As outrageous as they seem, the stories of fraud hiding within plain sight in Minnesota’s welfare system understate the scale of the scandal. Even the industrial-scale graft seen in the Gopher State might have a redeeming silver lining if the non-fraudulent portion of spending actually helped its beneficiaries.
But it doesn’t. And therein lies the true problem: In Minnesota, as elsewhere, programs intended to alleviate poverty end up perpetuating it — not despite the welfare system but because of it.
Confusing Morass of Programs Traps People in Poverty
To call America’s myriad government support programs balkanized and confusing would put it mildly. As a 2020 National Bureau of Economic Research paper began:
Earn or save $1 too much and, depending on the state, lose thousands of dollars in your own or your family members’ Medicaid benefits. Hold $1 too much in assets and forfeit thousands in Supplemental Security Income (SSI). Earn an extra dollar in a Medicaid non-expansion state and receive thousands of dollars in otherwise unavailable [Obamacare] subsidies.
All this complexity makes the Internal Revenue Code look simple — the bigger problem for our “too big to fail” welfare state.
Paradoxically, these complex “anti-poverty” programs keep households trapped in near-destitution, due to the phase-out of means-tested benefits as income rises. Gene Steuerle of the Urban Institute has called this dynamic a “poverty trap,” whereby households earning around twice the poverty level who raise their income further will forfeit nearly as much in government benefits — food stamps, housing vouchers, child care subsidies, Earned Income Tax Credit payments — as they earn from working.
The NBER paper concluded that, if families fully participated in all the government programs for which they qualified, households in the lowest income quintile would face lifetime marginal tax rates as high as those in the highest income quintile. The researchers called this “poverty lock” a “welfare paradox — more tax and benefit programs that claw back benefits in response to higher labor earnings, or greater participation in such programs, can induce … less work, lower labor earnings, and, on balance, increase poverty.”
Steuerle has noted that means-tested anti-poverty programs have other unintended consequences. A couple that combines incomes will face a greater “poverty trap” as a single household, discouraging marriage, ordinarily an institution that helps combat poverty. Overall, he describes a system that has done “a mediocre job at providing opportunity and investment, rather than just adequacy and higher levels of consumption, to a significant portion of our population.”
Obamacare Made It Worse
Unsurprisingly, Obamacare worsened the “poverty trap.” A December 2015 Congressional Budget Office working paper estimated that Exchange subsidy recipients would face marginal tax rates “an average of 28 percentage points higher than they would have been otherwise,” not counting the marginal taxes associated with phase-outs of other government programs. Little wonder that the budget gnomes estimated Exchange subsidy recipients would reduce their labor supply by 12 percent — evidence of the law’s staggering disincentives to work.
How did Democrats respond? Shortly after its enactment, then-House Speaker Nancy Pelosi, D-Calif., called Obamacare “an entrepreneurial bill” because it “says to someone, if you want to be creative, and be a musician or whatever, you can leave your work … because you will have health care.”
More recently, Sen. Amy Klobuchar, D-Minn., tweeted an article about early retirees being affected by the expiration of enhanced Obamacare subsidies. Her implication appears obvious: Taxpayers should fund the insurance premiums of those who retire in their 50s and earn upwards of six figures in pension income while retired.
Thankfully, lawmakers eschewed Klobuchar’s pleas, allowing the enhanced subsidies to expire. But millions of Americans still face a lack of opportunity because government programs discourage that opportunity.
Promote Work Over Welfare
No amount of prosecutions in Minnesota or elsewhere will loosen the “poverty trap.” That would require systemic reforms to our broken welfare system. And a Democrat establishment that has lost its roots as a working-class party, not least by promoting welfare over work, will not lead. Only conservatives can pass the reforms needed to restore opportunity and prosperity, and end the real tragedy behind the Minnesota welfare scandal — an underclass trapped in poverty by “anti-poverty” programs.
