The Samartian’s Dilemma & Welfare

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Introduction:

On a philosophical level, the virtue of charity is highly exalted. Few are willing to question if charitable efforts are effective. An even increasingly small number of philanthropists are willing to entertain the notion that they are harming the recipient. It is counter-intuitive to fathom the idea of our helping hand is causing negative consequences. Unfortunately, sometimes good intentions do not yield good results.

Despite the clear need for charity in our society that still doesn’t negate potential externalities. Intentions are mutually exclusive from the repercussions. This observation is demonstrated by Noble Laureate James M. Buchanan’s Samaritan’s Dilemma.  Buchanan based his postulation upon the Parable of the Good Samaritan. This biblical passage details an account of  “… the Samaritan aiding a man who had been beaten and robbed by thieves…” ( Wagner, P.11) [1]. Buchanan took this biblical allusion one step further and generalized it to charity as a whole. Once the recipient is cognizant that the charitable donation is larger than what they can earn from labor, they will lose the incentive to work (Wagner, P.11) [1]. Thus, they become dependent upon charity.

While this concept is applicable to private charity, it is quite prevalent in public policy. Many “safety-net” programs are merely forms of socialized charity. The implication of “socialized charity” is intended from a value-neutral standpoint. The Samaritan’s Dilemma is not confined to our stereotypical examples of government assistance. For instance, the Samaritan’s Dilemma arises in the area of subsidies for crop insurance. A 2009 study found a” … 0.2% decrease for every percent increase in expected disaster payments…” (Deryugina & Kirwan, P. 27) [2].  Similar findings are also applicable to moral hazard in flood insurance policies.  As policymakers succumb to the pressure of voters demanding increased funding for flooding relief. The number of property owners with flood insurances decreases (Michel-Kerjan et al, P. 9) [3].

The presence of moral hazard seems to be prevalent throughout disaster relief literature. Applying both domestically and internationally. If the precedent for government aid is established individuals are less apt to take precautions. Making them solely dependent on aid provided by various government agencies.

Why Focus On Means-Tested Welfare Benefits? 

It is quite evident that there is a robust body of literature related to disaster relief and the Samaritan’s Dilemma. The obvious question becomes, why focus on means-tested welfare?  For one, programs such as SNAP, WICC, Medicaid, etc. tend to find into our stereotypical perception of charity. Making it a clear example of where the line of assistance veers into incentivizing long-term dependence. Also, funding for such programs is always a consistent talking point pertaining to economic policy. There is also a lot of misconceptions concerning the incentives for welfare dependence. The ubiquitous image of indolent dirtbags avoiding work is largely a myth. The vast majority of welfare recipients wish to participate in the labor force. However, typically the total value of welfare benefits allocated tends to surpass an annual salary for most entry-level positions.  A fact that has been demonstrated by a 1995 study (Tanner et al. p.2) and the 2013 follow-up (Tanner & Hughes, p. 7) conducted by the Cato Institute [4] [5].

The Cato Institute 1995 Welfare Study:

The 1995 welfare study conducted by the Cato Institute found that overall combined welfare benefits generally exceed the income of most entry-level positions. The added benefit being even a state with benefits comparable to minimum-wage such allocations would be tax-exempt (Tanner et al. p.1) [6]. Clearly aligning incentives with long-term welfare dependence.  In the short-term could be perceived as being within the best interest of a rational actor. Setting the stage for applicability of the Samaritan’s Dilemma in the sphere of entitlement programs.

In order to fully illustrate how welfare benefits reduce incentives to work, it is best to compare wages with the sum of allocated benefits. Back in 1995, 40 states’ welfare benefits collectively amounted to more than $8.00 per hour (Tanner et al. p.1) [7]. In 17 states, the total amount was equivalent to more than $10.00 per hour (Tanner et al. p.1) [8]. Some of the more generous states in the country (HI, AK, MA, CT, NY, NJ, RI,& Washington D.C.) paid out more than the equivalent of $12.00 per hour in welfare benefits. That is more than 2.5 times the federal minimum wage in 1995 (Tanner et al. p.1) [9]. 8 states within this time frame provide more than $25,000.00 in welfare benefits annually (Tanner et al. P.2) [10].  This is equal to the purchasing power of $42,154.53 in 2020 when adjusted for inflation.

It is imperative that we cross-compare these findings with average entry-level wages back in 1995. This will establish a proper context for the previously detailed allocations.  Simply stating that Hawaii paid out the wage equivalent of $17.50 means very little without the appropriate context of market wages (Tanner et al. P.2) [11]. Per Tanner et al. :

An entry-level secretary can expect to earn about $9.01 per hour, which is less than equivalent to welfare benefits in 29 jurisdictions.[38] The national median wage for a janitor is $6.75 per hour.[39] Welfare recipients in 47 jurisdictions receive more in benefits than the average janitor. It is important to realize that, contrary to popular belief, the average janitor’s wage is well above the minimum wage rate of $4.25 per hour. Perhaps more interesting, the national median wage for computer programmers is about $13.03 per hour–less than the welfare benefit levels in the six most generous states.[40]  (Page 23-24) [12].

It is quite conspicuous why a welfare recipient would be susceptible to indefinite reliance on entitlement programs. If you are able to obtain more than the equivalent of a computer programmer’s median annual salary in public assistance it would be irrational to work. Typically those receiving government assistance lack the human capital to make equivalent wages in the labor market. When you combined the advantages of these benefits being tax-free and the general human preference for leisure, the choice is simple. Continue to receive welfare benefits as long as possible. Not only are incentives to work are removed, but consequentially the drive to improve one’s circumstances is relinquished. An occupation such as computer programming requires a lot of job training and even college degrees. Keeping human nature in mind, if there is a way to circumvent the schooling and job training but have equal compensation most people will take the shortcut. It is not laziness or malevolence, but rather a rational cognitive appraisal. That is why merely  68.6 % of welfare recipients in 1995 were actively seeking employment (Tanner et al. P.2) [13]. Poor people aren’t stupid, they respond to incentives in the same way anyone else would.

It should be important to not overgeneralize the findings of the 1995 study. The potential for misapplication is highly probably. Both by welfare advocates as well as opponents. The study notes how there were 77 programs in 1995, no single recipient receives benefits from each one (Tanner et al. P.4) [14].  For example, only 23 % of  AFDC beneficiaries had received housing assistance (Tanner et al. P.26) [15]. However, most had received benefits from multiple programs.

The 1995 study concludes that the salient incentives for long-term welfare dependence are tied to the number of benefits provided. As a means of policy reform, it is recommended that welfare benefits be reduced to minimize persistent reliance on such programs (Tanner et al. P.30) [16]. The timing of this study is somewhat ironic considering the timing of the study in relation to the 1996 Welfare reform of the Clinton administration. I would strongly surmise that this study provided some fodder for justifying such a policy change.

The Cato Institute 2013 Welfare Study:

In social sciences much like other disciplines that utilize empirical research replication of results is paramount.  In science, if results cannot be replicated odds are the researcher’s results were due to sampling error. Verifying the importance of follow-up studies. Michael Tanner and Charles Huges conducted a follow-up to the 1995 study.  One core difference between the 1995 and 2013 study is the implementation of the Welfare Reform Act of 1996. It would be natural to assume that the parameters of this reform have reduced the numbers of people dependent on welfare. Unfortunately, such an assumption is superficial and inaccurate.

Despite the efforts of the Clinton administration, the welfare reform of 1996 wasn’t as successful as anticipated. The dollar value of welfare benefits paid out has declined in 18 states since the reform (Tanner & Hughes, P. 8) [17]. However, in 33 states and the District of Columbia, the monetary sum of benefits paid out increased even when adjusted for inflation (Tanner & Hughes, P. 8) [18]. Placing into question the overall impact of the 1996 reform. Since 1995 the number of federal programs geared towards low-income recipients ballooned 126 (Tanner & Hughes, P. 7) [19]. Which does not lend much confidence in the effectiveness of the 1996 reform.

The unfortunate facts are that many state welfare programs are still far too generous. Despite minor improvements.  In 2013, 13 states had benefit allocations averaging over $15.00 per hour (Tanner & Hughes, P. 7) [20].  The study also notes that 35 states still have welfare benefits that exceed the wages earned on a minimum-wage salary (Tanner & Hughes, P. 7) [21]. The subsequent study found that in 12 states leaving welfare would result in a loss of income. Even with EITC and CTC tax credits taken into account (Tanner & Huges. P.7) [22]. An incentive that makes up for taking a job that pays slightly less than welfare benefits in  39 states. However, still cannot counterbalance the value of leisure (Tanner & Huges. P7) [23].

In  2013, the issue of welfare allocations eclipsing many entry-level positions is still a lingering issue.

In 11 states, welfare pays more than the average pre-tax first-year wage for a teacher. In 39 states it pays more than the starting wage for a secretary. And, in the 3 most generous states a person on welfare can take home more money than an entry-level computer programmer. (Tanner & Hughes, P.8) [24].

The number of states providing benefits surpasses the salary of an entry-level computer programmer has been reduced by 50% since 1995. However, it does seem superfluous to have any aid to top the salary of a computer programmer. Computer programming is a prime example of skilled labor. That alone is enough to discourage those in need to find work. Why go to college to gain such skills when you can just apply for welfare? However, it seems as if such generous distributions are relegated to a minority of states. State welfare benefits exceeded the salary of a starting secretary in 29 states in 1995. That number jumped to 39 in 2013. This is obviously a step in the wrong direction. Especially considering secretary positions can be a solid career stepping stone.

The five most generous states all increased the overall welfare allocations since 1995. Hawaii had a  $7,265.00 increase in average welfare benefits paid to a household. Washington D.C. a notably $8,730.00 increase. Massachusetts exhibited a $5,169.00. Connecticut a modest increase of  $1,781.00. Finally, New Jersey with a $5,533.00 (Tanner & Hughes, P. 8) [25]. To truly put these numbers in perspective it would be helpful to see how these benefits rank terms of hourly wages. For Hawaii, it amounts to the pre-tax equivalent of a resounding  $29.13 per hour. Washington D.C. $24.43 per hour. Massachusetts $24.30 per hour. Connecticut $21.33 per hour. New York $21.01 per hour (Tanner & Hughes, P.12) [26].  Please note that in Hawaii minimum-wage as 2020 was $10.10 per hour [27].

While derisive criticism could be directed at the states for generous benefits programs, there are other factors contributing to the lackluster results of the 1996 welfare reform. There is much due opprobrium that can be levied against the work requirements. The 1996 legislation added more stringent work requirements as a contingency for receiving means-tested aid [28].  Per federal law,  each can provide hardship work exemptions for up to 20 % of all welfare recipients (Tanner & Hughes, P. 39) [29].  Such a restriction seems like reasonable restraint many there are still states such as Massachusetts that have few recipients participating in work actives.(Tanner & Hughes, P. 39) [30].  For example, per the study, only 18% of adult participants in TANF were engaged in work actives (Table, P. 41).

Nationally less than 42% of adults receiving public assistance are working (Tanner & Hughes, P. 41) [31]. Even at that, the definition of work activities stretches beyond actual productive labor. Encompassing job training and even schooling. The definition of work activities was made even broader under the Obama administration. Per a 2012 executive order (Tanner & Hughes, P. 41) [32]. Providing more malleability in the parameters for welfare requirements only creates more loopholes. Participants are most likely not looking to cheat the system. However, broadening requirements increases the aptitude and propensity for chronic dependence. In turn, fulfilling the prophecy of Buchanan’s Samaritan’s Dilemma.

Conclusion:  

A help-handing can make all the difference for those who are in need. I would never set out to write a critical polemic against the virtue of charity. The institution of privatized charity would be the preferential over socialized assistance. Whenever the costs are socialized there is a disconnect between funding and the actual effectiveness of the government program. Most taxpayers operate under the assumption that the policy must be effective. Acquiesce the existence of welfare as a necessity, if it wasn’t the program wouldn’t exist. Few question whether or not their helping-hand is securing the ball-and-chain of multi-generational welfare dependence.

My policy preference concerning welfare programs leans Libertarian. However, the complete abolition of social assistance initiatives is unrealistic. Any politician suggesting such policy prescriptions would be committing political suicide. Most of these programs are entrenched fixtures of the massive bureaucratic body. Making them difficult to dismantle. Odds are most voters’ preferences would align with keeping such efforts in place. Therefore, it is important to look at this issue from the framework of reform versus the lofty aspirations conveyed in political theory.

Once you re-orientate your expectations become a matter of honing in welfare. Focusing on shaping these programs into being temporary assistance versus lifelong entitlements. Scaffolding towards independence versus multi-generational shackles. The only way to make this policy shift would be through reducing the value of welfare benefits paid. In turn, such a policy adjustment would realign motives towards investment in human capital and situational improvement. Not indefinite continuation of the same programs. Which is why I would recommend time limits on the duration of time a recipient can receive benefits. It is evident that work requirements are flimsy barriers. Flimsy barriers which can be easily penetrated.

Judging by some of the gaping holes in the Welfare Reform Act of 1996, it is reasonable to question if the Clinton Administration was serious about welfare reform. Easy to see this piece of legislation as a series of insincere concessions between a Democratic White House and a Republican congress. Even in light of the loopholes in the initial legislation, the reform initiative has been further eroded by subsequent administrations. Per the Cato Institute 2013 study pertaining to the work requirement changes made by the Obama administration:

However, other observers disagree, pointing out that the definition
of work activities is already extremely loose so that any increased latitude can only make the situation worse. Ron Haskins, who as a Republican committee aide helped draft the 1996 welfare reform and who now is an analyst for the Brookings Institution, says that if the administration “wanted to undermine the work requirement,” the new policy “is away to do it.” (Tanner & Hughes, P.45-46)

Which circles back to the whole concept of welfare dependence being a byproduct of legislative flaws. Designing welfare programs that make it too easy or too rewarding to obtain welfare benefits will breed long-term dependence. The question becomes are we are helping or hurting these individuals. I would be speculating we are hurting them. They continue to lack the skills for substantial employment. All it could are budget cuts or elimination of a program and then they are living in a cardboard box. The price of being completely reliant on government assistance is having no autonomy over your economic future. No hope of upward mobility. Being held captive by congress and voter attitudes towards welfare. If either falls out of favor of supporting welfare, vicissitudes do not bode well for recipients.