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Social programs are constantly in the news, often framed as a choice between cutting benefits and hurting the poor or bankrupting the government. In this Grumpy Economist Weekly Rant, John Cochrane argues that this framing misses the real problem: incentives. Across much of the income range, earning an extra dollar can mean losing a dollar—or more—in combined benefits as multiple programs overlap and interact.
These benefit cliffs, Cochrane explains, create powerful disincentives to work, even when individual programs are reasonably designed. The solution is not fewer beneficiaries, but better incentives: integrated programs, transparent marginal tax rates, and firm limits on how much work is discouraged.
Transcript
Hi, I’m John Cochrane, Senior Fellow here at the Hoover Institution, and this is my Grumpy Economist’s Weekly Rant.
Today, we’ll talk about social programs. They’re in the news. They’re always in the news because of the budget, and the Minneapolis affair brought them back to the news.
How are we going to fix social programs?
The left–right political tension seems to be: “Cut the programs, or else we’ll bankrupt the government. No! Cut the programs — people will be hurt. How heartless you are.”
Isn’t there a way out?
Yes—there is a way out. The economist’s way out: fix the incentives. We can help more people at a lower cost.
The big problem is that from about zero to about $60,000 in the US, if you earn an extra dollar, you lose a dollar’s worth of benefits—together with cliffs where earning an extra dollar loses you a lot. For example, losing your health insurance or losing your housing subsidy.
It’s how multiple programs work together. Each one is reasonably well designed, but when they work together, you get a huge disincentive.
Kim Strassel was writing about this in The Wall Street Journal recently, and she added up SNAP, WIC, unemployment insurance, EITC, LIHEAP, CHIP, TANF, Medicaid, Head Start, Pell Grants, public housing, rental assistance, legal services, adoption services, and adult education—overlaid with hundreds of state-level counterparts.
And I noticed she left out—excuse me, I have to read to not forget all of these—Social Security, disability, veterans’ benefits, homeless cash support, Medicare, Obamacare, affordable housing, Section 9 vouchers. All of these: if you earn more money, you lose some benefits.
Well, of course there’s a big disincentive to work, and that’s why so many Americans are not working at all.
On top of that, of course, we pay politicized nonprofits to provide services—a giant rat hole. Notice the daycares in Minneapolis or the homeless services here in California.
What can we do?
First of all, we need to fix this disincentive. One thing I’ve noticed is that income from other programs does not count as income. There’s a big incentive to go get another program, as opposed to going to get a job. At least, we can count all income from programs as income for the purposes.
We need far fewer, far more effective, and far more integrated social programs. We need to measure the marginal tax rate—how these programs interact.
I’d like to pass a law: nobody pays more than a 50 percent marginal tax rate. That goes for the poor and goes for the rich. Or maybe 70 percent—choose your number. But there are plenty of 100 percent marginal tax rates out there.
We should limit help by time, not by income. We should fix the disincentives. We can that way help more people at a lower cost.
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John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.