There is an elephant in the U.S. election room and it is called welfare. Americans will soon have to choose if they will go Stronger together or will Make America great again. Both presidential candidates seem to agree that more people should enter the middle class and contribute to national growth. But how exactly are those at the bottom going to climb the economic ladder?
Nobel Laureate Joseph Stiglitz highlights that "We have an economic, and not only moral, interest in saving the American dream." Both inequality and poverty create financial instability, whereas a rise in the income share of the bottom 20 per cent actually boosts growth. With 13.5 per cent of Americans living in poverty, the country faces a serious threat to financial stability. Combined with high dropout rates, this could be detrimental to the near-future economy if the government does not intervene.
What if a more innovative and economical program could provide its beneficiaries with the incentives to work?
The percentage of poor people covered by welfare has shrunk in the last two decades. For example, in 1996, 58.7 per cent of children below the poverty line received welfare; by 2011, the number had dropped to 20.9 per cent.
Education for marginalized groups is also problematic. Even though high school completion rates have risen to 82 per cent nationally, rates among the Hispanic, black, and native communities are significantly lower.
With almost one out of four American children living in poverty, many of whom end up dropping out of high school, we should focus on finding a solution for them, their families, and the good of the economy. A safety net provided by the government is necessary in order to reach those that the market cannot or is not interested in.
The usual counterarguments to welfare are their cost and inefficiency, and the dependency that poor people develop. What if a more innovative and economical program could provide its beneficiaries with the incentives to work? As behavioural sciences and specifically the nudge theory suggest, incentives can be effective instruments for shaping behaviour. For example, if families were required to keep their children enrolled in school in order to receive government assistance, they would be more likely to do so.
So instead of creating multiple initiatives for poverty, inequality, and education, why not link enrollment in school with conditional cash transfers? What if another condition would be to have a healthier lifestyle, perhaps to go for check-ups or participate in therapy when necessary? Then each dollar spent in cash transfers would save many in medical bills and motivate families to keep their children educated and healthy, which could then lead to a decline in poverty and inequality.
People in the world's richest country should not live in poverty or drop out of school.
Does it sound too idealistic? I have partially described Bolsa Familia, a program run for more than a decade in Brazil and praised by the World Bank. The program is a tool for social and economic transformation and reaches more than 46 million people. In sum, poor families with children receive an average of R$70.00 (about US$35) in direct transfers if they commit to taking their children for regular health check-ups and keeping them in school.
This has resulted in not only reducing current poverty but also, by investing in children, future poverty. Additionally, since Bolsa Familia is partnered with a Brazilian bank to distribute the funds, beneficiaries have opened accounts and use bank card technologies, while also reducing government corruption.
Conditional cash transfers could motivate more welfare recipients to become technologically and financially literate, empower them to meet deadlines and goals, and help them gain the confidence and skills to enter the workforce. As the program can run through online direct deposits, having welfare offices in every city won't be necessary, which is not only expensive but also stigmatizes the poor.
We need to think of welfare as a socially and technologically innovative system that is sustainable and efficient and keeps the economy stable by reducing inequality and poverty. Even though we tend to think of welfare as wasted money, the Brazilian example shows that existing alternatives are efficient, help the market reach marginalized populations, and keep the economy safe by reducing inequality and poverty.
People in the world's richest country should not live in poverty or drop out of school. Both presidential candidates agree that as a society Americans ought to provide opportunities to everyone. Hillary Clinton has accepted that we need to re-evaluate Welfare Reform but hasn't discussed a specific plan. Donald Trump has said that he won't cut welfare but the country needs to be rich first in order to afford it. In the coming debates, they need to explain how they would achieve it.
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10. Connecticut >> Supplemental poverty rate 2011-2013: 12.5% (17th lowest) >> Official poverty rate: 10.7% (7th lowest) >> State price level: 6th highest >> Pct. without health insurance: 9.4% (8th lowest) Based on pre-tax income alone, 10.7% of Connecticut residents lived in poverty between 2011 and 2013, one of the lower rates nationwide. Based on the supplemental poverty measure, however, 12.5% of state residents lived in poverty, still among the lower rates, but the 10th largest deviation from a state’s official poverty rate in the country. The supplemental poverty rate tends to be higher among older Americans. With the help of the nation’s third highest average social security payment, however, retirement-aged Connecticut residents had incomes of $26,581 on average, more than in all but a handful of states. The average earned income tax credit was $2,140 in Connecticut last year, one of the lower rates.
9. New Hampshire >> Supplemental poverty rate 2011-2013: 10.5% (7th lowest) >> Official poverty rate: 8.3% (the lowest) >> State price level: 9th highest >> Pct. without health insurance: 10.7% (12th lowest) New Hampshire had the nation’s lowest average official poverty rate from 2011 to 2013, at just 8.3%. Although using the supplemental poverty rate, 10.5% of state residents lived in poverty in that time, this was still among the lowest rates in the nation. Among the factors that may contribute to the state’s higher supplemental poverty rate is the low average earned income tax credit.The average refunded amount was just $1,926 in the latest tax year, lower than in any state except for Vermont.
8. Massachusetts >> Supplemental poverty rate 2011-2013: 13.8% (22nd highest) >> Official poverty rate: 11.5% (14th lowest) >> State price level: 7th highest >> Pct. without health insurance: 3.7% (the lowest) Massachusetts residents are some of the nation’s wealthiest, and the state does not lack generous social programs. Less than 4% of state residents didn’t have health insurance last year, for example, the lowest rate of any state. Despite the state’s support structures and high incomes, there is a large gap between the official poverty rate and the poverty rate that also considers social programs and the cost of living. Massachusetts had one of the nation’s highest costs of living as of 2012, and was one of the most expensive state in which to rent a home.
7. Virginia >> Supplemental poverty rate 2011-2013: 13.6% (24th highest) >> Official poverty rate: 10.9% (10th lowest) >> State price level:10th highest >> Pct. without health insurance: 12.3% (20th lowest) Under the official poverty measure, about 880,000 Virginia residents, or 10.9%, lived in poverty between 2011 and 2013. This was the 10th lowest rate in the nation. However, under the supplemental poverty measure, nearly 1.1 million Virginians, or 13.6%, lived in poverty in that time, 211,000 higher than the official measure. Moreover, the supplemental poverty rate was among the top half of all states. Among the factors that may contribute to this disparity are the relatively low share of households participating in federal social safety net programs. Just 28.3% of households received Social Security payments last year, 10% of households received food stamps, and 4.1% received Supplemental Security Income, in each case among the bottom 15 states nationwide.
6. Maryland >> Supplemental poverty rate 2011-2013: 13.4% (25th highest) >> Official poverty rate: 9.9% (2nd lowest) >> State price level:5th highest >> Pct. without health insurance: 10.2% (10th lowest) Less than 10% of Maryland residents lived below the official poverty line last year, lower than in every state except for New Hampshire. Yet, after taxes and supplemental measures were taken into account, this rate increased 3.5 percentage points. Maryland residents are exceptionally wealthy. For example, an average retirement-aged resident had an income of $30,678 in 2013, the highest nationwide. Despite the relatively high retirement income, poverty among Maryland seniors was more than twice as high based on the supplemental measure than under the official measure, according to a 2013 report from the Kaiser Family Foundation.
5. Nevada >> Supplemental poverty rate 2011-2013: 20.0% (2nd highest) >> Official poverty rate: 16.3% (13th highest) >> State price level:21st highest >> Pct. without health insurance: 20.7% (2nd highest) Nevada’s average poverty rate from 2011 to 2013 using the supplemental poverty measure was 20%, the second highest in the nation. One reason for the high rate may be the state’s relatively low EITC participation rate. Just 71.5% of eligible income tax filers claimed an earned income tax credit in the 2010 tax year, among the lowest rates nationwide. Additionally, many households may have to contend with high levels of out-of-pocket medical expenses. Last year, 20.7% of residents did not have health care coverage, the second highest rate in the nation. According to the Census Bureau, under the supplemental poverty measure, out-of-pocket medical costs are the top reason people fall into poverty.
4. Florida >> Supplemental poverty rate 2011-2013: 19.1% (3rd highest) >> Official poverty rate: 15.1% (18th highest) >> State price level: 16th highest >> Pct. without health insurance: 20.0% (3rd highest) When supplemental measures were taken into account, nearly 20% of Florida residents lived in poverty — not only one of the largest deviations from the official poverty rate, but also nearly the highest supplemental poverty rate in the country. High out-of-pocket medical expenses likely explain in part the high supplemental poverty rate in the state, as one in five residents didn’t have health insurance in 2013, nearly the highest rate nationwide. Between 2011 and 2012, 58% of school-age children were eligible for free or reduced lunch. While this was one of the highest rates in the country, it clearly was not enough to offset the state’s poverty level.
3. New Jersey >> Supplemental poverty rate 2011-2013: 15.9% (12th highest) >> Official poverty rate: 10.7% (7th lowest) >> State price level:3rd highest >> Pct. without health insurance: 13.2% (24th lowest) New Jersey had one of the nation’s lowest official poverty rates, at just 10.7% between 2011 and 2013. However, using the supplemental poverty measure, 15.9% of state residents lived in poverty during that time, 12th highest in the country. High prices may be one factor contributing to the area’s higher supplemental rate. As of 2012, New Jersey had the third highest price level of any state, and the fourth highest cost of renting a home. The relatively few individuals claiming an earned income tax credit, as well as the low levels of households receiving food stamp benefits, may play a role in the state’s high supplemental poverty rate as well. Taxes, too, may have played a role. As of fiscal year 2011, New Jersey had the nation’s second highest state and local tax burden, behind only New York, according to the Tax Foundation.
2. Hawaii >> Supplemental poverty rate 2011-2013: 18.4% (5th highest) >> Official poverty rate: 12.4% (18th lowest) >> State price level: the highest >> Pct. without health insurance: 6.7% (2nd lowest) Like a majority of states where poverty is worse than it seems, Hawaii residents aged 65 and older were more than twice as likely to live in poverty when supplemental measures were considered, according to a 2013 Kaiser Family Foundation study. Hawaii’s exceptionally high costs of living explain the difference between poverty rates under the official and supplemental poverty measures. Hawaii’s average cost of rent in 2012 was 60% more expensive than the average nationwide and the highest of any state. Because of geographical constraints, Hawaii’s utility costs are also among the nation’s highest. Electricity is supplied primarily by power plants fueled by petroleum, which is imported into the state.
1. California >> Supplemental poverty rate 2011-2013: 23.4% (the highest) >> Official poverty rate: 16.0% (15th highest) >> State price level:4th highest >> Pct. without health insurance: 17.2% (8th highest) In no state was the gap between the official poverty rate and the supplemental poverty rate wider than in California. Between 2011 and 2013, an average of 16% of residents earned incomes below the poverty line, one of the higher rates in the nation. Once taxes, cost of living, and non-cash income were taken into account, the poverty rate rose to 23.4%, the highest supplemental poverty rate nationwide. California’s high cost of living is the largest force pushing state residents into poverty. The cost of rent relative to the rest of the nation was higher than in every state except for Hawaii in 2012. Every day items are also more expensive in California than in the vast majority of states. And despite a wide-ranging need for government assistance, just 9.4% of households received food stamps last year, one of the lowest rates.
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