Making work pay

By R.G. | LONDON

NO ONE wants poor people to starve, so most governments provide a safety net of some kind. Yet if a safety net is too generous, it discourages work. Striking a balance is hard: an ideal welfare state would look after those who cannot help themselves or are temporarily down on their luck, while at the same time pushing anyone who can work to do so.

America took a giant step in that direction in 1996. President Bill Clinton and a Republican-led Congress, following the lead of states such as Wisconsin, made cash welfare payments temporary and conditional. When claimants were told they had to find work, many did. The number of people receiving benefits from the programme that is now called Temporary Assistance for Needy Families fell by two-thirds between 1996 and 2012. The triumph of welfare reform was not that it saved money, though it did. It was that it jostled millions of people into jobs, thus giving them self-respect and a shot at upward mobility.

Some Americans now worry that the gains of welfare reform are endangered (see our report in this week's issue). Other programmes, such as food stamps, have grown rapidly since the recession. Since it became harder for the able-bodied to draw jobless benefits, the number of Americans claiming to be disabled has more than doubled, with especially sharp rises in claims for things like depression or back pain, which are hard to verify. Last month the Cato Institute, a libertarian think-tank, added up seven types of benefit that a single mother with two children might receive and found that, in 39 states, the total package would be worth more than the starting salary for a secretary. In 11 states, it would be more than a new teacher earns.

The Cato study is misleading, since it includes housing benefit, which most people on welfare do not receive, and glosses over the fact that people continue to receive several benefits even after they find work. A single mother who takes a job flipping burgers will probably not lose her Medicaid (health care for the poor), for example. And thanks partly to the Earned Income Tax Credit (a negative income tax for the ill-paid), it is rare for Americans to become poorer by working harder. But that is not the end of the story.

People value their time, too, so work should ideally pay a lot better than welfare. Often, it does not. As low-paid workers start to earn more, they face a double-whammy of higher taxes and skimpier benefits. The Congressional Budget Office, a non-partisan number-cruncher, finds that this “effective marginal tax rate” is often above 60% and can be as high as 95%. No rich person pays anything like as much.

There is tremendous variation between states and some, such as Utah and Minnesota, are good at using data to figure out what works. But overall, the system is a sprawling mess. With at least 126 separate programmes just at the federal level, the poor often do not know about all the benefits to which they are entitled, and the government often has little idea how much any individual is receiving. Contrast this with Germany, where the single office where the jobless receive benefits is also the one that steers them, highly effectively, into work. Or Britain, which plans to replace six benefits with one. Or the Swedes, whose benefits have been trimmed and who now work longer hours than Americans. Different states should be free to experiment, but America needs a drastically simpler system. This would not only be easier to use; it would also make it easier to measure what works in putting Americans back to work—and do more of it.