Work vs. freedom: a liberal challenge to employment subsidies.

• Author: Alstott, Anne

1. INTRODUCTION

   Work has taken center stage in welfare reform. Federal legislation adopted in 1996 replaced the Aid to Families with Dependent Children (AFDC) program with Temporary Assistance for Needy Families (TANF).(1) The new law imposes a five-year time limit on benefits and requires states to put recipients to work more quickly than ever before.(2) The states are free to adopt shorter time limits and tougher work rules, and many have done so.(3) Politicians, including the President, argue that putting welfare recipients to work will end welfare "dependency" and usher in a new era of personal responsibility.(4)

   To date, the transition to the new regime has been relatively smooth. States are experimenting with workfare, childcare assistance, and other initiatives.(5) A booming economy has given the states an extra cushion of federal funding,(6) and a tight labor market has helped to ease the implementation of the new work rules.(7)The welfare rolls in most states have dropped dramatically, although the decline began well before the 1996 legislation took effect and is attributable in large part to the economic recovery.(8)

   Despite the early glow of success, the new approach to welfare reform is fundamentally flawed because it ignores the woeful condition of the low-wage labor market. The vast majority of welfare recipients will enter a labor market characterized by sub-poverty wages and little job security. Wages for low-skilled men fell twenty-two percent between 1979 and 1993, and unemployment rates for this group remain high, even in good times.(9) Low-skilled women have seen a smaller drop in their wage rate, but their wages remain significantly below those of their male counterparts.(10) Although economists predict that the market can eventually generate enough jobs for all welfare recipients, they also expect that wage levels will remain too low for many welfare recipients to become self-sufficient.(11) In 1993, for example, only twenty-two percent of less-skilled single mothers earned enough to support their families at the poverty level.(12) Even the 1990s economic boom has only mitigated, rather than reversed, these long-term trends.(13)

   The result is that TANF-style welfare reform will shrink the welfare rolls--but only by swelling the ranks of the working poor. Surprisingly, the response from critics has been muted. For the most part, they reject only the means of welfare reform, not its ends. Even left-leaning economists and policy analysts have largely accepted the right's agenda of putting welfare recipients to work.(14) But instead of leaving welfare recipients to the tender mercies of the market, they advocate an "employment strategy"(15) that uses the power of government to reduce unemployment and raise wages at the bottom.

   Employment subsidies are one key component of this employment strategy. An employment subsidy is simply a payment by the government to firms that hire low-wage or otherwise disadvantaged workers. In 1997, the Clinton administration won passage of the new "welfare to work tax credit" (WWTC), which pays firms a one-time bonus of several thousand dollars for every former welfare recipient they hire.(16) Edmund Phelps, a prominent economist, has a more ambitious proposal. Phelps advocates a permanent employment subsidy for all low-wage workers--not just former welfare recipients. At a cost of $125 billion each year, the program would pay private firms as much as $6000 per full-time employee.(17) Rather than a one-time payment, the subsidy would last as long as the worker remains employed. Phelps predicts that companies would respond by expanding employment and raising wages. Other prominent policy experts have also embraced employment subsidies.(18)

   This Article argues that employment subsidies take a step in the right direction but concede too much to the work-centered agenda that motivated the 1996 welfare legislation. The case for employment subsidies rests on mistaken or morally dubious claims about the intrinsic or instrumental value of paid work. Advocates of the employment strategy typically invoke either "community values" or the social benefits of work to defend work requirements. But a closer look shows that the values (and the community) being invoked are too ill-defined, and the social advantages of work are too unproven, to construct a solid moral foundation for making assistance conditional on work. Employment subsidies would enhance the resources available to some of the poor, but they would exclude too many inner-city residents and women. Employment subsidies also confront a host of practical problems. Not least, they would require ongoing government manipulation of labor market processes that economists do not fully understand. By distorting market allocations, they could--ironically--lure even more people into a lifetime of dead-end jobs. Employment subsidies are also extremely difficult to design and administer. Past programs have been notable failures, largely because of administrative dilemmas that are virtually insoluble in programs of this kind.(19)

   But there is a better way. A program of unconditional cash grants would enhance the freedom and economic security of the least advantaged. This cash strategy has three distinctive advantages. First, unlike employment subsidies (or conventional welfare programs), a modest, but truly unconditional source of income would allow the poor greater freedom to structure their working lives to meet personal and family needs, to seek more education, or even to choose where to live. Although no real-world program can promise boundless freedom for all, cash grants would go much further than either current, miserly programs or employment subsidies in expanding the real freedom of the least free members of society.(20)

   Second, unconditional grants also would help open the way for labor market reforms that can expand employment opportunities. If the poor were guaranteed a modest income, the government could more readily reduce or eliminate the minimum wage and other market regulations adopted in the name of fairness. The cash program alone would go a long way toward eliminating welfare rules that burden work, and additional programs might expand economic opportunity for inner-city residents. Employment subsidies distort the labor markets and make the promise of income conditional on finding and keeping a full-time, low-wage job. In contrast, the cash strategy provides a secure income floor and then lets markets set wages at realistic levels. Freeing up the labor market could not only expand work opportunities but also make the real rewards and opportunity costs of low-wage work more transparent.

   Third, the cash alternative has practicality, as well as principle, on its side. Unconditional cash grants are relatively simple to administer. Employment subsidies open up a host of new opportunities for abuse, inviting employers to understate wages, overstate hours, and even create phantom workers. Targeted employment subsidies, which call for detailed information on workers' income or personal history, only deepen the administrative quagmire. While cash programs are not entirely uncomplicated, they pose few new administrative challenges compared to the complex interventions that employment subsidies require.

   These shortcomings suggest that even the political case for employment subsidies has been oversold. At first glance, the employment strategy seems to be a canny compromise: It channels resources to the poor while meeting popular demands to put welfare recipients to work. But political support for employment subsidies may falter when the complexity, uncertainty, and high cost of the programs becomes apparent.(21) To be sure, unconditional cash grants are not likely to be enacted in the immediate future. In the longer term, however, a better understanding of the cash strategy's merits could help make the difference. For instance, in Europe and Latin America the liberal case for the basic income has been more widely understood, and it is treated as a serious proposal in both intellectual and political conversations.(22)

   This liberal argument for the cash strategy marks a departure from the conventional terms of debate in American tax- and welfare-policy circles. In philosophy and constitutional law, liberalism occupies center stage. In those fields, the great debates ponder the meaning of freedom and equality and the scope of individuals' fights against the collective. Bur when it comes to taxes and transfers, liberal principles of distributive justice give way to utilitarian talk of costs and benefits, incentives and disincentives.(23) To be sure, much of the utilitarian work in tax and transfer policy is admirably rigorous in identifying first principles and examining their policy implications.(24) And positive economics is enormously useful in analyzing the effects of tax policies. But on the normative side, utilitarian talk necessarily omits core liberal values of individualism, freedom, and equality.(25)

   This Article begins to show how liberalism can contribute to a richer debate. To illustrate the practical potential of the cash strategy, I offer two unconditional cash grants--the basic income and the negative income tax. Although the two programs differ in some respects,(26) nothing in the argument requires a choice between them, although that issue could usefully be pursued on another occasion.(27) There are even more novel institutional alternatives for a liberal program. In The Stakeholder Society, Bruce Ackerman and I pursue a somewhat different, though complementary, approach.(28) In this Article, I advocate a basic income or negative income tax in order to frame the policy alternatives in the most familiar terms. In future work, we or others may pursue the finer questions of how best to combine basic income, negative income tax, stakeholding, and other programs.(29) For now, when the liberal...