Cold Facts on the Bishops’ Pastoral

Cold Facts on the Bishops’ Pastoral

William E. Simon, Chairman of the Lay Commission on Catholic Social Teaching and the U.S. Economy, recently invited members of the Commission to submit comments on the third draft of the bishops’ pastoral on the American economic system.  J. Peter Grace responded to that invitation with the following thoughts.

The third draft of the bishops’ economic pastoral shows no evidence that the bishops have changed their basic views since the issuance of the first draft more than a year and a half ago. They continue to urge more government involvement in the economy, ignoring the trend of the past five years in both the U.S. and Europe, where countries are lowering the growth rate of government spending (including social programs) in an effort to improve economic performance.

An Appendix to the letter lists those who testified before the bishops’ drafting committee. Although a fairly wide diversity of economic opinion is evident among those who testified before, the issuance of the first draft in November 1984, the only world-class economist to testify since then is John Kenneth Galbraith, the Harvard liberal and economic advisor to Presidents Roosevelt, Kennedy, and Johnson. Thus, despite the widespread criticism of the first draft as being too liberal, the bishops have apparently made little effort since then to expose themselves to opposing viewpoints.

The bishops write convincingly about the relevance of religion and the Bible to economics, the dignity of serving the poor, the hedonistic consumerism of American society, the need for ethical standards to guide the economic conduct of institutions, managers, investors and workers (this made even more relevant by recent scandals in the investment banking and brokerage fields), and the right of an individual to participate with dignity in developing his or her talents. They can also be applauded for their broad comments on the skewed distribution of wealth in the U.S. and between the U.S. and the developing countries.

When they move to specific policy recommendations, however, they lose their moral tone, their message sounding more like a legislative agenda prepared for Lyndon Johnson than a statement by clerics calling attention to the moral, religious, and ethical dimension of the society they want to change. For example, in their comments on welfare reform, the bishops declare that public assistance programs should have national eligibility standards and a national minimum benefit level:

Currently welfare eligibility and benefits vary greatly among states. In 1985 a family of three with no earnings had a maximum AFDC [Aid to Families with Dependent Children] benefit of $96 a month in Mississippi and $558 a month in Vermont. To remedy these great disparities, which are far larger than the regional differences in the cost of living, and to assure a floor of benefits for all needy people, our nation should establish and fund national minimum-benefit levels and eligibility standards in cash-assistance programs. The benefits should also be indexed to reflect changes in the cost of living.

Table 1

POVERTY RATES AND WELFARE BENEFITS

(a)    Average monthly AFDC benefit per family, 1975.

(b)   Excludes Alaska and Hawaii.

Source: Statistical Abstract of the U.S., 1982-1983

This proposal, however well intentioned, ignores evidence that there is a positive correlation between AFDC benefits and poverty rates, as Table 1 shows.

Between 1969 and 1979 the average poverty rate increased by 4 percent (from 9.9 percent to 10.3 percent) in the 10 states with the highest AFDC benefits (line 11, col. 5). The poverty rate for children under age 18 increased 36 percent in these states, going from 10 percent to 13.6 percent (col. 6-8). Monthly AFDC benefits averaged $282 per family in these states in 1975, 28.8 percent more than the $219 per-family average for the nation.

On the other hand, the 10 lowest spending states (average AFDC benefit of $104 per family in 1975, 52.5 percent below the national average) experienced sharply lower poverty over the 1969-79 period. The average poverty rate in these states declined by 26.5 percent, from 23.1 percent in 1969 to 17 percent in 1979, while the poverty rate for children under age 18 fell 18.9 percent from 26.5 percent to 21.5 percent

This trend is consistent with the idea, proposed by Charles Murray in his book Losing Ground, that overgenerous welfare payments create additional poverty by inducing workers to give up low paying jobs voluntarily in order to qualify for transfer payments. According to Mur-ray, this explains much of the increase in the U.S. poverty rate during the late 1970s and early 1980s, despite record levels of real per capita federal welfare payments.

Although the bishops acknowledge that some social programs do not work as intended, they imply that this failure is primarily due to insufficient funding, rather than to the basic flaws inherent in these programs.

A recent study by two Ohio University economists showed, for example, that the financial incentives built into federal welfare programs make having children out of wedlock a rational, economically beneficial decision. Until a poor child reaches age 12, the annual welfare benefits (AFDC and food stamps) associated with the child exceed the annual costs of raising the child, as shown in Table 2.

Table 2

MARGINAL COSTS vs. MARGINAL
WELFARE BENEFITS OF RAISING A CHILD
(1985 dollars)

Source: Derived from data in “Suffer The Little Children: The True Casualties of the War on Poverty,” by Lowell Gallaway and Richard Vedder, Economics Department, University of Ohio. The study was reprinted in a Joint Economic Committee print, “War on Poverty – Victory or Defeat?”, hearing of June 20, 1985, pp. 48-63.

As seen in column 3, average welfare benefits exceed the average cost of an additional child by $598 in the child’s first year of life, and remain above $500 per year until age 4. Over a seventeen year period, the female-headed family can expect total welfare benefits to exceed the total cost of raising the child by $3,391 – $25,740 in benefits versus $22,349 in costs. According to economists Lowell Gallaway and Richard Vedder, the discounted present value of the net benefits/(costs) in column 3 is $3,207, meaning that poor families are given, in effect, a $3,207 lump sum grant over and above the costs of raising each additional child.

Table 3

U.S. DIVORCE RATE AND POOR
FAMILIES HEADED BY FEMALES

Source: Column 1: U.S. Dept. of Commerce, Historical Statistics of the U.S., and Statistical Abstract of the U.S., various years.

Column 2: U.S. Bureau of the Census, Money Income and Poverty Status of Families and Persons in the U.S: 1984.

This amount probably understates the true net welfare benefits from having children because: (1) poverty children often leave the household before their eighteenth birthday; (2), no account is taken of the additional tax exemption for the poor child if the family pays income taxes; and (3) no account is taken of income the children might earn before age 18.

The bishops urge anti-poverty policies which support the strength and stability of families, warning that the high rate of divorce and the alarming extent of teen-age pregnancies in our nation are distressing signs of the breakdown of traditional family values. Yet, the increase in the U.S. divorce rate also has been linked to the perverse incentives of the AFDC program, which is available only to poor families with children but no husband present.

Table 4

REASON FOR UNEMPLOYMENT
(April 1986)

(¹)                 (2)                (3)

% of Number of % of Civilian Unemployed Total Labor Force

(1,000’s)

Source: Bureau of Labor Statistics

As seen in Table 3, column 1, starting in the late 1960s the divorce rate skyrocketed beyond the range of 1.6 to 2.8 per 1,000 population – the range within which it had remained since these data were first collected in the 1920s. From 1965 – the beginning of the War on Poverty – until 1979, the divorce rate more than doubled, rising from 2.5 to 5.3 divorces per 1,000.

The same period saw a 55.6 percent rise in the percentage of poor people living in families headed by females – from 33.3 percent in 1965 to 51.8 percent in 1979. Thus far in the 1980s, both the divorce rate and the percentage of poor living in female-headed families have declined slightly.

Gallaway and Vedder’s model shows that more than 50 percent of the increase in the U.S. divorce rate since 1965 can be explained by the growth in welfare spending. Approximately 300,000 of the 1.2 million divorces occurring annually in the late 1970s are attributable to the growth in real welfare benefits. Overall, it is estimated that every additional dollar of per capita aid results in 5,000 more families headed by females. According to Gallaway and Vedder, these results are strong evidence against those who believe the relationship between the rising divorce rate and increases in welfare payments is merely a coincidence, or that increases in the divorce rate may cause the increased welfare, rather than vice versa.

Unfortunately, public policy is still strongly influenced by those (such as the bishops) who for one reason or another choose to play down the evidence linking increased poverty to increased welfare. A bill entitled the Omnibus Anti-Poverty Act of 1984 would, if it had passed, have mandated minimum AFDC benefits for the states, forcing forty-one of them to raise their benefit levels by 1986. At the extreme, Mississippi would have been forced to more than quadruple its AFDC benefits for a family of three. (Mississippi’s poverty rate declined 32.5 percent, going from 35.4 percent to 23.9 percent, between 1969 and 1979 – the largest percentage decline among the states shown in Table 1.)

If Congress had set out deliberately to increase the rate of poverty among children it could have done no better than this legislation, which is still a live issue with many in Congress, although it was not passed when originally introduced. What is required, instead, is a restructuring of the incentives to the potential poverty population so that they are encouraged – as well as enabled – to avoid poverty in the first place.

Regarding specific points of the bishops’ letter:

(1) Are there, as the bishops claim, eight million Americans looking for work? In April 1986 nearly half – 49.5 percent – of the 8.1 million unemployed were unemployed because they either left their jobs, re-entered the labor force, or were new entrants to the labor force. Only 50.5 percent of the unemployed were unemployed because they lost their jobs. Consider the data on Table 4 (page 9).

If one considers job leavers and re-entrants to be voluntarily unemployed, as in a sense they are, then the true number of unemployed falls to 5.077 million, comprised of 4.095 million job losers and 982,000 thousand new labor force entrants, and the unemployment rate falls to 4.3 percent instead of the official 7 percent.

Although the bishops rank unemployment as the most crucial economic problem confronting the country, in reality the increase in the civilian labor force and in the number of employed, both in absolute numbers and as a percent of the population – has been remarkable, as Table 5 (above) shows.

Total civilian employment was a record 108.9 million in April 1986, compared to only 58.9 million in 1950 – i.e., 50 million new jobs have been created since 1950, of which more than 9 million were created since 1982 (column 2).

As seen in column 3, the labor force participation rate (labor force as a percentage of civilian population age 16 and over) was at a record 65.1 percent in April 1986. It has risen 10 percent (5.9 percentage points) since 1950, with most of the growth occurring since 1975.

Civilian employment as a percentage of the civilian population was also at a record 60.5 percent in April 1986, up 8 percent from the 56 percent level of 1975 (column 4).

These numbers attest to the underlying strength of the U.S. economy, which has successfully absorbed the influx of baby boomers into the labor force. Yet, the bishops call for increased government support for direct job-creation programs which have, for the most part, been expensive and disappointing failures.

Table 5

CIVILIAN LABOR FORCE
AND EMPLOYMENT, 1950-1985
(Millions)

                                 (1)                     (2)                         (3)= (1)/O)   (4)=(2)/(5)      (5)

Memo:

As % Of Population              Civilian Non-
  Age 16 And Over:              Institutional

Civilian                                              Civilian                                   Population

Labor                    Civilian              Labor        Civilian              16 Yrs. And Older

                                 Force               Employment        Force         Employment     And Older

Source: Bureau of Labor Statistics, Employment and Earnings, May 1986, table A-3.

The bishops blame high rates of joblessness among racial minorities and women on “discrimination,” conveniently ignoring an alternative explanation, namely, that misguided public policies such as the minimum wage con-tribute to this situation. By focusing on the unemployment rate, the bishops miss the big picture of record employment levels in this country.

(2) Is the distribution of wealth in America as unequal as the bishops claim? They indicate that 2 percent of the families own 28 percent of the total net wealth and the top 10 percent holds 57 percent of the net wealth. They also say that 54 percent of the total net financial assets are held by 2 percent of all families, those whose annual income is over $125,000 and that 86 percent of these assets are held by the top 10 percent of all families.

The numbers on the distribution of wealth and financial assets cited by the bishops are those reported in the Federal Reserve Board’s “Survey of Consumer Finances, 1983: A Second Report,” which was released in December 1984. A footnote to the Federal Reserve’s survey indicates, however, that the net worth data exclude the value of consumer durables such as automobiles and home furnishings, and the value of small businesses and farms. In other words, the survey on which the bishops rely to show how unequally wealth is distributed in the U.S. does not count those assets which account for a large share of family net worth in this country.

Moreover, the Federal Reserve survey reports that the distribution of income is much less uneven than the distribution of assets: only 14 percent of total income is received by the highest 2 percent of families and 33 percent by the top 10 percent. Moreover, these numbers reflect the distribution of pre-tax income only, thereby ignoring the effect of the progressive income tax.

The present level of inequality, both within this country and between the U.S. and the less developed countries, is deemed unacceptable by the bishops. However, all industrial and industrializing societies – whether capitalist, socialist, or communist – exhibit patterns of economic inequality. They would have been better off judging the absolute rather than the relative standard of living of the poor, and if such a criterion were applied to American society (or to any other industrialized, capitalist nation), the bishops would find the condition of the poor in America to rank among the highest in human history.

Even so, the bishops’ zeal for increased economic equality leads them to recommend tax reform:

Those with relatively greater financial resources should pay a higher rate of taxation – both in principle and in the actual or “effective” tax rates paid. The inclusion of such a principle in tax policies is an important means of reducing the severe inequalities of income and wealth in the nation

As with their pronouncements on welfare, their tax policy reveals a fundamental misunderstanding of how economic incentives work. The experience of the past few years shows that lowering, not raising, tax rates on the rich is the proper tax policy for those interested in increasing the share of taxes paid by the wealthy, as Table 6 shows.

The numbers show that income taxes paid by the wealthiest 1 percent of taxpayers rose by 25.1 percent between 1981 and 1984, taxes paid by the top 5 percent rose 19 percent, while taxes paid by the bottom 95 percent actually declined by 1 percent. During this period marginal tax rates were cut by approximately 23 percent for most income levels, while top-bracket taxpayers saw their rates cut by 28.6 percent on both capital gains (from 28 percent to 20 percent) and other non-wage income (from 70 percent to 50 percent). In other words, the 1981-84 tax cut resulted in greater relative and absolute tax payments by high income taxpayers, even though in many cases they received a larger tax cut than others.

The increased tax burden on the wealthy obviously cannot be explained by changes in tax rates per se, but rather by the response of taxpayers to tax rate changes, i.e., investing more in taxable activities and less in tax shelters. The experience of 1981-84 shows that far more income is now taxed at a 50 percent rate than was taxed at rates that previously went as high as 70 percent.

Table 6

INCOME TAXES PAID
BY AGE GROUP
($ Billions)

Source: Internal Revenue Service, as reported in Tax Notes of June 9, 1986, p. 1029.

Clearly, those concerned with income distribution must look beyond statutory or effective tax rates to the amount of income actually taxed at those rates. It is likely that the proposed reduction in the top marginal tax rate to 28 percent will produce a similar result, i.e., increase the share of total taxes paid by the upper incomes.

In sum, the third draft continues to point to governmental intervention as the ultimate provider and guarantor of all good. America did not reach its economic peak through the actions of a benevolent government. The same private sector which raised our standard of living must be trusted to continue to produce the benefits that the bishops feel are the rights of all individuals. History has not produced a government that can produce more benefits for more people than the private sector has. Somehow, the bishops have not seen fit to recognize this and, because of that, their pastoral letter will lack credibility.