The Path Out of Poverty: A Failure of Government Welfare

Who has failed to pave the pathway out of poverty – the federal government, or charitable organizations? And if charitable organizations have failed, should the federal government fill their place in the “anti-poverty marketplace”?

The Cato Institute produced a clear answer in 2013: The government has failed when it comes to alleviating poverty.

Since Lyndon B. Johnson’s Great Society in the 1960s, America has thrown trillions of dollars at poverty, yet the poverty rate has remained relatively consistent, between 15 and 19 percent. Cato estimated that in 2013 alone, America spent about $1 trillion on poverty between national, state and local governments – that is about $20,610 per impoverished man, woman, and child per year. Theoretically, if the government simply gave this money to the impoverished, then no one would be in poverty.

There is clearly waste in government welfare spending. More important, however, is the problem of perverse incentives.

The Executive Summary of the Cato report stated, “In 40 states welfare pays more than an $8.00 an hour job. In 17 states the welfare package is more generous than a $10.00 an hour job.”

Through this assistance, the government takes away incentives to work. Why should anyone seek a job and lose their benefits if they could make more by not working?

But an examination of Census data by the Center for Poverty Research shows that, of people working full time, only 3 percent meet the government’s standard for poverty. Thus, full-time employment effectively solves poverty. It seems reasonable that any welfare program should seek to promote full time work, not discourage it.

Since the government has created a disincentive for work, poor individuals are less likely to seek even part-time minimum wage jobs. If they don’t acquire minimum wage jobs, they will not be able to advance in the workforce in order to secure higher-paying full-time jobs; and, if they don’t acquire these advanced jobs, they will likely remain in poverty. Consequently, the cycle of poverty continues.

Disincentives created by government welfare, then, have only caused the poor to remain poor.

Further, there is no evidence that charitable institutions have failed. Even in the Gilded Era – the quarter century from 1875 through 1900 touted for its economic evils – charitable organizations worked tirelessly to bring about social reform. Settlement Houses, private philanthropies in the inner city which sought to mitigate poverty and teach low-skilled workers, are one prevalent example of success.

Likewise, a  2011 study published in the Journal of Epidemiology and Community Health found that death rates, with the exception of suicides, did not increase during the Great Depression. Simply put, no mass starvation occurred.

The reason for this can be found in the free market. Privately funded soup kitchens and other philanthropic efforts, not government benevolence, supported people in need.

The so-called failure of these organizations truly began with Lyndon B. Johnson and his war on poverty. As the government, both federal and state, continued to absorb the role of charities, these organizations were forced out of the market by the government.

Economic theory teaches that as the government spends more money to fight poverty, it must tax more. When the government taxes more, people have less money to donate. Consequently, lack of funding puts charitable organizations out of business. In economics, this is called “crowding out.”

A 1996 study by the Heritage Foundation found that, on a federal level, taxes did not drastically influence charitable giving. It stated, “Despite large variations in federal tax rates over the past two decades, donations as a percentage of personal income have remained constant.” This consistency in charitable giving most likely stems from the existence of charitable tax deductions and the federal government’s ability to run large deficits, reducing the tax burden truly necessary to maintain welfare programs. However, the study maintained that since “the percentage of income donated to charities historically has been so constant, the surest way to increase charitable donations is to increase personal income.” The author proceeds to argue that the high tax rates needed for social programs stifle wage growth, resulting in less money donated.

A 2015 study of state tax policy’s effect on charitable giving by William Freeland, Ben Wilterdink and Jonathan Williams of the American Legislative Exchange Council discovered a much different result. They found that, “When all state taxes are considered, a 1 percentage point increase in the total tax burden is associated with a 1.16 percent drop in charitable giving per dollar of state income.” They also found that “The opposite is also true: a tax cut of the size described will result in a proportionate increase to charitable giving.” If donations increase due to state tax cuts, then money typically wasted by government bureaucracy would go directly through private organizations and toward localized poverty solutions. This is especially important as the federal government shifts the responsibility for welfare programs onto states.

America has never been without a social safety net, but the most efficient programs have always been administered at the local and private level. If the federal and state governments reduce their spending and proportionally cut taxes, charitable organizations will see an influx in money. In response to this influx, charitable organizations and local communities could effectively fill the void left by their less efficient and frivolous counterpart, the government.

America owes it to our impoverished to provide them a road out of poverty. This road starts with smarter government.


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