A Welfare Kingdom for 20 Somethings
|SZA - 20 Something|
Framing early adulthood
There’s a typical arc in an adult’s earnings over their lifetime. We start out broke at age 18, before our earnings gradually increase until late career. It’s a normal process.
When we conceptualize poverty, people typically think about lifetime earnings, although government policy only accounts for current earnings. People with low lifetime earnings normally have flatter earnings profiles. They never gain much education, and their earnings don’t increase much as they age.
People who get less education also tend to have babies earlier. As a stylized fact, rich people enter their profession before having babies while poor people more often have babies before starting a profession.
Many studies have shown that people’s lifetime trajectory is disturbingly predictable based on early-childhood experiences. If our goal is to prevent intergenerational transmission of poverty, we should be focused on families led by parents in their 20s.
The two goals are to ensure a healthy family life for children’s first five years and to help young adults grow their income as they age, healthily aging out of poverty.
It’s often useful to think about people’s lives in two periods: present and future. The idea is that decisions we make today directly impact our experience in the present and determine the options we’ll have in the future.1 It’s a useful way to approach poverty relief programs, which people qualify for during a defined period of time.
Money cannot buy happiness, but it helps. In the figure there are two boxes, representing money and happiness. Start with the money box. The black line is income and the red line is expenses. If the black line is higher than the red line, we’re saving money which is likely to boost future happiness. The relationship is relatively straightforward. It’ll be up to our future selves to make the most of it.2 On the other hand, the relationship between our current spending and current happiness is much more complicated since we have full control of the present. It depends on whether we’re smart consumers – broadly defined – and what the prices are. Drug addicts might have high expenses but be very unhappy, for example. Additionally, there’s a complicated relationship between our current spending and future happiness to the extent that our actions today determine our future skills and relationships, which we might call human capital.
To summarize, how well somebody’s life is shaping up is best expressed in two observations:
- How much do you enjoy your current lifestyle?
- How much are you saving for the future – in money, education, relationships, etc.?
The role of government in fighting poverty
Ideally, our relationship with the government is impersonal.3 Knowing little about us and needing consistent rules that apply to everybody, the government’s main actions to fight poverty are pretty blunt.
We often think the main role of government is to provide public goods, like roads or the military. But programs to direct money and consumption to individual citizens are a much bigger part of what the government does today, at least in dollar terms. There is direct government spending on things like medical care, old age pensions, public education, and unemployment insurance. And there are rules like the minimum wage and negative income tax (EITC), intended to funnel more money to people with low incomes.
Cash programs like the minimum wage or EITC aim to raise the top, black budget line. Other cash programs, like housing vouchers, try to lower the bottom, red budget line. And in-kind programs where the government directly buys good/services try to ensure that the things we consume are beneficial. For example, medicare dictates which medical procedures they’ll cover and WIC only supplies healthy foods for pregnant moms and babies.
Interfacing with the Leviathan
Government spending is nearly half of US GDP. The complicated rules and paperwork associated with that spending are breathtaking. As a broad rule, most of the money is taken from relatively few rich people and spent in the name of helping many poor and old people.
Faced with a lumbering bureaucracy doomed to apply blunt impersonal rules, the wellbeing of both rich and poor people is substantially impacted by how well they can squeeze advantage from interactions with the government. Success comes from (a) efficiently understanding rules and completing paperwork and (b) strategically changing behavior to maximize government benefits.4
Since rich people have more money at stake, they hire accountants to deal with the government and pursue sophisticated tax avoidance strategies. For poor people, although the benefits might be large relative to their consumption, government benefits are too small to justify hiring help. Ordinary folks are stuck wading through government paperwork and deciphering the complicated incentive schemes themselves.
However, the potential benefits to more sophisticated interaction with the government for poor people are large in percentage terms. Especially for young parents, knowing about and enrolling in all the government benefits they qualify for is a big hurdle. For a person who values their time highly, time costs can be substantial compared to the monetary benefit. Perhaps most importantly, income-based cutoffs for programs create complicated incentives that can be lucrative if properly understood.
The commune as a welfare kingdom
American life has drifted toward smaller and smaller households and more single parenting. But many of the challenges young parents face could be helped by living together more closely and receiving a bit of guidance. Parenting responsibilities and household costs could be pooled, creating space for career advancement. Individuals could cooperate to maximize the joint value of their government benefits and deal with bureaucracy more efficiently. And an atmosphere of openness would allow an expert advisor to guide young adults toward healthy growth.
In economics, this is an intertemporal choice model. ↩
Future happiness won’t be well-expressed in monetary terms when it happens either. But by definition, we can’t control our future selves today except by what we invest today. The impact of saving on our expectations of future happiness can be neatly summarized in money terms. ↩
Major exceptions being involvement with the criminal justice system and child protection services. ↩
The economics subfield of optimal taxation is the government counterpoint to tax avoidance, studying how to tax people in ways that least hurt the economy. ↩