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Welfare and the Federal Budget

By Melissa S. Kearney·July 25
University of Maryland

The Issue:

The notion that the federal government ought to spend less on welfare assistance to low-income individuals both to reduce government spending and to promote economic self-sufficiency has surfaced in current debates about spending priorities. However, federal transfer programs provide very little aid by way of cash assistance to non-working adults since welfare reform in the mid-1990s. In contrast, social insurance programs are a much larger share of the federal budget and have been seeing steady increases in the populations they serve, potentially having negative impacts on employment.

The Facts:

  • Spending on cash and near-cash transfer programs to low-income families comprises less than 5 percent of the federal budget. These programs are not drivers of increased government spending (see chart).
  • The program that most closely aligns with the conventional notion of “welfare”  — in the sense of providing cash income to low-income families — is the Temporary Assistance to Needy Families (TANF). However, it is not welfare in the traditional sense of unrestricted cash payments to non-working individuals. The program is time-limited and imposes work requirements on beneficiaries. In 2015, it accounted for 0.54 percent of total federal outlays: $19.9 billion.
  • The Supplemental Nutritional Assistance Program (SNAP), which is one of the nation's largest anti-poverty programs, offers very limited assistance to non-working able-bodied individuals without dependents. In 2015 the federal government spent $76.1 billion on SNAP, slightly more than 2 percent of total federal outlays, providing food vouchers to an average of 45.8 million individuals a month. Because the program responds to changes in the economy, spending on SNAP increased significantly during the Great Recession but has been decreasing as the economy has been improving.
  • Social Security Disability Insurance (SSDI) program and the Supplementary Security Income (SSI) program are major sources of income assistance in the U.S. Both have seen sizable increases in their beneficiary populations over recent decades. SSDI is by far the largest source of cash assistance to non-working, non-elderly individuals and comprises 3.9 percent of the federal budget.

What this Means:

If policymakers have dual goals of reducing federal government spending and reducing cash support for non-working individuals to increase employment rates, a focus on welfare programs that provide income support to low-income families is misplaced. Those programs constitute a tiny share of federal spending and already have stringent work requirements. Instead, policymakers should focus on social insurance programs. Well-designed reform of the SSDI program could have both a substantial positive fiscal impact on the federal budget as well as the economic self-sufficiency of individuals currently served by the program.

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Does Taxing U.S. Corporations Make Sense in a Global Economy?

By Kimberly Clausing·July 19
Reed College

The Issue:

The belief that it is essential to lower U.S. corporate tax rates is widely held. Critics argue that the tax system puts U.S. corporations at a competitive disadvantage relative to companies based in foreign countries.

The Facts:

  • The U.S. taxes corporate income at a statutory rate of 35 percent — which is among the highest in the world. In addition, the United States taxes the worldwide income of multinational companies.
  • In practice, both the high rate and the worldwide reach of the U.S. tax system have more bark than bite. The United States raises less revenue from corporate taxes relative to the size of its economy than peer countries, as corporations are able to reduce the amount of income that is subject to the statutory rate (what economists call the tax base). For instance, tax incentives that encourage profit shifting to overseas tax havens are estimated to cost the U.S. government over $100 billion in revenue per year.
  • Some suggest lowering the corporate tax rate or eliminating it altogether and coupling this with increased taxation of capital income through the individual income tax system. In practice, this is difficult. The vast majority of U.S. equity income goes untaxed at the individual level, and the taxable share of U.S. equity income has fallen dramatically in recent decades (see chart).

What this Means:

The corporate tax would certainly benefit from a major reform. While some rate reduction may be warranted, reform should focus on shoring-up the corporate tax base with measures to stem profit shifting and other tax loopholes. Despite its many critics and flaws, the corporate tax is a necessary part of capital taxation and it helps fulfill the efficiency, equity, and revenue goals of our tax system. Large cuts to corporate tax revenues would make our tax system far less progressive, a troubling response to the increasing income inequality and middle-class wage stagnation of the previous decades.

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The Case For Protecting Student Loan Borrowers

By Susan Dynarski·July 17
University of Michigan

The Issue:

U.S. Secretary of Education, Betsy DeVos, has taken measures to roll back some Obama-era regulations designed to limit fees and to ensure accountability of the private companies that manage federal student loans. At the same time, the administration and Republicans in Congress have signaled a push to limit the powers of the Consumer Financial Protection Bureau, which acts as a consumer advocate over the student loan industry.

The Facts:

  • The U.S. federal government is by far the largest provider of student loans (see chart). The U.S. Department of Education administers around $1.3 trillion in loans on behalf of nearly 43 million student borrowers. This is more than double the $611 billion owed less than ten years ago.
  • Private loan servicing companies are in charge of sending bills to borrowers, collecting payments and handling any problems that arise. Borrowers cannot switch companies if they are unsatisfied with the service. The Consumer Financial Protection Bureau has filed a lawsuit against Navient, the nation's largest student loan company, claiming it “illegally cheated borrowers out of repayment rights through shortcuts and deception.”
  • The Obama administration had instructed the Department of Education to give weight to a company's track record and steer away from companies with histories of shoddy service when awarding loan servicing contracts. However, the Department of Education has since rescinded this guidance. Similarly, the Obama administration had limited the ability that loan companies had to impose punitive fees from borrowers who were in default (which could in some cases be as much as 16 percent of the amount in default). In March, the Department of Education overturned this position.

What this Means:

Students cannot vote with their feet by moving to the loan servicing company that provides them with the best service. Deregulating loan servicing companies is unlikely to increase competition that leads to innovation or improved services for borrowers. Moreover, as a captive market, if the government does not monitor these companies, borrowers are at risk.

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Government Budget Deficits and Economic Growth

By Michael W. Klein·July 12
Fletcher School, Tufts University

The Issue:

The Congressional Budget Office (CBO) projects that the United States government budget deficit will rise to 5 percent of Gross Domestic Product (GDP) in 2027. In contrast, the Trump Administration's budget proposal has estimated that the U.S. will have no federal budget deficit in ten years but instead will be running a small budget surplus. Why are the projections so different? And, why does it matter?

The Facts:

  • The size of the federal budget deficit is tightly linked to how well the U.S. economy is performing. When the economy grows at a faster rate, this raises tax revenues and tends to lower spending on social safety net programs, both of which help to reduce the budget deficit, even with no change in spending or tax policy. During a recession, the budget deficit increases. (See chart. The green line represents the GDP Gap, an indicator of the performance of the economy.)
  • Projections of the federal budget deficit depend critically on economic growth expectations. The administration's view is based on the assumption that the United States can reach sustained GDP growth rates of 3 percent, as well as assumptions that proposed spending cuts and tax cuts are enacted. In contrast, the CBO projections are based on current laws and an expected average economic growth rate below 2 percent.
  • Despite very recent strong job growth, an ongoing growth rate of 3 percent over a longer horizon is at odds with other forecasts.

What this Means:

Large government budget deficits may be warranted at times when the economy is in a downturn in order to stimulate spending and mitigate economic weakness. But large deficits that occur when the economy is at or near its full-capacity raise concerns of increasing costs of borrowing, reduced private capital formation, and potential financial and economic destabilization. Deficits can shrink with strong economic growth, but the combination of likely policies and plausible GDP growth rates for the United States point towards rising deficits over the next decade.

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Where Have All the (Male) Workers Gone?

By Sandra Black and Wilson Powell·July 10
University of Texas, Austin and Harvard Kennedy School

The Issue:

Does the unemployment rate of 4.4 percent provide an accurate picture of the health of the United States’ economy? The statistic only accounts for those who are actively looking for a job. Studying the trends among people who have left the labor force altogether highlights challenges still facing some groups, particularly men of prime working age.

The Facts:

  • The share of men aged 25 to 54, who are either working or actively searching for work has fallen from a high of 98 percent in the 1950s to 88 percent today (see chart). The decline has been steepest among men with a high school degree or less.
  • Reduction in labor supply — men choosing not to work for a given set of labor market conditions — can explain relatively little of the long-run trends. Explanations such as increased use of disability benefits or improvements in leisure technology (such as video games) cannot fully account for the magnitude of the drop or its longevity.
  • Declining demand for low-skilled labor seems likely to be an important part of the explanation. Since the 1980s, the relative wages of low-skilled workers has been steadily falling, reducing the relative benefits of working.
  • Labor market institutions may play a role. While other countries have also been exposed to the forces of globalization and technological change, the fall in the labor force participation of prime-aged men has been especially marked for the United States.

What this Means:

The declining labor force participation rate, especially for prime-working-age men, suggests that the economy as a whole may not be operating at its full capacity despite a very low unemployment rate. Policies such as strengthening the unemployment insurance system and promoting education and training that encourage unemployed workers to keep searching for work and support those who re-enter the workforce are important, both for the individuals involved and society as a whole.

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