Almost any kind of social welfare program you can dream up is going to have some kind of tendency to reduce people's eagerness to work long hours. And that's not a bad thing! That's a straightforward consequence of a program making people's lives better. What's more, both the average annual hours worked per employed person and the employment-population ratio are presently higher in the U.S. than in most other western countries so it's not at all clear that this is something we should panic about.
Nonetheless, a sustainable welfare state does need working people and a growing economy to sustain it. So how can we keep the welfare state generous while rewarding hard work? I would suggest the following:
- Rebalance the case for tax cuts: The political case for tax cuts in the United States remains mired in a 1970s mentality that's about rewarding effort by highly skilled high-earning people and creating incentives for investors. From the vantage point of 40 years later, the exploding pay gap and generally more prestigious nature of high-end work ensures that there are ample incentives for fancy rich people to keep working for that promotion. Structurally low interest rates show that there's no shortfall of investment capital. To the extent that we cut taxes, we should be talking about the taxation of the bottom 50-60 percent of the labor market. Between Democrats who want to tax the rich to pay for services and Republicans who want to cut services to cut taxes on the rich, the option of lower taxes on the working class has fallen through the cracks.
- Shift to flatter cash grants: The poor often face work disincentives in the form of the phase-out of in-kind grants. Putting in an extra 10 hours a week at the Burger King isn't anyone's dream job and if it costs you some of your housing vouchers, it may not be very economically rewarding either. This is part of the case for trying to transition, over time, away from a welfare state based on means-testing in-kind services and toward a flat basic income paid in cash. I don't think you could cash out every program on earth (things related to kids and to elements of health care, especially) and creating a reasonable basic income would be overall more expensive in a fiscal sense than what we do now. But if a well-structured basic income did more to improve people's lives while also doing less to discourage work, which I think would be possible, it would be much less socially costly than the present day mix of poverty and poverty traps.
- Expand the EITC: Making noncustodial parents and nonparents more eligible for EITC benefits as Barack Obama and Marco Rubio have proposed is a great, simple way to encourage labor force participation among the poor.
- Rethink occupational licensing: When you make people jump through unnecessary hoops to qualify to cut hair, give massages, replace locks, decorate homes, etc., you make it that much harder for people who may not have prestigious college degrees to find a line of work that they find reasonably fulfilling and enjoyable. Job quality in the sense of not just objective pay but subjectively how you feel about doing the work is a big deal in life and it's important for people to have choices.
- Rebalance education spending: Liberals have been talking a big game lately about the importance of child-care services for parents and early education for kids. And rightly so. But if you take the rhetoric about the importance of these ideas even remotely seriously, you'll see that insisting that they be paid for exclusively through new progressive taxes is counterproductive. We already spend a lot of money in the aggregate on education. It's fine to spend somewhat more. But it's by no means unreasonable to suggest that some new programs could be financed by redirecting existing flows. We currently very heavily subsidize colleges through both direct spending and indirect tax subsidies even though the evidence that early education is more important is pretty strong And as a bonus, quality preschool makes it much easier for moms to pursue careers.
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