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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