The Incentive Trap of Government Subsidies

Small business president Gerry Auclair has observed an interesting conundrum arising from the effect of government subsidies in society. He participated in a program through Workforce of Rhode Island to hire and train an employee as a sewing-machine operator, which essentially provided a $5,000 subsidy for the company’s cost of employing her, but:

Then, in July, she got married. The state now looks at combined income of husband and wife, and quickly dropped daycare assistance for her two children. A few months later, it notified her it was dropping the health-care assistance for the children, as well.
If she continues to work, the cost of day care plus the family health-insurance co-pay is more than she earns working. She had no choice but to give her notice, quit working, so she would fall under the magic income level and secure affordable health care for her kids.

While I’m certainly in favor of indirect participation, if the government is going to attempt to move the economy forward, Auclair’s anecdote strikes me as evidence that government handouts will tend to multiply. It’s a bit like inflation; we give money to assist with healthcare so children don’t suffer poor health, then we add in daycare so a single mom can provide for her own family, but these payments then become part of the baseline for other activities.
The mindset comes to be that subsequent actions (such as marriage and employment) are premised on these underlying payments, and the recipient ought therefore be entitled to their continuation; otherwise, we’re creating disincentive to good decisions. Small-government conservatives will find that to be a very human response, inasmuch as we think that healthy choices tend to require the application of social and financial incentives; rarely are healthy choices so inherently and immediately attractive that people will give up government handouts in order to make them.
Part of the reason society (and government) ought to encourage marriage is that parents working together will be more self contained when it comes to raising children, both for the well-being of the children and to alleviate pressure for public assistance. What Auclair is requesting, in a sense, is that his former employee continue to be considered a single mom, even though she’s now part of a married family with income beyond the bounds that merit public assistance. (One wonders: Should we subsidize well-paid single parents whose one income is equivalent to that of a married pair?)
Of course, it also ought to remain a question whether, as a community, we should really prefer having both parents in the workforce. As my family staggers through our busy schedules, with inadvisably extensive involvement in community activities of various sorts, I’m increasingly struck by the value of having one spouse relieved from the necessity of work. Not only is maintaining a home a labor-intensive operation, but community involvement and other volunteer activities suffer when homes become mere rest-stops between workdays and cleaning, maintenance, management of children’s schedules, and so on all must be squeezed in amidst professional responsibilities. (This drain of free time among the population, I’d speculate, increases the call for government to direct money toward community services and charity, thus making jobs out of them.)
It seems to me that we’d all be better off if Mr. Auclair’s ire were directed toward relieving the burden of government on his business (through mandates, regulations, and taxes) so he could pay for his own training and raise the salary that he offers until it is sufficiently attractive to bring employees to him. Instead, his call for continued subsidies is little more than an attempt to ensure that he, with his particular needs, realizes a net gain from government’s hand in economic affairs, even though it will inevitably increase the burden on somebody else.

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Russ
Russ
9 years ago

“It seems to me that we’d all be better off if Mr. Auclair’s ire were directed toward relieving the burden of government on his business (through mandates, regulations, and taxes) so he could pay for his own training and raise the salary that he offers until it is sufficiently attractive to bring employees to him.”
Ah, yes, let’s return to the glorious good old days in the textile industry before those awful regulations made wages fall, a paradise for seamstesses. Ahhhhh, baloney!
en.wikipedia.org/wiki/Triangle_Shirtwaist_Factory_fire

Swazool
Swazool
9 years ago

[Comment deleted because commenter was banned last week — JK]

ANTHONY
ANTHONY
9 years ago

Once again the law of unintended consequences rears it’s ugly head. It is the individual who suffers (and society in the end)as they never reach their true potential. Mama Govt. though social engineering steers the individual to dependence.

Dan
Dan
9 years ago

Russ, as is typical of all great thinkers, boils the issue down to an entirely accurate dichotomy of public policy options – accept all regulation or die in a fire. Whichever should we choose?

Russ
Russ
9 years ago

“…boils the issue down to an entirely accurate dichotomy of public policy options…”
Don’t blame me. That’s exactly the false dichotomy presented by Justin, or did I miss the part where he provided something concrete about the ineffectiveness of this program or of job training incentives generally?
The argument above reads: there are problems at the margins of who should/should not qualify for certain government sponsored programs, therefore we shouldn’t offer them. And by eliminating mandates, regulations, and taxes (which ones we’re left to wonder) we magically improve training options and salaries. That’s clearly wasn’t the case historically, but Justin doesn’t feel the need to justify such articles of faith when preaching to the faithful.

mangeek
mangeek
9 years ago

“If she continues to work, the cost of day care plus the family health-insurance co-pay is more than she earns working.”
I can relate to that. It’s true. There are tremendous costs to health insurance and child care ($10,000 and 12,000 annually, respectively), if someone is making under $40K and you can handle expenses on one income, it makes sense to have one partner drop out of the workforce and raise the kids. Plus, you get a stay-at-home Mom, which is awesome. If you’re not married, you can apply for various benefits to ease the burden further.
You’re screwed if you’re middle class, married, and both employed trying to do this.
I’m going to present a ‘third path’ for you: What if we aggregate the costs of Health Care and Child Care for the employed to the whole of society… Yes, I’m suggesting we make health care and day care ‘free’.
There’s no amount of tax-cutting you can do for the middle class that will change the current situation; health + child costs plus the benefits of a stay-at-home parent exceed the earnings of someone who makes even upper-middle class wages and pays $0 taxes.
Putting it into the government’s hands, especially with health care, is an undeniable macroeconomic boon. There’s no question that the current American system is a drag on employment from the supply and demand side.
I hate admitting that, seeing as how I’m a fiscal conservative. I still can’t deny the truth though.

Justin Katz
Justin Katz
9 years ago

Russ,
As usual, you prove yourself unable to paraphrase that which you’re disputing.

Max D
Max D
9 years ago

“Ah, yes, let’s return to the glorious good old days in the textile industry before those awful regulations made wages fall, a paradise for seamstesses. Ahhhhh, baloney!”
Ah yes, the 100+ year old tragedy to justify modern day oppressive union protectionist regulations. Is that all you got Russ?

Dan
Dan
9 years ago

Mangeek – It’s hard to disagree with anything you’ve said, but people will misinterpret and draw flawed inferences based on that alone. The “current American system” is a government controlled, privately run corporatist monstrosity that combines all of the worst aspects of socialism with a bastardized capitalism in which all of the natural competition-based market controls have been eliminated. It allows illegal immigrants, the homeless, and mentally ill unlimited misuse and overuse of a free commodity while forcing working Americans to participate in a rigged pseudo-market in which only the biggest, baddest, most corrupt players can survive due to government mandates, regulations, and subsidization. As in all sectors of the economy, a truly market-based system would have lower costs and better services. However, given what we already have now as a result of failed central planning, a fully socialized system could very well lower costs. It is important to point out that the socialist/progressive argument that removing profits from the equation result in a net bonus to the economy is a complete fallacy because it simultaneously removes the incentives and efficiencies that made the profit possible in the first place and assumes a functioning price-based information network that a socialized system would not have. Actually, there was a very good EconTalk that came out today on this topic: http://www.econtalk.org/archives/2011/12/munger_on_profi.html Russ – Yes, you completely misstated Justin’s central argument and missed most of his supporting points as well. It’s like we’re not even reading the same article. You are lucky that you did not take the LSAT because you would have bombed the reading comprehension section and gone to Roger Williams, and then you’d really be stuck in Rhode Island forever. As for your second “point,” you are simply wrong – there is a great deal of historical evidence that deregulation… Read more »

Justin Katz
Justin Katz
9 years ago

I don’t find it difficult at all to disagree with Mangeek’s comment. In fact, I’d go so far as to suggest that, of itself, it invalidates claims of fiscal conservatism.
For one thing, nothing is “free,” especially when filtered through government. (And no, contrary to liberal fantasy, rich people aren’t going to say, “well, you got us,” and empty all of the money they hide unproductively in their basements.) The point is especially strong given the context of Mangeek’s statement:

You’re screwed if you’re middle class, married, and both employed trying to do this.

To whom, exactly, do you think government-funded health and child care will aggregate the costs? Precisely the productive people who are struggling to incorporate such expenses will wind up paying for them when they’re “free,” but they’ll also be paying even more in order to further subsidize families like the one described in the post, for whom it is apparently more economically efficient to keep one spouse home.
A second major problem with the premise is the inherent requirement that the healthcare and childcare systems won’t adjust, in price, to the reality of socialization. The costs will just escalate more rapidly.
As to Dan’s suggestion that full socialism might be more economical than what we’ve got now: perhaps in a purely intellectual exercise. In reality, there’s no way to get to “full” socialism from where we currently stand without making matters worse.

mangeek
mangeek
9 years ago

“To whom, exactly, do you think government-funded health and child care will aggregate the costs?” Right now the middle class is shouldering the costs for a health care system that costs 20% of GDP. Through their own and their employers’ premiums, they are paying a disproportionately high portion of an already expensive system, and they already do have to pay for freeloaders because providers can push costs around ($175 Aspirin, anyone?). The math clearly shows that we’d be better-off going entirely one way or another on health care, but the current system (which Dan accurately describes) is ‘the worst of both worlds’. Justin, if we socialized health care -properly-, meaning there are still some market incentives and providers are still private but have to publish their price schedules and efficacy rates (enabling ‘rational consumers’), it would effectively be a small tax hike that enabled massive personal and corporate savings on Health Insurance. I think we either need to go full-blown free-market with insurers being able to operate across state lines and basically ‘run the show’ (no mandates on what they pay for), or we become the last developed nation to adopt universal health care, but we do it with all the lessons from Europe and modern economics in mind. I’d take either one over what we currently have, but I think the latter would be far less destructive, far more valuable, and actually quite beneficial to the economy in the big picture. Think of it this way: Taking Health Care (all of it, including existing payroll taxes) off of the shoulders of employers is more valuable than any tax cut you can offer them. Ask any small business owner and they’ll agree. The way to pay for that sort of thing should be through a payroll tax that lands entirely… Read more »

Russ
Russ
9 years ago

“As usual, you prove yourself unable to paraphrase that which you’re disputing.”
Couldn’t be the writing. Must be those stupid readers. And you guys think liberals are the elitists, right?
“Is that all you got Russ?”
Sorry for remember what that industry was actually like without regulation. I could point to current day sweatshops in many parts of the world as examples as well.
I’d say the burden of proof is on those who ask us to ignore that history, not the other way around.

Dan
Dan
9 years ago

Russ – Do you know what a consensus standard is? It’s from where most regulations in the United States derive. Guess who develops them voluntarily – the evil employers.

Russ
Russ
9 years ago

Let’s leave aside the limits to self-regulation and the problems that can occur with industry captured regulatory bodies.
But if your point is that most regulation is written by the industries themselves, then it’s hard to see why we need to eliminate them as Justin suggests or certainly how that would in any way benefit workers. Enforcement in those cases is simply ensuring businesses compete on a level playing field by the rules to which they themselves agree.

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