In the aftermath of Katrina hitting New Orleans, and the images of so many poor black Americans who lived there, there is renewed interest in fighting poverty in America. But admit it – adding some more funding to existing programs, and adding new programs here and there, is not going to have much impact on the entrenched problems in poor black inner city communities in the large cities across America. To make any significant progress, some completely different ideas are needed … some ideas that have the promise of actually working.
In this previous post, I said that what is needed to help poor blacks get out of poverty are some outside-of-the-box ideas. Here I make some proposals. Are these politically realistic? Not my goal to figure out here, I just offer some ideas. Are they radical? Yes, they are radical. Would they work? Yes, they would work.
Are these ideas progressive or conservative? They are progressive in the sense that they aim to take very change-oriented steps to help improve the lives of poor blacks. The result is social progress. They are conservative in the sense that they aim to leverage existing institutions in American society in ways that all evidence indicates will work. These steps are also libertarian in that they extend personal freedom for the poor. So here we go, with a six step plan …
1) Implement Mandatory Health Savings Accounts (HSAs) for all workers
The idea is that quickly, all American workers will have full health insurance and cash for out-of-pocket medical expenses. They will have a savings account with its funds dedicated to paying health care bills. They will pay cash for services by withdrawing money from this account. Also, from this account, they will purchase high-deductible health insurance. This insurance kicks in if all of the money is used up in the HSA.
The lowest income workers will get subsidies in their HSAs. Otherwise we would be imposing an impossible burden on low income workers by demanding that they save thousands of dollars per year. The subsidies phase out as your income increases. But the traditional incentive to work less, to retain your Medicaid coverage, is eliminated (as explained in the Effective Flat Tax ahead).
One great advantage of mandatory HSAs is that they maximally leverage the existing U.S. private health care system. It is an alternative to moving to national health insurance (sometimes called socialized medicine). And there is simply no question that mandatory HSAs will work. The working poor will have health insurance, and cash for out-of-pocket medical expenses, to use within the proven American private health care system. And unlike with Medicaid, if you make too much you don’t lose your health insurance.
With mandatory HSAs, Medicaid is no longer needed and is phased out. All workers have private health insurance purchased with their HSA funds.
There is no doubt that low-income black American workers would greatly benefit from a system of mandatory HSAs which assure that everyone has health insurance as well as cash for out-of-pocket medical expenses.
2) Secure the southern border and limit the influx of low-skill workers legally immigrating to the U.S.
For all the protest about allowing approximately 3 million people per year to illegally sneak over the southern border to find jobs in the U.S., no group suffers more from this than low-income blacks. Poor black Americans, to get out of poverty, must follow the time-proven method of all poor persons (including black Americans) that have moved out of poverty. They have to work steadily, earn a good work record, and strive to advance in their wages by being valuable to employers.
For low-income blacks to advance, first there has to be jobs available. It is hard to imagine a more cruel policy than allowing millions of impoverished people, mainly from Mexico, to flood into the U.S. and take the very jobs that low-income blacks would have taken to advance them in the workforce. The Mexican immigrants, although hard workers and here just trying to better themselves and help their families, are leaving behind often Third World living conditions. Thus, when getting here, they will work for very low wages. Since employers hire them illegally, these employers can cut corners in other ways too. Thus employers are getting super-cheap labor, so why would they hire low-income blacks instead who have higher expectations for employment than illegal immigrants from Mexico?
Allowing massive illegal immigration from Mexico shatters the first rung on the economic ladder that low-income blacks need to pull themselves up from poverty. Instead of a wealth of job opportunities for manual labor and lower skill positions, they are competing for these jobs against people with much lower expectations, and people desperate enough to work for very low wages.
Is it sad to block impoverished workers from Mexico from finding jobs in the U.S.? Yes it is. But it is no sadder than the billions of other people, most much poorer than the poor in Mexico, who struggle in Third World countries today. About three billion people total, making up half of the people on earth, live on $2 per day or less. The U.S. should have policies to try to get the typically terrible governments in these countries to reform. And the U.S. should strive for fair trading polices with these countries, such as eliminating U.S. subsidies to American farms. But we cannot let these three billion people all immigrate to the U.S. It may sound heartless, but we have to take care of own. We cannot just hand over the keys to the country of which generations of Americans have toiled to build. And it is terribly unfair to shove aside our own poor citizens to make room for even poorer persons from other countries.
Any massive legal guest-worker program has many of the same pitfalls as allowing in millions of illegal workers. Instead of importing low-income workers, why not force employers to bid in the free market for the labor services of millions of low-income Americans? This would be a much more just economic policy in terms of treatment of low-income black Americans.
3) Implement an Effective Flat Tax
The Effective Flat Tax (EFT) is a proposal to integrate the income tax code with mandatory Heath Savings Accounts (mentioned above) and also with mandatory Retirement Savings Accounts (mentioned below). The EFT includes the mechanism that makes the HSAs affordable to even the poorest workers.
With the EFT, all workers have the same HSA dollars put into their savings accounts each year regardless of a worker’s income. Yet everyone also has an identical “tax & save rate“. Instead of thinking in terms of only the income tax rate, now workers think in terms of their tax & save rate.
The perceived tax & save rate is the same for all workers regardless of income. Thus the incentive to stay poor, due to not maximally striving to improve your income, is removed. For the poor today, when all welfare benefits are included along with the progressive income tax rates – extremely steep marginal rates occur for low-income workers. These effective marginal tax rates can exceed 100%. But with the EFT, as your income increases, there is NO INCREASE in your tax & save rate and there are no reductions in your health care benefits.
For example, if the national tax & save rate is 20%, EVERY WORKER has 20% of their income dedicated to their combined obligations for taxes and their mandatory savings accounts REGARDLESS OF THEIR INCOME. There is no penalty as a person earns more in terms of the tax & save rate that is felt by them. The core idea here is to absolutely eliminate any speed bumps in the tax rates that can discourage the poor from working more to increase their income and upward mobility.
It takes a little bit of work to understand the EFT idea, but once you see it, it is very simple. See here for further explanation.
It should also be pointed out that the federal Earned Income Tax Credit, which is a negative income tax, is to be phased-out with the EFT. Otherwise the tax & save rate is not flat.
4) Eliminate all Loopholes From the Income Tax Code
Many get away with murder in the tax code. It really is possible to greatly reduce the number of loopholes, but this can only be done over the long term if they are ALL eliminated. Loopholes come in two types: Zero or Zillions. And Zero is the better choice. This brings the ultimate in transparency to the income tax code.
New York Times writer David Cay Johnston, in his book Perfectly Legal, documents how many of the rich get out of paying much of their taxes by hiring expensive tax consultants to exploit the loopholes and complexities of the income tax code.
Eliminating loopholes for the rich, as well as wealthy corporations, is only fair to low-income Americans. A new sense of fair-play is needed. The income tax code should be such that everyone pays the same tax & save rate and no one gets tax write-offs (that is, loopholes).
Eliminating all loopholes means that the tax & save rate is as low as possible for everyone, including the poor, since many advantaged people no longer get out of paying some of their taxes. The lower the tax & save rate on the poor, the more of their income that they can keep for their own needs.
5) Phase-out Social Security and Go to Mandatory Retirement Savings Accounts (RSAs)
Social Security has served America well for many decades now. However, the shortcomings in the system have become increasingly apparent. One problem is that low-income workers stay low-income in retirement. Looking back in history, if low income workers had invested their Social Security taxes in stock market index funds, they would be retiring with far more than Social Security pays today. The taxes collected and the stock market returns of index funds in the past are all known facts. You just have to plug in the numbers to see the results. There is no question that low-income workers could have retired into comfort if Retirement Savings Accounts had been in place starting years ago.
Many forward-thinking countries are converting now from pay-as-you-go retirement systems, to a system of private savings accounts, so that future generations will inherent a superior retirement system. The U.S. is behind the curve on this. Chile has emerged as a model for how it is done having started conversion in 1981. In around 2020, the first generation will retire in Chile having saved in private accounts from the start of their working years.
If the U.S. does not begin this transition soon, a generation from now people will wonder what we were thinking – and what all the fuss was about protecting the old pay-as-you-go system.
Nothing could do more to raise incomes of poor blacks in retirement than transitioning to mandatory Retirement Savings Accounts. And for those blacks that die early, they can pass on their savings to their families.
6) Eliminate All Means-Tested Subsistence Welfare
The idea here is that all of the various incentives to remain poor within the anti-poverty welfare system are eliminated. Subsistence welfare benefits are phased out by not accepting any new applications and putting time limits on those who currently receive benefits.
Subsistence welfare today includes: TANF welfare checks, EITC tax refund welfare checks, public housing, housing vouchers, Medicaid, food stamps, school lunches, and so on. All programs that provide benefits to you, as long as you stay poor, are phased out.
This is the 1996 Welfare Reform taken to the next level. I am suggesting that this is a key policy that will help poor blacks advance economically. So before you reject this out of hand, consider the support structures that will remain in place to help poor black families after subsistence welfare is phased out.
All Americans get these benefits from government, regardless of their income:
– Comprehensive health care for all worker’s families via HSAs
– 100% funding for education of children for K-12
– Free public libraries
– Above poverty level incomes during retirement via RSAs
– Disability Insurance
– Workman’s Compensation Insurance
– Unemployment Insurance (up to 6 months pay if you lose your job)
– Disaster Relief
– Free access to roads
– High-quality infrastructure for water, electricity, communications, and sewage system
– Police protection from criminals
– Military protection from foreign dangers to U.S. citizens
– Many, many other government services which are not means-tested
There will remain in place all of these significant government supports for helping individuals and families to succeed and escape poverty.
In this new world where subsistence welfare does not exist, work becomes imperative and two-parent families are an extremely beneficial institution for escaping poverty. For daily subsistence (food, shelter, clothes, utilities, transportation) you are on your own. Yes, it does introduce a bit of the Wild West kind of freedom. People are fully responsible for putting food on the table, getting a roof over their heads, taking care of their children, and making enough money to pay any bills owed to others.
Yet the poor will be set free. Rather than look to government to attain their daily subsistence needs, these newly freed people must take responsibility for themselves and for their children.
No one gets special benefits just because they are poor. There are no means-tested benefits. People must take care of themselves, communities must pull together, volunteer and charity organizations must more actively engage poor communities. Families and neighbors must help each other more. And fathers must help support their children and their mothers.
Will people be starving in the streets? No way. Will people be adequately clothed? For sure. Will there be more homeless people? Perhaps initially. But just like with the 1996 Welfare Reform, with its dire predictions by opponents, low income people overall will make economic and social gains. Yes, there will always be exceptions. By the key is to consider how the great bulk of the poor make out, not the exceptions. The exceptions will have to rely on families, friends, neighbors, churches, and private charities to help them if they fall into a genuine state of urgent need.
While private charities will still provide temporary assistance to families in need, government should not begin channeling money to charities so that these charities begin providing long term means-tested subsistence welfare.
To me, there is little hope for restoring two-parent families among low-income blacks unless means-tested subsistence welfare is eliminated. The knot that so profoundly ties low-income blacks to government dependence must be cut.
The government-created speed bumps that slow down the upward progress of low-income black Americans must be eliminated. And phasing out means-tested subsistence welfare is a key step toward this end.
The welfare state, the more intrusive it becomes, wears away at families. In Sweden, often considered the most elaborate welfare state, out-of-wedlock births have become the norm, even among the middle class. As long as poor American blacks remain dependent on government welfare, it is hard to imagine how two-parent families will ever become the norm again.
Isn’t it time to consider radical changes in policies toward the poor? Isn’t it time to consider changes that will actually work? That is the goal behind the six step plan above.