthermore, China and India have realized some progress in abating poverty since they moved in the direction of capitalism. Of course, China and India adopted regulated crony capitalism, but this is still better than their old socialist systems.

One could argue that global capitalism allows a few people in some nations to exploit the masses of other nations. Marxists have attempted to make this case since Lenin. Lenin revised Marx because even in his day it had become obvious that Marx’s prediction that capitalists would exploit domestic workers was refuted by evidence. We now know that Lenin’s attempt to blame poverty on global markets is wrong. As previously mentioned, economic conditions in China and India improved after switching from socialism to crony capitalism. China and India have also expanded trade in global markets.

There have been significant improvements in living conditions around the world over the past thirty years. The largest improvements in the poorest nations took place during the wave of globalization that took place twenty years ago, after the fall of the USSR. The collapse of the Soviet Union opened the door to unprecedented globalization of industry. What does real data tell us about poverty during this period? Per Capita GDP rose dramatically:

Thirty years ago half (50 percent) the people in the poorer nations of the world lived in extreme poverty. In 2012, 21 percent of people in the poorer nations of the world live in extreme poverty. Development of global markets has greatly lessened poverty around the world. This is a very important fact. Movement from being in the lowest global income bracket, to lower middle income to middle income means moving from average life expectancy in the low forties to life expectancy of fifty or sixty, respectively. This economy does not kill; it has extended the lives of the poorest people in the world.

End the Minimum Wage

This is one of the worst offenders since it renders jobs illegal for the most unskilled workers, and hits the poor the hardest. As explained in the pages of mises.org here, here, and here, the primary effect of the minimum wage is to make the lowest-skilled workers legally unemployable. In other words, if the minimum wage is $10 per hour, and a worker only produces $8 of goods or services per hour, he will never be hired. Naturally, with a little experience, an unproductive (in the economic sense of the word) worker becomes more productive with job experience. But with a minimum wage, how is the worker supposed to get his first job? He can’t. As a result, many workers caught up in this catch-22 become long-term welfare recipients or they turn to black markets where they are branded criminals by the legal system.

Abolish All Income Taxes (Including Payroll Taxes)

Even low-income wage earners pay taxes on income. Social Security and Medicare taxes are nothing more than income taxes that go straight to the general fund — the “social security trust fund” does not exist. That claim by Mitt Romney that half the country doesn’t pay income taxes was never anything more than disingenuous political hair-splitting. Payroll taxes are income taxes, and we all know they take a big bite out of our paychecks, at all income levels.

Thus, even the poor pay taxes to finance TARP and various bailouts of the ultra-rich. As if this insult were not enough, the federal government then punishes the poor further with a central bank that punishes them for saving what little they can.

End the Fed

The Federal Reserve — and central banks in general — have in recent decades functioned largely to push down interest rates and devalue the currency.

The Federal Reserve — in addition to giving us the gift of the boom-bust cycle — has been key in bailing out huge too-big-to-fail corporations and has facilitated endless government spending on wars, corporate welfare, and social programs. Whether the amount of money poured into low-income households via social programs rivals the amount of money sucked out of them — in the form of devalued currency and below-inflation interest rates for low-income savers — remains to be seen.

What we do know is that the Fed’s commitment to low interest rates has made it almost impossible to save money through savings accounts and other low-risk traditional investments. Once upon a time, it might have been possible to put money in a savings account or CD and receive a respectable amount of interest on those funds, and at least earn an interest rate that exceeded the inflation rate. That certainly isn’t possible today. If you’re poor and try to make any returns off a savings account or CD, you’re out of luck. You’ll be very lucky to get 0.9 percent, and you’ll probably get lower than that. Meanwhile, the official low-ball inflation rate is well above that. So, your savings lose value in real terms constantly. You might as well keep that money in your mattress — where your money will also constantly lose value. On the other hand, if you have $100,000 to put in a CD right now, you might be able to get 1.5 percent at some banks. But poor people rarely have that kind of money lying around. People with more money are able to hire financial advisors and stock brokers and better keep up with an inflationary economy. The poor are just on their own.

Stop Regulating Small Businesses

Starting small businesses are often the preferred way for low-income, non-white workers to find work and build capital. Immigrants often turn to small businesses because they offer flexibility and work for people who are unattractive to larger established operations. While the wages and incomes associated with small businesses are often lower than they are in larger businesses, many turn to small business employment because they offer many non-monetary advantages over other types of income.

Governments work to crush small businesses on a daily basis. Every small business owner must deal with a myriad of government agencies from the IRS, to OSHA, to the EEOC, Obamacare, and beyond. Every new regulation and every new tax makes it harder for a small business owner to make payroll and to turn a profit. The net effect, of course, is to both restrict growth of small businesses and to restrict the number of small businesses. The decrease in competition then lessens benefits for both consumers and wage workers in the communities where these businesses are likely to spring up — in low-income communities. Instead, governments make sure that only large, well-capitalized companies can afford to open new businesses in many cases — probably miles away in higher-income areas.

Legalize Poverty

Everywhere the government intervenes to “help” we find not more choice, but less. Not more jobs, but fewer. Do you want to start up your own taxi service by driving people around? Forget about it if you have not obtained all the applicable (and costly) government licenses. Do you want to rent out your converted garage to tenants for cash? Too bad. Zoning laws don’t allow it. Do you want to get a job at five bucks per hour for your teenage son who has no skills? Sorry, that’s illegal too. Do you need a loan, but you’re a high risk borrower? Get lost. We’d have to charge you a high interest rate. That’s usury, and it’s not allowed.

We’re told every day that the only solution to poverty is more government power, more government regulation, more central planning, bigger deficits, and less freedom.

The true solution, however, is better described by a left-wing slogan: “Legalize Poverty.” The left usually says this when homeless people are being thrown off government property, but it’s better applied to the many types of free enterprise that are placed out of reach to the poor by government edicts. So many low-income workers must turn to black markets and low-wage semi-legal work because that’s all that’s open to them. It’s simply illegal for them to find entry-level work in mainstream enterprises, keep all of their meager wages, or start up small enterprises. Needless to say, these assaults on free markets help no one but the government agents paid to enforce them.