New Economic Thinking Against Childhood Poverty

The United States has averaged 20% of children living under poverty, compared to just 13% across the Organization for Economic Cooperation and Development (OECD). This trend briefly changed with the expansion of the Child Tax Credit (CTC), which led to unprecedented lows in childhood poverty between March 2021 and March 2022. Such a success challenges the assumptions of mainstream economic thought, and compels researchers to endorse generous and universal social programs. 

The rollout of the CTC was an anomaly in the history of social policy in the United States. Mainstream economic thought has long influenced policymakers towards limited and means-tested programs. Still, the expansion of the CTC in 2021 has shown that many of the common assumptions and forecasts were wrong. Against expectations, the program reduced childhood poverty without decreasing the number of working parents.

From March to December 2021, the American Rescue Plan (ARP) transformed the CTC from a small benefit for low-income working parents into a large and nearly universal child allowance. The reform removed earning requirements, making it available to all couples earning less than $150,000 and single parents earning less than $112,500 on their tax filings. The benefit was then phased out for higher incomes. 

Additionally, it was given in monthly installments of $250 per child and $300 for children below six years old. Moreover, the maximum annual credit amount was raised to $3,000 for children ages 6 to 17 and $3,600 for children under six. 

According to the Center on Budget and Policy Priorities analysis, 91% of low-income households used the monthly benefit to satisfy basic needs. Less often, they spent it on car payments (19% of households), child care (16%), or to pay previous debts (17%). Current empirical evidence has attributed a reduction of about 30% of childhood poverty to these monthly child payments. This change translated to around 3.7 million children being kept outside of poverty and had higher food security during this time due to the CTC.

 Despite these massive successes, the policy failed to be extended into 2022 when the Senate rejected the Biden Administration’s Build Back Better (BBB) package. Senator Joe Manchin, a Democrat from West Virginia, frustrated the policy’s extension when he refused to vote for any program without working requirements.

Source: CTCResearch Roundup: One Year On

In doing so, Senator Manchin espoused the ideas of orthodox economics, which advised against fiscally progressive policies. The fear has always been that many parents would either resign from their jobs or stop looking for work if they received ‘free money’ from the government.

Proponents of this view fear working tax-payers would maintain a large pool of able people who refuse to work. Researchers from the Becker-Friedman Institute at the University of Chicago simulated a policy similar to the CTC and they estimated that 1.46 million workers  (2.6% of all working parents) would leave the workforce, with 72% of the employment loss coming from workers with earnings below $50,000.   

This prediction was based on the assumption that single mothers and parents with multiple children have low incentives to work. They have a low return to work because they must care for their children at home or pay for childcare. In addition, the poorer a parent is, the lower their return to work. Since their salaries are lower and have either minimal or no benefits, more disadvantaged parents have fewer incentives to work. 

It follows that low-income, single parents with multiple children are more likely to exit the workforce. Government transfers without work requirements push them to do so because they allow them to survive without working. However, if parents do not work, they will never earn enough to escape poverty. Economists at the Becker-Friedman Institute and the American Enterprise Institute imagine that government transfers would make poverty perpetual and inescapable in the long term.

Source: The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed CTCExpansion | BFI

However, the CTC has shown that most of this thinking needs to be corrected. Defying expectations, the CTC did not lead to an exodus from the workforce. This conclusion was the finding of a team from the Center on Poverty and Social Policy at Columbia University. They compared the employment and workforce participation from survey responses between workers with children and workers without them before and after transfers began in July. 

Their outcomes indicate that the CTC did not significantly affect workforce participation or employment. Relative to adults without children, those with children only had a 0.6 percentage point drop in employment. An additional $100 in CTC led to a 0.1 percentage point reduction in their employment and a 0.3 percentage point increase in workforce force participation.

 Additionally, the effects on those earning less than $50,000 are indistinguishable from those on higher-income earners. Since low-income parents were not more affected than others, and there was no massive reduction in workforce participation, most of the assumptions economists have based on their policy advice were misestimated.

Source: Effects of the Expanded CTC on Employment Outcomes

Economists have grossly overestimated the reduction in workforce participation because their assumptions did not represent the behavior of real people. It turns out that parents do not have such a strong preference for not working. Moreover, real-world survey data does not support the expectation that those with the highest decrease in return to work were more likely to exit the workforce. 

When the results in real-world applications differ so much from theoretical expectations, it becomes necessary for researchers to review their assumptions.  In particular, new estimates are needed for single and lower-income parents who seem less prone to reduce their workforce participation.

This calls into question the assumption in traditional economic thought regarding the nature of labor, mainly that it should not increase workers’ utility or well-being. Instead, creating new models of how people value work could benefit from reviewing socialist thinkers who contend that labor is a source of pleasure. 

Usually, decisions on whether to work or not are modeled as a tradeoff between leisure and consumption. Rational agents would maximize their utility by increasing their time for leisure or their income for consumption. In the orthodox model outlined below, labor is a means to increase pay for consumption, which reduces the time available for leisure.

Homo economicus 

Utility = Leisure(hours) – Labour(hours) + Consumption(Income from labor)

Then, recipients of government support would decrease their supply of labor, which increases their leisure time without reducing their consumption. The homo economicus model assumes that utility is maximized by increasing leisure and consumption at the lowest possible time spent at work. 

Homo economicus 

Utility = Leisure(hours) – Labour(hours) + Consumption(Income from labor)

Instead, socialist thinkers have traditionally emphasized the joy and social value of unalienating work. They argue that there is the urge to be creative within human nature, and their alternative model, the homo faber, pursues work to satisfy this need. Creative work can positively affect utility for its inherent value rather than just as a means for consumption. In their account, the pleasures of creation are equal, if not superior, to those of consumption. 

Homo faber 

Utility = Leisure(hours) + Creative labor(hours) – Alienating labor(hours) + Consumption(Income from labor)

In the words of Saint-Simone, recipients of the CTC might have kept working because “being happy is to act and enjoy.” It follows that single and low-income parents derive utility from working because time spent in work is a constituent part of their well-being. Therefore, government transfers could increase their consumption without necessarily decreasing their willingness to work, which adjusts to the findings from real-world data surveys better than standard economic thinking. 

To reinstate the CTC and eventually eliminate childhood poverty in the US, economists must recover valuable insights from social thought that challenge long-held assumptions in the field. Proponents of ‘new economic thinking’ have already made advances in modeling the type of “good jobs” that increase well-being. Economics as a discipline should take further steps in this direction and offer policymakers more accurate models of behavior that dispel with the assumption that poor and single parents are averse to work.

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This article was edited by Brianna Karishma Budhram.