And Now Something for Our Most Recession-Weary Workers

With economic recovery from the deep recession in view, a double-headed challenge remains. Reducing the deficit requires cutting back government spending, but we still need to promote employment and work, and that won’t come free. Given this administration’s progressive leanings, its attention to low- and moderate-income workers is surprisingly modest.

So how hard is it to spend less overall but more on lower-income workers? Presidents George H.W. Bush, Bill Clinton, and Ronald Reagan all expanded wage subsidies for some low-wage workers through the earned income tax credit (EITC) while and reforming taxes and significantly lowering the deficit.

Shifting policy toward low-income workers brings other benefits, too.

It increases employment more per dollar spent than many current subsidies that go to higher-income individuals and to those who do not work at all.

It helps reduce the long-term costs of added crime and depression borne of long spells of unemployment.

Done right, it can reduce the marriage penalties in many wage subsidies and welfare programs.

This administration and Congress have hoped that their biggest initiative—saving and subsidizing Wall Street and lowering borrowing costs—would trickle down benefits for everyone else. Maybe so, but more money for low-income workers can also trickle up. And it costs far less to subsidize a low-wage job than a high-wage job.

The biggest direct wage subsidy enacted so far has been the Making Work Pay tax credit. For most eligible working households, however, it’s just a $400 credit ($800 for married couples). It’s really not a jobs subsidy so much as an across-the-board tax cut to spur consumption.

The Obama administration’s latest ventures include such items as a $5,000 tax credit for small businesses for each new employee hired this year. Puny relative to the economy’s size, this incentive also gets mired in all sorts of definitional issues. What is a small business? (Your maid service? Your friendly billionaire’s 20th venture?) Who’s new? (Your kid? Someone already on your to-hire list?). Why discriminate against struggling businesses? And why not count the worker they would otherwise let go?

Wage subsidies for low- and moderate-income earners, by contrast, traditionally have fans on both the left and the right. More progressive than most other subsidies, they also offer an alternative to welfare and unemployment insurance, which can discourage work. Indeed, past EITC increases helped give low-income households a foothold that allowed President Clinton and the Republican Congress to reform and deemphasize welfare in 1996.

The Obama administration does support expanding EITC for families with three or more children a bit. And, arguably, its proposed extension of the child credit to include some very low earning households who generally don’t owe taxes subsidizes part-time or part-year work. Nonetheless, most moderate-income workers are excluded from these expansions, which send money mainly to one-parent households and only to households with children.

What’s the most sensible approach? For my money, it’s concentrating additional work support to the largest groups now left out: low-wage single workers and many married, two-earner, low-wage families. Especially key is an EITC-like subsidy for the low-wage worker based mainly on his or her earnings.

That way, we reach single people with no kids, including many of the males hardest hit during this recession and still ineligible for most government programs. And we reach many households who marry or contemplate marriage, only to realize that tying the knot means losing or jeopardizing thousands of dollars worth of EITC, Medicaid, welfare, and housing subsidies annually. Better to stay unmarried, even if living together.

And if we don’t take these steps? For starters, we ignore the fundamental policy lessons that leaving millions of productive people jobless has long-lasting costs. Unemployed people are more depressed, less entrepreneurial, more risk averse, more bored, more inclined toward substance abuse, and more likely (especially if they are young men) to turn to crime. Just as failing to create jobs for more Iraqis right after Saddam Hussein’s fall was a big foreign policy mistake because many turned to more violent pursuits, neglecting job creation now could be a colossal domestic policy mistake that plays out long after our economy is back on its feet.

Our national sense of fair play is at stake here too. The recession hurt low-income workers most, but they were largely left out of most stimulus programs.

Policy two-fers are often rare. But this policy shift is a five-fer that appeals to both liberal and conservative principles: reduced spending, greater progressivity, higher employment per dollar spent, reduced crime and depression, and fewer penalties for marriage. And with predictions of only slow employment growth ahead, the timing is right for confronting unemployment more strategically.