Mamdani's "Free" Universal Childcare and What Happens Socialism Meets Economic Reality

Socialists have a peculiar relationship with mathematics. Much like protectionists think that arithmetic is for globalists, socialists think that adding up the costs of a program is a form of capitalistic oppression. Costs are somehow lower than expected, savings are larger than advertised, and somehow someone is expected to pick up the tab. 

And this is where New York City Mayor Zohran Mamdani comes into play. On his campaign trail, he made a campaign promise for universal childcare at a price tag of $6 billion per annum. It turns out that his math was off and that it will cost about 50 percent more. According to a recent study from The New School's Center for New York City Affairs, it will cost anywhere from $8.7 billion to $9.3 billion. This is not about a single headline. It is the idea that making things "free" comes at a high price tag. 

Calling something "free" is one of the oldest tricks in politics. The word focuses attention on the person receiving the benefit while hiding the costs somewhere else. Universal childcare requires caregivers, facilities, equipment, and administration. Guess what? All of that costs money. 

Plus, when government sets the price of the service at zero, demand rises because consumers no longer face the normal costs of their choices. That means the government must fund a larger system than anticipated. Economics has a habit of ruining politically attractive slogans by introducing something called arithmetic. 

If this were just about a single overly optimistic estimate, that would be one thing. But Mamdani's childcare proposal fits the broader pattern of government programs that sound affordable until someone has to calculate the costs and pay the bills. 

Consider his other proposals. His rent freeze assumes that the government can make housing more affordable by restricting prices, while ignoring the incentives those prices create for landlords, maintenance, and future housing supply. His government grocery store proposal assumes that City Hall can enter a competitive market and somehow deliver better outcomes at a 30 percent discount. His free bus proposal fell through because he forgot that buses still require drivers, maintenance, and fuel, all of which cost money. 

Each proposal involves a different policy mechanism, but none of it can avoid the reality that resources are limited. Building still need maintenance, workers still need wages, and services still require resources. Costs do not vanish simply because a politician invokes the word "free."

The appeal of socialism has been its promise to remove difficult choices. If only government were ambitious enough, everyone could have what they want while nobody would have to sacrifice. Unfortunately, the world doesn't work that way. Every society faces tradeoffs. Pretending otherwise only ensures that those tradeoffs appear later and do so in much more painful forms. 

The best ideas survive scrutiny because they account for costs and benefits, not because they assume those pesky costs disappear. Campaign promises don't need to balance the books, but someone eventually has to pay a price for those who decide to implement them.

August 13, 2026 Addendum: Speaking of high price tags, the Cato Institute published a solid analysis of what it would cost if the Democratic Socialists of America got everything on their wish list, which includes universal health care, reparations, a federal jobs guarantee, housing for all, paid family leave, and free college. On the high end, it would cost $211.6 trillion over the next decade. Even in the low-bound estimate (which given what I previously wrote, is most likely a woeful understatement), it is still $71.2 trillion. 

Immigrants Aren’t Draining Welfare: The Welfare State Is Draining America

Immigration is one of those peculiar topics in US policy debates that produce durable myths. They sound like plausible claims in theory, but collapse under the slightest bit of empirical evidence. Over the years, immigrants have been accused of spikes in crime, overwhelming public services, and draining this country's finances. These claims are so hard-wired into the political discourse that they harden into "conventional wisdom." Last year, I examined the "migrant crime wave" claim and refuted it by showing how immigrants are much less likely to commit crimes. 

Schrödinger's Immigrant and the Myth about Immigrants and Welfare

The welfare argument is no exception. In policy debates, you see what is jokingly referred to as Schrödinger's immigrant: an immigrant who is too lazy to work but manages to take all the jobs, which is a paradox that plays into an inaccurate, nativist caricature of immigrants. The nativist crowd at the Center for Immigrant Studies argues that immigrants consuming welfare and working can go together, thereby trying to refute the idea of Schrödinger's immigrant. While rhetorically clever, it only focuses on the theoretical possibility of the two co-existing rather than actual welfare consumption patterns. 

This is where research from the Cato Institute that was released last week comes into play. They actually did the work to see how much welfare and means-tested benefits are consumed by immigrants versus native-born US citizens. It turns out that immigrants consume about 24 percent less in welfare benefits than native-born citizens on a per capita basis. This finding lines up with a National Bureau of Economic Research paper from 2020 that looked at welfare use from 1995 to 2018. Guess what? Those researchers found that immigrants consume much less welfare than their native-born counterparts. 

Why Immigrants Consume Less Welfare

Immigrants consuming less welfare makes sense when you think it through. Immigrants are younger, healthier, and are more likely to either be working or actively seeking work. Because they come with a higher labor force participation rate and fewer chronic health conditions, they are less likely to need disability benefits or unemployment insurance. Furthermore, immigrants face legal and administrative barriers to receiving benefits. 

Immigrants as Net Contributors to Society

When you hear this anti-immigrant diatribe of immigrants draining the welfare system, it ignores the other half of the conversation, which is what immigrants contribute to the economy and to society. In 2024, I illustrated how immigrants contribute billions in income, property, and sales taxes every year. When you look at both the costs and the benefits, the picture flips. Immigrants do not merely "pay their own way." It turns out that immigrants are actually a net positive for government budgets. 

The Real Problem: The Welfare State

The evidence is clear. Immigrants are not the ones bankrupting this country. Immigrants use less welfare than native-born citizens and also contribute significantly in taxes. In net, immigrants are a benefit to the economy, not a burden. I have been consistent in critiquing the welfare state, whether it has been Social Security, Medicare, Medicaid, food stamps, or TANF. The anti-immigrant crowd rails against immigrants supposedly "draining the system" (which they don't), yet pays far less attention to the programs that drain this country's finances. If anti-immigrant nativists want to get at the real problem, they would go after the real problem of a large welfare state that costs the American people hundreds of billions of dollars every year. Otherwise, that is not fiscal responsibility or concerns about taxpayer dollars. That's just scapegoating dressed up as moral outrage.

How the Government's War on Single-Room Occupancy Fueled the Housing Crisis

Along with food and clothing, a roof over one's head has been considered one of the three fundamental needs for human survival. This remains true even for those who have next to nothing. There was a time when housing existed for those who had very little: a room, a lockable door, and typically a shared bathroom. It was not glamorous, but it was a roof over one's head. These housing units, called single-room occupancies (or SROs), were a reliable and affordable source of housing for the United States' poorest residents, seniors, and those looking to climb out of poverty. Today, SROs are all but nonexistent in the United States. Rent is higher than ever, homeless shelters are jam-packed, and many are out of luck when it comes to housing. What happened to SROs? In two words: government intervention. 

Last week, a report from Pew Research that was released in July was brought to my attention. With the title "How States and Cities Decimated Americans' Lowest-Cost Housing Option," the researchers at Pew Research detail the various policies that state and local governments used to get rid of SROs. The reason why governments went after SROs was because even as early as the early 1900s, SROs were seen as run-down, neglected, dilapidated. They were stigmatized as a public nuisance and blamed for such outbreaks as pneumonia and tuberculosis. Between the 1950s to 1980s, there were numerous local-level, piecemeal government regulations that severely curtailed SRO usage:

• Los Angeles and San Francisco rewrote zoning codes to prohibit rooming houses and share-living arrangements. 
• Chicago adopted stricter building and housing codes (e.g., imposed requirements for private bathrooms, minimum square footage) that effectively outlawed traditional SRO designs. 
• San Diego used code enforcement and licensing crackdowns to close SROs for safety or sanitation violations. 
• Seattle used redevelopment campaigns in "blighted" areas to clear out residential units where SROs were concentrated in exchange for higher-value development. Other countries similarly subsidizer to demolish these areas courtesy of the Federal Urban Renewal programs, especially Title I of the 1949 Housing Act
• Denver provided housing subsidies for traditional apartment-style housing that effectively sidelined SROs.

There could be better health inspections, rehabilitation incentives, or proper building management to make SROs more habitable, but these regulations that de facto eliminated SROs were overkill. SROs were the lowest-cost housing for individuals in need without requiring government subsidies or intervention. Primarily as a result of this crackdown, the overall SRO housing supply was reduced by 2.5 million units. This especially puts a crunch on the housing supply for those in the lowest-cost tier. This has placed undue demand on government services, subsidized housing, and homeless shelters because they cannot meet the housing demand. Just as one example, about half of the men who entered homeless shelters in 1980 were previously living in SROs. Without SROs, low-income individuals have very few alternatives of places to live, thereby contributing to homelessness, as we will see shortly.

This pushes low-income renters into larger, more expensive units when all they needed was a single room. As the Pew Research pointed out, an SRO in 1924 only cost $230 in today's dollars, which is below the $391 per month that an individual at the federal poverty line can afford in rent. Contrast that to the $1,205 that a median one-bedroom apartment costs. This should not be a mystery. Regulations requiring larger units crowds out the smaller units from the market and forces low-income individuals into more expensive units than necessary. These zoning regulations put additional strain on housing supply.

I first raised the alarm on overregulation in the housing market in 2017, citing a range of studies on how land-use restrictions reduce supply and inflate housing costs. Eight years later, the data has only grown stronger and the consequences more visible. These SRO-related land-use regulations are tantamount to a production quota, which restricts housing supply while jacking up housing costs. In the case of SROs, it is especially problematic because it constricts housing supply for the poorest of Americans, thereby squarely and concretely affecting low-income Americans. 

The Manhattan Institute found that areas with greater housing regulations also had a greater homelessness population (see below). While a compelling pattern, it stops short of showing causation. However, a peer-reviewed study from the University of Maryland fills that gap. The author found that land use regulations are responsible for increasing homelessness by 9 to 12 percent (Dawkins, 2023). In other words, restrictive land-use regulations are not merely correlated with homelessness. They are shown to cause increased homelessness.

There is a way to provide a modern-day equivalent of an SRO that is well-designed, hygienic, clean, and up to code. To do so, the government needs to get out of the way. Modifying current zoning laws to include small, shared-unit formats is a necessary first step. Second, remove the stringent codes in order to allow for smaller units and shared bathrooms and kitchens. Relax permitting regulations to allow for conversion of older building into SROs, especially since it is 25-35 percent cheaper than new construction.

Millions already live in shared housing without stigma, whether it is college dormitories, senior co-housing (aka "Golden Girls" Homes), professional households in which young professionals rent individuals in shared homes to split rent, transitional housing, monasteries, boarding schools, and military barracks. States and cities need to remove regulatory barriers and provide incentives to create low-housing options so that we can reduce homelessness, help financially vulnerable Americans, and help keep America's streets safer and cleaner.

It Is Not a Snap Judgment to Criticize SNAP's Rising Overpayment Problem

Everyone needs to eat. If people do not eat food, they die. It is part of why the Supplemental Nutrition Assistance Program (SNAP), also known as food stamps, is touted as playing a crucial role in fighting food insecurity across the United States. This is especially the case considering that SNAP benefits are second to unemployment insurance in terms of providing assistance during economic downturns. While it is purported as being this wonderful lifeline for struggling Americans, the reality is quite different. 

I am not referring to obesity rates exacerbated by SNAP  benefits (see my 2023 analysis here). When I was doing some research a couple of days ago on what to write about next, I came across a recently released report from the Mercatus Center entitled Reducing Waste and Fraud in SNAP. The most shocking finding of this report was that overpayment rates increased from 2 percent in 2012 to 10 percent in 2023. What this translates to is it costing U.S. taxpayers $10 billion in SNAP overpayments. It is smaller than the $31.1 billion in Medicaid improper payments I criticized last month, but it is still a jarring amount given the size of SNAP.

It is mind-blowing because in spite of the U.S. Department of Agriculture (USDA) spending more on improving retailer integrity and fighting trafficking in SNAP benefits, the overpayment rate continued to surge. Part of the reason for the surge is because USDA applied an improved methodology in 2017 and did not re-calculate the pre-2017 data. Then there are the matters of eligibility misreporting, Electronic Transfer Benefit (ETB) technical issues, and SNAP benefits trafficking, the latter of which account for about 40 percent of overpayments. 

This September 2024 report from the General Accountability Office (GAO) gives a better sense of weak oversight. For example, the GAO recommended in 2018 to increase penalties for when a retailer exchanges recipients' SNAP benefits for cash instead of food. As of September 2024, the USDA did not implement that recommendation provided in a GAO 2018 report. In that same 2018 report, the GAO criticized USDA for not applying previous recommendations from 2016. The Mercatus Center came up with a few recommendations on how to deal with these overpayment rates:

1. Create an office of program integrity within the FNS.
2. Require the disclosure of payment errors of any size, instead of just those over $57.
3. Allow states to retain more of the funds that they recover when they detect fraud.
4. Permit states to dis-enroll retailers that are taking advantage of SNAP. 
5. Encourage states to move over to SNAP EBT cards with chips.
6. Close loopholes that allow those with higher income and assets to collect SNAP benefits so that only genuinely needy households qualify.

I would also add some of the recommendations that I wrote about back in 2013, including separating SNAP benefits from agricultural subsidies, eliminating broad-based categorical eligibility, and modify the gross income limit from 130 percent to 100 percent of the poverty line, and enacting spending caps for SNAP. Sadly enough, there has been such little reform made on SNAP that these recommendations are still by and large applicable about 12 years later. The fact that so little has been done this century to improve SNAP benefits is troublesome.

Aside from the fact that this costs millions in taxpayer dollars a year, why should we care? Misallocating resources vis-à-vis overpayments means fewer dollars actually going to those in need. Eroding public trust in the program can mean less support for SNAP, which can harm those who rely on those benefits. More to the point, if the government cannot manage a program such as SNAP with competence, it makes it more difficult to justify its existence. Yes, libertarian economist Frederich Hayek believed that there should be at least a minimal social safety net. At the same time, all the USDA's intransigence and recalcitrance show is that SNAP should be as small and minimal of a social safety net as possible.

How Much of a Mixed Bag Is It That States Are Eliminating Their Grocery Taxes?

Governments have a knack for taxing everything, from property, alcohol, and millionaires to carbon, soft drinks, and recycling. Yet there is an exception I recently came across: the grocery tax. Fewer and fewer states are enacting a consumption tax on their groceries. Oklahoma Governor Kevin Stitt signed off on abolishing Oklahoma's 4.5 percent grocery tax. Earlier this month, Illinois Governor J.J. Pritzker announced eliminating Illinois' 1 percent grocery tax in his budget. If Pritzker is successful, that would mean that there would be 11 states that have a state grocery tax. It makes me wonder why a majority of states no longer have grocery taxes and what the costs of grocery taxes are.

One aspect is related to the impact of taxes generally. Taxes on the whole have two main outcomes: to collect revenue for the government and to discourage the consumption or production of what is being taxed. Since groceries are an essential for people to survive, it could discourage eating. A study from the U.S. Department of Agriculture (USDA) found that a one percentage increase leads to 0.7 percent decrease of food-at-home spending for SNAP-eligible non-participants (Stewart and Dong, 2021). SNAP benefits were not found to be affected, although that might not say much considering SNAP participants have worse health outcomes than low-income non-participants. 

That segues us into the second issue of grocery taxes: it discourages healthy eating. One study from Health Economics Review (Wang and Zheng, 2021) showed that "a one percentage point increase in grocery taxes increases obesity and diabetes rates by 0.588 and 0.215 percentage points, respectively." 

To quote the Left-leaning Center on Budget and Policy Priorities (CBPP), "Reducing or eliminating grocery taxes offers states a way to help families put more food on the table and afford basic needs." In 2020, CBPP illustrated how households in the lowest quintile spend up to eight times their income on sales tax than the top one percent. The disparate impact makes sense given that lower-income households spend more of their income on food than high-income households (ibid.), which causes greater food insecurity (Zheng et al., 2021).

At first glance, you would think I would be thrilled to see a tax cut. A tax cut seems like a win-win because it means less tax revenue, which in theory should mean less government (although it could also mean more spending with a smaller tax base). This also would help households when inflation has caused such harm, especially to low-income households. As I brought up with a Kansas tax cut in 2017, tax policy is more than "tax cuts = good." 

The problem is assuming that exempting groceries from the sales tax helps low-income households. It actually does the opposite. According to the Tax Foundation and its research on the grocery tax, "the poorest decile of households experience 9 percent more sales tax liability with a grocery tax exemption than they would if groceries were taxed and the general rate were reduced commensurately." In part, this happens as a combination of the substitution effects of unprepared foods for prepared foods and the already-existing exemptions for SNAP and WIC beneficiaries. It also happens because to compensate for the exemption, the overall sales tax has to be increased elsewhere. 

Exempting groceries from the sales tax also makes tax revenue more volatile. Another appealing aspect of the grocery tax is that it provides a constant source of revenue. Why? Everyone has to eat. Relying on other forms of consumption, especially during an economic downturn, increases revenue volatility. Plus, it erodes the tax base because having a broad sales tax base minimizes economic distortions and administrative and compliance burdens. The burden on low-income households is less, given that groceries make up a smaller portion of overall revenue. They have decreased from 14 percent of disposable income in 1960 from approximately 5 percent in 2022 (U.S. Department of Agriculture), thereby diminishing an argument of burden on low-income households. 

The reality is that we are not going to live in a world without government. Yes, I would like for government to be significantly smaller than it is, but a government in either case needs a revenue base. I have asked these questions about which sorts of taxes are preferable, not whether taxes should exist. I have no love for the wealth tax. I find the corporate tax problematic enough that I would prefer a capital gains tax over a corporate tax. 

As for the consumption tax, I worry about how states could respond if they exempt groceries. In addition to raising the sales tax, I also have concerns that they could raise income taxes instead. The problem is that consumption taxes are more efficient than income taxes. To quote the Tax Foundation:

"Income taxes impose steeper economic costs, and often steeper administrative and compliance costs, than consumption taxes. They place a higher tax burden on saving and investment. They also impose significant administrative and compliance costs that undermine the large anti-poverty programs for families and children administered through the tax code."

I am not looking at this as a matter of a utopia with zero government or zero taxes. I am looking at whether having a grocery tax beats the alternative. Based on the data we have, the answer is "no." It is better to have a grocery tax with a lower overall sales tax rate than it is having a grocery tax exemption. It is not only preferable for tax revenue purposes, but also for the purpose of helping out lower-income households. As counterintuitive as it seems for a libertarian, I am against a grocery sales tax exemption.

Why In the World Is the U.S. Department of Agriculture Providing International Food Aid?

Ever since the beginning of the Industrial Revolution, the rate of extreme poverty began to decline. There was a considerable decline starting in the 1990s. Although there was a corresponding decline in hunger, global hunger remains a scourge on this planet. Reporting from the United Nations' Food and Agricultural Organization finds that about 9.2 percent of the planet (or 735.1 million) face undernourishment. Global hunger had been declining, started to creep up in the mid-2010s, and shot up during the pandemic because of the increased food prices and lockdowns causing greater economic insecurity. 

Sadly, global food insecurity is nothing new. The U.S. Department of Agriculture (USDA) has formally been trying to fight global hunger since it started the food assistance program Food for Peace in 1954. This was followed in 1984 by the Food for Progress program with the goal to strengthen the agricultural sector, as well as a program that donates food to schoolchildren: McGovern-Dole. Since these three programs cost the U.S. taxpayers over $2 billion, I have to wonder how effective these programs really are. After all, the USDA is responsible for food stamps that very well might make recipients more unhealthy, subsidized school lunches that do not help improve child nutrition, and WIC vouchers that contributed to the infant formula shortage of 2022. A report released from the libertarian Cato Institute last month shows that USDA does not fare better with its international food aid programs. Here are some findings from the report:

• U.S. farm product donations undercut local farmers, which undermines the ability to feed poor countries and sustain long-term market development. 
• An increase to food aid can increase the incidence and duration of civil conflicts because "food aid is regularly transported across vast geographic territories [and] is a particularly attractive target for armed factions."
• U.S. food aid shipments typically take four to six months, which can open the shipments to greater incidence of theft, infestation, and storage. 
• Congress mandates that these food shipments need to be shipped on U.S.-flagged vessels, which can  increase shipping costs by up to threefold. 
• The monetization process used by USDA means losing 30 percent of taxpayer funds compared to paying for aid projects with cash. Direct cash transfers would do more than in-kind food transfers.
• The USDA international food aid projects have redundancies with the U.S. Agency for International Development (USAID), thereby wasting more money. 

The U.S. government's program has bureaucratic overlap, stifling cargo requirements, and has such costs as exacerbating conflict and undermining agricultural markets. It makes me wonder why in the world the USDA is in charge of providing international food aid in the first place. As I brought up in 2016, trade liberalization does a better job at fighting poverty than foreign aid. The Cato Institute provides a few suggestions, including strengthening property rights, rule of law, opening markets, removing entrepreneurial barriers, and creating stable currencies. By implementing deregulation and trade liberalization, countries can improve their economy and reduce hunger without foreign intervention. 

Generous Unemployment Benefits During the Pandemic Disincentivized People Looking for Work

The pandemic came with the federal government spending so much money that it would have made Franklin D. Roosevelt blush. There was a lot of wasteful spending during the pandemic, whether it was the Paycheck Protection Program, "stimulus" checks, the student loan repayment pause, or the American Rescue Plan Act that greatly contributed to the inflation spike. 

Today, I would like to look at a different form of pandemic-era spending: the unemployment benefits. It was not bad enough that there was at least $60 billion in unemployment benefit-related fraud. There is the question about how these unemployment benefits affected unemployment. There is a common worry among economists that unemployment benefits exacerbate and extend unemployment. I first brought up that economic argument on my blog in 2012. 

Shortly after the CARES Act passed in 2020, I expressed concern about its extensive unemployment benefits creating greater incentive for people to stay home than to work. In the Great Recession, unemployment insurance created disincentives to find a job. The unemployment benefits in the pandemic were more generous during the COVID pandemic than in the Great Recession. It stood to reason that the magnitude of unemployment benefits on employment would be greater than that of the Great Recession. It turns out that my concerns were valid. 

New research from the American Enterprise Institute answers this question about the effects of unemployment insurance (Strain et al., 2023). In March 2021, the federal government expanded Federal Pandemic Unemployment Compensation (FPUC), as well as extended UI benefits to the self-employed, "gig" workers, and part-time workers. 26 states opted out of at least one of these programs before they were set to expire in September 2021. This natural experiment allowed for the researchers to as which states fared better: those that opted out or those that stayed with the programs? 

If the idea was to get people back to work as soon as possible, the figure above shows that opting out of these lavish employment benefits was the right call: '

"Using CPS data, we present difference-in-difference estimates that the flow of unemployed workers into employment increased by around 12-14 percentage points following early termination. Among prime-age workers, the effect is about two-thirds the size of the unemployed-to-employed flow among control states during the February-June 2021 period...We show that state-level unemployment rates fell following earl exit from FPUC and PUA."

In layman's terms, not having those generous unemployment benefits provided the unemployed the incentive to find a job. States that kept the lavish benefits struggled more with their employment levels. Not only did taxpayers cough up billions to pay for these outrageous benefits, but the lavish nature of these benefits kept people at home and unemployed for longer periods of time. It makes sense: why go to work when you could get paid more to not work? Such myopic thinking about welfare dependency leads to a drag on the economy, which ultimately affects our quality of life. It makes me wonder how many more economic downturns it will take before the U.S. government finally learns the lesson that unemployment benefits do not pay.

SNAP Benefits Exacerbate Obesity and Diet-Related Disease: Can Something Be Done?

The debt ceiling fight wages on in Congress. One of the items that is part of this fight is Supplemental Nutrition Assistance Program (SNAP), more colloquially known as food stamps. Part of what the Republican Party is negotiating is to raise the work requirements for able-bodied adults without dependents (ABAWD) from 50 to 56. This reform would potentially affect over 1 million Americans currently receiving SNAP benefits. 

The people over at USA Today make it seem like a callous move by the Republicans. As I explained last month, this reform is a step in the right direction. It is needed to maintain the long-term solvency of the program. These new work requirements would improve employment rates, as well as the well-being of unemployed ABAWD individuals on SNAP benefits. That being said, the issues with SNAP go beyond budgetary or labor market issues. 

According to the U.S. Department of Agriculture (USDA), "SNAP provides nutrition benefits to supplement the food budget of needy families so they can purchase healthy food and move towards self-sufficiency." You would think that with "nutrition assistance" in the title, SNAP would actually deliver nutritious options to those who need it. Much like with the Inflation Reduction Act or the Affordable Care Act, the Supplemental Nutrition Assistance Program fails to live up to its name.  

Earlier this month, the center-Right American Enterprise Institute (AEI) released a report entitled Promoting Mobility Through SNAP: Toward Better Health and Employment Outcomes. AEI took a look at data from the U.S. Department of Agriculture (USDA) and the National Health Interview Survey (NHIS). One of the main findings of this report is that SNAP recipients have poorer health outcomes than non-recipients. The first shocking aspect is that SNAP recipients are more likely to have diet-related diseases. 

What is just as concerning is that SNAP recipients across all age categories are more likely to be obese than non-recipients, regardless of income bracket (AEI, p. 12). 

This finding lines up with a 2018 USDA report on the nutritional quality of food purchased by Americans. As we see from this report, SNAP recipients are more likely to purchase empty calories and refined grains. SNAP recipients are also less likely to purchase fruits, vegetables, protein, and whole grains. 

A 2016 USDA study similarly shows that 23 percent of SNAP benefits were spent on sweetened drinks, desserts, salty snacks, candy, and sugar. In other words, the U.S. government uses SNAP to spend $25 billion a year subsidizing junk food. The 2016 study found that soft drinks was the single largest commodity purchased under SNAP (USDA, 2016, p. 5). 

One has to ask why there is a correlation between SNAP benefits and poorer health outcomes. Advocates posit it is because SNAP recipients do not have nearby access to healthy food, that they live in food deserts. The USDA begs to differ: "Further, on all of our measures of nutritional quality, SNAP-participating households with low household-level access to food stores did not differ from SNAP-participating households with better access (USDA, 2018, p. 15)."  

Price of healthy food does not seem to be the culprit, either: "Contrary to conventional wisdom, research shows that when measured properly (per nutrient or per serving, for example), healthy foods actually cost less than unhealthy foods (AEI, p. 15)." You cannot blame American culture or poverty on these disparities because SNAP participants have worse health outcomes than low-income non-participants. Many who advocate for greater SNAP benefits would like to ignore that cost or access to healthier options are not the issue with SNAP, so what is?

While it is easier to identify what is not the cause of the health disparities, figuring out what is turns out to be a more difficult task. Part of these poor health outcomes comes from the fact that SNAP program has no nutrition standards whatsoever (AEI, p. 1). It still does not explain why SNAP recipients have worse health outcomes, even worse so than low-income individuals who do not receive SNAP benefits. Subsidies act as an economic incentive, that much is true. In this case, SNAP benefits are subsidizing a disproportionate amount of unhealthy eating and exacerbate public health outcomes, including the obesity epidemic. Do SNAP benefits incentivize poor health decisions or is this a demographic that happens to make more unwise decisions when it comes to their health?

Whether SNAP benefits are explicitly causing poor health or not, what remains clear is this: after years of food stamps and having increased funding for SNAP spending, nutrition and health outcomes for SNAP recipients remains poor. The question is whether anything could be done to reform SNAP.  I detailed in 2013 how we could reform the SNAP program. 

Conceptually, it would be nice to have nutrition requirements on SNAP benefits to help SNAP recipients have better health outcomes. Either banning the purchase of soda or having a certain percentage of benefits allotted towards fruits and vegetables comes to mind. I would even be for a limited Fruits and Vegetables program instead of no nutrition requirements. That alternative would cost only about $20 billion instead of $127 billion allotted for SNAP benefits in FY 2023. 

Much like with Social Security, I wonder if it would be simpler to scrap SNAP instead. The government getting the food pyramid wrong is an example of why the government does not have the best track record in telling people how they should eat. We cannot even get Congress to pass something as minimal as stricter work requirements after Biden did away with them in 2021. Plus, the Secretary of the USDA recently commented that nutrition requirements are not an option because they would stigmatize the obese. The intransigence in Congress gives me little hope that SNAP would be eliminated. Government gets spending regardless of whether a program works, and once established, it is hard to eliminate a government program. 

At the same time, I hope that private charities can step in while Congress gets its act together. Private food-related charities are at least incentivized to be more efficient with spending and fund programs that succeed. Regardless of the outcome in Congress, it does not change the fact the SNAP benefits do a poor job at promoting nutrition for its recipients. 

More Evidence Against Minimum Wage: Why Minimum Wage Fails to Reduce Poverty

Bernie Sanders says the darnedest things. There have been a number of his proposals I have criticized over the years: single-payer healthcare, free college, breaking up big banks, the financial transaction tax, and capping consumer loan interest rates. I can add another one to the list: a $17/hour minimum wage. For Sanders, a $15/hour minimum wage is not enough due to the inflation caused by the federal government's fiscal policy and Federal Reserve's monetary policy. Sanders is looking to introduce legislation next month to increase the minimum wage to $17/hour over the next five years. Let's forget the opposition that there would be in the Senate to more than double the minimum wage. 

Let's get at Sanders' argument, which is "If you work 40-50 hours a week, you should not be living in poverty. It's time to raise the minimum wage to a living wage." There are two insights from Bureau of Labor Statistics data on minimum wage workers that Sanders wants to conveniently ignore and that I brought up last year. One is that fewer workers in this country are minimum wage workers, decreasing from 6.9 million hourly workers (or 13.9 percent) in 1979 to 1.5 million workers (or 1.4 percent) in 2021. The second is that 52.9 percent of minimum wage workers are part-time, which is in contrast to the 8.9 percent of minimum wage workers who work over 40 hours a week, or approximately 120,000 workers. 

Even if we ignore BLS data, we still have a research paper from the National Bureau of Economic Research (NBER) that was released about a week ago entitled Minimum Wages and Poverty: New Evidence from Dynamic Difference-in-Differences Estimates (Burkhauser et al., 2023). The main finding of this paper is that "a 10 percent increase in the minimum wage is associated with a (statistically significant) 0.17 percent increase in the probability of longer-run poverty in all persons." This study is intriguing because it is more longitudinal because it spans over four decades. Plus, it spans over multiple industries, which I cannot say for the Card and Krueger study from 1994. That being said, I would like to explore why minimum wage would actually increase poverty instead of reduce it. 

For a minimum wage proponent, it makes sense that minimum wage should help alleviate poverty. After all, if you give someone a higher wage, it means they can better afford to pay their bills and claw their way out of poverty, right? 

It’s not that simple. Mainstream microeconomic theory posits that minimum wage acts as a price floor above the equilibrium point. This in turn causes a surplus of labor in this particular labor market, which is a fancy way of saying that minimum wage causes net unemployment (e.g., Neumark et al., 2021). The most recent report from the Congressional Budget Office (CBO) in 2021 showed that while a $15/hour minimum wage would pull 900,000 people out of poverty, it would also make 1.4 million people unemployed. Minimum wage only helps if you are one of the lucky ones who keeps their job. If you are one of those who loses their jobs, then you are earning $0/hour and will have a harder time gaining the skills and experience necessary to eventually acquire a higher-earning job (e.g., Clemens and Wither, 2014). 

This unemployment effect of minimum wage has a disproportionate effect on the marginalized. To quote the Foundation of Economic Education, "When jobs are scarce, then immigrants, workers with few skills or little education, and those with limited English proficiency are going to have a harder time convincing employers that their labor is work $15 an hour [or $17 if Bernie Sanders gets his way] than their better-skilled, native, English-speaking competitors." 

There is more to this puzzle. This point was mentioned at the end of the aforementioned NBER paper: "We find that less than 10 percent of workers who would be affected by a newly proposed $15 federal minimum wage live in poor families." That is because minimum wage is not determined by household income, but individual income. This is one of the main reasons why minimum wage is not effective at reducing poverty: because it is not targeting the poor. 

As the Foundation of Economic Education points out, there is only partial overlap between low-wage workers and the poor. This is important because poverty is measured at the household level, not the individual level. There are large segments of the poor who do not receive minimum wage, including the unemployed, stay-at-home parents, and gig workers. Conversely, there are many minimum wage workers who are not poor, such as teenagers and young adults living at home with their parents. Going back to that BLS data, workers under 25 account for 44 percent of those paid minimum wage or less. Contrast that with workers under 25 representing one-fifth of hourly paid workers nationwide. 

Another reason why minimum wage fails to reduce poverty is, as I have brought up before (see here, here, and here), because employers have ways to pass on the cost of minimum wage. It is not going to be the same response for each employee, but here are a few possibilities of working around minimum wage increases: cutting workers' hours, cutting workers' benefits, letting workers go, increasing consumer prices, and automation. 

To recap, here are the three main reasons why minimum wage does not reduce overall poverty levels. One is that it causes more unemployment than it does poverty reduction. The second reason is that minimum wage is not effective at targeting the poor. The third reason is that an employer can find ways around the labor costs that are part of minimum wage increases. I am open to discussing ideas of alleviating poverty so that all families in this country get a shot at the American dream. I am equally in favor of tossing such ineffective ideas as the minimum wage to the side. 

We Need to Strengthen Work Requirements in SNAP and Other Safety Net Programs

The drama with the debt limit continues. The deadline to deal with the debt ceiling is in about two months. Biden wants a no-strings-attached increase of the debt limit, but the Republicans are playing hardball with a series of proposed reforms called Limit, Save, Grow. One of the reforms in this proposal is strengthening work requirements for food stamps, also known as Supplemental Nutrition Assistance Program (SNAP). 

The proposal raises the top age for the able-bodied adults without dependents, or ABAWD, category from 48 to 56. Looking at USDA data, that would affect around 1 million SNAP recipients. According to the bipartisan Committee for a Responsible Federal Budget (CRFB), the work requirements for SNAP, Medicaid, and Temporary Assistance for Needy Families (TANF) in Limit, Save, Grow will save $100 billion over the next ten years. If passed, all the reforms would reduce debt over the next decade from a debt-to-GDP of 118 percent to 107 percent (CRFB). While this country has a ways with reigning in its debt issues, it highlights the importance of work requirements in safety net programs.

Opponents of work requirements view work requirements as punitive, especially for the needy. In 2016, I wrote about why SNAP benefits need work requirements. One reason why I supported and still support work requirements is because it helps with the longevity of the program. In 2021, the Biden administration ended the work requirement policies that the Trump administration put into place. The American Enterprise Institute estimates that not enforcing SNAP work requirements costs us $20 billion per annum. As we see with the CRFB projections, having lax requirements seeks to drive debt. 

In the Road to Serfdom (p. 148), Frederich Hayek advocated for some provision of a social safety. To channel Hayek: if there is going to be a safety net, it should go to those who are neediest and should be temporary. Although a temporary, minimal safety net can be a net social positive, having a safety net for too long can create a disincentive to get back to work. As the American Enterprise Institute points out, we do not have definitive conclusions about work requirements for SNAP or Medicaid due to data limitations. There is some information from the Upjohn Institute that shows marginal effects on employment for SNAP recipients (Harris, 2018).

If we want to get a better idea of how work requirements could impact employment, we can use another safety net program as a proxy: TANF. A working paper from the Congressional Budget Office (CBO) shows that work requirements in TANF are effective at offsetting the work disincentives (Falk, 2022). This CBO finding has been consistent with other research on the topic (e.g., Hamilton et al., 2001). Similarly, data show that unemployment insurance creates disincentives to go back to work. 

Finally, long-term unemployment is bad for the unemployed. This is more than a matter of long-term employment prospects or lifetime earnings. As the Left-leaning Urban Institute illustrates, it can reduce life expectancy by a year and a half (Nichols et al., 2013). In its recent analysis, the Right-leaning Heritage Foundation gets into some of the benefits on not being long-term unemployed. 

Increasing work requirements for social safety net programs such as SNAP will help with debt reduction. It will help the macroeconomy given that we are facing a labor shortage. It will also help SNAP recipients that are ABAWD because in the long-run, working is better for physical and mental health than being on welfare. Increasing the work requirements only scratches the surface on what could be done for safety net reform, but it is a good start. 

5 Government Policies That Brought on the Baby Formula Shortage

Taking care of a baby can be challenging with the sleepless nights and the demands on free time. In 2022, raising an infant has become more challenging because baby formula has become harder to find. As grocery and retail data firm Datasembly shows, the out-of-stock (OOS) rate for baby formula has skyrocketed in the first half of 2022. Major distributors such as Wal-Mart, Target, and Kroger are rationing baby formula. This is significant since CDC data on breastfeeding show that a majority of infants use formula. While switching over to breastfeeding might be possible for some, other mothers might not be able to breastfeed (e.g., allergies, medical conditions) or are have time constraints. This shortage has the potential to truly impact pediatric health. 

So how did we get here in the first place? The most recent shock to the U.S. baby formula market was in February 2022 with a contamination problem at an Abbott plant that produces baby formula. This caused the FDA to recall formula from Abbott. While the OOS rates are higher in recent months, we can see from the above graph that OOS rates were still high in 2021. Part of this was due to the pandemic-induced hoarding in 2020, followed by lower demand in 2021. There is also the inflationary pressure, a phenomenon that the Federal Reserve Bank of San Francisco points out has been more prevalent in the United States than in other countries due to its larger-than-average government stimulus during the pandemic (Jordà et al., 2022). Since 2021, we have more generally found ourselves in a supply chain crisis. As I pointed out in October 2021, some of this was going to happen regardless because of the pandemic. At the same time, there was plenty of government policy that negatively attributed to the supply chain crisis. 

The infant formula manufacturer market was struggling with the same things other manufacturers were struggling with, whether that is labor, materials, transport, and logistics. The extent to which the government is responsible for the trends on a macroeconomic level does not change that the government has a heavy-handed approach when it comes to infant formula. As the New York Times reported in March 2021, "Baby formula is one of the most tightly regulated food products in the U.S." How bad is it? Here are five ways in which the government made the infant formula shortage as dire as it is. 

1. WIC Vouchers and Market Concentration. WIC stands for Women, Infants, and Children. It is a supplemental nutrition option program from the U.S. Department of Agriculture that is aimed to safeguard the health of low-income women, infants, and children. What could such a seemingly innocuous government program have to do with the shortage? Formula companies are heavily subsidized by WIC through the voucher program. In exchange for offering lower prices on infant formula in the form of rebates, the formula companies receive "the exclusive right to provide their product to the state's WIC participants." This means that the companies with the greatest number of lobbyists can vie for this exclusive right to a de facto state-level monopoly in this market segment for infant formula. This cannot be overstated since it is through these WIC vouchers that about 50 percent of infant formula is provided nationwide (Choi et al., 2020). Abbott holds 42 percent of the market share for infant formula, according to market research firm Euromonitor. This favoritism makes it hard for new companies to enter the market, which leads to market concentration. If the WIC vouchers did not attribute to this market concentration, one plant closing would not make mothers in the United States so vulnerable to such a supply shock. 

2. FDA's Non-Tariff Trade Barriers. Not only have FDA regulations gotten in the way of such things as making prescription drugs cheaper or e-cigarettes more available, the latter of which being a healthier alternative to traditional smoking. The FDA has specific labeling requirements and ingredient requirements, as well as a mandate stating that retailers wait 90 days before marketing a new infant formula. The excess of labeling regulations in particular make European infant formula illegal in the U.S. (DiMaggio et al., 2019). These onerous regulations provide little incentive to non-U.S. businesses to sell their formula to U.S. retailers. 

3. Infant Formula Tariffs. For the few brands of formula that can past the FDA gatekeeping, they are subjected to tariffs up to 17.5 percent (also see here). Looking at the economics of tariffs, tariffs are an import tax. Who pays that tax? The domestic consumer through higher costs of foreign goods or services. Between the tariffs and FDA regulations, is it any wonder that 98 percent of baby formula consumed in the United States comes from producers in the United States?  

4. Trump's Trade Deal and Export Fees. Part of the Trump Presidency was the enactment of NAFTA 2.0, which is better known as the United States-Mexico-Canada Agreement (USMCA). During the negotiations in USMCA, one of the sticking points was with the dairy industry. The U.S. dairy industry wanted certain provisions to protect themselves. Part of this negotiation had to do with China. Prior to the enactment of USMCA, Chinese baby food producer Feihe invested $225 million into building a manufacturing plant in Kingston, Ontario, Canada. Part of USMCA is limiting how much infant formula Canada can export, not only to the United States but globally. If Canada exceeds exporting 40,000 metric tons of infant formula, they are walloped with an export fee of $4.25CAD for each kilogram. While Trump was trying to screw over China, he ended up screwing over the American people by discouraging Canadians from producing baby formula that we clearly need. 

5. Marketing Orders. A marketing order is a series of price and income supports imposed by the USDA (see Cato Institute brief for more information). Looking at the economics of milk marketing orders, such orders drive up the price of milk (e.g., Chouinard et al., 2005). Since dry milk is an essential ingredient in baby formula, it is reasonable to assume that these marketing orders are attributing to the increased cost in baby formula. As Cato Institute scholar Gabriella Beaumont-Smith points out, there are import barrier provisions in the marketing orders that dampen U.S. producers' demand for foreign milk, which makes infant formula all the more scarce in a time of emergency. 

Postscript

Without a doubt, the pandemic threw the infant formula market in disarray, as the pandemic did with so many markets. The panic buying and hoarding in 2020 garbled market signals on infant formula demand in 2020 and 2021. The pandemic also had its role in contributing to the supply chain crisis and affecting various inputs of infant formula production. The factory of the leading domestic producer of infant formula in the United States does not do any favors. But make no mistake: government policy is a major culprit. USDA subsidies for large infant formula manufacturers increased market concentration. If the market were fragmented, the Abbott manufacturing plant closure would not have made the infant formula market so vulnerable. If trade barriers and FDA regulations were not so onerous and excessive, there would have been a U.S. demand for internationally produced infant formula that could have helped fill the gaps while the Abbott manufacturing plant worked on getting open again. In short, if it were not for government meddling in the infant formula market, mothers would not be scrambling to feed their children. This infant formula shortage serves as another reminder that instead of regulating its people to death, the government is much more likely to do a better job at improving our lives by deregulating and getting out of the way.

What's Causing the Shortage in the U.S. Labor Market?: Fall 2021 Edition

2021 seems like it would be a better year than 2020. In spite of a Delta variant, we have safe and effective vaccines that have helped COVID become more manageable. One would think that as we get closer to the end of the pandemic, the economy would be getting significantly better. On the one hand, the recession did not last long. According to the National Bureau of Economic Research (NBER), the COVID recession lasted less than a quarter. On the other hand, the pandemic has really thrown the economy into disarray. A couple of weeks ago, I analyzed the main causes of the supply chain crisis that we are experiencing. 

Today, I would like to talk about a different abnormality occurring in the economy: a shortage in the labor market. As of the end of August, the Bureau of Labor Statistics (BLS) found that there were 10.4 million job openings. During the same time, there were 7.4 million unemployed (BLS). The labor shortage is perplexing because there are about three million more job postings than there are workers in the labor market. With more job postings than ever, you would think people would get back to work. Yet there seems to be a fair amount of reluctance to reenter the labor force. So what gives? I plan on covering the main theories as to why people are not entering the labor market. 

The COVID-19 pandemic. I understand that the counterproductive and harmful lockdowns caused businesses to be shut down, thereby creating a labor shortage. I can even understand how in 2020, people were afraid to take a job or go back into the office for fear of COVID. After all, the media was peddling fear throughout this pandemic (Sacerdote et al., 2020). But along came the vaccines in a record time previously thought impossible. In spite of the vaccine effectiveness, many people are still reeling from the aftermath of so much COVID fear. Ironically enough, a AP-NORC September 2020 poll found that the vaccinated are on average more fearful of COVID than the unvaccinated. This fear is so potent that I wrote a piece earlier this month about how this pandemic will come to an end when we as a society reach a point when we surmount fear and learn to manage risk once more. While hard to quantify, I think this residual fear will be in the background of the labor markets in the upcoming months.

Unemployment Insurance (UI) Benefits and Other Welfare Benefits. Unemployment benefits normally have been given to temporarily help those who lost their job. My concern at the beginning of the pandemic was that if the benefits were so large that they were either comparable to or exceeded one's previous salary, it could provide a disincentive for people to return to work. Given that the UI benefits delayed economic recovery during the Great Recession, I was naturally worried. The Mercatus Center found that expanded UI benefits have discouraged unemployment (Farren and Kaiser, 2021). Analysts at Goldman Sachs measured the main causes for the labor shortage. What was at the top of the list? As we see below, the answer to that question is "Unemployment benefits."

There was certainly a fair amount of politicking when the federal UI benefits expired. But let's keep a few things in mind. One is that only the expansion that expired. The expiration did not apply to base UI benefits. Two, there has been the addition of the expanded child tax credit. Three, there are other welfare benefits that are available, including food stamps and TANF. Four, the economic stimulus payments received in 2020 gave households extra disposable income to save. This extra cushion in cash, whether it be used for savings, consumption, or to pay off debt, reduces the incentives to return to the workplace. 

Lack of Childcare. With the increase of remote work and childcare closures, parents had to deal with juggling their childcare duties and remote work duties. Intuitively, one would think that this lack of childcare would make it harder for parents (especially mothers) to reenter the workforce. However, economists from the Council of Economic Advisers found that parents generally did not lower their work-hours during the pandemic (Furman et al., 2021). That finding suggests that lack of childcare played a negligible role in the labor market shortage throughout the pandemic. With more schools opening up, the "lack of childcare" explanation becomes even less plausible. 

Low Immigration. One of the unfortunate remnants from the Trump administration was the low levels of immigration. In spite of Trump's fears, immigration has not shown to lower employment. If anything, higher immigration levels can increase employment. As the libertarian Cato Institute brings up, we can raise legal immigration by addressing the administrative processing delays and the low immigration caps. The Left-leaning Vox also provides an argument for increasing immigration to help deal with the labor shortage.   

Early Retirees. Retirees are becoming a larger portion of the U.S. population. After all, U.S. population is slowing in growth and the Baby Boomers (commonly defined as those who were born between 1946 and 1964) are opting not to work anymore. Some of this retirement was bound to happen, but much like we saw with remote working, the pandemic served to accelerate that trend. The Federal Reserve Bank at St. Louis brings up two main reasons for the acceleration of excess retirements in its research on the topic (Faria e Castro, 2021). 

The first has to do with danger to one's health. COVID-19 disproportionately affects those who are older, especially those in the sixty-plus crowd. It is understandable that in the worst pandemic in about a century, those who are close to retirement age (i.e., mid-to-late sixties) would rather avoid getting infected with COVID if they can help it. 

The Fed brings up a second reason: rising asset values made retirement more feasible. Although it is wise to diversify one's retirement account, it is also common practice that there is a large percentage invested in the stock market because of its high potential rate of return. This is where the monetary policy of quantitative easing (QE) comes in. QE keeps interest rates low and more money flowing through the economy. This expansionary monetary policy signals to the stock markets that the Fed is not afraid to continue to buy assets to keep interest rates low. Setting aside that QE can cause inflation or asset bubbles for a moment, one of its effects is increasing the value of the stock market. The fact that we are seeing historic highs in the stock market (e.g., NASDAQ, Dow Jones) gives those in their sixties more confidence to retire early. The silver lining is that the vast majority of those who are not of retirement age intend to look for work within the next twelve months (Goldman Sachs).

"The Great Resignation." Coined by psychologist Anthony Klotz, the "Great Resignation" refers to the phenomenon in which a multitude of employees are quitting their jobs. This "Great Resignation" is in part due to the burnout caused by the pandemic. Others are rethinking how work plays a role in their life, reassessing their career choices, and reevaluating their working conditions, whether it is compensation, benefits, work-life balance, promotional potential, or overall working environment. It seems have less tolerance for "sticking it out at my current job" than it did previously. As we see in labor data from the BLS, labor retention is becoming a greater problem that employers need to address if they want to keep their staff for the long-term.

Vaccine Mandates. One of my concerns behind Biden's vaccine mandate was that there would be a significant (or non-negligible) number of unvaccinated employees that would rather quit their jobs than be vaccinated. Preliminary survey data from the Kaiser Family Foundation suggests that 5 percent of the unvaccinated have quit their jobs rather than get vaccinated. While there is already anecdotal evidence of this trend taking place, it is too soon to tell what sort of impact the mandates will have on the labor market. 

Postscript

Before writing this piece, I would have guessed that the unemployment benefits were the primary cause. Looking at the Goldman Sachs analysis, it seems to be the number one cause. In that sense, I was correct. At the same time, there are other factors that play into this labor market shortage, such as declining birth rates, a skills mismatch, and the list of multiple factors that I made above. What I will conclude with is that there are some issues with the labor market that will get resolved as this pandemic comes to an end. Hopefully, the Biden administration can lower the backlog of immigrants so we can increase the labor force that way. Conversely, there are other trends that signal that some of the people who left the labor market did so on a permanent basis. In any case, we are looking at a tight labor market for the foreseeable future.

The Latest Child Tax Credit Modifications Will Cost More Than a Pretty Penny: Let's Not Make Them Permanent

Former Chicago Mayor Rahm Emanuel once say that you never let a crisis go to waste. The government certainly does that in respects to expanding power and clout in an emergency. We saw that when the U.S. government spent $1.9 trillion on a supposed relief bill that had little to do with pandemic relief. One of the features of that bill, the American Rescue Plan Act of 2021 [ARP], was the expansion of the child tax credit [CTC]. Per the IRS, the goal of the expansion is to reduce child poverty. The ARP's CTC expansion has three main components. The first is that the maximum credit increases from $2,000 per child to $3,000 per child ($3,600 if the child is under 6 years old). Second, the CTC now includes 17-year olds. Third is that the CTC is now fully refundable. The last part is important because as the Tax Policy Center (TPC) points out, it makes the tax credit more accessible to households in the lowest quintile. 

Last week, Biden proposed the American Families Plan [AFP], a major spending bill focused on families and children. The Ivy League Wharton School of Business found in its analysis of the Plan that it would cost $2.5 trillion, which is $700 billion more than the White House estimate of $1.8 trillion. Included in the Plan are two modifications of the CTC. One is that the expansion in the ARP would be extended to 2025. The second is that the CTC would remain permanently refundable. Let's forget for a moment that the AFP as a whole is estimated to reduce the GDP by 0.33 percent by 2031 and increase the government debt by 6.2 percent by 2031 (Wharton). I previously covered the CTC in 2015 and 2016, but I really want to get into the issues with the recent expansion from the ARP and the proposal of the AFP.

The main argument for the CTC expansion is that of poverty reduction. The CTC helps to reduce tax liability for parents with dependents. If it reduces poverty, it must be a good deal, right? The Left-leaning Urban Institute estimates that the CTC from the ARP would reduce poverty by one percentage point, to 12.8 percent (Wheaton et al., 2021, p. 4). Similarly, the Left-leaning Center on Budget and Policy Priorities goes as far as estimating that the CTC and EITC in the ARP will collectively reduce child poverty by 40 percent. 

That sounds nice until you get into the issue of making the CTC refundable. On the one hand, it does provide greater access to the CTC for lower-income households. On the other hand, it takes a tax credit and de facto turns it into a direct cash transfer. The Right-leaning American Enterprise Institute puts those estimates from the above Left-leaning think-tanks into question with a report on child allowances (Winship, 2021). In this report, Winship outlines how government cash transfers such as the CTC substitutes work income, thereby undermining efforts to reduce unemployment. This is especially true since this will be the first time in U.S. history that cash benefits will be extended to nonworking parents. As an additional point, AEI scholar Angela Rachidi touches upon the fact that increases under the ARP will barely get many families above the poverty line, thereby doing little to create a long-term path out of poverty. 

We have already seen this phenomenon play out with another direct cash transfer: unemployment benefits. When unemployment benefits reach a certain level, they disincentivize work. As research from the Right-leaning Heritage Foundation illustrates (Rector et al., 2020), the Earned Income Tax Credit [EITC] did not succeed at reducing poverty or increasing employment. 

Seeing what has happened with other direct cash transfers such as unemployment benefits and the EITC, I am concerned that the refundability and the increase of the CTC size will act in contrary to the intent of poverty reduction and improving employment figures. In case diminishing the primary argument is not adequate, let's take a few other factors into consideration.

• Cost of the CTC. The Congressional Budget Office [CBO] estimated that the expansion under the ARP is going to cost us $88.8 billion over the next ten years. If we were to make the CTC permanent, the Right-leaning Tax Foundation found that it would cost $1.6 trillion over ten years.
• Tax Code Neutrality. The CTC is a provision in the tax code that incentivizes child rearing. Why should childless households pay for those who decide to have children? What business does the IRS have in punishing or rewarding people for the size of families they choose to have or whether to have children? 
• Getting At the Root of the Problem. Advocates of the CTC argue that childcare is too expensive. The issue with a CTC, especially one with refundability, is that it is de facto acts as a demand-side subsidy. What happens when you increase demand while supply stays the same? It increases prices, which is a point I have brought up with federal subsidies towards college loans and LIHEAP. So how does the CTC lower childcare prices?  It does nothing to address the rising cost of education, healthcare, or food. It does nothing to contribute towards welfare reform. It is just more money being handed out, which is the premise behind a direct cash transfer. If the cost of childcare is the problem, then we need to find ways to reduce the costs. I can save this topic for another time, but I will leave with one suggestion that was brought up by the libertarian Cato Institute (Bourne, 2018). Regulations on childcare facilities include stringent staff-to-child ratios. If we were to loosen the ratio regulations, it could lower childcare costs from 9 to 20 percent. If we were to put our focus on the drivers of high childcare costs, we could provide a more targeted and less costly solution to affordable childcare. 

October 8, 2021 Addendum: Researchers from the University of Chicago recently released a working paper on the effects of Biden's CTC requirements (Corinth et al., 2021). One result is that 1.5 million workers (or 2.6 percent of working parents) would leave the workforce. The second is that it will do nothing to reduce deep child poverty. Third, with the new data used in this study, it shows that the effects of reducing general child poverty have been overstated in other studies.