The right kind of welfare reform

Democrats have taken a big bite out of child poverty — but so far, just for one year. President Biden's American Rescue Plan has a big expansion and reform of the Child Tax Credit (CTC) to make it work basically like a Nordic-style child allowance. That is great, except the administration of the credit is technically inept, and the rest of the welfare state is shot through with the same problems this reform of the CTC is supposed to solve.

Democrats are already mobilizing to make this child benefit permanent. They should absolutely do that — but in the process, they should rationalize its design, and reform the rest of the welfare state to fit with its logic.

Let's start with some history. The Personal Responsibility and Work Opportunity Act of 1996 is often called "welfare reform," but it really was a giant welfare cut. The original program (a benefit for very poor mothers) was block granted to the states, who could and often did spend the money on basically anything they wanted, its dollar size was capped so its value is eroded by inflation every year, and onerous work requirements were added so it is very hard to claim benefits. The replacement program (Temporary Assistance for Needy Families) is a dead husk — paying out just $3.5 billion in federal cash to individuals in 2019.

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Other American programs have been similarly twisted. For instance, in most states, the unemployment system assumes people are probably cheats who are looking to swindle the government, and so makes people who have been laid off go through an obnoxious and intrusive application process. In some states the system has been designed not to work so as few people as possible can collect benefits. The Earned Income Tax Credit (EITC) requires work income to claim, as did the prior Child Tax Credit, because policymakers did not want to incentivize idleness.

Biden's child benefit, by contrast, automatically goes out to all low-income families (at least in theory). It does phase out for higher-income families, which is not ideal design, but what matters most is that families with little or no income get the money. The bulk of the very poorest people in the country are single parents, often because they face childcare costs greater than they could earn at a low-wage job working full time. They thus rationally choose to care for their children instead and get by on whatever scraps they can.

This benefit reflects a revolution in thinking about the causes of poverty and political morals. The 1996 welfare cuts were rooted in capitalist ideology, which holds that a primary objective of government is to force people to work for business through the threat of starvation. Even today the idea of people being paid without working is morally abhorrent to conservatives like Lindsey Graham. By this view the way to "fix" poverty is to somehow force all people out into the labor market, which alas does not work because about half of people — children, seniors, people with disabilities, family caregivers, etc. — don't work.

But under the social democratic way of thinking, poverty is simply a lack of money that can be solved by giving out money. In Nordic countries with their ultra-comfortable welfare states, employers must entice workers into jobs with good wages and benefits. Indeed, it turns out this approach actually gets more people into jobs than the threat of destitution!

So far, so good. But this is where the problems start. Democrats have basically backed themselves into a social-democratic child allowance, but are trying to jam it through the structure of a totally unsuitable tax credit. Most obviously, they are handing out monthly payments for a credit that is based on annual characteristics that can't be known until the end of the year. The IRS will apparently estimate using the previous year's tax information, but because people's income tends to bounce around from year to year, some people will be overpaid while others will be underpaid, leading to all sorts of headaches. Worse, poor people often do not file their taxes, so a substantial portion of eligible families will likely not get the money.

This is just offensively messy design that serves no purpose. The political point of tax credits is to do welfare that allows recipients to pretend they aren't collecting a government handout. But giving out monthly payments is already making the welfare obvious!

It would be far better to follow the design of Mitt Romney's child allowance. He would send out the payments through the Social Security Administration to all families, and then do the phase-out with a special tax that exactly compensates what the rich have received. That is so much more logical and elegant — families wouldn't have to bother with any paperwork, and the phase-out would be calculated after the end of the year when it makes sense. (Payroll companies would build the calculation into their withholdings so few people would get whacked with a bill at the end of the year.)

Democrats also haven't completely divested themselves of poor-starving program phase-ins. The American Rescue Plan also has an expansion of the EITC, which (aside from a minuscule benefit for single people) is basically just another traditional child tax credit that cuts out the poor. Democrats might as well get rid of that and plow the savings into whatever size child benefit they want.

More broadly, the legacy of capitalist labor ideology should be eradicated from the rest of the American welfare system. Unemployment insurance should ideally be one clean, centralized program done at the federal level, with simple qualifications and as little red tape as possible. At the very least, Congress can mandate a minimum benefit and require states to make their systems work, on the threat of it being taken over by the feds.

Possibly worst of all is the qualification procedure for Social Security Disability Insurance (SSDI). This program is supposed to provide income to people who have a work-limiting disability, and indeed it is a godsend for millions. But as Beatrice Adler-Bolton writes for Libby Watson's Sick Note, it is incredibly burdensome both to apply for and stay on, because of onerous requirements that basically amount to finding any excuse to kick people off the program. You also need to have a history of work to be able to qualify, which straight up makes no sense — if you can't work because of a disability now, that should have nothing to do with whether you happen to have worked before.

Again, American elites have long been convinced that people claiming disability are probably cheats who need to be disciplined through starvation (see Nicholas Kristof in The New York Times back in 2012).

In keeping with the logic of Biden's child benefit, the SSDI qualification process should be drastically streamlined and most of the paperwork requirements removed. Insofar as we want people to get into paid work, the smart approach is to run the economy hot and get the unemployment rate very low, thus creating a labor shortage that will force employers to go to workers and offer them generous pay.

There is not much of a constituency for cleaning up all this abusive and expensive junk (and there is a lot more of it). A politician doesn't get to have a big signing ceremony where he slaps his name on a big new program. But I suspect it would pay substantial political benefits. One reason the $1,400 checks are so popular is that they are easy — no onerous application process or insulting bureaucratic requirements needed. Changing the welfare state to be simple, obvious, and respectful of the dignity of enrollees would surely be popular for the same reason.