Census Bureau numbers show the cost to move everyone in America out of a poverty status is $174 billion. Yet the current cost of 13 separate Welfare Programs is $373 billion and that is not including Medicaid (see Poverty Gap for backup and why our programs are so expensive). If we were to roll up all of our current welfare programs into a single cash payment to the poor we could alleviate poverty and still save $199 billion a year. There are 26.5 million working age adults in poverty today. If we gave them all a $3.50 an hour wage subsidy from the federal government it would cost us $193 billion.
Milton Friedman argued for a simplified cash payment to replace the in-kind benefits of our welfare system (See Poverty Quotes).
A wage subsidy could be set at higher levels for lower wage jobs (i.e. $4.00/hr subsidy for $4.00/hr job) and gradually phase out at something like wages of $11.00 - $12.00/ hr. When the subsidy is added to low paying jobs it would still take people above the minimum wage that exists today and in most cases well above the minimum wage. A low wage subsidy would allow us to remove the minimum wage entirely and encourage employers to create new low paying jobs. Today too many are trapped in the welfare system and don’t have the opportunity for that first job – a critical step for any lifetime worker. It is hard for many small businesses to hire an unskilled worker at $9.00/ hr, but they can do it at $4.00/hr.
A simplified cash welfare program and wage subsidy would need to be set in concert so that they “make work pay”. If we coordinated the two programs every new job created would lower federal costs and help us lower the deficit. Our current welfare system too often discourages work because in many circumstances benefit loss is greater than the added job income (see welfare examples).
The worry will be that a low wage job subsidy could get out of control and end up as a new expensive entitlement program. But if the program is limited to households in poverty or near poverty the program can be controlled. The EITC program functions like this today and works well.
Mr. Obama says government and business should work in partnership to create more jobs. This is how a real partnership would work.