Government Incentivizing Being Poor

Public Choice

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At the beginning of your life if you were given a choice of what socioeconomic class you want to be born into almost everyone chooses to not be in the lower class or poor. There is almost nothing good about being poor.

Life is Hard

It’s a brutal and difficult life. Life is already hard and has a lot of suffering but now being poor just adds a slew of new problems. Suffering in life is good, to a degree, we need optimal challenges to overcome in life. As we overcome these challenges or overcome our suffering, we become stronger and learn new things to overcome even more difficult challenges that we will face.

Too much suffering isn’t good

The harder your life is the greater your incentive to get out of the hellhole you are in. Being poor is one of the hardest situations you can be in life, and therefore one of the best incentives to get out of it.

Government Incentives

But the government supports the poor. Gives them benefits like Medicaid, Temporary Assistance for Needy Families (TANF), Food Stamps, and other financial assistance. All these benefits incentivizes being poor.

I won’t go into detail on how well these programs helped or hurt the poor, the effectiveness of these benefits is an entirely different topic. I will only be talking about the incentive structures they create.

These programs are intended to help the poor get back on their feet and work their way out of poverty. Eventually, they will be an effective member of society and will be removed from these programs as they will not require them anymore. Or at least that’s what’s supposed to happen.

Sin Tax

The government creates make incentives with their policies, some intentional, some completely unintentional, and unexpected. For example, the government places a “sin tax” (a type of Pigovian Tax) on products or services that they don’t want their citizens to use. These excessive taxes are put on tobacco, alcohol, and gambling. They are deemed as socially bad by the government therefore tax the product to discourage the behavior.

These sin taxes work to a degree as the increased tax will make people think twice about purchasing the product or service or at least limit the amount of use. The government can all implement decreasing tax policies to encourage certain behavior.

Tax Breaks

Donating to charity can be written off on your taxes. This is why you see why some rich people pay very little (relative to their income) in taxes. They donate so much money to a charity that a lot of it gets written off on their taxes. The reason is that the government wants to incentivize people to donate to charity and they do this with tax breaks.

Every policy the government passes has a change in behavior from its citizens, that doesn’t me it is always an intentional behavior change. This can be seen in California’s used or old car buyback programs.

The idea was that there are too many cars in California. Many of the old, leading to a lot of pollution. The state thought to reduce emissions and remove the excess cars would be to pass a car buyback law. This law would give a monetary incentive to the owner for retiring their car. They thought this would lead to fewer cars, less pollution, and more public transportation use. That didn’t happen.

Instead, people would go out of state and buy used old cars, bring them into California, and sell those cars to the state. This led to Califonia paying people to retire cars that were brought in from another state. In the end, there were more used old cars in California after the policy was put in place than before. The policy did exactly the opposite of what was intended.

So what does this have to do with Incentiving being poor?

The Poor Ceiling

Well implementing policies that give people money and make their life easier when they are poor will incentivize being poor. You are rewarding people for not having a job, not having money, and being irresponsible financially. This is not saying that some of these policies don’t help the poor, it may or may not be an effective redistribution policy. That is completely up for debate.

What isn’t up for debate is that these programs create a ceiling for the poor. There is a certain point where they work enough to get a raise but that raise will kick them out of the government benefits leaving them worse off. Since we are self-interested beings we don’t want to be worse off, so they decline the raise to keep their government benefits. Because that’s what’s best for them. That’s what they are incentivized to do.

These government programs reward socially and economically inefficient behavior. Whether that was the intention or not it makes it harder to be motivated to get out of poverty.

Unemployment

A relatable example of this is during the summer of 2020. Many lost their job and went on unemployment. You could have gone back to work but why would you? You would be making the same or slightly more for doing 40 hours a week of work. Or you can do nothing all day at home and wait for the same check from the government.

These incentives are very powerful and can go under the radar for many. They definitely go under the radar for people who push more redistribution policies. They fail to recognize the incentives they create and that it keeps the poor poor.