Monday, April 24, 2006
Welfare Reform 10 Years On
One of the most successful policy changes in the last 20 years was the welfare reform act of 1996. If you have the time, read this article. It is a bit lengthy. Welfare reform ties in to one of the most basic assumptions in life that is People Respond to Incentives. Until reform there was no incentive to work. Here's a key quote from the article:

Human beings tend to do pretty much what they are expected to do. When the
culture expects self-sufficiency, people will try to achieve it. When the
culture sends mixed messages about self-sufficiency, as it did during the old
welfare regime - particularly to the minority poor - some will not try to become

Perhaps the second best policy change regarding poverty was increasing the Earned Income Tax Credit. Basically this boils down to a negative income tax for low-income workers. There is no reason why a person working full-time shouldn't be able to provide for their family. They are doing everything right and in a society as wealthy as ours they should be provided for if they are working. The problem is that well meaning people think we should raise the minimum wage to accomplish this. Raising the minimum wage is the wrong way to go about doing it. Artificially modifying the cost of labor inevitably causes unemployment and kills jobs. One needs to look no further than Europe to see the effects of rigid, high-cost labor markets. With the EITC the burden is shared by the taxpayer (society as a whole), rather than the business doing the hiring. Again, people respond to incentives. If the employer is incented to not higher someone because they cost more than they are worth, then they will find a way to not hire them.


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